[Federal Register Volume 63, Number 114 (Monday, June 15, 1998)]
[Notices]
[Pages 32691-32693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15824]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40070; File No. SR-PCX-98-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Capital Requirements 
and Guaranteed Participation of Lead Market Makers

June 4, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 16, 1998, the 
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change, and amended such proposed rule change on June 4, 1998,\2\ as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Amendment No. 1 clarified the text of the proposed rule 
change. See letter from Michael D. Pierson, Senior Attorney, to 
Heidi Pilpel, Special Counsel, Division of Market Regulations, SEC 
(June 4, 1998).

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[[Page 32692]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    PCX is proposing to modify its capital requirements for Lead Market 
Makers (``LMMs'') on the Exchange and to clarify the procedures 
applicable to LMMs' guaranteed participation. The text of the proposed 
rule change is attached as Exhibit A.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PCX 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. PCX 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
    a. LMM Capital. PCX Rule 6.82(c)(11) currently provides that each 
LMM on the Exchange must maintain a cash or liquid asset position in 
the amount of $100,000 or in an amount sufficient to assume a position 
of twenty trading units of the security underlying the option the LMM 
has been allocated, whichever amount is greater.\3\ The term ``trading 
unit'' means, in the case of stocks, 100 shares.\4\ Therefore, LMMs are 
currently required to maintain a cash or liquid asset position in the 
amount of $100,000 or in an amount sufficient to assume a position of 
2000 shares of stock in each option issue allocated to the LMM.
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    \3\ Cf. CBOE Rule 8.80, Interp. and Policy .02. The Commission 
notes that PCX rules governing LMMs, including PCX Rule 6.82, apply 
strictly to options trading.
    \4\ See PCX Rule 5.3(a).
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    The Exchange is proposing to eliminate the current LMM capital 
requirement and to replace it with another one providing that each LMM 
must maintain a cash or liquid asset position of at least $350,000, 
plus $25,000 for each issue over eight issues that have been allocated 
to the LMM.\5\ Under the proposal, PCX Rule 6.82(c)(11) will continue 
to provide that in the event that two or more LMMs are associated with 
each other and deal for the same LMM account, the LMM capital 
requirement will apply to such LMMs collectively, rather than to each 
LMM individually.\6\
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    \5\ As with the current rule, the proposed rule would not apply 
to issues traded by an LMM in connection with the Exchange's LMM 
Book Pilot Program, as provided in PCX Rule 6.82(h). The current 
capital requirement for LMMs trading such issues is a cash or liquid 
asset position of at least $500,000 plus $25,000 for each issue over 
5 issues for which they perform the function of an Order Book 
Official. See PCX Rule 6.82, Comm. 04. LMMs who are participating in 
the LMM Book Pilot Program are also required to maintain ``minimum 
net capital'' as provided in SEC Rule 15c3-1. Id.
    \6\ Cf. CBOE Rule 8.80, Interp. and Policy .02.
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    The Exchange believes that the current LMM capital requirement, 
which generally fluctuates as the price of the underlying stock 
fluctuates, is unduly complicated and difficult to calculate, both for 
the Exchange and for individual LMMs. In that regard, the Exchange 
notes that the Commission's net capital rule also establishes fixed 
dollar amounts applicable to broker-dealers. In addition, the Exchange 
believes that all of its LMMs should have cash or liquid asset 
positions of at least $350,000 and the current minimum amount of 
$100,000 is insufficient.
    b. Guaranteed Participation. PCX Rule 6.82(d)(2) currently provides 
that LMMs are guaranteed 50% participation in transactions occurring on 
their disseminated bids or offers in their allocated issues. But the 
LMM's guaranteed participation may be reduced from 50% to 40% in a 
multiply-traded issue, and may be reduced from 50% to 25% in a non-
multiply traded issue, if trading in the issues reaches certain levels 
(and other events occur). The applicable trading volume requirement, 
for both multiply-traded and non-multiply traded issues, is an average 
daily trading volume of 3,000 contracts at the Exchange for three 
consecutive months. The Exchange believes that the current formulation 
of this provision is ambiguous and therefore is proposing to clarify it 
by replacing the words ``for three consecutive months'' with the words 
``during any three-calendar-month period (measured on a `rolling' 
three-calendar-month basis).'' \7\
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    \7\ Thus, for example, if trading volume in an issue reached an 
average of 2,000 contracts per day in the first month, 4,000 per day 
in the second month, and 4,000 per day in the third month, the 
condition would have been met under the proposed formulation, but 
not under the current formulation.
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    The Exchange is also proposing to adopt Rule 6.82(d)(2)(C) to 
specify the circumstances under which an LMM may return to receiving a 
guaranteed 50% participation after having had it reduced to 40% or to 
25%. Specifically, the proposal states that ``[i]f the Options 
Allocation Committee has reduced an LMM's guaranteed participation in 
an issue pursuant to subsections (A) or (B) . . . and average daily 
trading volume in an issue falls below 3,000 contracts at the Exchange 
during any three-calendar-month period (measured on a `rolling' three-
calendar-month basis), the Options Allocation Committee will evaluate 
the LMM's performance in that issue and, based on that evaluation, may 
raise the LMM's guaranteed participation in that issue from 40% to 50% 
(in a multiply-traded issue) or from 25% to 50% (in a non-multiply 
traded issue).'' The purpose of this proposal is to codify the 
Exchange's existing policy on when an LMM's guaranteed participation 
may return to 50%.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) \8\ of the Act, in general, and 
furthers the objectives of Section 6(b)(5),\9\ in particular, in that 
it is designed to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 79f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    The Exchange has neither solicited nor received comments on 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 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 Exchange 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

[[Page 32693]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of the submissions, 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 persons, 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, NW, 
Washington, DC 20549. Copies of such filings will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-98-19 and should be 
submitted by July 6, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

Test of the Proposed Rule Change \1\
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    \1\ New text is italicized, deleted test is bracketed.
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LEAD MARKET MAKERS

para. 5181  Lead Market Makers

    Rule 6.82(a)-(b)--No change.
    (c) Obligations of Lead Market Makers
    Each LMM must [shall] meet the following obligations:
    (1)-(10)--No change.
    (11) Maintain a cash or liquid asset position [in the amount] of 
at least $350,000, plus $25,000 for each issue over 8 issues that 
have been allocated to the LMM. [$100,000 or in an amount sufficient 
to assume a position of twenty (20) trading units of the security 
underlying the option the LMM has been allocated, whichever amount 
is greater.] In the event that two or more LMMs are associated with 
each other and deal for the same LMM account, this requirement will 
[shall] apply to such LMMs collectively, rather than to each LMM 
individually;
    (12)-(13)--No change.
    (d) Rights of Lead Market Makers:
    (1)--No change.
    (2) Guaranteed Participation--No change.
    (A) Multiply-traded Issues. If the average daily trading volume 
in a multiply-traded issue reaches 3,000 contracts at the Exchange 
during any three-calendar-month period (measured on a rolling three-
calendar-month basis), [for three consecutive months] and if:
    (i) in the case of an issue traded by two options exchanges, the 
Exchange's monthly share of the total multi-exchange customer 
trading volume in an issue drops from above 70% to below 70%; or
    (ii) in the case of an issue traded by three or more options 
exchanges, the Exchange's monthly share of the total multi-exchange 
customer trading volume in the issue drops from above 45% to below 
45%; the Options Allocation Committee will [shall] evaluate the 
LMM's performance in that issue and, based on that evaluation, may 
reduce the LMM's guaranteed participation in that issue from 50% to 
40%.
    (B) Non-multiply-traded Issues. If the average daily trading 
volume in a non-multiply-traded issue reaches 3,000 contracts at the 
Exchange during any three-calendar-month period (measured on a 
``rolling'' three-calendar-month basis) [for three consecutive 
months,] the Options Allocation Committee will [shall] evaluate the 
LMM's performance in that issue and, based on that evaluation, may 
reduce the LMM's guaranteed participation in that issue from 50% to 
25%.
    (C) Return to Previous Levels of Guaranteed Participation. If 
the Options Allocation Committee has reduced an LMM's guaranteed 
participation in an issue pursuant to subsections (A) or (B) above, 
and average daily trading volume in the issue falls below 3,000 
contracts at the Exchange during any three-calendar-month period 
(measured on a ``rolling'' three calendar month basis), the Options 
Allocation Committee will evaluate the LMM's performance in that 
issue and, based on that evaluation, may raise the LMM's guaranteed 
participation in that issue from 40% to 50% (in a multiply-traded 
issue) or from 25% to 50% (in a non-multiply-traded issue).
    (e)-(g)--No change.
    Commentary: .01-.04--No change.

[FR Doc. 98-15824 Filed 6-12-98; 8:45 am]
BILLING CODE 8010-01-M