[Federal Register Volume 62, Number 242 (Wednesday, December 17, 1997)]
[Notices]
[Pages 66169-66170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39419; File No. SR-Phlx 97-56]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, 
Inc. Relating to Margin and Net Capital Requirements for Joint Back 
Office Arrangements

December 10, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 7, 1997, the 
Philadelphia Stock Exchange, Inc. (``Phlx'' 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 Exchange. On November 24, 1997, the Exchange 
filed with the Commission Amendment No. 1 to the proposed rule 
change.\2\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Amendment No. 1 modified the proposed rule change to require 
Joint Back Office clearing members to develop risk analysis 
standards which are acceptable to the Exchange. See Letter from 
Michele R. Weisbaum, Vice President and Associate General Counsel, 
Exchange, to Michael L. Loftus, Attorney, Division of Market 
Regulation, Commission, dated November 21, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend Exchange Rules 703 and 722 to establish 
margin and net capital requirements for Joint Back Office (``JBO'') 
participants and clearing firms.
    The text of the proposed rule change is available at the office of 
the Secretary, the Exchange, 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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects 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 seeks to revise Exchange Rules 703 and 722 to 
establish margin and net capital requirements for JBO participants and 
clearing firms. JBO arrangements permit a participating broker-dealer 
to be deemed self-clearing for margin purposes and entitle the 
participating broker-dealer to good faith credit.\3\
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    \3\ Under the proposed rule change, JBO participants would not 
be considered self-clearing for any purpose other than the extension 
of credit under Exchange Rule 722, as revised, or under the 
comparable rules of another self-regulatory organization.
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    In recent amendments to Regulation T,\4\ the Board of Governors of 
the Federal Reserve System (``FRB'') placed its reliance on the 
authority of self-regulatory organizations (``SROs'') to ensure the 
reasonableness of JBO arrangements.\5\ When the provision permitting 
JBO arrangements was first adopted, the FRB assumed there would be a 
reasonable relationship between the good faith credit extended to a JBO 
participant and its ownership interest in the clearing firm. 
Consequently, the FRB did not establish any explicit requirement for 
the amount of ownership each participant should have in the JBO. 
Because Regulation T does not provide an ownership standards,\6\ 
however, good faith credit has been extended to ``owners'' holding 
merely a nominal interest in a clearing firm.
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    \4\ 12 CFR 220 et seq. Regulation T is entitled ``Credit by 
Brokers, and Dealers.'' The Board of Governors of the Federal 
Reserve System issued Regulation T pursuant to the Act.
    \5\ See Board of Goverors of the Federal Reserve System Docket 
No. R-0772 (Apr. 26, 1996), 61 FR 20386 (May 6, 1996).
    \6\ Section 220.11(a)(2) of Regulation T only requires that a 
JBO clearing firm be ``a clearing and servicing broker or dealer 
owned jointly or individually by other [broker-dealers].'' 12 CFR 
220.11(a)(2).
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    In conjunction with other SROs and representatives from the 
securities industry, the Exchange has established standards for JBO 
participants and clearing firms. These standards will permit the 
extension of good faith credit to clearing firm ``owners'' only when 
the owners maintain meaningful assets on deposit with the JOB clearing 
firm, and the clearing firm maintains sufficient net capital and risk 
control procedures to carry such accounts. The Exchange's proposed rule 
change would establish the following requirements:
    Net Capital Requirements. As proposed, Exchange Rule 703 will 
require each JBO participant \7\ to be a registered broker-dealer 
subject to the net capital requirements prescribed by Commission Rule 
15c3-1 (``Rule 15c3-1).\8\ JBO participants may not claim the net 
capital exemption available to option market makers under Commission 
Rule 15c3-1(b)(1).\9\ JBO participants will be required to deposit and 
maintain minimum account equity of $1,000,000, and also will be subject 
to Financial and Operational Combined Uniform Single Report (``FOCUS'') 
filings and certified audits. In addition, each JBO participant must 
meet and maintain the ownership standards established by the JBO 
clearing member. To ensure that adequate procedures exist for complying 
with these requirements, JBO participants will be required to employ or 
have access to a qualified Series 27 principal.
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    \7\ The proposed rule change allows member organizations and 
foreign currency option participant organizations to establish JBO 
arrangements with JBO clearing members.
    \8\ 17 CFR 240.15c3-1.
    \9\ 17 CFR 240.15c3-1(b)(1).
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    In addition, the proposed rule change will require a clearing 
member carrying JBO accounts to notify its Designated Examining 
Authority in writing of its intention to clear such accounts and will 
require the clearing member to comply with additional net capital 
requirements prescribed by the Exchange. Such a clearing member must 
maintain either: (i) tentative net capital of $25 million;\10\ or (ii) 
net capital of $10 million, if the clearing member's primary business 
is the clearance of option market maker accounts. A clearing member 
will be deemed to conduct a primary options market maker business if at 
least 60% of the

[[Page 66170]]

gross haircuts calculated for all options market maker and JBO 
participant accounts, in aggregate, is attributable to options market 
maker transactions. A JBO clearing firm conducting a primary options 
market maker business must include the gross deductions calculated for 
all JBO participant accounts in its ration of gross options market 
maker deductions to adjusted net capital.
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    \10\ The term ``tentative net capital'' refers to a clearing 
member's net capital before the application of haircuts and undue 
concentration deductions.
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    Further, each JBO clearing member shall adjust its net worth daily 
by deducting any deficiency between a JBO participant's account equity 
and the proprietary haircut calculated pursuant to Rule 15c3-1 for the 
positions maintained in the JBO account. As previously referenced, each 
clearing member which maintains JBO accounts must require and maintain 
equity of $1,000,000 for each JBO participant, over all related funds. 
The clearing member is required to issue a margin call if the JBO 
participant's account equity falls below the $1,000,000 threshold. 
Finally, each JBO clearing member will be required to establish and 
maintain written ownership standards for JBO accounts.\11\ The clearing 
member also must develop risk analysis standards which are acceptable 
to the Exchange.
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    \11\ The Exchange will not require JBO clearing members to 
establish ownership standards that meet any minimum guidelines in 
addition to the rules of the Exchange. As a result, clearing members 
will possess the discretion to develop the ownership criteria 
governing their JBO accounts. However, should the Exchange learn of 
any inappropriate ownership standards through its audit and 
surveillance activities, the Exchange will move to correct the 
impropriety. Telephone conversation between Michele R. Weisbaum, 
Vice President and Associate General Counsel, Exchange, and Michael 
L. Loftus, Attorney, Division of Market Regulation, Commission 
(November 26, 1997).
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    Margin Requirements. The Exchange proposes to revise Exchange Rule 
722, Margin Accounts, to permit a member organization to carry the 
accounts of JBO participants on a good faith margin basis. The JBO 
accounts must comply with the requirements established in Regulation T, 
Section 220.11,\12\ and Exchange Rule 703, as modified above. JBO 
participants must maintain equity of at least $1,000,000 in their 
accounts. If the equity falls below $1,000,000, the JBO clearing firm 
must issue a margin call for additional funds or securities which must 
be satisfied within 5 business days.
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    \12\ 12 CFR 220.11.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act,\13\ in general, and with Section 
6(b)(5),\14\ in particular, in that it is designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and to protect investors and the public interest. The Exchange 
further believes that the proposed rule change is designed to ensure 
the reasonableness of JBO arrangements in accordance with the FRB's 
directive in its recent amendments to Regulation T.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe 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

    The Exchange did not solicit or receive written comments with 
respect to 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 Exchange consents, the Commission will:
    (A) by order approved 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 submissions, 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 persons, 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 filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-97-56 and should be 
submitted by January 7, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32824 Filed 12-16-97; 8:45 am]
BILLING CODE 8010-01-M