Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices 68331

5 15 U.S.C. 78s(b)(3)(A).

6 17 CFR 240.19b–4(e).

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2The proposal was originally filed with the

Commission on November 18, 1997, but was

withdrawn on December 1, 1997. See Letter from

Alden S. Adkins, Vice President and General

Counsel, NASD Regulation, to Richard C. Strasser,

Assistant Director, Division of Market Regulation,

Commission. (File No. SR–NASD–97–84). On

December 22, 1997, the NASD filed Amendment

No. 1 with the Commission. See Letter from Alden

S. Adkins, Vice President and General Counsel,

NASD Regulation, to Richard C. Strasser, Assistant

Director, Division of Market Regulation,

Commission. In addition, several minor technical

corrections authorized by NASD Regulation are

included in this Notice. Telephone conversation

between David A. Spotts, Office of the General

Counsel, NASD Regulation, and Elaine M. Darroch,

Office of Market Supervision, Division of Market

Regulation, Commission (December 4, 1997).

3 15 U.S.C. § 78s(b)(3)(A)(i).

4 17 CFR 240.19b–4(e)(i).

5Securities Exchange Act Release No. 38812 (July

3, 1997), 62 FR 37105 (July 10, 1997) (File No. SR–

NASD–97–29).

B. Self-Regulatory Organization’s

Statement on Competition

The proposed rule change does not

impose any burden on competition that

is not necessary or appropriate in

furtherance of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The Association has neither solicited

nor received written comments on the

proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change constitutes

a stated policy, practice, or

interpretation with respect to the

meaning, administration, or

enforcement of an existing rule and,

therefore, has become effective pursuant

to Section 19(b)(3)(A)(i) of the Act 5 and

subparagraph (e) of Rule 19b–4

thereunder.6

At any time within sixty days of the

filing of such proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

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, 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 for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–97–86 and should be

submitted by January 21, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–33993 Filed 12–30–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

(Release No. 34–39478; File No. SR–NASD–

97–85)

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc., Relating to NASD Rule

2460 Concerning Payments for Market

Making

December 22, 1997.

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

Securities Exchange Act of 1934

(‘‘Exchange Act’’),1 notice is hereby

given that on December 1, 1997, the

National Association of Securities

Dealers, Inc. (‘‘NASD’’), through its

wholly owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by NASD

Regulation.2 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation, pursuant to Section

19(b)(3)(A)(i) of the Act 3 and Rule 19b–

4(e)(i) under the Act,4 is proposing this

interpretation of NASD Rule 2460

concerning payments for market

making. The text of the letter setting

forth the interpretation is attached as

Exhibit 1.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASD Regulation included statements

concerning the purpose of, and basis for,

the proposed rule change and discussed

any comments it received on the

proposed rule filing. The text of these

statements may be examined at the

places specified in Item IV below.

NASD Regulation 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

NASD Regulation is proposing to

issue a staff interpretation of NASD Rule

2460 to clarify the position of NASD

Regulation with respect to the

application of the rule to certain

member broker-dealers that participate

in a Freddie Mac Interdealer Cash

Market Trading Initiative, as described

below.

NASD Rule 2460—Payments for Market

Making

On July 3, 1997, the SEC approved

NASD Rule 2460 (‘‘Rule’’),5 which

explicitly prohibits an NASD member or

person associated with a member from

accepting any payment or other

consideration from issuers or the

issuers’ affiliates or promoters, directly

or indirectly, for: (1) publishing a

quotation, (2) acting as a market maker,

or (3) submitting an application in

connection therewith. The rule was

intended, among other things, to assure

that members act in an independent

capacity when publishing a quotation or

making a market in an issuer’s

securities.

NASD Regulation originally proposed

this new rule and requested comment

from members and the public in Notice

to Members 96–83 (‘‘NTM 96–83’’) in

December 1996. As stated in NTM 96–

83, it has been a longstanding policy

and position of the NASD that a brokerdealer is prohibited from receiving

compensation or other payments from

an issuer for listing, quoting, or making

a market in an issuer’s securities or for

covering the member’s out-of-pocket
68332 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices

6See Notices to Members 75–16 (February 1975)

and 92–50 (October 1992).

7 15 U.S.C. § 77e.

8Freddie Mac’s statutory purpose is to, among

other things, promote access to mortgage credit

throughout the Nation by increasing the liquidity of

mortgage investments and improving the

distribution of investment capital available for

residential mortgage financing (12 U.S.C. § 1451(b)).

9 In the years following 1990, Freddie Mac has

built a supply of tradable Gold PCs in an attempt

to achieve a liquid market of 30-year Gold PCs

($152 billion as of September 1, 1997). The dealer

response, however, has primarily remained

unchanged in maintaining Fannie Mae MortgageBacked Security (‘‘MBS’’) positions and entering

into synthetic transactions in the swap market

despite the availability of a sizable amount of

tradable Gold PCs. Broker-dealers primarily enter

into Gold PC transactions synthetically as opposed

to direct transactions in the Gold PC cash market.

The synthetic transactions are structured generally

as follows: A dealer will first purchase a 30-year

Fannie Mae MBS in the cash market with a forward

delivery (with a fixed settlement date in the future).

The dealer will enter into another separate

transaction in the swap market. The dealer will

swap the obligation to buy the Fannie Mae MBS for

a commitment to purchase (accept delivery at

settlement) Gold PCs.

To gain an understanding of the relative size of

the cash market for MBS, the following statistics are

provided. In 1996, the average cash market volume

on the interdealer broker screens for MBS was

approximately $20 billion per month. Of this,

approximately 96% was conducted in Fannie Mae

MBS transactions and approximately 4% was

conducted directly in the cash market in 30-year

Gold PCs.

10To normalize the environment for dealers to

accumulate credits) so as not to favor larger dealers

who naturally conduct a higher volume business),

a system for accumulation of credits was

established that would be based on the individual

dealer’s level of participation. Credits are awarded

on the current volume traded on the cash screens.

Credits are awarded at an increasing rate when

dealers exceed their previous monthly cash trading

volume, as calculated since the beginning of the

Initiative, that the dealers have traded on the cash

screens. This feature was designed to limit the

duration of the Initiative by creating momentum in

moving dealers progressively away from the swap

market.

Under this Initiative, credits are redeemable at a

value of 1⁄64th of a point (or $156.25 per million).

This value was selected so as to provide nominal

economic incentive over the additional 1⁄4th to 3⁄8ths of a 32nd (or $78.13 to $117.20 per million)

in the transaction cost of executing a synthetic Gold

PC in the MBS cash and swap markets.

expenses for making a market, or for

submitting an application to make a

market in an issuer’s securities.6 As

stated in Notice to Members 75–16

(February 1975), such payments may be

viewed as a conflict of interest since

they may influence the member’s

decision as to whether to quote or make

a market in a security and, thereafter,

the prices that the member would quote.

In the past, certain broker-dealers

have entered into arrangements with

issuers to accept payments from the

issuers, their affiliates or promoters to

make a market in the issuer’s securities,

or for covering out-of-pocket expenses

of the member incurred in the course of

market making, or for submitting an

application to act as a market maker. As

stated above, NASD Regulation believes

that such conduct may be viewed as a

conflict of interest. NASD Regulation

believes that a market maker should

have considerable latitude and freedom

to commence or terminate market

making activities in an issuer’s

securities. The decision by a firm to

make a market in a given security and

the question of what price the firm will

quote for that security generally are

dependent on a number of factors,

including, among others, supply and

demand, the firm’s expectations toward

the market, its current inventory

position, and exposure to risk and

competition. This decision should not

be influenced by payments to the

member from issuers or promoters.

NASD Rule 2460 establishes a fair

practice standard regarding a particular

course of conduct of a member.

Members should be mindful that certain

actions of a member in accepting a fee

from an issuer for making a market, or

accepting an unsolicited payment from

an issuer where the member makes a

market in the issuer’s securities, in

addition to violating NASD Rule 2460,

could also violate the anti-fraud

provisions of the federal securities laws

and NASD Rule 2120, an NASD antifraud provision. Further, the payment

by an issuer to a market maker to

facilitate market making activities could

also violate the registration

requirements of Section 5 of the

Securities Act of 1933 (‘‘Securities

Act’’).7

Freddie Mac Interdealer Cash Market

Trading Initiative

The Federal Home Loan Mortgage

Corporation (‘‘Freddie Mac’’) is a

government-sponsored enterprise

created pursuant to the Federal Home

Loan Mortgage Corporation Act, Title III

of the Emergency Home Finance Act of

1970, as amended, to provide a

continuous flow of funds for residential

mortgages.8 To finance its mortgage

purchase activities, Freddie Mac sells its

securities to investors directly and

through securities dealers. The primary

financing vehicle for its mortgage

purchases is the sale of Mortgage

Passthrough Certificates (‘‘PCs’’). These

securities are exempt from registration

under the Securities Act and the

Exchange Act. In 1990, Freddie Mac

redesigned its fixed-rate PC structure

and issues a new type of PC, called Gold

PC. Since the Gold PCs were entirely

new and a separate product, there was

limited initial liquidity in the Gold PC

market. As a result, dealers responded

to the initial lack of liquidity in the

Gold PC market, with its potential

volatility, by maintaining primary

Federal National Mortgage Association

(‘‘Fannie Mae’’) security positions, and

by entering into synthetic transactions

in the swap market.9

As a result of the above, Freddie Mac

launched a program to encourage

dealers to purchase Gold PCs directly,

rather than through the swap market

mechanism (the ‘‘Initiative’’). Freddie

Mac and The Bond Market Association

(‘‘BMA’’) submitted to the staff of NASD

Regulation a letter dated October 7,

1997, regarding the application of NASD

Rule 2460 to members participating in

the Initiative.

The Initiative includes offering

dealers ‘‘credits’’ for trading directly on

the interdealer cash market, as opposed

to the swap market. Freddie Mac has

developed procedures and internal

controls to calculate trading volume

credits monthly to the dealers and

assure proper administration of the

program. According to the October 7,

1997 letter from Freddie Mac and the

BMA, this Initiative is intended to be

temporary, and the value of the credits

were selected so as to provide a nominal

economic incentive over the transaction

costs on the swap market, while not

providing so much of an incentive as to

alter pricing of the securities in the open

market.10 The credits awarded under

this Initiative may only be redeemed

through transactions with Freddie Mac,

that is, the credits are utilized by

participating broker-dealers to reduce

the fees associated with future

transactions with Freddie Mac.

Due to unique characteristics of the

Initiative, Freddie Mac presented

principally three arguments why NASD

Rule 2460 was not intended to cover the

Initiative: (1) The Initiative promotes

Freddie Mac’s statutory purpose; (2) the

Initiative does not affect the integrity of

the marketplace; and (3) the Initiative is

intended to be temporary.

First, Freddie Mac represents that the

Initiative appears to promote Freddie

Mac’s statutory purpose, in that, Freddie

Mac was created by Congress to provide

a conduit for ensuring a continuous

supply of funds from the capital markets

to the mortgage markets. Freddie Mac

purchases mortgages daily and finances

them primarily with the issuance of

MBS. The prices Freddie Mac pays for

its mortgage purchases is based directly

on the prices at which its sells its PCs.

Freddie Mac represents that this

Initiative was developed to eliminate

certain unnecessary costs in the

mortgage finance system by improving

interdealer PC liquidity through
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices 68333

11Currently, broker-dealers enter into gold PC

transactions synthetically, first by conducting a

transaction in a 30-year Fannie Mae MBS followed

by a subsequent swap transaction into or out of

Gold PCs. This process subjects Gold PCs to an

additional bid-ask spread (that of the cash market

and that of the swap market) of 1⁄8th to 1⁄4th of a

32nd (or up to $78.13 per million). In addition, the

two-step process results in broker fees for the

trading on the interdealer screens of an additional

1⁄16th to 1⁄8th of a 32nd (or up to $39.07 per million).

Thus, this persistent trading pattern creates

additional costs in the marketplace, preventing

investors from obtaining up to 3⁄8ths of 1⁄32nd (or

$117.20 per million) of the true economic value of

the Gold PCs that an efficient market would

produce.

As of May 1997, the average monthly dollar

volume of cash trades in Fannie Mae MBS and Gold

PCs approximated $19,239 million, $1,021 million,

respectively. As of that date, the average monthly

swap trades in Gold PCs and MBS approximated

$4,177 million.

12 15 U.S.C. § 78s(b)(3)(A)(i).

13 17 CFR 240.19b–4(e)(1).

14 17 C.F.R. 200.30–3(a)(12).

1Freddie Mac’s statutory purpose is to, among

other things, promote access to mortgage credit

throughout the Nation by increasing the liquidity of

mortgage investments and improving the

distribution of investment capital available for

residential mortgage financing (12 U.S.C. Section

1451(b)).

encouraging dealers to purchase Gold

PCs directly, as opposed to entering into

transactions in the swap market.11

Second, Freddie Mac represents that

the Initiative does not appear to affect

the integrity of the marketplace, since

the nature and characteristics of the

agency mortgage pass-through securities

market is unique and appears outside of

the intended scope of NASD Rule 2460.

The dealers in this market trade PCs and

similar securities essentially as fungible

products and trade these securities

indiscriminately on the interdealer

broker screens to meet customer

demand. As a result, the concept of

market making a particular security in

this market has little application. In

addition, Freddie Mac represents that

the incentives which lead a brokerdealer to make a quotation on a PC

differ from traditional equity trading.

Customer demand in fixed-income

securities is based primarily on changes

in interest rates, supply and demand,

and the quality of the credit backing the

security. In the agency MBS market, the

credit of the three primary agencies

(Freddie Mac, Fannie Mae and

Government National Mortgage

Association) is considered comparable,

the supply of the securities is

considered plentiful, and a welldeveloped forward trading market

permits ready hedging of positions. This

market differs from the characteristics of

the traditional equity market.

Accordingly, Freddie Mac represents

that, given the number of comparable

securities in the yield-driven debt

market, it is unlikely that certain dealer

credits to purchase Gold PCs would

mislead market participants to purchase

the Gold PCs versus other comparable

securities.

Further, Freddie Mac represents that

this Initiative is intended to be

temporary. It is expected that dealer

behavior will eventually become selfsustaining and no further incentives

will be required.

Based on the above information and

representations presented by Freddie

Mac, and the importance of the role of

Freddie Mac in promoting liquidity of

these instruments under statutory

mandate, it is NASD Regulation’s

opinion that the participation of

member firms in the Freddie Mac

Initiative as described in the letter

would not be deemed in violation of

NASD Rule 2460.

NASD Regulation believes that this

interpretation maintains investor

protection and clarifies a member’s

obligations under NASD Rule 2460

while participating in the Freddie Mac

Interdealer Cash market Trading

Initiative. Accordingly, NASD

Regulation believes that the

interpretation is consistent with the

provisions of Section 15A(b)(6) in that

it protects investors and the public

interest, and is designed to promote just

and equitable principles of trade.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

NASD Regulation does not believe

that the proposed rule change will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change has become

effective upon filing pursuant to Section

19(b)(3)(A)(i) of the Exchange Act 12 and

Rule 19b–4(e)(1) 13 thereunder in that it

constitutes a stated policy, practice or

interpretation with respect to the

meaning, administration, or

enforcement of an existing rule.

At any time within 60 days of the

filing of the proposed rule change, the

Commission may summarily abrogate

such rule change if it appears to the

Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

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, 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 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 NASD. All

submissions should refer to File No.

SR–NASD–97–85 and should be

submitted by January 21, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

Exhibit 1

November 25, 1997.

Ms. Gail Vance, Associate General Counsel,

Freddie Mac, 8200 Jones Branch Drive,

McLean, VA 22102–3110.

Mr. George P. Miller, Vice President and

Deputy General Counsel, The Bond Market

Association, 40 Broad Street, New York,

NY 10004–9400.

Re: Interpretive Guidance Under NASD Rule

2460.

Dear Ms. Vance and Mr. Miller: We are in

receipt of your letter dated October 7, 1997

in which you request interpretive guidance of

NASD Rule 2460 (Rule) and its potential

application to Freddie Mac’s Interdealer Cash

Market Trading initiative (‘‘Initiative’’). As

represented in your letter, Freddie Mac

launched this Initiative on June 2, 1997 in an

attempt to encourage dealers to purchase

Gold PCs directly, as opposed to entering

into swap market transactions.

Background

As stated in your letter, Freddie Mac is a

government-sponsored enterprise created

pursuant to the Federal Home Loan Mortgage

Corporation Act, Title III of the Emergency

Home Finance Act of 1970, as amended, to

provide a continuous flow of funds for

residential mortgages.1 To finance its

mortgage purchase activities, Freddie Mac

sells its securities to investors directly and
68334 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices

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

2 17 CFR 240.19b–4.

3Amendment No. 2 states that the Equity

Allocation Committee (‘‘EAC’’) will consider

mitigating circumstances on a case-by-case basis.

The restrictions will apply in all cases in which the

specialist fails to meet the standards; any failure to

impose the restrictions should not be routine and

should only occur in exceptional circumstances

which demonstrate that imposing the restrictions is

not justified. For example, the EAC may consider

a systems problem to be a mitigating circumstance

in a particular case. See letter from Jeffrey S. Norris,

Manager, Regulatory Development, PCX, to Heather

Seidel, Attorney, Market Regulation, Commission,

dated December 4, 1997 (‘‘Amendment No. 2’’).

4Prior to the adoption of the pilot program, PCX

Rule 5.37(a) provided that the Exchange’s EAC

evaluate all registered specialists on a quarterly

through securities dealers. The primary

financing vehicle for its mortgage purchases

is the sale of Mortgage Passthrough

Certificates (PCs). These securities are

exempt from registration under the Securities

Act of 1933 and the Exchange Act of 1934.

In 1990, Freddie Mac redesigned its fixedrate PC structure and issued a new type of

PC, called Gold PC. Since the Gold PCs were

entirely new and a separate product, there

was limited initial liquidity in the Gold PC

market. As a result, dealers responded to the

initial lack of liquidity in the Gold PC

market, with its potential volatility, by

maintaining primary Fannie Mae security

positions, and by entering into synthetic

transactions in the swap market.

As a result of the above, Freddie Mac

launched this Initiative to encourage dealers

to purchase Gold PCs directly, rather than

through the swap market mechanism. The

Initiative includes offering dealers ‘‘credits’’

for trading directly on the interdealer cash

market, as opposed to the swap market.

Freddie Mac has developed procedures and

internal controls to calculate trading volume

credits monthly to the dealers and assure

proper administration of the program.

According to your letter, this Initiative is

intended to be temporary, and the value of

the credits were selected so as to provide a

nominal economic incentive over the

transaction costs on the swap market, while

not providing so much of an incentive as to

alter pricing of the securities in the open

market. More important, the credits awarded

under this Initiative may only be redeemed

through transactions with Freddie Mac.

Discussion

NASD Rule 2460 prohibits NASD members

from receiving payments or other

consideration from an issuer for publishing a

quotation or acting as a maker in a security,

or for submitting an application to make a

market in the issuer’s securities. The

definition of ‘‘consideration’’ specifically

includes offering securities products on

terms that are more favorable than those

granted or offered to the public. The Rule

was intended to prevent certain conflicts of

interest that may influence a broker-dealer’s

decision regarding whether to quote or make

a market in a security and prices that are

quoted and to prevent a misleading

appearance of market activity based on such

conflicts. Paragraph (b) of the Rule also

provides an exemption, among others, for

certain payment to members for ‘‘bona fide’’

services, including, but not limited to,

investment banking services.

Due to unique characteristics of the

Freddie Mac Initiative, you principally

present three arguments why the Rule was

not intended to cover your Initiative: (1) the

Initiative promotes Freddie Mac’s statutory

purpose; (2) the Initiative does not affect the

integrity of the marketplace; and (3) the

Initiative is intended to be temporary.

First, you represent that the Initiative

appears to promote Freddie Mac’s statutory

purpose, in that, Freddie Mac was created by

Congress to provide a conduit for ensuring a

continuous supply of funds from the capital

markets to the mortgage markets. Freddie

Mac purchases mortgages daily and finances

them primarily with the issuance of

mortgage-backed securities. The prices

Freddie Mac pays for its mortgage purchases

is based directly on the prices at which it

sells its PCs. It has been represented in your

letter that this Initiative was developed to

eliminate certain unnecessary costs in the

mortgage finance system by improving

interdealer PC liquidity through encouraging

dealers to purchase Gold PCs directly, as

opposed to entering into transactions in the

swap market.

Second, you represent that the Initiative

does not appear to affect the integrity of the

marketplace, since the nature and

characteristics of the agency mortgage passthrough securities market is unique and

appears outside of the intended scope of the

Rule. Since the dealers in this market trade

these securities as fungible products (i.e.,

PCs, Mortgage-backed securities, Ginnie

Maes) and trade on the interdealer broker

screens daily as a matter of course to meet

their customer’s demand, the concept of

market making a particular security has little

application in this marketplace.

In addition, you represent that the

incentives which lead a broker-dealer to

make a quotation on a PC differ from

traditional equity trading. Customer demand

in fixed-income securities is based primarily

on changes in interest rates, supply and

demand, and the quality of the credit backing

the security. In the agency mortgage-backed

securities market, the credit of the three

primary agencies (Freddie Mac, Fannie Mae

and Ginnie Mae) is considered comparable,

the supply of the securities is considered

plentiful, and a well-developed forward

trading market permits ready hedging of

positions. This market differs from the

characteristics of the traditional equity

market. Accordingly your letter represents

that, given the number of comparable

securities in the yield driven debt market, it

is unlikely that certain dealer credits to

purchase Gold PCs would mislead market

participants to purchase the Gold PCs versus

other comparable securities.

Lastly, you represent that this Initiative is

intended to be temporary. According to your

letter, it is expected that dealer behavior will

eventually become self-sustaining and no

further incentives will be required.

Based on the above information and the

representations presented by Freddie Mac,

and the importance of the role of Freddie

Mac in promoting liquidity of these

instruments under statutory mandate, it is

the staff’s opinion that the participation of

member firms in the Freddie Mac Initiative

as described in your letter would not be

deemed in violation of Rule 2460.

I hope this letter is responsive to your

inquiry. Please note that the opinions

expressed herein are staff opinions only and

have not been reviewed or endorsed by the

Board of Directors of NASD Regulation. This

letter responds only to the issues that you

have raised based on the facts as described,

and does not address any other rule or

interpretation of the Association, or all the

possible regulatory and legal issues involved.

Sincerely,

David A. Spotts,

Office of General Counsel, NASD Regulation,

Inc.

[FR Doc. 97–33994 Filed 12–30–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39477; File No. SR–PCX–

97–43]

Self-Regulatory Organizations; Order

Granting Accelerated Approval of

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval to Amendment No. 2 to

Proposed Rule Change by the Pacific

Exchange, Inc. Relating to Its

Specialist Evaluation Program

December 22, 1997.

On November 17, 1997, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

submitted to 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 to

extend its pilot program regarding the

evaluation of its equity specialists until

January 1, 1999, and to implement

certain changes to the pilot program.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 39358

(November 25, 1997), 62 FR 64035

(December 3, 1997). No comments were

received on the proposal. The Exchange

filed Amendment No. 2 to the proposed

rule filing on December 5, 1997.3 This

order approves the proposed rule

change, as amended, on an accelerated

basis.

I. Description

On October 1, 1996, the Commission

approved a nine-month pilot program

for the evaluation of PCX equity

specialists.4 On June 3, 1997, the