41308 Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices

9 17 CFR 200.30–3(a)(12).

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

2See Letter from Agnes M. Gautier, Vice

President, Market Surveillance, NYSE to David

Sieradzki, Attorney, Division of Market Regulation,

Commission dated July 13, 1998 (‘‘Amendment No.

1’’). In Amendment No. 1, the Exchange requests

accelerated approval for the proposal to allow the

Exchange’s procedures for limit-at-the-close orders

to continue on an uninterrupted basis. As noted

below, the Exchange’s pilot program expires on July

31, 1998. See infra note 9 and accompanying text.

3See Securities Exchange Act Release No. 33706

(March 3, 1994), 59 FR 11093 (March 9, 1994)

(‘‘LOC Pilot Program Approval Order’’).

4See Securities Exchange Act Release No. 35854

(June 16, 1995), 60 FR 32723 (June 23, 1995) (order

approving SR–NYSE–95–09).

5A MOC order is a market order to be executed

in its entirety at the closing price on the Exchange.

See NYSE Rule 13.

6The term ‘‘expiration days’’ refers to both (1) the

trading day, usually the third Friday of the month,

when some stock index options, stock index futures

and options on stock index futures expire or settle

concurrently (‘‘Expiration Fridays’’) and (2) the

trading day on which end of calendar quarter index

options expire (‘‘QIX Expiration Days’’).

7See LOC Pilot Program Approval Order, supra

note 3.

8See Securities Exchange Act Release No. 37969

(November 20, 1996), 61 FR 60735 (November 29,

1996) (order approving SR–NYSE–96–21).

9See Securities Exchange Act Release No. 40094

(June 15, 1998), 63 FR 33975 (June 22, 1998) (order

approving SR–NYSE–97–36).

10For a more complete description of the changes

to the MOC/LOC program, see Securities Exchange

Act Release No. 40094 (June 15, 1998), 63 FR 33975

(June 22, 1998) (order approving SR–NYSE–97–36).

11See Securities Exchange Act Release No. 38865

(July 23, 1997), 62 FR 40881 (July 30, 1998), (order

approving SR–NYSE–97–19).

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20558 Filed 7–31–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40262; File No. SR–NYSE–

98–15]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval to Proposed

Rule Change and Amendment No. 1 to

the Proposed Rule Change by the New

York Stock Exchange, Inc. Seeking

Permanent Approval of the Exchange’s

Pilot Program Concerning Entry of

LOC Orders

July 24, 1998.

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

Securities Exchange Act of 1934

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

May 21, 1998, the New York Stock

Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I and II below, which Items

have been prepared by the NYSE. On

July 16, 1998, the Exchange submitted

Amendment No. 1 to the proposed rule

change to the Commission.2 The

Commission is publishing this notice to

solicit comments on the proposed rule

change and Amendment No. 1 to the

proposed rule change from interested

persons and to grant accelerated

approval to the proposed rule change, as

amended.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change seeks

permanent approval of the procedures

for handling limit-at-the-close (‘‘LOC’’)

orders. The text of the proposed rule

change is available at the Office of the

Secretary, NYSE 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

NYSE 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 III below. The NYSE 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

The proposed rule change seeks to

make permanent the Exchange’s pilot

program for entry of LOC orders, which

was first approved by the Commission

on March 3, 1994.3 A LOC order is one

that is entered for execution at the

closing price, provided that the closing

price is at or within the limit specified.

NYSE Rule 13 provides, in part, that

‘‘the term ‘at the close order’ shall also

include a limit order that is entered for

execution at the closing price, on the

Exchange, of the stock named in the

order pursuant to such procedures as

the Exchange may from time to time

establish.’’ The LOC order type has been

available, on a pilot basis, for all NYSElisted stocks since July 1995.4 Under the

original pilot, LOC orders could be

entered only to offset published

imbalances of market-on-close (‘‘MOC’’)

order 5 and had to be entered by 3:55

p.m. on both expiration and nonexpiration days.6 In addition, on

expiration days, LOC orders could not

be canceled after 3:40 p.m., except for

legitimate errors. On non-expiration

days, LOC orders could not be canceled

after 3:55 p.m., except for legitimate

errors.7

In May 1997, the Exchange

implemented an amended policy

regarding LOC orders to permit their

entry at any time during the trading day

up to 3:40 p.m. on expiration days, and

3:50 p.m. on non-expiration days.8

Thereafter, as with MOC orders, LOC

orders could not be canceled (except for

legitimate errors), and could be entered

only to offset published imbalances.

LOC orders are subject to the same

restrictions regarding order entry and

cancellation as are MOC orders, as well

as to the additional limitation that LOC

orders yield priority to conventional

limit orders at the same price.

In June 1998, the Exchange further

amended its policy regarding MOC and

LOC orders.9 Under the amended

procedures, the deadline for entry of all

MOC and LOC orders was set at 3:40

p.m. on all trading days. Thereafter,

MOC and LOC orders cannot be

canceled (except for legitimate errors),

and can only be entered to offset a

published imbalance. In addition, the

Exchange made several changes to its

rules regarding the publication of order

imbalances. First, the Exchange now

requires publication of all MOC/LOC

imbalances of 50,000 shares or more in

all stocks on any trading day as soon as

practicable after 3:40 p.m. Second, the

Exchange includes marketable LOC

orders as well as MOC orders in the

imbalance publication. Third, the

Exchange is now allowing publication

of MOC/LOC imbalances of any size

between 3:00 p.m. and 3:40 p.m. with

Floor Official approval. Finally, an

additional imbalance publication will

be made at 3:50 p.m. for stock that has

an imbalance published at 3:40 p.m.10

These procedures are part of the current

pilot for LOC orders which expires July

31, 1998.11

The Commission has commented on

the appropriateness of LOC orders in

previous releases. For example, in its

release approving the original proposal

for the creation of LOC orders, the

Commission noted that LOC orders

could help curb excess price volatility at

the close ‘‘without diminishing any

benefit to investors from trading

strategies which rely on MOC orders to
Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices 41309

12See LOC Pilot Program Approval Order, supra

note 3.

13See supra note 9.

14See supra note 8.

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

16 15 U.S.C. 78f(b).

17 15 U.S.C. 78f(b)(5).

18 In approving this rule change, the Commission

has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

guarantee a fill at the closing price.’’ 12

In its most recent approval order for the

LOC pilot, the Commission commented

that since LOC orders are required to

yield priority to conventional limit

orders at the same price, ‘‘it is satisfied

that public customer orders on the

specialist book will not be

disadvantaged by this proposal.’’13 The

Commission has also stated that it does

not believe that allowing the use of LOC

orders throughout the day would have

harmful effects on other orders for on

the market in general.14

The Exchange has submitted three

monitoring reports on LOC orders to the

Commission. The reports suggest that

use of LOC orders, while limited, may

contribute to reducing volatility at the

close. Although use of LOC orders

remains limited, the Exchange believes

it is appropriate to seek permanent

approval for the use of LOC orders to

continue to provide Exchange members

with the flexibility to enter such orders,

which help them to manage risk at the

close.

2. Statutory Basis

The basis under the Act for the

proposed rule change is the requirement

under Section 6(b)(5) 15 that an

Exchange have rules that are designed to

promote just and equitable principles of

trade, to remove impediments to, and

perfect the mechanism of a free and

open market and, in general, to protect

investors and the public interest. The

proposed rule change perfects the

mechanism of a fee and open market by

providing investors with the ability to

use LOC orders as a vehicle for

managing risk at the close.

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

Member, Participants or Others

The Exchange has neither solicited

nor received written comments on the

proposed rule change.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change, as amended 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 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 at 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the NYSE. All submissions

should refer to File No. SR–NYSE–98–

15 and should be submitted by August

24, 1998.

IV. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Commission finds that the

proposed rule change is consistent with

the Act and the rules and regulations

thereunder applicable to a national

securities exchange, and, in particular,

with the requirements of Section 6(b) of

the Act.16 Specifically, the Commission

believes the proposal is consistent with

the Section 6(b)(5)17 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.18

This pilot program has been a part of

the Exchange’s effort to institute

safeguards to minimize excess market

volatility that may arise from the

liquidation of stock positions related to

trading strategies involving index

derivative products. For instance, since

1986, the NYSE has utilized auxiliary

closing procedures on expiration days.

These procedures allow NYSE

specialists to obtain an indication of the

buying and selling interest in MOC

orders at expiration and, if there is a

substantial imbalance on one side of the

market, to provide the investing public

with timely and reliable notice thereof

and with an opportunity to make

appropriate investment decisions in

response.

The NYSE auxiliary closing

procedures have worked relatively well

and may have resulted in more orderly

markets on expiration days.

Nevertheless, both the Commission and

the NYSE remain concerned about the

potential for excess market volatility,

particularly at the close on expiration

days. Although, to date, the NYSE has

been able to attract sufficient contra-side

interest to effectuate an orderly closing,

adverse market conditions could

converge on an expiration day to create

a situation in which member firms and

their customers would be unwilling to

acquire significant positions.

The Commission believes that LOC

orders may provide the NYSE with an

additional means of attracting contraside interest to help alleviate MOC order

imbalances both on expiration and nonexpiration days. The Commission

believes that LOC orders may appeal to

certain market participants who might

otherwise be reluctant to commit capital

of the close. Specifically, unlike a MOC

order, which results in significant

exposure to adverse price movements,

LOC orders allow each investor to

determine the maximum/minimum

price at which he or she is willing to

buy/sell. To the extent that such risk

management benefits encourage NYSE

member firms and their customers to

enter LOC orders to offset MOC order

imbalances of 50,000 shares or more,

thereby adding liquidity to the market,

the Commission agrees with the NYSE

that LOC orders may be a useful

investment vehicle for curbing excess

price volatility at the close.

The Commission also believes that the

NYSE has established appropriate

procedures for handling LOC orders and

that the NYSE’s existing surveillance

should be adequate to monitor

compliance with those procedures.

Because LOC orders will be required to

yield priority to conventional limit

orders at the same price, the

Commission is satisfied that public

customers order on the specialist’s book

will not be disadvantaged by this

proposal. The Commission believes that

the prohibition on canceling LOC orders

is consistent with the Exchange’s

auxiliary closing procedures and, like

those procedures, should allow

specialists to make a timely and reliable

assessment of order flow and its

potential impact on the closing price.

The Commission notes that the LOC

order pilot program has been ongoing

since 1994 and the NYSE has submitted

detailed reports describing its

experience with the pilot program.

Although the use LOC orders has been
41310 Federal Register / Vol. 63, No. 148 / Monday, August 3, 1998 / Notices

19See Securities Exchange Act Release No. 40094

(June 15, 1998), 63 FR 33975 (June 22, 1998) (order

approving SR–NYSE–97–36).

20 15 U.S.C. 78f(b)(5) and 78s(b)(2).

21 15 U.S.C. 78s(b)(2).

22 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 39813

(March 27, 1998), 63 FR 16849 (April 6, 1998)

(order approving File No. SR–NYSE–98–08)

(‘‘March Approval Order’’).

4See Letter from James E. Buck, Senior Vice

President and Secretary, NYSE, to Richard C.

Strasser, Assistant Director, Division of Market

Regulation, Commission, dated July 23, 1998

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

No. 1 modifies the proposal to: (1) clarify that the

proposal amends the definition of ‘‘customer’’ in

NYSE Rule 431(a)(2) to codify the Exchange’s

position that exempted borrowers will remain

exempt from the provisions of NYSE Rule 431; and

(2) correct a reference in NYSE Rule 431(a)(2) to the

Board of Governors of the Federal Reserve System

(‘‘FRB’’).

5The NYSE confirmed that the Exchange is

seeking to extend the changes to NYSE Rule 431

that were approved in the March Approval Order

for six months or until the Commission approves

the changes on a permanent basis, whichever

occurs first. Telephone conversation between Mary

Anne Furlong, Attorney, NYSE, and Yvonne

Fraticelli, Attorney, Division of Market Regulation,

Commission, on July 27, 1998 (‘‘July 27

Conversation’’).

6 12 CFR 220. Regulation T, ‘‘Credit by Brokers

and Dealers,’’ is administered by the FRB pursuant

to section 7 of the Act.

7See March Approval Order, supra note 3.

8See Amendment No. 1, supra note 4, and July

27 Conversation, supra note 5.

9See Docket Nos. R–905, R–0923, and R–0944, 63

FR 2806 (January 16, 1998).

10 12 CFR 220.6.

limited, the use of such orders could

help reduce volatility at the close.

Accordingly, the Commission believes

that it is reasonable and consistent with

the Act for the Exchange to seek

permanent approval of the LOC

procedures.

The Commission finds good cause for

approving the proposed rule change and

Amendment No. 1 to the proposed rule

change prior to the thirtieth day after

the date of publication of notice thereof

in the Federal Register. Accelerated

approval of the proposal will allow the

NYSE to continue to use its procedures

for entering LOC orders to continue on

an uninterrupted basis. The

Commission notes that this proposal

does not make any substantive changes

to the Exchange’s existing LOC program.

In its proposal, the Exchange simply

requests permanent approval of its

existing LOC program. Further, the

Commission notes that the last

substantive change to the LOC program

was published for the full notice and

comment period and the Commission

received no comments on that

proposal.19 Accordingly, the

Commission does not believe that the

current filing raises any new regulatory

issues. Therefore, the Commission

believes it is consistent with Section

6(b)(5) and Section 19(b)(2) of the Act to

grant accelerated approval to the

proposed rule change.20

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,21 that the

proposed rule change (SR–NYSE–98–

15) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–20557 Filed 7–31–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40266; File No. SR–NYSE–

98–16]

Self-Regulatory Organizations; Notice

of Filing and Order Granting Partial

Accelerated Approval of a Proposed

Rule Change and Amendment No. 1 to

the Proposed Rule Change by the New

York Stock Exchange, Inc., Relating to

Margin Requirements for Exempted

Borrowers and Good Faith Accounts

July 27, 1998.

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 June 30,

1998, the New York Stock Exchange,

Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with

the Securities Exchange Commission

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

rule change to amend NYSE Rule 431,

‘‘Margin Requirements,’’ to

accommodate certain recent changes to

the federal margin requirements. The

proposal, which is described in Items I,

II, and III below, which Items have been

prepared by the NYSE, originally was

approved by the Commission on a

temporary basis until July 27, 1998.3 On

July 24, 1998, the NYSE amended its

proposal to request that the Commission

approve the NYSE’s proposal for six

months on an accelerated bases.4 The

Commission is publishing this notice

and order to solicit comments from

interested persons on the proposed rule

change and to grant accelerated

approval to the portion of the proposal

that requests an extension of the

proposal for six months, until January

27, 1999, or until the Commission

approves the proposal permanently,

whichever occurs first.5

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

On March 27, 1998, the Commission

approved until July 27, 1998, an NYSE

proposal to apply the maintenance

margin requirements of NYSE Rule 431

to good faith accounts and to provide

that the proprietary accounts of

introducing broker-dealers that are

‘‘exempted borrowers’’ as that term is

defined in Regulation T6 will continue

to be subject to NYSE Rule 431(e)(6) as

applicable.7 The NYSE requests

permanent approval of the changes to

NYSE Rule 431 that were approved on

a temporary basis in the March

Approval Order. In addition, the NYSE

requests that the Commission extend the

changes to NYSE Rule 431 that were

approved in the March Approval Order

for six months, until January 27, 1999,

or until the Commission approves the

changes to NYSE Rule 431 on a

permanent basis, whichever occurs

first.8

Copies of the proposed rule change

are available at the NYSE 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

NYSE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposal.

The text of these statements maybe

examined at the places specified in Item

V below. The NYSE has prepared

summaries, set forth in Section 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

In January 1998 the FRB amended

Regulation T, which governs initial

extensions of credit to customers and

broker-dealers.9 Among other things,

these amendments established a ‘‘good

faith’’ account, which can be used for

transactions in non-equity securities.10