[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Notices]
[Pages 14174-14176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7393]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38411; File No. SR-NYSE-97-01]


Self-Regulatory Organization; Notice of Filing of Proposed Rule 
Change by New York Stock Exchange, Inc. Relating to Amendments to Rule 
431 (``Margin Requirements'')

March 17, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on January 9, 
1997 the New York Stock Exchange, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange has filed amendments to Rule 431 (``Margin 
Requirements''). The change consists of amendments regarding permitted 
market maker and specialist offset positions being eliminated from 
Regulation T of the Federal Reserve Board (``FRB'') and to acknowledge 
specific provisions of Rule 15c3-1 of the Securities Exchange Act of 
1934 (``the Net Capital Rule''). The proposed rule change also 
incorporates in Rule 431 cash account transactions permitted by the FRB 
and SEC, as well as incorporating several definitions. Proposed new 
language is italicized; proposed deletions are in brackets.
Proposed Amendment of Rule 431
Margin Requirements
    Rule 431. (a) through (f)(2)(I) unchanged.
    (J) Registered specialists, market makers or traders.--
Notwithstanding the other provisions of this sub-section (f)(2), a 
member organization may clear and carry the listed option transactions 
of one or more registered specialists, registered market makers or 
registered traders in options (which registered traders are deemed 
specialists for all purposes under the Securities Exchange Act of 1934 
pursuant to the rules of a national exchange) (hereinafter referred to 
as ``specialist(s)'', upon a ``Good Faith'' margin basis satisfactory 
to the concerned parties, provided [that all real and potential risks 
in accounts carried under such arrangements are at all times adequately 
covered by the margin maintained in the account or in the absence 
thereof, by the carrying

[[Page 14175]]

member organization's excess Net Capital under Rule 325.] the ``Good 
Faith'' margin requirement is not less than the Net Capital haircut 
deduction of the member organization carrying the transaction pursuant 
to Rule 325. In lieu of collecting the ``Good Faith'' margin 
requirement, a carrying member organization may elect to deduct in 
computing its Net Capital the amount of any deficiency between the 
equity maintained in the account and the ``Good Faith'' margin 
required.
    For purposes of this paragraph (f)(2)(J), a permitted offset 
position means, in the case of an option in which a specialist makes a 
market, a position in the underlying asset or other related assets, and 
in the case of other securities in which a specialist makes a market, a 
position in options overlying the securities in which a specialist 
makes a market. Accordingly, a specialist in options may establish, on 
a share-for-share basis, a long or short position in the securities 
underlying the options in which the specialist makes a market, and a 
specialist in securities other than options may purchase or write 
options overlying the securities in which the specialist makes a 
market, if the account holds the following permitted offset positions:
    (i) A short option position which is ``in or at the money'' and is 
not offset by a long or short option position for an equal or greater 
number of shares of the same underlying security which is ``in the 
money'';
    (ii) A long option position which is ``in or at the money'' and is 
not offset by a long or short option position for an equal or greater 
number of shares of the same underlying security which is ``in the 
money'';
    (iii) A short option position against which an exercise notice was 
tendered;
    (iv) A long option position which was exercised;
    (v) A net long position in a security (other than an option) in 
which a specialist makes a market;
    (vi) A net short position in a security (other than an option) in 
which the specialist makes a market; or
    (vii) A specified portfolio type as referred to in SEC Rule 15c3-
1--Appendix A.
    For purposes of this paragraph (f)(2)(J), the term ``in or at the 
money'' means the current market price of the underlying security is 
not more than two standard exercise intervals below (with respect to a 
call option) or above (with respect to a put option) the exercise price 
of the option; the term ``in the money'' means the current market price 
of the underlying asset or index is not below (with respect to a call 
option) or above (with respect to a put option) the exercise price of 
the option; and, the term ``overlying option'' means a put option 
purchased or a call option written against a long position in an 
underlying asset; or a call option purchased or a put option written 
against a short position in an underlying asset.
    Securities, including options, in such accounts shall be valued 
conservatively in the light of current market prices and the amount 
which might be realized upon liquidation. Substantial additional margin 
must be required or excess Net Capital maintained in all cases where 
the securities carried: (i) are subject to unusually rapid or violent 
changes in value including volatility in the expiration months of 
options, (ii) do not have an active market, or (iii) in one or more or 
all accounts, including proprietary accounts combined, are such that 
they cannot be liquidated promptly or represent undue concentration of 
risk in view of the carrying organization's Net Capital and its overall 
exposure to material loss.
    (K) unchanged.
    (L) Exclusive designation.--A customer may designate at the time an 
option order is entered which security position held in the account is 
to serve in lieu of the required margin, if such service is offered by 
the member organization; or the customer may have a standing agreement 
with the member organization as to the method to be used for 
determining on any given day which security position will be used in 
lieu of the margin to support an option transaction. Any security held 
in the account which serves in lieu of the required margin for a short 
put or short call shall be unavailable to support any other option 
transaction in the account.
    (M) Cash account transactions.--A member organization may make 
option transactions in a customer's cash account, providing:
    (i) The transaction is permissible under Section 220.8 of 
Regulation T of the Board of Governors of the Federal Reserve System; 
or
    (ii) The transaction is a debit put spread in listed broad-based 
index options with European-style exercise comprised of a long put(s) 
coupled with a short put(s) overlying the same broad-based index with 
an equivalent underlying aggregate index value and the short put(s) and 
long put(s) expire simultaneously, and the strike price of the long 
put(s) exceed the strike price of the short put(s).

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 self-regulatory organization 
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
    Regulation T of the FRB currently prescribes option margin 
requirements. In April 1996, the FRB amended Regulation T to 
effectively delegate margin requirements for options transactions for 
both customers and market makers/specialists, shifting responsibility 
for establishing margin requirements for such transactions to the self-
regulatory organizations. This amendment to Regulation T will become 
effective June 1, 1997.
    Accordingly, the proposed amendments incorporate the current FRB 
requirements into Exchange Rule 431 so that they may remain in effect 
after June 1, 1997. The proposed amendments also incorporate certain 
treatments of positions recognized under the Net Capital Rule.
    Specifically, the proposed amendments to Rule 431 adopt provisions 
regarding permitted market maker and specialist offset positions from 
Regulation T and the Net Capital Rule. These offset positions would be 
subject to the same ``good faith'' margin treatment as currently 
accorded under Regulation T and would require the clearing/carrying 
firm to comply with the applicable haircut requirements of the Net 
Capital Rule for any cash margin deficiency (e.g., the difference 
between the margin required under Rule 431 and the amount received from 
the specialist/market maker). The proposal also incorporates the 
current Regulation T definitions of the terms ``in or at the money,'' 
``in the money'' and ``overlying options.'' The parameters for 
permitted offsets within the ``in or at the money'' definition have 
been expanded from one to two ``standard exercise intervals.''
    Section (f)(2)(J) of the rule has been revised in order to clarify 
the existing

[[Page 14176]]

definition of ``good faith'' margin requirements.
    A new provision has been added (Section (f)(2)(L)) to incorporate 
the provisions currently contained in Regulation T regarding 
``exclusive designation'' that allow a customer to designate which 
security position in an account is to be utilized to cover the required 
margin at the time an option order is entered; provided the member 
organization offers such a service.
    Further, Section (f)(2)(M) has been added to incorporate those cash 
account transactions currently permitted under Regulation T and the 
debit put spread currently allowed pursuant to the Commission's no-
action letter on ``theoretical pricing.''\1\
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    \1\ Letter dated March 15, 1994 from Brandon Becker, Director, 
Division of Market Regulation addressed to Ms. Mary L. Bender (CBOE) 
and Mr. Timothy Hinkas (OCC).
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(2) Statutory Basis
    The proposed rule change is consistent with the requirements of 
Section (6)(b)(5) of the Securities Exchange Act of 1934 (the ``Act``) 
which provides that the rules of the Exchange be designed to promote 
just and equitable principles of trade and to protect the investing 
public. The proposed rule change is also consistent with the rules and 
regulations of the Board of Governors of the Federal Reserve System for 
the purpose of preventing the excessive use of credit for the purchase 
or carrying of securities, pursuant to Section 7(a) of the Act.

(B) Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange believes that the proposed rule change will not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Comments were neither solicited nor received.

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 reason 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 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 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 filing will also be available 
for inspection and copying at the principal office of the above-
mentioned self-regulatory organization. All submissions should refer to 
the File No. SR-NYSE-97-01 and should be submitted by April 15, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority
Jonathan G. Katz,
Secretary.
[FR Doc. 97-7393 Filed 3-24-97; 8:45 am]
BILLING CODE 8010-01-M