[Federal Register Volume 68, Number 204 (Wednesday, October 22, 2003)]
[Notices]
[Pages 60423-60425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26643]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48644; File No. SR-BSE-2003-13]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 Relating to the Initial 
Allocation Plan for the Proposed Boston Options Exchange Facility

October 16, 2003.

I. Introduction

    On July 30, 2003, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'')

[[Page 60424]]

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 that 
would establish an allocation plan for market maker appointments and 
accompanying deposit requirements related to the Exchange's proposed 
options trading facility, Boston Options Exchange (``BOX'').\3\ On 
August 7, 2003, the Exchange's rule proposal was published for comment 
in the Federal Register.\4\ No comment letters were received on the 
proposal. On October 2, 2003, BSE submitted Amendment No. 1 to the 
proposed rule change.\5\ This order approves the proposal, publishes 
notice of Amendment No. 1, and approves Amendment No.1 on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 47186 (January 14, 
2003), 68 FR 3062 (January 22, 2003) and 48355 (August 15, 2003), 68 
FR 50813 (August 22, 2003) (SR-BSE-2002-15).
    \4\ See Securities Exchange Act Release No. 48271 (August 1, 
2003), 68 FR 47113.
    \5\ See letter from George W. Mann, Jr., Executive Vice 
President and General Counsel, BSE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated October 
1, 2003 (``Amendment No. 1''). In Amendment No. 1, the Exchange 
clarified that it would use Options Clearing Corporation volume 
statistics from January 2003 through June 2003 for the initial 
allocation. The Exchange made several technical modifications to the 
rule text to reflect this clarification. In addition, the Exchange 
amended the proposal to clarify that all applicants would receive 
their requested assignments within six months of the launch of the 
BOX market.
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II. Description of Proposal

    The BSE proposes that it would ultimately not restrict the number 
of market makers assigned per class in its proposed BOX market model. 
Nevertheless, BSE proposes a six-month plan to allocate assignments to 
a limited number of firms to make markets in the initial 250 classes 
traded on BOX.\6\ Specifically, BOX would phasein trading for the top 
250 classes by limiting the number of market maker assignments to 
1,911, during the first three months of trading. All remaining 
assignments requested prior to the commencement of trading on BOX would 
be assigned by BSE to prospective market making firms on a class-by-
class basis during the following three months. In this regard, the 
Exchange proposes to add to its rules new Chapter XXXVII, which sets 
forth the initial allocation process for BOX market maker appointments 
and accompanying deposit requirements.
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    \6\ The top 250 classes would be determined based on Options 
Clearing Corporation volume statistics from January 2003 through 
June 2003. See Amendment No. 1, supra note 5.
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    Under the proposal, BSE would request that prospective market maker 
firms declare their interest for the initial market making assignments, 
and provide information regarding their prior experience as a market 
maker on an automated market and their capital commitment to options 
activities. In addition, prospective market maker firms would deposit 
funds with BSE based on their requested assignments.
    To begin the initial allocation, BSE would allocate 889 assignments 
to experienced firms.\7\ BSE would assign firms to a class based on the 
firms' requests unless the number of requests for a particular class 
exceeds the number of assignments available. In that case, the BSE 
would use a random lottery whereby names would be drawn from a pool of 
all experienced firms requesting a class until the assignments 
available in that class are allocated. BSE represents that the random 
lottery would be externally audited to verify its integrity, 
neutrality, and fairness.
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    \7\ A prospective market making firm would qualify as 
experienced if it has been a market maker or specialist on an 
organized fully automated market for a minimum of fifty classes for 
at least six months and has sufficient capital committed to its 
options activities to effectively support an automated market in 
BOX, as determined by the BSE. See proposed BSE Chapter XXXVII, 
Section 1(b).
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    Following the allocation to experienced firms, BSE would allocate 
1,022 assignments to all other prospective market making firms, 
including any experienced firms that did not receive assignments for 
all of their requested classes in the lottery. BSE would also allocate 
these 1,022 assignments by request unless the demand for a particular 
class exceeds the number of assignments available, in which case BSE 
would allocate assignments using a random lottery. Any prospective 
market making firms that do not receive a requested allocation in the 
1911 assignments allocated for the first three months of trading would 
be placed on a waiting list and would be allocated their requested 
assignments within six months of the launch of the BOX market.\8\
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    \8\ See Amendment No. 1, supra note 5.
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    All assignments to prospective market making firms would be subject 
to such an applicant's approval as an Options Participant \9\ and a 
market maker on BOX. In addition, any applicant denied any privilege 
under the allocation process, including denial of acceptance as an 
``experienced'' market maker, could appeal such decision according to 
the procedures set forth in BSE Chapter XXX, Disciplining of Members, 
Denial of Membership.
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    \9\ See proposed BOX Rules, Chapter I, General Provisions, 
Section 1(a)(39) (definition of ``Options Participant'').
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    At the time a market maker's assignments become available to trade 
on BOX, deposits for those assignments would be released to BOX and 
would be nonrefundable, and considered as pre-paid fees credited 
against such market maker's BOX account to offset trading, technology 
and other related fees and charges.\10\ Before any class becomes 
available for trading for a particular market maker, if the applicant 
notifies BSE that it wishes to drop certain allocated classes, BSE 
would refund fifty percent of the related deposit.
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    \10\ See Amendment No. 1, supra note 5.
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    The proposed allocation plan would apply on a pilot basis set to 
expire no later than six months beyond the initial launch date of the 
BOX market. Following the pilot period, the BSE would no longer limit 
the number of market makers assigned per class.

III. 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 filings will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-BSE-2003-13 and should be 
submitted by November 12, 2003.

IV. Discussion

    After careful review, 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 
\11\ and, in particular, the requirements of Section 6 of the Act.

[[Page 60425]]

\12\ Specifically, the Commission finds that the proposal to allocate 
options classes to prospective market makers on the proposed BOX market 
is consistent with Section 6(b)(5) of the Act,\13\ because it will help 
the Exchange manage the initial launch of trading on the proposed BOX 
market. In this regard, the Commission notes that all allocations under 
this proposal are contingent on a prospective firm obtaining approval 
as a BOX market maker and Options Participant, and Commission approval 
of the BOX market. Further, the Commission notes that the proposal 
provides an appeal process for an applicant in the event that any such 
applicant is denied any privilege in connection with the allocation 
process.
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    \11\ The Commission has considered the proposed rules' impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause, consistent with Section 19(b)(2) 
of the Act,\14\ to approve Amendment No. 1 to the proposed rule change 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. The Commission notes that in 
Amendment No. 1 the BSE proposes no substantive changes to its filing 
and, instead, merely clarifies the proposed allocation procedure.
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    \14\ 15 U.S.C. 78s(b)(2).
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    In approving this allocation plan, the Commission is not prejudging 
the BOX proposal. If the Commission were not to approve BOX, all 
deposits would be refunded to applicant firms. Approving the allocation 
plan does, however, afford the BSE an opportunity to prepare for the 
possibility that the Commission will approve BOX and reduces the time 
between any such approval and the commencement of trading on the BOX 
market.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that Amendment No. 1 is approved on an accelerated basis, and 
that the proposed rule change (File No. SR-BSE-2003-13) is hereby 
approved, as amended.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26643 Filed 10-21-03; 8:45 am]
BILLING CODE 8010-01-U