35282 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

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

2 15 U.S.C. 78q–1(a) (1988).

3Letter from Robert J. Woldow, Secretary and

General Counsel, MBS, to Jerry Carpenter, Assistant

Director, Division of Market Regulation,

Commission (June 6, 1996).

4 15 U.S.C. 78q–1(b) and 78s(a)(1) (1988).

5 17 CFR 240.17Ab2–1(c) (1994).

6Securities Exchange Act Release No. 24046

(February 2, 1987), 52 FR 4218.

7Securities Exchange Act Release Nos. 25957

(August 2, 1988), 53 FR 29537; 27079 (July 31,

1989), 54 FR 32412; 28492 (September 28, 1990), 55

FR 41148; 29571 (September 27, 1991), 56 FR

50602; 31750 (January 21, 1993), 58 FR 6424; 33348

(December 15, 1993), 58 FR 68183; and 35132

(December 21, 1994), 59 FR 67743.

8Securities Exchange Act Release No. 36540

(November 30, 1995) 60 FR 63089 [File No. MBS–

95–09] (order granting accelerated approval of

proposed rule change).

9Securities Exchange Act Release No. 37205 (May

13, 1996), 989 61 FR 24898 [File No. MBS–95–08]

(order approving proposed rule change).

10 15 U.S.C. 78q-1(b) (1988).

11 17 CFR 200.30–3(a)(50)(i) (1994).

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the Exchange makes

several clarifications to the proposed pilot. See

Letter from Michael L. Meyer, Attorney, Schiff

Hardin & Waite, to John Ayanian, Attorney, Office

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

Regulation (‘‘Market Regulations’’), Commission,

dated June 26, 1996 (‘‘Amendment No. 1’’).

4 In Amendment No. 2, the Exchange clarifies that

it intends to turn on the system each day a few

minutes prior to the 3:00 p.m. central time close of

trading in the primary market, in order to be certain

that the system is operating by the time the primary

market closes. Letter from Michael L. Meyer,

Attorney, Schiff Hardin & Waite, to John Ayanian,

Attorney, OMS, Market Regulation, Commission,

dated June 26, 1996 (‘‘Amendment No. 2’’).

Section 19(a) 1 of the Securities

Exchange Act of 1934 (‘‘Act’’) for

extension of its temporary registration

as a clearing agency under Section 17A 2

of the Act for a period of one year.3 The

Commission is publishing this notice of

filing of request and order to solicit

comments from interested persons and

to grant MBS’s request for an extension

of its temporary registration as a

clearing agency through June 30, 1997.

On February 2, 1987, the Commission

granted MBS’s application for

registration as a clearing agency

pursuant to Sections 17A(b) and 19(a)(1)

of the Act 4 and Rule 17Ab2-1(c) 5

thereunder on a temporary basis for a

period of eighteen months.6

Subsequently, the Commission has

issued orders that extended MBS’s

temporary registration as a clearing

agency. The last extension order

extended MBS’s temporary registration

through June 30, 1996.7

As discussed in detail in the original

order granting MBS’s registration, one of

the primary reasons for MBS’s

registration was to enable it to provide

for the safe and efficient clearance and

settlement of transactions in mortgagebacked securities. Since the original

temporary registration order, MBS has

implemented several improvements to

its operating and financial standards

and continues to work towards

enhancing the safety and efficiency of

its operations. For example, over he past

year the Commission granted permanent

approval of MBS’s Electronic Pool

Notification (‘‘EPN’’) service, an

electronic, post-trade communication

system for mortgage-backed securities.8

In addition, MBS modified its

procedures relating to settlement

balance order (‘‘SBO’’) settlement to

help prevent participants from

influencing the amount of their cash

adjustments through submissions of

internal trades.9

MBS has functioned effectively as a

registered clearing agency for over nine

years. Accordingly, in light of MBS’s

past performance and the need for MBS

to provide continuity of service to its

participants, the Commission believes

that, pursuant to Section 17A(b)(2) of

the Act, it is necessary and appropriate

in the public interest and for the prompt

and accurate clearance and settlement of

securities transactions to approve MBS’s

request to extend its temporary

registration through June 30, 1997.

During this temporary registration

period, the Commission expects MBS to

file a request for permanent registration

as a clearing agency. Any comments

received during MBS’s temporary

registration will be considered in

conjunction with the Commission’s

consideration of whether to grant MBS

permanent registration as a clearing

agency under Section 17A(b) of the

Act.10

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 request for extension

of temporary registration as a clearing

agency that are filed with the

Commission, and all written

communications relating to the

requested extension between the

Commission and any person, other than

those that may be withheld from the

public in accordance with 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 MBS. All

submissions should refer to File No.

600–22.

Conclusion

On the basis of the foregoing, the

Commission finds that MBS’s request

for extension of temporary registration

as a clearing agency is consistent with

the Act and in particular with Section

17A of the Act.

It is therefore ordered, that MBS’s

temporary registration as a clearing

agency (File No. 600–22) be, and hereby

is, extended through June 30, 1997.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–17145 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37380; File No. SR–CBOE–

96–37]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change, as Amended, by Chicago

Board Options Exchange, Incorporated

Relating to a Pilot Operation of a

System for Monitoring News

Announcements Made After the Close

of Trading in the Primary Market for

the Underlying Stock

June 28, 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 June 17,

1996, the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’ 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 CBOE. The Exchange

submitted to the Commission

Amendment Nos. 1 3 and 2 4 to the

proposed rule change on June 26, 1996.

The Commission is publishing this

notice, as amended, 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 Exchange proposes to institute a

pilot test of a system that, shortly before
Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices 35283

5A PAR workstation is an automated, computerbased workstation that provides users with the

ability to execute trades, transmit trade reports, and

enter other data and commands at the touch of a

screen, thereby eliminating the delay inherent in a

keyboard-based system.

6The Commission expects that if there is enough

time before the close of options trading, and the

news is not significant or if there has been time for

prices to have been adjusted, the Floor Officials will

resume RAES operations for the subject options

class.

7The Exchange will issue a circular to its

membership outlining the terms of the pilot and the

classes that will be included in it. Telephone

conversation between Michael L. Meyer, Schiff

Hardin & Waite, and Sharon Lawson and John

Ayanian, OMS, Market Regulation, Commission, on

June 25, 1996.

the close of trading each day, will

monitor news announcements

pertaining to underlying securities, and

will automatically suspend the

Exchange’s automatic execution system

in respect of options on those securities

that are the subject of such

announcements. The text of the

proposed rule change is available at the

Office of the Secretary, CBOE and at the

Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

CBOE 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 CBOE 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

The Exchange proposes to establish a

limited pilot test of an automated

system that would monitor news wires

received at the Exchange shortly before

the close of trading each day, and would

suspend the Exchange’s automatic order

execution system in a class of equity

options whenever there is a news

announcement pertaining to the security

underlying options of that class.

Options on equity securities are

currently traded on CBOE until 3:10

p.m. central time on each trading day,

which is 10 minutes after the close of

trading on the primary market’s for

underlying securities. The Exchange

notes that this additional period of

options trading after the underlying

market has closed is provided to

accommodate orders to buy or sell

options at prices that reflect the closing

prices of the underlying securities. The

Exchange has experienced difficulties

when issuers of underlying stocks make

significant news announcements after

the 3:00 p.m. central time close of

trading in the underlying stocks, but

before options cease trading at 3:10 p.m.

central time. The Exchange believes that

because these issuers are often unaware

of or indifferent to the fact that options

trading on their stocks continues for 10

minutes after the stocks cease to trade,

they do not wait until 3:10 p.m. central

time to make these announcements.

According to the Exchange, it is not

uncommon for significant news

announcements to be made between

3:00 p.m. and 3:10 p.m., when options

are still traded primary markets. These

announcements often require an

immediate adjustment to the prices of

series of options on the stock in

question, to take into account the likely

affect of the announcement on the

market price of the underlying stock,

even through the stock is not then

trading in its primary market. The

Exchange believes that until such option

prices are adjusted, the Exchange’s retail

automatic execution system (‘‘RAES’’)

may be providing automatic executions

of customer orders at prices that do not

reflect the current state of the market.

Currently, CBOE addresses this

occurrence by positioning two Floor

Officials in close communication with

newsreaders in the Exchange’s Control

Room beginning shortly before 3:00 p.m.

central time. If a significant news

announcement is made, these two Floor

Officials may exercise their authority

under Exchange Rule 6.6(a) to declare a

‘‘fast’’ market, in the interest of

maintaining a fair and orderly market,

in the class or classes of options affected

by the news announcement, and then to

suspend RAES in respect of those

classes as authorized under Rule

6.6(b)(v). The Exchange believes that

there are at least two difficulties with

this approach. First, it depends on the

continuous availability of two Floor

Officials at a critical time prior to the

close of options trading when they

might be needed to attend to other

matters. Second, even if two Floor

Officials are available, it still can take 30

seconds or more after a news

announcement is received before the

Floor Officials are able to suspend

RAES, during which time a considerable

number of orders may be automatically

executed at inappropriate prices.

In response to these problems, CBOE

developed a system that can monitor

news wires during the 10 minutes

following the close of trading in primary

stock markets while options are still

traded, and automatically suspend

RAES in all series of options on those

stocks that are the subject of news

announcements. This permits RAES to

be turned off at virtually the same time

as the news item appears on the wire.

According to the Exchange, when RAES

is turned off, customer orders that might

otherwise have been automatically

executed will instead be automatically

routed to the Public Automated Routing

System (‘‘PAR’’) workstation 5 at the

appropriate trading post, where they can

be immediately executed at the then

current price almost as quickly as if they

had received automatic execution in

RAES.

The Exchange notes that the

automatic news monitor cannot

determine the significance of a

particular announcement, and will

automatically suspend RAES in a class

of options whenever there is any news

announcement pertaining to its

underlying stock. Because significant

news announcements, however, tend to

be concentrated during the period

immediately following the close of

trading in primary stock markets, CBOE

intends to operate its new system only

during the time from just before 3:00

p.m. central time to the close of options

trading on CBOE at 3:10 p.m. central

time, when it is not expected that there

will be very many ‘‘false alarm’’

announcements. Additionally, two

Floor Officials will promptly be

informed each time RAES is

automatically turned off in response to

a news announcement, and if enough

time remains before the 3:10 p.m.

central time close of options trading, the

Floor Officials should be able to

evaluate the significance of the

announcement, and if it is not

significant or if there has been time for

prices to have been adjusted, to turn on

RAES for the remainder of the trading

session.6

In order to test the effectiveness of

this automatic system in actual market

conditions, CBOE proposes to

implement it in respect of various

classes of options during a 30-day pilot

period.7 The Exchange believes that this

will enable it to evaluate how quickly

the automatic system if able to respond

to news announcements, how many, if

any, false alarms are received, how

quickly customer orders are able to be

rerouted and executed over the PAR

system, and whether Floor Officials are

able to make an evaluation of the

situation and restore the operation of

RAES in the limited time available after

there has been an automatic suspension

of RAES. If after the 30-day pilot period
35284 Federal Register / Vol. 61, No. 130 / Friday, July 5, 1996 / Notices

8See Amendment No. 2, supra note 4.

9The pilot expires at 3:10 p.m. central time on

July 26, 1996. Any request for an extension of the

pilot period or request for permanent approval of

the system would have to be submitted to the

Commission pursuant to Section 19(b)(2) of the Act.

10 17 CFR 200.30–3(a)(12).

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

2See Securities Exchange Act Release No. 33377

(December 23, 1993), 58 FR 69419 (December 30,

1993) (‘‘Interim SOES Rules Approval Order’’).

3See Securities Exchange Act Release No. 36795

(January 31, 1996), 61 FR 4504 (February 6, 1996)

(‘‘Interim SOES Rules Extension Order’’).

CBOE desires to implement the

automatic system on a permanent basis

for all classes of equity options, CBOE

will make a subsequent filing to this

effect under Section 19(b)(2) of the Act.

CBOE believes that the

implementation of a pilot test of a

system that, if successful, would permit

the continued availability of CBOE’s

automatic execution system for public

customer orders during the period when

options are traded after the close of

trading in the primary markets for

underlying stocks and would assure that

these orders are executed at fair prices

in the event of significant news

announcements, is in the interest of

promoting just and equitable principles

of trade and protecting investors and the

public interest, and thus is consistent

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

the Act.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

CBOE does not believe that the

proposed rule change will impose any

burden on competition.

C. Self-Regulatory Organization’s

Statement on the Proposed Rule Change

Received from Members, Participants or

Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Exchange has requested that the

proposed rule change be given

accelerated effectiveness pursuant to

Section 19(b)(2) of the Act. 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, and, in

particular the requirements of Section

6(b)(5) thereunder.

The Commission believes that the

Exchange’s proposal provides a

reasonable method of testing a system to

address pending news announcements

after the close of trading in the primary

market for the underlying securities.8

The Commission notes that the test will

be limited to news announcements after

the close of trading in the primary

market for the underlying stock, while

continuing to (1) ensure prompt

execution of customer orders in the

particular class subject to a news

announcement by rerouting such orders

to a PAR workstation and (2) make

RAES executions available in classes of

options not subject to news

announcements during the time when

options continue to be traded after the

close of trading in the primary market

for underlying stocks.

As noted, the CBOE intends to

evaluate the pilot in several respects to

determine if it wants to implement the

system on a permanent basis.9 The

CBOE will provide the Commission

with the analysis of the pilot.

The Commission finds good cause for

approving this proposed rule change, as

amended, on an accelerated basis prior

to the thirtieth day after the date of

publication of notice thereof in the

Federal Register. Specifically, the

Commission believes that accelerated

approval of the proposal, as amended, is

appropriate because it is to be

implemented for a limited 30-day

period which will provide CBOE with

the time to test the effectiveness of the

system.

Accordingly, the Commission believes

that it is consistent with Section 6(b)(5)

of the Act to approve the proposed rule

change, as amended, on an accelerated

basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing and

Amendment Nos. 1 and 2. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, N.W., 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 in

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to File No. SR–CBOE–96–37 and

should be submitted by July 26, 1996.

V. Conclusion

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–

CBOE–96–37), as amended, is hereby

approved for a 30-day pilot period, on

an accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.10

Jonathan G. Katz,

Secretary.

[FR Doc. 96–17149 Filed 7–3–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37377; File No. SR–NASD–

96–22]

Self-Regulatory Organizations; Notice

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to an Extension

of the SOES Minimum Exposure Limit

Rule and the SOES Automated

Quotation Update Feature Until

January 31, 1997

June 27, 1996.

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

Securities Exchange Act of 1934

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

June 10, 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 proposes to extend, until

January 31, 1997, the effectiveness of

certain rules governing the operation of

the Nasdaq Stock Market, Inc.’s

(‘‘Nasdaq’’) Small Order Execution

System (‘‘SOES’’). Specifically, these

SOES rules, which were previously

approved by the Commission on a pilot

basis on December 23, 19932 and

recently extended through July 31,

1996,3 provide for: (1) a reduction in the

minimum exposure limit for

unpreferenced SOES orders from five

times the maximum order size to two

times the maximum order size, and for

the elimination of exposure limits for

preference orders (‘‘SOES Minimum

Exposure Limit Rule’’); and (2)