66158 Federal Register / Vol. 62, No. 242 / Wednesday, December 17, 1997 / Notices

2The Commission approved the CBOE’s proposal

to incorporate its telephone policy for equity

options into the rules of the Exchange in 1994. See

Securities Exchange Act Release No. 33701 (March

2, 1994), 59 FR 11336 (March 10, 1994) (order

approving File No. SR–CBOE–93–24) (‘‘Equity

Option Approval Order’’).

3 15 U.S.C. 78f(b)(5)(1988).

4 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(b)(5).

5Telephone conversation among Timothy

Thompson, Senior Attorney, CBOE, Pat Cerny,

Market Surveillance, CBOE, and Yvonne Fraticelli,

Attorney, Office of Market Supervision, Division of

Market Regulation, Commission, on November 18,

1997 (‘‘November 18 Conversation’’).

6See Equity Option Approval Order, supra note

2.

7 15 U.S.C. 78f.

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

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

2The Commission has modified the text of the

summaries prepared by DTC.

Section 19(b)(2) of the Act. According to

the CBOE, the proposed change is

consistent with the use of telephones at

other locations on the CBOE floor,

including at the equity option telephone

posts, where the use of telephones is

governed by a policy approved by the

Commission.2

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, and, in particular, the

requirements of Section 6(b)(5) 3 in that

it is designed to promote just and

equitable principles of trade, prevent

fraudulent and manipulative acts and

practices, and maintain fair and orderly

markets.4 Specifically, the CBOE has

represented that allowing OEX market

makers to receive incoming calls from

outside the CBOE building may allow

OEX market makers to receive

information that will assist OEX market

makers in performing their duties. In

addition, the proposal will make the

OEX telephone policy regarding market

makers’ receipt of incoming calls

consistent with the telephone policies at

all other trading locations on the CBOE

floor.

The Commission believes that it is

reasonable for the Exchange to amend

its telephone policy for OEX market

makers to make the policy consistent

with the procedures applicable to all

other trading locations on the CBOE has

indicated that market makers’ receipt of

incoming calls at other trading posts on

the CBOE floor. In this regard, the

Commission notes that the CBOE floor

has produced no detrimental effect on

the conduct of business at those trading

posts. In addition, the CBOE states that

the Exchange has not detected any

improper trading activity resulting from

its telephone policies.5 The Commission

believes, as it found in approving the

CBOE’s telephone policy for equity

options, that the Exchange’s existing

surveillance procedures will ensure that

the CBOE is aware of any options

transactions that raise manipulation

concerns.6 Accordingly, the

Commission believes that the CBOE’s

modification of its telephone policy for

OEX market makers will not diminish

the Exchange’s ability to detect and

deter manipulation.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. Accelerated

approval will allow the CBOE to

implement a uniform policy regarding

market makers’ receipt of incoming calls

at their trading posts. Accordingly, the

Commission believes that granting

accelerated approval to the proposal is

appropriate and consistent with Section

6 of the Act.7

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

argument concerning the foregoing.

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. 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 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to File No. SR–CBOE–97–55 and

should be submitted by January 7, 1998.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (File No. SR–

CBOE–97–55) is approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–32920 Filed 12–16–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39422; File No. SR–DTC–

97–20]

Self-Regulatory Organizations; The

Depository Trust Company; Notice of

Filing and Order Granting Accelerated

Approval of a Proposed Rule Change

Expanding the Money Market

Instrument Settlement Program

December 19, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

September 22, 1997, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) and on November 13,

1997, amended the proposed rule

change (File No. SR–DTC–97–20) as

described in Items I and II below, which

items have been primarily prepared by

DTC. The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons and to grant accelerated

approval of the proposed rule change on

a permanent basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change seeks

permanent approval of DTC’s expanded

money market instrument (‘‘MMI’’)

settlement program. The Commission

previously approved DTC’s expanded

MMI program on a temporary basis.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DTC included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments that it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below. DTC

has prepared summaries, set forth in

sections (A), (B), and (C) below, of the

most significant aspects of such

statements.2
Federal Register / Vol. 62, No. 242 / Wednesday, December 17, 1997 / Notices 66159

3Securities Exchange Act Release Nos. 33958

(April 22, 1994), 59 FR 22878; and 35655 (April 28,

1995), 60 FR 22423.

4 Id.

5Because transactions in a failing MMI issue

would be reversed by DTC only if DTC is informed

of the default by 3:00 PM (Eastern Time), LPNC

procedures remain in effect only until

approximately 3:05 PM (Eastern Time). After this

time, collateralization and net debit cap controls are

applied to net debits incurred by participants as a

result of transactions that have actually completed.

6 15 U.S.C. 78q–1.

7 15 U.S.C. 78q–1(b)(3)(F). 8 17 CFR 200.30–3(a)(12).

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

DTC’s expanded MMI program is an

extension of DTC’s same-day funds

settlement (‘‘SDFS’’) system. The

proposed rule change seeks permanent

approval of DTC’s expanded MMI

settlement program for transactions in

institutional certificates of deposit,

municipal commercial paper, and

bankers’ acceptances.3 The proposed

rule change also seeks to permanently

approve changes made to DTC’s MMI

programs for corporate commercial

paper (‘‘CP’’), medium term notes,

preferred stock in a CP-like mode, short

term bank notes, and discount notes.4

The Commission previously granted

only temporary approval to the

expansion of DTC’s MMI settlement

program because at the time DTC had

not yet implemented the largest

provisional net credit (‘‘LPNC’’) control.

The LPNC control consists of two new

risk management features which are

designed to protect DTC against the

combined failure of a MMI issuer and a

participant.

Under the first LPNC risk

management feature, DTC subtracts

from a participant’s actual overall SDFS

net debit or credit the amount of the

participant’s largest provisional net

credit due to transactions in any single

issuer’s MMI program. If a transaction

causes the resulting net debit

(‘‘simulated net debit’’) to exceed the

participant’s net debit cap, the

transaction will be blocked until the

account receives sufficient credits to

complete the transaction.

Under the second LPNC risk

management feature, DTC subtracts

from the participant’s collateral monitor

the amount of a participant’s largest

provisional net credit due to

transactions in any single issuer’s MMI

program. If a transaction will cause the

resulting collateral monitor (‘‘simulated

collateral monitor’’) to become negative

(i.e., the participant’s collateral would

be insufficient to cover its simulated net

debit after the transaction), the

transaction will be blocked until the

account receives sufficient collateral to

complete the transaction.5

DTC has reported that MMI issuers

have defaulted both before and after the

LPNC controls were implemented in

September 1995. However, since the

implementation of the LPNC controls,

DTC stated that it has not had any

problems with liquidity or blocked

transactions. DTC indicated that the

application of LPNC controls may cause

some participants to reach their net

debit cap and as a result, block the

completion of further transactions.

However, DTC reported that

participants generally complete blocked

transactions by sending intraday funds

to DTC for credit to their participant

settlement account.

DTC believes the proposed rule

change is consistent with the

requirements of Section 17A of the Act 6

and the rules and regulations

promulgated thereunder because it

promotes the prompt and accurate

clearance and settlement of transactions

in MMIs.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

DTC does not believe that the

proposed rule change will impact 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

DTC has not solicited comments on

the proposed rule change. Discussions

with DTC participants indicate

continued wide support for the MMI

programs.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Section 17A(b)(3)(F) 7 of the Act

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

responsible. The Commission believes

that DTC’s proposed rule change is

consistent with DTC’s obligations under

the Act.

Because the Commission was

concerned that the proposed expanded

MMI settlement program increased risks

associated with the use of provisional

credits, the Commission previously

approved the proposed rule change on

a temporary basis until the new LPNC

controls could be implemented and

monitored for their effectiveness. During

the temporary approval period, the

LPNC risk management features have

helped minimize the impact of a default

by an MMI issuer. In this regard, since

the LPNC controls were implemented in

September 1995, DTC has reported that

it has had no problems with liquidity or

blocked transactions. Thus, the

Commission finds that DTC’s expanded

MMI settlement program, with the

addition of the LPNC controls, is

consistent with its obligations under the

Act to assure the safeguarding of

securities and funds which are in its

custody or control or for which it is

responsible.

DTC has requested that the

Commission find good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of the filing. The

Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice of filing because

accelerated approval will allow DTC to

continue to use its MMI program

without interruption.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. 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. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization.

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–

DTC–97–20) be and hereby is

permanently approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8
66160 Federal Register / Vol. 62, No. 242 / Wednesday, December 17, 1997 / Notices

1On September 30, 1997, the NASD submitted an

amendment (‘‘Amendment No. 1’’) to the proposed

rule change to make technical amendments to the

text of the proposed rule change. See Letter from

Robert E. Aber, Vice President and General Counsel,

The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), to

Katherine England, Assistant Director, Division of

Market Regulation, Commission, dated September

30, 1997.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4 ‘‘SOES’’ refers to Nasdaq’s Small Order

Execution System.

5Securities Exchange Act Release No. 39218

(October 8, 1997) 62 FR 53675 (October 15, 1997).

6Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Division of Market Regulation,

Commission, dated December 3, 1997

(‘‘Amendment No. 2’’). In Amendment No. 2, the

NASD made certain technical changes to NASD

Rules 4620 and 4730 as well as clarified certain

issues involving NASD Rule 4730. These points are

discussed in detail below.

7See NASD Rule 4613.

8NASD Rule 4730(b)(6).

9To avoid being ‘‘SOESed out of the Box,’’

members can elect not to have their quote size

decremented (‘‘no dec’’) upon the execution of

SOES orders, provided the market maker’s quote

size is equal to or greater than the applicable SOES

tier size (i.e., the maximum SOES order size). See

NASD Rule 4730; see also Nasdaq Subscriber

Bulletin, vol. 15, July 1997, at page 2. In the

alternative, the market maker may use Nasdaq’s

auto-refresh feature, which automatically updates a

market maker’s quote after its quote size has been

decremented. NASD Rule 4730(b)(2).

10See NASD Rule 4730(b)(7).

11See Appendix to Report Pursuant to Section

21(a) of the Securities Exchange Act of 1934

Regarding the NASD and The Nasdaq Stock Market

(‘‘21(a) Report’’), SEC, August 8, 1996, at p. 91–95.

12The factors were (1) the timeliness of the

market maker’s call to Market Operations; (2) the

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–32821 Filed 12–16–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39423; File No. SR–NASD–

97–04]

Self-Regulatory Organizations; Order

Approving Proposed Rule Changes

and Amendment No. 1 Thereto by the

National Association of Securities

Dealers, Inc. and Notice of Filing and

Order Granting Accelerated Approval

to Amendment No. 2 Thereto

Regarding Excused Market Maker

Withdrawals and Reinstatements

December 10, 1997.

On January 24, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

proposed rule changes 1 pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’) 2 and Rule 19b–4 thereunder.3 The

proposal amends NASD Rule 4619

(excused market maker withdrawals),

NASD Rule 4620 (voluntary termination

of market maker registrations), and

NASD Rule 4730 (reinstatement of

market makers that have been ‘‘SOESed

out of the Box’’ 4 or that accidentally

withdrew from a security). Notice of the

proposed rule changes, including the

substance of the proposal and

Amendment No. 1 thereto, was

published for comment in the Federal

Register.5 No comments were received.

On December 3, 1997, the NASD filed

with the Commission Amendment No.

2.6 The Commission is hereby

approving the proposed rule changes,

including Amendment No. 1 thereto. In

addition, the Commission is publishing

this notice to solicit comments from

interested persons on Amendment No.

2; the Commission hereby approves that

amendment.

I. Description of Rule Changes

To ensure that market makers are

complying with their obligation to

maintain continuous, firm, two-sided

quotations,7 NASD Rule 4620 provides

that a market maker that voluntarily

terminates its registration in a security

may not re-register as a market maker in

that security for 20 business days. This

rule is commonly referred to as the ‘‘20-

Day Rule.’’ With respect to SOES,

withdrawal from participation as a

market maker in a Nasdaq National

Market (‘‘NNM’’) security constitutes

termination of registration as a market

maker in that security for purposes of

NASD Rule 4620. NASD Rule

4730(b)(6), an SOES rule, provides that

for NNM securities a market maker will

be suspended from SOES if its bid or

offer has been decremented to zero due

to SOES executions. If this occurs, the

market maker will be permitted a

standard grace period (i.e., five minutes)

within which to take action to restore a

two-sided quotation in the security for

at least one normal unit of trading. A

market maker that fails to reenter a twosided quotation in an NNM security

within the allotted time will be deemed

to have withdrawn as a market maker.

Unless the market maker’s withdrawal

is ‘‘excused,’’ that market maker may

not reenter SOES as a market maker in

that security for twenty (20) business

days.8 When a market maker is

deregistered from a security because it

failed to restore its quotation, it is

referred to as being ‘‘SOESed out of the

Box.’’ 9

Notwithstanding NASD Rules 4620

and 4730(b)(6), NASD Rule 4619

permits market makers to obtain an

‘‘excused’’ withdrawal in certain limited

circumstances. Under NASD Rule 4619,

a market maker may withdraw

quotations in a security without being

subject to the 20-Day Rule or NASD

Rule 4730(b)(6) (for SOES market

makers). A market maker that

withdraws from a security for a reason

permitted by NASD Rule 4619 may reenter its quotes once the circumstances

justifying the withdrawal no longer

exist.10 The rule currently allows

excused withdrawals for:

(1) Physical circumstances beyond the

market maker’s control (NASD Rule

4619(b));

(2) Demonstrated legal or regulatory

requirements (e.g., the market maker is

in possession of material non-public

information regarding the issue) (NASD

Rule 4619(b));

(3) Religious holidays (provided the

request is submitted five business days

in advance of the holiday) (NASD Rule

4619(b));

(4) Vacations (provided the request is

received 20 business days in advance of

the vacation and is made by a market

maker with three or fewer Nasdaq level

3 terminals) (NASD Rule 4619(b));

(5) A market maker that has

withdrawn from an issue prior to the

public announcement of a merger or

acquisition and wishes to re-register in

that issue pursuant to applicable NASD

rules;

(6) Involuntary failures to maintain

clearing arrangements (NASD Rule

4619(c)); and

(7) The duration of the ‘‘cooling off’’

periods mandated by certain rules under

Regulation M under the Exchange Act

(NASD Rule 4619(d)).

The SEC criticized the NASD’s

handling of excused withdrawal

requests and the reinstatement of market

makers that had been ‘‘SOESed out of

the Box’’ in the SEC’s 21(a) Report on

the NASD and The Nasdaq Stock

Market.11 The SEC found, among other

things, that the NASD had improperly

granted waivers of the 20-Day Rule for

market makers that were ‘‘SOESed out

of the Box’’ and that the NASD had not

followed its own rules when granting

excused withdrawals. Until 1995, the

21(a) Report found, the practice of

Nasdaq Market Operations was to grant

SOES withdrawal waivers as a matter of

course without inquiring into the

reasons for the withdrawals. A market

maker merely had to request the waive

and Nasdaq Market Operations granted

it. Beginning in 1995, Nasdaq Market

Operations started to make some inquiry

into the reasons for the SOES

withdrawals, granting waivers based

upon an examination of four factors.12