

[Federal Register: April 5, 2007 (Volume 72, Number 65)]
[Notices]               
[Page 16839-16841]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ap07-139]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55559; File No. SR-NYSE-2005-03]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing of Amendment No. 3 to and Order Granting Accelerated 
Approval of Proposed Rule Change, as Amended Related to Exchange Rule 
325 (Capital Requirements for Member Organizations) and Rule 326 
(Growth Capital Requirement, Business Reduction Capital Requirement, 
Unsecured Loans and Advances)

 March 29, 2007.

I. Introduction

    On January 5, 2005, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act''),\1\ and Rule 
19b-4 thereunder,\2\ the proposed rule change relating to Exchange 
Rules 325 and 326. The NYSE filed Amendment No. 1 to the proposed rule 
change on February 13, 2006. The NYSE filed Amendment No. 2 to the 
proposed rule change on March 17, 2006.\3\ The proposed rule change was 
published in the Federal Register on August 8, 2006.\4\ The Commission 
received one comment on the proposal.\5\ On February 1, 2007, the 
Exchange filed Amendment No. 3 to the proposed rule change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Partial Amendment No. 2 (``Amendment No. 2''), the 
Exchange clarified the application of proposed amendments to NYSE 
Rule 326 to make explicit the ability of the Exchange to restrict 
the growth or business of a member organization, respectively, when 
its tentative net capital declines below the early warning 
notification amount required by the Exchange Act Rule 15c3-
1(a)(7)(ii).
    \4\ Exchange Act Release No. 54255 (July 31, 2006), 71 FR 45086 
(August 8, 2006).
    \5\ See letter from Thomas Petrone, Managing Director, Citigroup 
Global Markets, Inc. to Nancy M. Morris, Secretary, Commission, 
dated September 13, 2006.
    \6\ See Partial Amendment No. 3 dated February 1, 2007 (`` 
Amendment No. 3''). Amendment No. 3 proposed amended language to 
Rules 325 and 326 to add an early warning notification more 
restrictive than Commission/CFTC requirements. The text of Amendment 
No. 3 is available at the NYSE, the Commission's Public Reference 
Room, and http://www.nyse.com.

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    This order provides notice of Amendment No. 3 to the proposed rule 
change and approves the proposed rule change as amended on an 
accelerated basis.

II. Description of the Proposal

    The proposed rule change consists of amendments to Rule 325 and 
Rule 326 to reflect Commission amendments under the Exchange Act, 
including amendments to Exchange Act Rule 15c3-1 that established an 
alternative method of computing net capital for broker-dealers, and to 
reflect amendments to Commodity Futures Trading Commission rules 
(``CFTC'') under the Commodities Exchange Act \7\ with respect to 
minimum net capital requirements for futures commission merchants.\8\
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    \7\ 7 U.S.C. 1 et seq.
    \8\ The CFTC rules became effective on September 30, 2004. See 
69 FR 49784 (Aug. 12, 2004). The Commission also recently proposed 
amendments to Exchange Act Rule 15c3-1 and Rule 17a-11 to conform 
provisions of its net capital rule to the CTFC amendments. See 
Exchange Act Release No. 54575 (October 5, 2006), 71 FR 60636 
(October 13, 2006).
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    The Commission's net capital rule, Exchange Act Rule 15c3-1, 
imposes minimum financial requirements on broker-dealers.\9\ To help 
insure that broker-dealers maintain sufficient liquid assets to satisfy 
promptly the claims of customers and cover potential market and credit 
risks, the net capital rule requires broker-dealers to maintain 
different minimum levels of capital based upon the nature of their 
business and whether they handle customer funds or securities.
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    \9\ 17 CFR 240.15c3-1.
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    On June 8, 2004, the Commission adopted rule amendments under the 
Exchange Act, including amendments to Exchange Act Rule 15c3-1, that 
established a voluntary, alternative method of computing net capital 
for certain large broker-dealers that are part of consolidated 
supervised groups referred to as consolidated supervised entities 
(``CSEs'').\10\ Under the Commission amendments, a broker-dealer may 
use this alternative method only if its ultimate holding company agrees 
to compute group-wide allowable capital and allowances for market, 
credit, and operational risk in accordance with the standards adopted 
by the Basel Committee on Banking Supervision, and consents to group-
wide Commission supervision. The alternative method of computing net 
capital permits a broker-dealer to use

[[Page 16840]]

models, such as ``value-at-risk'' (``VAR'') models and scenario 
analysis, which are already part of its internal risk management 
control system to calculate the market risk and derivatives-related 
credit risk components of its net capital requirement. The deduction 
for market risk calculated using internal models replaces the 
traditional ``haircut'' approach to calculating net capital.\11\
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    \10\ Exchange Act Release No. 49830 (June 8, 2004), 69 FR 34425 
(June 21, 2004).
    \11\ The ``haircut'' approach to computing net capital involves 
reducing the value of firms' proprietary securities by pre-
determined percentages to allow for potential reductions in market 
value. See paragraph (c)(2)(vi) of Rule 15c3-1.
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    In 2004, the CFTC amended Rule 1.17 and adopted certain new 
``risked-based'' capital requirements applicable to futures commission 
merchants.\12\ CFTC Rule 1.17, as amended, requires a futures 
commission merchant to maintain adjusted net capital equal to a 
specific percentage of the margin required to be collected under 
exchange or clearing organization rules for positions carried in 
customer and noncustomer accounts.\13\
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    \12\ See supra note 8.
    \13\ 17 CFR 1.17.
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    When NYSE member firms allow their net capital to decline below 
certain levels, the firms risk non-compliance with the requirements of 
Exchange Act Rule 15c3-1. NYSE Rules 325 and 326 are designed to alert 
the Exchange before such problems occur, and to enable the Exchange to 
prevent membership non-compliance by restricting the business 
activities of any member organization whose net capital falls below 
certain defined levels.

Proposed Amendment to NYSE Rule 325

    Rule 325, the Exchange's primary net capital rule, requires NYSE 
member firms to comply with Exchange Act Rule 15c3-1 and imposes 
additional requirements to ensure such compliance. Rule 325(b) requires 
a member organization to notify the Exchange if its net capital falls 
below certain percentages. The proposed amendments to Rule 325(b)(1) 
reflect recent changes to the CFTC rules with respect to risk-based 
capital requirements for futures commission merchants. The proposed 
amendments conform Rule 325 to these CFTC rule changes.\14\
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    \14\ See supra note 8; see also 17 CFR 1.17.
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    In addition, the proposed amendments also add Rule 325(b)(3), which 
would require a member organization to provide concurrently to the 
Exchange a copy of any report or notification made to the Commission 
pursuant to Exchange Act Rule 17a-11 \15\ or CFTC Rule 1.12.\16\ The 
NYSE stated that this new requirement is necessary to help ensure that 
the Exchange continues to receive timely notification of potential 
violations of Exchange Act Rule 15c3-1, including the rule's CSE 
provisions. Therefore, because CFTC Rule 1.12 requires notification by 
any futures commission merchant that experiences a decline in net 
capital below the CFTC's early warning levels, the Exchange will 
continue to receive notification if a member organization acting as 
futures commission merchant is in danger of violating CFTC minimum 
capital requirements.
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    \15\ 17 CFR 240.17a-11.
    \16\ 17 CFR 1.12.
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Proposed Amendments to NYSE Rule 326

    NYSE Rule 326, which enables the Exchange to restrict a member 
organization's business activities if its net capital falls below 
certain defined levels, uses a two-step approach to preventing 
membership non-compliance with Exchange Act Rule 15c3-1. First, Rule 
326(a) allows the Exchange to prohibit a member organization from 
expanding its business if its net capital falls below specified levels. 
Second, if a member organization's net capital falls below lower, 
specified levels, Rule 326(b) allows the Exchange to compel it to 
reduce its existing business. To enable the Exchange to regulate its 
membership proactively (that is, to act if a member or member 
organization is in danger of violating Exchange Act Rule 15c3-1, rather 
than waiting until Exchange Act Rule 15c3-1 has been violated), the 
levels specified in NYSE Rule 326 are higher than those contained in 
Exchange Act Rule 15c3-1.
    The proposed amendments would add language to provide minimum 
tentative net capital \17\ and net capital levels for the Exchange to 
use when prohibiting, under Rule 326(a), the expansion of business by a 
member organization using the alternative method of computing net 
capital under the Commission's CSE rules. The proposed amendments also 
conform the rule language with respect to member organizations 
registered as futures commission merchants to the CFTC rule amendments 
regarding risk-based capital requirements.
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    \17\ ``Tentative net capital'' is defined in the CSE rules as 
net capital before deductions for market and credit risk. See 
Exchange Act Rule 15c3-1(c)(15).
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    The NYSE stated that the levels proposed in Rule 326(a) for CSE 
firms (50 percent of the tentative net capital level that triggers 
Commission notification or a net capital level of less than $1.25 
billion) would not unduly restrict a member organization's business, 
but would allow the Exchange, after evaluating a member organization's 
financial condition, to use the disincentive of restricted business 
expansion to encourage necessary corrective action by a member 
organization whose net capital has fallen to levels that risk violation 
of Exchange Act Rule 15c3-1.
    The Exchange also proposes to amend Rule 326(a) to require a 
futures commission merchant to restrict its business activities during 
any period in which its net capital is less than 120 percent of the 
minimum risk-based capital requirements of CFTC Rule 1.17.
    The Exchange also proposes to amend Rule 326(b) to provide minimum 
tentative net capital and net capital levels for the Exchange to use in 
requiring a CSE firm to reduce its business pursuant to Rule 326(b). 
The Exchange stated that the levels proposed in Rule 326 (40 percent of 
the tentative net capital level that triggers Commission notification 
or net capital of less than $1 billion) would not unduly restrict a 
member organization's business, but would allow the Exchange, after 
evaluating a member organization's financial condition, to use the 
disincentive of mandatory business reduction to encourage necessary 
corrective action by a member organization whose net capital has fallen 
to levels that risk violation of Exchange Act Rule 15c3-1.
    The proposed rule changes to Rule 326(b) also would require a 
member organization to reduce its business if its net capital falls 
below 110 percent of the minimum capital requirements of CFTC Rule 1.17 
(the same level that triggers notification to the CFTC under CFTC Rule 
1.12). Therefore, the Exchange will retain the ability to compel a 
member organization to reduce its business if its net capital falls to 
levels that may violate CFTC minimum capital requirements.
    The Exchange also proposed rule amendments to Rules 326(c) and (d) 
to reflect the CFTC rule amendments with respect to risk-based capital 
requirements for futures commission merchants. These proposed rules 
amendments are parallel to the proposed changes to Rules 326(a) and 
(b), respectively.
    Finally, the proposed rule amendments contain proposed language 
changes to renumber certain paragraphs and other non-substantive 
changes.

[[Page 16841]]

III. Summary of Comment Received

    The Commission received one comment letter to the proposed rule 
change.\18\ The commenter supported prompt implementation of the 
proposal and commented specifically on the proposed changes to NYSE 
Rule 431(e). The NYSE, however, deleted this proposed paragraph in 
Amendment No. 3, and determined to proceed with the proposed rule 
change addressing amendments to NYSE Rules 325 and 326 only. No 
specific comments were received with respect to the proposed amendments 
to these rules.
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    \18\ See supra note 5.
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IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
comment letter and finds that the proposed rule change is consistent 
with the requirements of Section 6(b)(5) \19\ of the Exchange Act, 
which requires that the rules of the Exchange be designed to promote 
just and equitable principles of trade, 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.\20\
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    \19\ 15 U.S.C. 78f(b)(5).
    \20\ In approving the proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The Commission believes that the proposed amendments are consistent 
with the requirements of Section 6(b)(5) of the Act in that they align 
the language in Rules 325 and 326 to reflect the Commission amendments 
to Rule 15c3-1 with regard to the alternative method of computing net 
capital for broker-dealers and they incorporate the CFTC rule 
amendments for NYSE member firms registered as futures commission 
merchants.
    NYSE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of Amendment No. 3 in the Federal 
Register. The Commission notes that the proposal, as modified by 
Amendment Nos. 1 and 2, was published for notice and comment,\21\ and 
that the Commission received one comment letter.\22\ In Amendment No. 
3, NYSE made proposed changes to NYSE Rules 325 and 326 to make 
conforming changes to CFTC early warning requirements for futures 
commission merchants and determined not to proceed with amendments to 
Rule 431(e).\23\ Accordingly, the Commission does not believe that 
Amendment No. 3 raises any new or novel issues. Based on the above, the 
Commission finds good cause to accelerate approval of the proposed rule 
change, as amended.
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    \21\ See supra note 4.
    \22\ See supra note 5.
    \23\ The CFTC rules became effective on September 30, 2004. See 
69 FR 49784 (Aug. 12, 2004).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2005-03 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-2005-03. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NYSE.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSE-2005-03), as amended, 
be, and hereby is, approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-6311 Filed 4-4-07; 8:45 am]

BILLING CODE 8010-01-P
