Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Notices 24521

5 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988).

class, which is assumed not to be

multiply-listed and also assumed to

have a 25,000 contract standard position

limit, the firm may qualify for a firm

facilitation exemption of up to twice the

standard limit (50,000 contracts), as

well as an equity hedge exemption of up

to twice the standard limit (50,000

contracts), in addition to the 25,000

contract standard limit. If both

exemptions are allowed, the facilitation

firm may hold or control a combined

position of up to 125,000 XYZ contracts

on the same-side of the market.

Initially, the Exchange intends to

provide the facilitation exemption to

member firms only for positions in

equity options that are solely listed on

the Exchange and not for multiply-listed

equity options. The reason for this

temporary limitation is to allow the

options exchanges, working through the

Intermarket Surveillance Group (‘‘ISG’’),

to develop uniform procedures to assure

that all market participants at each

exchange are given an opportunity to

participate in an order before a member

firm is given an exemption from the

position limit rules.

Under the proposal, member firms

must receive approval from the

Exchange prior to executing the

facilitating order which would result in

the firm exceeding position limits.

Although permission may be obtained

based on oral representations, the

facilitation firm is required to furnish to

the Exchange, within two business days

or such other time period designated by

the Exchange, forms and documentation

substantiating the basis for the

exemption. Further, to remain qualified

for the exemption, the member firm

must, within five business days after the

execution of the exempted order, hedge

all exempt option positions that have

not previously been liquidated, and

furnish to the Exchange documentation

reflecting the resulting hedging position.

In meeting this requirement, the

facilitation firm must liquidate and

establish its customer’s and its own

option and stock positions or their

equivalent in an orderly fashion, and

not in a manner calculated to cause

unreasonable price fluctuations or

unwarranted price changes. In addition,

a facilitation firm is not permitted to use

the facilitation exemption for the

purpose of engaging in index arbitrage.

Moreover, the facilitation firm is

required to promptly provide to the

Exchange any information or documents

requested concerning the exempted

option positions and the positions

hedging them, as well as to promptly

notify the Exchange of any material

change in the exempted option

positions or the hedge.

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Act in general and

furthers the objectives of Section 6(b)(5)

in particular in that it is designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, and is not

designed to permit unfair

discrimination between customers,

issuers, brokers, and dealers.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe the

proposed rule change will impose any

inappropriate burden on competition.

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 written comments with

respect to the proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing proposed rule

change: (1) does not significantly affect

the protection of investors or the public

interest; (2) does not impose any

significant burden on competition; (3)

was provided to the Commission for its

review at least five business days prior

to the filing date; and (4) does not

become operative for 30 days from April

9, 1996, the date on which it was filed,

the proposed rule change has become

effective pursuant to Section 19(b)(3)(A)

of the Act and Rule 19b–4(e)(6)

thereunder. In particular, the

Commission believes that the proposal

qualifies as a ‘‘noncontroversial filing’’

in that the proposed amendments do not

significantly affect the protection of

investors or the public interest and do

not impose any significant burden on

competiton. At any time within 60 days

of the filing of the proposed rule change,

the Commission may summarily

abrogate such rule change if it appears

to the Commission that such action is

necessary or appropriate for the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

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 at

the Commission’s Public Reference

Section, 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 Amex. All submissions

should refer to File No SR–Amex–96–11

and should be submitted by June 5,

1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12174 Filed 5–14–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37186; File No. SR–PSE–

96–12]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange, Inc.

Relating to Financial Arrangements of

Market Makers

May 9, 1996.

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

Securities Exchange Act of 1934

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

April 5, 1996, the Pacific Stock

Exchange Incorporated (‘‘PSE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested Persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PSE proposes to amend its rules

on the trading restrictions that apply to

Options Floor Members with ‘‘financial

arrangements’’ as defined in PSE Rule

6.40.
24522 Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Notices

2Under PSE Rule 6.40, Commentary .05, two or

more Lead Market Makers (‘‘LMMs’’) who are

trading on behalf of the same Member organization

may not trade in the same option series at the same

time, but may trade in the same trading crowd at

the same time.

3Current Commentary .04 to Rule 6.40 attempts

to address the problem of market domination by

multiple traders with ‘‘indirect’’ financial

arrangements by expressly prohibiting unfair

domination of markets. In this regard, the Exchange

believes that the proposed rule improves upon the

current rule by relying more on the nature of the

financial arrangement and less on patterns of

trading.

4See PSE Rule 6.35, Commentary .05.

5See Exchange Act Release No. 36370 (October

13, 1995), 60 FR 54273.

6PSE Rule 10.13.

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

self-regulatory organization 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 self-regulatory organization 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

PSE Rule 6.40(a) currently provides

that two Members have a ‘‘financial

arrangement’’ with each other for

purposes of Rule 6.40 if: (1) one Member

directly finances the other Member’s

dealings on the Exchange and has a

beneficial interest in the other Member’s

trading account such that the first

Member is entitled to at least 10% of the

second Member’s trading profits; or (2)

both Members are trading for the same

joint account. Rule 6.40(b) provides that

two Members with a financial

arrangement may not bid, offer and/or

trade in the same trading crowd without

a written exemption from two floor

officials.2 Commentary .06 sets forth the

circumstances under which the Options

Floor Trading Committee (‘‘OFTC’’)

ordinarily may grant an exemption to

those trading restrictions, i.e., to provide

liquidity in the trading crowd.

The Exchange proposes to redefine

the term ‘‘financial arrangements’’ for

purposes of Rule 6.40, so that two

Members have a financial arrangement

with each other if: (1) One Member

directly finances the other Member’s

dealings on the Exchange, the amount

financed is $5,000 or more, and the

Member providing the financing is

entitled to a share of the other Member’s

trading profits; or (2) both Members are

registered with the Exchange as

nominees of the same Member

Organization; or (3) both Members are

registered with the Exchange to trade on

behalf of the same joint account; or (4)

both Members’ dealings on the

Exchange are financed by the same

source, the amount financed is $5,000 or

more, and the Member providing the

financing is entitled to a share of each

of the other Members’ trading profits.

The proposal states that Members with

‘‘financial arrangements,’’ as defined,

may not bid, offer and/or trade in the

same trading crowd at the same time in

the absence of an exemption from the

OFTC.

The proposal further provides for both

long-term and short-term exemptions

that can be provided by the OFTC or

two Floor Officials, respectively.

Proposed Rule 6.40(b)(4) states, more

specifically, that the OFTC may grant

long-term exemptions to Members on a

case-by-case basis if it determines that a

fair and orderly market would not be

impaired by allowing such Members

with financial arrangements to trade in

the same trading crowd at the same

time. It further states that in making

such determinations, the Committee

shall consider the following factors; (1)

The nature of the financial arrangement;

(2) the degree of independence to be

maintained by the applicants in making

trading decisions; (3) the impact on

competition in the trading crowd if an

exemption were granted; (4) the

applicants’ prior patterns of trading if

they have traded previously in the same

trading crowd at the same time; and (5)

any other information relevant to

whether the applicants would tend

collectively to dominate the market in a

particular trading crowd or a particular

option series. The proposal further

states that the Committee may revoke

any long-term exemption granted

pursuant to this subsection if it

determines that a fair and orderly

market otherwise would be impaired by

a continuation of the exemption. The

Exchange believes that the proposed

criteria to be used by the OFTC in

granting long-term exemptions will

provide for even-handed treatment of

Members who apply for a long-term

exemption. With respect to short-term

exemptions, the proposal states that two

Floor Officials may grant short-term

exemptions to Members on a case-bycase basis if such Floor Officials

determine that a fair and orderly market

would not be impaired and that the

need for liquidity in the trading crowd

warrants such action.

The Exchange believes that the

proposed definition improves upon the

current definition by expanding, to an

appropriate extent, the scope of persons

who are covered by its terms.

Specifically, the current rule allows two

or more Members who are backed

financially by the same source (i.e.,

Members with ‘‘indirect’’ financial

arrangements), to trade in the same

crowd or same series as long as they are

not receiving trading profits from each

other and are not trading for the same

joint account. This however, allow for

certain situations where the spirit (i.e.,

to prevent one source from dominating

the market in a particular option issue

or dominating a particular trading

crowd), but not the letter, of Rule 6.40

might be violated. The Exchange

believes that the proposed rule would

better assure that such situations do not

occur and that competition will

continue to be maintained in each

trading crowd.3

The Exchange also proposed to

remove a provision in the current rule

that states that the primary appointment

of a market maker may not include

trading posts that constitute the primary

appointment of any market maker with

whom the first market maker has an

existing financial arrangement.4 The

Exchange believes that that rule is

superfluous in light of the trading

restrictions set forth in Rule 6.40.

Moreover, the Exchange believes that

Members trading for joint accounts

should be permitted to establish

overlapping primary appointment zones

to allow for coverage on the floor when

members who trade for those accounts

are temporarily absent from the floor. In

this regard, the Exchange notes that the

Commission recently approved a PSE

rule change to increase from two to six

the maximum number of trading posts

that may be included within a market

marker’s primary appointment zone.5

Finally, the PSE proposes to add

violations of Rule 6.40(b) to the

Exchange’s Minor Rule Plan 6 with

recommended fines of $500, $1,000 and

$1,500 for first-, second- and third-time

violations, respectively. The Exchange

believes that violations of Rule 6.40(b)

are easily ascertainable and easily

verifiable, and, therefore, are

appropriate for inclusion in the Minor

Rule Plan.

The Exchange believes that the

proposal is consistent with Section 6(b)

of the Act, in general, and Section

6(b)(5), in particular, in that it is

designed to promote just and equitable

principles of trade, and to protect

investors and the public interest.
Federal Register / Vol. 61, No. 95 / Wednesday, May 15, 1996 / Notices 24523

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3On May 2, 1996, the PSE filed Amendment No.

1 to the proposed rule change to include within the

rule text the requirement that if the Exchange grants

a facilitation exemption on the basis of oral

representations, the member organization must file

the appropriate forms and documentation

substantiating the basis for the exemption within

either two businesses days or a period of time to

be designated by the Exchange (‘‘Amendment No.

1’’). See Letter from Michael D. Pierson, Senior

Attorney, Market Regulation, PSE, to Matthew S.

Morris, Attorney, Office of Market Supervision,

Division of Market Regulation, Commission, dated

May 2, 1996.

4The Commission notes that a facilitation trade

is defined as a transaction that involves crossing an

order of a member firm’s public customer with an

order for the member firm’s proprietary account.

5The PSE’s exercise limit provisions will

correspond to the increase in position limit levels

permitted by the firm facilitation exemption.

(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 on the proposed

rule change were neither solicited nor

received.

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 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

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to File No. SR–PSE–96–12 and

should be submitted by June 5, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12172 Filed 5–14–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37178; File No. SR–PSE–

96–10]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Pacific Stock

Exchange, Inc., To Establish a Firm

Facilitation Exemption

May 8, 1996.

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 April 4,

1996, the Pacific Stock Exchange, Inc.

(‘‘PSE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I and II

below, which Items have been prepared

by the self-regulatory organization. The

PSE subsequently filed Amendment No.

1 to the proposed rule change on May

2, 1996.3 The PSE has requested

accelerated approval for the proposal.

This order approves the PSE’s proposal,

as amended, on an accelerated basis and

solicits comments from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PSE is proposing to amend its

rules on option position limits in order

to establish a firm facilitation exemption

to such limits.

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

PSE 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 PSE 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 PSE is proposing to establish a

firm facilitation exemption 4 for all nonmultiply-listed Exchange option issues

by adding new Commentary .08 to

Exchange Rule 6.8, the general options

position limit rule.5 The exemption

would be available to equity, broadbased index, narrow-based index,

Flexible Exchange (‘‘FLEX’’), interest

rate, and government securities option

issues to the extent and at the levels

specified therein.

Under the proposal, the procedures in

Exchange Rule 6.47(b) and Options

Floor Procedure Advice A–6 for

crossing a customer order with a firm

facilitation order must be followed. In

this regard, before a customer order can

be crossed with a firm facilitation order,

the trading crowd must be given a

reasonable opportunity to participate.

Moreover, only after it has been

determined that the trading crowd will

not fill the order, may the firm’s

customer order be crossed with the

firm’s facilitation order.

In addition, except for an interest rate

firm facilitation exemption, which is set

at a higher level, the firm facilitation

exemption will be twice the standard

limit.

The PSE notes that the firm

facilitation exemption will be in

addition to and separate from the

standard limit, as well as other

exemptions available under Exchange

position limit rules. For example, if a

firm desires to facilitate customer orders

in the XYZ option issue, which is

assumed not to be multiply-listed and

also assumed to have a 25,000 contract

standard position limit, the firm may

qualify for a firm facilitation exemption

of up to twice the standard limit (50,000

contracts), as well as an equity hedge

exemption of up to twice the standard

limit (50,000 contracts), in addition to