[Federal Register Volume 60, Number 21 (Wednesday, February 1, 1995)]
[Notices]
[Pages 6330-6332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2385]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35277; File No. SR-PSE-94-24]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Pacific Stock 
Exchange, Inc., Relating to Financial Arrangements of Options Market 
Makers

January 25, 1995.
    On September 9, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change regarding financial arrangements of market makers 
and the trading restrictions that are imposed on market makers who have 
financial [[Page 6331]] arrangements with other members or member 
organizations. Notice of the proposal appeared in the Federal Register 
on December 23, 1994.\3\ No comment letters were received on the 
proposed rule change. The Exchange filed Amendment No. 1 to the 
proposal on January 25, 1995.\4\ This order approves the Exchange's 
proposal, as amended.

    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\See Securities Exchange Act Release No. 35107 (December 16, 
1994), 59 FR 66395 (December 23, 1994).
    \4\In Amendment No. 1, the Exchange deleted proposed Commentary 
.07 from PSE Rule 6.40, regarding inadvertent violations of Rule 
6.40. See Letter from Michael Pierson, Senior Attorney, Market 
Regulation, PSE, to Brad Ritter, Senior Counsel, Office of Market 
Supervision, Division of Market Regulation, Commission, dated 
January 25, 1995 (``Amendment No. 1'').
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    The Exchange is proposing several amendments to Exchange Rule 6.40 
(Financial Arrangements of Market Makers). First, the Exchange is 
proposing to change its definition of ``financial arrangement.'' 
Specifically, instead of relying on the Exchange's definition of 
financial arrangement under Rule 4.18,\5\ a financial arrangement for 
purposes of Rule 6.40 would exist if one member directly finances the 
other member's dealings upon the Exchange and has a beneficial interest 
in the other member's trading account such that the first member is 
entitled to at least ten percent of the second member's trading 
profits. In the alternative, a financial arrangement will be deemed to 
exist under Rule 6.40(a) where two members trade for the same joint 
account.

    \5\Rule 4.18 requires disclosure to the Exchange of certain 
financial arrangements of members. For these purposes, a financial 
arrangement is defined as: (1) The direct financing of a member's 
dealings upon the Exchange; or (2) any direct equity investment or 
profit sharing arrangement; or (3) any consideration over the amount 
of $5,000 that constitutes a gift, loan, salary, or bonus. See PSE 
Rule 4.18(a).
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    Second, the Exchange proposes to modify Rule 6.40(b) to provide 
that two floor officials, on the basis of demonstrated need, may grant 
a written exemption\6\ to the trading restrictions imposed by the 
rule.\7\

    \6\This amendment merely changes the word ``dispensation'' to 
``exemption.''
    \7\The Exchange also proposes non-substantive amendments to Rule 
6.40(b) by deleting subsections (b)(2) and (b)(3) and adding to 
subsection (b)(1) the restriction on bidding, offering, and/or 
trading in the same option series at the same time.
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    Finally, the Exchange proposes to add several commentaries to Rule 
6.40. Proposed Commentary .03 merely provides that for purposes of Rule 
6.40(a), the term ``member'' includes members and member organizations.
    Proposed Commentary .04 states the purpose of Rule 6.40 and further 
provides that any market makers who are not technically covered by the 
terms of Rule 6.40, but who unfairly dominate the market in any class 
of options, will be considered to be in violation of their obligation 
to contribute to the maintenance of fair and orderly markets and to act 
in accordance with just and equitable principles of trade.
    Proposed Commentary .05 codifies the Exchange's existing policy 
that two or more Lead Market Makers (``LMMs'') who are trading on 
behalf of the same member organization may not bid, offer, and/or trade 
in the same option series at the same time. Commentary .05 further 
provides that two or more LMMs who do not have financial arrangements 
with each other are permitted to bid, offer and/or trade in the same 
option series at the same time.\8\

    \8\See generally PSE Rule 6.82 (Lead Market Maker System Pilot 
Program).
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    Proposed Commentary .06 provides that exemptions to the trading 
restrictions in Rule 6.40(b) may ordinarily be granted by two floor 
officials for the purpose of providing liquidity in a trading crowd or 
where the individual situation otherwise warrant such action. 
Commentary .06 further provides that an exemption granted pursuant to 
Rule 6.40(b) generally will not extend beyond the trading day on which 
it is issued. Moreover, Commentary .06 provides that the Exchange's 
Options Floor Trading Committee (``Committee'') will review, on a 
regular basis, the exemptions granted pursuant to Rule 6.40(b).\9\

    \9\This requirement is presently set forth in Rule 6.40(c). To 
avoid repetition, the Exchange also proposes to delete Rule 6.40(c) 
and renumber rule 6.40(d).
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    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).\10\ Specifically, the 
Commission finds, as it did in originally approving Rule 6.40,\11\ that 
full disclosure of financial arrangements among PSE market makers, 
members, and member organizations helps the Exchange to better identify 
and deter potential trading abuses among affiliated PSE members and 
member organizations. In addition, with such disclosure, the Exchange's 
ability to monitor the financial condition of its members and member 
organizations is enhanced. The Commission believes that the proposed 
amendments to Rule 6.40 do not detract from these benefits in any 
material manner and thus, are consistent with the Act.

    \10\15 U.S.C. Sec. 78f(b)(5) (1988).
    \11\See Securities Exchange Act Release No. 32775 (August 20, 
1993), 58 FR 45368 (August 27, 1993).
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    The Commission believes that it is appropriate for the Exchange to 
amend the definition of ``financial arrangement'' to focus more on the 
nature of the financial interest that a member may have in a market 
maker's trading account. The Commission believes that the amended 
definition will help the Exchange to achieve a balance whereby it can 
still restrict the types of activity for which the rule was intended 
without unnecessarily removing liquidity from its trading crowds. 
Commentary .04 furthers this by clarifying the purpose of the rule and 
providing that unfair domination by market makers subject to financial 
arrangements that technically are not covered by the amended definition 
will be considered a violation of just and equitable principles of 
trade.\12\ The Commission believes that Commentary .06 is also 
consistent with this goal by providing that exemptions to the trading 
restrictions in Rule 6.40(b) may ordinarily be granted for purposes of 
providing liquidity in a trading crowd.

    \12\The Commission also notes that as with other PSE rules, in 
considering appropriate sanctions for violations of Rule 6.40, the 
Exchange can consider mitigating factors, such as whether a 
violation was inadvertent. See Amendment No. 1, supra note 4.
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    On balance, the Commission believes that the trading restrictions 
in Rule 6.40 should continue to help to preclude collusive trading 
activity and increase public confidence in the markets while the 
proposed amendments to Rule 6.40 will allow PSE market makers to 
continue to respond to trading conditions in all options classes on the 
Exchange floor without adversely affecting the liquidity of the 
Exchange's options markets.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. As 
discussed above, the Commission believes that Proposed Commentary .07 
was merely a restatement of the general proposition that in considering 
appropriate sanctions for violation of Exchange rules, the Exchange 
(and appropriate committees) may consider mitigating factors, such as 
whether a violation was inadvertent. As a result, the Commission 
believes that deleting this language from Rule 6.40 does not raise any 
new regulatory concerns. Accordingly, the Commission believes that it 
is consistent with Section 6(b)(5) of the Act to approve Amendment No. 
[[Page 6332]] 1 to the proposed rule change on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 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 submissions, all subsequent 
amendments, all written statements with respect to the proposed rule 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes 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, N.W., Washington, D.C. 20549. 
Copies of such filings will also be available for inspection and 
copying at the principal office of the PSE. All submissions should 
refer to File No. SR-PSE-94-24 and should be submitted by February 22, 
1995.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PSE-94-24), as amended, is 
approved.

    \13\15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2385 Filed 1-31-95; 8:45 am]
BILLING CODE 8010-01-M