[Federal Register Volume 61, Number 225 (Wednesday, November 20, 1996)]
[Notices]
[Pages 59122-59124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37945; File No. SR-Amex-96-32]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 1 To Proposed Rule Change by the
American Stock Exchange, Inc., To Amend the Firm Facilitation Exemption
November 3, 1996.
I. Introduction
On September 10, 1996, the American Stock Exchange, Inc. (``Amex''
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 to amend its firm facilitation exemption.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
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Notice of the proposed rule change appeared in the Federal Register
on September 26, 1996.\3\ No comments were received on the proposed
rule change. The Exchange subsequently filed Amendment No. 1 to the
proposed rule change on November 4, 1996.\4\ This order approves the
Amex's proposal, as amended.
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\3\ See Securities Exchange Act Release No. 37706 (September 20,
1996), 61 FR 50524 (September 26, 1996).
\4\ In Amendment No. 1, the Amex revised the proposed rule
language of Commentary .10 to Exchange Rule 904 and Commentary .02
to Exchange Rule 904C so that a member firm who receives a customer
order for execution only against the member firm's proprietary
account may qualify for the facilitation exemption. See letter from
Claire P. McGrath, Managing Director and Special Counsel, Derivative
Securities Amex, to Ivette Lopez, Assistant Director, Office of
Market Supervision, Division of Market Regulation, Commission, dated
November 4, 1996 (``Amendment No. 1'').
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II. Background and Description
In May of this year, the Exchange received Commission approval to
expand the firm facilitation exemption \5\ from position and exercise
limits to all non-multiply-listed Exchange option classes.\6\
Currently, only a member firm who facilitates and executes an order for
its own customer \7\ may qualify for a firm facilitation exemption.
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\5\ The Amex notes that a facilitation trade is a transaction
that involves crossing an order of a member firm's public customer
with an order from the member firm's proprietary account.
\6\ See Securities Exchange Act Release No. 37179 (May 8, 1996),
61 FR 24520 (May 15, 1996) (approval order for File No. SR-Amex-96-
11).
\7\ The Amex defines a customer order as one that is entered,
cleared, in which the resulting position is carried with the firm.
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The Amex is proposing to amend the firm facilitation exemption in
two ways. First, a member firm who facilitates its own customer whose
account it carries, whether the firm executes the order itself or gives
the order to an independent broker for execution may qualify for the
exemption. Second, the facilitation exemption will be expanded to
include member firms who facilitate another member's customer order.
Such customer order must be for execution only against the member
firm's proprietary account. Further, unlike a member firm that
facilitates its own customer, the resulting position will not be
carried by the facilitating member firm.\8\
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\8\ The Commission notes that any solicitation of a member by
another member or customer to facilitate a customer order must
comply with the relevant Exchange rules concerning solicited
transactions.
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[[Page 59123]]
III. Discussion
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).\9\ Specifically,
the Commission believes that by allowing member firms an exemption from
position limits to facilitate large customer orders, whether they are
firms who accept customer orders for execution only against the member
firm's proprietary account, or they are firms who carry their own
customers' accounts and positions, the depth and liquidity of the
market will be enhanced in a manner consistent with the protection of
investors and the public interest. Further, permitting a member firm
who facilitates its own customer order to qualify for the exemption
whether it executes the order itself or gives it to an independent
broker for execution should provide firms with flexibility in handling
such orders while still requiring compliance with the rule's
requirements.
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\9\ 15 U.S.C. 78f(b)(5) (1988).
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The Commission believes that the Amex's proposal to amend its firm
facilitation exemption will accommodate the needs of investors as well
as market participants without substantially increasing concerns
regarding the potential for manipulation and other trading abuses. The
Commission also believes that the proposed rule change will further
enhance the potential depth and liquidity of the options market as well
as the underlying markets by providing Exchange members greater
flexibility in executing large customer orders. Moreover, the
Commission is relying on the absence of discernible manipulation
problems under the Amex's current firm facilitation exemption as an
indicator that the proposal is appropriate.
In addition, the Amex's existing safeguards that apply to the
current facilitation exemption will continue to serve to minimize any
potential disruption or manipulation concerns. First, the facilitation
firm must receive approval from the Exchange prior to executing
facilitating trades. 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 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 on 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 ``all or none'' or ``fill or kill'' instructions, and the
orders may not be executed until Exchange Rule 950(d), Commentary .02
(crossing order) procedures have been satisfied and market participants
have been given a reasonable time to participate in the order.
Fifth, the facilitation firm may not increase the exempted option
position once it is closed, unless approval from the Amex is again
received pursuant to a reapplication.
Lastly, violation of any of these provisions, absent reasonable
justification or excuse, will result in the withdrawal of the
facilitation exemption and may form the basis for subsequent denial of
an application for a facilitation exemption.
In summary, the Commission continues to believe that the safeguards
built into the facilitation exemptive process will serve to minimize
the potential for disruption and manipulation concerns, while at the
same time benefiting market participants by allowing member firms
greater flexibility to facilitate large customer orders. The Commission
also notes that the facilitation exemption will be monitored in the
same manner, whether the facilitation is done by the member firm for
its own customer and executed by the firm itself or given to an
independent broker for execution, or whether the facilitation is done
by another member firm willing to facilitate the order of another
member firm's customer. Further, as noted above, any firm solicitation
to facilitate a customer order must comply with the Amex's solicitation
rules as well as with the Amex's facilitation and crossing rules.
Lastly, the Commission believes that the Amex has adequate surveillance
procedures to surveil for compliance with the rule's requirements.
Based on these reasons, the Commission believes that it is appropriate
for the Amex to amend its firm facilitation exemption.
The Commission finds good cause to approve 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.
Specifically, because the revised rule language contained in Amendment
No. 1 only serves to clarify the Exchange's original intent, no new
regulatory concerns are raised. In addition, the Amex's rule proposal
was subject to a full notice and comment period, and no comments were
received. Accordingly, the Commission believes that it is consistent
with Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No.
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 rule proposal. 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
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. 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 filing also will be available for inspection and copying
at the principal office of the Amex. All submissions should refer to
File No. SR-Amex-96-32 and should be submitted by [insert date 21 days
from date of publication].
IV. Conclusion
For the foregoing reasons, the Commission finds that the Amex's
proposal to amend its firm facilitation exemption is consistent with
the requirements of the Act and the rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-Amex-96-32), as amended, is
approved.
\10\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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[[Page 59124]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-29611 Filed 11-19-96; 8:45 am]
BILLING CODE 8010-01-M