Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices 32873

5See Letters from C. Philip Curley, Attorney,

Robinson Curley & Clayton, P.C., to Jonathan G.

Katz, Secretary, SEC, dated May 2, 1996 (‘‘Comment

Letters’’).

6The SEC notes that Amendment No. 3 was

submitted in response to the Comment Letter. The

comment letter received by the SEC regarding the

CHX’s proposal and Amendment No. 3 are available

in the SEC’s public reference room in File No. SR–

CHX–96–11. 1 15 U.S.C. § 78s(b)(1) (1988).

acceptable to the Exchange.’’

Amendment No. 3 explains the

application of the standard ‘‘acceptable

to the Exchange’’ to control persons. In

the proposed rule change, the Exchange

will apply the ‘‘acceptable to the

Exchange’’ standard to control persons

in the same manner as it has applied

that standard to employees of members

or member organizations in the past

since the rule was first adopted. While

the Exchange has not had to exercise

this standard in recent years, the

Exchange might apply it if, for example,

a prospective employee or control

person is subject to a statutory

disqualification or if the person, while

not subject to a statutory

disqualification, is barred from the

banking industry because he or she stole

from customers.

In the original filing, the proposed

amendments to Rule 2 of Article VI

stated that upon notice to a member or

member organization that the President

of the Exchange has withheld or

withdrawn approval of the employment

of any other person, the relationship

between the member or member

organization and such person shall be

terminated. Amendment No. 3 deletes

the reference to ‘‘the employment of’’

any such other person.

Rule 2 of Article VI requires members

or member organizations that know or

in the exercise of reasonable care should

know that any prospective employee is

subject to one or more statutory

disqualifications to submit details on

such prospective employee to the

Exchange and receive Exchange

approval before such person becomes

associated with the member or member

organization. Rule 2 also requires that

each member or member organization

take reasonable care to determine the

existence of a statutory disqualification

prior to employing any prospective

employee. Further, if any person already

employed by a member or member

organization thereafter becomes subject

to a statutory disqualification, notice

must be sent to the Exchange promptly.

Amendment No. 3 clarifies that these

provisions are applicable to control

persons as well as employees of

members or member organizations.

2. Statutory Basis

The proposed rule change is

consistent with section 6 of the Act in

general, and in particular, with Section

6(b)(5), in that it is designed to promote

just a equitable principles of trade,

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, as well as

to protect investors and the public

interest.

The proposed rule change is also

consistent with Section 6(c)(3)(B) of the

Act, which provides that a national

securities exchange may examine and

verify the qualifications of an applicant

to become a person associated with a

member in accordance with procedures

established by the rules of the exchange,

and require any person associated with

a member, or any class of such persons,

to be registered with the exchange in

accordance with procedures so

established.

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

The Exchange understands that the

Commission has received comments on

SR–CHX–96–11 and Amendments Nos.

1 and 2 thereto.5 The Exchange believes

that issues raised by the commenter are

addressed herein, and in Amendment

No. 3.6

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the 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.

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 at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CHX. All submissions

should refer to File No. SR–CHX–96–11

and should be submitted by July 16,

1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16167 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37318; File No. SR–OCC–

96–03]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing of a Proposed Rule Change

Relating to the Clearance and

Settlement of Flexibly Structured

Equity Options

June 18, 1996.

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

Securities Exchange Act of 1934

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

April 30, 1996, The Options Clearing

Corporation (‘‘OCC’’) 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 primarily by OCC. 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 purpose of the proposed rule

change is to enable OCC to clear and

settle flexibly structured equity options.
32874 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices

2The Commission has modified the text of the

summaries submitted by OCC.

3For a complete description of flexibly structured

equity options, refer to Securities Exchange Act

Release No. 36841 (February 14, 1996), 61 FR 6666

[File Nos. SR–CBOE–95–43 and SR–PSE–95–24]

(order approving the trading of flexibly structured

equity options by the CBOE and PSE). The AMEX

and PHLX also have filed proposed rule changes for

the trading of flexibly structured equity options. For

a complete description of these filings, refer to

Securities Exchange Act Release Nos. 37053 (March

29, 1996), 61 FR 15537 [File No. SR–AMEX–95–57]

(notice of filing of proposed rule change); and

37048 (March 29, 1996), 61 FR 15549 [File No. SR–

PHLX–96–08] (notice of filing of proposed rule

change).

4An American-style equity option may be

exercised at any time prior to its expiration date.

5A European-style equity option may be

exercised only during a specified period before the

option expires.

6A capped-style equity option will be exercised

automatically prior to expiration if the options

market on which the option is trading determines

that the value of the underlying interest at a

specified time on a trading day ‘‘hits the cap price’’

for the option (i.e., when the cap price is less than

or equal to the closing price of the underlying

security for calls or when the cap price is greater

than or equal to the closing price of the underlying

security for puts).

7Although the rules of the Exchanges provide for

capped-style flexibly structured equity options, the

Exchanges advised OCC that they do not intend to

provide a market in capped-style flexibly structured

equity options at the outset. Accordingly, this

proposed rule change does not include the rules

that would be required for the clearance and

settlement of such options. The commencement of

trading in capped-style flexibly structured equity

options will require that the Commission approve

another proposed rule change filed by OCC under

Section 19(b)(1) of the Act.

8A Request for Quotes is the initial request

suppled by the submitting exchange member to

initiate FLEX bidding and offering.

9The specific changes to OCC’s By-Laws and

Rules are set forth in OCC’s proposed rule change,

which is available for review at the principal office

of OCC and the Commission’s Public Reference

Room.

10Adjustments may be made to the number of

option contracts, the unit of trading, the exercise

price, and the underlying security with respect to

all outstanding option contracts open for trading in

an underlying security which is the subject of a

dividend, stock dividend, stock distribution, stock

split, reverse stock split, rights offering,

distribution, reorganization, recapitalization,

reclassification or similar event, or the merger,

consolidation, dissolution, or liquidation of the

issuer of the underlying security.

11OCC Rule 805 sets forth the expiration date

exercise procedures.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

OCC 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. OCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of this proposed rule

change is to accommodate within OCC’s

existing By-Laws and Rules the

clearance and settlement of flexibly

structured options on individual equity

securities, as proposed for trading by the

American Stock Exchange, Inc.

(‘‘AMEX’’), the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’), the

Philadelphia Stock Exchange, Inc.

(‘‘PHLX’’) and the Pacific Stock

Exchange, Inc. (‘‘PSE’’) (collectively,

‘‘Exchange’’ or ‘‘Exchanges’’).3

Flexibly structured equity options

allow parties to each flexibly structured

equity option trade to customize certain

terms of the option within specified

limits established by the Exchange.

Specifically, for each flexibly structured

equity option trade parties may

establish the exercise price, the exercise

style (i.e., American,4 European,5 or

capped 6), the cap interval in the case of

capped-style options, the expiration

date, and the option type (i.e., put or

call).7 In addition to customization,

flexibly structured equity option trades

will require a minimum transaction size

of 250 contracts in opening trades in

currently unopened series and 100

contracts in the case of opening and

most closing trades in currently open

series. Flexibly structured equity

options thus will differ from existing

Exchange-traded equity options both in

terms of customization and size.

From a clearance and settlement

perspective, flexibly structured equity

options can be treated and processed

like any other equity option in virtually

all respects. While Exchange rules

permit a Request for Quotes 8 to specify

a quote either as a dollar amount or as

a percentage of the underlying stock

price, when a trade is reported to OCC

the option premium always will be

expressed as a dollar amount. Therefore,

when a flexibly structured equity option

trade is reported to OCC by one of the

Exchanges all of the terms of that option

will have been established in the

Exchange’s report, and the terms will

correspond to existing equity options

term categories. As a result, on receipt

of a matched trade report from an

Exchange, OCC will establish long and

short flexibly structured equity option

positions in clearing member accounts

in precisely the same way it does for

existing equity options. Furthermore,

flexibly structured equity option

positions will exhibit virtually the same

characteristics as existing equity

options.

Because of the similarities between

existing equity options and flexibly

structured equity options, only a few of

OCC’s By-Laws and Rules need

adjustment to accommodate flexibly

structured equity options.9 OCC

proposes to amend Section 1 of Article

I to add an all-purpose definition of

‘‘flexibly structured option.’’ Thus, the

definitions for ‘‘flexibly structured

option’’ as set forth in Articles XV, XVII,

and XXIII will be deleted. The

definition of ‘‘expiration date’’ in

Article I, Section 1 is being amended to

make clear that flexibly structured

equity options may expire on dates

other than the Saturday following the

third Friday of the expiration month.

The expiration date of any such option

will be the date reported to OCC by the

Exchange, subject to such constraints on

the range of possible expiration dates as

are set forth in the rules of the

Exchanges.

Section 11 of Article VI, regarding

adjustments to equity and index

options, will be amended to apply to the

adjustment of flexibly structured equity

and index options.10 OCC also is

proposing to add Interpretation and

Policy .08 to Section 11 for situations

where a European-style flexibly

structured equity option is adjusted to

require the delivery upon exercise of a

fixed amount of cash, such as would

normally occur in the event of a merger

where the underlying security is

converted into a right to receive a fixed

amount of cash. In such a circumstance,

it is proposed that the expiration of the

option will ordinarily be accelerated so

that the option will expire on or shortly

after the date on which the underlying

stock is converted into a right to receive

cash. Without this adjustment, the

option position would have to be

maintained until it could be exercised at

its regular expiration even though the

amount to be received on exercise has

already been fixed. This special

adjustment is being proposed to

accommodate flexibly structured equity

options because unlike existing equity

options flexibly structured equity

options may have European-style

exercise features.

The only change proposed to be made

to OCC’s Rules is the addition of

Interpretation and Policy .03 to Rule

805, which will clarify that OCC’s

exercise procedures as set forth in Rule

805 11 shall apply to the exercise of

flexibly structured equity options. The

new interpretation also gives OCC the

flexibility, if necessary, to depart from

regular expiration date procedures and
Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Notices 32875

12 17 CFR 200.30–3(a)(12) (1995).

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

2 17 CFR 240.19b–4.

3The three measures of performance currently

utilized by the PSE are: (1) National Market System

Quote Performance, accounting for 45% of the

overall score, measures the percentage of times in

a given quarter that a specialist’s bid and/or offer

is equal to or greater than the best bid or offer in

the consolidated quote system for each duallytraded security; (2) the Specialist Evaluation

Questionnaire Survey, also accounting for 45% of

the overall score, is composed of questions

designed to evaluate a specialist’s market-making

performance and is to be completed only by floor

brokers who regularly trade with a specialists; and

(3) SCOREX Limit Order Acceptance Performance,

which accounts for the final 10% of the overall

score, measures the percentage of P/COAST

(formerly SCOREX) limit orders accepted by a

specialist. See Securities Exchange Act Release No.

28843 (February 1, 1991), 56 FR 5040 (February 7,

1991) (File No. SR–PSE–87–19) for a more complete

description of each of these measures of

performance.

4The PSE maintains two equity trading floors,

one in Los Angeles and one in San Francisco. See

PSE Rule 4.1(g).

5See PSE Rules 5.37(b)–(e).

6SEE Rules 5.37(g)–(i). The EAC also has the

authority to bypass the second informal proceeding

and commence formal reallocation proceedings

after a specialist’s second quarter of substandard

performance in a rolling twelve-month period. See

PSE Rule 5.37.

7For a description of the procedures followed in

such proceedings, see PSE Rules 5.37(j)–(s).

deadlines in the case of flexibly

structured equity options. Such

departures are not currently anticipated

and adequate prior notice will be given

to all clearing members.

OCC believes the proposed rule

change is consistent with the purposes

and requirements of Section 17A of the

Act because the proposal provides for

the prompt and accurate clearance and

settlement of transactions in flexibly

structured equity options and because it

provides for the safeguarding of related

securities and funds. OCC believes the

proposed rule change meets such

requirements by establishing a

framework in which existing, reliable

OCC systems, rules, and procedures are

extended to the processing of flexibly

structured equity options. Finally, OCC

believes the proposed rule change will

foster cooperation with persons,

including OCC clearing members,

engaged in the clearance and settlement

of securities transactions and will

thereby promote the protection of

investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

OCC does not believe that the

proposed rule change will impose any

burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

Written comments were not and are

not intended to be solicited with respect

to the proposed rule change, and none

have been received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five 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

ninety 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 OCC 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. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of OCC. All submissions should

refer to File No. SR–OCC–96–03 and

should be submitted by July 16, 1996.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16062 Filed 6–24–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37326; File No. SR–PSE–

96–13]

Self-Regulatory Organizations; Pacific

Stock Exchange, Incorporated; Order

Granting Approval to Proposed Rule

Change Relating to Restrictions on

Equity Allocations (10% Rule)

June 19, 1996.

On April 10, 1996, the Pacific Stock

Exchange, Incorporated (‘‘PSE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

codify a policy that any specialist whose

score on a quarterly specialist

performance evaluation ranks in the

bottom 10% of specialist on his or her

trading floor shall not be eligible for

allocations of securities, absent

mitigating circumstances, until such

ranking rises above the bottom 10%.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 37142 (April

24, 1996), 61 FR 19328 (May 1, 1996).

No comments were received on the

proposal.

The Exchange’s specialist evaluation

program is governed by PSE Rule 5.37.

Subsection (a) of that Rule provides that

the Equity Allocation Committee

(‘‘EAC’’) shall evaluate all registered

specialists on a quarterly basis. Those

evaluations result in overall ratings of

specialists that are based upon three

separate measures of performance, as

specified in the Rule.3 Subsection (b)

provides that any registered specialists

who is in the bottom 10% of all

registered specialists on that specialist’s

trading floor,4 as determined by the

overall evaluation scores in any one

quarterly evaluation, shall be requested

to meet with the EAC (or a panel

appointed by the EAC) on an informal

basis.5 If a specialist is in the bottom

10% during any two out of four

consecutive quarterly evaluations, the

specialist is requested to appear a

second time before the EAC to explain

his or her performance.6

If the EAC finds in its second informal

meeting with a specialist that there are

no mitigating circumstances that would

demonstrate substantial improvement of

or reasonable justification for the

specialist’s most recent evaluation

score, the EAC will make a

determination that the specialist’s

performance is below acceptable levels,

and notify the specialist of his or her

right to a hearing on such

determination.7 The EAC may take a

number of actions against a registered

specialist found to perform below

acceptable levels, including limitation,

suspension or termination of the

specialist’s registration as a specialist, or

reallocation of his or her stocks.