Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to Minimum Net Capital and Excess Net Capital Requirements for Members

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42239; File No. SR-CHX-99-20]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Stock Exchange, Inc. Relating to Minimum Net

Capital and Excess Net Capital Requirements for Members

December 15, 1999.

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 September 24, 1999, the Chicago Stock Exchange, Inc. (``CHX'' 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 CHX. On December

8, 1999, the CHX submitted Amendment No. 1 to the proposed rule

change.\3\ The Commission is publishing the notice to solicit comments

on the proposed rule change from interested persons.

---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4

\3\ In Amendment No. 1, the CHX clarified Interpretation .01 to

Rule 3 of Article XI and made technical amendments to the proposed

rule language. See letter from Kathleen M. Boege, Associate General

Counsel, CHX, to Jack Drogin, Senior Special Counsel, Division of

Market Regulation, Commission, dated December 7, 1999.

---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

The Exchange proposes to amend Article XI, Rule 3 of the Exchange's

rules to modify the minimum net capital and excess net capital

requirements applicable to members of the Exchange who are specialists

or who carry accounts of specialists. Below in the text of the proposed

rule change. Proposed new language is italicized; proposed deletions

are in brackets.

Article XI--Financial Responsibility and Reporting Requirements

* * * * *

Net Capital and Aggregate Indebtedness

Rule 3. (a)(1) Except as otherwise provided below, a member or

member organization shall at all times--

(i) maintain net capital not less than that prescribed by SEC 15C3-

1 (17 CFR 240.15c3-1) and

(ii) maintain subordinated cash borrowing and secured demand notes

equal to or greater than 50% of its total subordinated borrowings to

the extent that these subordinated borrowings are part of the debt

equity total.

* * * * *

(3) a member or member organization that is registered as a

specialist on the Exchange [in less than 200 securities] and that

clears its own specialist account(s) shall at all time--

(i) maintain[,] (A) at a minimum, net capital that is equal to the

greater of (1)[a] $100,000 [$250,000, subject to the phase-in period

set forth in Interpretation and Policy .01, below] or (2)[(b)] the

amount prescribed by SEC 15c3-1 (17 CFR 240.15c3-1); and (B) excess net

capital equal to the greater of (1) $500,000 (or the minimum amount

required by National Securities Clearing Corporation (``NSCC'') for

such direct participants), subject to the phase-in-period set forth in

Interpretation and Policy .01, below or (2) the amount prescribed by

SEC 15c3-1.

* * * * *

[(4) A member or member organization that is registered as a

specialist on the Exchange in 200 or more securities and that clears

its own specialist account(s) shall at all times--

(i) maintain, at a minimum, net capital that is the greater of (a)

$350,000, subject to the phase-in period set forth in Interpretation

and Policy .01, below, or (b) the amount prescribed by SEC 15c3-1) (17

CFR 240.15c3-1); and

(ii) maintain subordinated cash borrowings and secured demand notes

equal to or greater than 50% of its total subordinated borrowings to

the extent that these subordinated borrowing are part of the debt

equity total.]

(4) [5] A member or member organization that clears the specialist

accounts of another member or member organization registered as a

specialist on the Exchange shall, at all times--

(i) maintain[,] (A) at a minimum, net capital that is equal to the

greater of (1)[a] $250,000 [$500,000, subject to the phase-in period

set forth in Interpretation and Policy .01, below] or (2)[(b)] the

amount prescribed by SEC 15c3-1 (17 CFR 240.15c3-1); and (B) excess net

capital equal to the greater of (1) $1,000,000 (or the minimum amount

required by NSCC for such direct participants), subject to the phase-in

period set forth in Interpretation and Policy .01, below or (2) the

amount prescribed by SEC 15c3-1.

* * * * *

(5) [6] * * *

(6) [7] * * *

Interpretations and Policies

.01 Phase-In Periods for Minimum Capital Standards for Self-

Clearing Specialists and Firms Clearing Specialist Accounts.

On [May 31, 1999] (insert date 30 days after date of SEC approval

order), the Exchange adopted separate minimum net capital and excess

net capital standards for self-clearing specialists and firms clearing

other specialist accounts, as specified in subsections (a)(3) and

(a)(4) [and (a)(5) above. These minimum capital standards are to be

phased in over a 12 month (or other time period based on date of SEC

approval order) period.

Self-Clearing Specialists [Registered as Specialist in Less Than

200 Securities: $250,000 Standard]

The amount specified in Rule 3(a)(3)(i)(B)(1) above shall be

[$150,000 effective on May 31, 1999;] $200,000 effective on November

30, 1999; [and $250,000] $350,000 effective on May 31, 2000; and

$500,000 effective on June 30, 2000.

[Registered as a Specialist in 200 or More Securities: $350,000

Standard].

The amount specified in Rule 3(a)(4)(i)(a) above shall be $200,000

effective on May 31, 1999; $275,000 effective on November 30, 1999; and

$350,000 effective on May 31, 2000.]

Firms Clearing Other Specialist Accounts: [$500,000 Standard].

The amount specified in Rule 3(a)(4)(i)(B)(1) above shall be

[$350,000 effective on May 31, 1999;] $425,000 effective on November

30, 1999; [and] $500,000 effective on May 31, 2000; and $1,000,000

effective on June 30, 2000.

[[Page 71836]]

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 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 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 purpose rule change is intended to ensure that the Exchange's

members who are specialists or who carry accounts of specialists meet

the financial responsibility requirements imposed by qualified clearing

agencies \4\ as well as the Commission. The Exchange's current rules,

and the rules of the MCC, permit floor members of the Exchange to

establish `'sponsored accounts'' pursuant to which the MCC provides

sponsored participants with access to clearance, settlement and

delivery via a qualified clearing agency such as the National

Securities Clearing Corporation (``NSCC''). The Exchange in turn

provides a guaranty to the NSCC (and through the NSCC to the Depository

Trust Company (``DTC'')) from time to time to guarantee the obligations

of the MCC with respect to liabilities that could be generated in

sponsored accounts.\5\ In order to minimize the Exchange's exposure

through sponsored accounts and in keeping with capital requirements

imposed by the Act, the Exchange's rules governing members' financial

responsibility and reporting requirements contain provisions

establishing minimum net capital requirements for specialists and those

who carry accounts of specialists.\6\

---------------------------------------------------------------------------

\4\ See Midwest Clearing Corporation (``MCC'') Rules, Art. XI,

Rule 1.

\5\ See CHX Rules, Art. XXI, Rule 14.

\6\ See CHX Rule, Art. XI, Rule 3.

---------------------------------------------------------------------------

The Exchange and the MCC have determined to discontinue the

sponsored account program, effective June 30, 2000, after which time

the MCC will be dissolved and the Exchange will no longer guarantee the

MCC's obligations to qualified clearing agencies. Accordingly, it will

be necessary for all current sponsored participants to become direct

participants in qualified clearing agencies such as NSCC and DTC. The

Exchange thus proposes to amend Article XI, Rule 3 to incorporate the

minimum net capital and excess net capital requirements currently

required for direct participation in NSCC, subject to the amended

phase-in periods set forth in Interpretation and Policy .01 to the

amended rule. It is anticipated that the proposed phase-in periods will

ameliorate any financial burden that might otherwise be placed on

members who are specialists or who carry accounts of specialists.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent

with Section 6(b)(5) \7\ of the Act in that it is designed to promote

just and equitable principles of trade, to remove impediments 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.

---------------------------------------------------------------------------

\7\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------

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

No written comments were solicited or received.

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 self-regulatory organization 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

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 available for inspection and copying in the Commission's

Public Reference Room. Copies of such filing will also be available for

inspection and copying at the principal office of the CHX. All

submissions should refer to File No. SR-CHX-99-20 and should be

submitted by January 12, 2000.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

---------------------------------------------------------------------------

\8\ 17 CFR 200.30-3(a)(12).

---------------------------------------------------------------------------

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-33177 Filed 12-21-99; 8:45 am]

BILLING CODE 8010-01-M