Document ID: SEC-2007-1014-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange LLC
Posted Date: 2007-07-27T04:00Z

[Federal Register: July 27, 2007 (Volume 72, Number 144)]
[Notices]               
[Page 41377-41380]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy07-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56107; File No. SR-NYSE-2007-56]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
Extending the Portfolio Margin Pilot Program Under NYSE Rules 431 
(Margin Requirements) and 726 (Delivery of Options Disclosure Document 
and Prospectus)

July 19, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on June 28, 2007, the New York Stock Exchange LLC 
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been 
substantially prepared by the Exchange.

[[Page 41378]]

The Exchange has designated the proposed rule change as constituting a 
``non-controversial'' rule change pursuant to section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. 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\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE is filing with the Commission rules previously approved in 
order to secure a one-year extension of the pilot program (from August 
1, 2007 until July 31, 2008) reflected in the changes embodied in SR-
NYSE-2006-13, which was approved by the Commission on December 12, 2006 
on a pilot basis, to expire on July 31, 2007.\5\ The previously 
approved changes to NYSE Rule 431 (``Margin Requirements'') expanded 
the scope of products that are eligible for treatment as part of the 
original Commission-approved portfolio margin pilot program \6\ and 
expanded pilot; \7\ eliminated the $5 million equity requirement, 
except for accounts that carry unlisted derivatives; and eliminated the 
use of a cross-margin account for margining eligible securities 
products with eligible commodity products. The approved pilot rules 
also deleted the ``Sample Portfolio Margining and Cross Margining Risk 
Disclosure Statement to Satisfy Requirements of Exchange Rule 431(g),'' 
previously found in NYSE Rule 726 (``Delivery of Options Disclosure 
Document and Prospectus'').\8\
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    \5\ See Exchange Act Release No. 54918 (December 12, 2006), 71 
FR 75790 (December 18, 2006) [SR-NYSE-2006-13].
    \6\ See Exchange Act Release No. 52031 (July 14, 2005), 70 FR 
42130 (July 21, 2005) [SR-NYSE-2002-19]; see also NYSE Information 
Memo 05-56, dated August 18, 2005, for additional information.
    \7\ See Exchange Act Release No. 54125 (July 11, 2006), 71 FR 
40766 (July 18, 2006) (SR-NYSE-2005-93); see also NYSE Information 
Memo 06-57, dated August 2, 2006, for additional information.
    \8\ See supra note 5.
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    There is no change to the rule text with this proposed rule change. 
The text of the proposed rule change is available at the NYSE's Web 
site (http://www.nyse.com), at the principal office of the NYSE, and at 

the Commission's Public Reference Room.

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. 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 is proposing to extend for one year the portfolio 
margin pilot program,\9\ which has been expanded to make the following 
products eligible for treatment under portfolio margin requirements: 
all margin equity securities,\10\ listed options, unlisted derivatives, 
and security futures products, provided certain requirements are met. 
The Exchange believes that the benefits which these regulations 
deliver, together with the widespread industry acceptance of the 
changes, supports a one year extension of the pilot program. Such an 
extension will give the Exchange an opportunity to better gauge the 
impact of the changes to the credit profile of its member organizations 
and to determine whether changes to the pilot are needed. The Exchange 
will also seek to determine whether fixed income securities should be 
added to the list of eligible products.
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    \9\ See supra note 5.
    \10\ The term ``margin equity security'' utilizes the definition 
at Section 220.2 of Regulation T of the Board of Governors of the 
Federal Reserve System, excluding a non-equity security.
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    The proposed rule change will facilitate the continuing evaluation 
of the portfolio margin pilot. The Exchange believes that the proposed 
rule change is non-controversial, given the extensive prior publication 
of the portfolio margining rules, their previous approval in pilot 
status, the lack of problematic public comment on prior filings, and 
the lack of comment on the December 2006 approval of the pilot 
program.\11\
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    \11\ See supra note 5.
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a. The Original Pilot
    On July 14, 2005, the Commission approved the original portfolio 
margin rules that amended Exchange Rules 431 and 726 to permit, on a 
two-year pilot basis, the use of a prescribed risk-based methodology 
\12\ for listed, broad-based U.S. index options and index warrants, 
along with any underlying instruments, as an alternative to the 
strategy or position based margin requirements,\13\ currently required 
in Rule 431(a) through (f).
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    \12\ See supra note 6.
    \13\ Prior to the portfolio margin pilot, member organizations 
were solely subject, pursuant to NYSE Rule 431, to strategy or 
positioned-based margin requirements. This methodology applied 
specific margin percentage requirements as prescribed in Rule 431 to 
each security position and/or strategy, either long or short, held 
in a customer's account, irrespective of the fact that all security 
(e.g., options) prices do not change equally (in percentage terms) 
with a change in the price of the underlying security. When 
utilizing a portfolio margin methodology, offsets are fully 
realized, whereas under strategy or position-based methodology, 
positions and/or groups of positions comprising a single strategy 
are margined independently of each other and offsets between them do 
not efficiently impact the total margin requirement.
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b. Portfolio Margin Requirements
    Portfolio margining is a margin methodology that sets margin 
requirements for an account based on the greatest projected net loss of 
all positions in a product class or group. The pilot utilizes a 
Commission-approved theoretical options pricing model.\14\ These 
scenarios are designed to measure the theoretical loss of the positions 
given changes in both the underlying price and implied volatility 
inputs to the model. Accordingly, the margin required is based on the 
greatest loss that would be incurred in a portfolio if the value of its 
components move up or down by a predetermined amount. Member 
organizations are no longer required to compute a margin requirement 
for each individual position or strategy for eligible positions in a 
customer's portfolio margin account.\15\
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    \14\ The theoretical options pricing model is used to derive 
position values at each valuation point for the purpose of 
determining the gain or loss. For purposes of the portfolio margin 
pilot, the amount of initial and maintenance margin required with 
respect to a portfolio is the larger of: (1) The greatest loss 
amount among the valuation calculations; or (2) the sum of $.375 for 
each option and security future in the portfolio multiplied by the 
contract's (e.g. 100 shares per contract) or instrument's 
multiplier.
    \15\ See NYSE Rule 431.
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    Utilizing portfolio margin enables the portfolio to be subjected to 
certain preset market volatility parameters that reflect historical 
moves in the underlying security thereby assessing potential loss in 
the portfolio in the aggregate. Accordingly, such a methodology 
provides a more risk based calculation of margin requirements.
    As a pre-condition to permitting portfolio margining, member 
organizations are required to establish

[[Page 41379]]

comprehensive procedures and controls to monitor credit risk to the 
member organization's capital, including intra-day credit risk and 
stress testing of portfolio margin accounts. Further, member 
organizations must establish procedures for regular review and testing 
of these required risk analysis procedures and controls.\16\
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    \16\ See NYSE Rule 431(g).
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c. Expanded Pilot
    On December 29, 2005, the Exchange filed with the Commission a 
proposed rule change to Rule 431 to expand the approved products for 
certain customers eligible for treatment under portfolio margin 
requirements to include security futures and single stock options.\17\ 
Collectively, these approved pilot rules are referred to as the 
``Expanded Pilot.'' \18\ The Expanded Pilot was noticed for comment in 
the Federal Register on January 23, 2006.\19\ The comment period that 
ended February 13, 2006, resulted in three comment letters received, 
dated February 13, 2006, from the Securities Industry Association, 
Citigroup Global Markets Inc. and the Futures Industry Association.
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    \17\ The Exchange and CBOE received letters in late September 
2005 from SEC Chairman Cox asking the SROs to consider expanding 
portfolio margining to a broader universe of products. The SEC 
encouraged the Exchanges to file a rule proposal before year-end 
2005.
    \18\ The discussion under the ``Expanded Pilot'' section 
includes the portfolio margin rules, as expanded to include security 
futures and single stock options only. This discussion does not 
include the portfolio margin rules as approved by the Commission in 
December 2006. See Sections I and II.A.1. for a discussion of the 
portfolio margin rules as approved in December 2006; see also supra 
note 5.
    \19\ See Exchange Act Release No. 53126 (January 13, 2006) 71 FR 
3586 (January 23, 2006) [SR-NYSE-2005-93].
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    On June 2, 2006 the Exchange filed with the Commission a response 
to the comment letters. In its response to comments, the Exchange noted 
that many of the comments included in these three letters were 
addressed in a subsequent rule filing, SR-NYSE-2006-13 \20\ that was 
made by the Exchange with the Commission on March 1, 2006. 
Specifically, in SR-NYSE-2006-13, the Exchange proposed the elimination 
of the cross-margin account and the expansion of the types of eligible 
products that could be included in a portfolio margining account.\21\
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    \20\ See Exchange Act Release No. 53577 (March 30, 2006) 71 FR 
17539 (April 6, 2006) [SR-NYSE-2006-13].
    \21\ See supra note 5.
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    On July 11, 2006, the Commission approved the Expanded Pilot \22\ 
to include listed security futures and listed single stock options as 
eligible products for customer portfolio margining.
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    \22\ See supra notes 7 and 18.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the section 6(b) of the Act,\23\ in general, and furthers the 
objectives of section 6(b)(5) \24\ of the Act, in particular, because 
it is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest. A one-year 
extension of the portfolio margin pilot program is consistent with this 
section in that it will enable the Exchange to better judge the 
operation and benefit of the rules, which in turn are expected to 
better align margin requirements with the actual risk of hedged 
products, potentially alleviate excess margin calls and potentially 
reduce the risk of forced liquidations of positions in customer 
accounts. In addition, it will allow the Exchange to study the impact 
of these changes to the credit profile of its member organizations.
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule change does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative prior 
to 30 days after the date of filing, or such shorter time as the 
Commission may designate, it has become effective pursuant to section 
19(b)(3)(A) of the Act \25\ and Rule 19b-4(f)(6) thereunder.\26\
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NYSE-2007-56 on the subject line.

Paper Comment

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSE-2007-56. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, 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 Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of NYSE. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-NYSE-2007-56 and 
should be submitted on or before August 17, 2007.

[[Page 41380]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-14503 Filed 7-26-07; 8:45 am]

BILLING CODE 8010-01-P