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“Our proposal is part of an overall reassessment and modernization of specialist regulation at the Exchange and moves us to a methodology where risk management and capital standards are integrated,” said Grace Vogel, executive vice president of Member Firm Regulation, NYSE Regulation. “Using value-at-risk as a component of the net liquid asset requirement creates an incentive for specialist firms to develop state of the art risk management systems. The new rules may also encourage new specialist organizations to begin operations on the trading floor of the Exchange.”
“Current net liquid assets requirements impose excessively high capital requirements on specialists,” said Richard G. Ketchum, chief regulatory officer, the New York Stock Exchange. “They are not based upon the amount of risk a specialist takes or the volatility of its portfolio. As a result, the current rules impose unjustified costs on specialist firms and discourage new entrants to the market. The new requirements for specialist capital are still far more conservative than capital requirements applied to other classes of U.S. broker-dealers. They will not impact the specialists’ role as a liquidity provider or their responsibility to maintain fair and orderly markets.”
In developing a more risk-based rule for specialists, NYSE Regulation staff studied specialist risk exposure in volatile trading scenarios over a period of years, including a simulation of how specialist capital levels would fare if faced with an extremely volatile situation similar to the October 19, 1987 market correction. Value-at-risk, which seeks to predict the risk of loss based on historical or market implied price and volatility patterns and is widely adopted across most areas of financial services, was part of that analysis. Based on the staff’s study, it was determined that the levels of capital resulting from the proposal would provide a conservative and prudent level of capitalization to handle possible future severe shocks to the market.
The amendment to NYSE Rule 104 would require that specialist firm be required to maintain net liquid assets in excess of the sum of: a) $1 million for each one tenth of one percent of NYSE transaction dollar volume in registered securities, totaling $1 billion of net liquid assets required for all specialists, plus $500,000 for each Exchange Traded Fund; and b) the specialists’ value-at-risk at a 99% confidence level, ten working day time horizon, multiplied by three or a higher number depending upon the effectiveness of the specialist’s proprietary model for computing value-at-risk; or for those firms not using value-at-risk or whose models have not been approved by the NYSE, three times the average of the prior 20 business day’s capital requirements for market risk computed pursuant to the SEC’s net capital rule 15c31c(2)(vi).
Capital reduction would be phased in over a nine-month period in four tranches. The first reduction of 25 percent will be permitted upon adoption of the rule. Three subsequent 25 percent reductions will occur every 90 days thereafter. Staff will closely review the overall impact to the market and recommend adjustments if necessary.
The new rule would also alleviate the so-called “marriage penalty” provisions of NYSE Rule 104.22. In 2000, 25 specialist organizations were operating on the Floor of the Exchange. Today, there are seven. Because of the marriage penalty, which was adopted in 2000, capital requirements for the seven specialists represent the combined capital requirements of the 25 organizations that were merged, consolidated or acquired. The current rule does not recognize the benefits derived from such combinations, nor does it compensate for excess capital that may have been in each specialist organization prior to the merger.
To read the full text of the proposed Amendment to NYSE Rule 104, please click here.
About NYSE Regulation
On December 17, 2003, the SEC approved a new governance structure for the NYSE. Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, who have no affiliation with any regulated member firm. A new position of chief regulatory officer was created and reports directly to the board of directors through a new Regulatory Oversight Committee. As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms, operates separately from the business side and is independent in its decision-making.
NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws. Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange. These firms service 92 million customer accounts, or 90 percent of the total public customer accounts handled by broker-dealers, with total assets of over $3 trillion. They operate from 19,000 branch offices around the world and employ 146,000 registered personnel. Nearly 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation and Enforcement and Listed Company Compliance.
