Document ID: SEC-2007-1766-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, LLC
Posted Date: 2007-12-28T05:00Z

[Federal Register: December 28, 2007 (Volume 72, Number 248)]
[Notices]               
[Page 73947-73949]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de07-197]                         

[[Page 73947]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57000; File No. SR-NYSE-2007-101]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of a Proposed Amendment to NYSE Rule 104.21 
(``Specialist Organizations--Additional Capital Requirements'')

December 20, 2007.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is 
hereby given that on November 2, 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. The Commission is publishing 
this notice to solicit comments on the proposed rule changes from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78(a) et seq.
    \3\ 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 New York Stock Exchange LLC (``NYSE'' or ``Exchange'') is 
filing with the Securities and Exchange Commission (``SEC'' or 
``Commission'') a proposed rule change to amend NYSE Rule 104.21 
(``Specialist Organizations--Additional Capital Requirements''), which 
would reduce the net liquid asset requirements for specialist member 
organizations. The text of the proposed rule change is set forth below. 
Proposed new language is italicized; brackets indicate deletions.
* * * * *

Rule 104. Dealings by Specialists

    (a)-(b)--No Change.
    * * *
Supplementary Material:

Functions of Specialists

    .10 through .20--No Change.

.21 Specialist Organizations--Additional Capital Requirements.--

    (1) Each specialist organization subject to Rule 104.21 must 
maintain minimum net liquid assets equal to:
    (i) [$1,000,000] $250,000 for each one tenth of one percent (.1%) 
of Exchange transaction dollar volume in its registered securities, 
exclusive of Exchange Traded Funds, plus $500,000 for each Exchange 
Traded Fund; and * * *
Remainder of Rule--No Change
* * * * *

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

Background

    Specialist member organizations must maintain net liquid assets as 
required by NYSE Rule 104, and in addition, must satisfy the net 
capital requirements prescribed in Rule 15c3-1,\4\ promulgated under 
the Securities Exchange Act of 1934 (the ``Exchange Act'').\5\ NYSE 
Rule 325 requires members and member organizations to comply with 
Exchange Act Rule 15c3-1 and also requires notification to the Exchange 
whenever tentative net capital has declined below defined levels. In 
addition, Rule 325 gives the Exchange the authority, at any time, to 
prescribe greater net capital or net worth requirements than those 
explicitly prescribed by the rule, or to require more stringent 
treatment of items when computing net capital, net worth and, by 
implication, net liquid assets. Further, the NYSE can restrict the 
business activities of specialist organizations consistent with good 
business practices and its obligation to maintain a fair and orderly 
market. Such restrictions may include prohibitions against business 
expansion and business reduction requirements.
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    \4\ 17 CFR 240.15c3-1.
    \5\ 15 U.S.C. 78a et seq.
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    The term ``net liquid assets'' refers to liquidity, in the form of 
cash and cash equivalents, that is immediately available (within twenty 
four hours) to a specialist organization for the continuing purchase 
and sale of securities in which a specialist is registered, in support 
of the specialist book, and market maintenance. It is a shorter-term 
form of liquidity that is meant to be available to the specialist 
organization to facilitate the performance of its affirmative duty to 
maintain a fair and orderly market on the Exchange. In addition, it is 
important for all specialist organizations and market participants to 
know that specialists have sufficient liquidity to support the 
specialist book and market maintenance activities.
    Specialist member organizations' unique liquidity needs dictate the 
general form of the net liquid asset requirement. Therefore, a 
specialist organization's net liquid asset requirement functions to 
ensure that the specialist is able to continue operations; whereas a 
broker-dealer's net capital requirement functions to ensure that, if 
the broker-dealer were liquidated, the broker-dealer's obligations to 
its customers and creditors would be satisfied.
    On July 25, 2006, the SEC approved amendments to NYSE Rule 104 
(``Dealings by Specialists'') to change the net liquid asset 
requirement for specialist member organizations.\6\ The amendments 
restructured the net liquid asset requirement for specialist 
organizations from an approach based on valuation of classes of 
allocated securities (``concentration measures''), which included 
penalties for mergers among specialists, to an approach based on 
specialist market share that is measured by total dollar volume traded 
combined with market stress and volatility risk analysis.
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    \6\ See Release No. 34-54205 (July 25, 2006); 71 FR 43260 (July 
31, 2006) File No. SR-NYSE-2005-38) (approving amendments to NYSE 
Rules 104 and 123E (``Specialist Combination Review Policy'') which 
change the capital requirements of specialist organizations). See 
also NYSE Information Memo 06-56 (August 2, 2006).
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    Pursuant to the 2006 amendments, NYSE Rule 104.21 (``Specialist 
Organizations--Additional Capital Requirements'') currently requires, 
in part, that each specialist organization subject to the provision 
maintain minimum net liquid assets equal to $1,000,000 for each one 
tenth of one percent (.1%) of the Exchange transaction dollar volume in 
its registered securities, exclusive of Exchange Traded Funds, plus 
$500,000 for each Exchange Traded Fund, in addition to the market risk 
add-on under Rule 104.21(2). Additionally, the filing noted that, as a 
result of the changes to the structure of the marketplace, NYSE would 
be assessing market risks annually to determine the continuing adequacy 
of the net liquid asset requirements.

[[Page 73948]]

Proposed Rule Change

    The proposed rule change would reduce the total base capital 
requirement that must be maintained as net liquid assets for all 
specialists from $1 billion to $250 million. NYSE believes this amount 
will adequately protect specialist organizations during periods of 
market stress. Further, each of the specialist organizations have 
sources of funding that will provide necessary liquidity during a 
period of market stress. It is no longer necessary for this liquidity 
to be maintained as capital, as specialist positions and the likelihood 
of losses have been reduced dramatically due to changes in the 
structure of the market.

Analysis

    The role of specialists has changed significantly as increased 
electronic trading and the Exchange's ``Hybrid Market'' \7\ have 
contributed to lower participation by, and therefore less risk being 
assumed by, specialist organizations. In light of the reduced 
participation, NYSE is proposing a reduction in the minimum net liquid 
asset requirement under Rule 104.21(1) for specialist organizations.
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    \7\ See Release No. 34-53539 (March 22, 2006); 71 FR 16353 
(March 31, 2006) File No. SR-NYSE-2004-05) (approving amendments to 
NYSE Rules (approving the proposed rule change to establish the NYSE 
Hybrid Market). The rule change created a ``Hybrid Market'' by, 
among other things, increasing the availability of automatic 
executions in its existing automatic execution facility, NYSE 
Direct+, and providing a means for participation in the expanded 
automated market by its floor members. The change altered the way 
NYSE's market operates by allowing more orders to be executed 
directly in Direct+, which in essence moves NYSE from a floor-based 
auction market with limited automation order interaction to a more 
automated market with limited floor-based auction market 
availability.
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    The proposed net liquid asset reduction for specialist 
organizations is consistent with the current dealer position levels, 
the profitability results during the volatile periods of July and 
August 2007, as well as specialist participation statistics. FINRA, on 
behalf of the Exchange, undertook an assessment for the periods of: (1) 
July 2, 2007 through August 17, 2007, selected due to the volatility in 
the marketplace during this period; and (2) February 27, 2007, when the 
Dow Jones Industrial Averages, DJIA, declined by 416.02 points to test 
levels of specialist trading on the Exchange. The assessment focused on 
position levels, daily dealer account profit and loss, and market 
volatility. In addition, FINRA compared participation by equity 
specialists in trading on the Exchange pre and post Hybrid Market.
     Generally, during periods of volatility there were no 
material net losses by specialists. Also, there were no material drops 
in specialist Net Liquid Assets during these periods.
     The participation by specialist firms in trading on the 
Exchange has declined along with the proliferation of electronic 
trading and the significant change in the Exchange's trading system 
introduced by the Hybrid Market. The increased efficiency with which 
others can access the Exchange's market has increased liquidity and 
decreased the market's reliance on the specialist to provide the contra 
side in our continuous auction. While the NYSE considers specialist 
participation to still be an important feature of its Hybrid Market, 
that participation can be and is at a significantly lower level. For 
example, specialists participated in 15.1% of all shares bought and 
sold on the Exchange in August 2002, but consistent with the evolution 
of trading styles and our market model, the participation rate dropped 
to 8.5% in November 2005, and to approximately 3.9% today.
     Pro-forma daily net liquid asset positions with the 
proposed requirement for the week ending September 14, 2007 were 
prepared using actual computations submitted by each of the seven 
equity specialist firms.\8\ The first summary of calculations reflects 
the $1 billion requirement, whereas, the second set of calculations 
reflects the proposed $250 million requirement. Each of the 
calculations includes a market risk add on amounting to three times the 
average of the twenty prior business days securities haircuts on its 
specialist dealer positions computed pursuant to SEA Rule 15c3-
1(c)(2)(vi) exclusive of paragraph (N) or three times VaR, if approved 
to calculate under this methodology:
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    \8\ Effective at the close of business on November 30, 2007, one 
equity specialist firm resigned from the NYSE and its stocks will be 
reassigned to one of the six remaining firms. Further consolidation 
and/or reallocation of specialist books is possible in the future.

               Aggregate Specialist Data Current Requirement: $1 Billion Plus Market Risk Add-Ons
                                                  [000 Omitted]
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                                                                                            NLA
                   Trade date                        LMV          SMV          NLA        required    Excess NLA
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9/10/2007>.....................................     $183,841      $49,955   $1,380,063   $1,117,106     $262,957
9/11/2007>.....................................      122,939      128,276    1,381,871    1,112,180      269,692
9/12/2007>.....................................      162,047      121,583    1,379,123    1,109,360      269,763
9/13/2007>.....................................      148,012      181,734    1,378,222    1,108,381      269,841
9/14/2007>.....................................      135,832      164,699    1,378,537    1,106,220      272,317
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             Aggregate Specialist Data Pro-Forma Requirement: $250 Million Plus Market Risk Add-Ons
                                                  [000 Omitted]
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                                                                                          Proposed
                   Trade date                        LMV          SMV          NLA          NLA        Proposed
                                                                                          required    excess NLA
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9/10/2007>.....................................     $183,841      $49,955   $1,380,063     $367,106   $1,012,957
9/11/2007>.....................................      122,939      128,276    1,381,871      362,180    1,019,692
9/12/2007>.....................................      162,047      121,583    1,379,123      359,360    1,019,763
9/13/2007>.....................................      148,012      181,734    1,378,222      358,381    1,019,841
9/14/2007>.....................................      135,832      164,699    1,378,537      356,220    1,022,317
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[[Page 73949]]

    Based on the foregoing assessment, the proposed amendments would 
require a specialist organization to meet, with its own assets, a net 
liquid asset requirement equal to $250,000 for each one tenth of one 
percent (.1%) of the Exchange transaction dollar volume in its 
registered securities, exclusive of Exchange Traded Funds, plus 
$500,000 for each Exchange Traded Fund, in addition to the market risk 
add-on under Rule 104.21(2), amounting to three times the average of 
the prior twenty business days securities haircut on its specialist 
dealer positions computed pursuant to SEA Rule 15c3-1(2)(vi) exclusive 
of paragraph (N) or three times VaR, if approved to calculate under 
this methodology.
    Finally, the proposal takes into consideration the circuit breakers 
in effect to prevent a market freefall included in NYSE Rule 80B. NYSE 
Rule 80B provides for trading halts that are triggered when the DJIA 
declines below its closing value on the previous trading day by: 10% 
(level 1), 20% (level 2), and 30% (level 3). At level 3, trading shall 
halt and not resume for the rest of the day. The intent of the halts is 
to allow buyers and sellers an opportunity to regroup and objectively 
assess the marketplace.
    FINRA, on behalf of NYSE, will continue to assess the specialists' 
net liquid asset requirements in relationship to the Hybrid Market and 
monitor their net liquid assets on a daily basis. NYSE and FINRA 
require notification for all withdrawals of capital, and approval for 
any withdrawal being made on less than six months advance notice to the 
Exchange.
(2) Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Exchange Act \9\ which requires, among other things, that the 
rules of the Exchange are 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 to, and facilitating transactions in 
securities, to remove impediments to perfect the mechanism of a free 
and open market and national market system, and in general to protect 
investors and the public interest. The Exchange believes that the 
proposed rule change will reduce the burden on specialist member 
organizations to maintain net liquidity while still ensuring adequate 
protection of specialist organizations during periods of market stress. 
Each of the specialist organizations have sources of funding that will 
provide necessary liquidity during a period of market stress and thus, 
it is no longer necessary for this liquidity to be maintained as 
capital, as specialist positions and the likelihood of losses have been 
reduced dramatically due to changes in the structure of the market.
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    \9\ 15 U.S.C. 78f(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 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

    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 
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-2007-101 on the subject line.

Paper Comments

     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-2007-101. 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 the 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-2007-101 and should be 
submitted on or before January 18, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25183 Filed 12-27-07; 8:45 am]

BILLING CODE 8011-01-P