[Federal Register Volume 66, Number 162 (Tuesday, August 21, 2001)]
[Notices]
[Pages 43944-43946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44695; File No. SR-PCX-2001-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Order Service Firms

August 14, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notices is hereby given 
that on August 7, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 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\ 7 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt PCX Rule 6.60 (``Order Service 
Firms'') to allow members and member organizations to accept orders for 
the purchase and sale of stocks and futures contracts (and options 
thereon) from Exchange Market Makers and to forward such orders to the 
appropriate marketplace for execution. The text of the proposed rule 
change is available at the Office of the Secretary, the PCX and the 
Commission.

[[Page 43945]]

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. The Exchange 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 allow PCX members and 
member organizations to accept orders for the purchase and sale of 
stocks and futures contracts (and options thereon) from Exchange Market 
Makers and to forward such orders to the appropriate marketplace for 
execution. Members or member organizations who conduct an order 
execution service (``order service'') typically have as its primary 
function the execution of hedging transactions in underlying stocks or 
futures for Exchange options Market Makers. The Exchange options floor 
members and their personnel route such orders to other markets for 
execution. The Exchange recognizes the order service business as a 
floor function for which Exchange approval will be required. The 
Exchange believes that the proposed rule serves to assist the Exchange 
in regulating the business activities that is members and member 
organizations engage in.
    Under the requirements of the proposed rule change, members or 
member organizations seeking to act as Order Service Firms (``OSF'') 
would be required to register with the Exchange. An applicant for 
registration as an OSF would be required to file a written application 
with the Membership Department of the Exchange. Applications would be 
reviewed by the Exchange's Membership Committee. The Membership 
Committee would consider the applicant's financial condition, 
regulatory history, and such other factors the Membership Committee 
deems appropriate. After reviewing the application, the Membership 
Committee would either approve or disapprove the applicant's 
registration to become an OSF. Before registration, the Exchange's 
Membership Department, upon direction of the Membership Committee, 
would post the names of the member organization and its nominee(s) on 
the floor of the Exchange for at least three business days. The 
Exchange also proposes that an OSF be required to make available to 
Market Maker customers upon request a statement of financial condition 
as disclosed on its most recent balance sheet, which would be required 
to be prepared no later than the tenth business day following each 
calendar month-end. The Exchange believes that this would assist Market 
Makers in assessing the financial security of entrusting their orders 
with a particular OSF. The Exchange also believes that the proposed 
rule change would allow OSFs the ability to accept orders for the 
purchase or sale of commodity futures contracts (and options thereon). 
The OSF, however, would be required to comply with the Commodity 
Exchange Act (``CEA'') and the rules and regulations promulgated 
thereunder. Such a firm would be required to keep the Exchange's 
Department of Financial and Operational compliance Department 
(``FOCD'') apprised of its registration status under the CEA on an 
ongoing basis and also would be required to keep it appraised regarding 
any financial reporting or capital requirements.
    The Exchange proposes that prior to accepting orders from Market 
Makers on the Floor of the Exchange, all OSF's would be required to 
have on file with the Exchange and in effect an updated Letter of 
Authorization issued for such firm by a member of the Options Clearing 
Corporation. That Letter of Authorizations would be required to be in a 
form prescribed by the Exchange and would be required to provide that 
the issuing Clearing Member accepts financial responsibility for all 
orders handled by the OSF on the Floor of the Exchange and for all 
financial obligations of the OSF to the Exchange. Further, the Exchange 
proposes that Exchange Clearing Members seeking to act as OSFs need not 
register as such in order to accept orders from Market for which they 
have an existing letter of Authorization. Clearing Members would not be 
permitted to authorize more than three OSFs without the prior written 
approval of the FOCD. In considering a request to authorize more than 
three such firms, the Exchange proposes that the FOCD considers the 
Clearing Member's level of access net capital, additional financial 
resources, and such other factors as the FOCD deems appropriate. 
Moreover, the Exchange has determined that because of the limited 
number of clearing firms that operate on its floor, Clearing Members 
that act as OSFs would not be counted towards the established limit of 
three.
    Finally, the proposal provides that a Letter of Authorization must 
remain in effect until a written notice of revocation is filled with 
the Exchange. if the notice is filed within at least one hour prior to 
the opening of trading, the revocation would not become effective until 
the close of trading on that particular day. Upon request by the 
Clearing Members that files the notice of revocation, the Exchange 
would post the notice on the Floor of the Exchange.
    The Exchange notes that the Commission has approved a similar rule 
filing of the Chicago Board Options Exchange, Inc. (``CBOE'').\3\ The 
Commission approved a proposed rule change that recognized the 
existence of OSF's under CBOE Rules.\4\ The Exchange believes that the 
proposed rule change would assist its regulatory staff in monitoring 
the activities of its members and member organizations so as to ensure 
that investors and the public interest are protected.
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    \3\ See Securities Exchange Act Release No. 24814 (August 18, 
1987), 52 FR 42224 (August 26, 1987) (order approving SR-CBOE-87-
07).
    \4\ Id. In a subsequent amendment, the Commission approved the 
expansion of CBOE's OSF Rule to allow for the ability to take Market 
Maker orders for the purchase or sale of commodity futures contracts 
and options thereon. See Securities Exchange Act Release No. 34841 
(October 14, 1994), 59 FR 52999 (October 20, 1994) (order approving 
SR-CBOE-94-16).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\5\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\6\ in particular, in that it 
is designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, and protect investors 
and the public interest by establishing a mechanism for improving the 
PCX regulatory function.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

[[Page 43946]]

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

    Because the foregoing proposed rule change does not (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, and the Exchange 
provided the Commission with written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date, it has become effective pursuant to section 19(b)(3)(A) of the 
Act \7\ and Rule 19b-4(f)(6) thereunder.\8\ At any time within 60 days 
of the filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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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 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 
PCX.
    All submissions should refer to File No. SR-PCXC-2001-32 and should 
be submitted by September 11, ,2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-20977 Filed 8-20-01; 8:45 am]
BILLING CODE 8010-01-M