[Federal Register Volume 66, Number 150 (Friday, August 3, 2001)]
[Notices]
[Pages 40761-40764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19436]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44616; File No. SR-NYSE-2001-08]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 3 to the Proposed Rule 
Change by the New York Stock Exchange, Inc. Amending Its Rules To 
Provide for the Trading of Exchange-Traded Funds on an Unlisted Trading 
Privileges Basis

July 30, 2001.

I. Introduction

    On April 25, 2001, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') 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 certain NYSE rules and 
policies to accommodate the trading of certain exchange-traded funds 
(``ETFs'') on an unlisted trading privileges (``UTP'') basis. On May 
22, 2001, the NYSE filed Amendment No. 1 to the proposed rule 
change.\3\ The proposed rule change and Amendment No. 1 were published 
in the Federal Register on June 5, 2001.\4\ No comments were received 
on the proposal, as amended. On July 18, 2001, the NYSE filed Amendment 
No. 2 to the proposed rule change.\5\ On July 27, 2001, the NYSE filed 
Amendment No. 3 to the proposed rule change.\6\ This order

[[Page 40762]]

approves the proposed rule change, as amended. The Commission also 
seeks comment on Amendment no. 3 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated May 21, 2001 
(``Amendment No. 1''). In Amendment No. 1, the NYSE amended the 
proposed rule text to reflect the correct wording of current NYSE 
Rule 36.
    \4\ See Securities Exchange Act Release No. 44352 (May 25, 
2001), 66 FR 30256 (``Notice'').
    \5\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated July 18, 2001 (``Amendment No. 2''). The NYSE 
withdrew Amendment No. 2 on July 27, 2001.
    \6\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Nancy Sanow, Assistant Director, Division, 
Commission, dated July 27, 2001 (``Amendment No. 3''). In Amendment 
No. 3, the NYSE withdrew the proposed amendment to NYSE Rule 111; 
revised the rule text of NYSE Rule 36 to clarify that if an order in 
a component security of an ETF is executed on the Exchange floor, 
the order must be in compliance with NYSE Rule 112.20 and Rule 11a2-
2(T) under the Act, 17 CFR 240.11a2-2(T), and must be for the 
purpose of hedging a position in the ETF; and revised its proposed 
amendment to NYSE Rule 13 to require Floor Official approval in a 
situation where the bid or offer that would elect a stop or stop 
limit order is more than 0.10 point away from the last sale and is 
made for the specialist's dealer account.
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II. Description of the Proposed Rule Change

    The NYSE proposes to amend its rules and policies to accommodate 
the listing and trading ETFs on a UTP basis. These ETFs may include the 
NASDAQ 100 Trust (symbol QQQ), Standard and Poor's Depositary Receipts 
(symbol SPY) and the Dow Industrials DIAMONDS (symbol DIA).
    The NYSE proposes to amend the following NYSE rules and policies: 
NYSE Rule 98, NYSE Rule 36, paragraph (l) of the Guidelines to NYSE 
Rule 105, NYSE Rule 13, NYSE Rules 104.20 and 104.21, and the NYSE's 
Market-On-Close/Limit-At-The-Close and Pre-Opening Price Indications 
Policies.

A. NYSE Rule 98

    NYSE Rule 98 provides that affiliates of a specialist organization 
can receive an exemption from certain rules applicable to specialists, 
provided that they establish a system of information barriers between 
themselves and the affiliated specialist. One of the conditions for the 
NYSE Rule 98 exemption is that the specialist organization be 
capitalized separately and apart from any affiliate. The Exchange is 
proposing to delete this requirement in the case of a specialist 
organization that is registered solely in ETFs. However, a specialist 
organization that is registered only in ETFs will remain subject to the 
minimum capital requirements specified in NYSE Rule 104.20.

B. NYSE Rule 105

    Currently, Guideline (1) to NYSE Rule 105 prohibits affiliates of 
specialist units from acting as a primary market marker in the option 
on a specialty security. The NYSE proposes to permit an affiliate of an 
NYSE ETF specialist to act in any market making capacity with respect 
to options on an ETF as long as NYSE Rule 98 information barriers are 
established.\7\ The Exchange also proposes to permit an affiliate of 
the ETF specialist to act in a market making capacity, but not as a 
specialist, in the ETF itself on another market center, as long as NYSE 
Rule 98 information barriers are established.
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    \7\ As discussed above, the NYSE proposes to eliminate the 
separate capital requirement with respect to ETF specialists. See 
also Securities Exchange Act Release No. 44175 (April 11, 2001), 66 
FR 19825 (April 17, 2001).
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C. NYSE Rules 36.30

    NYSE Rule 36.30 governs the establishment of telephone or 
electronic communications between the Exchange's trading floor and any 
other location.\8\ The Exchange proposes to permit ETF specialists to 
use communication devices at the post to enter proprietary orders in 
options \9\ and futures on the ETF, on the ETF itself on another market 
center, or in component securities of the ETF,\10\ and would permit the 
ETF specialist to obtain market information with respect to ETFs 
options, futures, and component securities.
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    \8\ Currently, NYSE Rule 36.30 allows specialists to have 
telephone lines to its off-floor office or its clearing firm for the 
purpose of entering options or futures hedging orders. The 
specialist also is permitted to transmit such orders through a 
member on the floor of the options or futures exchange.
    \9\ Any proprietary order for an option based on an ETF for 
which the specialist is registered must comply with the requirements 
of NYSE Rule 105.
    \10\ See Amendment No. 3, supra note 6. Any order in a component 
security of the ETF that is to be executed on the NYSE floor must be 
entered and executed in accordance with the principles of Exchange 
Rule 112.20 and Rule 11a2-2(T) under the Act, 17 CFR 240.11a2-2(T), 
and must be for the purpose of hedging a position in the ETF.
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D. NYSE Rule 13

    NYSE Rule 13 currently provides that stop and stop limit orders in 
an ETF can be elected by a bid (in the case of an order to buy) or an 
offer (in the case of an order to sell), provided that the specialist 
obtains the prior approval of a Floor Governor or two Floor Officials. 
The Exchange proposes to amend this prior approval requirement for ETFs 
to require floor official approval only where the bid or offer that 
would elect a stop or stop limit order is more than 0.10 point away 
from the last sale and is made for the specialist's dealer account.\11\
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    \11\ See Amendment No. 3, supra note 6. This amendment parallels 
the specialist's responsibility to obtain floor official approval 
under NYSE Rule 123A.40 in situations where the specialist is the 
party to the electing trade.
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E. NYSE Rules 104.20 and 104.21

    The Exchange proposes to amend NYSE Rules 104.20 and 104.21 to 
provide a capital requirement of $500,000 per ETF. A specialist 
registered only in an ETF would be subject to the $1,000,000 minimum 
capital requirement of NYSE Rule 104.20.

F. NYSE's Market-on-Close/Limit-At-The-Close Policy

    The Exchange proposes that orders in ETFs will not be subject to 
the Exchange's Market-on-Close (``MOC'')/Limit-At-The-Close (``LOC'') 
policy concerning order entry limitations, cancellation of orders 
during a regulatory halt, imbalance publications, and any other 
limitations or procedures with respect to MOC/LOC procedures. A MOC/LOC 
order in an ETF could be permitted to be entered at any time without 
regard to the limitations of the Exchange's MOC/LOC policies. In 
addition, the closing price of an ETF will not be subject to 
publication of imbalances under the Exchange's MOC/LOC policy. 
Furthermore, ETFs will trade until 4:15 p.m.\12\
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    \12\ But see Securities Exchange Act Release No. 44595 (July 26, 
2001), which amended the time of close for ETFs to 4:05 p.m. on the 
last business day of each month.
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G. NYSE's Pre-Opening Price Indications Policy

    Similarly, the Exchange proposes that its policies regarding 
mandatory dissemination of pre-opening price indications (other than 
ITS pre-opening notifications) in the case of significant order 
imbalances and potentially large price dislocation from the prior close 
will not apply to ETFs.
    The Exchange will inform its members and member organizations of 
these proposed changes to its policies by publication of an Information 
Memo.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission believes that 
the proposal is consistent with Section 6(b)(5) of the Act,\14\ which 
requires, among other things, 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 
to protect investors and the public interest. The Commission notes that 
the

[[Page 40763]]

proposed amendments to NYSE rules and policies are designed to 
facilitate the introduction of ETFs trading on the Exchange on a UTP 
basis.
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    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    NYSE Rule 98 provides that, as long as certain information barriers 
are in place between a specialist and its affiliates, the affiliates of 
a specialist organization can receive an exemption from certain rules 
applicable to specialist organization that is registered only in the 
ETFs, the Exchange has proposed to eliminate the requirement for the 
NYSE Rule 98 exemption that a specialist organization be capitalized 
separate and apart from any affiliate. The Commission notes that this 
amendment merely removes the requirement that specialists and their 
affiliates keep their capital separate and does not diminish the amount 
of capital required of the ETF specialists will still be required to be 
adequately capitalized pursuant to NYSE Rule 104. Further, the Exchange 
will continue to monitor the adequacy of capital of its ETF specialists 
through its special allocation committee. The Commission also notes 
that all other NYSE Rule 98 requirements must be satisfied as a 
condition to an NYSE Rule 98 exemption.
    In addition, the Exchange proposes to revise NYSE Rules 104.20 and 
104.21 to provide for a capital requirement of $500,000 per ETF.\15\ 
The Commission finds that the amendments to eliminate the separate 
capitalization requirement in the limited context noted above and to 
establish a capital requirement of $500,000 per ETF are consistent with 
the Act.
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    \15\ The Commission notes that specialists registered only in an 
ETF are subject to the $1,000,000 minimum capital requirement of 
NYSE Rule 104.20.
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    Currently, Guideline (1) to NYSE Rule 105 provides that affiliates 
of a specialist may not act as primary market makers in the options 
overlying its specialty security. The NYSE proposes to amend Guideline 
(1) to allow an affiliate of an NYSE specialist to act in any market 
making capacity in options overlying an ETF, subject to the condition 
that NYSE Rule 98 information barriers are in place. In addition, the 
Exchange proposes to allow an affiliate of an ETF specialist to act in 
any market capacity, other than as a specialist in the ETF itself, on 
other market centers, as long as NYSE Rule 98 information barriers are 
in place. The Commission finds that the revision to Guideline (1) of 
NYSE Rule 105 is consistent with the Act.
    The Commission also finds the amendment to NYSE Rule 36.30 to allow 
ETF specialists to maintain telephone lines at their off-floor offices 
or clearing firm, to members of options and futures exchanges, and to 
maintain order entry terminals to be consistent with the Act. ETF 
specialists will be permitted to enter proprietary options \16\ and 
futures orders, proprietary orders in the ETF on other market centers, 
and in component securities of the ETF. In addition, specialists will 
be permitted to obtain market information regarding the ETF, options, 
and futures on the ETF, and component securities of the ETF.\17\ The 
Commission notes that the specialist entering proprietary orders in a 
component security of the ETF with the upstairs clearing firm for 
execution on the floor of the Exchange must enter and execute the 
orders in accordance with Rule 11a2-2(T) under the Act \18\ and NYSE 
Rule 112.20 and must enter such orders only for the purpose of hedging 
a position in the ETF.\19\
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    \16\ Any proprietary options order must be executed in 
compliance with NYSE Rule 105, which generally restricts 
specialist's specialty options transactions to hedging transactions.
    \17\ The Commission notes that the specialist will only be able 
to gain public market information from other market centers. See, 
e.g., NYSE Rule 115.
    \18\ 17 CFR 240.11a2-2(T).
    \19\ See Amendment No. 3, supra note 6. NYSE Rule 112.20 states, 
in relevant part, that a member using a communication facility 
located on the Floor of the Exchange to enter an order for his own 
account will be deemed to be initiating an off-Floor order if such 
order is routed through a clearing firm's order room, where a time-
stamped record of the order is maintained, before such order re-
transmitted to the Floor for execution. However, an off-Floor order 
for an account in which a member has an interest is to be treated as 
an on-Floor order if it is executed by the number who initiated it. 
Rule 11a2-2(T) under the Act relates to conditions surrounding a 
member's ability to trade for his own account or for the account of 
an associated person on the floor of the Exchange.
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    The NYSE proposes to amend NYSE Rule 13 to remove the requirement 
that the specialist obtain the prior approval of a Floor Governor or 
two Floor Officials before electing a stop order or a stop limit order 
by a quotation. The specialists, however, must obtain Floor Official 
approval in the situation where the bid or offer that would elect a 
stop or stop limit order is more than 0.10 point away from the last 
sale and is made for the specialist's dealer account.\20\ The 
Commission believes that the amendment to NYSE Rule 13 is consistent 
with the Act.
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    \20\ The Commission notes that the amendment to NYSE Rule 13 
parallels the specialist's responsibility to obtain floor official 
approval under NYSE Rule 123A.40 in situations where the specialist 
is a party to the electing trade.
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    The Commission notes that, pursuant to the proposed rule change, 
ETFs will not be subject to the NYSE's MOC/LOC policy regarding order 
entry limitations, cancellation of orders during a regulatory halt, 
imbalance publications, and any other limitations or procedures with 
respect to MOC/LOC procedures. Moreover, ETFs will trade until 4:15 
p.m., except on the last business day of each month.\21\ ETFs will not 
be subject to the NYSE's policies concerning mandatory pre-opening 
price indications and notifications in cases of order balances because 
ETF prices are based on the values of the underlying component 
securities, notwithstanding any other imbalance. The Exchange will 
publish Information Memos to notify member organizations of the 
foregoing policies. The Commission finds that these policies, as 
revised, are appropriate in the context of ETFs.
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    \21\ See supra note 12.
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    Finally, the Commission, pursuant to Section 19(b)(2) of the 
Act,\22\ finds good cause for approving Amendment No. 3 to the proposed 
rule change prior to the thirtieth day after the date of publication in 
the Federal Register. In Amendment No. 3, the NYSE withdrew the 
proposed amendment to NYSE Rule 111; revised the rule text of NYSE Rule 
36 to clarify that if an order in a component security of an ETF is 
executed on the Exchange floor, the order must be in compliance with 
NYSE Rule 112.20 and Rule 11a2-2(T) under the Act,\23\ and must be for 
the purpose of hedging a position in the ETF; and revised its proposed 
amendment to NYSE Rule 13 to require Floor Official approval in a 
situation where the bid or offer that would elect a stop or stop limit 
order is more than 0.10 point away from the last sale and is made for 
the specialist's dealer account. The Commission finds these changes are 
necessary to clarify the rules governing the ability of specialists to 
execute trades for their own account on the Exchange. Therefore, 
accelerated approval of Amendment No. 3 is appropriate.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ 17 CFR 240.11a2-2(T).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the whether Amendment No. 3 to 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

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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 NYSE. All 
submissions should refer to File No. SR-NYSE-2001-08 and should be 
submitted by August 24, 2001.

V. Conclusion

    for the foregoing reasons, the Commission finds that the NYSE's 
proposal to amend its rules and policies to accommodate the trading of 
certain ETFs on a UTP basis, as amended, is consistent with the 
requirements of the Act and rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-NYSE-2001-08), as amended, 
is approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12)
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-19436 Filed 8-2-01; 8:45 am]
BILLING CODE 8010-01-M