[Federal Register Volume 63, Number 177 (Monday, September 14, 1998)]
[Notices]
[Pages 49142-49144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24524]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40407; File No. SR-CHX-98-19]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 and Amendment No. 2 to Proposed 
Rule Change Relating to the Qualification by Market Makers for Exempt 
Credit

September 4, 1998.

I. Introduction

    On July 2, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'')

[[Page 49143]]

filed with the Securities and Exchange Commission (``SEC'' or 
``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 an interpretation to Article XXXIV, Rule 26 of the 
CHX Rules relating to registered market makers' eligibility to receive 
exempt credit. The proposed rule change was published for comment in 
the Federal Register on August 4, 1998. \3\ On July 24, 1998, the 
Exchange filed Amendment No. 1. \4\ On August 28, 1998, the Exchange 
filed Amendment No. 2. \5\ The Commission received no comments on the 
proposal. This order approves the proposed rule change. Also Amendment 
Nos. 1 and 2 are approved on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 40270 (July 28, 1998), 
63 FR 41610.
    \4\ The substance of this amendment is incorporated into this 
order. See Letter from David T. Rusoff, Counsel, Foley & Lardner, to 
Katherine England, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated July 23, 1998 (``Amendment No. 
1'').
    \5\ The substance of this amendment is incorporated into this 
order. See Letter from Patricia L. Levy, Senior Vice President and 
General Counsel, CHX, to Karl Varner, Attorney, Division, 
Commission, dated August 27, 1998 (``Amendment No. 2'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The purpose of the proposed rule change is to modify an 
interpretation regarding the use of exempt credit by market makers.\6\ 
Interpretation .01 to Article XXXIV, Rule 16 sets forth certain 
requirements that must be met for market makers to be eligible to 
receive market maker exempt credit for financing their market maker 
transactions. Currently, one requirement for receiving market maker 
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 the Intermarket Trading 
System.\7\
---------------------------------------------------------------------------

    \6\ In Amendment No. 2 the Exchange modified the rule language 
to account for Regulation T and Exchange rules. As previously 
drafted, the rule would have prohibited a market maker from 
utilizing exempt credit for all non-qualifying issues, even if 
exempt credit is otherwise available under Regulation T. Regulation 
T permits the use of exempt credit for certain broker-dealers 
irrespective of whether the broker-dealer is a market maker. 
Amendment No. 2 makes clear that once a market maker has been 
notified by the Exchange that an issue is a non-qualifying issue the 
procedures prohibit the market maker from receiving exempt credit in 
a market making account, but the market maker remains eligible to 
receive exempt credit under non-market maker accounts as provided by 
Regulation T and Exchange rules.
    \7\ 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).
---------------------------------------------------------------------------

    The proposed rule change will include in the Interpretation the 
consequences for failing to meet the 50% requirement. The proposed rule 
change would suspend a market maker's eligibility to receive market 
maker exempt credit in the calendar quarter immediately following the 
calendar quarter in which a violation occurred for all issues in which 
the 50% requirement was not meet (a ``non-qualifying issue'').\8\
---------------------------------------------------------------------------

    \8\ 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.
---------------------------------------------------------------------------

    At the beginning of every calendar quarter, the Exchange will 
notify market makers who failed 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 of the Exchange, within three trading days of receiving such 
notification from the Exchange, that they are not entitled to market 
maker exempt credit for non-qualifying issues for 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 
tradings days of the date the lender receives notification, all non-
qualifying issues in their V-account to an account not entitled to 
market maker exempt credit and confirm with the Exchange that such 
action has been taken. Members that are not using market maker exempt 
credit and confirm with the Exchange that such action has been taken. 
Members that are not using market maker exempt credit must notify the 
Exchange of such in writing within three tradings 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 
market maker 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.\9\ A market maker that exhibits chronic non-
compliance with the 50% threshold may be subject to disciplinary action 
by the Exchange.
---------------------------------------------------------------------------

    \9\ In order to clarify the quarterly transition from a non-
qualifying issue to a qualifying issue the Exchange offers the 
following example in Amendment No. 1:
    Suppose a market is eligible to receive market maker exempt 
credit in Stock A on January 1. Suppose further that on March 31, at 
the end of the quarter, the market maker has not met the 50% 
threshold. Then, Stock A will be a non-qualifying issue from the 
date upon which lender notification is required through June 30th. 
On July 1, the member would once again be eligible to receive market 
maker exempt credit for Stock A (so long as other requirements of 
Interpretation .01 are met). If the member is notified that he did 
not meet the 50% threshold for the quarter ending September 30th, 
the issue would then become a non-qualifying issue again from the 
date upon which lender notification is required until December 31st. 
On January 1 of the following year, the process would start all over 
again.
---------------------------------------------------------------------------

III. Discussion

    After careful review, 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. 
The Commission believes that the proposed rule change is consistent 
with Section 6 of the Act, in general,\10\ and Section 6(b)(5),\11\ in 
particular, in that it is designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts and 
practices, to foster cooperation and coordination with persons engaged 
in regulating and facilitating transactions in securities, 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.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f.
    \11\ U.S.C. 78f(b)(5).
    \12\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    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,\13\ and, in return, are accorded certain 
privileges, including exempt credit financing.\14\ Accordingly,

[[Page 49144]]

the Commission believes it is appropriate for the Exchange to 
temporarily discontinue a privilege if the market maker fails to meet 
the minimum threshold of an affirmative obligation upon which the 
privilege is based.
---------------------------------------------------------------------------

    \13\ 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).
    \14\ 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.
---------------------------------------------------------------------------

    The proposed rule change permits the Exchange to suspend a market 
maker's eligibility to receive market maker exempt credit in the 
calendar quarter immediately following the calendar quarter in which a 
violation occurred for all issues in which the 50% requirement was not 
met. The Exchange's ability to discipline market makers for failure to 
meet minimum quarterly share volume requirement should help ensure 
greater market maker compliance with the rule in the future. The 
Commission believes that greater compliance with the 50% minimum 
quarterly share volume should enhance the quality of the market for 
CHX-traded securities, and in turn foster investor confidence and 
participation in the market as well as protect investors and the public 
interest.
    The Commission finds good cause for approving proposed Amendments 
Nos. 1 and 2 prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register. Amendment No. 1 
merely clarifies the quarterly transition from a qualifying to a non-
qualifying issue by means of an example.\15\ Amendment No. 2 clarifies 
that a market maker who does not achieve the 50% minimum quarterly 
share volume, while ineligible for market maker exempt credit, may 
still be eligible for other forms of exempt credit pursuant to 
Regulation T and Exchange Rules.\16\ Amendment Nos. 1 and 2 have no 
substantive or procedural effect on the application of the proposed 
rule change, and serve to obviate potential confusion in the 
administration of the proposed rule change for Exchange officials, 
Exchange members and investors alike. For these reasons, the Commission 
finds good cause for accelerating approval of the proposed rule change, 
as amended.
---------------------------------------------------------------------------

    \15\ Supra, note 9.
    \16\ Supra, note 6.
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments Nos. 1 and 2, 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, 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CHX-98-19 and should be submitted by October 5, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CHX-98-19) is approved.

    \17\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24524 Filed 9-11-98; 8:45 am]
BILLING CODE 8010-01-M