[Federal Register Volume 59, Number 26 (Tuesday, February 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2824]


[[Page Unknown]]

[Federal Register: February 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33571; File No. SR-CHX-94-01]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by Chicago Stock 
Exchange, Inc. Relating to the Capital Requirement for the Designated 
Primary Market Maker in the Chicago Stock Basket

    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 January 22, 1994, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization. The CHX has requested accelerated approval of 
the proposal. 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) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Interpretation and Policy .01 to 
Rule 3 of Article XXXVI that describes the capital requirement for the 
Designated Primary Market Maker (``DPM'') of the Chicago Stock Basket 
(``CXM'').\3\
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    \3\The Commission notes that the CXM is a standardized basket 
product consisting of twenty-five shares of each of the stocks 
included in the Chicago Mercantile Exchange's futures contract that 
is based on the American Stock Exchange's Major Market Index 
(``MMI''). The MMI is a broad-based price-weighted index of twenty 
stocks listed on the New York Stock Exchange. See Securities 
Exchange Act Release No. 33053 (October 15, 1993), 58 FR 54610 
(October 22, 1993) (File No. SR-CHX-93-18) (``CXM Approval Order''). 
the DPM acts as the specialist in the basket and is required to 
quote continuously a two-sided market in four CXM contracts. The DPM 
must be an Exchange member registered as a specialist in securities 
underlying the basket. Id.
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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 III 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.

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

1. Purpose
    The purpose of the proposed rule change is to reduce the capital 
requirement of the DPM for the CXM, and clarify that the excess 
capital\4\ required to be maintained by the DPM is not excess net 
capital\5\ and therefore does not include haircuts. Specifically, the 
proposed rule change would reduce the DPM's excess capital requirement 
to $150,000 from $250,000. Because of the low trading volume in the 
CXM, the Exchange believes that the current capital requirement is too 
burdensome and not commensurate with the risk involved.
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    \4\The text of the proposed rule would specify that this capital 
is to be maintained in excess of the DPM's required regulatory 
capital levels, i.e., as set forth in SEC Rule 15c3-1 and Article 
XI, Rule 3(b) (Specialist Capital Requirement) of the CHX rules.
    \5\Under SEC Rule 15c3-1, the term ``net capital'' typically is 
deemed to mean the net worth of a broker-dealer adjusted by, among 
other things, deducting a specified percentage of the value of each 
securities position (i.e., the ``haircut'').
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2. Statutory Basis
    The proposed rule change is consistent with section 6(b)(5) of the 
Act in that it is designated 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, in general, 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 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 comments were solicited or received.

III. 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, NW., 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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-94-01 and should be 
submitted by March 1, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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, with the requirements of Section 6(b).\6\ In particular, 
the Commission believes the proposal is consistent with the section 
6(b)(5) requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest.
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    \6\15 U.S.C. 78f(b) (1988).
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    In its order approving the CXM,\7\ the Commission found that, in 
comparison to other methods of portfolio trading, basket products, such 
as the CXM, are an efficient means to make investment decisions based 
on the direction of standardized measures of stock market performance, 
and may enhance the market's ability to absorb program trading. As part 
of its review, the Commission evaluated, among other things, the 
trading structure for market basket contracts and, in particular, the 
responsibilities assigned to the DPM\8\ and Exchange oversight of the 
DPM's performance. The Commission concluded that the CHX's financial 
standards, including the requirement that the DPM set aside an extra 
cushion of capital above that otherwise required for a specialist under 
relevant Commission and Exchange rules,\9\ should help to ensure that 
the DPM has sufficient resources to perform his or her market making 
obligations effectively.
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    \7\See CXM Approval Order, supra, note 3.
    \8\See supra, note 3.
    \9\See supra, note 4.
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    To the extent that trading volume in the CXM may be lower than 
originally was forseen, the Exchange argues that the current capital 
requirements is too burdensome for the DPM and should be lowered to a 
level that is more commensurate with the DPM's actual exposure to risk. 
After careful review of the proposed rule change, the Commission 
continues to believe that the DPM should have adequate capital to 
conduct his or her market making activities. Accordingly, in these 
particular circumstances, the Commission believes that it is not 
inconsistent with the Act for the CHX to reduce the DPM's capital 
requirement that is set forth in the Exchange rules governing basket 
trading.
    In reaching the above conclusion, however, the Commission placed 
great weight on the CHX's representations regarding the depth and 
liquidity of the prevailing market for the CXM. The Commission expects 
and the Exchange has agreed that, if there is a significant increase in 
basket trading volume, then the CHX will reconsider the adequacy of its 
reduced capital requirement and, if appropriate, submit another 
proposed rule change to the Commission.\10\
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    \10\Telephone conversation between David T. Rusoff, Foley & 
Larnder, and Beth A. Stekler, Attorney, Division of Market 
Regulation, SEC, on February 1, 1994.
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    The Commission finds good cause for approving the proposed rule 
change prior the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. The Commission believes that 
accelerated approval of this proposal should allow a regulatory burden 
to be reduced immediately, thereby facilitating the efficient 
allocation of market making capital.

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act\11\ that the proposed rule change (File No. SR-CHX-94-01) is hereby 
approved.


    \11\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2824 Filed 2-7-94; 8:45 am]
BILLING CODE 8010-01-M