11 Wall Street
Darla C. Stuckey
Via email to email@example.com
October 24, 2002
Mr. Jonathan G. Katz,
RE: Proposed Rule Change of OneChicago, LLC Relating to Customer Margin
Dear Mr. Katz:
The New York Stock Exchange, Inc. (the "Exchange") appreciates the opportunity to provide comments on the proposed rule change by OneChicago, LLC ("OneChicago")1 relating to customer margin requirements for security futures and security future dealers.
OneChicago is proposing to adopt new Rule 515 to establish general requirements and procedures relating to customer margining by security futures intermediaries, to establish initial and maintenance margin levels and also, to exclude the proprietary trades of qualifying security futures dealers from the proposed margin and regulatory requirements (the "Market Maker Exclusion"). The Exchange takes exception to certain of the conditions prescribed for market makers in order to obtain this exclusion as outlined in Rule 515(n).
The Securities and Exchange Commission and the Commodity Futures Trading Commission ("the Commissions") issued final customer margin rules2 relating to security futures to establish uniform policies for margin requirements on security futures products. In their Release, the Commissions granted some latitude to the exchanges and associations to propose their own rules and establish alternative methods whereby market makers could qualify for exclusion from the margin requirements. One of the requirements noted was that the exchange member "hold itself out as being willing to buy and sell security futures for its own account on a regular or continuous basis." The Commissions suggested that there might be alternative ways to satisfy this requirement using revenue or volume-based criteria.
OneChicago, it its rule filing, is proposing to use a revenue test as an alternative means to satisfy the condition that a market maker "holds itself out as being willing to buy and sell security futures for its own account on a regular or continuous basis." Under the proposal, an entity could qualify for the Market Maker Exclusion if at least seventy-five percent (75%) of its gross revenue on an annual basis is derived from trading listed financial derivatives and the instruments underlying those derivatives including: security futures, stock index futures and options, stock and index options, stocks, foreign currency futures and options, foreign currencies, interest rate futures and options, fixed income instruments and commodity futures and options.
The Exchange believes that market makers necessarily assume primary responsibility for maintaining a fair and orderly market and have an affirmative obligation to provide liquidity on a regular basis. We believe that substituting a revenue test which includes an exhaustive variety of hedging products, for active and regular participation in the market, does not achieve this objective since it does not require the "market maker" to concentrate its trading activity on a specific market or the specific securities or class of securities in which it has been assigned to make a market, nor does it require that the "market maker" make a "continuous or regular" market.
The proposed definition is inconsistent with the Commissions' statement in the customer margin release to the effect that the "regular and continuous" test would be satisfied were the exchange member subject to "rules that impose on it an affirmative obligation to quote on a regular or continuous basis in security futures"3 and should be disapproved.
We appreciate the opportunity to comment on this rule proposal. We would welcome the opportunity to further discuss alternate proposals for determining standards or criteria for market makers to qualify for an exclusion from the customer margin rules.