[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29276-29277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14021]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40016; File No. SR-CHX-98-5]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change by the Chicago Stock Exchange, Inc. Relating to
the Utilization of Exempt Credit by Market Makers
May 20, 1998.
I. Introduction
On February 18, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder.\2\ In the filing, the CHX proposed amendments to an
interpretation to Article XXXIV, Rule 16 relating to registered market
makers' utilization of exempt credit. Notice of the proposed rule
change was published in the Federal Register on April 8, 1998.\3\ The
Commission received no comments on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 39822 (March 31, 1998),
63 FR 17248 (April 8, 1998).
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II. Description of the Proposal
Interpretation .01 to Article XXXIV, Rule 16 notes that
``[e]xchange members registered as equity market makers are members
registered as specialists for purposes of [the Act] and as such they
are entitled to obtain exempt credit for financing their market maker
transactions.'' \4\ The Interpretation also sets forth certain
parameters that market makers must satisfy to obtain such exempt
credit. The Interpretation specifies that 50% of the quarterly share
volume that creates or increases a position in a market maker account
must result from transactions consummated on the Exchange or sent from
the Exchange floor for execution in another market via the Intermarket
Trading System (``ITS''). The proposed rule change modifies this
Interpretation by eliminating the reference to ``creating or increasing
a position,'' thereby including all transactions consummated
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on the Exchange or sent from the Exchange floor via ITS in determining
a market maker's ability to use exempt credit.
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\4\ The Board of Governors of the Federal Reserve System is
authorized, pursuant to Section 7 of the Act, to establish initial
margin requirements and credit restrictions on margin financing. 12
CFR 220 and 221. Generally, Regulation T limits to 50% the amount of
financing extended to or by a broker-dealer to finance a securities
position. 12 CFR 220.18. Bona fide market making activity, however,
may be exempt from these credit restrictions.
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In providing assistance in maintaining a fair and orderly market, a
market maker may be required to decrease either a long or a short
position in a particular security. Consequently, a market maker may,
from time to time, engage in transactions that decrease its position.
These transactions were not previously included in the calculation of
transactions that qualify for exempt credit. The proposed rule change
amends Interpretation .01 to Article XXXIV, Rule 16 to note that
positions that decrease a position in a market maker account will be
treated the same way as those that create or increase a position for
purposes of determining whether a market maker has satisfied the 50%
volume requirements needed to obtain exempt credit.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with Sections 6(b) and 11(b) of the Act.\5\ In
particular, the Commission believes the proposal is consistent with the
Section 6(b)(5) \6\ requirements that the rules of an exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest. The Commission believes, moreover, that the proposed
rule change is consistent with the requirements of Section 11(b) and
Rule 11b-1 thereunder \7\ that specialist (i.e., market maker) \8\
transactions contribute to the maintenance of fair and orderly markets.
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\5\ 15 U.S.C. 78f(b) and 78k(b).
\6\ 15 U.S.C. 78f(b)(5).
\7\ 17 CFR 240.11b-1.
\8\ Under Article XXXIV, Rule 16, registered market makers are
registered as specialists for purposes of the Act.
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The Commission believes that registered market makers on the
Exchange serve an important function inasmuch as they add depth and
liquidity to the market for CHX-traded securities. Pursuant to Article
XXXIV of the CHX Rules, market makers are subject to both affirmative
and negative obligations,\9\ and, in return, are accorded certain
privileges, including exempt credit financing.\10\ For this reason, it
is critical that only those members who are engaged in bona fide market
making activities qualify for favorable margin treatment under the
Exchange's rules. To the extent that transactions that decrease a
position in a market maker account contribute to the depth and
liquidity in the market for CHX-traded securities, the Commission
believes that it is appropriate for the Exchange to conclude that such
transactions constitute bona fide market making activity.
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\9\ For example, under Article XXXIV, a registered market maker
on the Exchange has the duty to maintain fair and orderly markets in
assigned issues (Rule 1); the duty to execute at least 50% of
quarterly share volume in assigned issues (Rule 3); and the duty to
register separately for each security to be traded as a market maker
(Rule 4).
\10\ Under the federal securities laws and the Exchange's Rules
as set forth in Article XXXIV, market makers are also granted
special treatment and exemptions from requirements regarding net
capital, position financing, and short sales for transaction
effected during the course of bona fide market making.
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By including in the Exchange's exempt credit 50% minimum quarterly
share volume requirements a greater number of transactions that
contribute to the maintenance of fair and orderly markets, registered
market makers are facilitated in their ability to finance transactions
that provide market continuity and stability. Enhancements in the
quality of the market CHX-traded securities in turn foster investor
confidence and participation in the market. Accordingly, the Commission
believes 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) and 11(b).\11\
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\11\ In approving the rule change, the Commission has considered
the proposed rule's impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change SR-CHX-98-05 be and hereby is
approved.
\12\ 15 U.S.C. 78s(b).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14021 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M