[Federal Register Volume 65, Number 108 (Monday, June 5, 2000)]
[Notices]
[Pages 35686-35688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13958]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42823; File No. SR-ISE-00-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
International Securities Exchange LLC Relating to Authority to Grant 
Exemptions From ISE Rule 805

May 25, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 24, 2000, the International Securities Exchange LLC (``ISE'' or 
``Exchange'')

[[Page 35687]]

filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the ISE. The Commission is publishing this notice 
and order to solicit comments on the proposed rule change from 
interested persons, and to grant accelerated approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to amend ISE Rule 805 to authorize the 
Exchange to grant exemptions from certain restrictions on market makers 
placing orders in other than their assigned options. This exemptive 
authority would be in place only until the Exchange opens all ten of 
its options groups for trading, or for one year from the date the 
Exchange commences operations, whichever should occur first. The text 
of the proposed rule change is below. Proposed additions are in 
italics.

Rule 805. Market Maker Orders

    (a) and (b) No changes.
    (c) Exemptive Authority. Until the earlier of (1) one year from the 
date on which the Exchange commences operations or (2) the date on 
which the Exchange opens all options Groups for trading, an Exchange 
official designated by the Board may grant market makers exemptions 
from the requirements of subparagraphs (b)(2) and (3) of this rule, 
subject to the following:
    (i) If a market maker has only one membership, and thus is assigned 
to only one Group, any exemption would end when the assigned Group is 
open for trading, regardless of the number of options classes that 
begin trading in the assigned Group;
    (ii) If a market maker has multiple memberships, and thus is 
assigned to trading in more than one Group, the exemption would end 
when all the market maker's Groups are open for trading, again 
regardless of the number of options classes that begin trading in the 
assigned Groups; as the market maker's assigned Groups open for 
trading, the amount of trading the market maker would be permitted to 
execute outside of its assigned Groups would be reduced;
    (iii) Any exemption would be conditioned on the member performing 
market maker functions in the classes they trade;
    (iv) An exemption could be revoked by the Exchange at any time if 
the market maker is not acting in accordance with the terms of the 
exemption; and
    (v) No exemption would have a term of more than one month, but 
would be renewable on a monthly basis until the market maker's group(s) 
was open for trading.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    It is filing with the Commission, the ISE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The ISE has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Subparagraphs (b)(2) and (3) of ISE Rule 805 contain the following 
``Volume Limitation'': Primary Market Makers (``PMMs'') can execute no 
more than 10 percent of their aggregate volume outside of their 
assigned options; and Competitive Market Makers (``CMMs'') can execute 
no more than 25 percent of their aggregate volume outside of their 
assigned options. The Exchange assigns market makers to specific option 
``Groups'' and will ``roll out'' its trading in stages, beginning with 
a limited number of Groups, and with a limited number of options in 
each Group. During the ``roll out,'' the Exchange will open additional 
Groups for trading, while also commencing trading in additional 
securities in open Groups. The Exchange anticipates having all options 
open for trading within one year from the date it commences operations.
    Due to this roll out schedule, it is likely that some ISE market 
makers will be fully connected to the ISE and prepared to begin trading 
before the Exchange opens their assigned Groups(s) for trading. As 
currently in effect, ISE Rule 805 would prohibit these market makers 
from doing any trading, since, by definition, 100 percent of their 
trading would be in options to which they are not assigned. The 
Exchange believes that prohibiting these firms from conducting any 
trading is inappropriate and would unnecessarily restrict liquidity on 
the Exchange.
    To address this concern, the proposed rule change would authorize 
an Exchange official with delegated authority by the board to grant 
market makers exemptions from the Volume Limitations during the roll 
out period. The Exchange's authority to grant exemptions would 
terminate when all groups are open for trading (even if the Groups are 
not fully populated with the full complement of options) or one year 
from the date on which the Exchange commences operations, whichever 
should occur first. The Exchange will grant these exemptions on a case-
by-case basis, tailored to the individual situation of each market 
maker applying for an exemption. The proposed rule includes the 
following guidelines in granting exemptions pursuant to this authority:
    <bullet> If a market maker has only one membership, and thus is 
assigned to only one Group, any exemption would end when the assigned 
Group is open for trading, regardless of the number of options classes 
that begin trading in the assigned Group;
    <bullet> If a market maker has multiple memberships, and thus is 
assigned to trading in more than one Group, the exemption would end 
when all the market maker's Groups are open for trading, again 
regardless of the number of options classes that begin trading in the 
assigned Groups; as the market maker's assigned Groups open for 
trading, the amount of trading the market maker would be permitted to 
execute outside of its assigned Groups would be reduced;
    <bullet> Any exemption would be conditioned on the member 
performing market maker functions in the classes they trade;
    <bullet> An exemption could be revoked by the Exchange at any time 
if the market maker is not acting in accordance with the terms of the 
exemption; and
    <bullet> No exemption would have a term of more than one month, but 
would be renewable on a monthly basis until the market maker's group(s) 
was open for trading.
    The Exchange believes that this narrowly-crafted exemptive 
authority will help provide additional liquidity to the Exchange during 
the roll out period. It also will encourage market makers to begin 
trading on the exchange as soon as they are connected and authorized to 
trade, even if their assigned Group(s) is not yet open to trading.
2. Statutory Basis
    The Exchange believes that the basis under the Act for this 
proposed rule change is the requirement under Section

[[Page 35688]]

6(b)(5) \3\ that an exchange have rules that are designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism for a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purpose of 
the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited,and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 
Exchange. All submissions should refer to File No. SR-ISE-00-05, and 
should be submitted by June 26, 2000.

IV. Commissions's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission has reviewed carefully the ISE's proposed rule 
change and finds, for the reasons set forth below, the proposal is 
consistent with the requirements of Section 6 of the Act \4\ and the 
rules and regulations thereunder applicable to a national securities 
exchange. \5\ Specifically, the Commission finds the proposal is 
consistent with Section 6(b)(5) of the Act. \6\
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    \4\ 15 U.S.C. 78f.
    \5\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    Section 6(b)(5) of the Act \7\ requires an exchange to promulgate 
rules designed to prevent fraudulent and manipulative acts and 
practice, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
national market system, and, in general, to protect investors and the 
public interest. The Commission finds that the proposal is consistent 
with Section 6(b)(5) of the Act, \8\ because the proposal is designed 
to enhance liquidity on the Exchange during its start-up phase.
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    \7\ Id.
    \8\ Id.
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    The Commission finds that the proposal is narrowly-tailored, and 
provides reasonable standards and guidelines to be applied in granting 
exemptions pursuant to this authority. In particular, the Commission 
notes that the Exchange's decisions to grant exemptions would be made 
on a case-by-case basis, and any exemption granted would be limited to 
a term of no longer than one month. In addition, the guidelines require 
that a market maker's exemption from the Volume Limitations would end 
as soon as the Group to which the market maker is assigned is opened 
for trading, even if only one options class in that Group has been 
listed at that time. Similarly, the exemption granted to a market maker 
holding more than one ISE membership would be reduced when one or more 
of its assigned Groups are opened for trading.
    The Commission also believes that the proposal may encourage market 
makers to begin trading on the Exchange as soon as they are authorized 
and able to do so, which in turn, may benefit investors by providing 
liquidity to the market. The Commission notes that the proposed 
standards require market makers receiving an exemption to perform 
market making functions in the classes in which they trade, which 
should also enhance the liquidity of the market. Because of these 
potential improvements to the market, the Exchange's authority to grant 
exemptions on a case-by-case basis tailored to the individual situation 
of each market maker applying for an exemption, and the limited 
duration of the grant of exemptive authority, the Commission finds that 
the proposal is both reasonable and consistent with the Act.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. Having found that the proposal 
is both reasonable and consistent with the Act, and that it should 
result in enhancements to the marketplace during the Exchange's start-
up phase, the Commission believes it would be counterproductive to 
delay the implementation of the proposal. Specifically, the Commission 
notes that the ISE intends to commence trading on May 26, 2000, in a 
limited number of options classes. The proposal will permit ISE PMMs 
and CMMs that are ready to begin trading, but have been assigned to 
Groups that are not yet open for trading, to participate in ISE's 
market, thereby increasing liquidity in the market. The Commission 
finds, therefore, that granting accelerated approval of the proposed 
rule change is consistent with Section 6(b)(5) of the Act.\9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-ISE-00-05) is hereby 
approved on an accelerated basis.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-13958 Filed 6-2-00; 8:45 am]
BILLING CODE 8010-01-M