41310 Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices

19See Securities Exchange Act Release No. 40094

(June 15, 1998), 63 FR 33975 (June 22, 1998) (order

approving SR–NYSE–97–36).

20 15 U.S.C. 78f(b)(5) and 78s(b)(2).

21 15 U.S.C. 78s(b)(2).

22 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 39813

(March 27, 1998), 63 FR 16849 (April 6, 1998)

(order approving File No. SR–NYSE–98–08)

(‘‘March Approval Order’’).

4See Letter from James E. Buck, Senior Vice

President and Secretary, NYSE, to Richard C.

Strasser, Assistant Director, Division of Market

Regulation, Commission, dated July 23, 1998

(‘‘Amendment No. 1’’). In addition, Amendment

No. 1 modifies the proposal to: (1) clarify that the

proposal amends the definition of ‘‘customer’’ in

NYSE Rule 431(a)(2) to codify the Exchange’s

position that exempted borrowers will remain

exempt from the provisions of NYSE Rule 431; and

(2) correct a reference in NYSE Rule 431(a)(2) to the

Board of Governors of the Federal Reserve System

(‘‘FRB’’).

5The NYSE confirmed that the Exchange is

seeking to extend the changes to NYSE Rule 431

that were approved in the March Approval Order

for six months or until the Commission approves

the changes on a permanent basis, whichever

occurs first. Telephone conversation between Mary

Anne Furlong, Attorney, NYSE, and Yvonne

Fraticelli, Attorney, Division of Market Regulation,

Commission, on July 27, 1998 (‘‘July 27

Conversation’’).

6 12 CFR 220. Regulation T, ‘‘Credit by Brokers

and Dealers,’’ is administered by the FRB pursuant

to section 7 of the Act.

7See March Approval Order, supra note 3.

8See Amendment No. 1, supra note 4, and July

27 Conversation, supra note 5.

9See Docket Nos. R–905, R–0923, and R–0944, 63

FR 2806 (January 16, 1998).

10 12 CFR 220.6.

limited, the use of such orders could

help reduce volatility at the close.

Accordingly, the Commission believes

that it is reasonable and consistent with

the Act for the Exchange to seek

permanent approval of the LOC

procedures.

The Commission finds good cause for

approving the proposed rule change and

Amendment No. 1 to the proposed rule

change prior to the thirtieth day after

the date of publication of notice thereof

in the Federal Register. Accelerated

approval of the proposal will allow the

NYSE to continue to use its procedures

for entering LOC orders to continue on

an uninterrupted basis. The

Commission notes that this proposal

does not make any substantive changes

to the Exchange’s existing LOC program.

In its proposal, the Exchange simply

requests permanent approval of its

existing LOC program. Further, the

Commission notes that the last

substantive change to the LOC program

was published for the full notice and

comment period and the Commission

received no comments on that

proposal.19 Accordingly, the

Commission does not believe that the

current filing raises any new regulatory

issues. Therefore, the Commission

believes it is consistent with Section

6(b)(5) and Section 19(b)(2) of the Act to

grant accelerated approval to the

proposed rule change.20

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,21 that the

proposed rule change (SR–NYSE–98–

15) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20557 Filed 7–31–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40266; File No. SR–NYSE–

98–16]

Self-Regulatory Organizations; Notice

of Filing and Order Granting Partial

Accelerated Approval of a Proposed

Rule Change and Amendment No. 1 to

the Proposed Rule Change by the New

York Stock Exchange, Inc., Relating to

Margin Requirements for Exempted

Borrowers and Good Faith Accounts

July 27, 1998.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on June 30,

1998, the New York Stock Exchange,

Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with

the Securities Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) a proposed

rule change to amend NYSE Rule 431,

‘‘Margin Requirements,’’ to

accommodate certain recent changes to

the federal margin requirements. The

proposal, which is described in Items I,

II, and III below, which Items have been

prepared by the NYSE, originally was

approved by the Commission on a

temporary basis until July 27, 1998.3 On

July 24, 1998, the NYSE amended its

proposal to request that the Commission

approve the NYSE’s proposal for six

months on an accelerated bases.4 The

Commission is publishing this notice

and order to solicit comments from

interested persons on the proposed rule

change and to grant accelerated

approval to the portion of the proposal

that requests an extension of the

proposal for six months, until January

27, 1999, or until the Commission

approves the proposal permanently,

whichever occurs first.5

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

On March 27, 1998, the Commission

approved until July 27, 1998, an NYSE

proposal to apply the maintenance

margin requirements of NYSE Rule 431

to good faith accounts and to provide

that the proprietary accounts of

introducing broker-dealers that are

‘‘exempted borrowers’’ as that term is

defined in Regulation T6 will continue

to be subject to NYSE Rule 431(e)(6) as

applicable.7 The NYSE requests

permanent approval of the changes to

NYSE Rule 431 that were approved on

a temporary basis in the March

Approval Order. In addition, the NYSE

requests that the Commission extend the

changes to NYSE Rule 431 that were

approved in the March Approval Order

for six months, until January 27, 1999,

or until the Commission approves the

changes to NYSE Rule 431 on a

permanent basis, whichever occurs

first.8

Copies of the proposed rule change

are available at the NYSE 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

NYSE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposal.

The text of these statements maybe

examined at the places specified in Item

V below. The NYSE has prepared

summaries, set forth in Section 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

In January 1998 the FRB amended

Regulation T, which governs initial

extensions of credit to customers and

broker-dealers.9 Among other things,

these amendments established a ‘‘good

faith’’ account, which can be used for

transactions in non-equity securities.10
Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices 41311

11NYSE Rule 431(c), as amended, will specify the

margin that must be maintained in all customer

accounts, except for cash accounts subject to

Regulation T, unless a transaction in a cash account

is subject to other provisions of NYSE Rule 431.

12 12 CFR 220.2.

13See Amendment No. 1, supra note 3.

14Specifically, NYSE Rule 431(a)(2), as amended,

excluded from the definition of ‘‘customer’’ (a) a

broker or dealer from whom a security has been

purchased or to whom a security has been sold for

the account of the member organization or its

customers, or (b) an ‘‘exempted borrower’’ as

defined by Regulation T, except for the proprietary

account of a broker-dealer carried by a member

organization pursuant to NYSE Rule 431(e)(6). 15See Amendment No. 1, supra note 4.

Unlike transactions in a cash or margin

account, transactions in the good faith

account are not subject to the

requirements of Regulation T with

respect to initial margin and payment

and liquidation time frames.

The NYSE believes that transactions

in a good faith account raise the same

safety and soundness concerns from a

maintenance margin perspective as cash

and margin account transactions.

Accordingly, the NYSE proposes to

amend NYSE Rule–431 so that

transactions in all accounts of customers

(except for cash accounts, as discussed

below), including the new good faith

account, will be subject to the current

applicable maintenance margin

requirements of NYSE Rule 431(c).11 As

is currently the case, cash accounts

subject to Regulation T will not be

subject to the overall NYSE Rule 431

requirements, but in certain cases will

be covered by specific rule provisions.

In this regard, the NYSE notes that

NYSE Rule 431 requirements currently

apply to cash account transactions in

exempted securities (NYSE Rule

431(e)(2)(F)); for certain options (NYSE

Rule 431(f)(2)(M)); and for ‘‘when

issued’’ and ‘‘when distributed’’

securities (NYSE Rule 431(f)(3)(B)).

In the Regulation T amendments

adopted in January 1998, the FRB also

established a class of borrowers that is

exempt from Regulation T. An

‘‘exempted borrower,’’ as defined in

Regulation T, is a broker-dealer ’’ a

substantial portion of whose business

consists of transactions with persons

other than brokers or dealers.’’ 12 The

NYSE historically has not applied the

requirements of NYSE Rule 431 to

member organization accounts, except

for transactions in the proprietary

accounts of registered broker-dealers

that are carried by a member

organization. In this regard, NYSE Rule

431(e)(6) provides that a member

organization may carry the proprietary

account of another registered brokerdealer upon a margin basis that is

satisfactory to both parties, provided the

requirements of Regulation T are

adhered to and the account is not

carried in a deficit equity condition. In

addition, NYSE Rule 431(e)(6) requires

that the amount of any deficiency

between the equity in the proprietary

account and the margin required under

NYSE Rule 431 be deducted in

computing the net capital of the member

carrying the proprietary account.

The NYSE believes that exempted

borrowers would remain exempt from

the requirements of NYSE Rule 431, and

the Exchange proposes to amend the

definition of ‘‘customer’’ in NYSE Rule

431(a)(2) to codify the Exchange’s

position that such borrowers are exempt

from NYSE Rule 431.13 Specially, the

NYSE proposes to amend NYSE Rule

431(a)(2) to exclude from the definition

of ‘‘customer’’ and ‘‘exempted

borrower’’ as defined by Regulation T of

the FRB, except for the proprietary

accounts of a broker-dealer carried by a

member pursuant to NYSE Rule

431(e)(6).14

Under the new Regulation T

definition of exempted borrower, the

proprietary transactions of an

introducing organization that qualifies

as an exempted borrower (i.e., an

organization that conducts a substantial

public business) will not be subject to

Regulation T. Accordingly, the

requirement in NYSE Rule 431(e)(6) that

member adhere to the requirements of

Regulation T will not apply to the

proprietary accounts of exempted

borrowers. However, for safety and

soundness purposes, the proprietary

account of a broker-dealer that are

carried or cleared by another brokerdealer member organization will remain

subject to the NYSE Rule 431(e)(6)

equity requirements, which prohibit a

member from carrying a proprietary

account in a deficit equity condition

and require that the amount of any

deficiency between the equity

maintained in the proprietary account

and the margin required by NYSE Rule

431 be deducted in computing the net

capital of the member carrying the

proprietary account.

2. Statutory Basis

The NYSE believes that the proposed

rule change is consistent with the

requirements of Section 6(b)(5) of the

Act in that it is designed to promote just

and equitable principles of trade and to

protect the investing public. The NYSE

believes that the proposed rule change

also is consistent with the rules and

regulations of the FRB in that it is

designed to prevent 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 on Burden on Competition

The NYSE believes that the purpose

rule change will not impose any burden

on competition that is not necessary or

appropriate in furtherance of the

purpose of the Act.

C. Self Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments were solicited

or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action.

The NYSE has requested that the

Commission find good cause pursuant

to Section 19(b)(2) of the Act for

approving the portion of the proposal

that requests a six-month extension of

the changes to NYSE Rule 431 that were

approved in the March Approval Order

prior to the 30th day after publication of

the proposed rule change in the Federal

Register.15 Accelerated approval, until

January 27, 1999, will ensure the

uninterrupted effectiveness of the

changes to NYSE Rule 431 that were

approved in the March Approval Order,

so that transactions in good faith

accounts and in the proprietary

accounts of non-carrying/clearing

member organizations will continue to

be subject to NYSE Rule 431(e)(6).

With regard to the portion of the

proposal requesting permanent approval

of the changes to NYSE Rule 431 that

were approved in the March Approval

Order, 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 by order approve such proposed

rule change, or institute proceedings to

determine whether the proposed rule

change should be disapproved.

IV. Commission’s Findings and Order

Granting Partial Accelerated Approval

of the Proposed Rule Change

After careful review of the NYSE’s

proposal and for the reasons discussed

below, the Commission finds that the

portion of the current proposal that

extends through January 27, 1999, the

effectiveness of the changes to NYSE
41312 Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices

16 15 U.S.C. 78f(b)(5).

17 In approving this potion of the proposal, the

Commission has considered the proposed rule’s

impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

18See March Approval Order, supra note 3.

19As noted above, because exempted borrowers

are exempt from Regulation T, the provision in

NYSE Rule 431(e)(6) requiring adherence to

Regulation T will not apply to the proprietary

accounts of exempted borrowers.

20 15 U.S.C. 78s(b)(2).

20 17 CFR 200.30–3(a)(12).

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

Rule 431 that originally were approved

in the March Approval Order is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange and, in particular,

this portion of the proposal is consistent

with Section 6(b)(5) of the Act,16 in that

it is designed 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.17

Specifically, the Commission finds, as

it has concluded previously,18 that it is

appropriate for the NYSE to apply the

existing maintenance margin

requirements of NYSE Rule 431(c) to

transactions in the new ‘‘good faith’’

account adopted under Regulation T.

Although non-equity transactions

permitted in the good faith account will

not be subject to the initial margin

requirements and payment and

liquidation time frames of Regulation T,

as the NYSE notes, transactions in the

good faith account may raise the same

safety and soundness concerns with

regard to maintenance margin as do

transactions in cash and margin

accounts. Accordingly, the Commission

believes that it is appropriate for the

NYSE to apply the existing maintenance

margin requirements specified in NYSE

Rule 431(c) to transactions in the good

faith account. The Commission believes

that applying the maintenance margin

requirements of NYSE rule 431(c) to

transactions in the good faith account

will protect investors and the public

interest and help to maintain fair and

orderly markets by ensuring that good

faith accounts contain adequate margin

reserves.

In addition, the Commission believes

that it is appropriate for the NYSE to

revise the definition of ‘‘customer’’ in

NYSE Rule 431(a)(2) to codify the

Exchange’s position that exempt

borrowers will remain exempt from the

requirements of NYSE Rule 431, except

for the proprietary account of a brokerdealer carried by a member pursuant to

NYSE Rule 431(e)(6). The Commission

believes that it is appropriate for the

NYSE to continue to apply the equity

requirements of NYSE Rule 431(e)(6) to

the proprietary accounts of introducing

broker-dealers that qualify as ‘‘exempted

borrowers’’ under Regulation T if these

accounts are carried by another

Exchange member. By continuing to

apply the equity requirements of NYSE

Rule 431(e)(6) to these proprietary

accounts, the Commission believes that

the proposal will help to ensure that

these accounts contain adequate margin,

thereby protecting investors and the

public interest.19

The Commission finds good cause for

approving the portion of the proposed

rule change requesting approval for six

months, until January 27, 1999, of the

changes to NYSE Rule 431 that were

approved in the March Approval Order

prior to the thirtieth day after the date

of publication of notice in the Federal

Register to ensure that the changes to

NYSE Rule 431 that were approved in

the March Approval Order remain in

effect without interruption. The

Commission continues to believe that

the changes to NYSE rule 431 that were

approved in the March Approval Order

should help to ensure appropriate

margin requirements for good faith

accounts and for the proprietary

accounts of introducing broker-dealers

that qualify as exempted borrowers

which accounts are carried by Exchange

members. Accordingly, the Commission

finds that it is consistent with Sections

6(b) and 19(b)(2) of the Act to grant

accelerated approval to the portion of

the NYSE’s proposal that extends for six

months, until January 27, 1999, or until

the Commission approves the proposal

permanently, whichever occurs first, the

changes to NYSE Rule 431 that were

approved in the March Approval Order.

The Commission also finds good

cause for approving Amendment No. 1

to the proposal on an accelerated basis.

In Amendment No. 1, the NYSE

clarified several provisions in its

proposal and requested accelerated

approval of a six-month extension,

through January 27, 1999, of the changes

to NYSE Rule 431 that were approved

in the March Approval Order. The

Commission believes that it is

appropriate to approve Amendment No.

1 on an accelerated basis to permit the

changes to NYSE Rule 431 that were

approved in the March Approval Order

to continue to apply without

interruption. Therefore, the Commission

believes that Amendment No. 1 is

consistent with Sections 6(b) and

19(b)(2) of the Act.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

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

submission, all subsequent

amendments, all written statements

with request to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission any 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

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NYSE. All

submissions should refer to File No.

SR–NYSE–98–16 and should be

submitted by August 24, 1998.

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,20 that the

portion of the NYSE’s proposal (SR–

NYSE–98–16), as amended, to extend

the changes approved by the

Commission in the March Approval

Order on an accelerated basis until

January 27, 1999, or until the

Commission approves the proposal

permanently, whichever occurs first, is

approved.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.21

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20559 Filed 7–31–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40263; File No. SR–PCX–

98–27]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 Thereto by the

Pacific Exchange, Inc. Relating to the

Automatic Execution of Option Orders

July 24, 1998.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

June 12, 1998, the Pacific Exchange, Inc.

(‘‘PCX’’ or ‘‘Exchange’’) filed with the

Securities Exchange Commission

(‘‘Commission’’) the proposed rule