Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices 45893

1 15 U.S.C. 78s(b)(1).

2See Securities Exchange Act Rel. No. 20766

(Mar. 20, 1984), 49 FR 11274 (Mar. 26, 1984).

3See Securities Exchange Act Rel. No. 27458

(Nov. 21, 1989), 54 FR 49376 (Nov. 30, 1989).

4 17 CFR 240.15c3–1.

5 17 CFR 240.15c3–1.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38956; File No. SR–CSE–

97–09]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Cincinnati Stock Exchange, Inc.,

Relating to Net Capital Requirements

August 21, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 1

(‘‘Exchange Act’’ or ‘‘Act’’), notice is

hereby given that on July 29, 1997, the

Cincinnati Stock Exchange,

Incorporated (‘‘CSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the CSE. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange hereby proposes to

amend Exchange Article II, Section 5.1

and Exchange Rule 11.9(a) to increase

the net capital requirements for

members and Designated Dealers.

The text of the proposed rule change

is available at the Office of the

Secretary, CSE and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

CSE included statements concerning the

purpose of, and basis for, the proposed

rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CSE has prepared

summaries, set forth in sections A, B,

and C below, of the most significant

parts of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

(1) Purpose. The Exchange is

proposing to increase its net capital

requirements for member firms. The

CSE notes that several smaller,

introducing broker-dealers have recently

encountered financial trouble,

endangering the investing public. In this

increasingly volatile and uncertain

marketplace, the Exchange believes that

increased net capital levels are justified.

Specifically, the proposed rule change

would increase the net capital

requirement for Exchange specialists,

called Designated Dealers, to $500,000

from the current requirement of

$100,000, and the net capital

requirement for other members to

$250,000 from the current requirement

of $25,000.

The Exchange Act, as amended, and

Commission Rules require specialists to

undertake certain responsibilities and

obligations in return for the privilege of

trading for their own accounts. These

include a requirement to maintain

adequate minimum capital levels, as set

forth in exchange rules, and a

responsibility to engage in a course of

dealings for the specialist’s own account

to assist in the maintenance of a fair and

orderly market. Specialists are thus

required to provide liquidity and depth

in times of market stress or volatility.

Minimum net capital requirements are

intended to help ensure that specialists

have the financial resources necessary

to perform this function.

Prior to 1984, the CSE’s net capital

rules required a Designated Dealer to

maintain at least $500,000 in net

capital.2 The Exchange has

subsequently amended the net capital

requirement from time to time, as

market conditions have warranted.

Exchange Rule 11.9(a) currently requires

Designated Dealers to maintain net

capital of at least the greater of $100,000

or the amount required under

Commission Rule 15c3–1. When

implemented in 1989, the $100,000

minimum was determined by the

Exchange to be a level of capital

sufficient to ensure that the Exchange’s

Designated Dealers would possess

sufficient financial resources to enable

them to provide liquidity and depth in

times of market stress.3 Subsequent

growth in the United States’ capital

markets generally, and in the CSE’s

market in particular have outstripped

this requirement. Record price and

volume levels have created a need for

greater capital levels on the CSE. These

greater levels of capital will help to

ensure that Designated Dealers are

adequately prepared to provide depth

and liquidity to the Exchange’s markets

in times of market stress or volatility.

The Exchange believes that the previous

net capital requirement for Designated

Dealers of at least the greater of

$500,000 or the amount required under

Commission Rule 15c3–1 will better

protect the integrity and quality of the

Exchange’s markets, and therefore the

investors whose orders are executed on

the Exchange.

Article II, Section 5.1 of the CSE ByLaws imposes a minimum net capital

level on non-specialist Exchange

members equal to the greater of the net

capital level required by Commission

Rule 15c3–1 or $25,000. The proposed

rule change would increase that

requirement from $25,000 to 250,000.

Members would, of course, still be

subject to any higher net capital

requirements imposed by Commission

Rule 15c3–1. Commission Rule 15c3–1

distinguishes minimum net capital

levels among dealer firms that trade for

their own account and between

brokerage firms that carry accounts and

those that introduce customers to other

firms. The Exchange believes, however,

that a higher, uniform minimum

requirement is appropriate because each

of these types of firms may pose a risk

to the financial integrity of the

Exchange, as well as to the investing

public generally, if permitted to operate

with inadequate capitalization.

Commission Rule 15c3–1 currently

requires minimum net capital of

$100,000 for any broker or dealer that

effects more than 10 transactions in any

one calendar year for its own

investment account.4 CSE members that

trade for their own accounts on the

Exchange often effect more than 10

trades per day. Because proprietary

trading places member firm capital

directly at risk, the Exchange believes

the higher net capital requirement of

$250,000 is appropriate for member

firms that trade for their proprietary

accounts on the Exchange.

Commission Rule 15c3–1 currently

imposes a similar $250,000 minimum

net capital requirement for any brokerdealer that carries customer accounts.5

The proposed rule change would bring

the CSE’s net capital requirement for

brokerage firms that carry accounts in

line with the Commission’s

requirements.

The Exchange also believes that a

uniform net capital requirement should

apply to introducing brokerage firms.

The CSE notes that the Commission

examined this issue in revising

Commission Rule 15c3–1 in 1992. The

Commission noted in proposing to raise

the minimum net capital level for

introducing brokers under Commission

Rule 15c3–1 that customers are placed

at risk by brokers that do not receive or

hold customer funds or securities

because such brokers have indirect
45894 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices

6Securities Exchange Act Rel. No. 31512 (Nov.

24, 1991), 57 FR 57027 (Dec. 2, 1992).

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No. 38820 (July

7, 1997), 62 FR 37947.

3The amendment was technical in nature and

therefore did not require republication of the notice.

4A copy of DTC’s procedures for repo accounts

is attached as Exhibit 2 to DTC’s proposed rule

change, which is available for inspection and

copying at the Commission’s Public Reference

Room or through DTC.

access to customer funds and securities,

and can direct the movement of such

assets by placing orders with clearing

firms.6 Customers are often unaware of

or unable to distinguish between

introducing and clearing firms, and tend

to rely heavily upon the representations

of brokers at introducing firms. A higher

net capital requirement will help ensure

the financial integrity of such

introducing firms and thereby help to

protect investors.

Similarly, better capitalized

introducing firms are less likely to

become insolvent. In the event that such

a firm does become insolvent, customers

will be better protected by higher

minimum net capital requirements. The

failure of an introducing firm can strand

an investor, who may be unable to place

orders directly with a clearing firm

because the clearing firm regards the

investor as the customer of the

introducing firm. Such a customer

would be unable either to liquidate or

open new positions until the

introducing firm is wound up or the

customer opens a new account with a

different broker. Higher net capital

levels would likely result in a quicker,

easier sale of the introducing firm and

would help to minimize the impact of

such a failure on the investing public.

Finally, the Exchange believes that

raising the minimum net capital level

for members will further the antifraud

provisions of the federal securities laws.

Members have access to customer

securities and funds either directly, as

in the case of a clearing firm, or

indirectly, as in the case of an

introducing firm that places orders with

a clearing firm on behalf of its

customers. In either case, member firms

are presented with an opportunity to

convert customer assets for personal or

other inappropriate use. Higher net

capital levels will help ensure adequate

firm resources to address such

problems. In addition, higher net capital

levels may create a disincentive toward

such activity by ensuring sufficient

operating capital. That is, a firm with

sufficient net capital may be less likely

to attempt to convert customer funds for

the firm’s use.

(2) Basis. The proposed rule change is

consistent with Section 6(b) of the Act

in general, and furthers the objectives of

Section 6(b)(5) in particular in that it is

designed to promote just and equitable

principles of trade and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. Specifically, the

proposed rule change will help ensure

greater financial stability of the

Exchange’s members by requiring those

members to maintain higher capital

levels. In the event of adverse market

movements, these capital reserves will

help protect members and their

customers by helping to ensure that

funds are available to cover securities

positions.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CSE does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No comments were solicited in

connection with the proposed rule

change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change; or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of the CSE. All submissions

should refer to File No. SR–CSE–97–09

and should be submitted by September

19, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23011 Filed 8–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38964; File No. SR–DTC–

97–05]

Self-Regulatory Organizations; The

Depository Trust Company; Order

Approving a Proposed Rule Change

Relating to the Establishment of

Procedures to Distinguish Repurchase

Transactions and Other Financing

Transactions From Securities Pledges

August 22, 1997.

On May 14, 1997, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–DTC–97–05) pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 Notice

of the proposal was published in the

Federal Register on July 15, 1997.2 The

Commission received no comment

letters in response to the filing. On

August 7, 1997, DTC amended the

proposed rule change.3 For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The rule change amends DTC’s

Collateral Loan Program (‘‘CLP’’)

procedures 4 to enable DTC’s

participants to distinguish repurchase

transactions (‘‘repos’’) and other types of

financing transactions from pledges of

securities. The CLP’s current procedures

do not differentiate between a securities

transaction that involves the transfer of

the entire interest in securities (i.e., as

in a repo transaction) from a securities

transaction that involves the transfer of