[Federal Register Volume 66, Number 168 (Wednesday, August 29, 2001)]
[Notices]
[Pages 45713-45715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21739]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44739; File No. SR-ISE-00-22]


Self-Regulatory Organizations; International Securities Exchange 
LLC; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendments Nos. 1 and 2 to the 
Proposed Rule Change Relating to Market Maker Financial Requirements

August 22, 2001.

1. Introduction

    On November 28, 2000, the International Securities Exchange LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``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 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 proposed rule change was published for 
comment in the Federal Register on February 9, 2001.\3\ No comments 
were received on the proposed rule change. On March 13, 2001, ISE filed

[[Page 45714]]

Amendment No. 1 \4\ and on August 8, 2001, ISE filed Amendment No. 2 to 
its proposal.\5\ This notice and order approves the proposed rule 
change, as amended, and solicits comments from interested persons on 
Amendments Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43922 (February 2, 
2001), 66 FR 9735.
    \4\ In Amendment No. 1, the Exchange clarified that it would be 
reviewing the adequacy of any business plans submitted under the 
proposed rule change, as well as clarified why it is unnecessary for 
ISE to appoint interim competitive market makers (``CMMs''). See 
letter from Michael Simon, Senior Vice President and General 
Counsel, ISE, to Kathy England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated March 12, 2001 
(``Amendment No. 1'').
    \5\ In Amendment No. 2, the Exchange deleted supplemental 
materials .02 and .03 to ISE Rule 809, which required, in part, that 
a member (1) notify the Exchange when it equity falls below the 
minimum requirement, and (2) submit a business plan for raising its 
equity to comply with ISE Rule 809, as well as allowed the Exchange 
to appoint an interim Primary Market Maker (``PMM''). In lieu of the 
supplemental materials, the Exchange submitted a draft Regulatory 
Information Circular specifying the foregoing requirements in 
greater detail. ISE has represented that it will submit any changes 
to the Regulatory Information Circular to the Commission pursuant to 
Rule 19b-4, 17 CFR 240.19b-4. See letter from Michael Simon, Senior 
Vice President and General Counsel, ISE, to Nancy Sanow, Assistant 
Director, Division, Commission, dated August 7, 2001 (``Amendment 
No. 2''). The Exchange also clarified that if the Exchange appoints 
an interim PMM, ISE will appoint the interim PMM in accordance with 
ISE Rule 802. An interim PMM will have the same responsibilities and 
obligations as a regular PMM. Telephone conversation between 
Jennifer M. Lamie, Assistant General Counsel, ISE, and Terri L. 
Evans, Special Counsel, Division, Commission, on August 15, 2001.
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II. Description

    Exchange Rule 809 sets forth the minimum financial requirements for 
market makers. Currently, Exchange Rule 809 provides that every PMM 
maintain a cash or liquid asset position equal to the greater of $5 
million or an amount sufficient to assume a position of twenty options 
contracts of each class in which the PMM is appointed. Exchange Rule 
809 similarly provides that every CMM maintain a cash or liquid asset 
position equal to the greater of $1 million or an amount sufficient to 
assume a position of ten 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 proposed rule 
change would require CMMs to maintain net liquidating equity of not 
less than $1 million. With respect to PMMs, the proposed amendment 
would require PMMs to maintain net liquidating equity of not less than 
$3.25 million plus $25,000 excess equity for each issue over 10. 
According to the Exchange, 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. \6\
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    \6\ 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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    Under the proposed rule change, the Exchange would also replace the 
phrase ``cash or liquid asset position'' with ``net liquidating 
equity,'' and define the later term to conform to the Chicago Board 
Options Exchange's (``CBOE'') rule. \7\ 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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    \7\ 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. 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 if the deficiency cannot be rectified 
immediately. According to the Exchange, 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.\8\ ISE will review the adequacy of all business 
plans submitted by a deficient market maker,\9\ as well as review a 
market maker's continued compliance with the provisions of the 
plan.\10\ Finally, in the case of a PMM with a deficient net 
liquidating equity, the Exchange may determine to appoint an interim 
PMM to assure fair and orderly markets.\11\
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    \8\ ISE has represented that it also will separately monitor a 
market maker's net liquidating equity and notify a market maker if 
its net liquidating equity falls below the minimum level required by 
ISE Rule 809. Telephone conversation between Jennifer M. Lamie, 
Assistant General Counsel, ISE, and Terri L. Evans, Special Counsel, 
Division, Commission, on August 15, 2001.
    \9\ See Amendment No. 1, supra note 4.
    \10\ Telephone conversation between Jennifer M. Lamie, Assistant 
General Counsel, ISE, and Terri L. Evans, Special Counsel, Division, 
Commission, on August 15, 2001.
    \11\ See Amendment No. 2, supra note 5.
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III. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations thereunder.\12\ Specifically, the Commission finds that the 
proposed rule change is consistent with the requirements of section 
6(b)(5) of the Act \13\ 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.
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    \12\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    ISE proposes to amend its rule to revise the minimum financial 
requirements for market makers. Under the proposal, the minimum net 
liquidating equity for PMMs will be $3.25 million plus $25,000 excess 
equity for each underlying security upon which appointed options are 
open for trading in excess of the initial ten underlying securities. 
The minimum net liquidating equity for CMMs will be $1 million.
    The Commission believes that the proposed net liquidating equity 
requirements are designed to assure that ISE market makers are capable 
of making liquid and competitive markets. Although the proposal may 
reduce the minimum financial requirements for PMMs and CMMs, the 
Commission believes, based on the representations of ISE, that there 
are sufficient safeguards (in addition to the proposed minimum 
financial requirements) to assure that ISE's PMMs and CMMs are 
adequately capitalized. In this regard, the ISE has represented that it 
will separately monitor market makers to determine whether a market 
maker has fallen below the minimum net liquidating equity required by 
ISE Rule 809 and will notify the market maker if the market maker has 
failed to notify the Exchange of its deficiency.\14\ If the deficiency 
cannot be rectified immediately, the market maker must submit within 
five business days, a business plan for raising its equity to the 
appropriate level. ISE will review all business plans submitted by a 
deficient market maker,\15\ as well as review a market maker's 
continued compliance with the provisions of the plan.\16\ If the 
Exchange determines that summary suspension is necessary under ISE Rule 
1500, given the facts and circumstances, it will appoint an interim PMM 
to

[[Page 45715]]

assure that fair and orderly markets are continued in the PMM's 
assigned options.\17\
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    \14\ See Amendment No. 2, supra note 5, and telephone 
conversation between Jennifer M. Lamie and Terri L. Evans, supra 
note 8.
    \15\ See Amendment No. 1, supra note 4.
    \16\ Telephone conversation between Jennifer M. Lamie, Assistant 
General Counsel, ISE, and Terri L. Evans, Special Counsel, Division 
Commission, on August 15, 2001.
    \17\ See supra note 5.
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    The Commission also believes that the proposed financial 
requirements are comparable to the financial requirements at other 
options exchanges. For example, generally, on the American Stock 
Exchange (``Amex''), the financial requirement for options specialists 
is equal to a minimum of $600,000, plus $25,000 for each option issue 
in excess of the initial ten issues in which such specialist is 
registered,\18\ while on CBOE, a designated primary market maker 
(``DPM'') must maintain, in part, net liquidating equity in its DPM 
account of not less than $100,000, as well as conform to guidelines 
established by the MTS Committee, which require $350,000 plus $25,000 
in excess equity for each class or product allocated in excess of the 
initial eight products.\19\ On the Pacific Exchange (``PCX''), lead 
market makers that perform the function of an Order Book Official 
(``OBO'') must maintain, in part, a cash or liquid asset position of at 
least $500,000 plus $25,000 for each issue over five issues for which 
they perform the function of an OBO,\20\ while LMMs that do not perform 
the function of an OBO must maintain a cash or liquid asset position of 
at least $350,000 plus $25,000 for each issue over eight issues that 
has been allocated to the LMM.\21\ Finally, on the Philadelphia Stock 
Exchange (``Phlx'') members that are exempt from Rule 15c3-1 must 
generally maintain net liquid assets of $25,000.\22\ Phlx also has 
specific provisions applicable to FLEX and foreign currency options 
ROTs. For example, a specialist in FLEX index options must maintain a 
minimum of $1 million in net capital and an assigned ROT in foreign 
currency options must maintain a minimum $1 million in net liquid 
assets.\23\ Accordingly, the Commission believes that the proposal will 
help ISE market makers compete effectively with specialists at other 
exchanges. Increased competition, in turn, should benefit investors by 
producing a more efficient marketplace.
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    \18\ See Amex Rule 950(h).
    \19\ See CBOE Rule 8.86 and CBOE DPM Equity Guidelines 00-111.
    \20\ See PCX Rule 6.82 Commentary .03.
    \21\ See PCX Rule 6.82(c)(11).
    \22\ See Phlx Rule 703.
    \23\ See Phlx Rule 1079(c)(2) and Phlx Rule 1069(d), 
respectively.
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    The Commission finds good cause for accelerating approval of 
Amendments Nos. 1 and 2 to the proposed rule change prior to the 
thirtieth day after the date of publication in the Federal Register. 
The Commission finds that Amendments Nos. 1 and 2 clarify ISE's 
proposal by providing additional information and representations 
regarding the operation of the proposed rule and guidance to be 
provided to members. Accordingly, the Commission believes that granting 
accelerated approval of Amendments Nos. 1 and 2 is appropriate and 
consistent with sections 6(b)(5) and 19(b)(2) of the Act.\24\ in that 
it should promote just and equitable principles of trade and, in 
general, protect investors and the public interest.
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    \24\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. I and 2, including whether the 
Amendments are 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, 
D.C. 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 September 19, 2001.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NYSE-00-22), as amended, is 
approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21739 Filed 8-28-01; 8:45 am]
BILLING CODE 8010-01-M