Document ID: SEC-2007-0590-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2007-04-24T04:00Z

[Federal Register: April 24, 2007 (Volume 72, Number 78)]
[Notices]               
[Page 20392-20395]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ap07-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55640; File No. SR-Amex-2007-04]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Its Buy-In Rules

April 17, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 8, 2007, the 
American Stock Exchange LLC (``Amex'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change described 
in Items I, II, and III below, which items have been prepared primarily 
by Amex. Amex filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \2\ and Rule 19b-4(f)(6) thereunder \3\ so that 
the proposal was effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \3\ 17 CFR 240.19b-4(f)(6).
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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 amend Amex Rules 759, 
783, 784, and 789 and to adopt new Rule 798 to standardize Amex's buy-
in rules.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Amex 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. Amex has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by Amex.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Amex is amending its Rules 783, 784, and 789 and is adopting new 
Rule 798

[[Page 20393]]

to permit buyer executed buy-ins,\5\ to reduce the waiting period to 
execute a buy-in from twenty-one (21) days to three (3) days, and to 
otherwise provide more standardized and consistent industry buy-in 
rules and procedures. Amex is also making conforming changes to Rules 
759, 784, and 789. This proposal seeks to substantially mirror the 
recent New York Stock Exchange (``NYSE'') amendments to its buy-in 
rules approved by the Commission, which were made mainly for the 
purpose of achieving industry uniformity.\6\
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    \5\ A ``buy-in'' is a transaction between broker-dealers where 
because the securities are not delivered on time by the broker-
dealer on the sell-side, the broker-dealer on the buy-side purchases 
the securities from another source.
    \6\ Securities Exchange Act Release No. 52842 (November 28, 
2005), 70 FR 72321 (December 2, 2005) [File No. SR-NYSE-2005-50].
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Introduction

    The Amex buy-in rules apply to transactions that are not subject to 
the rules of a qualified clearing agency, such as The Depository Trust 
Company (``DTC'') \7\ and the National Securities Clearing Corporation 
(``NSCC'') \8\, including transactions processed in NSCC's Continuous 
Net Settlement service (``CNS'') \9\ that settle through them.\10\ In 
the event that a buy-in is sent to the Amex floor for execution, then 
Amex buy-in rules apply.
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    \7\ DTC is a member of the U.S. Federal Reserve System, a 
limited-purpose trust company under New York State banking law, and 
a clearing agency registered with the Commission.
    \8\ NSCC is a central counterparty that provides centralized 
clearance, settlement, and information services for virtually all 
broker-to-broker equity, corporate bond and municipal bond, 
exchange-traded funds, and unit investment trust trades in the U.S. 
NSCC provides clearing and settlement, risk management, central 
counterparty services, and a guarantee of completion for trades. 
NSCC also nets trades and payments among its members thereby 
reducing the volume of securities and payments that need to be 
exchanged each day.
    \9\ CNS is an automated accounting system that centralizes and 
nets the settlement of compared security transactions in order to 
maintain an orderly flow of security and money balances.
    \10\ See Securities Exchange Act Release No. 53528 (March 21, 
2006), 71 FR 15506 (March 28, 2006) [File No. SR-NSCC-2005-15] 
(approving NSCC's CNS buy-in rules).
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    However, under current Amex rules that place the responsibility for 
the actual execution of the buy-in on the defaulting member or member 
organization (``defaulting member'' or ``seller''), there are 
disincentives for the defaulting member to execute the buy-in. For 
example, the defaulting member could potentially manipulate the extent 
to which it has market exposure by timing its purchase of the necessary 
securities to benefit itself. Therefore, an initiating member or member 
organization (``initiating member'' or ``buyer'') may receive negative 
customer reaction if the customer learns that its trade has not been 
settled and that their securities are not available because a buy-in 
has not been executed in a timely manner by the defaulting member.
    Other self-regulatory organizations (``SROs'') have recognized this 
conflict of interests, and their buy-in rules assign responsibility 
accordingly by allowing the buyer to execute the buy-in. By allowing 
buyers to execute their own buy-ins, the defaulting members' conflicts 
of interest are avoided, and the process is expedited.
    The Securities Industry Association (``SIA'') Securities Operations 
Division Buy-In Committee (``Committee'') \11\ has expressed a strong 
preference that Amex consider amending its buy-in rules to eliminate is 
buy-in notice procedures and to change who executes the buy-in to the 
buyer from the seller. The purpose of the Committee's recommendation is 
to identify and to standardize various buy-in rules and procedures 
regarding the buy-in process related to non-CNS transactions and to 
help formulate uniformity among industry rules. The Committee requested 
that Amex conform its rules to those of the other exchanges that allow 
the initiating member to execute buy-ins to close out a contract.
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    \11\ The Committee is made up of representatives from a broad 
cross-section of broker-dealers and industry groups.
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Current Requirements

    Amex Rule 784 sets forth the ``mandatory closing of fails'' process 
by which a buyer is required to close-out a contract that has not been 
completed by the seller for a period of twenty-one (21) business days. 
A mandatory closing of fails requires that a notice of intention be 
delivered in quadruplicate and on the twenty-first (21st) business day 
after the original due date of the contract by the initiating member to 
the seller. The member organization receiving the notice of intention 
must indicate its position with respect to the resolution of the failed 
trade (e.g., doesn't know the trade, knows the trade but cannot 
deliver, will deliver) and return the notice of intention to the 
initiating member no later than three business days after the notice 
was sent. If the notice of intention is not returned when due or is 
returned with the indication that the contract is not known, the 
initiating member shall itself close the contract by buying or selling 
the securities involved through its own floor representative. If the 
notice of intention is returned when due with an indication that the 
contract is known but that delivery cannot be made and if the contract 
is one which has been designated as acceptable for clearance as a fail 
item by a registered clearing agency of which both parties are clearing 
members, it shall be submitted for clearance by the defaulting member. 
If the notice of intention is returned when due with an indication that 
the contract is known but that delivery cannot be made and the contract 
is one which has not been designated as acceptable for clearance as a 
fail item by a registered clearing agency of which both parties are 
clearing members, the initiating member shall close the contract 
according to the procedures in Amex Rule 783. Therefore, the rule 
currently provides that more than three weeks may lapse before the 
contract is closed.
    Amex Rule 783 sets forth a permissive procedure by which an 
initiating member may close-out a contract that has not been executed 
by the defaulting member. The initiating member must provide notice of 
its intention to make a closing. Pursuant to Amex Rule 783, Amex 
determines the times for the delivery of such notices of intention to 
close and orders to close and the time for the closing of contracts. If 
the times within which securities may be delivered are extended or 
shortened, the time limits established by Amex may be similarly 
extended or shortened.\12\ Once the initiating member sends the notice 
to the defaulting member, the defaulting member shall be given a copy 
of the order to close for execution on that day. If the order is not 
executed, the defaulting member shall return the original order within 
fifteen minutes of the close of trading indicating why it cannot be 
executed, and the buy-in desk will deliver a copy of the floor report 
to the initiating member. The initiating member may then close the 
contract and must notify the defaulting party with respect to any money 
differences that it will claim as damages. If the order is executed by 
the defaulting member, it shall furnish a copy of the order to close 
and a copy of the floor report to the buy-in desk on the floor.
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    \12\ Contracts made for cash within one and one-half hour before 
the close of trading are given different treatment with respect to 
timing. When a contract made for cash within one and one-half hour 
before the close of trading is to be closed on the same day, the 
time of the transaction shall be stated on the order and notice, 
which shall be delivered within thirty minutes after the time of the 
transaction, and the contract shall not be closed until thirty-five 
minutes after the time of the transaction.
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    Amex Rule 789 requires an initiating member to accept physical 
delivery of some or all of the securities that are the

[[Page 20394]]

subject of a buy-in thereby halting the buy-in execution for those 
securities if the defaulting member tenders the securities prior to the 
buy-in. The defaulting member must promptly tender the securities, and 
if they are not promptly delivered, such member or member organization 
is liable for any resulting damages.

Proposal

    Amex is amending Rule 784 to allow the member or member 
organization failing to receive the securities to execute the buy-in 
and to reduce the waiting period to execute a buy-in from twenty-one 
(21) days to three (3) days after delivery on the contract was due. The 
elimination of Commentary .01 through .06 to Rule 784 is intended to 
facilitate the amendments to the buy-in procedures. The amendments to 
these procedures are largely proposed in the text of Rule 784. Amex 
believes that once the responsibility is shifted to the buy-side of the 
transaction, the buy-in process will work more efficiently.
    The amendments to Rule 784 provide that the initiating member may 
close a contract no sooner than three business days after the original 
due date for delivery (``Effective Date''). The initiating member must 
deliver a written notice to the defaulting member at least two days 
before the proposed buy-in. After receipt of the buy-in notice, the 
defaulting member must then send a signed, written response to the 
initiating member stating its position. If the response is not received 
by 5 p.m. ET on the day of receipt of the buy-in notice or it is 
returned with an indication that the contract is not known or that it 
is known but that delivery cannot be made, the buy-in may be executed 
on the Effective Date. The initiating member shall be required to 
accept any portion of the securities called for by the contract from 
the defaulting member that the defaulting member submits prior to the 
execution of the buy-in, but the initiating member shall not be 
required to accept any securities from the defaulting member if the 
buy-in has already been executed and if the buy-in could not have been 
reasonably cancelled by the initiating member. Once the buy-in has been 
executed, the initiating member shall notify the defaulting member 
confirming the purchase along with a bill or payment.
    Amex is also eliminating the requirements for quadruplicate paper 
notices and will permit electronic notices, including notices from a 
computerized network facility, or the electronic functionality of a 
Qualified Clearing Agency, such as DTC and NSCC. The amendments also 
change the existing time deadlines for delivering notices, securities, 
and executions and adopt those used by other self-regulatory 
organizations.
    Amex is also adopting new Commentary .01 to Rule 784 to help ensure 
that members and member organizations comply with the requirements of 
Regulation SHO.\13\ Members and member organizations are obligated to 
comply with the marking, locate, and delivery requirements of 
Regulation SHO for short sales of equity securities. As a result, 
members and member organizations should have policies and procedures in 
place to comply with these requirements, including close-out 
procedures.\14\
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    \13\ 17 CFR 242.200 through 242.203. Securities Exchange Act 
Release No. 50103 (July 28, 2004), 69 FR 48008 (August 6, 2004), 
[File No. S7-23-03] (adoption of Regulation SHO).
    \14\ At the same time the changes noted above were being 
developed, the SEC implemented Regulation SHO, Regulation of Short 
Sales, which shares a similar purpose, the reduction of fails to 
deliver, with the buy-in rules. Rule 203 to Regulation SHO imposes 
locate and borrowing/ delivery requirements on broker-dealers that 
sell equity securities, including close-out requirements on certain 
open fail to deliver positions.
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    Amex is rescinding Rule 783 and has incorporated the permissive 
buy-in procedures of Rule 783 into Rule 784. Amex is also amending Rule 
789 to conform it to this proposal to permit buyer executed buy-ins and 
to create a Rule 798 to clarify the requirements and time frames upon 
which a defaulting member may deliver against a buy-in notice. Finally, 
Amex is making technical amendments to Rules 759, 784 and 789 to better 
coordinate the rules with industry practice.
    Amex believes that the revisions to its buy-in rules will help 
standardize Amex's procedure and practice by allowing members and 
member organizations to clean-up fails and efficiently deliver Amex-
listed securities. Amex believes that the proposed rule change is 
consistent with Section 6 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. By amending the Amex buy-in 
rules to permit buyers to execute buy-ins, firms are expected to find 
it easier to execute buy-ins of Amex-listed securities. In addition, 
the amendments seek to remove inefficient requirements and amend time 
deadlines to conform to current industry practice.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Amex 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

    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

    Because the foregoing proposed rule change (1) Does not 
significantly affect the protection of investors or the public 
interest, (2) does not impose any significant burden on competition, 
and (3) does not become operative for 30 days from the date of filing 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A)(iii) of the 
Act \15\ and Rule 19b-4(f)(6) thereunder.\16\ As required by Rule 19b-
4(f)(6)(iii), Amex provided the Commission with written notice of its 
intent to file the proposed rule change at least five business days 
prior to filing the proposal with the Commission or within such shorter 
period as designated by the Commission.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within sixty (60) days of the filing of the proposed 
rule change, the Commission could have summarily abrogated such rule 
change if it appeared to the Commission that such action was necessary 
or appropriate in the public interest, for the protection of investors, 
or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 20395]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
) or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2007-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2007-04. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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, 100 F Street, 
NE., Washington, DC 20549. The text of the proposed rule change is 
available at Amex, the Commission's Public Reference Room, and http://www.amex.com/atamex/ruleFilings/at_rulefilings.html.
 All comments 

received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Amex-2007-04 and should be 
submitted on or before May 15, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-7711 Filed 4-23-07; 8:45 am]

BILLING CODE 8010-01-P