Self-Regulatory Organizations; Notice of Filing of a Proposed Rule Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating to Options Trading Rules for Market Makers and Lead Market Makers

[Federal Register Volume 64, Number 206 (Tuesday, October 26, 1999)]
[Notices]
[Pages 57681-57684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27886]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42035; File SR-PCX-99-13]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating 
to Options Trading Rules for Market Makers and Lead Market Makers

October 19, 1999.
    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 May 10, 1999, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. 
Amendment No. 1 was filed with the Commission on June 15, 1999.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Michael A. Walinskas, Associate Director, 
Division of Market Regulation (``Division''), SEC from Robert P. 
Pacileo, Staff Attorney, Regulatory Policy, PCX, dated June 8, 1999. 
In Amendment No. 1, the PCX expanded the ``proposal'' section of the 
filing and made several technical corrections to the text of the 
proposed rule change. The additions are incorporated into this 
notice.

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[[Page 57682]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposes to modify its rules pertaining to Market Makers 
and Lead Market Makers on the trading floor by clarifying existing 
provisions, eliminating superfluous provisions, incorporating current 
policies and procedures and otherwise updating its current Market Maker 
and Lead Market Maker rules. The text of the proposed rule change is 
available at the Office of the PCX, the Secretary, 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, the Exchange 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 Exchange 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

1. Purpose
    The Exchange is proposing to make the following changes to the text 
of PCX Rule 6 (``Options Trading--Rules Principally Applicable to 
Trading of Options Contracts'') with regard to Market Makers and Lead 
Market Makers (``LMMS''):
    The PCX proposes to change the registration procedures for Market 
Makers under PCX Rule 6.33. Under the rule change, the application of 
Market Makers for registration will be approved when the applicant 
passes a Market Maker examination. The Exchange proposes to remove the 
review process whereby the Options Floor Trading Committee (``OFTC'') 
must review and approve applications.\4\ The Exchange believes that the 
OFTC review and approval of each Market Maker is unnecessary because 
each Market Maker's name is routinely posted and if there are any 
problems with a particular Market Maker, they can be brought to the 
attention of the Exchange before the Market Maker's application for 
membership is approved. In addition, the rule change will provide that 
an applicant Market Maker's name be posted on the bulletin board of the 
Floor of the Exchange for ten calendar days (rather than three business 
days, as currently stated).\5\ The Exchange proposes these changes to 
expedite the registration process and to make the rules reflect current 
practices on the PCX.
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    \4\ Currently, PCX Rule 6.33 requires the OFTC to review 
applications and consider an applicant's ability, as demonstrated by 
his passing a Market Maker examination, financial resources and such 
other factors as the OFTC deems appropriate.
    \5\ In the future, the Exchange will propose similar rule 
changes to the procedure for registration of floor brokers under PCX 
Rule 6.44.
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    The PCX also proposes to change PCX Rules 6.35 and 6.38(a) 
regarding the procedures for selection of Market Maker Primary 
Appointment Zones, which is akin to a post, so that in all cases, 
Market Makers will be required to select a primary zone before the 
expiration of a 60-day grace period.\6\ The proposed change will allow 
Market Makers to select a Primary Appointment Zone during their first 
60 days of trading to allow them to participate in the Exchange's 
Automatic Execution System (``Auto-Ex'').\7\ The proposed change will 
also delete PCX Rule 6.35, Commentary .02, which provides that the PCX 
Board of Governors may act to make all initial Primary Appointments. 
The Exchange proposes this change to simplify the process for Primary 
Appointment Zone selection and approval. Finally, the Exchange proposes 
to make PCX Rule 6.38 consistent with the changes to PCX Rule 6.35 by 
providing that certain Members ``must obtain'' a Primary Appointment 
Zone instead of ``shall be given'' a Primary Appointment Zone as 
currently provided.
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    \6\ Currently, PCX Rule 6.35 requires the Options Appointment 
Committee to assign Market Makers to a Primary Appointment Zone, 
however, it does not expressly require that Market Makers apply for 
such appointments. PCX Rule 6.35 states that a Market Maker's 
refusal to accept a Primary Appointment Zone may be deemed a 
sufficient cause for termination or suspension of a Market Maker's 
registration.
    \7\ Under Rule 6.87, Market Makers without a primary zone are 
not permitted to log on to the Auto-Ex system. Additionally, in the 
future, the Exchange proposes to modify its Minor Rule Plan and 
Recommended Fine Schedule to provide that Market Makers who fail to 
select a Primary Appointment Zone prior to the expiration of their 
60-day grace periods, or thereafter, during any one-month period, 
will be subject to fines of $500, $1,000 and $1,500 for first-, 
second-, and third-time violations, respectively. See PCX Rules 
10.13(h) and (i). The Exchange believes such sanctions to be more 
appropriate than termination or suspension of a Market Maker's 
registration, as currently provided.
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    To clarify PCX Rule 6.36 on the requirements pertaining to letters 
of guarantee and letters of authorization, the PCX proposes to add a 
provision (d) on FLEX Options, prohibiting Market Makers from 
transacting in FLEX options unless one or more letters of guarantee 
have been issued on behalf of the Market Maker. The Exchange also 
proposes to incorporate OFPA B-4, Subject: Market Maker Trading on the 
PSE Equity Floors into PCX Rule 6.36, Commentary .02. The Exchange 
proposes to remove the specific requirements from the provision 
pertaining to the form of a letter of guarantee and replace the 
requirements with a general statement whereby a letter of guarantee 
must be ``in a form approved by the Exchange.'' The Exchange proposes 
to make this change to simplify and ease the PCX requirements on 
letters of guarantee.
    To simplify PCX Rule 6.37, the PCX proposes the following changes. 
The PCX proposes to incorporate PCX Rule 6.37, Commentary .05, 
regarding a Market Maker's obligation to trade at least one contract at 
the quoted price, into PCX Rule 6.37(f). To clarify this obligation, 
the Exchange proposes to require that a Market Maker who makes a one-
sided market will be obligated to trade at least one contract at the 
``implied'' price, (e.g., if a Market Maker provides a bid but not an 
offer, the Market Maker's offering price will be implied by that bid 
price plus the maximum bid/ask spread differential specified in PCX 
Rule 6.37(b)(1)). The Exchange also proposes to add a provision to 
proposed new Rule 6.37(f) stating that if a Market Maker at a trading 
post fails to provide a bid or offer after having a reasonable 
opportunity to do so, the Market Maker will be obligated to trade one 
contact at the best price quoted in the crowd, or if there are no 
prices quoted, at that Market Maker's disseminated price. Finally, the 
PCX proposes to eliminate the provision in PCX Rule 6.37(c)(1) that 
states that Market Makers should not ``congregate in a particular class 
of option contract.'' \8\
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    \8\ PCX contends that this provision, which was intended to 
promote trading in thinly traded securities, is not longer needed 
because there is sufficient liquidity across the trading floor and 
PCX rules on primary appointment zones (PCX Rule 6.35) and LMMs (PCX 
Rule 6.82) serve to assure that there is adequate coverage by Market 
Makers in all areas of the trading floor.
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    The PCX also proposes to amend PCX Ruled 6.37, Commentary .08 (new 
Rule 6.37, Commentary .05), to specify the circumstances under which 
Market Makers, while on a leave of absence, may make opening 
transactions in Exchange-listed options for their Market Maker 
accounts. Specifically, the only circumstances permitted will be those 
specified under current PCX Rule 6.32, Commentary .03, which states in 
part

[[Page 57683]]

that ``limit orders to buy and sell in the same series, discretionary 
orders, and market not-held orders may not be handled on a GTC basis 
without being treated as orders entered from off the floor.'' 
Accordingly, the Exchange proposes to change the current reference in 
PCX Rule 6.37, Commentary, .08, Subsection (3) from PCX Rule 6.032, 
Commentary .01 to PCX Rule 6.32, Commentary .03.
    The PCX proposes to change its rule on LMMs (PCX Rule 6.83) by 
replacing references to ``alternate LMMs'' and ``substitute LMMs'' with 
references to ``interim LMMs'' and ``back-up LMMs,'' respectively.
    The Exchange also proposes to make various housekeeping, editorial 
and structural changes to the current rules on Market Makers and LMMs. 
The Exchange proposes to create Commentary .01 to PCX Rule 6.34 from 
the text of OFPA A-5, Subject: Prohibitions Against Use of the Book by 
Floor Brokers in Closing Out Errors, which states that ``[s]ince bids, 
offers and transactions make to close out a position carried for a 
Floor Broker as a result of a brokerage error are clearly for the 
proprietary account of a member, they should not receive the priority 
treatment accorded to public customer orders held in the Book. 
Accordingly, the placing of such orders in the Book is deemed a 
violation of PCX Rule 6.52(a).'' The Exchange proposes to delete the 
portion of text from OFPA A-5 which forbids any member, while on the 
Floor, from initiating a transaction in which the member has an 
interest, unless the member is acting as a Market Maker, or unless the 
member is liquidating a position taken into his own account as a result 
of an error made while attempting to execute an order for a customer 
because the Exchange believes this language is similar to the text of 
PCX Rule 6.34. The Exchange also proposes to incorporate PCX Rule 6.37, 
Commentary .07 into Rule 6.37(e) as ``In Person Trading Requirements,'' 
and OFPA G-11, Subject: Marking, into Rule 6.37, Commentary .07. The 
Exchange proposes to make these changes to centralize rules applicable 
to Market Makers.
    The Exchange also proposes to make the following minor changes to 
PCX Rule 6 pertaining to Market Makers. In PCX Rule 6.32, Commentary 
.04, the Exchange proposes to qualify commentary .04 by adding the 
following language: ``[w]ith regard to orders of Market Makers entered 
from off the floor that are not entitled to special margin treatment 
pursuant to Commentaries .02 or .03.'' The Exchange proposes this 
language to clarify the commentary with respect to identification of 
orders.
    In PCX Rule 6.35(f) the Exchange proposes to change the reference 
that currently reads ``Rule 6.35. Com. .03'' to ``Commentary .03'' to 
simplify and clarify that the Exchange is proposing to move commentary 
.03 or PCX rule 6.35 into the text of PCX rule 6.35.
    The Exchange proposes to require, pursuant to PCX Rule 6.38(d), 
that a member who wishes to act as a Market Maker and Floor Broker 
apply for and receive approval ``from the Exchange'' and not ``through 
the Option Appointment Committee.'' \9\ The Exchange proposes this rule 
change to reflect the current practice for a Member applying for and 
receiving approval to act as Market Maker and Floor Broker.
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    \9\ ``From the Exchange'' means from the Exchange's Membership 
Department. Telephone conversation between Robert P. Pacileo, Staff 
Attorney, Regulatory Policy, PCX, and Heather Trigger, Attorney, 
Division, SEC, on August 25, 1999.
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    Finally, in PCX Rule 6.84 (d) and (g), the Exchange proposes to 
change the reference from ``Member Services Department'' to 
``Exchange'' to accurately reflect the practice of applying for joint 
accounts pursuant to PCX Rule 6.84(d), in which each participant in a 
joint account must file with the Exchange and thereafter keep current a 
completed application on a form prescribed by the Exchange. The 
Exchange also proposes to clarify, under PCX Rule 6.84(h) that a Market 
Maker trading for a joint account must have a primary appointment, but 
the joint account itself is not required to have a primary 
appointment.\10\ The Exchange proposes this rule change to clarify the 
responsibilities of Market Makers with respect to joint accounts.
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    \10\ PCX Rule 6.84(g) currently provides that joint accounts 
shall not be permitted to enter: (1) opening transactions from off 
the Floor for option contracts listed on the Exchange; (2) any 
transactions for option contracts not listed on the Exchange; and 
(3) transactions for any other security. This prohibition shall not 
apply to transactions entered for securities underlying Exchange 
option contracts in the joint account.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act \11\ because it is designed 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, and in general, to protect investors and the public 
interest. The Exchange also believes the proposal is consistent with 
Section 6(b)(6) of the Act \12\ because it is designed to provide that 
the PCX members will be cross-only disciplined for violations of the 
PCX Rules.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will impose 
no burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were not solicited or received with respect to the 
proposed rule change.

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 the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-
0609. Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All

[[Page 57684]]

submissions should refer to File No. SR-PCX-99-13 and should be 
submitted by November 16, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(A)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27886 Filed 10-25-99; 8:45 am]
BILLING CODE 8010-01-M