[Federal Register Volume 68, Number 158 (Friday, August 15, 2003)]
[Notices]
[Pages 48977-48978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20820]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48307; File No. SR-NYSE-2002-63]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 Relating to Amendments 
to Rules 98, 104A.50, 105, and 900 To Permit Single Stock Futures 
Hedging by Specialists

August 8, 2003.

I. Introduction

    On November 21, 2002, the New York Stock Exchange (``NYSE'' 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 amend certain Exchange rules to permit single 
stock futures hedging by specialists. On January 10, 2003, the rule 
proposal was published for comment in the Federal Register.\3\ On July 
23, 2003 the NYSE filed Amendment No. 1 to the proposed rule change.\4\ 
The Commission received no comments on the proposed rule change. This 
order approves the proposed rule change, as amended, grants accelerated 
approval of Amendment No. 1 and solicits comments from interested 
persons on Amendment No. 1.
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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. 47160 (January 10, 
2003), 68 FR 02064 (January 17, 2003).
    \4\ In Amendment No. 1, the Exchange amended the definition of 
``security future'' in Rule 105(b) to conform it to the definition 
of that term in section 3(a)(55) of the Act for uniformity. The 
Exchange also made certain technical changes to the proposed rule 
text and added an example that describes the way a combination of 
options and single stock futures contracts may be used to hedge a 
specialty stock position. In addition, the Exchange acknowledged 
that the prohibition in section 6(h)(1) of the Act on effecting 
transactions in security futures products that are not listed on a 
national securities exchange would apply to the transactions 
permitted under the proposed rule change. The Exchange stated 
further that it will remind its members of this prohibition when it 
announces the approval of the proposed rule change.
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II. Description of the Rule Change

    Under the rule change, the Exchange will permit specialists to use 
security futures overlying single securities (hereinafter referred to 
as ``single stock futures'') to hedge specialty stock positions. Rule 
105 currently permits specialists to use options to hedge their 
specialty stock positions. Specifically, the Exchange is amending Rules 
105, 98, 104A.50, and 900(d)(v).

Amendments to Rule 105

    The Exchange is amending paragraph (d) of the Guidelines to Rule 
105 (the ``Guidelines'') to explain the conditions under which single 
stock futures may be used to hedge an existing specialty stock. Under 
the rule change, anticipatory hedging is not permitted. As is the case 
under Rule 105 with options, only existing specialty stock positions 
may be hedged.
    As amended, Rule 105 will provide three conditions (similar to 
those applicable to options) that single stock futures transactions 
must meet:
    (i) The transaction must result in a net futures position on the 
opposite side of the market from the underlying specialty stock 
position;
    (ii) The transaction must be effected solely to offset the risk of 
making a market in the underlying specialty stock; and
    (iii) The resulting net futures position must not exceed the number 
of shares of the specialty stock position that the specialist is 
offsetting.
    Any single stock futures transaction that does not meet all three 
of the above conditions would be deemed to be in violation of Rule 105.
    Under the rule change, a specialist would be able to use one single 
stock futures contract to hedge each 100 shares of the existing 
specialty stock position. A hedge that subsequently exceeds the 
specialty stock position being hedged as a result of 25% or more in the 
specialist's stock position or which becomes on the same side of the 
market as the specialty stock position must be liquidated, unless the 
equivalent share position is 5000 shares or less.
    Similarly, Rule 105 will be amended to specify that, as with 
options, specialists may also not front-run blocks and must record 
futures positions in a separate ``memo'' account. Additionally, 
specialists must report to the Exchange: (i) accounts in which single 
stock futures positions are held and (ii) their positions in single 
stock futures.
    Rule 105 permits an approved person of a specialist to act as a 
primary market maker or specialist with respect to an option on a 
specialty stock, provided all the requirements of the Rule 98 exemptive 
program are met. This provision will be amended to incorporate 
references to market makers in single stock futures so that an approved 
person of an equity specialist may act as a primary market maker or 
specialist with respect to a stock futures contract, provided all the 
requirements of the Rule 98 exemptive program are met.
    In addition, Rule 105 prohibits an approved person of an equity 
specialist from acting as a market maker in any equity security in 
which the associated specialist is registered as such and which 
underlies an option as to which the approved person acts as an options 
market maker. Under the rule change, the same prohibition will apply 
with respect to market makers in single stock futures contracts.
    The Exchange is adding a provision to Rule 105 to explain the 
combined use of both options and single stock futures to hedge 
specialty stock positions. Under the rule change, if a specialist 
chooses to hedge a specialty stock position with positions in both 
options and single stock futures, the resulting total market position, 
when established, may not exceed the size of the existing specialty 
stock position being hedged. Any excess or same side of the market 
equivalent position must be liquidated in accordance with the 
provisions of Rule 105.

Other Proposed Amendments

    In addition to the amendments to Rule 105, the Exchange is amending 
Rules 98, 104A.50, and 900(d)(v) to incorporate appropriate references 
to single stock futures.

[[Page 48978]]

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\5\ Specifically, the Commission believes the 
proposed rule change, as amended, is consistent with section 6(b)(5) of 
the Act,\6\ which requires, among other things, that the rules of the 
Exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to perfect the mechanism of a free and open market, and in 
general to protect investors and the public interest.
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    \5\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the rule change should provide 
specialists with greater flexibility in their ability to use hedging 
transactions to offset market-making risk. By permitting specialists to 
use single stock futures to hedge their specialty stock positions, the 
Commission believes that the rule change should enable specialists to 
add to overall stock market liquidity by taking specialty stock 
positions they might not otherwise assume or by reducing risks on 
positions they are required to assume.
    The Commission is accelerating approval of Amendment No. 1 to the 
proposed rule change. Amendment No. 1 made technical corrections and 
certain other minor changes to the proposed rule change. The Commission 
believes that the changes included in Amendment No. 1 should not affect 
the substance of the rule change. Accordingly, pursuant to Section 
19(b)(2) of the Act,\7\ the Commission finds good cause to approve 
Amendment No. 1 prior to the thirtieth day after notice of the 
Amendment is published in the Federal Register.
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    \7\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 also will be available for 
inspection and copying at the principal office of the NYSE. All 
submissions should refer to File No. SR-NYSE-2002-63 and should be 
submitted by September 5, 2003.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-NYSE-2002-63) is approved, 
and Amendment No. 1 is approved on an accelerated basis. 
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    \8\ Id.

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. 03-20820 Filed 8-14-03; 8:45 am]
BILLING CODE 8010-01-P