36206 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

2The Commission has modified the text of the

summaries prepared by NSCC.

3 15 U.S.C. 78q–1(b)(3)(F).

4 15 U.S.C. 78q–1(b)(3)(F).

5 15 U.S.C. 78s(b)(2).

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 41867

(September 13, 1999), 64 FR 51171.

4The substantive modifications of Amendment

No. 1 are incorporated in the description of the

proposal in Section II below, and are further

discussed in Section III below.

and (C) below, of the most significant

aspects of such statements. 2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

filing is to permit NSCC to keep

McDonalds Corp., USX-Maraton GR.,

and Blackrock Inc., securities, which are

subject to mini-tender offers, in the CNS

system. Under normal circumstances

because these mini-tender offers have

no protect period, NSCC would exit

these securities from CNS. However,

because of the high trading volume in

these securities and the operational

impact exiting this security from CNS

would have on NSCC’s participants,

NSCC has filed this rule change to allow

NSCC to continue to process these

securities in CNS. If NSCC receives a

request from a long participant, NSCC

will exit the relevant position and will

issue a receive and deliver instruction

naming short participants selected by an

allocation procedure using the oldest

short position first. Participants who

wish to participate in any of the tender

offers must contact NSCC Operations no

later than 1:00 PM on Tuesday, May 30,

2000, so arrangements can be made to

remove the relevant positions from CNS.

NSCC believes that the proposed rule

change is consistent with the

requirements of the Act and the rules

and regulations thereunder. In

particular, the proposed rule change is

consistent with section 17A(b)(3)(F) of

the Act 3 which requires that the rules

of a clearing agency be designed to

promote the prompt and accurate

clearance and settlement of securities

transactions.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

NSCC does not believe that the

proposed rule change will have an

impact on or impose a burden on

competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

No written comments have been

solicited or received. NSCC will notify

the Commission of any written

comments received by NSCC.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder and

particularly with the requirements of

section 17A(b)(3)(F).4 Section

17A(b)(3)(F) requires that the rules of a

clearing agency be designed to promote

the prompt and accurate clearance and

settlement of securities transactions.

Allowing these securities which are

subject to mini-tender offers to continue

to be processed in the CNS system

should help ensure the securities will be

promptly and accurately cleared and

settled.

NSCC has requested that the

Commission approve the proposed rule

change prior to the thirtieth day after

publication of the notice of the filing.

The Commission finds good cause for

approving the rule change prior to the

thirtieth day after publication because

such approval will allow NSCC to

continue to process these securities in

the CNS system.

IV. 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, 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 in

the Commission’s Public Reference

Room, 450 Fifth Street, NW,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of NSCC. All submissions should

refer to File No. SR–NSCC–00–07 and

should be submitted by June 28, 2000.

It is therefore ordered, pursuant to

section 19(b)(2) of the Act,5 that the

proposed rule change (File No. SR–

NSCC–00–07) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14258 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42848; File No. SR–PCX–

99–18]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 to the Proposed Rule Change by

the Pacific Exchange, Inc., Relating to

Facilitation Crosses

May 26, 2000.

I. Introduction

On June 4, 1999, the Pacific Exchange,

Inc. (‘‘PCX’’ or ‘‘Exchange’’) filed with

the Securities and Exchange

Commission (‘‘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 to give member firms a

participation right in trades proposed as

facilitation crosses in certain

circumstances; and to allow facilitation

crosses for broker-dealer orders. Notice

of the proposed rule change was

published for comment in the Federal

Register on September 21, 1999.3 On

May 26, 2000, the PCX filed

Amendment No. 1 to the proposal. 4 No

comments were received on the

proposal. This order approves the

proposed rule change, as amended,

accelerates approval of Amendment No.

1, and solicits comments from interested

persons on that amendment.

II. Description of the Proposal

PCX Rule 6.47(b) sets forth the

procedures by which a floor broker

representing the order of a member

firm’s public customer may cross it with

a contra side order provided by the firm

from its own proprietary account. In

these circumstances, the firm is said to

be ‘‘facilitating’’ the customer order, and

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36207

5Telephone conversation between Robert P.

Pacileo, Senior Attorney, Regulatory Policy, PCX,

and Ira L. Brandriss, Attorney, Division of Market

Regulation, the Commission, on May 23, 2000

(‘‘Telephone conversation with the PCX’’).

6Telephone conversation with the PCX.

7See Amendment No. 1, which reduces the

proposed percentage guarantee from 50% to 40%.

8Such orders are included within the meaning of

‘‘all public customer orders represented in the

trading crowd’’ in the proposed rule text.

Telephone conversation with the PCX

9See Amendment No. 1, concerning proposed

subsection 6.47(b)(1). In this case, the members of

the trading crowd would have priority over the

floor broker seeking to cross a transaction.

Telephone conversation with the PCX.

10As codified in PCX Rule 6.46, the floor broker

must make all persons in the crowd aware of his

request for a market, and must allow adequate time

for a response. In its proposed amendments to Rule

6.47, the PCX has deleted current references to

these procedural obligations to avoid redundancy.

Telephone conversation with the PCX.

11See PCX Rule 6.82(d)(1).

12See Amendment No. 1, concerning proposed

subsection 6.47(b)(5).

13 Id., concerning proposed subsection 6.47(b)(6).

14Thus the LMM participation right is not a

concern where the facilitating firm receives a 40%

crossing right, because that right is granted only

when the trade occurs between the best bid and

offer given by the crowd, which is by definition at

a price other than the LMM’s quoted bid or offer.

15See Amendment No. 1, concerning proposed

subsection 6.47(b)(6).

16 Id.

17Current Rule 6.47(b) authorizes facilitation

crosses only for public customer orders.

the transaction is called a ‘‘facilitation

cross.’’

Under the current version of the rule,

a floor broker seeking to execute a

facilitation cross must first bring the

transaction to the trading floor and

request a market from the trading

crowd. After receiving bids and offers

from the crowd, the floor broker must

propose a price at which to cross the

order that improves upon the price

provided by the crowd. However, before

the floor broker can execute the cross,

the market makers in the crowd are

given the opportunity to take all or part

of the transaction at the proposed price.

Under the current rule, if the crowd

does not want to participate in the trade,

the floor broker may proceed with the

cross. If the crowd wants to take part of

the order, however, the crowd has

precedence and the floor broker may

cross only that amount remaining after

the crowd has taken its portion. If the

crowd wants to take the entire order, the

floor broker will not be able to cross any

part of the order.

The proposed rule change, applicable

to both equity options and index

options,5 would entitle the floor broker,

under certain conditions, to cross a

specified percentage of the customer

order on behalf of the member firm

before market makers in the crowd can

participate in the transaction. This

provision would apply only to orders of

200 contracts or more. The percentage of

the floor broker’s guarantee would

depend upon whether the price at

which the order is ultimately traded is

at the crowd’s best bid or offer in

response to the broker’s initial request

for a market, or at an improved price.

First, the floor broker would be

granted a right under the proposal to

execute a facilitation cross event at the

price that does not improve upon the

best bid or offer provided by the crowd

in response to his initial request for a

market. The proposed rule change

provides that where the trade takes

place at the market provided by the

crowd, all public customer orders in the

book 6 and those represented in the

crowd at the time the market was

established would first need to be

satisfied. Once these public customer

orders are satisfied, the floor broker

would be entitled to facilitate 25% of

the contracts remaining in the customer

order.

The proposed rule change further

provides that if the floor broker

proposes the facilitation cross at a price

between the best bid and offer provided

by the crowd in response to his initial

request for a market—and the crowd

then wants to take part or all of the

order at the improved price—the floor

broker would be entitled to priority over

the crowd to facilitate 40% of the

contracts 7 remaining after any public

customer orders represented at that

improved price have been satisfied.8

In the case of orders for less than 200

contracts, the proposed rule change

makes clear that the floor broker would

be permitted to facilitate a customer

order by following PCX Rule 6.47(b)

procedures, but would not receive any

priority over the crowd.9

As under the current version of the

PCX facilitation cross rule, the order

tickets for both the customer order and

the firm’s facilitation order would be

required under the proposal to display

all the terms of the orders, including

any contingencies involving, and all

related transactions in, either options or

the underlying security. Similarly, the

floor broker would continue to be

required to disclose all securities that

are components of the customer order

before requesting the crowd’s market.10

The proposed rule change adds a

stipulation that would require the floor

broker to clearly disclose to the crowd

that he is intending to execute a

facilitation cross when he initially asks

for its market. Once the trading crowd

provides that market, it would remain in

effect under the proposal until (a) a

reasonable amount of time has passed;

(b) a significant change has occurred in

the price of the underlying security of

the option; or (c) the market is

improved. ‘‘Significant change’’ would

be interpreted on a case-by-case basis by

two Floor Officials, based upon the

extent of recent trading in the option

and the underlying security and any

other relevant factors.

The proposed rule change also

provides that if the trade takes place at

the quoted bid or offer of the Lead

Market Maker (‘‘LMM’’) in the options

class being traded, the guaranteed

participation to which the LMM is

ordinarily entitled in such case 11 would

apply only to the number of contracts

remaining after all public customer

orders have been filled and the

facilitating firm’s crossing rights have

been exercised. Further, the total

number of contracts allocated in the

aggregate to the facilitating firm and the

LMM as the result of their guaranteed

participations could not exceed 40%.12

The proposed rule change makes

clear, however, that it is not intended to

prohibit either a floor broker or LMM

from trading more than their percentage

entitlements if the other members of the

trading crowd do not choose to trade

with the remainder of the order.13 The

proposal further makes clear, in

accordance with PCX Rule 6.82, that if

the trade takes place at a price other

than that of the LMM’s quoted bid or

offer, the LMM would not be entitled to

a guaranteed participation.14

The proposed rule change also

provides that the members of the crowd

who establish the facilitation market in

response to the floor broker’s initial

request would have priority over all

other non-public customer orders 15 that

were not represented in the crowd at the

time that market was established, except

for orders that improve upon those

quotes. Further, a floor broker holding a

customer order and a facilitation order

who calls for a facilitation market would

be deemed to be representing both the

customer order and the facilitation

order, so that the customer order and

the facilitation order would also have

priority over all other non-public

customer orders 16 that were not being

represented in the trading crowd at the

time the market was established.

Finally, the proposed rule change

would permit facilitation crosses for

broker-dealer orders.17

III. Discussion

After careful review, the Commission

finds that the proposed rule change is

consistent with the provisions of the Act

applicable to a national securities

exchange, particularly those of section

36208 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

18 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that

the rules of a national securities exchange be

designed to, among other things, promote just and

equitable principles of trade, remove impediments

to and perfect the mechanism of a free and open

market, and, in general, to protect investors and the

public interest. It also requires that those rules not

be designed to permit unfair discrimination

between customers, issuers, brokers, or dealers.

19 15 U.S.C. 78f(b)(8). Section 6(b)(8) requires that

the rules of the exchange do not impose any burden

on competition not necessary to appropriate in

furtherance of the purposes of the Act.

20 In approving this proposal, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

21See Securities Exchange Act Release No. 42455

(February 24, 2000), 65 FR 11388 (March 2, 2000).

22 15 U.S.C. 78s(b)(2).

23Among these is a textual revision that makes

clear that members of the trading crowd who

established the facilitation market will not maintain

priority over any order that improves the market.

24 15 U.S.C. 78f(b)(5).

25 15 U.S.C. 78s(b)(2).

26 17 CFR 200.30–3(a)(12).

6(b)(5) 18 and section 6(b)(8) 19 of the

Act, and the rules and regulations

thereunder.20 The Commission believes

that the proposal will enable the PCX to

better compete with other options

exchanges in attracting the order flow of

broker-dealer firms seeking to facilitate

customer orders, with adversely

impacting the prices those orders

receive.

The Commission finds that the PCX’s

proposal to grant participation rights,

under certain conditions, to member

firms seeking to execute facilitation

crosses on the Exchange is reasonable.

Currently, PCX market makers have

priority rights for the full size of a

customer order over the firm that brings

a crossing transaction to the PCX floor,

as long as the market makers are willing

to trade at the proposed price.

While the proposal entitles the

member firm to a specified percentage

of a facilitation transaction when

executed at the trading crowd’s best bid

or offer, it does not eliminate the

crowd’s ability to trade with a portion

of the order proposed to be crossed, or

even so substantially reduce that ability

so as to raise serious concern that the

proposal would reduce price

competition by the crowd. Moreover,

the Commission believes that the

proposal may contribute to better prices

for crossing transactions. Specifically, it

provides an incentive for upstairs firms

to improve on the prices quoted by the

crowd by offering these firms a greater

participation in the trade when they

better the crowd’s price. In addition,

market makers will always have an

opportunity to improve the market and

compete for a greater portion of the

trade.

In evaluating the proposed rule

change, the Commission considered,

among other matters, whether the PCX’s

proposal to guarantee that a member

firm could cross up to 40% of an order

would reduce the incentive of crowds to

compete for orders, and thus impair the

price discovery mechanism of the

Exchange’s market.

In its recent approval of the

application of the International

Securities Exchange (‘‘ISE’’) for

registration as a national securities

exchange, the Commission discussed

the same concern with respect to the

ISE’s proposed ‘‘facilitation

mechanism,’’ a system designed to effect

a type of facilitation guarantee in an

electronic context. The Commission

wrote:

It is difficult to assess the precise level at

which guarantees may begin to erode

competitive market maker participation and

potential price competition within a given

market. In the future, after the Commission

has studied the impact of guarantees, the

Commission may need to reassess the level

of these guarantees. For the immediate term,

the Commission believes that 40% is not

clearly inconsistent with the statutory

standards of competition and free and open

markets.21

By the same token, the Commission

believes that the PCX’s proposed rule

change, which allocates no more than

40% of an order to the firm seeking to

facilitate an order, is not inconsistent

with the statutory standard. The

Commission notes, moreover, that for

those crossing transactions in which an

LMM is entitled to an allocation in

addition to the proposed allocation for

the facilitating firm, the PCX has

included a provision to limit the

combined allocations awarded to the

firm and the LMM an aggregate of no

more than 40% of the order.

Although facilitation cross rules have

heretofore been limited to public

customer orders, the Commission

believes it is reasonable to permit the

PCX to allow firms to facilitate orders of

broker-dealers—to the degree permitted

under the proposed rule change—in its

belief that this will enable the PCX to

better compete with other exchanges in

attracting order flow to its market.

The Commission finds good cause,

pursuant to section 19(b)(2) 22 of the

Act, for approving Amendment No. 1 to

the proposal prior to the thirtieth day

after the date of publication of notice of

filing thereof in the Federal Register.

Amendment No. 1 includes the

provisions described above that limit

the total percentage of an order that may

be guaranteed to no more than 40%, a

percentage that the Commission has

previously found consistent with the

Act. It also clarifies the application of

the facilitation cross rule, as amended

by the proposal, for orders of less than

200 contracts. Amendment No. 1 further

includes several changes to the

proposed new rule text that clarify its

meaning and thus strengthen the

proposal.23 Accordingly, the

Commission finds good cause,

consistent with Sections 6(b)(5) 24 and

19(b)(2) 25 of the Act to accelerate

approval of Amendment No. 1 to the

proposed rule change.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether it is consistent

with the Act. Persons making written

submissions 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 in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the PCX. All

submissions should refer to File No.

SR–PCX–99–18 and should be

submitted by June 28, 2000.

V. Conclusion

For the reasons discussed above, the

Commission finds that the proposal is

consistent with the Act and the rules

and regulations thereunder.

It is therefore ordered, pursuant to

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

proposed rule change (SR–PCX–99–18),

as amended, be and hereby is approved.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority. 26

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14256 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M