Skip to Content


Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the International Securities Exchange LLC, Relating to Requirements for Joint Back Office Arrangements

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble March 6, 2002.

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 February 13, 2002, the International Securities Exchange LLC (“ISE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The ISE is proposing to adopt Rule 1303, “Joint Back Office Arrangements,” to establish margin and net capital requirements for ISE members participating in joint back office (“JBO”) arrangements.[3] The text of the proposed rule change is available at the Office of Start Printed Page 11366the Secretary, ISE, 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 ISE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The ISE 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 proposes to adopt Exchange Rule 1303 to establish requirements for JBO arrangements.[4] The proposed rule would provide certain regulatory requirements for establishing and maintaining such JBO arrangements.[5] A broker-dealer that carries and clears, or carries JBO accounts would be required to: (i) Provide written notification to its Designated Examining Authority prior to establishing a JBO; (ii) maintain minimum tentative net capital[6] of $25 million, or maintain minimum net capital of $7 million if engaged in the primary business of clearing options market maker accounts;[7] (iii) provide prompt written notice when tentative net capital or net capital, whichever may apply, falls below the prescribed standard; (iv) take appropriate action within three business days to resolve any capital deficiency;[8] (v) maintain a written risk methodology for assessing the amount of credit extended to participating broker-dealers, and (vi) deduct from net capital, the “haircut” requirements pursuant to the Commission's Net Capital Rule (Rule 15c3-1)[9] in excess of the equity maintained in the accounts of participating broker-dealers.

Furthermore, under the proposal JBO participants must be registered broker-dealers subject to Rule 15c3-1, and will be required to maintain an ownership interest in the JBO pursuant to Regulation T. Exclusive of their ownership interest in the JBO arrangement, JBO participants must maintain a minimum liquidating equity of $1 million. If the liquidating equity falls below $1 million, the JBO participant must eliminate the deficiency within five business days or become subject to the margin requirements for customers in Regulation T, and the maintenance margin requirements pursuant to the provisions of Exchange Rule 1202.[10]

2. Statutory Basis

The ISE believes that the proposed rule change is consistent with Section 6(b) of the Act,[11] in general, and furthers the objectives of Section 6(b)(5) [12] in particular, which requires that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Exchange also believes that the proposed rule is consistent with the rules and regulations promulgated by the FRB for the purpose of preventing the excessive use of credit for the purchase or carrying of securities, pursuant to Section 7(a) of the Act.[13]

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.

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

Written comments were neither solicited nor received.

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

The proposed rule change has been filed by the Exchange as a “non-controversial” rule change pursuant to Section 19(b)(3)(A)(iii) of the Act [14] and Rule 19b-4(f)(6) thereunder.[15] Because the foregoing proposed rule change: (1) Does not significantly affect the protection of investors or the public interest, (2) does not impose any significant burden on competition, and (3) by its terms does not become operative for 30 days after February 13, 2002, the date on which it was filed, or such shorter time as the Commission may designate, and the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to the filing date, it has become effective pursuant to Section 19(b)(3)(A)(iii) [16] of the Act and Rule 19b-4(f)(6) [17] thereunder. At any time within 60 days of the filing of the 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 Start Printed Page 11367available for inspection and copying at the Commission's Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the ISE. All submissions should refer to File No. SR-ISE-2002-05 and should be submitted by April 3, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[18]

J. Lynn Taylor,

Assistant Secretary.

End Signature End Preamble


3.  In February 2000, the Commission issued a single order approving substantially uniform requirements with respect to JBO arrangements submitted by the American Stock Exchange, the Chicago Board Options Exchange (“CBOE”), the Chicago Stock Exchange, the New York Stock Exchange (“NYSE”), the Pacific Exchange and the Philadelphia Stock Exchange. Securities Exchange Act Release No. 42453 (Feb. 24, 2000), 65 FR 11620 (Mar. 3, 2000). In May 2000, the Commission approved JBO requirements submitted by the National Association of Securities Dealers. Securities Exchange Act Release No. 42858 (May 30, 2000), 65 FR 36194 (June 7, 2000). There were only minor differences between the proposals adopted by each of these SROs. The proposed ISE Rule is identical to the requirements adopted by the NYSE.

Back to Citation

4.  Regulation T, issued by the Board of Governors of the Federal Reserve System (“FRB”), permits a broker-dealer to “effect or finance transactions of any of its owners if the [broker-dealer] is a clearing and servicing broker or dealer owned jointly or individually by other [broker-dealers].” 12 CFR 220.7(c).

Back to Citation

5.  Because all other SROs (other than the Cincinnati Stock Exchange) currently have the proposed requirements in their rules, and every ISE member is also a member of at least one of these SROs, the proposal will not place any requirements on ISE members to which they are not already subject.

Back to Citation

6.  The term “tentative net capital” generally refers to net capital before the application of “haircuts” and undue concentration charges on securities and options positions.

Back to Citation

7.  Under the proposed rule, clearance of options market maker accounts would be deemed a broker-dealers primary business if a minimum of 60% of the aggregate deductions in the ratio of gross options market maker deductions to net capital (including gross deductions for JBO participant accounts) are options market maker deductions.

Back to Citation

8.  Under the proposed rule, failure to correct such deficiencies within the allotted period will preclude the JBO carrying and clearing, or carrying, member from accepting any new transactions pursuant to the JBO arrangement.

Back to Citation

9.  17 CFR 240.15c3-1 et seq., “Net Capital Requirements for Brokers or Dealers.” Rule 15c3-1 requires a broker-dealer to reduce its net worth by certain percentages, known as “haircuts,” of the market value of its securities position.

Back to Citation

10.  Rule 1202 permits Members to elect to be bound by the margin rules of either the CBOE or the NYSE.

Back to Citation

14.  15 U.S.C. 78s(b)(3)(A)(iii).

Back to Citation

16.  15 U.S.C. 78s(b)(3)(A)(iii).

Back to Citation

[FR Doc. 02-5929 Filed 3-12-02; 8:45 am]