[Federal Register Volume 63, Number 149 (Tuesday, August 4, 1998)]
[Notices]
[Pages 41610-41612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20692]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40270; File No. SR-CHX-98-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by The Chicago Stock Exchange, Inc. Relating to the 
Qualification by Market Makers for Exempt Credit

July 28, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 2, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the CHX. 
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) (1994).
    \2\ 17 CFR 240.19b-4 (1997).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend an interpretation to Article XXXIV, 
Rule 16 of the CHX Rules relating to registered market makers' 
eligibility to receive exempt credit.

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 CHX 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 CHX has prepared summaries, set forth in sections 
(A), (B) and (C) below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to modify an 
interpretation regarding the use of exempt credit by market makers. 
Interpretation .01 to Article XXXIV, Rule 16 sets forth certain 
requirements that must be met for market makers to be eligible to 
receive exempt credit for financing their market maker transactions. 
One requirement for

[[Page 41611]]

receiving exempt credit for a particular issue is that 50% of the 
quarterly share volume in that issue recorded 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 ITS.\3\
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    \3\ Securities Exchange Act Release No. 40016 (May 20, 1998), 63 
FR 29276 (May 28, 1998) and Securities Exchange Act Release No. 
40152, (July 1, 1998), 63 FR 37159 (July 9, 1998) (clarifying the 
prior approval order).
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    The Exchange seeks to include in the Interpretation the 
consequences for failing to meet the fifty percent requirement. The 
proposed rule change would suspend a market maker's eligibility to 
receive exempt credit in the calendar quarter immediately following the 
calendar quarter in which a violation occurred for all issues in which 
the fifty percent requirement was not met (a ``non-qualifying 
issue'').\4\
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    \4\ In the event that a member registers as a market maker at 
any time during a calendar quarter, the fifty percent requirement 
would apply from the date of registration to the end of that 
quarter.
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    At the beginning of every calendar quarter, the Exchange will 
notify market makers who fail to meet the 50% test for a particular 
issue or issues during the previous quarter. Market makers who are so 
notified by the Exchange must notify their lender in writing, with a 
copy to the Exchange, within three trading days of receiving such 
notification from the Exchange, that they are not entitled to exempt 
credit for non-qualifying issues for the remainder of the current 
quarter. If the lender is unable to distinguish between issues or is 
unable to verify that exempt credit is not being granted in non-
qualifying issues, such market makers must transfer, within three 
trading days of the date the lender receives notification, all non-
qualifying issues in their V-account to an account not entitled to 
exempt credit and confirm with the Exchange that such action has been 
taken. Market makers who are not using exempt credit must notify the 
Exchange of such in writing within three trading days of receiving 
notification and ask their lender to verify the same with the Exchange.
    Once an issue becomes a non-qualifying issue for a market maker, 
the issue will remain a non-qualifying issue for one calendar quarter. 
At the end of that quarter, the market maker would be permitted to seek 
exempt credit for the issue beginning the following quarter (assuming 
the market maker complies with all of the other requirements in 
interpretation .01). If the market maker again fails to meet the 50% 
requirement for that issue, the issue will again become a non-
qualifying issue.
    A market maker the exhibits chronic non-compliance with the 50% 
threshold may be subject to disciplinary action by the Exchange. The 
text of the proposed rule change is as follows:
    Additions are italicized; deletions [bracketed].
ARTICLE XXXIV
Registered Market Makers--Equity Floor
Regulatory Status
    RULE 16. No text change.
    * * * Interpretations and Policies:
    .01  Utilization of Exempt Credit. Exchange Members registered as 
equity market makers are members registered as specialists for purposes 
of the Securities Exchange Act of 1934 and as such are entitled to 
obtain exempt credit for financing their market maker transactions. 
Members and/or prospective members who are anticipating becoming 
registered as equity market makers as well as those clearing firms who 
are or will be carrying the accounts of market makers should be aware 
of the following interpretation relative to the use of such credit:
    1. Only those transactions initiated on the Exchange Floor qualify 
as market maker transactions. This restriction prohibits the use of 
exempt credit where market maker orders are routed to the Floor from 
locations off the Floor.
    2. Fifty per cent (50%) of the quarterly share volume in each [an] 
issue in a market maker account must result from transactions which are 
either consummated on the Exchange or sent from the Exchange Floor for 
execution in another market via ITS in order for the market maker to be 
entitled to exempt credit for such issue. Members who do not meet this 
50% volume threshold for a particular issue in a calendar quarter will 
not be entitled to exempt credit for such issue for the following 
calendar quarter.
    3. Only those positions which have been established as a direct 
result of bonafide equity market maker activity qualify for exempt 
credit treatment. This restriction precludes exempt credit financing 
based on an equity market maker registration for positions resulting 
from options exercises and assignments.
    4. Members who are notified by the Exchange that they are not 
entitled to exempt credit for a particular issue (because they failed 
to meet the 50% threshold for that issue in the previous calendar 
quarter as outlined in paragraph 2 above) must notify their lender in 
writing, within three trading days of receiving such notification, that 
they are not entitled to exempt credit for those specific issues 
(``non-qualifying issues'') both on existing positions and new 
transactions, for the remainder of the current calendar quarter. A copy 
of the notification letter sent to the lender must also be sent 
concurrently to the Exchange. If the lender is unable to distinguish 
between issues or verify that exempt credit is not being granted in 
non-qualifying issues, then, within three trading days of the date the 
lender receives notification, such Members must transfer, to a customer 
account or to an account not entitled to exempt credit, all non-
qualifying issues in their V-account and confirm with the Exchange that 
such action has been taken. If such Members are not utilizing exempt 
credit, they must send the Exchange a letter to that effect, within 
three trading days of receiving notification that they are not entitled 
to exempt credit for a particular issue, and request their lender to 
verify the same with the Exchange.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \5\ in that it is designed to promote just and equitable principles 
of trade, to remove impediments and to perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \5\ 15 U.S.C. 78f(b)(5).
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(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.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date 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 funding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or

[[Page 41612]]

    (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, including whether the proposed rule 
change is consistent with the Act. 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CHX. All submissions should refer to File No. SR-CHX-98-19 and should 
be submitted by August 25, 1998.

    For the Commission, 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. 98-20692 Filed 8-3-98; 8:45 am]
BILLING CODE 8010-01-M