[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