66154 Federal Register / Vol. 62, No. 242 / Wednesday, December 17, 1997 / Notices

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

2Under the proposed rule change, JBO

participants would not be considered self-clearing

for any purpose other than the extension of credit

under Exchange Rule 12.3, as revised, or under the

comparable rules of another self-regulatory

organization.

3 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.

4See Board of Governors of the Federal Reserve

System Docket No. R–0772 (Apr. 26, 1996), 61 FR

20386 (May 6, 1996).

5Section 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).

6The proposed rule change allows members and

member organizations to establish JBO

arrangements with JBO clearing members.

7 17 CFR 240.15c3–1.

to grant these exemptions to advisers

having a ‘‘national or multistate

practice’’ and that ‘‘[l]arger advisers,

with national businesses, should be

registered with the [SEC] and be subject

to national rules.’’ 6 Applicant notes that

Congress chose an assets under

management requirement as a rough

proxy that would divide responsibilities

between the SEC and the states;

investment advisers managing $25

million or more of assets under

management are more likely to be

national investment advisers.

6. Applicant asserts that prohibiting it

from registering with the SEC would be

a burden on interstate commerce in that

applicant would be subject to the

regulations and oversight of at least 30

jurisdictions, which would impede

applicant’s ability to operate its national

business on a uniform basis. Applicant

states that it is legally obligated to be

registered in at least 30 jurisdictions as

an investment adviser, taking into

account the national de minimis

standard in section 222(d) of the

Advisers Act and all applicable

exemptions and exclusions under the

securities laws and regulations of such

states. Applicant states that the extent of

its investment advisory services means

that it does not qualify for the national

de minimis exemption, as set forth in

section 222(d) of the Advisers Act, in at

least 30 states because it has provided

investment advisory services to more

than five clients during the preceding

twelve months who are residents of

those states.

7. Section 222(d) of the Advisers Act

makes state investment advisers statutes

inapplicable to investment advisers that

do not have a place of business located

within that state and, during the

preceding twelve month period, have

fewer than six clients who are residents

of that state.

8. Applicant also asserts that to

prohibit it from registered with the SEC

would be unfair because applicant’s

investment advisory business is

substantially similar to that of other

national investment advisers who are

eligible for SEC registration and

oversight. Moreover, applicant believes

that it would be inconsistent with the

purposes of section 203A if it is

prohibited from being registered with

the SEC.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–32919 Filed 12–16–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39418; File No. SR–CBOE–

97–58]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Incorporated 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

October 27, 1997, the Chicago Board

Options Exchange, Incorporated

(‘‘CBOE’’ 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. 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 seeks to amend

Exchange Rule 12.3 and adopt new

Exchange Rule 13.4 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 proposes to revise

Exchange Rule 12.3 and adopt new

Exchange Rule 13.4 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.2

In recent amendments to Regulation

T,3 the Board of Governors of the

Federal Reserve System (‘‘FRB’’) placed

its reliance on the authority of selfregulatory organizations (‘‘SROs’’) to

ensure the reasonableness of JBO

arrangements.4 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 standard,5

however, good faith credit has been

extended to ‘‘owners’’ holding merely a

nominal interest in a clearing firm.

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 JBO 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 13.4 will

require each JBO participant 6 to be a

registered broker-dealer subject to the

net capital requirements prescribed by

Commission Rule 15c3–1 (‘‘Rule 15c3–

1’’).7 JBO participants may not claim the
Federal Register / Vol. 62, No. 242 / Wednesday, December 17, 1997 / Notices 66155

8 17 CFR 240.15c3–1(b)(1).

9The term ‘‘tentative net capital’’ refers to a

clearing member’s net capital before the application

of haircuts and undue concentration deductions.

10The 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 Timothy Thompson, Senior

Attorney, Exchange, and Michael L. Loftus,

Attorney, Division of Market Regulation,

Commission (November 25, 1997).

11 12 CFR 220.11.

12 15 U.S.C. 78f.

13 15 U.S.C. 78f(b)(5). 14 17 CFR 200.30–3(a)(12).

net capital exemption available to

option market makers under

Commission Rule 15c3–1(b)(1).8 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.

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; 9 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

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

ratio of gross options market maker

deductions to adjusted net capital.

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.10 The

clearing member also must develop risk

analysis standards which are acceptable

to the Exchange and comply with the

requirements of Exchange Rule 15.8.

Margin Requirements. The Exchange

proposes to revise Exchange Rule 12.3,

Margin Requirements, 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

220.11,11 and Exchange Rule 13.4, 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.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6 of the Act,12 in general, and

furthers the objectives of Section

6(b)(5),13 in particular, in that it is

designed to 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.

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 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

argument concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 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, NW.,

Washington, DC 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–CBOE–97–

58 and should be submitted by January

7, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–32823 Filed 12–16–97; 8:45 am]

BILLING CODE 8010–01–M