40 Broad Street
VIA ELECTRONIC MAIL & FEDERAL EXPRESS
June 30, 2000
Mr. Jonathan Katz
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 200549
Re: File No. SR-NASD-00-08: Notice of Proposed Rule Change by NASD
Regulation, Inc. Relating to Margin Rule Amendments for Non-equity Securities and Exempt Accounts
Dear Mr. Katz:
The Bond Market Association (the "Association")1 is pleased to submit this letter in response to the Commission's request for comments on the changes that NASD Regulation, Inc. ("NASDR") proposes to make to its margin rule (the "NASDR Proposal"). These changes, which would reduce minimum margin requirements relating to non-equity securities and "exempt accounts," are substantially identical to changes proposed in 1998 by the New York Stock Exchange, Inc. ("NYSE") (File No. SR-NYSE-98-14).
The Association wishes to express its strong support for the NASDR Proposal, echoing its longstanding support for the NYSE proposal. The Association believes that the NASDR Proposal would wisely reduce minimum margin requirements now burdening the domestic funding markets while still retaining adequate safeguards for the safety and soundness of those markets. The adoption of more flexible
margin requirements by self-regulatory organizations is essential to the full realization of the policies embodied in the National Securities Markets Improvement Act of 1996 and the Federal Reserve Board's adoption, over two years ago, of a "good faith" margin standard for non-equity securities. The Association also agrees with NASDR's view that the reduced margin percentages permitted by the NASDR Proposal provide minimum margin requirements for non-equity securities that are "commensurate with the risks associated with positions in such securities held by customers."
Since the time of the parallel NYSE proposal, the financial services industry has been engaged in a great deal of study and self-examination, through efforts such as the Counterparty Risk Management Policy Group Report (1999)(the "CRMPG Report"), with the object of enhancing counterparty risk management practices. The Association supports the viewpoint of the CRMPG Report that evaluation and management of counterparty credit risk should not be done on a "one size fits all" basis, but rather should be adapted closely to the particular counterparties, products, and circumstances involved. The NASDR Proposal generally aligns with this widely accepted wisdom by allowing NASD members greater flexibility to exercise their judgment as to appropriate margin requirements for debt securities transactions and financings.
The Association notes, however, that the NASDR Proposal would impose on NASD members an additional requirement not contained in the NYSE proposal: "Member organizations shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraphs (e)(2)(F) and (e)(2)(G) which shall be made available to the Association upon request." The Association believes this requirement is unnecessary because NASD member organizations are already subject to sophisticated external and internal oversight of credit practices. Our members feel strongly that if this provision does become a part of the final rule change, it should not impose upon NASD members any obligations over and above their existing credit practices, nor give NASDR the occasion to second-guess those practices. An NASDR examination is not an appropriate context in which to evaluate a firm's credit risk management policies, given their complexity and the fact that in many cases they are developed at a corporate group level to ensure adequate management of global exposures.
When we commented on the NYSE proposal, we suggested a few clarifications of a technical nature with respect to the "exempt account" provisions. Rather than reiterate these points here, we refer you to the attached copy of our NYSE comment letter.
Overall, the Association strongly supports the NASDR Proposal and believes it provides ample protection of investors and the public interest while alleviating unnecessary burdens on competition. We urge the Commission to approve the NASDR Proposal, as well as the NYSE's "sister" proposal, without further delay.
Very truly yours,
s/s WENDY FRIED
Vice President and Associate General Counsel
cc: Annette Nazareth, Securities and Exchange Commission
Michael Macchiaroli, Securities and Exchange Commission
M. Schwartz, Securities and Exchange Commission
Raymond Hennessy, New York Stock Exchange
Corporate Legal Advisory Committee of The Bond Market Association
Funding Legal Advisory Committee of The Bond Market Association
MBS/ABS Legal & Compliance Advisory Committee of The Bond Market Association
Municipal Legal Advisory Committee of The Bond Market Association
Legal and Regulatory Staff of The Bond Market Association
|1||The Bond Market Association represents securities firms and banks that underwrite, distribute and trade in fixed income securities, both domestically and internationally. Our members are actively involved in the funding markets for such securities, including the repurchase agreement and securities lending markets. Further information regarding the Association, its members, and activities, can be obtained from our website (www.bondmarkets.com).|