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April 19, 2014

No-Action Letter Regarding Definition of "Ready Market" with Regard to Foreign Equity Securities Pursuant to SEC Rule 15c3-1(c)(11)(i)

Currently, under Securities and Exchange Commission Rule 15c3-1 (the Net Capital Rule), broker-dealers may treat equity securities of a foreign issuer that are listed on the FTSE World Index as having a ready market. A ready market is relevant because the Net Capital Rule requires a broker-dealer to deduct 100% of the carrying value of securities it holds in its proprietary account for which there is no ready market. See SEC Rule 15c3-1(c)(2)(vii). Because its members were interested in expanding the criteria for recognizing foreign equity securities as having a ready market, FINRA requested no-action relief from the SEC to treat certain additional foreign equity securities as having a ready market under paragraph (c)(11) of the Net Capital Rule.

The SEC granted no-action relief on November 28, stating that it would not recommend enforcement action if a broker-dealer treats an equity security of a foreign issuer as having a ready market under paragraph (c)(11) of the Net Capital Rule (and subject to the haircuts under paragraph (c)(2)(vi)(J)), if the following conditions are met:

  1. The security is listed for trading on a foreign securities exchange located within a country that is recognized on the FTSE World Index, when the security has been trading on that exchange for at least the previous 90 days; 
     
  2. Daily quotations for both bid and ask or last sale prices for the security provided by the foreign securities exchange on which the security is traded are continuously available to broker-dealers in the United States through an electronic quotation system; 
     
  3. The median daily trading volume (calculated over the preceding 20-business-day period) of the foreign equity security on the foreign securities exchange on which the security is traded is either at least 100,000 shares or $500,000; and
  4. The aggregate unrestricted market capitalization in shares 
    of such security exceeds $500 million over each of the preceding 10 business days.

Additionally, any foreign equity security that ceases to meet one or more of the eligibility requirements will continue to be considered to have a “ready market” for purposes of paragraph (c)(11) for five business days from the date such foreign equity security ceases to meet the requirements. After the end of the five-business-day period, the security will be considered to have a “ready market” only if and when it again meets all of the eligibility requirements.

Click here for the No-Action letter.

©2014 Katten Muchin Rosenman LLP

About the Author

Janet M. Angstadt, Securities Attorney, Katten Muchin Law Firm
Partner

Janet Angstadt concentrates her practice in financial services. She counsels broker-dealers and market centers on a wide variety of legal and regulatory matters, including mergers and acquisitions involving broker-dealers; exchange, FINRA and SEC investigations; compliance issues related to registrations, sales practice, short sales, Regulation NMS, market making, and options and equities order handling; broker-dealer sponsored alternative trading systems such as dark pools and electronic communication networks; policies and procedures for trading systems development and testing; and...

312.902.5494

About the Author

Staff Attorney

Tanja Samardzija concentrates her practice in financial services. Ms. Samardzija began her legal career as a litigator before embarking on a career in market regulation at the Chicago Board Options Exchange (CBOE). Ms. Samardzija’s work at the CBOE has familiarized her with a wide variety of regulatory matters including exchange and SEC investigations; compliance issues related to registrations, market making and options order handling; and risk management controls and supervisory procedures for brokers or dealers with market access. In addition to being thoroughly involved in...

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