Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices 34513

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42473

(February 29, 2000), 65 FR 11818.

4See letters to Jonathan G. Katz, Secretary, SEC,

from Holly H. Smith, Sutherland, Asbill & Brennan

LLP, dated March 24, 2000 (‘‘SA&B Letter’’); Peter

J. Chepucavage, Fulbright 7 Jaworski L.L.P., dated

March 28, 2000 (‘‘Phlx Letter’’); and Charles J.

Henry, President and Chief Operating Officer,

Chicago Board Options Exchange, dated March 31,

2000 ‘‘CBOE Letter’’).

5See letter from Katherine Simmons, Vice

President and Associate General Counsel, ISE, to

Deborah Flynn, Senior Special Counsel, Division of

Market Regulation, SEC, dated May 19, 2000

(‘‘Amendment No. 1’’). In Amendment No. 1, ISE

proposes to delete a reference to ISE Rule 713 to

eliminate a Primary Market Maker’s participation

right with respect to facilitation orders. ISE also

proposes to clarify that members may enter

indications at prices that improve the facilitation

price if such improved price is inferior to the ISE

best bid or offer.

6For purposes of ISE rules only, block-size orders

are orders for fifty contracts or more. See ISE Rule

716(a).

7See Amendment No. 1, supra note 5.

8 ISE Rule 713 sets forth the PMM’s allocation

algorithm. See Securities Exchange Act Release No.

42808.

9See Amendment No. 1, supra note 5.

security except at a price based on the

current net asset value of such security

which is next computed after receipt of

a tender of such security for redemption

or of an order to purchase or sell such

security.

8. Ohio National’s recapture of the

Credit might arguably be viewed as

resulting in the redemption of

redeemable securities for a price other

than one based on the current net asset

value of the Account. Applicants

contend, however, that the recapture of

the Credit does not violate Section 22(c)

and Rule 22c–1. To effect a recapture of

a Credit, Ohio National will redeem

interests in an owner’s Account at a

price determined on the basis of the

current net asset value of that Account.

The amount recaptured will equal the

amount of the Credit that Ohio National

paid out of its general account assets.

Although the owner will be entitled to

retain any investment gain attributable

to the Credit, the amount of that gain

will be determined on the basis of the

current net asset value of the Account.

Thus, no dilution will occur upon the

recapture of the Credit. Applicants also

submit that the second harm that Rule

22c–1 was designed to address, namely

speculative trading practices calculated

to take advantage of backward pricing,

will not occur as a result of the

recapture of the Credit. However, to

avoid any uncertainty as to full

compliance with the Act, Applicants

request an exemption from the

provisions of Section 22(c) and Rule

22c–1 to the extent deemed necessary to

permit them to recapture the Credit

under the Contracts.

Conclusion

Applicants submit, based on the

grounds summarized above, that their

exemptive request meets the standards

set out in Section 6(c) of the Act,

namely, that the exemptions requested

are necessary or appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act, and that,

therefore, the Commission should grant

the requested order.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–13375 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42807; File No. SR–ISE–

00–03]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 by the International Securities

Exchange LLC Relating to Block and

Facilitation Trades

May 22, 2000.

I. Introduction

On February 25, 2000, the

International Securities Exchange LLC

(‘‘ISE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 29b–4 thereunder,2 a proposed rule

change relating to its proposed block

order and facilitation mechanisms.

The proposed rule change was

published for comment in the Federal

Register on March 6, 2000.3 The

Commission received three comment

letters regarding the proposal.4 On May

19, 2000, the ISE filed Amendment No.

1 to the proposed rule change.5 This

order approves the proposed rule

change. In addition, the Commission is

publishing this notice to solicit

comments on Amendment No. 1 and is

simultaneously approving Amendment

No. 1 on an accelerated basis.

II. Description of the Proposal

ISE Rule 716(c) establishes a ‘‘block

mechanism’’ through which ISE

members can obtain liquidity for the

execution of block-size orders 6 from

market makers and other ISE members

with orders at the ISE inside bid or offer

(‘‘Crowd Participants’’). Similarly, ISE

Rule 716(d) establishes a ‘‘facilitation

mechanism’’ through which members

can seek to facilitate block-size public

customer orders. Upon the entry of an

order into the block or facilitation

mechanisms, a broadcast message is

sent to the Crowd Participants.

The proposed rule change contains

several proposed revisions to existing

ISE Rule 716. First, the ISE has

proposed commentary to ISE Rules

716(c) and (d) with respect to the block

order mechanism and the facilitation

mechanism, specifying that participants

will be given 30 seconds to respond to

a broadcast message from either the

block or facilitation mechanism.

Second, the ISE proposes to amend

ISE Rule 716(d)(4)(i) to provide that

only public customer bids (offers) on the

Exchange at the time a facilitation order

is executed that are priced higher

(lower) than the facilitation price will be

executed at the facilitation price, unless

there is sufficient size to execute a

facilitation order entirely at a better

price. Higher bids and lower offers from

non-customer orders and quotes will be

executed at their stated price. The

current rule provides non-customer

orders and quotes the benefit of the

facilitation or ‘‘block clean-up’’ price.

Third, ISE is proposing amendments

to ISE Rule 716(d)(4)(ii) 7 to eliminate a

Primary Market Maker’s (‘‘PMM’’)

participation right with respect to the

allocation of orders entered into the

facilitation mechanism by deleting a

reference to ISE Rule 713.8 In other

words, under ISE’s proposed

amendments to ISE Rule 716(d)(4)(ii), if

a PMM is among the Crowd Participants

with interest at the facilitation price, the

PMM will be treated the same as all

other Crowd Participants and not given

a preferential allocation under ISE Rule

713.

Finally, ISE is proposing to amend

ISE Rule 716(d)(2) and (3) 9 to clarify

that a Crowd Participant may enter into

the facilitation mechanism an indication

at a better price than the facilitation

price, but only if such better price is

inferior to the ISE best bid or offer. If a

Crowd Participant wishes to enter an

indication at a price equal to or better

than the ISE best bid or offer, the Crowd

Participant may do so only by changing

its quote or entering an order, so that

34514 Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices

10See note 4, supra.

11The Commission notes that commenters

expressed views on a number of issues related to

the ISE block and facilitation mechanisms that were

outside the scope of the current ISE proposal,

several of which were addressed in the

Commission’s approval of ISE as a national

securities exchange. See Securities Exchange Act

Release No. 42455 (February 24, 2000, 65 FR 11388.

Consequently, this order addresses only comments

regarding those issues presented by the current

proposal.

12See SA&B Letter; Phlx Letter; CBOE Letter.

13See SA&B Letter; Phlx Letter.

14See letter to Jonathan G. Katz, Secretary, SEC,

from Katherine Simmons, Vice President and

Associate General Counsel, ISE, dated May 19, 2000

(‘‘ISE Response Letter’’).

15 Id.

16 Id.

17See SA&B Letter; Phlx Letter.

18 Id.

19See ISE Response Letter.

20 Id.

21 In approving this rule, the Commission has

considered its impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

22 15 U.S.C. 78f(b)(5).

23 Id.

24 Id.

such interest will be disseminated to the

public.

III. Summary of Comments

The Commission received three

comment letters on the proposal. 10

These commenters opposed ISE’s

proposed rule change, as originally

proposed.11 Commenters argued that the

proposed 30 second response time

would make it easier for ISE members

to execute as principal their own

customers’ orders for 50 contracts or

more without meaningful opportunity

for price improvement by competitors,

which they argued would undermine

the intended purpose of having

customers’ orders reasonably exposed to

other trading interest before being

executed by the facilitating ISE

member.12 Moreover, this proposed 30

second response time, commenters

emphasized, is not enough time for

market participants to have a reasonable

opportunity to improve the facilitation

price, especially because Crowd

Participants who wish to improve the

price are required by the rules to do so

10 seconds prior to the expiration of the

30 second time period, effectively

reducing the response time to 20

seconds.13

In response to commenters’ objections

to the proposed 30 second ‘‘exposure

period,’’ ISE states that 30 seconds is

sufficient time for Crowd Participants in

the ISE market to respond to an order,

noting that the Commission has

approved exposure times of as few as 15

seconds for certain equity exchanges.14

ISE notes that floor-based exchanges

have no specific limitation on how long

a proposed facilitation order must be

exposed to the crowd before it is

executed. Moreover, ISE states that

commenters have no basis to assert that

20, 30 or 60 seconds is the appropriate

exposure time, given the lack of

precedent for an electronic options

market.15 ISE asserts that, based upon

consultation with its members and

using the knowledge and understanding

of electronic trading it has developed,

its proposal is reasonably designed to

protect both customers and liquidity

providers in its electronic marketplace

and is consistent with the requirements

of the Act.16

Commenters also objected to the

proposed amendment requiring noncustomer bids (offers) priced higher

(lower) than the facilitation price to be

executed at their stated price, rather

than a single ‘‘clean-up’’ price.17 The

commenters argued that the ISE’s

proposal would act as a disincentive to

ISE Competitive Market Makers

(‘‘CMMs’’) and other Electronic Access

Members (‘‘EAMs’’) to display their true

trading interest and offer price

improvement, because a CMM who

wants to trade, but cannot facilitate the

entire order at an improved price, will

likely elect not to offer any price

improvement to avoid the ‘‘penalizing

impact’’ of the rule.18

In response, ISE argues that this

proposed amendment benefits

customers because where a noncustomer (i.e., broker-dealer or market

maker) indicates that it is willing to

trade at a price that is better than the

facilitation or ‘‘clean-up’’ price, the

customer order being facilitated would

get the benefit of the better price, even

if the entire order cannot be executed at

the better price.19 The ISE believes that

the effect of the proposed change will be

to increase opportunities for price

improvement for customer orders.20

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether the proposed

amendment is consistent with the Act.

Persons making written submission

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW,

Washington, DC 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the ISE. All

submissions should refer to File No.

SR–ISE–00–03 and should be submitted

by June 20, 2000.

V. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange.21 In particular, the

Commission finds that proposal is

consistent with Section 6(b)(5) of the

Act.22

Under Section 6(b)(5) of the Act,23 a

registered national securities exchange

must have rules that are designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, to foster

cooperation and coordination with

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

in securities, 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.

Specifically, the Commission finds

that ISE’s proposed commentary to ISE

Rule 716 establishing the ‘‘exposure

time’’ for a facilitation order at 30

seconds is consistent with Section

6(b)(5) of the Act.24 Currently, there is

no time period specified in the ISE’s

rules for how long facilitation orders

must be exposed to the trading crowd.

Instead, the amount of time to respond

is set by the Exchange. The Commission

believes that setting out in the ISE’s

rules the response period will provide

certainty to the other market

participants and ensure that this time

period will not be changed without a

corresponding change in the ISE rules.

On floor-based exchanges, there are no

rules that govern how long an order,

including a proposed facilitation order,

must be exposed to the crowd before it

is executed. In addition, in the

Commission’s view, 30 seconds is a

reasonable time frame for Crowd

Participants in ISE’s market to assess

market conditions and their own trading

interest and to enter a response to a

facilitation order. Accordingly, the

Commission is approving the ISE’s

proposed commentary to ISE Rule 716.

Federal Register / Vol. 65, No. 104 / Tuesday, May 30, 2000 / Notices 34515

25 Id.

26 Id.

27See Amendment No. 1, supra note 5.

28 15 U.S.C. 78f(b)(2).

29Under ISE’s rules, only the PMM has access to

all orders on the ISE book; not just the top of the

book.

30 15 U.S.C. 78f(b)(5).

31 15 U.S.C. 78f(b)(2).

32 Id.

33 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 42473

(February 29, 2000), 65 FR 11818.

4See letters to Jonathan G. Katz, Secretary, SEC,

from Holly H. Smith, Sutherland, Asbill & Brennan

LLP, dated March 24, 2000 (‘‘SA&B Letter’’); Peter

J. Chepucavage, Fulbright & Jaworski L.L.P., dated

March 28, 2000 (‘‘Phlx Letter’’); and Charles J.

Henry, President and Chief Operating Officer,

Chicago Board Options Exchange, dated March 31,

2000 (‘‘CBOE Letter’’).

The Commission also agrees with the

ISE that public customer bids (offers) on

the Exchange at the time a facilitation

order is executed that are priced higher

(lower) than the facilitation price should

be executed at the facilitation price. The

Commission believes that this proposal

will both protect public customer limit

orders on the ISE’s book and provide

public customers with the benefit of

price improvement through the

facilitation mechanism. The

Commission also believes that allowing

the execution of higher bids and lower

offers from non-customer orders and

quotes by executing them at their stated

price is reasonable. Accordingly, the

Commission finds that the proposed

amendment to ISE Rule 716(d)(4)(i) is

consistent with Section 6(b)(5) of the

Act 25 in that it promotes just and

equitable principles of trade and

facilitates transactions in securities by

allowing the partial execution of a

facilitation order at an improved price

for the number of non-customer

contracts available, while protecting

public customer orders on the book by

giving them the benefit of a better

execution price.

The Commission also finds that the

proposed amendments to ISE Rule

716(d)(4)(ii) are consistent with Section

6(b)(5) of the Act.26 Under current ISE

rules, a PMM is guaranteed certain

participation rights in a facilitation

order after public customer orders are

executed and the facilitating EAM

receives an allocation of 40 percent of

the order. Amendment No. 1 eliminates

the PMM’s participation guarantee.

Thus, any indication or quote by a PMM

will be treated the same as other Crowd

Participants’ interest. The Commission

believes that this proposed amendment

is consistent with the public interest,

and that it promotes just and equitable

principles of trade by ensuring that

market makers will be able to compete

in a fair and equitable manner, based on

the competitiveness of their quotes, for

that portion of an order remaining after

public customer interest and the EAM’s

facilitation guarantee.

The Commission finds good cause for

approving this proposed amendment

prior to the thirtieth day after date of

publication of the notice of filing in the

Federal Register. The proposed change

to paragraph (d)(4)(ii) of ISE Rule 716

makes available to Crowd Participants a

greater percentage of facilitation

orders. 27 Specifically, this change

ensures that, if a PMM is among the

Crowd Participants with interest at the

facilitation price, the PMM will be

treated equally with all other Crowd

Participants, rather than being

‘‘guaranteed’’ special participation

rights. Because this amendment reduces

the guarantees to PMMs, the

Commission believes it will increase the

opportunity for other participants in ISE

to complete for order flow and finds that

granting accelerated approval to the

proposed amendments to ISE Rule

716(d)(4)(ii) in Amendment No. 1

consistent with Section 18(b)(2) Act. 28

Finally, the Commission believes that

ISE’s proposed amendment to ISE Rules

716(d)(2) and (3) to clarity that members

may enter indications into the

facilitation mechanism at prices that

improve the facilitation price, if such

improved price is inferior to the ISE best

bid or offer, is consistent with the Act.

ISE’s rules currently state that

indications from Crowd Participants

must be priced at the price of the order

to be facilitated and must not exceed the

size of the order to be facilitated. To

facilitate the order at a price superior to

the facilitation price, ISE’s current rules

require Crowd Participants to enter

orders change their quotes, as

applicable. The proposed amendment

allows a Crowd Participant to enter an

indication to facilitate an order at a

price better than the facilitation price,

but inferior to the ISE best bid or offer.

Without this change, it would have been

possible for a Crowd Participant to

improve the facilitation price, but not be

at the ISE best bid or offer. In this

situation, only the PMM 29 would know

about the improved price, creating the

potential for PMM to benefit at the

expense of the customer order being

facilitated. For these reasons, the

Commission finds that ISE’s proposed

amendment is consistent with Section

6(b)(5) of the Act 30

The Commission also finds good

cause for approving the proposed

amendments of ISE Rules 716(d)(2) and

(3) prior to the thirtieth day after the

date of publication of notice of filing in

the Federal Register. These proposed

changes eliminate a potential avenue for

abuse and ensure that a public customer

order would receive the benefit of any

price offered that is better than the

facilitation price. Accordingly, the

Commission believes that these

proposed amendments do not

significantly alter the original proposal,

which was subject to a full notice and

comment period and addresses the

issued raised by commenters. Therefore,

the Commission finds that granting

accelerated approval to the proposed

changes to ISE Rules 716(d)(2) and (3)

in Amendment No. 1 is consistent with

Section 19(a)(2) of Act. 31

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, 32 that the

proposed rule change (SR–ISE–00–03),

including Amendment No. 1, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.33

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–13413 Filed 5–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42808; File No. SR–ISE–

00–01]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 by the International Securities

Exchange LLC Relating to Market

Maker Allocations

May 22, 2000.

I. Introduction

On February 25, 2000, the

International Securities Exchange LLC

(‘‘ISE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder,2 a proposed rule

change relating to its proposed market

maker allocation algorithm.

The proposed rule change was

published for comment in the Federal

Register on March 6, 2000.3 The

Commission received three comment

letters regarding the proposal.4 On May

19, 2000, the ISE filed Amendment No.