[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Notices]
[Pages 33568-33570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16370]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37335; File No. SR-PSE-96-09]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange Incorporated Relating to the 
Options Book Pilot Program

June 19, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 1, 1996, the Pacific 
Stock Exchange Incorporated (``PSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. The Exchange filed 
Amendment No. 1 to the proposed rule change on June 4, 1996.\2\ 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\ Amendment No. 1 adds a provision to proposed PSE Rule 6.82, 
Commentary .05 stating that no Market Maker Cooperatives may 
participate as LMMs in the pilot program. Amendment No. 1 also 
replaces a PSE Rule 6.82, Commentary .05 reference to ``April __, 
1997'' as the proposed expiration date for the pilot program, with a 
reference to ``[Date]''. Letter from Michael D. Pierson, Senior 
Attorney, Market Regulation, PSE, to Michael Walinskas, Special 
Counsel, Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Division''), Commission, dated June 4, 1996 
(``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to establish a pilot program under which its Lead 
Market Makers (``LMMs'') would be able to assume operational 
responsibility for the options public limit order book (``Book'') in 
certain issues.

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 IV 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.

[[Page 33569]]

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

    The Exchange proposes to amend its rules governing LMMs to allow 
some LMMs to manage the Book function in certain designated issues. The 
program would be implemented on a limited basis, involving no more than 
three LMMs and no more than forty option symbols in total,\3\ during a 
one-year pilot phase. No Market Maker Cooperatives would be permitted 
to participate in the pilot.\4\ The Exchange would evaluate the 
program, and, six months prior to its expiration, would determine 
whether to modify it and whether to seek permanent approval from the 
Commission. Under the pilot, the designated LMMs would manage the Book 
function, take responsibility for trading disputes and errors, set 
rates for Book execution, and pay the Exchange a fee for systems and 
services.
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    \3\ Telephone conversation between Michael D. Pierson, Senior 
Attorney, PSE, and Michael Walinskas, Special Counsel, OMS, 
Division, Commission, on June 4, 1996.
    Each option issue typically has only one symbol associated with 
it, unless LEAPs are traded on that issue, in which case there 
usually would be two additional symbols related to the issue, or 
unless a contract adjustment is necessary due, for example, to a 
merger or stock split, in which case one additional symbol usually 
would be added.
    \4\ Amendment No. 1, supra note 2.
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    The LMMs who participate during the pilot phase would be selected 
by the Options Floor Trading Committee based on some or all of the 
following factors: experience with trading an option issue as a Market 
Maker or LMM and willingness to assume LMM responsibilities; trading 
volume of the issue(s); adequacy of capital; willingness to promote the 
Exchange as a marketplace; history of adherence to Exchange rules and 
securities laws; trading crowd/LMM evaluations conducted pursuant to 
Options Floor Procedure Advice B-13; and ability to manage the Book 
operation. Only dually or multiply traded option issues would be 
eligible during the pilot phase.
    The Exchange proposes to amend its Rule 6.82 to provide that, 
subject to the approval of the Exchange, LMMs would be eligible to 
perform all functions of the Order Book Official (``OBO'') in 
designated option issues pursuant to Rules 6.51 through 6.59. In that 
regard, the Exchange would allow the LMM to use Exchange personnel to 
assist the LMM in performing the OBO function, and the Exchange would 
charge the LMM a reasonable fee for such use of Exchange personnel. If 
the program is made permanent, LMMs would be responsible for hiring and 
maintaining their own employees, but the Exchange would provide 
employees to assist LMMs when necessary due to market conditions. In 
all cases, however, employees working in the Book operation would be 
subject to all policies and procedures established by the Exchange. In 
addition, the LMM would resolve trading disputes, subject to the review 
of two Floor Officials upon the request of any party to such dispute. 
The LMM also would be required to disclose Book information to Members 
upon request, pursuant to PSE Rule 6.57.
    With regard to their duties as market makers, LMMs would be 
required to perform all obligations provided in Rules 6.35 through 6.40 
and 6.82. In addition, in executing transactions for their own ``Market 
Maker'' accounts, LMMs would have a right to participate pro rata with 
the trading crowd in trades that take place at the LMM's principal bid 
or offer.
    The proposal further provides that if the Options Allocation 
Committee decides to reallocate an issue to the market maker system 
pursuant to PSE Rule 6.82(f)(2), the terminated LMM may receive a 
proportionate share of the net Book revenues, not to exceed one-half, 
for any period specified by the Options Appointment Committee up to a 
maximum of five years. Such award would take into account various 
factors, including: the length of the time of LMM service; the LMM's 
capital commitment; efforts expended as LMM; activity level of the 
issue when the LMM assumed responsibility for the Book function; and 
other relevant factors. The Exchange intends to develop a procedure for 
determining ``net Book revenues'' and specific guidelines for the 
Options Appointment Committee to follow in determining the amount of 
net Book revenues, if any, to be awarded.
    Finally, the proposal specifies that LMMs who perform the function 
of an Order Book Official pursuant to PSE Rule 6.82(h) shall maintain 
``minimum net capital,'' as provided in Rule 15c3-1 under the Act,\5\ 
and also shall maintain a cash or liquid asset position of at least 
$500,000, plus $25,000 for each issue over five issues for which they 
perform the function of an OBO.
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    \5\ 17 CFR 240.15c3-1.
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    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act, in general, and Section 6(b)(5), in particular, in 
that it is designed to facilitate transactions in securities, to 
promote just and equitable principles of trade, and 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 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 on the proposed rule change were neither solicited 
nor received.

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 such 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. 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 in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-PSE-96-09 and should be submitted by July 8, 1996.


[[Page 33570]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16370 Filed 6-26-96; 8:45 am]
BILLING CODE 8010-01-M