Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39333

149See, e.g., R. Chung Letter; Eisner Letter;

Meurer Letter; Sanbeg Letter; Sherwood Letter;

Wieser Letter; Wilson Letter; and Zatorski Letter.

150March 1998 Study at 87–88.

151 Id. at 89.

152 Id. at 90.

153 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. As

discussed above, the proposed rule likely will

produce more accurate and informative quotations,

increase competition, and encourage market makers

to maintain competitive prices.

154 15 U.S.C. 78s(b)(2).

This conclusion rebuts some

commenters’ assertions that it is

difficult to fill orders over 100 shares

close to the inside market without

multiple executions, potentially

occurring at different price levels.149

The NASD concluded in the March

1998 Study, however, that

98.5% of SOES orders (98.3% of volume)

were fully executed at a single price for pilot

stocks after implementation of the Actual

Size Rule. For non-pilot stocks, 98.9% of

orders (98.8% of volume) were executed at a

single price during this period. Multiple

price SOES executions are rare for both

groups; only 1.3% and 0.9% of SOES orders

(1.5% and 1.1% of volume) were executed at

multiple prices for the pilot stocks and nonpilot stocks, respectively, postimplementation. Clearly, the Actual Size

Rule has had no measurable impact on SOES

order disposition. (Footnotes omitted.) 150

The March 1998 Study also made

important findings that rebutted claims

that investors’ access to automatic

executions was compromised by the

Actual Size Rule. The March 1998

Study found that

As with Nasdaq’s SOES system,

proprietary autoexecution systems provide

investors with immediate access to market

maker capital through automatic executions

at the inside market. Unlike SOES, however,

these systems often automatically execute

orders for sizes well above 1,000 shares,

which is the largest SOES tier size. Also

unlike SOES, these systems are operated at

the discretion of the market maker, which

generally sets size parameters for proprietary

autoexecution systems. Parameters usually

vary by stock and customer. Further, market

makers determine which customers may use

the systems. Accordingly, these systems are

not perfect substitutes for SOES. The

importance of these systems to individual

investors should not be underestimated,

however, because a number of the largest

national brokerage houses use them to

provide immediate, automated access to

market maker capital.151

* * * * *

Like Nasdaq’s SOES system, proprietary

autoexecution systems provide investors

immediate access to market maker capital.

Indeed, the analysis of data provided by

Participant Firms underscores the

importance of these systems to the

marketplace. The survey conducted by NASD

Economic Research and empirical analysis of

these data demonstrates that the Actual Size

Rule has not impacted these important

systems in any way.152

In sum, the Commission approved the

NASD’s rule change (to require Nasdaq

market makers to quote at least 1,000

shares) in 1990 out of concern that

market maker quotations at that time

did not provide a realistic picture of

execution size available and the depth

of the market. The NASD’s data shows

that this is no longer the case. Thus, in

light of the changes brought about by

the Order Handling Rules, which have

served to make the Nasdaq market

significantly more order-driven, and the

empirical research indicating no

material adverse impact of the Actual

Size Rule on investors or the Nasdaq

market, and after carefully considering

all of the comment letters, the

Commission has concluded that

minimum quotation sizes are no longer

necessary and should be removed for all

Nasdaq stocks.

The Commission therefore finds that

the proposed rule change is consistent

with the Exchange Act, including

Sections 11A(a)(1)(C), 15A(b)(6), and

15A(b)(11). Specifically, Section

11A(a)(1)(C) provides that it is in the

public interest to, among other things,

assure the economically efficient

execution of securities transactions and

the availability to brokers, dealers, and

investors of information with respect to

quotations for and transactions in

securities. Section 15A(b)(6) requires

that the rules of a national securities

association be designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to foster cooperation

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in

securities, to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system and, in general, to protect

investors and the public interest.

Section 15A(b)(11) requires that the

rules of a national securities association

be designed to produce fair and

informative quotations and to prevent

fictitious or misleading quotations,

among other things.

As discussed above, the Commission

believes that the Actual Size Rule

should not have a material adverse

impact on market spreads, volatility,

depth, liquidity, or investor access. In

addition, the Actual Size Rule should

give market makers more flexibility to

manage their risk. Removing the current

minimum size requirements enables

market makers to reflect size in their

quotations based on market and

business factors instead of a regulatoryimposed minimum. This should

increase the information content of

market makers’ quotes. Finally, by

removing the current regulatory size

requirements, the Actual Size Rule

removes a barrier to entry for making

markets in Nasdaq securities. The

Commission believes that the net longterm results of the Actual Size Rule

should benefit market makers and

investors without adversely affecting

market quality.

V. Conclusion

For the reasons discussed above, the

Commission finds that the NASD’s

proposal is consistent with the

Exchange Act (specifically, Sections

11A and 15A of the Exchange Act) and

the rules and regulations thereunder

applicable to a national securities

association and has determined to

approve the NASD’s proposal to amend

NASD Rule 4613(a)(1)(C) permanently

to allow Nasdaq market makers to quote

their actual size by reducing the

minimum quotation size requirement

for Nasdaq market makers in all Nasdaq

securities to one normal unit of

trading.153

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,154

that the proposed rule change, SR–

NASD–98–21, be and hereby is

approved.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19436 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[(Release No. 34–40200; File No. SR–NASD–

98–33)]

Self-Regulatory Organizations;

National Association of Securities,

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change and

Amendment 1 Thereto Relating to

Exemptions From Fidelity Bonding

Requirements

July 14, 1998.

I. Introduction

On April 20, 1998, the National

Association of Securities Dealers, Inc.,

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities
39334 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

1 15 U.S.C. 78s(b)(1) (1994).

2 17 CFR 240.19b–4 (1997).

3Amendment 1 revised the last sentence of

proposed new paragraph (c)(4) of Rule 3020. See

Letter from Elliott R. Curzon, Assistant Chief

Counsel, NASD Regulation, to Lisa Henderson,

Attorney, SEC, dated May 27, 1998.

4Securities Exchange Act Release No. 40065

(June 3, 1998), 63 FR 31819.

5 17 CFR 240.15c–1 (1997).

6 15 U.S.C. 78f(b)(6).

7 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).

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 39648

(February 11, 1998), 63 FR 8509.

3OCC Rules 301 and 302.

4Robert C. Rubenstein from OCC in a letter dated

September 3, 1997, to the Commission stated that

according to OCC, the terms clearing organization

and SRO shall have the meanings ascribed to them

in the General Regulation of the Commodity

Exchange Act, 17 CFR 1.3(d) and 17 CFR.1.3(ff) (1)

and (2).

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder 2 to grant

authority to NASD staff to adjust the

fidelity bond required of a member in

certain circumstances. By letter dated

May 27, 1998, the Association filed

Amendment 1 to the proposed rule

change.3 The proposed rule change and

Amendment 1 were published for

comment in the Federal Register on

June 10, 1998.4 No comments were

received. This order approves the

proposal.

II. Description of the Proposal

Rule 3020 of the Conduct Rules of the

NASD specifies that members are

required to maintain fidelity bonds to

insure against certain losses and the

potential effect of such losses on firm

capital. The rule applies to all members

with employees who are required to join

the Securities Investor Protection

Corporation and who are not covered by

the fidelity bond requirements of a

national securities exchange. The

amount of coverage a member is

required to maintain is linked to the

member’s net capital requirements

under Rule 15c3–1 under the Act.5

Under paragraph (c) of Rule 3020, each

member must annually review the

adequacy of its fidelity bond coverage

and maintain coverage that is adequate

to cover its highest net capital

requirement during the preceding 12

months. For example, even if a fullservice member divests its clearing

business, so that it no longer holds

customer funds or securities, it would

still be required to maintain bond

coverage that is based on the higher net

capital requirement that applied during

the preceding year.

The proposed rule change would

amend Rule 3020 to permit staff of

NASD Regulation, Inc., (‘‘NASD

Regulation’’) to adjust the fidelity bond

requirements to reflect changes in a

member’s business. Requests for

exemption would be considered under

recently adopted Procedures for

Exemption in the 9600 Series of Rules

in the Code of Procedure. Under the

procedures, NASD Regulation staff

issues written determinations that are

subject to review by the National

Adjudicatory Council.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of Section 15A(b)(6) of

the Act,6 which provides, among other

things, that the rules of a national

securities association be designed to

protect investors and the public

interest.7 The Commission believes that

the proposed rule change will allow

members to be relieved from

maintaining unnecessarily high fidelity

bond coverage without compromising

investor protection.

The rule change applies a ‘‘good

cause’’ standard that will require a

member to demonstrate that a

modification from the bonding

requirement is justified by the level of

loss exposure that may be expected from

the member. The premiums are changed

from time to time to reflect changes in

loss experience and to ensure that

sufficient funds are available to pay any

losses reported to the insurer. NASD

Regulation represents that it will apply

this authority only where it is clear that

an exemption will not have any

unintended impact on the insurance

pool, and the modified coverage will

adequately protect the member against

potential losses. In addition, the

proposed rule change will permit NASD

Regulation staff to include conditions in

an exemption to ensure that any

subsequent increase in capital

requirements is accompanied by a

corresponding increase in coverage.

IV. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act,8 that the

proposed rule change (SR–NASD–98–

33) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19443 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40205; File No. SR–0CC–

97–12]

Self-Regulatory Organizations; The

Options Clearing Corporation; Order

Approving a Proposed Rule Change

Regarding Initial and Minimum Net

Capital Requirements for Futures

Commission Merchants

July 15, 1998.

On July 15, 1997, The Options

Clearing Corporation (‘‘OCC’’) filed with

the Securities and Exchange

Commission (‘‘Commission’’) a

proposed rule change (File No. SR–

OCC–97–12) pursuant to Section

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

of 1934 (‘‘Act’’).1 Notice of the proposal

was published in the Federal Register

on February 19, 1998.2 No comment

letters were received. For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The proposed rule change amends

OCC’s initial and ongoing minimum net

capital requirements and early warning

notice provisions to establish additional

requirements for clearing members that

are also registered futures commission

merchants (‘‘FCMs’’). Currently, OCC’s

rules require its members to satisfy

initial and ongoing minimum net capital

requirements of $1,000,000 and

$750,000, respectively.3 Under the

proposed rule change, the initial and

ongoing minimum net capital of OCC

members that are also FCMs must

exceed the greater of the following

standards: OCC’s current initial and

ongoing minimum net capital

requirements or that required by the

clearing organization of the FCM

member’s designated self-regulatory

organization (‘‘DSRO’’).4

The proposed rule change also

modifies OCC’s early warning notice

provisions to require OCC members that

are also FCMs to notify OCC if that

member’s net capital falls below OCC’s

requirements or if its net capital falls

below the minimum net capital required

by the clearing organization of the FCM

member’s DSRO.