[Federal Register Volume 63, Number 131 (Thursday, July 9, 1998)]
[Notices]
[Pages 37146-37151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18151]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40161; International Series Release No. 1144; File No. 
10-101]


Tradepoint Financial Networks plc; Notice of Application for 
Limited Volume Exemption From Registration as an Exchange Under Section 
5 of the Securities Exchange Act

July 2, 1998.
AGENCY: Securities and Exchange Commission.

ACTION: Request for Comments.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is soliciting comments on whether to grant an exemption 
from registration as an exchange under Section 5 of the Securities 
Exchange Act of 1934 (``Exchange Act'') to Tradepoint Financial 
Networks plc on the basis of expected low volume.

DATES: Comments must be received on or before August 10, 1998.

ADDRESSES: Interested persons should submit three copies of their 
written data, views and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Comments may also be submitted electronically at the 
following e-mail address: <a href="/cdn-cgi/l/email-protection#8dfff8e1e8a0eee2e0e0e8e3f9fecdfee8eea3eae2fb"><span class="__cf_email__" data-cfemail="1664637a733b75797b7b737862655665737538717960">[email protected]</span></a>. All comment letters 
should refer to File No. 10-101; this file number should be included on 
the subject line if comments are submitted using e-mail. All 
submissions will be available for public inspection and copying at the 
Commission's Public Reference Room, Room 1024, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Electronically submitted comment letters will 
be posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: For questions or comments regarding 
this release, contact: Sheila C. Slevin, Assistant Director, at (202) 
942-0796 or Constance B. Kiggins, Special Counsel, at (202) 942-0059; 
Division of Market Regulation, Securities and Exchange Commission, Mail 
Stop 10-1, 450 Fifth Street, N.W., Washington, D.C. 20549. For 
questions or comments regarding corporate disclosure and securities

[[Page 37147]]

registration issues raised in this release, contact Paul Dudek, Office 
Chief, at (202) 942-2990, Division of Corporation Finance, Securities 
and Exchange Commission, Mail Stop 3-2, 450 Fifth Street, N.W., 
Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Tradepoint Financial Networks plc (the ``Company'' or the 
``Exchange'') operates as a securities exchange from facilities in 
London under the marketing name Tradepoint Stock Exchange. It is a 
Recognized Investment Exchange under section 37(3) of the U.K. 
Financial Services Act 1986. The Exchange does not have a physical 
trading floor; it is a screen-based electronic market for the trading 
of securities (the ``Tradepoint System''). All of the securities 
currently traded through the Tradepoint System are listed on the London 
Stock Exchange (the ``LSE''), which is the primary market for those 
securities.
    By letter dated November 20, 1997, the Company filed with the 
Commission, pursuant to Section 5 of the Exchange Act, an application 
for exemption under Section 5 from registration as a national 
securities exchange under Section 6 of the Exchange Act if the Company 
operates the Tradepoint System in the United States. The Company 
anticipates that the Exchange will account for limited volume in 
trading of securities.\1\
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    \1\ See Letter from Joseph S. Cohn, Davis Polk & Wardwell, 
counsel for the Company, to Jonathan G. Katz, Secretary, dated 
November 20, 1997, available in the Commission's Public Reference 
Room. On April 6, 1998, the Company filed an amendment to the 
filing. On June 30, 1998, the Company filed a second amendment to 
the filing. Both amendments are also available in the Commission's 
Public Reference Room.
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II. Description of the Tradepoint System<SUP> \2\</SUP>
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    \2\ This description is based upon the material representations 
made by the Company in its application requesting the exemption, see 
supra note 1.
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    The Exchange is an alternative market to the LSE. As mentioned 
above, all of the stocks currently traded on the Exchange are listed on 
the LSE. The Exchange does not ``list'' securities; it offers trading 
only in securities listed on other exchanges, and presently offers 
trading only in certain securities listed on the LSE.
    From its facilities in London, the Exchange supplies automated 
trading services to market-makers, broker-dealers and institutional 
investors (collectively, ``Members'') on identical terms and 
conditions. Potential Members must meet the eligibility requirements of 
the Exchange.\3\ Members are not ``members'' of the Exchange in the 
sense that a member of a national securities exchange is a member: 
status as a Member of the Exchange does not carry voting rights or any 
other rights, other than the right to trade using the Tradepoint 
System.\4\
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    \3\ These requirements are set forth in Tradepoint Market Rule 
3.4 (see Exhibit A(2)(b) of the Company's application). Requirements 
include that the applicant is authorized to conduct investment 
business; that the applicant has arranged for clearing arrangements 
with an Exchange Clearing Member (a Member of the Exchange that is 
also a member of the London Clearing House, as more fully described 
below); and that the applicant meets the standards of financial 
responsibility and operational capability prescribed by the 
Exchange.
    \4\ The Company is listed on the Vancouver Stock Exchange and on 
the Alternative Investment Market of the LSE. Unlike U.S. national 
securities exchanges, which are owned by their members, the Exchange 
is a publicly held, for-profit company.
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    The Exchange provides to its Members an electronic, order-driven 
market that handles order entry and management, information display, 
matching, execution, and immediate trade publication and settlement 
message routing. Members are able to access the current market position 
in any security traded on the Exchange; monitor selected market 
information provided by the Exchange in real time; enter or revise 
orders; send orders to the relevant instant auction and/or periodic 
auction books for execution (described below); set up, access, and 
request trading and market reports; and input settlement routing 
instructions.
    In addition to these functions, the Exchange also supports order 
processing and management of the order book; order book display and 
updating; maintenance of individual trading status books; maintenance 
and updating of individual stock watch lists; and market supervision, 
surveillance and compliance. Most of these functions are controlled by 
the Exchange, but allow for some customization by the Member.
    The Exchange maintains an electronic order book for each traded 
security. Members enter a bid or an offer directly into the Tradepoint 
System. Orders have time/price priority. Those orders with the best bid 
or offer price are prioritized according to the time they are entered 
into the Tradepoint System. Prices and volumes are displayed 
automatically and simultaneously to all Members. Members have the 
option to display their entire order, or they may choose to display 
only part of their order; however, the minimum size for any order is 
one thousand shares. If only part of the order is displayed, the Member 
may direct the Tradepoint System to update the order when certain 
conditions have been met, such as when their displayed order has been 
filled. Orders that are not displayed are at the end of the queue for 
time priority, and when an undisplayed order becomes a displayed order, 
it goes into the electronic order book at the end of the queue. The 
Tradepoint System is anonymous; the names of the Members are not 
displayed to other Members and are revealed only upon clearance and 
settlement.
    In order for a Member to access the Tradepoint System, he or she 
must have a Personal Identification Number (``PIN''), which is assigned 
by the Exchange.\5\ Access to the Tradepoint System in the United 
Kingdom is currently available through an internal network of personal 
computers (``PCs''), via a stand alone PC, through a separate 
application on an existing Reuters RT terminal, ICV-Topic 3 Trader 
workstation, through a Liberty InterTrade Direct Screen, or through a 
Bloomberg terminal. Access to the Tradepoint System in the United 
States would be exclusively through Bloomberg terminals.\6\ In the 
future, the Exchange's screens may be accessible from other 
distributors of information services.
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    \5\ All individuals who have access to the Tradepoint System 
must have completed training from representatives of the Exchange in 
the use of the System.
    \6\ Access from terminals other than Bloomberg in the U.S. would 
be considered a material change to the manner in which the Exchange 
is offering its services in the U.S. and would require SEC 
notification.
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    The Exchange operates two types of auctions: instant and periodic. 
A security may be traded in either an instant auction or a periodic 
auction, but not both. In the instant auction, orders are matched 
electronically, in full or in part, at the posted and accepted price. 
Execution is automatic and continuous. Thus, a Member's orders are 
executed as soon as a contra-side order reaches the order book.
    The periodic auction is used for smaller capitalization and 
infrequently traded securities. It allows orders for these securities 
to accumulate over a period of time at the end of which the central 
computer matches qualifying buy and sell orders at a ``balance price.'' 
\7\ All transactions in a given periodic auction take place at the 
balance price; during the period leading up to the auction, a projected 
balance price is recalculated each time a new order is entered into the 
Tradepoint System. This projected balance price is continuously 
displayed during the time before the auction. Orders can be

[[Page 37148]]

amended and withdrawn up to the commencement of the periodic auction. 
Bids above and offers below the balance price are executed at the 
balance price (lowest offers and highest bids are filled first). Orders 
at the balance price are matched on a time priority basis, to the 
extent that there are equal bids and offers. Bids below and offers 
above the balance price are not filled, but they may remain on the 
Tradepoint System after the auction to be carried forward to the next 
auction at the Member's discretion. Periodic auctions take place at 
specified times during the trading day with the frequency determined by 
trading patterns in individual securities as well as other market 
requirements. There is no set time for the periodic auctions, and there 
is no set number of periodic auctions. According to the Exchange, the 
frequency of the periodic auctions is designed to maximize liquidity in 
each security.\8\
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    \7\ The ``balance price'' is calculated so that the maximum 
possible number of buy and sell orders in the auction will be 
matched.
    \8\ Presently, the Exchange has suspended periodic auctions. 
When there is sufficient interest among Members, periodic auctions 
will resume. Members would be notified electronically as to the time 
a periodic auction would commence.
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    Members of the Exchange are also able to enter ``cross trades.'' 
Cross trades are trades between two customers of the same firm that 
take place between the posted bid and offer. These orders are exposed 
to the Exchange's book prior to the cross. To effect a cross trade, a 
Member will simultaneously enter a bid and an offer for a security, 
which will match (``cross'') after exposure to the electronic order 
book.\9\ Thus, cross trades are entered into the Tradepoint System by 
the firm essentially for reporting purposes.
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    \9\ If there is a bid or an offer on the Exchange's book that 
will match either side of the cross trade, however, that bid or 
offer will have priority over the bid or offer that is part of the 
cross, and will receive execution. As a result, half of the cross 
trade (or some portion of that side of the trade) would be left on 
the Exchange's book.
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    In addition, the Exchange may create a ``specialist'' capability 
for some of the stocks traded on the Exchange. The Exchange would enter 
into an arrangement with a specific Member who would commit to 
providing liquidity with respect to a particular security (``Committed 
Liquidity Provider'' or ``CLP''). The CLP would function in a manner 
similar to that of a specialist on a U.S. exchange. The CLP would enter 
a bid or an offer if none exists, or if the spread was greater than a 
maximum limit agreed upon by the Exchange and the CLP, or when the size 
of an order was smaller than an agreed upon minimum. There would be no 
more than one CLP for any security, and there would be no requirement 
that every security have a CLP. These orders would be subject to the 
same price and time priorities as other system orders. As payment, the 
CLP would receive a percentage of the Exchange's net transaction fees 
resulting from execution of the orders entered by the CLP.
    All trades executed on the Exchange (including those involving a 
U.S. Member) must be registered with the London Clearing House 
(``LCH'') for clearance and settlement through CREST (with the 
exception of cross trades, which are settled as described below).\10\ 
All Members (including U.S. Members) must either be a member of the LCH 
(``Clearing Member'') or have entered into a direct or indirect 
clearing arrangement with a Clearing Member (``Non-Clearing Member''). 
It is expected that U.S. Members would be Non-Clearing Members. Cross 
trades are settled directly through CREST by the Member that entered 
the trade (or by a sponsor of the Member that is a member of CREST). 
The LCH is not involved in the clearance and settlement of cross 
trades.
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    \10\ After a trade is registered with the LCH, the LCH becomes 
the counterparty to both sides of that trade, guaranteeing 
settlement.
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    The settlement cycle in Great Britain is five business days, as 
opposed to three in the United States. Thus, U.S. Members' trades will 
not settle on the normal U.S. cycle, but on the U.K. cycle.

III. Trading by U.S. Members

    The Exchange would permit U.S. Persons to become Members in 
accordance with its normal business procedures. However, to comply with 
the U.S. securities laws, the Exchange would offer two different levels 
of service--one for all U.S. Members (``Public Market'') and one 
limited to U.S. Members who are non-U.S. persons, international 
agencies or ``qualified institutional buyers'' (``QIBs'') as defined in 
Rule 144A under the Securities Act of 1933 \11\ (``Securities Act'') 
(``QIB Market''). Bids and offers in securities registered in the U.S. 
in American Depositary Receipt (``ADR'') form or in ordinary share form 
would be available in the Public Market; bids and offers in those 
securities that are not registered in the U.S. would be available only 
in the QIB Market. In addition, U.S. Members in the QIB Market would be 
required to resell any securities purchased on the Exchange through the 
Exchange or outside the United States. Such resales would be limited to 
other QIBs, international agencies, and non-U.S. persons.
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    \11\ 17 CFR 230.144A.
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    Other than these restrictions, U.S. Members would trade on the 
Exchange under the same terms as non-U.S. Members.\12\ For example, 
both periodic and instant auctions would take place on both the QIB and 
the Public Market. The type of auction that occurs would vary from 
security to security based on criteria unrelated to the security's 
registration status in the U.S. U.S. Members would also trade on the 
Exchange during London business hours.\13\ In addition, U.S. Members 
would be subject to the same fees as all other Members.\14\ As 
mentioned above, trades involving a U.S. Member would settle through 
the LCH in the normal U.K. settlement cycle.
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    \12\ The Exchange generally will not provide access to U.S. 
Members to securities for which there is a U.S. transfer agent or 
which are eligible for deposit at a registered clearing agency. 
However, U.S. Members may have access to such securities if the 
annual trading volume in the U.S. of such securities is less than 
ten percent of the securities' annual worldwide trading volume.
    \13\ Thus, the Exchange would be available to U.S. Members from 
7:30 a.m. to 5:30 p.m. London time (2:30 a.m. to 12:30 p.m. Eastern 
Standard Time).
    \14\ See Exhibit N, Sections 4 and 6, of the Company's Form 1 
filing for the specific fees charged by the Exchange.
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IV. Exemption Standards

    Section 5 of the Exchange Act requires that all exchanges subject 
to the jurisdiction of the United States either register with the 
Commission as a national securities exchange or obtain a Commission 
exemption from that requirement.\15\ Section 5 authorizes the 
Commission to grant an exemption from registration if the Commission 
finds that, ``by reason of the limited volume of transactions effected 
on [the] exchange, it is not practicable and not necessary or 
appropriate in the public interest for the protection of investors'' to 
require such registration.\16\
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    \15\ 15 U.S.C. 78e (1988). The Commission has published a 
release in order to solicit the public's comments on proposed rules 
that would permit, among other things, alternative trading systems 
to register as broker-dealers or as exchanges. See Exchange Act 
Release No. 39884 (April 17, 1998), 63 FR 23504 (April 29, 1998) 
(``Regulation ATS Proposing Release''). The limited volume exemption 
remains another choice for such systems. The Commission believes an 
exemption on the basis of low volume would only be appropriate, 
however, for a foreign market, such as the Exchange, that is also a 
low volume market in its home country. See the discussion at note 27 
infra.
    \16\ 15 U.S.C. 78(e) (1988).
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    In its order granting a limited volume exemption from registration 
as an exchange to the Arizona Stock Exchange (``AZX''),\17\ the 
Commission used the ``present volume levels of fully regulated national 
securities exchanges'' as the benchmark for low volume for

[[Page 37149]]

AZX.\18\ Consequently, AZX's exemption order was conditioned upon its 
volume staying below that of the registered national securities 
exchange with the lowest average daily volume.\19\
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    \17\ See Exchange Act Release No. 28899 (Feb. 20, 1991), 56 FR 
8377 (February 28, 1991). AZX was originally named Wunsch Auction 
Systems, Inc.
    \18\ Id. at 17.
    \19\ For calendar year 1990, this was the Cincinnati Stock 
Exchange (``CSE''). In 1990 the CSE's average daily trading volume, 
expressed in shares, was 1,238,241. In 1996, AZX's volume threshold 
was increased to 5,965,346 shares, which was the average daily 
volume of shares traded on the Philadelphia Stock Exchange 
(``Phlx'') in 1995. In 1995, the Phlx was the national securities 
exchange with the lowest average daily volume.
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    Pursuant to a condition in the order granting relief from 
registration as an exchange, AZX trades only securities registered 
under the Exchange Act. As was the case with AZX, however, the Exchange 
has no U.S. operating history, so it is virtually impossible to predict 
what the Exchange's U.S. volume would be. The Exchange, however, 
currently trades certain securities listed on the LSE, only some of 
which are registered in the United States and trade on a market here, 
either as ADRs or as ordinary shares.\20\ Therefore, the Commission 
believes that AZX's exemption standards are not the best benchmark for 
the Exchange. The Commission believes it is appropriate to consider the 
volume levels of the primary stock exchange in the U.K., the LSE, as 
well as the volume levels of U.S. national securities exchanges.\21\
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    \20\ As of June 30, 1998, the Exchange traded 72 securities 
whose issuers also have securities registered in the United States. 
This number may change in the future, as issuers' registration 
status under the Exchange Act changes. As a condition to an 
exemptive order, the Exchange would be required to inform the 
Commission of any changes in the registration status of the 
securities it trades. As described above, the registration status of 
a given security under the Securities Act and under the Exchange Act 
has an effect on how it will be traded through the Tradepoint System 
in the U.S.
    \21\ Similarly, it would be appropriate to consider the primary 
market in any other country from which a low volume exchange was 
applying for an exemption as a benchmark, as well as the volume 
levels of U.S. national securities exchanges.
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    Trading volume in the United States is generally measured in 
shares. In 1990, when AZX was granted an exemption, the average daily 
volume of all regional stock exchanges was 24.5 million shares and the 
average price of shares traded was $28.51.\22\ In 1997, the average 
daily volume of all regional stock exchanges was 59.2 million shares 
and the average price of shares traded was $42.20. In 1997, the average 
daily volume on the LSE was 1.1 billion shares and the average price of 
shares traded was $6.04.\23\ By contrast, the average daily volume of 
the Exchange in 1997 was 3.1 million shares.
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    \22\ Securities Industry Association, 1996 Securities Industry 
Fact Book at 45.
    \23\ See Application of Tradepoint Investment Exchange, 
Amendment No. 2, Exhibit N, available in the Commission's Public 
Reference Room.
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    As the numbers cited above for the LSE and the Exchange illustrate, 
the Exchange is a low-volume market in its home country. The Exchange's 
average daily volume in 1997 was significantly less than one percent of 
the LSE's average daily volume.
    In the United Kingdom, the monetary value of trading is the common 
measure of a securities transaction and of overall market activity.\24\ 
In the U.K., share prices are roughly one-seventh of what they are in 
the U.S. for a comparable security. This difference in share price is 
also reflected in the trading of ADRs in this country, where each ADR 
is generally a multiple of the ordinary shares that are traded on the 
LSE.\25\
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    \24\ According to the Exchange, commissions in the United 
Kingdom are also based on a percentage of the share price, rather 
than on the number of shares purchased.
    \25\ For example, British Airways PLC (``BAB'') is traded on the 
New York Stock Exchange (``NYSE'') in ADR form. On June 26, 1998, 
BAB closed at 106 7/16. The ADR ratio for BAB is 10:1; thus, each 
ADR is equivalent to ten ordinary shares. Glaxo Welcome PLC 
(``GLX'') is also traded on the NYSE in ADR form. On June 26, GLX 
closed at 61 3/16. The ADR ratio for GLX is 2:1. SmithKline Beecham 
PLC (``SBH'') is also traded on the NYSE in ADR form. On June 26, 
SBH closed at 61 1/8. The ADR ratio for SBA is 5:1. These securities 
would all be available for trading through the Exchange in their 
ordinary share form in the U.S. if the Exchange receives an 
exemption from exchange registration.
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    Because of this difference in share price and volume, average daily 
share volume is not the best measure for a U.K. Recognized Investment 
Exchange proposing to operate as a limited volume exchange in the U.S. 
The average daily volume of the Exchange in 1997 was 3.1 million 
shares, and the average price of shares traded was $5.61.\26\ This 
average daily volume, however, may not be indicative of what the 
Exchange's U.S. volume would be.
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    \26\ See Application of Tradepoint Investment Exchange, 
Amendment No. 2, Exhibit N, available in the Commission's Public 
Reference Room.
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    In order to adjust for these factors, the Commission is proposing 
to grant the Exchange's application for exemption from exchange 
registration, using dollar value as a benchmark for volume, rather than 
average daily number of shares traded. This will permit the Exchange to 
operate in the U.S. under a benchmark which more appropriately reflects 
the difference in dollar value between U.S. and U.K. markets, and the 
difference in the way trading is measured in the U.K. In addition, the 
Commission is proposing to condition the Exchange's operation in the 
U.S. upon it remaining a low volume exchange in the U.K.
    Under the proposed Exemption, the Exchange would be exempt so long 
as (i) the average daily dollar value of trades (measured on a 
quarterly basis) involving a U.S. Member did not exceed $40 
million,\27\ and (ii) its worldwide average daily volume (measured on a 
quarterly basis) did not exceed ten percent of the average daily volume 
of the LSE. The limitation on the Exchange's worldwide trading volume 
would ensure that the Commission could reevaluate the appropriateness 
of the low volume exemption should the Exchange achieve significant 
volume relative to the LSE.
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    \27\ The Average price of shares traded on all regional 
exchanges in 1997 was $42.20. Thus, $40 million is equivalent to 
significantly less than 1.2 million shares a day, which was the 
original volume limitation placed on AZX.
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    The Commission also proposes to exempt the Exchange from Rules 6a-
1, 6a-2, 6a-3 and 24b-1 under the Exchange Act.\28\ Rules 6a-1, 6a-2 
and 6a-3 set forth the procedures regarding amendments and supplemental 
material exchanges must file. Essentially the same information required 
by these rules will be provided to the Commission by the Exchange under 
the other conditions the Division of Market Regulation is proposing 
(see V. Conditions, below). To require the Exchange to comply with 
these rules would be duplicative, and would not result in the 
Commission receiving the materials in as useful a form as proposed 
under the conditions set forth here.
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    \28\ 17 CFR 240.6a-1, 17 CFR 240.6a-2, 17 CFR 240.6a-3 and 17 
CFR 240.24b-1. Rules 6a-1, 6a-2 and 6a-3 have been proposed to be 
amended in the Commission's release on the regulation of alternative 
trading systems. See Regulation ATS Proposing Release supra note 15. 
Should the proposed rules be adopted, the Commission would re-
evaluate the appropriateness of the exemption from Rules 6a-1, 6a-2 
and 6a-3 for the Exchange.
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    Rule 24b-1 requires an exchange to make a copy of statements and 
exhibits filed with the Commission available to the public at its 
offices during reasonable business hours. Some of the information the 
Commission is proposing that the Exchange be required to file, however, 
is volume information which is substantially similar to the information 
required of broker-dealer trading systems under Rule 17a-23.\29\ 
Information filed pursuant to Rule 17a-23 is confidential, and is not 
required of exchanges. In addition, the Commission

[[Page 37150]]

is proposing that the Exchange provide certain trading data regarding 
trades involving U.S. Members and trades involving non-U.S. Members. 
This data is confidential and proprietary and would not otherwise be 
public. Data of this nature is not currently required from any other 
registrant. This data is necessary so that the Commission may monitor 
the Exchange's compliance with the proposed volume limitations. For 
these reasons, and because the Exchange will have no offices in the 
U.S. and therefore would be making such information public in the 
United Kingdom, the Commission proposes to exempt the Exchange from 
Rule 24b-1 as well.
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    \29\ 17 CFR 240.17a-23. Rule 17a-23 is proposed to be repealed 
in the Commission's release on the regulation of alternative trading 
systems. See Regulation ATS Proposing Release, supra  note 15 at 
IV.A. The recordkeeping requirements currently imposed under Rule 
17a-23. however, would still be required under amendments to Rules 
17a-3 and 17a-4 if the proposed rules are adopted. Because the 
Exchange's volume information would be needed by the Commission to 
determine if the thresholds had been reached, the Exchange would 
still be required to report volume information as outlined here.
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V. Conditions

    The Commission proposes to impose other conditions on the Exchange 
besides the low volume requirements discussed above. In general, these 
conditions would allow the Commission to monitor the Exchange for 
compliance with all applicable sections of the Securities Act and the 
Exchange Act (such as the anti-fraud and securities registration 
sections), and would ensure that the Commission has access to books, 
records and personnel of the Exchange should the need arise.
    Specifically, the Commission proposes to impose the following 
conditions on the operation of the Exchange in the U.S.: the Exchange 
would keep and provide to the Commission upon request (a) records 
regarding the identity of U.S. Members in the Tradepoint System and the 
identity of those denied participation in the Tradepoint System and the 
reason for such denial, as well as a description of the reason for 
terminating any former Member's capacity to use the Tradepoint System; 
(b) records regarding daily summaries of trading and time-sequenced 
records of each transaction involving a U.S. Member; (c) information 
disseminated to U.S. Members, such as quotation and transaction 
information regarding securities traded through the Tradepoint System, 
as well as market notices to Members and other communications (such as 
changes to the Market Rules); (d) daily pound and equivalent dollar 
value transactions, and daily share volume of business transacted 
through the Tradepoint System (separately for orders entered by non-
U.S. and U.S. Members, and in the aggregate); (e) a list of securities 
for which U.S. orders are accepted; and (f) copies of Member 
application and criteria standards for selection used by the Exchange. 
The Exchange would also provide 30 days prior notice to the Commission 
of any material changes in the operation of the Tradepoint System.
    Furthermore, the Exchange would supply to the Commission on a 
quarterly basis within thirty days of the end of each quarter: total 
volume and average daily volume of transactions effected through the 
system during the period and year-to-date aggregates of these numbers, 
expressed in (a) number of units of securities (for transactions in 
stock, number of ordinary shares; for transactions in securities other 
than stock, other appropriate commonly used measure of value of such 
securities); (b) number of transactions; and (c) monetary value (for 
transactions in stock, pound value and equivalent dollar value; for 
transactions in securities other than stock, other appropriate commonly 
used measure of value of such securities and equivalent dollar value). 
The Exchange would provide separate unit, transaction, and monetary 
volume and average daily volume information for the period covered by 
the report reflecting: (i) Tradepoint System activity in securities 
involving a U.S. Member and; (ii) Tradepoint System activity in 
securities not involving a U.S. Member. The primary market and hours 
for each type of security would also be identified.
    The Exchange would also be required to adopt and implement 
procedures to conduct surveillance of trading by Exchange employees and 
adopt requirements to ensure the non-disclosure of confidential 
information in the possession of Exchange employees. In addition, in 
response to regulatory trading halts on U.S. markets, the Exchange 
would be required to either suspend trading on the Tradepoint System 
for U.S. Members or consult with the Commission with respect to a 
possible suspension of trading; cooperate with any investigation in 
connection with trading on the Tradepoint System conducted by the 
Commission, including allowing Commission staff access to the 
facilities, books and records and other documents, as well as employees 
for interviews; and to provide the Commission with any requested 
information (including documents) in connection with trading on the 
Tradepoint System. The Exchange would also be required to continue to 
operate at all times in accordance with all applicable U.K. laws. The 
Exchange would also be required to maintain an agent for service of 
process in the U.S. at all times that it was offering its services in 
the U.S.
    The Exchange would also be required to maintain, at all times, 
certain provisions in its Member Agreement and its Market Rules 
relating to choice of law and choice of forum. Specifically, the 
Exchange would be required to retain provisions requiring that, in the 
event of a dispute involving a Member arising out of a transaction that 
occurred in the U.S., or that resulted in damages suffered in the U.S., 
the U.S. federal securities laws statutes would be applied if the cause 
of action is based upon fraudulent acts or omissions. These provisions 
are designed to satisfy the anti-waiver provision of the Exchange 
Act.\30\
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    \30\ The anti-waiver provision of the Exchange Act can be found 
in Section 29(a).
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    The Exchange would also be required to disclose to its U.S. Members 
information regarding the trading priorities of the Exchange and the 
response time of orders entered into the Tradepoint System by U.S. 
Members as compared to the response time of orders entered by European 
or other non-U.S. Members. In addition, the Exchange would be required 
to disclose that the nature and timeliness of pre-trade and post-trade 
information provided by the Exchange differ from that provided by U.S. 
registered securities exchanges. Such information should include 
notification that trades executed through the Exchange are not reported 
to the U.S. Consolidated Tape; a description of clearance and 
settlement procedures and disclosure that the time for clearance and 
settlement under U.K. law is the date of the transaction plus five 
business days, as compared to three business days under U.S. law; and 
disclosure of any Tradepoint System limitations affecting capacity to 
disseminate timely information or to handle Members' orders during peak 
or other periods.
    In addition, the exemptive order would be subject to amendment were 
the Exchange to offer trading in securities listed on any market (in 
the U.K. or otherwise) other than the LSE.

VI. Conclusion

    The Commission believes that permitting the Exchange to operate in 
the U.S. would provide U.S. investors with greater opportunities to 
invest in foreign securities. At the same time, the Commission is 
concerned that U.S. investors who utilize the Exchange are afforded 
sufficient protection. Accordingly, the Commission requests comment 
regarding the Exchange's application for a limited volume exemption 
from registration as a national securities exchange under the Exchange 
Act. In particular, the Commission requests comment on: (1) Whether the 
Commission should grant the Exchange the exemption it seeks; (2)

[[Page 37151]]

whether dollar value volume is an appropriate measure for determining 
limited volume; and (3) what conditions should apply to such an 
exemption.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18151 Filed 7-8-98; 8:45 am]
BILLING CODE 8010-01-P


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