[Federal Register Volume 66, Number 156 (Monday, August 13, 2001)]
[Notices]
[Pages 42572-42574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44657; File No. SR-BSE-2001-04]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 by the Boston Stock Exchange, Inc. Relating to Capital 
Requirements for Specialists and Competing Specialists Trading 
Portfolio Depositary Receipts

August 6, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''), \1\ and Rule 19b-4 thereunder, \2\ notice is hereby 
given that on June 29, 2001, the Boston Stock Exchange, Inc. (``BSE'' 
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 
BSE.\3\ The

[[Page 42573]]

Commission is publishing this notice to solicit comments on the 
proposed rule change and Amendment No. 1 from interested persons and to 
approve the proposal, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On August 1, 2001, the BSE filed Amendment No. 1 to the 
proposal. See letter from John A. Boese, Assistant Vice President, 
Rule Development and Market Structure, BSE, to Katherine England, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission, dated July 31, 2001 (``Amendment No. 1''). In Amendment 
No. 1, the BSE states that it has carefully evaluated volume and 
price measures for the portfolio depositary receipts (``PDRs'') that 
BSE specialists trade actively and concluded that the proposed 
equity requirement will continue to ensure that BSE specialists have 
sufficient resources to perform their market making obligations 
effectively. In addition, the BSE states that neither the volume nor 
the price of PDRs necessitates an additional equity requirement 
(i.e., an equity requirement in excess of $200,000), and that the 
BSE requests elimination of the additional equity requirement so 
that the capital requirement for PDRs will be more commensurate with 
the exposure to risk. In a telephone conversation on August 6, 2001, 
the BSE confirmed that the additional equity requirement discussed 
in Amendment No. 1 refers to an equity requirement in excess of 
$200,000. Telephone conversation between Yvonne Fraticelli, Special 
Counsel, Office of Market Supervision, Division, Commission, and 
John Boese, Assistant Vice President, Rule Development and Market 
Structure, BSE, on August 6, 2001 (``August 6 Conversation'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The BSE proposes to amend Chapter XXIV, ``Portfolio Depositary 
Receipts,'' Section 6, ``Limitation on Exchange Liability,'' 
Interpretation and Policy .01 (``Interpretation and Policy. 01'') of 
the BSE's rules to reduce the minimum equity requirement for the 
trading of PDRs by specialists and competing specialists from 
$1,000,000 to $200,000. Because Interpretation and Policy .01, as 
amended, would make Interpretation and Policy .03 to Chapter XXIV, 
Section 6 (``Interpretation and Policy .03'') of the BSE's rules 
unnecessary, the BSE proposes to delete Interpretation and Policy 
.03.\4\
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    \4\ See Securities Exchange Act Release No. 44269 (May 7, 2001), 
66 FR 24417 (May 14, 2001) (order approving File No. SR-BSE-00-22) 
(adopting Interpretation and Policy .03). Under Interpretation and 
Policy .03, the minimum equity requirement for derivative based 
trading products is reduced from $1,000,000 to $200,000 when a BSE 
member firm arranges to clear its trades through a non-Boston Stock 
Exchange Clearing Corporation member clearing center.
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    The text of the proposed rule change is available at the BSE and at 
the Commission.

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 BSE 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 III below. The BSE 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 BSE seeks to amend its rule establishing a separate minimum 
equity requirement for specialists and competing specialists who trade 
PDRs. Currently, Interpretation and Policy .01 provides that the 
minimum equity requirement for the trading of PDRs by specialists and 
competing specialists is $1,000,000. The BSE's regular minimum equity 
requirement is $200,000.\5\ The BSE seeks to eliminate the separate 
higher minimum equity requirement for PDRs.
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    \5\ See Chapter XXII, ``Financial Reports and Requirements--
Aggregate Indebtedness--Net Capital,'' Section 2, ``Capital and 
Equity Requirements,'' of the BSE's rules.
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    According to the BSE, the Exchange imposed the $1,000,000 equity 
requirement for PDRs during the initial period of trading exchange 
traded funds (``ETFs'') on the BSE.\6\ Because ETFs were a relatively 
new and untested financial instrument, the BSE established the higher 
equity requirement due to the possible volatility of the new products 
and the unknown risks they might have posed to the BSE. According to 
the BSE, the BSE has since determined that ETFs do not pose undue 
financial exposure risk to the Exchange. The BSE states that ETFs are 
similar in most respects to ``standard'' equity securities.
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    \6\ The Commission approved the BSE's proposal to adopt listing 
standards and trading rules for PDRs in 1998. See Securities 
Exchange Act Release No. 39660 (February 12, 1998), 63 FR 9026 
(February 23, 1998) (order approving File No. SR-BSE-97-08).
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    In addition, the BSE states that it conducted an internal analysis 
to evaluate the overnight positions held by specialists who trade ETFs, 
both separately and in relation to other equity securities. As a result 
of this analysis, the BSE determined that the risks to the Exchange 
posed by specialists trading ETFs were commensurate with the risks 
posed by the trading of listed equity securities. Moreover, the BSE 
notes that short positions held by specialists overnight in ETFs were 
not measurably different from the positions held in other listed 
equities and, in either case, did not pose a financial risk to the BSE 
or its members beyond that for which the minimum equity requirement of 
$200,000 was deemed to be sufficient.
    In addition, the BSE states that it has carefully evaluated the 
volume and price measures for the PDRs and BSE specialists actively 
trade and that the proposed capital requirement will continue to ensure 
that BSE specialists have sufficient resources to perform their market 
making obligations.\7\ The BSE believes that neither the volume nor the 
price of PDRs necessitates an equity requirement for PDRs in excess of 
$200,000 and that the proposal will make the capital requirement for 
PDRs more commensurate with the exposure to risk.\8\
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    \7\ See Amendment No. 1, supra note 3.
    \8\ See Amendment No. 1, supra note 3.
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    Accordingly, the BSE seeks to amend Interpretation and Policy .01 
to reduce the minimum equity requirement for the trading of PDRs from 
$1,000,000 to $200,000 to bring the equity requirement for PDRs into 
parity with the BSE's minimum equity requirement and to eliminate the 
possibility of an unfair burden on firms that trade these products. In 
addition, the BSE seeks to eliminate Interpretation and Policy .03 from 
its rules because Interpretation and Policy .01, as amended, will make 
Interpretation and Policy .03 unnecessary.
(2) Basis
    The BSE believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act in that it is designated to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, 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, and is not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The BSE 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 comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change and Amendment No. 1 are consistent with the Act. Persons making

[[Page 42574]]

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 Amex. All submissions should refer to file 
number SR-BSE-2001-04 and should be submitted by September 4, 2001.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The BSE has asked the Commission to approve the proposal on an 
accelerated basis to ease the financial burden on member firms subject 
to the $1,000,000 capital requirement for PDRs.
    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. In particular, 
the Commission finds that the proposal is consistent with Section 
6(b)(5) of the Act,\9\ which requires, among other things, that the 
rules of a national securities 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. As discussed more fully above, the BSE established the 
current $1,000,000 capital requirement for PDRs during the initial 
period of trading ETFs on the BSE, when ETFs were a relatively new and 
untested financial instrument. The BSE established the $1,000,000 
capital requirement due to the possible volatility of ETFs and the 
unknown risks that they might have posed to the BSE.
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    \9\ 15 U.S.C. 78f(b)(5). In approving the proposed 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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    Since the initial period of trading PDRs on the BSE, the BSE states 
that it has determined that ETFs do not pose undue financial exposure 
risk to the BSE. In addition, the BSE states that an internal analysis 
performed by the Exchange indicated that specialists' trading of ETFs 
and listed equity products pose commensurate risks to the BSE. The 
Exchange states that it has carefully evaluated volume and price 
measures for PDRs that BSE specialists trade actively and that the 
proposed equity requirement will continue to ensure that BSE 
specialists have sufficient resources to perform their market making 
obligations effectively.\10\ The BSE believes that neither the volume 
nor the price of PDRs necessitates an equity requirement in excess of 
$200,000 of PDRs and that the proposal will make the capital 
requirement for PDRs more commensurate with the exposure to risk.\11\
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    \10\ See Amendment No. 1, supra note 3.
    \11\ See August 6 Conversation, supra note 3.
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    The Commission believes that the proposed $200,000 capital 
requirement for PDRs should help to ensure that BSE specialist continue 
to have adequate capital to conduct their market making activities. 
Accordingly, the Commission believes that it is not inconsistent with 
the Act for the BSE to reduce the specialist capital requirement for 
trading PDRs from $1,000,000 to $200,000. However, the Commission 
expects, and the BSE has agreed, that if there is a significant 
increase in the trading volume of PDRs, the BSE will reconsider the 
adequacy of its reduced capital requirement and, if appropriate, submit 
to the Commission a proposal to increase the capital requirement for 
specialists trading PDRs.\12\
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    \12\ See August 6 Conversation, supra note 3.
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    The Commission believes that it is reasonable for the BSE to 
eliminate Interpretation and Policy .03 because Interpretation and 
Policy .01, as amended, will make Interpretation and Policy .03 
unnecessary.
    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that accelerated approval of the proposal will 
reduce the financial burden on BSE specialists trading PDRs and 
facilitate the efficient allocation of market making capital. Amendment 
No. 1 strengthens the BSE's proposal by representing that BSE 
specialists trading PDRs will continue to have sufficient resources to 
fulfill their market making obligations under the reduced capital 
requirement. Accordingly, the Commission believes that there is good 
cause, consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\13\ to 
approve the proposal and Amendment No. 1 to the proposal on an 
accelerated basis.
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    \13\ 15 U.S.C. 78f(b)(5) and 78s(b)(2),
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-BSE-2001-04), as amended, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-20186 Filed 8-10-01; 8:45 am]
BILLING CODE 8010-01-M