29272 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

7 17 CFR 200.30–3(a)(12)(1994).

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

2 17 CFR 240.19b–4.

3See Letter from William Floyd-Jones, Assistant

General Counsel, Amex, to Heather Seidel,

Attorney, Market Regulation, Commission, dated

March 16, 1998 (‘‘Amendment No. 1’’). Amendment

No. 1 explains in further detail why the Exchange

is eliminating the Gateway; which records members

are required to keep pursuant to Exchange and

Commission rules that the Gateway would have

separately maintained; how the Exchange will

obtain records from its members for surveillance

purposes without the Gateway; and how the

Exchange will monitor overall radio frequency

usage and individual firm usage in the absence of

the a Gateway in order to determine that the

wireless infrastructure is approaching its capacity,

and which firm(s) is using a disproportionate

amount of the radio frequently capacity.

4See Securities Exchange Act Release No. 37728

(September 26, 1996), 61 FR 51476 (October 2,

1996).

5The Commission notes that in general members,

brokers, and dealers are subject to the Commission’s

recordkeeping and record retention rules, Rule 17a–

3, and 17a–4 under the Act (17 CFR 240.17a–3 and

240.17a–4).

6See, e.g., Article II, Section 3(a) of the Exchange

Constitution, Article V, Section 4(k) of the

Exchange Constitution, and Exchange Rule 31.

7The Exchange also states that to the best of its

knowledge, the Exchange’s current procedures for

obtaining member books and records are consistent

with existing practice at all other exchanges.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.7

[FR Doc. 98–14020 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40019; File No. SR–Amex–

97–40]

Self-Regulatory Organizations;

American Stock Exchange, Inc.; Order

Granting Approval to Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 to Proposed Rule

Change Relating to Proposed

Revisions to the Exchange’s Policy

Regarding the Use of Wireless Data

Communications Devices

May 21, 1998.

I. Introduction

On October 29, 1997, the American

Stock Exchange, Inc. (‘‘Amex’’ or

‘‘Exchange’’) submitted to 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

amend its policy regarding the use of

wireless data communications devices

on the trading floor.

Notice of the proposed rule change,

together with the substance of the

proposal, was published for comment in

Securities Exchange Act Release No.

39411 (December 8, 1997), 62 FR 65727

(December 15, 1997). No comments

were received on the proposal. The

Exchange subsequently filed

Amendment No. 1 on March 17, 1998.3

The order approves the proposed rule

filing, as amended.

II. Description

The Exchange has undertaken to build

an infrastructure (‘‘Infrastructure’’) to

support wireless data communications

on the trading floor by members and

Exchange staff. On September 26, 1996,

the Commission approved various rule

changes and a policy regarding the use

of wireless data communications

devices on the trading floor (the

‘‘Wireless Communications Policy’’ or

‘‘Policy’’).4 The Wireless

Communications Policy was originally

based upon a design for the

Infrastructure that called for all wireless

data transmissions to pass through an

application residing between the

member firms and the Exchange’s

wireless infrastructure (the ‘‘Gateway’’).

The Gateway would have monitored

data that was being transmitted to and

from the Infrastructure and would have

repackaged it to conform to a standard

format for all members to use. The

Gateway would have permitted the

Exchange to make a record of all

wireless communications and to

unilaterally ‘‘throttle’’ all, or selected,

member communications in the event

that such transmissions used a

disproportionate amount of the

available radio frequency or threatened

to exceed available radio frequency

capacity. The Exchange is now

proposing to eliminate the Gateway.

As noted above, the Gateway would

have maintained a record of all wireless

communications. The Exchange states

that the records obtained through the

Gateway would have been duplicative

of records already maintained by

member firms pursuant to Commission

and Exchange rules and that the

proposed rule change will eliminate this

duplicative data base. Under the revised

Wireless Communications Policy,

members will still be required to

maintain books and records pursuant to

Exchange rules and policies and federal

securities laws. According to the

Exchange, the relevant Exchange rules

require members to prepare and

maintain records of orders and

transactions containing the information

specified in Exchange Rule 111,

Commentary .04; Exchange Rule 114,

Commentary .09; and Exchange Rules

153, 180, 181, and Exchange Rule

950(a), (c) and (d), Commentary .03. The

Exchange’s audit trail policies also

require members to records the time of

trade, executing broker badge number

and contra broker badge number with

respect to all trades. In addition, the

Exchange states that Rules 17a–3(a) (6)

and (7) under the Act require registered

brokers and dealers to prepare records

of brokerage orders and dealer

transactions meeting the requirements

of these rules, and that these records

must be maintained for the period stated

in Rule 17a–4(b)(1) under the Act.5

In addition, the Exchange states that

the elimination of the record keeping

capabilities of the Gateway will not

cause any diminution of the Exchange’s

surveillance capabilities because the

Exchange will retain the same access to

member books and records that it

currently possesses. The Exchange

currently has the ability to obtain

records from its members for

investigative purposes pursuant to its

authority to require members to produce

their books and records and to

discipline members (and their

employees) that fail to comply with

such requests.6 In the Absence of a

Gateway, the Exchange would continue

to employ its current procedures for

obtaining information from its members

and their employees.7

With respect to monitoring radio

frequency capacity and usage, the

revised Wireless Communications

Policy will state that the Exchange’s

staff may request members to reduce

radio traffic if and when required

because a particular user is using more

than its fair share to radio frequency

capacity of overall usage is reaching its

maximum. Members will be obligated to

comply immediately with any such

request and their ability to send wireless

communications may be immediately

terminated for failure to comply.

The Exchange also proposes some

further changes to the Wireless

Communications Policy to include a

requirement that members using

wireless technology maintain a record of

orders and quotes initiated on the Floor

and transmitted to other markets, a

statement that members do not acquire

a property interest in their assigned

band width, a requirement that affiliates

be treated as a single entity for purposes

of band width assignment and a

reduction in the number of handheld

terminals that the system is able to

support in view of anticipated demand

for this capacity.

III. Discussion

The Commission finds that the

proposed rule change is consistent with
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29273

8 15 U.S.C. 78f(b).

9 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(f).

10 In late 1996, the Exchange reviewed the design

of the Infrastructure. The Exchange determined that

there was no immediate need for throttling because

the amount of radio frequency capacity available in

the 2.4 GHz frequency could support all foreseeable

wireless communications, and that it was unclear

when it might become necessary. The Exchange

also noted that it could control excessive radio

frequency use by denying requests to use wireless

applications that required excessive capacity. Also,

the Exchange noted there are other radio

frequencies and emerging technologies that could

be employed in the unlikely event that the capacity

of the 2.4 GHz frequency is exhausted. The

Exchange concluded that since there was no need

for throttling, there was no need for a Gateway and

that, if and when necessary, throttling could be

accomplished by the member firms without a

Gateway.

11Also during this 1996 review, the Exchange

estimated that the use of a Gateway instead of a

router would have more than doubled its costs to

develop and install the infrastructure and would

have also necessitated a high degree of customized

programming which raised reliability issues. In

addition to concerns with the Exchange’s costs and

system reliability, members using the infrastructure

with a gateway would have had to conform their

message formats to the gateway’s requirements,

which would have required members that already

had developed wireless communications

capabilities to incur significant costs to reprogram

their existing systems to comply with the

Exchange’s unique requirements. Potentially, these

members would have had to operate different

wireless systems on different exchanges.

12According to Amex, the Infrastructure has been

designed to support 4 million megabits per second;

thus, overall usage that approaches the four million

megabit level would be considered to be

approaching system capacity.

13See Description Section supra.

14The Commission also believes that the

miscellaneous amendments to the Wireless

Communications policy are reasonable under the

Act because the changes are designed to enhance

the Policy in light of the Exchange’s experience

with wireless technology since the Policy was first

adopted.

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

16 17 CFR 200.30–3(a)(12).

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with the

requirements of Section 6(b).8

Specifically, the Commission believes

the proposal is consistent with the

Section 6(b)(5) requirements that the

rules of an exchange be designed to

promote just and equitable principles of

trade, to prevent fraudulent and

manipulative acts, and, in general, to

protect investors and the public.9

The Commission continues to believe

that the Wireless Communication Policy

should help remove impediments to and

perfect the mechanism of a free and

open market, and protect investors and

the public interest, by expediting and

making more efficient the process by

which members receive and execute

orders on the floor of the Exchange. In

particular, the Commission believes that

the removal of the Gateway should

increase efficiency by eliminating any

time delay that the requirement that all

orders pass through the Gateway

subsystem may have caused. The

Commission finds, based upon the

Exchange’s representations concerning

the lack of need for a Gateway 10 and the

excessive cost and difficulty of

designing and implementing the

Gateway,11 that it is consistent with the

Act for the Exchange to eliminate the

Gateway.

The Commission believes that it is

reasonable for the Exchange to conclude

that the Gateway is not necessary

because the selected radio frequency

should be able to support all foreseeable

wireless communications and because

the Exchange will have the ability to

monitor radio frequency capacity and

usage and require member firms to cut

down on their usage to ensure that the

system does not become overloaded.

The Exchange states that the Wireless

Network Management System

(‘‘WNMS’’) is a monitoring tool that will

enable it to monitor radio frequency

usage by (1) all wireless users

collectively, (2) a particular firm, and (3)

an individual using a handheld terminal

within a particular firm. The WNMS

combines some of the capabilities of the

Gateway and Wireless Control

Subsystem which existed in the former

design of the wireless infrastructure.

The next version of the WNMS will

allow the Exchange’s personnel to see

all, or a selected number, of users sorted

according to their use of the system.

Each firm (or group of affiliated firms)

that has been approved to use wireless

technology currently may use up to 1/

30th of total radio frequency capacity,

and the Exchange would consider a

member’s use of more than 1/30th of

total system capacity to be a

disproportionate usage of its radio

frequency capacity.12

The Commission also believes that the

Exchange and member firms should be

able to adequately maintain records of

all wireless transactions, because of the

already existing recordkeeping and

surveillance procedures, in the absence

of the Gateway. Member firms currently

are, and will still be, subject to

Exchange and Commission

recordkeeping and record retention

rules.13 In addition, the elimination of

the recordkeeping capabilities of the

Gateway should not cause undue

diminution of the Exchange’s

surveillance capabilities because the

Exchange has the ability to obtain those

records from members for investigative

purposes, with the authority to

discipline members who do not comply

with such requests.14

The Commission finds good cause to

approve Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment No. 1

clarifies and strengthens the proposed

rule change by more fully explaining

why the Exchange is amending the

Wireless Communications Policy to

eliminate the Gateway, and how the

Exchange will still have adequate ability

to monitor and surveille wireless usage

and wireless transactions without the

Gateway. Amendment No. 1 does not

make any substantive changes to the

proposed rule change. Also, the

proposed rule change was noticed for

the full statutory notice and comment

period and no comment letters were

received. Accordingly, the Commission

believes that it is consistent with

Section 6(b)(5) of the Act to approve

Amendment No. 1 to the proposal on an

accelerated basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1 to the rule proposal, including

whether Amendment No. 1 is consistent

with the Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

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 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 Exchange. All

submissions should refer to File No.

SR–Annex–97–40 and should be

submitted by June 18, 1998.

IV. Conculsion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,15 that the

proposed rule change (SR–Amex–97–

40), as amended, is approved.

For the Commission, by the Division of

Market Regulations, pursuant to delegated

authority.16
29274 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

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

2On May 7, 1998, the CBOE filed Amendment

No. 1 to the proposal. See Letter from Timothy H.

Thompson, Director, Regulatory Affairs, Legal

Department, CBOE, to Yvonne Fraticelli, Division of

Market Regulation, Commission, dated May 6, 1998

(‘‘Amendment No. 1’’) In Amendment No. 1, the

CBOE revised its proposal to: (1) indicate that CBOE

Rule 12.3(f)(3)(C)(3), rather than Regulation X of the

Board of Governors of the Federal Reserve System,

prohibits a clearing firm from extending credit to

a market maker when the market maker’s account

is in deficit; (2) replace a reference in proposed

Interpretation and Policy .06 to CBOE Rule

12.3(b)(1)(D) with a reference to CBOE Rule

12.3(f)(1)(F) to define net liquidating equity; and (3)

revise proposed Interpretation and Policy .06 to

indicate that clearing firms will be allowed to

extend credit for opening trades, rather than to

permit opening trades.

3All time references are in Central Time.

4See Amendment No. 1, supra note 2.

5See e.g., Securities Exchange Act Release No.

38543 (May 14, 1997), 62 FR 28082 (May 22, 1997)

(order approving File No. SR–CBOE–96–71).

6When the options markets closed at 3:10 p.m.,

this situation would rarely arise because the final

stock prices were almost always disseminated by

the time the options markets closed, thereby

allowing options market makers to adjust their

quotes accordingly.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14116 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40015; File No. SR–CBOE–

98–11]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 to the Proposed

Rule Change by the Chicago Board

Options Exchange, Inc., Relating to

Adjustments in Market Maker Equity

May 20, 1998.

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

Securities Exchange Act of 1934

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

March 31, 1998, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) 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 the CBOE.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

The CBOE proposes to amend CBOE

Rule 12.3, ‘‘Margin Requirements’’ by

adopting Interpretation and Policy .06,

which will allow clearing firms to adjust

a market maker’s equity under certain

limited circumstances so that the

clearing firm may extend credit for

opening trades. Specifically, proposed

Interpretation and Policy .06 will allow

a clearing firm to adjust the equity in a

market maker’s account when the

underlying stock price is disseminated

after the options close at 3.02 p.m.3 at

a price that is inconsistent with the

options closing price.

Copies of the proposed rule change

are available at the Office of the

Secretary, CBOE, 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

CBOE 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 CBOE has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

CBOE Rule 12.3(f)(3) (C)(3) 4 prohibits

clearing firms from extending credit to

a market maker for opening transactions

when the market maker’s account is in

deficit. The CBOE proposes to add

Interpretation and Policy .06 to CBOE

Rule 12.3 to permit a clearing firm to

adjust the equity in a market maker’s

account under certain limited

circumstances in order to allow the

clearing firm to extend credit for

opening trades. Specifically, proposed

Interpretation and Policy .06 will permit

a clearing firm to adjust the equity in

market maker’s account when the

underlying stock price is disseminated

after the options close at 3:02 p.m. at a

price that is inconsistent with the

options closing price.

In 1997, the CBOE and the other

options exchanges changed the closing

time for trading equity options and

certain narrow-based index options

from 3:10 p.m. to 3.02 p.m.5 Since then,

the CBOE has discovered that the equity

of market maker’s account at a clearing

firm can be severely affected when news

of a stock underlying a CBOE option is

disseminated near the close, resulting in

heavy trading and a late trade tape. In

these situations, the last sale of the

underlying stock could be disseminated

well after the overlying options stop

trading at 3:02 p.m.,6 and closing price

of the underlying stock may be out of

line with the closing quotes and the last

sale of the options series. The CBOE

notes that while this situation would

almost assuredly realign itself at the

opening of trading on the next day, the

discrepancy in closing prices may cause

a market maker’s account to have deficit

equity. This is true even though from a

market risk standpoint the market maker

may be hedged.

Proposed Interpretation and Policy

.06 would allow a clearing firm to

appropriately adjust a market maker’s

account equity to eliminate a pricing

disparity for a trader whose account is

in deficit as a result of such a situation.

The clearing firm will be required to

provide documentation to the CBOE for

such adjustments before the opening of

trading the next day (or before the firm

may extend credit for opening

transactions). These adjustments will be

made on a case-by-case basis. In

situations where the deficit is

eliminated by the adjustment and the

adjustment is approved by the CBOE’s

Department of Financial and Sales

Practice Compliance, the trader would

be permitted to continue trading the

next business day.

2. Statutory Basis

The CBOE believes that the proposed

rule change is consistent with Section

6(b) of the Act, in general, and furthers

the objectives of Section 6(b)(5), in

particular, in that, by allowing for an

adjustment in a market maker’s account

equity in situations where the stock and

the overlying options close at

anomalous prices, the proposal is

designed 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 CBOE 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

Within 35 days of the date of

publication of this notice in the Federal