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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41167; File No. SR-CHX-99-01]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

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

Establishment of Net Capital Requirements for Specialists

March 12, 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 February 26, 1999, the Chicago Stock Exchange, Inc. (``CHX'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the CHX.

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.

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

Substance of the Proposed Rule Change

The Exchange proposes to amend CHX Rule 3 of Article XI, and add

interpretation and policy .01 thereunder, to increase the minimum net

capital requirements for CHX. Below is the text of the proposed rule

change. Proposed new language is italicized; proposed deletions are in

brackets.

* * * * *

Article XI--Financial Responsibility and Reporting Requirements

Rule 3. Net Capital and Aggregate Indebtedness.

(a)(1) Except as otherwise provided below, [A] 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 borrowings 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.

(2) A member or member organization that is registered as a

specialist on the Exchange whose specialist transactions are effected

through and carried in a specialist account cleared by another broker

or dealer shall at all times--

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

$100,000, 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 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 times--

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

$250,000, 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 borrowings are part of the debt

equity total.

(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 borrowings are part of the debt

equity total.

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

$500,000, 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 borrowings are part of the debt

equity total.

[(2)](6) A member or member organization shall promptly notify the

Exchange if it ceases to be in compliance with the requirements of

clauses (1), (2), (3), (4) or (5) (which ever is applicable) of this

paragraph (a) or if it becomes obligated to file monthly reports under

paragraph (b) of this Rule. A member or member organization shall also

promptly notify the Exchange of any material unsecured or partly

secured loan, drawing in excess of share of profits, or other

obligation owed to the member or member organization by (i) any person,

including a subordinated lender, having a capital interest in the

member or member organization, (ii) any partner, officer, director or

employee of the member or member organization, or (iii) any

corporation, firm or entity in which any partner, officer, director or

employee of the member or member organization holds office or has a

material financial interest. Such notification may show such

obligations owed to the member or member organization by category

[[Page 14033]]

without personal identification, except that personal identification

shall be made in respect to any person having such obligations equal to

five percent or more of the member or member organization's debt equity

total.

[(3)](7) The Exchange may at any time or from time to time with

respect to a particular member or member organization or all members or

member organizations or a new member or member organization prescribe

greater net capital or net worth requirements than those prescribed

under this Rule including more stringent treatment of items in

computing net capital or net worth.

Monthly Financial Statements

(a) No exchange in text.

Responsibility of Computations of Net Capital Requirements

(b) No change in text.

Restrictions on Operations

(c) No change in text.

Interpretations and Policies

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

Clearing Specialists and Firms Clearing Specialist Accounts.

On [insert initial effective date], the Exchange adopted separate

minimum net capital standards for self-clearing specialists and firms

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

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

phased in over a 12 month period.

Registered as Specialist in Less Than 200 Securities; $250,000

Standard.

The amount specified in Rule 3(a)(3)(i)(a) above shall be: $150,000

effective on [insert initial effective date]; $200,000 effective on

[insert date six months from initial effective date]; and $250,000

effective on [insert date twelve months from initial effective date].

Registered as 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 [insert initial effective date]; $275,000 effective on

[insert date six months from initial effective date]; and $350,000

effective on [insert date twelve months from initial effective date].

Firms Clearing Other Specialists Accounts; $500,000 Standard.

The amount specified in Rule 3(a)(5)(i)(a) above shall be: $350,000

effective on [insert initial effective date]; $425,000 effective on

[insert date six months from initial effective date]; and $500,000

effective on [insert date twelve months from initial effective date].

* * * * *

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 CHX 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 CHX 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

Speciaists play a very unique role in an auction market. They are

responsible to investors, other members, and the Exchange to

efficiently and accurately effect transactions in the securities in

which they are registered. While specialists often act as agents, they

are also required to act as principal at times to ensure that no

imbalance between supply and demand in the market occurs. They must

also make continuous two-sided quotations in the securities in which

they are registered. As such, it is important that specialists are

financially stable to fulfill their duties while withstanding regular

market fluctuations.

The purpose of the proposed rule change is to establish increased

net capital requirements for CHX specialists over and above those

currently contained in the SEC's Rule 15c3-1 (``Net Capital Rule'') \3\

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\3\ 17 CFR 240.15c3-1.

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Non-Clearing Specialists

Pursuant to the proposed rule change, non-clearing specialists will

be required to maintain at a minimum the greater of (i) net capital in

the amount of $100,000, or (ii) the amount prescribed by the Net

Capital Rule. Current rules only require specialist adherence to the

amount set forth in the Capital Rule which is $100,000 at this time.

Specialists will also have to continue to comply with the Exchange

requirement that subordinated cash borrowing and secured demand notes

equal or exceed 50% of their total subordinated borrowing (to the

extent that the borrowings are part of their debt equity total).

Specialists will continue to be subject to the provisions of CHX

Rule 3 including filing monthly financial statements (in certain

circumstances), submitting to regular annual field examinations, and

timely and accurately computing their net worth. These provisions must

be satisfied using the additional capital requirements imposed herein.

For example, CHX Rule 3(b)(1)(i) requires a member organization to file

a monthly financial statement for a period of three months if such

member organization fails to maintain net capital of at least 120% of

the new Exchange minimum requirements.

Self-Clearing Specialists

The proposing rule change will also require members and member

organizations registered as specialists that are self-clearing to

comply with additional net capital requirements prescribed by the

Exchange, depending on whether they are registered as a specialist in

less than 200 securities or 200 or more securities. Specifically, such

members and member organizations registered as specialists in less than

200 securities will be required to maintain at a minimum the greater of

(i) net capital in the amount of $250,000. or (ii) the amount

prescribed by SEC Rule 15c3-1.\4\ Such members and member organizations

registered as specialists in 200 or more securities will be required to

maintain at a minimum the greater of (i) net capital in the amount of

$350.000, or (ii) the amount prescribed by SEC Rule 15c3-1.\5\

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\4\ 17 CFR 240.15c3-1.

\5\ 17 CFR 240.15c3-1.

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Members That Clear the Accounts of Other CHX Specialists

Finally, the proposed rule change will require members and member

organizations that wish to carry the accounts of CHX specialists to

comply with additional net capital requirements prescribed by the

Exchange. Specifically, such members and member organizations will be

required to maintain at a minimum the greater of (i) net capital in the

account of $500,000, or (ii) the amount prescribed by SEC 15c3-1 (17

CFR 240.15c3-1). This requirement also applies to CHX specialists that

are ``self-clearing'' and that also clear the accounts of other CHX

specialists.

Phase-in Periods

The increases to the net capital standards set forth above will be

phased-in in three stages over a twelve

[[Page 14034]]

month period. The actual phase-in will be set forth in a Notice to

Members to be issued within 30 days of the SEC order approving this

proposed rule change. The initial phase-in date will be no loner than

60 days from the date of such Notice. The second and third phase-in

dates will be six months and twelve months from the initial phase-in

date.

The amounts of the phase-in will be as follows:

For non-clearing specialists, the $100,000 standard will

apply as of the initial phase-in date.

For self-clearing specialist registered in less than 200

securities, the CHX net capital standard for the initial, second and

third phase dates will be $150,000, $200,000, and $250,000

respectively.

For self-clearing specialists registered in 200 or more

securities, the CHX net capital standard for the initial, second and

third phase dates will be $200,000, $275,000 and $350,000 respectively.

For members that clear for other specialists, the CHX net

capital standard for the initial, second and third phase dates will be

$350,000, $425,000, and $500,000 respectively.

2. Statutory Basis

The proposed rule change is consistent with Section 6(b)(5) of the

Act \6\ in that it is designed to promote just and equitable principles

of trade, to foster cooperation and coordination with persons

regulating securities transactions, 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.

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\6\ 15 U.S.C. 78f(b)(5).

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B. Self-Regulatory Organization's Statement on Burden on Competition

CHX 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 with respect to 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 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

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, N.W., Washington, D.C. 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-99-01 and should

be submitted by April 13, 1999.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-7091 Filed 3-22-99; 8:45 am]

BILLING CODE 8010-01-M