[Federal Register Volume 68, Number 45 (Friday, March 7, 2003)]
[Notices]
[Pages 11165-11167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5425]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47420; File No. SR-NQLX-2003-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by Nasdaq Liffe Markets, LLC, 
Relating to Revised Reporting Requirements for Exchange for Physical 
Trades

February 27, 2003.
    Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on February 11, 2003 Nasdaq Liffe Markets, LLC (``NQLX'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change described in Items I, II, and III below, which 
Items have been prepared by NQLX. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons. NQLX also filed the proposed rule change with the Commodity 
Futures Trading Commission (``CFTC''), together with written 
certifications on February 6, 2003 under Section 5c(c) of the Commodity 
Exchange Act \3\ (``CEA'').\4\
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ 7 U.S.C. 7a-2(c).
    \4\ Telephone conversation between Kathleen Hamm, Senior Vice 
President of Regulation and Compliance, NQLX, and Ian K. Patel, 
Attorney, Division of Market Regulation (``Division''), Commission 
on February 24, 2003.
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    NQLX proposes to adopt a change to its Rule 420(b) relating to the 
reporting, submission, and dissemination of trade information 
concerning exchange for physical trades.\5\-\7\ The proposed 
change would allow the reporting and dissemination of information 
related to exchange for physical trades effected by sophisticated and 
experienced customers (i.e., ``wholesale customers'') during hours 
other than trading hours for the futures leg of the transaction on the 
next trading day. As for exchange for physical trades effected for 
customers other than those meeting the definition of wholesale 
customers, there would be no change to the reporting requirements and 
those transactions would still need to be transacted during trading 
hours on the exchange and reported as soon as practicable but not 
longer than 30 minutes after the arranging of the transaction. Below is 
the text of the proposed rule change. Proposed new language is 
italicized. Proposed deletions are in [brackets].
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    \5\-\7\ An exchange for physical trade occurs between 
two parties where the first party sells, and the second party buys, 
the related physical (e.g., the common stock underlying a security 
futures contract) while simultaneously the first party buys, and the 
second party sells, an appropriate number of futures contracts, 
known as the ``futures leg'' of the transaction. See NQLX Rule 
420(a)(2). Exchange for physical trades allow certainty of execution 
at one place and in one transaction for the two parties to the 
transaction instead of requiring the parties to execute multiple 
transactions across several exchanges, which inherently creates risk 
that one market will move before the entire transaction can be 
executed. Generally, on futures exchanges, exchange for physical 
trades are negotiated and effected by parties outside the 
centralized market, and the exchange reports the futures leg as 
either transferred, newly created, or offset. Johnson and Hazen, 
Commodities Regulation Sec.  1.03[3] (3d ed. 2002). The CEA and the 
regulations of the CFTC both recognize exchange for physical trades 
as properly executed outside the centralized market. Commodity 
Exchange Act Sec.  5(b)(3), 7 U.S.C. 7a-1 (2000) and CFTC Regulation 
Sec.  1.38, 17 CFR 1.38; see Id.
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Rule 420 Exchange for Physical Trades
* * * * *
(b) Information Recording, Submission, and Dissemination
    (1) No change.
    (2) As soon as practicable but no later than (i) 30 minutes after 
effecting an Exchange for Physical Trade during trading hours on Market 
Days or (ii) 15 minutes after the opening of trading for the Futures 
Leg on the first Market Day after effecting an Off-Hours Exchange for 
Physical Trade, the Member--when the transaction is between a Member 
and a Customer--and the Member selling the Futures Leg--when the 
transaction is between two Members unless otherwise mutually agreed to 
by the two Members--must submit through the ATS the following 
information concerning the Exchange for Physical Trade:
    (i) to (xii) No change.
    (xiii) quantity of the Related Physical, [and]
    (xiv) to (xv) No change.
    (3) No change.
    (4) After sending the confirmation for the Exchange for Physical 
[t]Trade, NQLX will disseminate through the ATS the following 
information:
    (i) to (vi) No change.
    (5) to (7) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    NQLX has prepared statements concerning the purpose of, and basis 
for, the proposed rule change, burdens on

[[Page 11166]]

competition, and comments received from members, participants, and 
others. The text of these statements may be examined at the places 
specified in Item IV below. These statements are set forth in Sections 
A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Simultaneously with this filing, NQLX submitted to and certified 
with the CFTC, proposed rule changes to NQLX Rules 101(a)(79) and 
420(a). These proposed changes would allow members and persons 
associated with members to effect exchange for physical trades for 
sophisticated and experienced customers (known as ``wholesale 
customers'' \8\) during hours other than trading hours for the futures 
leg of the transaction.\9\ NQLX states that its general rule provisions 
on exchange for physical trades (NQLX Rule 420(a)), as well as its 
proposed changes to those provisions and the related definition of 
wholesale customers (NQLX Rule 101(a)(79)), do not fall within the 
categories of changes required to be submitted to the Commission for 
publication.\10\ However, to implement the proposed changes to Rules 
101(a)(79) and 420(a), NQLX proposes adopting a change to its Rule 
420(b) relating to the reporting, submission, and dissemination of 
trade information for exchange for physical trades.\11\-\13\
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    \8\ NQLX Rule 101(a)(79), as amended would revise the definition 
of wholesale customer to require that a customer receive 
notification from a Member that the customer is not only qualified 
to participate in block trades, but is also qualified to participate 
in exchange for physical trades at times other than during trading 
hours on market days for the futures leg.
    \9\ The rules of other futures exchanges allow exchange for 
physical trades to be effected after the close of trading and 
reported shortly after opening of trading the following trading day. 
See e.g., New York Futures Exchange Rule 303(e)(5)(iii)(2); Coffee, 
Sugar & Cocoa Exchange Rule 3.06(e)(iii)(2).
    \10\ 15 U.S.C. 78s(7)(A).
    \11\-\13\ NQLX previously submitted its Rule 420(b) 
to the Commission for publication as part of its rules related to 
the establishment of audit trails necessary or appropriate to 
facilitate coordinated market surveillance. Securities Exchange Act 
Release No. 46774, (November 5, 2002) 67 FR 68895, 68897 (November 
13, 2002); see also 15 U.S.C. 78f(h)(3)(J).
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    The proposed rule change to NQLX Rule 420(b) would require a member 
to report trade information on exchange for physical trades effected 
after the close of trading for wholesale customers within 15 minutes 
after the opening of trading on the next trading day. As for exchange 
for physical trades effected for customers other than those meeting the 
definition of wholesale customers or effected for any customer during 
trading hours, there would be no change to the reporting requirements 
and those transactions would still need to be transacted during trading 
hours on the exchange and reported as soon as practicable but not 
longer than 30 minutes after the arranging of the transaction. The 
remaining proposed changes to Rule 420(b) correct typographical errors.
2. Statutory Basis
    NQLX files this proposed rule change pursuant to Section 19(b)(7) 
of the Act.\14\ NQLX believes that the proposed rule change is 
consistent with the requirements of the Commodity Futures Modernization 
Act of 2000,\15\ including the requirement that trading in a listed 
security futures contract is not readily susceptible to manipulation of 
its price nor to causing or being used to manipulate the price of the 
underlying security, options on the security, or options on a group or 
index including the security.\16\ NQLX further believes that its 
proposed rule change complies with the requirements under Section 
6(h)(3) of the Act \17\ and the criteria under Section 2(a)(1)(D)(i) of 
the CEA,\18\ as modified by joint orders of the Commission and the 
CFTC. In addition, NQLX believes that its proposed rule change is 
consistent with the provisions of Section 6 of the Act,\19\ in general, 
and Section 6(b)(5) of the Act,\20\ in particular, which requires, 
among other things, that the rules of an exchange be designed to 
prevent fraudulent and manipulative acts and practices, to facilitate 
transactions in securities and, in general, to protect investors and 
the public interest.
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    \14\ 15 U.S.C. 78s(b)(7).
    \15\ Public Law 106-554, 114 Stat. 2763 (2000).
    \16\ See Section 6(h)(3)(H) of the Act, 5 U.S.C. 78f(h)(3)(H).
    \17\ 15 U.S.C. 78f(h)(3).
    \18\ 7 U.S.C. 2(a)(1)(D)(i).
    \19\ 15 U.S.C. 78f.
    \20\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NQLX does not believe that the proposed rule change will result in 
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

    NQLX neither solicited nor received written comment on the proposed 
rule change.

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

    Concurrent with the filing of the proposed rule change with the 
SEC, NQLX has filed on February 6, 2003 a written certification with 
the CFTC under Section 5c(c) \21\ of the CEA and CFTC Regulation Part 
40.6 \22\ in which NQLX certifies that it believes that its proposed 
changes to Rule 420 as well as Rule 101(a)(79) comply with the CEA. 
Proposed changes to Rules 101(a)(79) and 420 are effective on February 
7, 2003, the day after their filing with the CFTC.
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    \21\ 7 U.S.C. 7a-2(c).
    \22\ 17 CFR 38.4.
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    Within 60 days of the date of effectiveness of the proposed rule 
change, the Commission, after consultation with the CFTC, may summarily 
abrogate the proposed rule change and require that the proposed rule 
change be refiled in accordance with the provisions of Section 19(b)(1) 
of the Act.\23\
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    \23\ 15 U.S.C. 78s(b)(1).
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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 conflicts with the Act. Persons making written submissions 
should file nine copies of the submission with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments also may be submitted electronically to the 
following e-mail address: [email protected]. 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 these filings also will be available 
for inspection and copying at the principal office of NQLX. All 
submissions should refer to File No. SR-NQLX-2003-04 and should be 
submitted by March 28, 2003.


[[Page 11167]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(75).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-5425 Filed 3-6-03; 8:45 am]
BILLING CODE 8010-01-P