Document ID: SEC-2005-0315-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2005-12-02T05:00Z

[Federal Register: December 2, 2005 (Volume 70, Number 231)]
[Notices]               
[Page 72321-72322]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02de05-69]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52842; File No. SR-NYSE-2005-50]

 
Self-Regulatory Organizations; New York Stock Exchange Inc.; 
Order Approving Proposed Rule Change Relating to Proposed Amendments to 
Rules 282 (Mandatory Buy-In), 284 (Procedure for Closing Defaulted 
Contract), 289 (Must Receive Delivery), and 290 (Defaulting Party May 
Deliver After Notice of Intention to Close)

November 28, 2005.

I. Introduction

    On July 15, 2005, the New York Stock Exchange Inc. (``NYSE'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-NYSE-2005-50 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposed 
rule change was published in the Federal Register on September 28, 
2005.\2\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 52475 (September 20, 
2005), 70 FR 56757.
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II. Description

    The NYSE is amending NYSE Rules 282, 284, 289, and 290 to permit 
members and member organizations (collectively referred to as 
``member'') to initiate buy-ins, reduce the waiting period to initiate 
a buy-in from thirty days to three days, and to otherwise provide more 
standardized and consistent industry buy-in rules and procedures.

Current Requirements

    NYSE Rule 282 sets forth the ``mandatory buy-in'' process by which 
a member acting as a buyer (``initiating member'') is required to 
close-out a contract that has not been completed by the member acting 
as the seller (``defaulting member'') for a period of thirty calendar 
days. A mandatory buy-in requires that a buy-in notice be delivered in 
triplicate by the initiating member (buyer) to the defaulting member 
(seller). The defaulting member receiving the buy-in notice must 
indicate on the buy-in notice its position with respect to the 
resolution of the failed trade (e.g., doesn't know the trade, knows the 
trade but cannot deliver, will deliver) and return the buy-in notice to 
the initiating member. If the buy-in notice is not returned when due

[[Page 72322]]

or is returned with the indication that the contract is known but that 
delivery cannot be made, a ``buy-in order'' in duplicate is sent to the 
defaulting member for execution.
    NYSE Rule 284 sets forth a procedure by which an initiating member 
may close-out a contract that has not been completed by the defaulting 
member but that is not required to be closed-out. The initiating member 
must deliver a buy-in notice to the defaulting member prior to forty-
five minutes after delivery time. Then the initiating member (buyer) 
must deliver a buy-in order to the defaulting member between 2:15 p.m. 
and 2:30 p.m. for execution after 2:35 p.m.
    NYSE Rule 289 requires an initiating member to accept physical 
delivery of some or all of the securities that are the subject of a 
buy-in, thereby halting the mandatory buy-in execution for those 
securities if the defaulting member tenders the securities prior to the 
mandatory buy-in deadlines. NYSE Rule 290 permits a defaulting member 
to deliver securities subject to a notice of buy-in until 2:30 p.m. on 
the day of the execution of the buy-in.
    The NYSE buy-in rules apply to transactions that are not subject to 
the rules of a qualified clearing agency such as The Depository Trust 
Company (``DTC'') and the National Securities Clearing Corporation 
(``NSCC''). In the event that a buy-in is sent to the NYSE floor for 
execution, then NYSE buy-in rules apply.
    However, under the current NYSE rules, there are inherent conflicts 
of interest by permitting the defaulting member to execute the buy-in. 
For example, the defaulting member could manipulate the extent to which 
it has market exposure by timing its purchase of the necessary 
securities to benefit itself. The initiating member may receive 
negative customer reaction if the customer learns that its trade has 
not settled and their securities are unavailable because a buy-in has 
not been executed by the defaulting member or has not been executed in 
a timely manner.
    Other self-regulatory organizations (``SROs'') have recognized this 
potential conflict and have adopted buy-in rules that assign 
responsibility to the initiating member to execute the buy-in. By 
allowing initiating members to execute their own buy-ins, any potential 
conflict of interest involving the defaulting member is avoided and the 
process is expedited.
    In the course of reviewing the operation of its buy-in rules, the 
NYSE and other regulators met with the Securities Industry 
Association's Securities Operations Division Buy-In Committee 
(``Committee''), which is comprised of regulators, broker-dealers, and 
industry groups, to identify and standardize various buy-in rules and 
procedures regarding the close-out process related to street-side 
contracts. The Committee requested that the NYSE amend the buy-in rules 
to eliminate the ``Notice'' procedures described above and to allow the 
initiating member (buyer) to execute buy-ins to close out a contract.

Amendments \3\
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    \3\ The specific changes to NYSE rules are attached as an 
exhibit to its rule filing which can be found on the Commission's 
Web site and on NYSE's Web site.
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    The NYSE is effecting five amendments to its buy-in rules. First, 
the NYSE is amending Rule 282 to allow the initiating member to execute 
a mandatory buy-in and to reduce the waiting period to initiate a 
mandatory buy-in from thirty days to three days after delivery on the 
contract was due. The NYSE believes once the responsibility is shifted 
to the initiating member, the buy-in process will work more 
efficiently.
    Second, the NYSE is eliminating the requirement for duplicate and 
triplicate paper notices and is permitting electronic notices, 
including notices from a computerized network facility or from the 
electronic functionality of a qualified clearing agency, such as DTC 
and NSCC. The NYSE is also amending existing time deadlines for 
delivering notices, securities, and executions and is using those used 
by other self-regulatory organizations (i.e., DTC and NSCC).
    Third, the NYSE is adding a section to Rule 282's Supplementary 
Material to ensure that members comply with the closeout requirements 
of Regulation SHO.\4\ Members are obligated to comply with the marking, 
locate, and delivery requirements of Regulation SHO for short sales of 
equity securities. As a result, members should have policies and 
procedures in place to comply with these rules, including closeout 
procedures.
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    \4\ Securities Exchange Act Release No. 50103 (July 28, 2004), 
69 FR 48008 (August 6, 2004), [File No. S7-23-03] (adoption of 
Regulation SHO).
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    Fourth, the NYSE is rescinding Rule 284 and incorporating those 
``buy-in'' procedures into Rule 282. The NYSE is also amending Rules 
289 and 290 to clarify the requirements and timeframes upon which a 
defaulting member may deliver against a ``buy-in'' notice. Fifth, the 
NYSE is making certain technical amendments to Rules 282, 289, and 290 
to better coordinate the rules with industry practice.

III. Discussion

    Section 6(b)(5) of the Act requires that rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect, and facilitating 
transactions in securities, to remove impediments to and to perfect the 
mechanism of a free and open market and a national market system and, 
in general, to protect investors and the public interest.\5\ The 
Commission finds that the NYSE's proposed amendments to its buy-in 
rules should aid members in the clearance and settlement of their 
transactions by improving and making consistent with other self-
regulatory organizations' rules its buy-in procedures.
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    \5\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-NYSE-2005-50) be, and it 
hereby is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6753 Filed 12-1-05; 8:45 am]

BILLING CODE 8010-01-P