[Federal Register Volume 66, Number 10 (Tuesday, January 16, 2001)]
[Notices]
[Pages 3633-3634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1192]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43823; File No. SF-PCX-99-48]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating 
to Miscellaneous House-Keeping Amendments to Options Trading Rules

January 9, 2001.
    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 November 5, 1999, the Pacific Exchange, Inc. (``PCX'' 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 
Exchange. Amendment No. 1 was filed on October 11, 2000.\3\ 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\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange made several technical 
changes to the proposed rule text to correct the numbering and 
lettering of certain sections of the rule text. See Letter to 
Heather L. Traeger, Attorney, Division of Market Regulation, SEC, 
from Cindy Sink, Senior Attorney, Regulatory Policy, PCX, dated 
October 10, 2000 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposes to modify its rules on options trading by 
clarifying existing provisions, eliminating superfluous provisions, 
codifying current policies and procedures, and renumbering certain 
Option Floor Procedure Advices (``OPFAs''). The text of the proposed 
rule change is available at the Office of the Secretary, the PCX, and 
at the Commission.

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

    In this filing with the Commission, the Exchange 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 Exchange 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 Exchange is proposing to make several changes to the text of 
the PCX rules on options trading. First, the Exchange proposes to amend 
its rule 6.86 \4\ by providing a cross-reference to rule 6.37(f).\5\ 
The Exchange proposes that, when rule 6.86 does not apply because an 
order is for a broker/dealer; a fast market has been declared; or rule 
6.86 has been suspended, then rule 6.37(f) will apply. The Exchange 
proposes this rule change to protect investors and to emphasize the 
obligations of Market Makers on the Options Floor.
    In addition, the Exchange proposes to define and clarify the terms 
``executed'' and ``filled'' in rule 6.86, Commentary .09. Specifically, 
the Exchange proposes that an order is considered ``executed'' and 
``filled'' at the price that was agreed upon when the trade was 
consummated, i.e., when ``buy'' or ``sell'' was vocalized in response 
to a request for a market and disclosure was made of the price and the 
quantity of the order.
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    \4\ PCX rule 6.86 is the Exchange's ``firm quote'' rule for non-
broker dealer customer orders.
    \5\ PCX rule 6.37(f), to be amended as follows in a pending PCX 
filing with the Commission states that: ``The following rule applies 
if rule 6.86 does not apply because an order is for a broker-dealer, 
a fast market has been declared or rule 6.86 has otherwise been 
suspended. Whenever a Floor Broker enters a trading crowd and calls 
for a market in any class and series at that post, each Market Maker 
present at the post where the option is traded is obligated, at a 
minimum, to make a market for one contract on each Market Maker's 
quoted price or `implied' price (e.g., if a Market Maker provides a 
bid but not an offer, the Market Maker's offering price will be 
implied by the bid price plus the maximum bid/ask spread 
differential specified in rule 6.37(b)(1)). In the event a Floor 
Broker is unable to satisfy an order from bids and offers given in 
the crowd, the Order Book Official may assign one contract to every 
Market Maker present within the trading crowd to assist the Floor 
Broker in satisfying the order. If a Market Maker at the post either 
bids lower or offers higher than the established market, such, 
Market Maker will be obligated to trade one contract at the price 
quoted by the Market Maker. If a Market Maker at the post fails to 
provide a bid or offer after having a reasonable opportunity to do 
so, the Market Maker will be obligated to trade one contract at the 
best price quoted in the crowd, or if there are no prices quoted, at 
the disseminated price.'' See Securities Exchange Act Release No. 
42035 (October 19, 1999), 64 FR 57681 (October 26, 1999) (File No. 
SR-PCX-99-13).
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    Second, the Exchange is proposing that rule 7.3(a)(6) references to 
subparagraphs (d) and (e) be changed to correctly reference 
subparagraphs (4) and (5).
    Third, the Exchange proposes to renumber OFPA B-13, Subject: 
Evaluation of Options Trading Crowd Performance as rule 6.100. The 
Exchange proposes to renumber OFPA B-13 to centralize specific 
obligations, responsibilities and procedures of the Options Allocation 
Committee with respect to the evaluation of Lead Market Makers 
(``LMM'') and trading crowds. Specifically, the Exchange proposes to 
require that all procedures applicable to the Options Allocation 
Committee (``OAC'') for review of LMM or trading crowd performance 
pursuant to OFPA B-13 be renumbered and incorporated, verbatim, as rule 
6.100.
    Fourth, the Exchange proposes to eliminate the statement in rule 
10.13(g) which states that ``[e]except as provided in rule 10.14 
(Summary Sanction Procedures), the circumstances underlying the 
issuance of each floor citation shall be reviewed by a designated 
committee for a determination of whether the evidence is sufficient to 
find a violation of Exchange rules.'' The Exchange notes that this 
provision is inconsistent with rule 10.13(c), which provides, in part, 
that Exchange Regulatory Staff designated by the Exchange has the 
authority to impose a fine pursuant to rule 10.13.
    Fifth, the Exchange proposes to adopt new rules 10.13(h)(13) and 
10.13(k)(i)(13) to incorporate new rule 4.23 into the Minor Rule Plan 
and Recommend Fine Schedule.\6\ Rule 4.23 states that a member or 
member organization must obtain Exchange approval in order to Exchange 
or maintain a telephonic or electronic communication between the Floor 
and another location, or between locations on the Floor. The proposed 
recommended fines, pursuant to proposed rule 10.13(k)(i)(13) of this 
rule are $250, $750 and $1,500 for first, second and third time 
violations, respectively.
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    \6\ See Securities Exchange Act Release No. 40852 (December 28, 
1998), 64 FR 1058 (January 7, 1999) (File No. SR-PCX-98-16).
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    Sixth, the Exchange proposes to adopt rule 10.13(h)(35) and 
10.13(k)(i)(35) to incorporate new rule 6.35(d) into the Minor Rule 
Plan and Recommended Fine Schedule.\7\ Rule 6.35(d) states that newly 
registered Market Makers have a grace period (60 days from the 
commencement of trading), during which time they may have, but are not 
required to have, a Primary Appointment Zone. At the completion of the 
grace period, the Market Maker must select a Primary Appointment Zone. 
Market Makers who fail to select a Primary Appointment Zone prior to 
the expiration of their grace periods will

[[Page 3634]]

be subject to disciplinary action pursuant to rule 10.13. The proposed 
recommended fines, pursuant to proposed rule 10.13(k)(i)(35) of this 
rule are $500, $1000 and $1,500 for first, second and third time 
violations, respectively.
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    \7\ See supra note 5.
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    Seventh, the Exchange proposes to amend the text specifying the 
recommended fines for violations of the position limit rules pursuant 
to rule 10.13(k)(i)(21) of the Minor Rule Plan Recommended Fine 
Schedule. The Exchange proposes that position and exercise limit 
violations be the greater of $250.00 or $1 per contract over 5% of the 
applicable limit. The Exchange proposes this change so that it is 
obvious that the imposition of a monetary fine is recommended 
regardless of whether the applicable number of contracts is less than 
5% over the designated position or exercise limit.
    Eighth, the Exchange proposes to amend the text specifying the 
recommended fines for violations of the exercise limit rules pursuant 
to rule 10.13(k)(i)(22) of the Minor Rule Plan Recommended Fine 
Schedule. The Exchange proposes that position and exercise limit 
violations be the greater of $250.00 or $1 per contract over 5% of the 
applicable limit. The Exchange proposes this change so that it is 
obvious that the imposition of a monetary fine is recommended 
regardless of whether the applicable number of contracts is less than 
5% over the designated position or exercise limit.
    Ninth, the Exchange proposes to delete all references to OFPAs in 
rule 10.13(h) and (k), pertaining to the PCX Minor Rule Plan and to 
replace those references with the current rules. The Exchange proposes 
this change because it intends to renumber and incorporate all OFPAs 
pertaining to Options trading into the text of Rule 6.\8\
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    \8\ See Securities Exchange Act Release No. 42035 (October 19, 
1999), 64 FR 57681 (October 26, 1999) (File No. SR-PCX-99-13); 
Release No. 43293 (September 14, 2000) 65 FR 57416 (September 22, 
2000) (File No. SR-PCX-99-36); Release No. 43025 (July 12, 2000), 65 
FR 44559 (July 18, 2000) (File No. SR-PCX-99-40); Release No. 43149 
(August 11, 2000), 65 FR 51392 (August 23, 2000) (File No. SR-PCX 
99-44); and Release No. 42861 (May 30, 2000), 65 FR 36489 (June 8, 
2000) (File No. SR-PCX-99-45).
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act \9\ because it is designed 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, and in general, to protest investors and the public 
interest. The proposal is also consistent with Section 6(b)(6),\10\ 
which requires that members and persons associated with members be 
appropriately disciplined for violations of Exchange Rules.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
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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 
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 Members, Participants or Others

    Written comments were not 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 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 self-regulatory organization consents, the Commission will:
    A. by order approve the 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 
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 20549-0609. 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 at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-PCX-99-48 and should be submitted by February 6, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1192 Filed 1-12-01; 8:45 am]
BILLING CODE 8010-01-M