33566 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices

6 17 CFR 200.30–3(a)(12) (1995).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 37133

(April 19, 1996), 61 FR 18636.

4 In Amendment No. 1, the Exchange proposes to:

(1) permit FLEX Equity Options trading on any

options-eligible security, regardless of whether

Non-FLEX Equity Options overlie that security and

trade on the Exchange; and (2) provide for a

guaranteed minimum right of participation of at

least 25% of the trade for Submitting Members

indicating an intent to cross and responding to the

Request for Quotes with a price better than the

BBO. See Letter from Michael Pierson, Senior

Attorney, Market Regulation, PSE, to John Ayanian,

Attorney, Office of Market Supervision (‘‘OMS’’),

Division of Market Regulation (‘‘Market

Regulation’’), Commission, dated April 26, 1996

(‘‘Amendment No. 1’’).

5 In Amendment No. 2, the Exchange makes

several non-substantive corrections to PSE Rule

8.103(e)(3), as described more fully herein. See

Letter from Michael Pierson, Senior Attorney,

Market Regulation, PSE, to John Ayanian, Attorney,

OMS, Market Regulation, Commission, dated May

17, 1996 (‘‘Amendment No. 2’’).

6 In Amendment No. 3, the Exchange proposes to

amend PSE Rule 8.101(a) to allow FLEX

transactions during normal Exchange options

trading hours on any business day; provided

however, that the Board of Governors, in its

discretion at any time, may determine to narrow or

otherwise restrict the time set for FLEX options

trading. See Letter from Michael Pierson, Senior

Attorney, Market Regulation, PSE, to John Ayanian,

Attorney, OMS, Market Regulation, Commission,

dated May 23, 1996 (‘‘Amendment No. 3’’).

7See Securities Exchange Act Release No. 36841

(February 14, 1996), 61 FR 6666 (February 21,

1996).

8By contrast, under Rules 8.100 et seq., ‘‘FLEX

Appointed Market Makers’’ are those individuals

who have been designated by the Exchange to trade

FLEX options on a specific underlying index

(‘‘FLEX Index Option’’) that has been approved by

the Commission for FLEX Options trading. See PSE

Rules 8.100(a)(1) and 8.109(a).

9With respect to FLEX Index Options, two FLEX

Appointed Market Makers must be approved to

trade FLEX Options on a given index before the

Exchange may list FLEX Options on that index.

FLEX Appointed Market Makers must also meet the

capital requirements of Rule 8.114 (i.e., they must

maintain $1 million net liquidating equity and/or

$1 million net capital (as defined by SEC Rule

15c3–1 under the Act)), and they must also meet the

account equity requirements of Rule 8.113(a) (i.e.,

the net liquidating equity maintained in their

individual or joint accounts must be at least

$100,000).

10See PSE Rule 8.115(a).

11See PSE Rule 8.109(a).

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

Room, 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 NSCC. All submissions should

refer to File No. SR–NSCC–96–08 and

should be submitted by July 18, 1996.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16451 Filed 6–26–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37339; File No. SR–PSE–

96–11]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 1, 2, and 3 to the Proposed Rule

Change by the Pacific Stock Exchange,

Incorporated, Relating to FLEX Equity

Options

June 19, 1996.

I. Introduction

On April 5, 1996, the Pacific Stock

Exchange Incorporated (‘‘PSE’’ or

‘‘Exchange’’) filed a proposed rule

change with 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 to make certain revisions

to Exchange rules relating to FLEX

Equity Options.

Notice of the proposal was published

for comment and appeared in the

Federal Register on April 26, 1996.3

The Exchange filed Amendment Nos.

1,4 2,5 and 36 to the proposal on April

27, 1996, May 20, 1996, and May 28,

1996, respectively. No comment letters

were received on the proposed rule

change. This order approves the

Exchange’s proposal, as amended.

II. Description of the Proposal

On February 14, 1996, the

Commission approved an Exchange

proposal to list and trade FLEX Equity

Options.7 FLEX Equity Options permit

market participants to designate certain

contract terms for options of such

securities, including: exercise price;

exercise style (i.e., American, European

or capped); expiration date; and option

type (i.e., put, call or spread).

PSE Rule 8.109(a) currently provides

for the selection of ‘‘FLEX Qualified

Market Makers,’’ i.e., market makers

whom the Exchange deems to be

qualified to trade FLEX Equity Options

based on the following factors: (1) the

preference of the registrants; (2) the

maintenance and enhancement of

competition among market makers; and

(3) the assurance that the market maker

will have adequate financial resources.8

In addition, pursuant to Rule 8.115(a),

FLEX Qualified Market Makers may not

effect any transactions in FLEX Equity

Options unless one or more letter(s) of

guarantee has been issued by a clearing

member and filed with the Exchange

pursuant to Rule 6.36(a). In connection

with these letters of guarantee, a

clearing member must accept financial

responsibility for all FLEX transactions

made by such market makers.

PSE Rule 8.109(a) currently provides

that the Exchange shall appoint five or

more FLEX Qualified Market Makers to

each FLEX Equity Option prior to its

listing.9 The Exchange proposes to

reduce the minimum number of FLEX

Qualified Market Makers required under

Rule 8.109(a) from five to three. The

Exchange is proposing this change in

order to enhance its ability to trade

FLEX Equity Options on the Exchange.

The Exchange believes that no undue

financial risk to the Exchange would

result from this change because each

transaction of FLEX Qualified Market

Makers will be backed by a clearing

member, which will accept financial

responsibility for all FLEX transactions

made by such market makers pursuant

to a letter of guarantee.10 The Exchange

also believes that three FLEX Qualified

Market Makers will be a sufficient

number of traders to provide quotations

in response to requests for quotes

because the Exchange expects the FLEX

Equity Options will be traded in the

same trading crowd as Non-FLEX

Options on the same underlying

securities. In this regard, the Exchange

notes that under the current rules, two

FLEX Appointed Market Makers may be

designated in lieu of five FLEX

Qualified Market Makers to trade FLEX

Equity Options.11
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices 33567

12See Securities Exchange Act Release Nos.

37053 (March 29, 1996), 61 FR 15537 (April 8,

1996) (File No. SR–Amex–95–57), and 37048

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

96–08). See also File No. SR–CBOE–96–28

(proposing the same amendment).

13See Amendment No. 1, supra note 4.

14See Amendment No. 1, supra note 4; see also

Amendment No. 2, supra note 5.

15See Amendment No. 1, supra note 4.

16See Amendment No. 3, supra note 6.

17The Commission notes that FLEX Qualified

Market Makers are still required under Exchange

rules to obtain a specific Letter of Guarantee from

a clearing member.

18See PSE Rule 8.109(b).

19 15 U.S.C. 78k(a).

20 17 CFR 240.11a1–1(T).

Under PSE Rule 8.102(f)(1), only

those qualified and approved

underlying securities that are the subject

of Non-FLEX Equity Option trading on

the Exchange may serve as underlying

securities of FLEX Equity Options

traded on the Exchange. In this respect,

Rule 8.102(f)(1) differs from the rules

proposed by the American Stock

Exchange (‘‘Amex’’) and the

Philadelphia Stock Exchange (‘‘Phlx’’)

in respect of FLEX Equity Option

trading on those exchanges.12 Proposed

Amex Rule 903G(c) and proposed Phlx

Rule 1069A(a)(1)(B) are substantively

identical in that any options-eligible

security, regardless of whether the

security is the subject of Non-FLEX

Equity Options traded on the exchange,

may underlie a FLEX Equity Option.

The Exchange proposes to amend PSE

Rule 8.102(f)(1) to conform to similar

rules proposed by the exchanges

mentioned above, to permit FLEX

Equity Options trading on any optionseligible security regardless of whether

Non-FLEX Equity Options overlie that

security and trade on the Exchange.13

Additionally, the Exchange proposes

to amend PSE Rule 8.103(e)(3) in order

to provide a minimum right of

participation to Exchange members who

initiate Requests for Quotes (‘‘RFQ’’) in

respect of FLEX Equity Options and

indicate an intention to cross or act as

principal on the trade.14 The proposed

rule change will provide that a member

who submits a Request for Quotes in

respect of a FLEX Equity Option and

indicates an intention to cross or act as

principal on the trade, and who

improves the BBO during the BBO

Improvement Interval, has a priority

right to execute the contra side of the

trade for at least twenty-five percent

(25%) of the trade.15

Finally, the Exchange proposes to

amend PSE Rule 8.101(a) to allow FLEX

transaction during normal Exchange

options trading hours on any business

day; provided however, that the Board

of Governors, in its discretion at any

time, may determine to narrow or

otherwise restrict the time set for FLEX

options trading. The Exchange believes

that this proposed rule change is

consistent with the other options

exchanges FLEX Options rules.16

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, to foster

cooperation and coordination with

persons engaged in facilitating

transactions in securities, and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange. Moreover, the Commission

believes that the proposed rule change

is reasonable in that it promotes fair

competition among exchanges, and will

serve to protect investors and the public

interest in accordance with Sections

6(b)(5) and 11A of the Act.

The Commission believes that the

Exchange’s proposal to reduce the

minimum number of FLEX Qualified

Market Makers required under Rule

8.109(a) from five to three is consistent

with the Act. The Commission notes

that the Exchange’s rules currently

provide a framework that encourages

FLEX Qualified Market-Makers,

specifically guaranteed by a clearing

member,17 to actively make responsive

quotes to provide liquidity in FLEX

Equity Options. A FLEX Post Official

may call upon a FLEX Qualified MarketMaker to make responsive quotes in the

interests of a fair and orderly market.18

Moreover, a FLEX Post Official must

call upon a FLEX Qualified MarketMaker to make a quote in response to a

Request for Quotes if no quotes are

made in response to the RFQ. Based on

these requirements, the Commission

agrees with the PSE that a minimum of

three FLEX Qualified Market-Makers

should be sufficient to provide

quotations in response to a request for

quotes and generally accommodate

FLEX Equity Options trading.

The Commission also believes that the

proposed minimum guaranteed right of

participation of at least 25% of the trade

to Exchange members who initiate

Requests for Quotes in respect of FLEX

Equity Options, (improves the BBO),

and indicate an intention to cross or act

as principal on the trade, is consistent

with Act. In addition, under PSE rules,

such transactions must, in all cases, be

in compliance with the priority, parity,

and precedence requirements of Section

11(a) of the Act,19 and Rule 11a1–1(T) 20

promulgated thereunder. These

provisions set forth, among other things,

the conditions in which members must

yield priority to public customers’ bids

and offers at the same price.

The Commission believes that the

Exchange’s proposal to permit FLEX

Equity Options trading on any optionseligible security regardless of whether

Non-FLEX Equity Options overlie that

security and trade on the Exchange is

reasonable, in that it promotes fair

competition among exchanges,

consistent with Section 11A of the Act,

and will perfect the mechanism of a free

and open market and serve to protect

investors and the public interest in

accordance with Section 6(b)(5) of the

Act.

As originally approved, the PSE

determined to restrict the trading of

FLEX Equity Options to those options

which were traded on the Exchange as

Non-FLEX Equity Options. The PSE

rationale for this restriction was

reasonable and the Commission

therefore approved the restriction as

consistent with the Act. The

Commission believes, however, that the

restriction is not mandated by the Act

and that it is reasonable for the PSE to

conform its rules to those proposed by

other competing markets seeking to

establish FLEX Equity Options trading.

The Commission notes that PSE FLEX

Equity Options must still meet the

eligibility requirements and criteria set

forth in PSE Rule 3.6. The change

should also promote fair competition

among exchange markets trading FLEX

Equity Options by allowing PSE to trade

and compete for FLEX Equity Options

order flow on more options eligible

securities.

Finally, the Commission believes it is

consistent with Section 6(b)(5) of the

Act for the PSE to establish the same

trading hours for FLEX Options that

currently exist for PSE’s normal options

trading hours. The Commission also

believes that because of the nature of the

FLEX market, in contrast to the NonFLEX market, it is reasonable to permit

the Board, in its discretion, to narrow or

restrict trading hours for FLEX Options,

so long as such trading hours occur

within the normal options trading hours

of the Exchange.

The Commission finds good cause for

approving Amendment No. 1 to the

proposed rule change prior to the
33568 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices

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

22 17 CFR 200.30–3(a)(12).

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

2Amendment No. 1 adds a provision to proposed

PSE Rule 6.82, Commentary .05 stating that no

Market Maker Cooperatives may participate as

LMMs in the pilot program. Amendment No. 1 also

replaces a PSE Rule 6.82, Commentary .05 reference

to ‘‘April l, 1997’’ as the proposed expiration date

for the pilot program, with a reference to ‘‘[Date]’’.

Letter from Michael D. Pierson, Senior Attorney,

Market Regulation, PSE, to Michael Walinskas,

Special Counsel, Office of Market Supervision

(‘‘OMS’’), Division of Market Regulation

(‘‘Division’’), Commission, dated June 4, 1996

(‘‘Amendment No. 1’’).

thirtieth day after the date of

publication of notice thereof in the

Federal Register. Specifically,

Amendment No. 1 proposes a minimum

guaranteed right of participation of at

least 25% of the trade to Exchange

members who initiate Request for

Quotes in respect of FLEX Equity

Options, as described above. The

Commission believes that the

amendment is similar to existing

provisions in the Exchange rules

regarding FLEX Index Options and

raises no new regulatory issues.

Furthermore, Amendment No. 1

proposes to conform the PSE’s rules

concerning the selection of underlying

securities for FLEX Equity Option

trading, as described above, to the

proposed rules of other exchanges on

the same subject, and raises no new

regulatory issues. Additionally, the

Amex and Phlx proposals were subject

to a full notice and comment period,

and no comments were received.

Accordingly, the Commission believes,

consistent with Section 6(b)(5) of the

Act, that good cause exists, to approve

Amendment No. 1 to the proposed rule

change, on an accelerated basis.

The Commission finds good cause for

approving Amendment No. 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice thereof in the

Federal Register. Specifically,

Amendment No. 2 proposes certain nonsubstantive amendments to PSE Rule

8.103(e)(3) to clearly distinguish which

particular guaranteed minimum right of

participation is available to a FLEX

Equity Option and which is available to

FLEX Index Option. The Commission

believes that Amendment No. 2 is a

non-substantive amendment and raises

no new regulatory issues. Moreover, the

Commission believes that the

amendment clarifies and strengthens the

proposed rule change and the

Exchange’s FLEX Option rules,

generally.

Accordingly, the Commission

believes, consistent with Section 6(b)(5)

of the Act, that good cause exists, to

approve Amendment No. 2 to the

proposed rule change, on an accelerated

basis.

The Commission finds good cause for

approving Amendment No. 3 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice thereof in the

Federal Register. Specifically, the

Exchange proposes to amend PSE Rule

8.101(a) to allow FLEX transactions

during normal Exchange options trading

hours on any business day; provided

however, that the Board of Governors, in

its discretion at any time, may, with

normal trading hours, determine to

narrow or otherwise restrict the time set

for FLEX options trading. The

Commission believes that the

Exchange’s proposal to allow FLEX

transactions during normal Exchange

options trading hours on any business

day, as described above, is similar to

that provided under other options

exchanges’ rules regarding FLEX trading

hours and raises no new regulatory

issues.

Accordingly, the Commission

believes, consistent with Section 6(b)(5)

of the Act, that good cause exists, to

approve Amendment No. 3 to the

proposed rule change, on an accelerated

basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

1, 2, and 3 to the proposed rule change.

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 will also be available for

inspection and copying at the principal

office of PSE. All submissions should

refer to File No. SR–PSE–96–11 and

should be submitted by July 18, 1996.

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–PSE–

96–11), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.2

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16366 Filed 6–26–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37335; File No. SR–PSE–

96–09]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Pacific Stock Exchange

Incorporated Relating to the Options

Book Pilot Program

June 19, 1996.

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

Securities Exchange Act of 1934

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

April 1, 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 Exchange filed

Amendment No. 1 to the proposed rule

change on June 4, 1996.2 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 establish a pilot

program under which its Lead Market

Makers (‘‘LMMs’’) would be able to

assume operational responsibility for

the options public limit order book

(‘‘Book’’) in certain issues.

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.