[Federal Register Volume 61, Number 95 (Wednesday, May 15, 1996)]
[Notices]
[Pages 24523-24525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12173]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37178; File No. SR-PSE-96-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Stock Exchange, Inc., To Establish a Firm Facilitation Exemption

May 8, 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 April 4, 1996, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. The PSE subsequently filed Amendment No. 1 to the 
proposed rule change on May 2, 1996.\3\ The PSE has requested 
accelerated approval for the proposal. This order approves the PSE's 
proposal, as amended, on an accelerated basis and solicits comments 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ On May 2, 1996, the PSE filed Amendment No. 1 to the 
proposed rule change to include within the rule text the requirement 
that if the Exchange grants a facilitation exemption on the basis of 
oral representations, the member organization must file the 
appropriate forms and documentation substantiating the basis for the 
exemption within either two businesses days or a period of time to 
be designated by the Exchange (``Amendment No. 1''). See Letter from 
Michael D. Pierson, Senior Attorney, Market Regulation, PSE, to 
Matthew S. Morris, Attorney, Office of Market Supervision, Division 
of Market Regulation, Commission, dated May 2, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE is proposing to amend its rules on option position limits 
in order to establish a firm facilitation exemption to such limits.

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 PSE 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 PSE 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 PSE is proposing to establish a firm facilitation exemption \4\ 
for all non-multiply-listed Exchange option issues by adding new 
Commentary .08 to Exchange Rule 6.8, the general options position limit 
rule.\5\ The exemption would be available to equity, broad-based index, 
narrow-based index, Flexible Exchange (``FLEX''), interest rate, and 
government securities option issues to the extent and at the levels 
specified therein.
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    \4\ The Commission notes that a facilitation trade is defined as 
a transaction that involves crossing an order of a member firm's 
public customer with an order for the member firm's proprietary 
account.
    \5\ The PSE's exercise limit provisions will correspond to the 
increase in position limit levels permitted by the firm facilitation 
exemption.
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    Under the proposal, the procedures in Exchange Rule 6.47(b) and 
Options Floor Procedure Advice A-6 for crossing a customer order with a 
firm facilitation order must be followed. In this regard, before a 
customer order can be crossed with a firm facilitation order, the 
trading crowd must be given a reasonable opportunity to participate. 
Moreover, only after it has been determined that the trading crowd will 
not fill the order, may the firm's customer order be crossed with the 
firm's facilitation order.
    In addition, except for an interest rate firm facilitation 
exemption, which is set at a higher level, the firm facilitation 
exemption will be twice the standard limit.
    The PSE notes that the firm facilitation exemption will be in 
addition to and separate from the standard limit, as well as other 
exemptions available under Exchange position limit rules. For example, 
if a firm desires to facilitate customer orders in the XYZ option 
issue, which is assumed not to be multiply-listed and also assumed to 
have a 25,000 contract standard position limit, the firm may qualify 
for a firm facilitation exemption of up to twice the standard limit 
(50,000 contracts), as well as an equity hedge exemption of up to twice 
the standard limit (50,000 contracts), in addition to

[[Page 24524]]

the 25,000 contract standard limit. If both exemptions are allowed, the 
facilitation firm may hold or control a combined position of up to 
125,000 XYZ contracts on the same-side of the market.
    The PSE notes, however, that the firm facilitation exemption will 
not presently extend to all option issues listed on the Exchange. 
Rather, until coordinated intermarket procedures are developed, the 
exemption will be extended only to non-multiply-listed option 
issues.\6\
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    \6\ The PSE notes, however, that the Intermarket Surveillance 
Group (``ISG'') is currently working on developing such procedures.
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    Under the proposal, the facilitation firm must receive approval 
from the Exchange prior to executing facilitating trades. Although 
Exchange approval may be granted on the basis of verbal 
representations, the facilitation firm is required to furnish to the 
Exchange's Department of Options Surveillance, within two business days 
or such other time period designated by the Exchange, forms and 
documentation substantiating the basis for the exemption. Within five 
business days after the execution of a facilitation exemption order, a 
facilitation firm must hedge all exempt option positions that have not 
previously been liquidated, and furnish to the Exchange's Department of 
Options Surveillance documentation reflecting the resulting hedging 
positions. In meeting this requirement, the facilitation firm must 
liquidate and establish its customer's and its own option and stock 
positions or their equivalent in an orderly fashion, and not in a 
manner calculated to cause unreasonable price fluctuations or 
unwarranted price changes. In addition, a facilitation firm is not 
permitted to use the facilitation exemption for the purpose of engaging 
in index arbitrage. Moreover, the facilitation firm is required to 
promptly provide to the Exchange any information or documents requested 
concerning the exempted option positions and the positions hedging 
them, as well as to promptly notify the Exchange of any material change 
in the exempted options position or the hedge.
    Lastly, to aid in understanding the scope of the firm facilitation 
exemption, Commentary .08 will include both a table and an example 
showing how the exemption will be applied.
2. Statutory Basis
    The PSE believes that the proposal is consistent with Section 6(b) 
of the Act, in general, and furthers the objectives of Section 6(b)(5), 
in particular, in that it is designed to facilitate transactions in 
securities while continuing to further investor protection and the 
public interest, and will accommodate the needs of investors and other 
market participants without substantially increasing concerns regarding 
manipulation and other trading abuses.

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

    The PSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    Comments were neither solicited nor received with respect to the 
proposed rule change.

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, N.W., Washington, D.C. 20549. 
Copies of the submission, 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. Sec. 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 also will be 
available for inspection and copying at the principal office of the 
PSE. All submissions should refer to File No. SR-PSE-96-10 and should 
be submitted by [insert date 21 days from date of publication].

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)(5).\7\ Specifically, 
the Commission believes that the PSE's proposal is reasonably designed 
to accommodate the needs of investors and other market participants 
without substantially increasing concerns regarding the potential for 
manipulation and other trading abuses. The Commission also believes 
that the proposed rule change has the potential to enhance the depth 
and liquidity of the options market by providing Exchange members 
greater flexibility in executing large customer orders. Accordingly, as 
discussed below, the Commission believes that the rule proposal is 
consistent with the requirements of Section 6(b)(5) that exchange rules 
facilitate transactions in securities while continuing to further 
investor protection and the public interest.
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    \7\ 15 U.S.C. 78f(b)(5) (1988).
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    The PSE proposal contains several safeguards that will serve to 
minimize any potential disruption or manipulation concerns. First, the 
facilitation firm must receive approval from the Exchange prior to 
executing facilitating trades. Although Exchange approval may be 
granted on the basis of verbal representations, the Commission believes 
that trading abuses are unlikely because the facilitation firm is 
required to furnish to the Exchange's Department of Options 
Surveillance, within two business days or such other time period 
designated by the Exchange, forms and documentation substantiating the 
basis for the exemption.
    Second, a facilitation firm must, within five business days after 
the execution of a facilitation exemption order, hedge all exempt 
options positions that have not previously been liquidated, and furnish 
to the Exchange's Department of Options Surveillance documentation 
reflecting the resulting hedging positions. In meeting this 
requirement, the facilitation firm must liquidate and establish its 
customer's and its own options and stock positions or their equivalent 
in an orderly fashion, and not in a manner calculated to cause 
unreasonable price fluctuations or unwarranted price changes. In 
addition, a facilitation firm is not permitted to use the facilitation 
exemption for the purpose of engaging in index arbitrage. The 
Commission believes that these requirements will help to ensure that 
the facilitation exemption will not have an undue market impact on the 
options or any underlying stock positions.
    Third, the facilitation firm is required to promptly provide to the 
Exchange any information or documents requested concerning the exempted 
options positions and the positions hedging them, as well as to 
promptly notify the Exchange of any material change in the exempted 
options position or the hedge.
    Fourth, neither the member's nor the customer's order may be 
contingent on

[[Page 24525]]

``all or none'' or ``fill or kill'' instructions, and the orders may 
not be executed until the procedures in Exchange Rule 6.47(b) and 
Options Floor Procedure Advice A-6 have been satisfied, and crowd 
members have been given a reasonable time to participate in the trade.
    Fifth, in no event may the aggregate exempted position under 
Commentary .08 exceed the number of contracts specified in the 
exemption's table, i.e., twice the applicable standard limit, excluding 
interest rate options which are set at three times the applicable 
standard limit.
    Sixth, the facilitation firm may not increase the exempted options 
position once it is closed, unless approval from the Exchange is again 
received pursuant to a reapplication under Commentary .08.
    In summary, the Commission believes that the safeguards built into 
the facilitation exemption process discussed above should serve to 
minimize the potential for disruption and manipulation, while at the 
same time benefitting market participants by allowing member firms 
greater flexibility to facilitate large customer orders. This structure 
substantially mirrors the firm facilitation exemption process that was 
recently approved for the Chicago Board Options Exchange, Inc. 
(``CBOE'').\8\ The PSE also has surveillance procedures to surveil for 
compliance with the rule's requirements. Accordingly, the Commission 
believes it is appropriate to extend the benefits of a firm 
facilitation exemption to non-multiply-listed PSE option issues.
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    \8\ See Securities Exchange Act Release No. 36964 (March 13, 
1996), 61 FR 11453 (March 20, 1996) (File No. SR-CBOE-95-68).
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    The Commission finds good cause to approve the proposed rule 
change, including Amendment No. 1, prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. Specifically, by accelerating the approval of the Exchange's 
rule proposal, as amended, the Commission is conforming the Exchange's 
firm facilitation exemption to the relief recently approved for the 
CBOE. Accelerated approval of the proposed rule change will thereby 
provide for the desired uniformity of the exchanges' position limit 
exemptions. Any other course of action could lead to unnecessary 
investor confusion. In addition, the CBOE's proposal was noticed for 
the entire twenty-one day comment period and generated no responses. 
Accordingly, the Commission believes that it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule 
change, as amended, on an accelerated basis.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the 
Act, that the proposed rule change (File No. SR-PSE-96-10), as amended, 
is hereby approved on an accelerated basis.

    \9\ 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. \10\
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    \10\ 17 CFR 200.30-3(a) (12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12173 Filed 5-14-96; 8:45 am]
BILLING CODE 8010-01-M