[Federal Register Volume 67, Number 25 (Wednesday, February 6, 2002)]
[Notices]
[Pages 5631-5633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2792]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45351; File No. SR-PCX-2001-51]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc., 
Relating to Schedule of Fees and Charges for Options Market Share 
Shortfall Fee, Surcharge Fee, and Options Issue Transfer Fee

January 29, 2002.
    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 December 26, 2001, the Pacific Exchange, Inc. (``PCX'' 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 
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\ 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

    The PCX proposes to modify its Schedule of Fees and Charges to 
reflect a new options market share shortfall fee, surcharge fee, and 
options issue transfer fee.

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 PCX 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 PCX 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
Option Market Share Shortfall Fee
    The Exchange is proposing to adopt a new Lead Market Maker 
(``LMM'') shortfall fee, of $.35 per contract, to be paid by the LMM 
allocated any ``Top 120 Option'' if at least 10 percent of the total 
national monthly contract volume (``total volume'') for such Top 120 
Option is not achieved on the PCX in that month.\3\ A ``Top 120 
Option'' is defined by the proposal as one of the 120 most actively 
traded equity options in terms of the total number of contracts traded 
nationally for a specified month based on volume reflected by the 
Options Clearing Corporation (``OCC'')\4\.
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    \3\ The shortfall fee is similar to the Philadelphia Stock 
Exchange's shortfall fee. See Securities Exchange Act Release No. 
43201 (August 23, 2000), 65 FR 52465 (August 29, 2000).
    \4\ The PCX intends to divide by two the total volume amount 
reported by OCC, which reflects both sides of an executed 
transaction, thus avoiding one trade being counted twice for 
purposes of determining overall volume.
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    The PCX states that at the end of each trading month, the total 
number of contracts executed on the PCX (the ``PCX volume'') in a 
particular Top 120 Option will be subtracted from the amount that 
represents 10 percent of the total national volume for that option 
(``10% total volume'') to determine the number of contracts that 
represent the ``shortfall'' for that Top 120 Option for purposes of 
calculating this fee.
    Specifically, the PCX will apply the following calculation: 10% 
total volume minus PCX volume equals the shortfall volume. If the 
shortfall volume is a number of contracts greater than zero, the 
shortfall volume will be multiplied by $.35 per contract to determine 
the LMM shortfall fee for that month for that Top 120 Option.\5\
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    \5\ If the result of the first equation (10% total volume minus 
PCX volume) was negative, meaning the PCX volume exceeded 10% total 
volume for a Top 120 Option, then there would be no shortfall to 
which the LMM shortfall fee would apply. Under the proposal, any 
excess volume (over the 10% total volume target) could not be 
carried over to another month, nor could any excess volume in one 
option be assigned to another option. Telephone conversation between 
Cindy Sink, Senior Attorney, Regulatory Policy, PCX, and Ira 
Brandriss, Special Counsel, and John Riedel, Attorney-Advisor, 
Division of Market Regulation (``Division''), Commission, January 
15, 2002 (``Telephone conversation with the PCX'').
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    In sum, if the PCX fails to garner 10 percent of the total volume 
for a particular month for a Top 120 Option, the LMM for that Top 120 
Option would be required to pay the Exchange the LMM shortfall fee for 
each contract that falls below 10 percent up to the amount that would 
represent 10 percent of the total volume for that option.\6\
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    \6\ Telephone conversation with the PCX.
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    The total volume for purposes of the 10 percent threshold is based 
on the current month's volume.\7\ However, the determination of whether 
an equity option is considered a Top 120 Option for purposes of the fee 
is based on a different time period. The Top 120 Options for January 
will be based on November's volume. Thereafter, the Exchange will 
continue the two-month differentiation, so that February's Top 120 
Options will be based on December's volume, and March's Top 120 Options 
will be based on January's volume, and so forth.
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    \7\ For example, for the month of December, the LMM shortfall 
fee would apply to 10 percent of total December volume minus the PCX 
December volume.
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    The purpose of the proposed rule change is to amend PCX's schedule 
of dues, fees and charges to impose a fee for any deficiency between 
what the PCX actually traded and 10 percent of the total volume for 
each respective month. PCX intends the proposed fee to provide the PCX 
with the approximate revenue it would have received had a Top 120 
Option traded at least 10 percent of the total volume in a given month 
on the PCX. The PCX represents that the options LMM shortfall fee

[[Page 5632]]

generally parallels the amount that the Exchange would have received if 
an equity option contract were traded on the PCX with an LMM.\8\
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    \8\ The $.35 is intended by the PCX to represent the following 
amounts, which, the PCX believes, may be generated by a trade on the 
PCX with an LMM: a $0.21 LMM transaction fee, an estimated $.06 from 
Options Price Reporting Authority (recognizing that tape revenue can 
fluctuate significantly due to changes in trade and pool size), and 
a $.05 options comparison fee, all of which could have been 
collected by the Exchange per contract traded by the crowd. 
Transactions not involving an LMM would generate less revenue. The 
above listing of fees commonly charged in an LMM transaction does 
not represent the fees generated by every such transaction, but has 
been utilized by the PCX on a general basis, with room for 
fluctuation, to calculate what it believes to be an appropriate 
shortfall fee. Telephone conversation with the PCX.
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    Pursuant to PCX rules, options are allocated to LMMs based on 
certain factors. LMMs submit written applications that include the LMMs 
experience and capitalization, a demonstration of the LMM's ability to 
trade the particular option, and any other reasons why the LMM believes 
it should be assigned or allocated the security.\9\ Once an option is 
allocated to an LMM, certain performance reviews may be conducted.\10\ 
A Top 120 Option is unique and may require specific qualifications as 
determined by the Options Allocation Committee (``OAC'') and strategic 
efforts.
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    \9\ See PCX Rule 6.82(e)(1).
    \10\ See  PCX Rule 6.82(f).
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    Moreover, the PCX believes that the options traded by the LMM and 
the transactions related thereto, may be especially valuable to that 
LMM and to the Exchange due to their potential profitability. 
Therefore, the Exchange believes that the LMM should compete for order 
flow in the national market, because that LMM is the key party 
responsible for marketing and receiving order flow in that particular 
option. The PCX believes that an LMM's willingness to apply to be or 
continue to be an LMM in a Top 120 Option, in light of the shortfall 
fees, is an important tangible demonstration of commitment to making 
the efforts required to achieve at least a 10 percent national volume 
level at the PCX.
    The Exchange believes that it is necessary to continue to attract 
order flow to the Exchange in order to remain competitive. The proposed 
fee should encourage LMMs to vigorously compete for order flow, which 
not only enhances the LMM's role, but also provides additional revenue 
to the Exchange. Moreover, the Exchange expects that LMMs' efforts to 
maintain at least 10 percent of the total volume should contribute to 
deeper, more liquid markets and tighter spreads. Thus, competition 
should be enhanced, and important auction market principles preserved.
    The above-described proposed fee will be effective the January 2002 
trade month.
Surcharge Fee
    The Exchange proposes to adopt a surcharge fee of 2.5% on the total 
amount billed on regular PCX member monthly invoices. The rate will be 
applied to total invoice amounts excluding registered representative 
fees, marketing fees and member dues and fines. This fee includes fees, 
charges, and pass through fees, and applies only to Options billings, 
not Equities and Clearing billings. The PCX states that the purpose of 
the fee is to generate revenue for the Exchange.
    The above-described proposed fee will be effective the January 2002 
trade month.
Options Issue Transfer Fee
    The Exchange proposes to establish a new fee for transfers of 
options issues. The fee imposes a charge of $1000 per option issue 
transferred upon the transferor. PCX Rule 6.82(e) provides for 
allocation of option issues to LMMs by the Options Allocation Committee 
(``OAC''). The OAC selects the candidate who appears best able to 
perform the functions of an LMM in the designated option issue. Factors 
to be considered for selection include, but are not limited to, 
experience with trading the option issue; adequacy of capital; 
willingness to promote the Exchange as a marketplace; operational 
capacity; support personnel; history of adherence to Exchange rules and 
securities laws; and trading crowd evaluations.\11\ Issues may only be 
transferred by a firm or between nominees with the express approval of 
the OAC.\12\ To transfer issues, the transferor must file an 
application with the Exchange. That application is posted to the floor 
for comment. After the comment period, the OAC evaluates and approves 
or denies the transfer. The Exchange researches the relevant statistics 
for the OAC evaluation. Each issue transferred expends Exchange 
resources.
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    \11\ See PCX Rule 6.82(e)(1).
    \11\ See PCX Rule 6.82(e)(2).
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    Transfers of issues were first permitted in June 2000. Since that 
time, the Exchange has processed 37 transfers involving over 452 
issues. The PCX states that the purpose of the fee is to cover 
administrative fees relating to transfers.
    The above described proposed transfer fee will be effective January 
1, 2002.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act,\13\ in general, and section 6(b)(4),\14\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among its members.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
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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.

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

    Written comments were not solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \15\ and subparagraph (f)(2) of Rule 19b-4 \16\ 
thereunder, because it establishes or changes a due, fee, or other 
charge imposed by the Exchange. At any time within 60 days of the 
filing of a rule change pursuant to section 19(b)(3)(A) of the Act, the 
Commission may summarily abrogate the 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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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(2).
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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

[[Page 5633]]

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 PCX. All submissions should refer to file 
number SR-PCX 2001-51 and should be submitted by February 27, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2792 Filed 2-5-02; 8:45 am]
BILLING CODE 8010-01-P