[Federal Register Volume 68, Number 90 (Friday, May 9, 2003)]
[Notices]
[Pages 25074-25076]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11586]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47795; File No. SR-PCX-2002-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Elimination of the 
Lead Market Maker Concentration Level of 15% of the Issues Traded on 
the Exchange's Options Floor

May 5, 2003.
    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 April 22, 2002, 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. On April 29, 2003, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ 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.
    \3\ See letter from Mai Shiver, Senior Attorney, Regulatory 
Policy, PCX, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, SEC, dated April 28, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to eliminate the concentration limit for 
the number of issues that a Lead Market Maker (``LMM'') on the Exchange 
may be allocated. Below is the text of the proposed rule change. 
Proposed new language is italicized. Proposed deletions are in 
[brackets].
* * * * *

Pacific Exchange, Inc. Rules of the Board of Governors

* * * * *
Rule 6.82 (a)-(d)--No change.
(e) Allocation:
    (1) Allocation. The allocation of option issues to LMMs [shall] 
will be effected by the Options Allocation Committee. The Options 
Allocation Committee [shall] will select that candidate who appears 
best able to perform the function of an LMM in the designated option 
issue. Factors to be considered for selection include, but are not 
limited to, the following: 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; trading crowd 
evaluations made pursuant to [OFPA B-13] Rule 6.100; and any other 
criteria specified in this Rule. The Options Allocation Committee will 
also consider the number and quality of issues that have been 
allocated, reallocated or transferred to a Lead Market Maker.
    (2) Transfer of Issues. Issues allocated to an LMM may not be 
transferred to another firm or between nominees without the express 
approval of the Options Allocation Committee.
    [(3) Concentration of Issues. In the absence of extraordinary 
circumstances, as determined by the Options Allocation Committee, no 
LMM may be allocated more than fifteen percent (15%) of the

[[Page 25075]]

number of issues traded on the Options Floor.]
    [(4)] (3) Evaluation of LMMs. The Options Allocation Committee 
shall monitor and evaluate the performance of LMMs with regard to 
quality of markets and shall do so at least semiannually. In reviewing 
and evaluating an LMM's performance, the Committee will consider, among 
other things, the LMM's evaluation conducted pursuant to [Options Floor 
Procedure Advice B-13] Rule 6.100, the LMM's compliance with Exchange 
Rules, including, but not limited to, Rule 6.32 through 6.40 and 
Article XI, Section 2 of the Exchange Constitution.
* * * * *

Guidelines of the Options Allocation Committee

    The Options Allocation Committee has developed a guideline to 
assist the Committee in its review of matters that affect the level of 
LMM concentration on the Exchange. The Committee intends to evaluate 
matters related to the LMM concentration by considering a number of 
factors, including the number of issues allocated to an LMM and the 
contract volume in the products allocated to a LMM.
    Under the Committee's guidelines, the Committee intends to take 
into consideration an LMM's level of concentration if there is an event 
or proposal that would cause an LMM to meet either of the following 
criteria:
    1. The number of issues allocated to an LMM (and any affiliated 
LMM) is 25% or more of the total number of issues traded on the PCX;
    2. The volume in the issues allocated to an LMM (and any affiliated 
LMM) is 50% or more of the total volume of the PCX or 25% or more of 
the total volume in equity option issues of the PCX.
    If there is an event or proposal that would cause an LMM to reach 
either of the two above criteria (such as, for example, the allocation 
to an LMM of additional issues or a proposal involving a transfer of 
interest in an LMM organization), the Committee will carefully evaluate 
the level of concentration that would result. If the Committee 
determines that the event or proposal would result in an unacceptable 
level of concentration, the Committee could exercise its discretion and 
take action to lower the resulting level of concentration or to deny 
the applicable proposal. The Committee retains the discretion to review 
an LMM's level of concentration at any time regardless of whether the 
above criteria are satisfied.
* * * * *

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
    Current PCX Rule 6.82(e) provides that the allocation of option 
issues to an LMM is effected by the Options Allocations Committee 
(``OAC''). Under this rule, the OAC selects the candidate who appears 
best able to perform the function of an LMM in a particular 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; trading crowd evaluations made 
pursuant to Options Floor Procedure Advice (``OFPA'') B-13 (renumbered 
Rule 6.100) \4\, and any other criteria specified in Rule 6.82. In 
addition to the above, the rule provides that in the absence of 
extraordinary circumstances, as determined by the OAC, the OAC may not 
allocate more than 15% of the number of issues traded on the Options 
Floor to any LMM.\5\
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    \4\ See Securities and Exchange Act Release No. 44345 (May 23, 
2001), 66 FR 30037 (June 4, 2001).
    \5\ In 2000, the Commission approved a PCX proposal to increase 
the cap on the percentage of issues per LMM from 10% to 15%. See 
Securities and Exchange Act Release No. 42583 (March 28, 2000), 65 
FR 17689 (April 4, 2000).
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    The options industry continues to experience a consolidation and 
withdrawal of liquidity providers and therefore, the Exchange is 
proposing a rule change that would eliminate the 15% LMM concentration 
limit and replace it with a provision that would require the OAC to 
consider the number and quality of issues that it has allocated, 
reallocated or transferred to an LMM. Consistently, the Exchange seeks 
to apply a guideline developed by the OAC in order to assist it in its 
review of matters that affect the level of LMM concentration on the 
Exchange. The guideline requires the OAC to take into consideration the 
concentration of an LMM's issues if there is an event or proposal that 
would cause an LMM to meet either of the following criteria: (i) the 
number of issues allocated to an LMM (and any affiliated LMM) is 25% or 
more of the total number of issues traded on the PCX; or (ii) the 
volume in the issues allocated to an LMM (and any affiliated LMM) is 
50% or more of the total volume of the PCX or 25% or more of the total 
volume in equity option issues of the PCX. If an LMM meets either of 
the two above criteria, the guideline requires the OAC to evaluate the 
level of concentration and determine whether the event or proposal 
would result in an unacceptable level of concentration. If so, the OAC 
could exercise its discretion and take action to lower the resulting 
level of concentration or to deny the applicable proposal. Pursuant to 
the guideline, the OAC will retain the discretion to review an LMM's 
level of concentration at any time regardless of whether the above 
criteria are satisfied.
    The Exchange believes that the rule change and accompanying 
guideline are necessary to assure not only that the OAC has the 
discretion to allocate an issue to the most qualified LMM, but also to 
maintain a competitive advantage relative to other options exchanges 
with respect to the number of issues that an LMM may be allocated.\6\
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    \6\ The Exchange notes that the Chicago Board Options Exchange 
(``CBOE'') has a guideline, which dates back to 1999, that has no 
mandatory cap on the number of issues that may be allocated to a 
Designated Primary Market-Maker (``DPM''). The CBOE guideline may 
trigger a review with the relevant committee when, inter alia, the 
number of classes allocated to a DPM is 25% or more of the total 
number of classes traded on CBOE. See CBOE Regulatory Guideline 99-
135.
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2. Statutory Basis
    The Exchange believes that the proposed rule changes are consistent 
with section 6(b) \7\ of the Act, in general, and further the 
objectives of section 6(b)(5),\8\ in particular, in that they are 
designed to facilitate transactions in securities, to promote just and 
equitable principles of trade, to enhance competition, to perfect the 
mechanism of a free and open market and to protect investors and the 
public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

[[Page 25076]]

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

    The PCX 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of PCX. All submissions 
should refer to File No. PCX-2002-25 and should be submitted by May 30, 
2003.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11586 Filed 5-8-03; 8:45 am]
BILLING CODE 8010-01-P