34912 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Notices

3The firm quote rule, which obligates the trading

crowd to fill public orders for up to 10 contracts

at published quotes, remains in effect unless

suspended by two Floor Officials acting under Rule

6.6(b) in the event of a fast market. The proposed

rule change would not authorize an OBO or DPM

to declare a fast market or suspend the firm quote

rule.

4 17 CFR 200.30–3(a) (12).

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

2Securities Exchange Act Release No. 36933

(March 6, 1996), 61 FR 10045.

3Historically, this component has represented

about ten percent of the total clearing fund

requirement.

4Prior to the implementation of GSCC’s netting

service for repos, GSCC’s rules required

computation of the average of a member’s absolute

funds amounts over the prior twenty business days.

Securities Exchange Act Release No. 36491

(November 17, 1995), 60 FR 61577 (order approving

proposed rule change).

5This change has been made to both paragraphs

(b) and (d) of Rule 4, Section 2 of GSCC’s rules.

Paragraph (b) applies to bank netting members,

Category 1 dealer netting members, Category 1

futures commission merchant netting members,

Category 2 inter-dealer broker netting members,

government securities issuer netting members,

insurance company netting members, and registered

investment company netting members. Paragraph

(d) applies to Category 2 dealer netting members

and Category 2 futures commission merchant

netting members.

orders in accordance with Exchange

rules, including the firm quote rule.3

Members will be notified of any

deactivation of RAES in particular

classes of options by an OBO or a Post

Director pursuant to proposed Rule

6.6(e) by means of a message that is

printed at each trading post on the floor

and is transmitted to terminals

throughout the floor over the Exchange’s

TextNet system.

The Exchange believes that the

proposed rule change is consistent with

and furthers the objectives of Section

6(b)(5) of the Act in that, by permitting

the Exchange to act expeditiously to

prevent automatic executions of options

transactions at stale prices in the event

of significant news announcements or

other potentially disruptive situations, it

is designed to promote just and

equitable principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and to

protect investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed 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 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–CBOE–96–36 and

should be submitted by July 24, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16921 Filed 7–2–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37368; File No. SR–GSCC–

96–01]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving a

Proposed Rule Change Relating to the

Enhancement of Risk Management

Processes

June 25, 1996.

On January 5, 1996, the Government

Securities Clearing Corporation

(‘‘GSCC’’) filed with the Securities and

Exchange Commission (‘‘Commission’’)

the proposed rule change (File No. SR–

GSCC–96–01) 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 March 13, 1995.2 No comment letters

were received. For the reasons

discussed below, the Commission is

granting approval of the proposed rule

change.

I. Description

As part of GSCC’s continuous process

of reviewing its risk management

mechanism, GSCC has made various

enhancements and revisions to that

mechanism. The design of the risk

management process for GSCC’s newly

implemented netting service for

repurchase agreements (‘‘repos’’) and

recommendations made by Commission

staff during their inspection of GSCC

last year provided the impetus for

certain of the enhancements and

revisions. Each of the changes to GSCC’s

risk management process is described in

detail below.

A. Change in the Clearing Fund

Formula

1. Funds Adjustment Component

There are three components to a

netting member’s clearing fund deposit

requirement: (1) the funds adjustment

component, (2) the receive/deliver

settlement component, and (3) the repo

volatility component. The sum of the

three components is a member’s total

clearing fund deposit requirement. The

first component of the clearing fund, the

funds adjustment component, addresses

the potential risk that a member might

not pay a funds-only settlement amount

due to GSCC.3

Prior to this amendment, the funds

adjustment component was 125% of the

average of a member’s ten largest fundsonly settlement amounts measured on

an absolute basis during the most recent

seventy-five business days.4 Under the

proposed rule change, the funds

adjustment component is now 100% of

the average of the member’s twenty

largest funds-only settlement amounts

during the most recent seventy-five

business days.5 However, GSCC retains

the right to reinstitute at its discretion
Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Notices 34913

6 GSCC’s method of calculating the receive/

deliver/settlement component for Category 2 dealer

and Category 2 futures commission merchant

members is set forth below.

7 Gross margin is the product of GSCC’s margin

factors multiplied by the dollar value of a member’s

current outstanding net settlement position. GSCC’s

margin factors are designed to estimate daily

security price movements, are expressed as

percentages, and are determined by historical daily

price volatility. See Section 4 below for a

discussion of GSCC’s margin factors.

8Margin amounts on receive (long) and deliver

(short) positions are allowed to offset each other.

The extent to which an offset is allowed is

determined by product and the degree of similarity

in time remaining to maturity.

9This is done based on the assumption that those

trades will settle on the current day; thus,

calculating POMA in this manner will more

accurately reflect GSCC’s settlement exposure

during the current day.

10Supra note 4.

11As defined in GSCC’s rules, margin factors and

Category 2 margin factors are percentage, which

GSCC publishes from time to time, representing

variations weighted by maturity and product type.

These margin factors are used in GSCC Rule 4,

Section 2 to calculate the receive/deliver settlement

component of the required fund deposit for GSCC’s

members described above in Section 2.

12 GSCC’s margin factor schedule for zeros is

contained in GSCC’s filing. A copy of the filing is

available for copying and inspection in the

Commission’s Public Reference Room.

13These differences initially were based on the

differences in the amount of haircut factors between

zeros and other Treasury securities found in the

United States Treasury Department’s liquid capital

requirements for government securities brokers and

dealers.

all or a part of the twenty-five percent

cushion for a temporary period. For

example, GSCC might reinstitute this

cushion during volatile market

conditions.

2. Receive/Deliver Settlement

Component

The second component of the clearing

fund requirement is the receive/deliver

settlement component, which is based

on the size and nature of a member’s net

settlement positions. The receive/

deliver component for GSCC netting

members other than Category 2 dealer or

Category 2 future commission merchant

members 6 is the largest of the following

four calculations based on a member’s

gross margin:7

(1) Post-Offset Margin Amount

(‘‘POMA’’): The POMA essentially is a

member’s total gross margin taking into

account allowable offset percentages.8

(2) Average POMA: Prior to this

amendment, the average POMA

typically was based on a member’s ten

highest POMA amounts occurring in the

most recent seventy-five business days,

including the current day’s POMA

amount. Under the proposed rule

change, GSCC will now use an average

of the twenty largest POMA amounts

during the most recent seventy-five

business days.

(3) Adjusted POMA: The adjusted

POMA is calculated the same way as the

POMA with the exception of excluding

all trades that are scheduled to settle on

the current day.9

(4) Liquidation Amount: This is a

floor amount which previously equalled

fifty percent of the total gross margin on

all long and short positions without

offsets. The proposed rule change

lowers this amount to twenty-five

percent.

The proposed rule change also deletes

sections (2)(g)(i) and (2)(g)(ii) of Rule 4

regarding alternative formulas for the

receive/deliver settlement component of

the required clearing fund deposit.

GSCC rarely used the alternative

calculation under subsection (g)(i),

which disregards when-issued trades

that have been issued. Subsection (g)(ii)

has been made obsolete by the changes

approved in GSCC’s filing pertaining to

its repo netting service.10

With respect to Category 2 dealer or

Category 2 futures commission

merchant members, the receive/deliver

settlement component was the largest of

(1) the member’s total gross margin

without offsets, (2) the member’s total

gross margin without offsets and

excluding positions due to settle that

day, or (3) the average of the member’s

largest ten gross margin amounts over

the most recent seventy-five business

days. GSCC has revised the third

calculation to use the average of the

largest twenty gross margin amounts

over the most recent seventy-five

business days.

3. Repo Volatility Component

The third component of the clearing

fund requirement is the repo volatility

component. This component was

recently added to GSCC’s clearing fund

formula to cover securities’ settlement

exposure posed by repo activity. The

repo volatility component was the

greater of (1) the product of the repo

volatility factor and the market value of

the member’s repo transactions taking

into account allowable offset

percentages (‘‘repo offset amount’’) or

(2) the average of a member’s ten highest

repo offset amounts over the most recent

seventy-five business days. GSCC has

revised the second element of this

calculation to take the average of a

member’s twenty highest repo offset

amounts over the most recent seventyfive business days.

B. Providing GSCC With Discretion,

Within Parameters, To Lower Margin

Factors

GSCC’s Membership and Standards

Committee (‘‘Committee’’) reviews on

an ongoing basis the appropriateness of

its margin factors 11 by examining thirdparty price volatility data and GSCC’s

own short-term and long-term data

covering ninety-five and ninety-nine

percent of all price movements.

However, prior to this amendment,

GSCC was not allowed to lower any of

its margin factors without first obtaining

Commission approval through a formal

rule filing process.

GSCC has revised its rules to permit

the Committee to lower a margin factor

subject to a predefined limitation if the

Committee determines it appropriate

based on its review of historical price

volatility data and if the GSCC Board of

Directors approves such a lower margin

factor. With respect to GSCC netting

members other than Category 2 dealer

members and futures commission

merchant members, the predefined

limitation permits GSCC to reduce a

margin factor to a level that is no lower

than the higher of (1) the price volatility

for that remaining maturity category

taking into account ninety-five percent

of all movements during the last

calendar quarter or (2) the price

volatility for that remaining maturity

category taking into account ninety-five

percent of all movements during the last

calendar year. With respect to the

margin factors for Category 2 dealer

members and futures commission

merchant members, the limitation

provides that GSCC can reduce a margin

factor to a level that is no lower than the

higher of (1) the price volatility for that

remaining maturity category taking into

account ninety-nine percent of all

movements during the last calendar

quarter or (2) the price volatility for that

remaining maturity category taking into

account ninety-nine percent of all

movements during the last calendar

year.

C. Revision of Certain Margin Factors

for Zero-Coupon Government Securities

Other Than Treasury Bills (‘‘Zeros’’)

As noted above, GSCC’s margin

factors are based on an assessment of

historical daily price volatility data.

Zeros require different margin factors

than other Treasury securities because

zeros generally are subject to greater

price volatility than are other Treasury

securities with the same maturity.12 The

applicable margin percentages for zeros

range from percentages that are the same

as those for other Treasury securities

with respect to shorter-term maturities

to percentages that are two-and-a-half

times the percentages applicable to

other Treasury securities with respect to

long-term maturities.13
34914 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Notices

14At the conclusion of their recent inspection of

GSCC, Commission staff suggested that, in line with

what many other clearing agencies have in place,

GSCC should establish different classes of

surveillance for its members.

15The financial condition factors that will result

in Class 1 surveillance status include but are not

limited to (1) a member incurring recent significant

net losses, (2) a member’s required fund deposit

obligation representing a significant portion of its

net worth or net capital, and (3) a member

experiencing any condition that could materially

affect its financial or operational capacity.

16Under Rule 18 (Ceasing to Act for a Member),

GSCC may cease to act for a member upon notice

to such member for such reasons as: (1) the member

has failed to perform its obligations to GSCC or

materially violated any GSCC rule, procedure, or

agreement, (2) the member has failed to pay GSCC

any payment required, (3) the member no longer

meets its admissions or continuance standards, or

(4) the member has been responsible for fraudulent

or dishonest conduct. Under Rule 20 (Insolvency of

a Member), GSCC will cease to act for a member if

such member meets one of several tests of

insolvency (e.g., such member files a petition

seeking relief under the Bankruptcy Code).

17The clearance difference is the dollar difference

between GSCC’s system price for a settlement

obligation and the actual value at which the

settlement obligation was settled. The invoice

amount means all fees that a member owes GSCC.

18At the conclusion of their recent inspection of

GSCC, Commission staff suggested that GSCC

should either monitor the funds-only deficiency

call requirements or file with the Commission a

proposed rule change eliminating it.

Prior to this filing, the margin factors

for zeros in several categories were well

above the price volatility that GSCC’s

internal data show for such categories

under any measure. GSCC has lowered

the applicable margin factor for zeros in

the seven to ten years remaining

maturity category from 1.870 percent to

1.50 percent. GSCC has lowered the

applicable margin factor for the ten to

fifteen years remaining maturity

category from 2.813 percent to 1.813

percent. GSCC has lowered the

applicable margin factor for the fifteen

years and higher remaining maturity

category from 3.625 percent to 2.625

percent.

D. Introduction of a Tiered Surveillance

Status Mechanism

GSCC is placing members that pose a

heightened level of potential risk to

GSCC in various classes of surveillance

status instead of in one surveillance

status.14 GSCC’s rules required that a

member be placed on surveillance status

if one or more of a number of

circumstances is present. These

circumstances include, but are not

limited to, a significant reorganization

or change in control or management of

the member. In addition, GSCC could

place a member on surveillance status if

one or more of a number of factors, such

as a member experiencing a condition

that could materially affect its financial

or operational capability so as to

potentially increase GSCC’s exposure to

loss or liability, was present.

The proposed rule change establishes

three surveillance categories. A member

will be placed on Class 1 surveillance

status if one or more of a number of

factors pertaining to its financial

condition is present,15 if it has been

placed on surveillance status by another

self-regulatory organization, or if it has

been upgraded from Class 2 surveillance

status within the past three calendar

months. Class 1 surveillance status will

result in GSCC more thoroughly

monitoring a member’s financial

condition and activities and will

provide GSCC with discretion to require

a member to make more frequent

financial disclosures, including interim

and/or pro forma reports.

GSCC will place a netting member on

Class 2 surveillance status if one or

more of a number of factors is present.

These factors include but are not limited

to (1) any element of a member’s capital

position falls below the minimum

requirements, (2) a member has been

upgraded from Class 3 surveillance

status within the last three calendar

months, (3) a member temporarily

experiences an inability to meet its

securities settlement obligations to

GSCC in a timely fashion, and (4) a

member’s designated examining

authority or appropriate regulatory

agency has a pending action against or

investigation of the member that could

call into question the member’s ability

to meet its obligations to GSCC. In

addition to the consequences resulting

from placement on Class 1 surveillance

status, a member placed on Class 2

surveillance status will be required to

maintain a required fund deposit in

excess of the amount ordinarily

required, as permitted under GSCC’s

rules.

A GSCC netting member will be

placed on Class 3 surveillance status if

GSCC is considering taking action under

GSCC Rule 18 (Ceasing to Act for a

Member) or GSCC Rule 20 (Insolvency

of a Member).16 A GSCC netting member

on Class 3 surveillance status will be

placed on a final notification list. A

netting member will remain on such

final notification list until the

condition(s) that resulted in its

assignment to Class 3 surveillance status

have improved to an extent that GSCC

deems appropriate to support

reassignment of the member to Class 2

surveillance status.

E. Simplification of the Clearing Fund

Deficiency Call Mechanism

GSCC’s rules permit GSCC to make

clearing fund deficiency calls on a same

day basis under the following four

circumstances: (1) a member’s current

day’s required clearing fund deposit

exceeds by twenty-five percent the

value of its clearing fund collateral, (2)

a member’s current day’s required

clearing fund deposit level exceeds by

more than $250,000 the value of its

clearing fund collateral, (3) a member is

on surveillance status and its required

clearing fund deposit as of the current

day exceeds the value of its clearing

fund collateral, or (4) a member’s

‘‘clearing fund funds-only settlement

amount,’’ which excludes clearance

difference, invoice amount, and other

miscellaneous amounts, for the current

day exceeds by more than twenty-five

percent its average daily clearing fund

funds-only settlement amount over the

most recent twenty business days.17

The fourth circumstance, a twentyfive percent jump in the member’s

clearing fund funds-only settlement

amount, has rarely been used and is

now eliminated.18 A clearing fund

deficiency call that is based on a

member being on surveillance status can

now be invoked only if a member is on

Class 2 or Class 3 surveillance status.

Finally, because GSCC has the authority

to make clearing fund deficiency calls

on a same day basis, GSCC’s rule

permitting GSCC automatically to make

a clearing fund deficiency call at the

beginning of each month has been

deleted.

F. Elimination of the Noon Deadline for

Satisfaction of Clearing Fund Deficiency

Calls

By 9:00 a.m., GSCC issues by

telephone calls followed by telefax

notices calls for additional clearing fund

deposits by 9:00 a.m. The exact time

that each telephone call is made is

recorded. Prior to this filing, a member

had until the later of two hours after the

receipt of a clearing fund deficiency call

or noon to satisfy the call.

GSCC’s long term goal is to develop

an automated mechanism pursuant to

which it will be in receipt of clearing

fund collateral by the time that the

securities Fedwire opens in the

morning, which is currently at 8:30 a.m.

As an interim step toward achieving this

goal, GSCC is eliminating the noon

alternative deadline for satisfaction of

clearing fund deficiency call and is

requiring a member to satisfy a

deficiency call within two hours after it

is received. The practical effect of this

change is that, in the ordinary course, a

member will have to satisfy a deficiency

call by approximately 11:00 a.m.
Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Notices 34915

19 15 U.S.C. § 78q–1(b)(3)(F) (1988). 20 17 CFR 200.30–3(a)(12)(1995).

However, a clearing fund deficiency call

does not need to be satisfied before

10:00 a.m. regardless of when the call

actually is made.

II. Discussion

Section 17A(b)(3)(F) 19 of the Act

requires that the rules of a clearing

agency be designed to assure the

safeguarding of securities and funds

which are in the custody or control of

the clearing agency or for which it is

responsible. The Commission believes

GSCC’s proposed rule change is

consistent with the requirements of

Section 17A(b)(3)(F) because the

proposal, by enhancing and revising

GSCC’s risk management mechanism,

should help ensure that the mechanism

accurately reflects GSCC’s risk and

provides CSCC appropriate risk

protection while increasing members’

liquidity and minimizing the

operational burdens on GSCC netting

members.

Specifically, based upon its

assessment of historical data, GSCC has

found that certain components of its

clearing fund formula are overly

conservative. Therefore, GSCC is

revising the Average POMA calculation

of the receive/deliver component, the

funds adjustment component, and the

repo volatility component of its clearing

fund formula to utilize the twenty

largest, rather than the ten largest,

POMA amounts, funds-only settlement

amounts, and repo offset amounts

during the most recent seventy-five

business days. GSCC also is modifying

the funds adjustment component of its

clearing fund formula to eliminate the

twenty-five percent cushion in the

component’s calculation. Because GSCC

will retain the right to reinstitute at its

discretion all or part of the twenty-five

percent cushion for a temporary period,

GSCC will be able to react quickly to

changing market conditions. GSCC also

is lowering the liquidation amount of

the receive/deliver component of its

clearing fund requirement from fifty

percent to twenty-five percent of the

total gross margin on all long and short

positions without offsets. GSCC believes

that, based on historical performance,

the twenty-five percent floor should

provide sufficient protection to GSCC

from the risk that its margin offsets will

not reflect actual market conditions

during a liquidation period while

enabling members that engage in

activity on a fully hedged basis to

receive the benefits afforded by being

fully hedged. Because these

modifications are based upon GSCC’s

assessment of historical data, the

changes should ensure appropriate risk

protection for GSCC, while providing

members with increased liquidity.

GSCC also is revising its rules to

permit its Membership and Standards

Committee to lower a margin factor

subject to a predefined limitation if the

Committee determines it appropriate

based on its review of historical price

volatility and if GSCC’s Board of

Directors approves such a lower margin

factor. The Committee reviews the

appropriateness of its margin factors on

an ongoing basis. Thus, the proposed

rule change should provide GSCC with

the flexibility to lower margin factors

more readily for the benefit of its

members without compromising GSCC’s

risk protection. The limitation on the

Committee’s ability to lower margins

(95% of all movements during the last

quarter or year) should ensure that

GSCC will always have a sufficient level

of protection. GSCC also is lowering

certain margin factors for zeros to reflect

more accurately GSCC’s needs based

upon GSCC’s data at the ninety-nine

percent level over the past two years.

Accordingly, members will not be

subject to margin requirements that

exceed GSCC’s current needs.

In addition, GSCC is introducing a

tiered surveillance status mechanism.

The new surveillance mechanism

should enable GSCC to monitor more

effectively the potential risk posed by its

members and to react more swiftly to

changes in a member’s condition.

Finally, as a step toward GSCC’s goal to

develop an automated mechanism by

which GSCC will receive clearing fund

collateral by the time that the securities

Fedwire opens, GSCC is eliminating the

noon alternative deadline for

satisfaction of a clearing fund deficiency

call and to require a member to satisfy

a deficiency call within two hours after

it is received. By increasing the

efficiency of GSCC risk management

processes, the tiered surveillance

mechanism and the modifications to

GSCC’s clearing fund deficiency call

rules should help GSCC fulfill its

obligation to safeguard securities and

funds which are in its custody or

control or for which it is responsible.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and in

particular Section 17A of the Act and

the rules and regulations thereunder.

It is Therefore ordered, pursuant to

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

proposed rule change (File No. SR–

GSCC–96–01) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16922 Filed 7–2–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37370; File No. SR–NASD–

96–23]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by National

Association of Securities Dealers, Inc.

Relating to Small Order Execution

System Tier Size Classifications

June 26, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on June 17, 1996, the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD. 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 NASD is submitting this filing to

effectuate The Nasdaq Stock Market,

Inc.’s (‘‘Nasdaq’’) periodic

reclassification of Nasdaq National

Market (‘‘NNM’’) securities into

appropriate tier sizes for purposes of

determining the maximum size order for

a particular security eligible for

execution through Nasdaq’s Small Order

Execution System (‘‘SOES’’) and the

minimum quote size requirements for

Nasdaq market makers in NNM

securities. Specifically, under the

proposal, 728 NNM securities will be

reclassified into a different SOES tier

size effective July 1, 1996. Since the

NASD’s proposal is an interpretation of

existing NASD rules, there are no

language changes.

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

NASD 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