7286 Federal Register / Vol. 62, No. 32 / Tuesday, February 18, 1997 / Notices

4 15 U.S.C. 78f(b).

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

6 15 U.S.C. 78s(b)(3)(A).

7 17 CFR 240.19b–4(e).

8 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

implemented by the Exchange pursuant

to CBOE Rule 2.22.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Act 4 in general, and

furthers the objectives of Section 6(b)(5)

of the Act 5 in particular, in that it is

designed to promote just and equitable

principles of trade, to foster cooperation

and coordination with persons engaged

in facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any 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 were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing rule change

establishes or changes a due, fee, or

other charge imposed by the Exchange,

it has become effective pursuant to

Section 19(b)(3)(A) 6 of the Act and

subparagraph (e) of Rule 19b–4 7

thereunder. 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to File No. SR–CBOE–97–

05 and should be submitted by March

11, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–3918 Filed 2–14–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38270; File No. SR–PSE–

97–02]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange

Incorporated Relating to Proprietary

Brokerage Order Routing Terminals

February 11, 1997.

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 January

17, 1996, the Pacific Stock Exchange

Incorporated (‘‘PSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II and III below, which Items

have been prepared by the selfregulatory organization. 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

The PSE is proposing to adopt a

formal policy governing the use by PSE

Members and Member Organizations

(‘‘Members’’) of any proprietary

brokerage order routing terminals

(‘‘Terminals’’) on the Options Floor of

the Exchange. The text of the proposed

policy is available at the Office of the

Secretary, the Exchange, and at the

Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Exchange 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 IV below. The

Exchange 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

The Exchange is proposing to adopt a

policy governing proprietary brokerage

order routing terminals that Members

may use on the Options Floor of the

Exchange. The Policy includes specific

provisions on Exchange approval of

Terminals; Restrictions on Members’

use of Terminals; Exchange Inspection

and Audit; Exchange Liability;

Termination of Exchange Approval; and

pilot status of the program.

Exchange Approval

The proposed Policy specifies that

Members must obtain prior Exchange

approval to use any proprietary

brokerage order routing terminals on the

Options Floor. It states that the

Exchange may grant such approval for

use on an issue-by-issue basis. To

request such approval, Members must

submit a letter of application to the

Exchange specifying the make, model

number, functions and intended use of

the equipment, and must also provide

additional information upon the request

of the Exchange. The policy further

provides that the format of any orders to

be transmitted over the Terminals must

also be pre-approved by the Exchange.

The Exchange believes that it should

have the flexibility to permit the use of

Terminals on an issue-by-issue basis so

that it will have an opportunity to

observe the use of Terminals in

particular trading crowds and to

consider the benefits and any

unforeseen problems that may result

before floor-wide implementation

occurs.

Paragraph 2 of the Policy states that,

in considering the approval of an

application, as well as whether a

previously issued approval should be

withdrawn, the Exchange will take into
Federal Register / Vol. 62, No. 32 / Tuesday, February 18, 1997 / Notices 7287

3See. 15 U.S.C. 78c(a)(38).

account such factors as the physical size

of the Terminal; space available at the

post where the Terminal is to be used;

telecommunication, electrical and radio

frequency requirements; Terminal

characteristics and capacity; and any

factors that the Exchange considers

relevant in the interest of maintaining

fair and orderly markets, the orderly and

efficient conduct of Exchange business,

the maintenance and enhancement of

competition, the ability of the Exchange

to conduct surveillance of the use of the

Terminal and the business transmitted

through it, the adequacy of applicable

audit trails, and the ability of the

Terminal to interface with other

Exchange facilities.

Paragraph 3 of the Policy provides

that Members must report to the

Exchange every proposed material

change in functionality of a Terminal

and every proposed change in the use of

a Terminal. It further provides that

Members must not implement any such

proposed changes unless and until they

have been approved by the Exchange,

and that Members must also promptly

file with the Exchange supplements to

their applications whenever the

information currently on file becomes

inaccurate or incomplete for any reason.

Restrictions on Use of Terminals

Paragraph 4 sets forth four restrictions

applicable to Members’ use of Terminals

on the Options Floor. The first

restriction is that Members may receive

brokerage orders in the trading crowd

via Terminals, but must represent such

orders in the trading crowd by open

outcry in a manner that is consistent

with Exchange rules.

The second restriction states that

when a Member executes an order that

was received over a Terminal, the

Member must fill out and time stamp a

trading ticket within one minute of the

execution. Exchange rules on record

keeping and trade reporting are

unchanged.

The third restriction states that

Terminals may be used to receive

brokerage orders only, and that

Terminals may not be used to perform

a market making function. It states that

any system used by a Member to operate

a Terminal must be separate and

distinct from any system that may be

used by a Member of any person

associated with a Member in connection

with market making functions. It further

states that, for the purpose of this

paragraph, orders initiated from off the

floor of the Exchange that are not

counted as ‘‘Market Maker transactions’’

within the meaning of PSE Rule 6.32

and that do not create a pattern of

offering in the aggregate either to make

two-sided markets or simultaneously to

represent opposite sides of the market in

any class of options shall not be deemed

to be used to perform a market making

function.

The Exchange believes that if

Terminals were permitted to be used to

perform market making functions from

off the floor of the Exchange, it may

become undesirable for Exchange

market makers to continue to assume

the costs and obligations associated

with being a registered market maker,

which in turn could harm the liquidity

and quality of the Exchange’s market.

The Exchange is particularly concerned

that off-floor market making effectively

would establish a market making

structure devoid of affirmative market

making obligations that could result in

less deep and liquid markets during

periods of market stress, when off-floor

Terminal market makers would not be

required to continue making markets.

Moreover, the Exchange believes that

surveillance of market making through

the Terminals currently would be

particularly difficult.

The Exchange intends to interpret the

term ‘‘market making’’ in accordance

with its traditional definition as defined

under the Act, i.e., holding one’s self out

as being willing to buy and sell a

particular security on a regular or

continuous basis.3 The definition of

market making would not capture

parties who enter orders on one side of

the market; nor would it capture parties

who enter two-sided limit orders on

occasion. A party would not be deemed

to be engaging in market making unless

it regularly or continuously holds itself

out as willing to buy and sell securities.

The fourth restriction in Paragraph 4

states that no Member or any person

associated with a Member may use for

the benefit of such member or any

person associated with such Member

any information contained in any

brokerage order in the Terminal system

until that information has been

disclosed to the trading crowd.

Accordingly, prior to placing an order or

making or changing a bid or offer on the

Exchange or in any other securities or

futures market, a Member must disclose

such information to the trading crowd.

The Exchange believes that this

restriction will help to ensure that

Members using Terminals trade on the

same terms and conditions as other

market participants and do not receive

any trading advantages to interact with

orders transmitted through the

Terminals.

Inspection and Audit

Paragraph 5 of the proposed policy

states that the operation and use of all

aspects of the Terminal and all orders

entered through the Terminal are

subject to inspection and audit by the

Exchange at any time upon reasonable

notice. It further provides that Members

must furnish to the Exchange such

information concerning the Terminal as

the Exchange may from time to time

request upon reasonable notice,

including without limitation an audit

trail identifying transmission, receipt,

entry, execution and reporting of all

orders. For the purpose of this

paragraph, a notice of at least twentyfour hours shall be deemed to be

reasonable (however, shorter periods

may be provided in appropriate

circumstances).

Exchange Liability

Paragraph 6 states that neither the

Exchange nor its directors, officers,

employees or agents shall be liable to a

Member, a Member’s employees, a

Member’s customers or any other person

for any loss, damage, cost, expense or

liability arising from the installation,

operation, relocation, use of, or inability

to use a Terminal on the floor of the

Exchange (including any failure,

malfunction, delay, suspension,

interruption or termination in

connection therewith).

Termination of Approval

Paragraph 7 of the Policy provides

that the Exchange may at any time

determine to terminate all approvals for

the installation and use by Members of

Terminals on the floor of the Exchange

or at particular trading posts, in which

event such approvals will be deemed

terminated on the 30th calendar day

following the day on which the

Exchange gives notice to such

Member(s) of such termination of

approval. It further provides that

Members who incur costs in developing

or implementing proprietary systems do

so at their own risk, due to the fact that

the Exchange intends to roll out its own

brokerage order routing system for Floor

Brokers. It further provides that a

Member’s approval to use a Terminal

may also be summarily terminated by

the Exchange, once notice has been

provided to the affected Member, if any

statement by such Member in its

application or any supplement thereto is

inaccurate or incomplete, or if such

Member has failed to comply with any

provision of this Policy, or if the

operation of the Terminal is causing

operational difficulties on the floor of

the Exchange, and the Member has
7288 Federal Register / Vol. 62, No. 32 / Tuesday, February 18, 1997 / Notices

4PSE Rule 11.7 provides due process protections

for persons who have been aggrieved by Exchange

action. It gives such persons an opportunity to be

heard and to have the complained of action

reviewed by the Exchange.

5See Exchange Act Release No. 38054 (December

16, 1996), 61 FR 67365 (December 20, 1996). 6 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2Securities Exchange Act Release No. 37914

(Nov. 1, 1996), 61 FR 57940 (Nov. 8, 1996).

3See Letter from Karen M. O’Brien, General

Counsel, North American Securities Administrators

Association, Inc. (‘‘NASAA’’), to Karl Varner,

Division of Market Regulation, SEC, dated January

27, 1997, which indicated that OCC cleared options

qualify for designation as Tier I securities under the

NASAA Memorandum of Understanding (‘‘MOU’’)

between NASAA and the Phlx. But see infra note

5.

4NASAA is an association of securities

administrators from each of the 50 states, the

District of Columbia, Puerto Rico and ten Canadian

provinces.

5NASAA plans to have its board ratify this

amendment to the Phlx MOU at its February 21,

1997, board meeting. According to NASAA, because

the Phlx MOU is a membership document, it cannot

be revised until the members vote on this

amendment during the April 1997, membership

meeting. Telephone conversation between Karen

O’Brien, General Counsel, NASAA, and Karl

Varner, Attorney, Division of Market Regulation,

SEC, on February 7, 1997.

6See Securities Exchange Act Release No. 34235

(June 17, 1994), 59 FR 32736 (June 24, 1994).

failed to cure the same within seven

calendar days following the giving of

notice (or such shorter period of time as

the Exchange may deem appropriate if

it determines the circumstances have

created a situation requiring a shortened

cure period). It states that Members

must immediately stop using their

Terminals and must remove such

Terminals from the floor of the

Exchange upon the termination of

approval pursuant to this paragraph,

and that nothing in this paragraph shall

be construed as a waiver of or limitation

upon whatever right Members may

otherwise have to seek appropriate relief

pursuant to PSE Rule 11 in the event the

Exchange terminates approval of a

Member’s Terminal pursuant to this

paragraph.4

Pilot Program

Finally, Paragraph 8 of the proposed

policy states that the Pilot Program

expires six months after its

implementation, but may be renewed

upon an Exchange filing with the

Securities and Exchange Commission

pursuant to the Securities Exchange Act

of 1934.

The Exchange notes that, except in

certain minor respects, the proposed

Policy is consistent with an approved

rule change of the Chicago Board

Options Exchange (‘‘CBOE’’) relating to

the use of proprietary brokerage order

routing terminals on the CBOE floor.5

Basis

The Exchange believes that proposal

is consistent with Section 6(b) of the

Act, in general, and Section 6(b)(5) of

the Act, in particular, in that it is

designed to facilitate transactions in

securities; to foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, and

processing with respect to transactions

in securities; to promote just and

equitable principles of trade; and to

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will 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

Written comments on the proposed

rule change were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will—

(A) by order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

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, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principle

office of the PSE. All submissions

should refer to File No. SR–PSE–97–02

and should be submitted by March 11,

1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–3915 Filed 2–14–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38269; File No. SR–Phlx–

96–41]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.

Relating to Designating Options as

Tier I Securities

February 11, 1997.

On October 11, 1996, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change, pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’),1 to include equity

options, index options and other option

like products issued, cleared and

guaranteed by the Options Clearing

Corporation (‘‘OCC’’) as Tier I securities

under Exchange Rule 803. Notice of the

proposed rule change, together with the

substance of the proposal, was

published in the Federal Register.2 One

comment letter was received on the

proposal.3 The Commission is

approving the proposed rule change

contingent upon NASAA’s4 amendment

of the Phlx MOU to permit OCC issued

options to be designated as Tier I

securities.5

I. Background

In 1994, the Exchange adopted a two

tier listing criteria program for equity

and debt securities.6 The Exchange

originally adopted its Tier I listing

standards based on standards

established in a MOU between the

NASAA and the Phlx. The Phlx MOU is

modeled after the MOU between the