[Federal Register Volume 66, Number 28 (Friday, February 9, 2001)]
[Notices]
[Pages 9735-9737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43922; File No. SR-ISE-00-22]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by International Securities Exchange LLC, Relating to Market 
Maker Financial Requirements

February 2, 2001.
    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 November 28, 2000, the International Securities Exchange LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
by the Exchange. The Commission is publishing this

[[Page 9736]]

notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    ISE is proposing to amend Exchange Rule 809 regarding ``Financial 
Requirements for Market Makers.'' Specifically, the proposal would 
amend and further define the calculations necessary to determine the 
minimum financial requirements for the Exchange's market makers, and 
specify certain reporting requirements when a market maker fails to 
maintain the minimum financial requirements. The text of the proposed 
rule change follows. New text is italicized and deleted text is 
bracketed.

Rule 809. Financial Requirements for Market Makers

    (a) Primary Market Makers. Every Primary Market Maker shall 
maintain [a cash or liquid asset position equal to the greater of] net 
liquidating equity of not less than $3,250,000 plus $25,000 excess 
equity for each underlying security upon which appointed options are 
open for trading in excess of the initial ten (10) underlying 
securities [$5,000,000 or an amount sufficient to assume a position of 
twenty (20) options contracts of each class in which such Primary 
Market Maker is appointed (as computed on the basis of that series 
within each such class having the highest current premium)].
    (b) Competitive Market Makers. Every Competitive Market Maker shall 
maintain [a cash or liquid asset position equal to the greater of] net 
liquidating equity of not less than $1,000,000 [or an amount sufficient 
to assume a position of ten (10) options contracts in each class of 
options to which the Competitive Market Maker is appointed (as computed 
on the basis of that series within each such class having the highest 
current premium)].
    (c) Each market maker that makes an arrangement to finance his 
transactions as a market maker must identify to the Exchange the source 
of the financing and its terms. The Exchange must be informed 
immediately of the intention of any party to terminate or change any 
such arrangement.

Supplemental Material to Rule 809

    .01 For purposes of Rule 809, the term ``net liquidating equity'' 
means the sum of positive cash balances and long securities positions 
less negative cash balances and short securities positions.
    .02 Each day that a Member's net liquidating equity is less than 
120% of the minimum level required by Rule 809, the Member must notify 
the Exchange of its equity level on a daily basis from the date the net 
liquidating equity first comes below this level until and including 
three days following the date that the equity first comes above this 
level.
    .03 If a Member's net liquidating equity falls below the minimum 
level required by this Rule, the Member must immediately notify the 
Exchange of the deficiency and must submit within five (5) business 
days a business plan for raising its equity to the appropriate level. 
The Exchange may determine to appoint an interim Primary Market Maker 
when, in its discretion, the Member's failure to maintain the minimum 
level required by this Rule limits its ability to comply with market 
making obligations under the Rules.

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 Exchange 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. ISE 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
    Exchange Rule 809 sets forth the minimum financial requirements for 
market makers. Currently, Exchange Rule 809 provides that every Primary 
Market Maker (``PMM'') maintain a cash or liquid asset position equal 
to the greater of $5,000,000 or an amount sufficient to assume a 
position of twenty (20) options contracts of each class in which the 
PMM is appointed. Exchange Rule 809 similarly provides that every 
Competitive Market Maker (``CMM'') maintain a cash or liquid asset 
position equal to the greater of $1,000,000 or an amount sufficient to 
assume a position of ten (10) options contracts in each class of 
options to which the CMM is appointed.
    The Exchange proposes to eliminate the option position component in 
calculating the minimum equity. With respect to CMMs, the Exchange 
believes that the option position component in the current rule places 
an unnecessary burden on its members to make the variable calculation 
on a daily basis. The flat $1 million requirements far exceeds the 
minimum equity requirements for market makers on the other four options 
exchanges, and it is unlikely that the option position component would 
exceed $1 million. With respect to PMMs, the proposed amendment would 
require PMMs to maintain $3.25 million plus $25,000 for each issue over 
10. When the Exchange phases-in trading in 600 options with 
approximately 60 options trading in each of its 10 groups or ``bins,'' 
this requirement would equal $4.5 million for PMMs trading in one bin, 
and $6.0 million for a PMM trading in two bins.\3\
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    \3\ Pursuant to Exchange Rule 317(a), a member cannot be 
approved to trade in more than two bins as a PMM.
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    The Exchange also proposes to update its rule to replace the phrase 
``cash or liquid asset position'' with ``net liquidating equity,'' and 
to define the later term. This will conform our rule to the Chicago 
Board Options Exchange's (``CBOE'') rule.\4\ The proposed definition of 
net liquidating equity, which is the sum of positive cash balances and 
long securities positions less negative cash balances and short 
securities positions, is the same as the CBOE definition of the term in 
CBOE Rule 12.3(f)(1)(F).
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    \4\ See CBOE Rule 8.86, which states that ``[e]ach DPM shall 
maintain (i) net liquidating equity in its DPM account of not less 
than $100,000, and in conformity with such guidelines as the MTS 
Committee may establish from time to time.''
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    The Exchange further proposes to adopt notification requirements. 
Market makers would be required to notify the Exchange if their equity 
fails to exceed the minimum requirement by at least 20 percent. This 
will allow the Exchange to monitor carefully any firm that might be 
experiencing financial difficulties and to take actions to minimize any 
potential risk to the Exchange or investors. A market maker that falls 
below the equity requirement must immediately notify the Exchange of 
the deficiency and submit a plan for raising its equity to the 
appropriate level.
    Finally, in the case of a PMM with deficient equity, the Exchange 
may determine to appoint an interim PMM. The Exchange will do so when, 
in its discretion, the Member's failure to maintain the minimum level 
limits its ability to comply with market making obligations.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \5\ that an exchange

[[Page 9737]]

have rules that are designed to promote just and equitable principles 
of trade, 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 proposed rule change does not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 35 days of the date of 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 finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change; or
    (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 20549-0609. 
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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
above-referenced self-regulatory organization. All submissions should 
refer to File No. SR-ISE-00-22 and should be submitted by March 2, 
2001.

    For the Commission, by 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. 01-3340 Filed 2-8-01; 8:45 am]
BILLING CODE 8010-01-M