[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

[[Page 29277]]

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