[Federal Register Volume 68, Number 120 (Monday, June 23, 2003)]
[Notices]
[Pages 37187-37188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15712]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48029; File No. SR-PCX-2002-25]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the Pacific Exchange, Inc., To Eliminate the 
Lead Market Maker Concentration Limit of 15% of the Issues Traded on 
the Exchange's Options Floor

June 13, 2003.
    On April 22, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), 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 eliminate the concentration limit for the 
number of issues that a Lead Market Maker (``LMM'') on the Exchange may 
be allocated. Notice of the proposed rule change was published

[[Page 37188]]

for comment in the Federal Register on May 9, 2003.\3\ No comments were 
received on the proposed rule change.
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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. 47795 (May 5, 2003), 
68 FR 25074.
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    Current PCX Rule 6.82 requires the Options Allocations Committee 
(``OAC'') to allocate option issues to LMMs based on an overall 
evaluation of such factors as a candidate's adequacy of capital, 
operational capacity, support personnel, trading crowd evaluations and 
history of adherence to Exchange rules and securities laws. However, 
absent extraordinary circumstances, no LMM may be allocated more than 
15% of the number of issues traded on the options floor.
    The Exchange now proposes to eliminate this fixed concentration 
limit. Instead, PCX would add the number and quality of issues already 
allocated to an LMM to the list of factors considered by the OAC. 
Additionally, PCX would adopt a guideline requiring the OAC to consider 
the concentration of an LMM's issues if an event or proposal would 
cause the LMM to meet either of the following criteria: (i) The number 
of issues allocated to it (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 it (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 met either of these criteria, the 
guideline would require the OAC to evaluate 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 subject proposal. The 
OAC would also retain the discretion to review an LMM's level of 
concentration at any time, regardless of whether the above criteria are 
met.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\4\ 
Specifically, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act,\5\ which requires, among other things, that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, 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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    \4\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78(c)(f).
    \5\ 15 U.S.C. 78f(b)(5).
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    The Commission has previously noted that PCX's concentration limits 
serve the purpose of minimizing the disturbance to a fair and orderly 
market that might otherwise result from the failure of an LMM.\6\ 
However, as the Commission has also noted, other exchanges do not 
impose specified mandatory limits on the number of options that may be 
allocated to specialists.\7\ The Commission believes that the approach 
proposed by PCX is similar to one employed by the Chicago Board Options 
Exchange (``CBOE''). Like the proposed PCX Rule and Guidelines, CBOE 
Rule 8.84 and Regulatory Guideline 99-135 do not impose a mandatory cap 
on the number of issues that may be allocated to a Designated Primary 
Market-Maker (``DPM''). Instead, the CBOE guideline provides that a 
review with the relevant committee may be triggered when, inter alia, 
the number of classes allocated to a DPM is 25% or more of the total 
number of classes traded on CBOE. The Commission believes that it is 
permissible for the PCX to adopt a similar approach. The Commission 
further believes that the proposed rule changes should provide PCX with 
an appropriate degree of regulatory flexibility, and allow it to 
compete more effectively with other exchanges. At the same time, the 
proposal should preserve the Exchange's ability to minimize the risks 
associated with potential LMM failures.
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    \6\ See Securities Exchange Act Release No. 42583 (March 28, 
2000), 65 FR 17689 (April 4, 2000).
    \7\ Id. at 17690; Chicago Board Options Exchange Rule 8.84, 
Regulatory Guideline 99-135; American Stock Exchange Rule 26, 
Interp. 03.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-PCX-2002-25) be, and 
it hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    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. 03-15712 Filed 6-20-03; 8:45 am]
BILLING CODE 8010-01-P