[Federal Register Volume 68, Number 242 (Wednesday, December 17, 2003)]
[Notices]
[Pages 70328-70331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31072]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48894; File No. SR-PCX-2003-42]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. To Amend its Rules Governing the Execution 
of Complex Orders Involving Options and Single Stock Futures

December 8, 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 August 15, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule

[[Page 70329]]

change as described in items I, II and III below, which items have been 
substantially prepared by the PCX. On November 14, 2003, the PCX filed 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, 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 Sharif Shiver, Senior Attorney, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated November 13, 2003 
(``Amendment No. 1'') (replacing the form 19b-4 in its entirety). In 
Amendment No. 1, the Exchange, in part, clarified the margin 
requirements for members, requiring members who effect SSF/option 
order transactions to elect to be bound by the initial and 
maintenance margin requirements of either the Chicago Board Options 
Exchange (``CBOE'') or the New York Stock Exchange (``NYSE''), as 
those rules may be in effect from time to time. In addition, the 
Exchange amended the filing to make it immediately effective. For 
purposes of calculating the 60-day abrogation period, the Commission 
considers the period to have commenced on November 14, 2003, the 
date the PCX filed Amendment No. 1. In addition, the Exchange made a 
technical correction to its rule text and amended its discussion of 
its change to its proposed rule 6.62. Telephone conversation between 
Mai Sharif Shiver, Senior Attorney, Regulatory Policy, PCX, and 
Elizabeth MacDonald, Attorney, Division of Market Regulation, 
Commission, December 8, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to amend its rules governing the execution of 
complex orders involving options and single stock futures (``SSF''). 
The text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
Rules of the Board of Governors

Rule 6

Options Trading

``Crossing'' Orders and Stock/Option, SSF/Option Orders
    Rule 6.47(a)-(e)--No change.
    (f) Stock/Option and SSF/Option Orders.
    (1) When a stock/option or SSF/option order is taken to a crowd for 
execution, the stock transaction or SSF transaction must be effected 
prior to the option transaction pursuant to Rule 6.47, Commentary .04. 
The following procedure applies to all executions of stock/option and 
SSF/option orders: After an agreement with other members of the crowd 
has been reached as to the terms of the transaction, the option order 
tickets must be written up and time stamped. However, the order tickets 
should not be turned in to the Order Book Official at this time. The 
members shall attempt to immediately effect the transaction in the 
underlying or related security or SSF. If the stock or SSF transaction 
cannot be executed immediately or is effected at a price other than the 
agreed-upon price, the members shall not be held to the option 
transaction. If the stock or SSF transaction is effected at the agreed-
upon price, then all the members who participated in the option 
transaction shall be held to their agreed-upon price. At the time the 
stock or SSF transaction is effected, the option trade tickets should 
be given to the Order Book Official.
    (2) SSF/Option Orders Margin Requirements
    (a) Any Member or Member Organization must elect to be bound by the 
initial and maintenance margin requirements of either the Chicago Board 
of Options Exchange or the New York Stock Exchange as the same may be 
in effect from time to time;
    (b) Such election shall be made in writing by a notice filed with 
the Exchange.
    (c) Upon the filing of such election, a Member will be bound to 
comply with the margin rules of the Chicago Board of Options Exchange 
or the New York Stock Exchange, as applicable, as though such rules 
were part of these rules.
    Commentary:
    .01-.06--No change.
Certain Types of Orders Defined
    Rule 6.62(a)-(i)--No change.
    (j) Combination orders [with no-equity options legs]. One or more 
legs of a combination order may be to purchase or sell a stated number 
of units of another security.
    (1) Stock/option order. A stock/option order is an order to buy or 
sell a stated number of units of an underlying stock or a [related] 
security convertible into the underlying stock (``convertible 
security'') coupled with either (A)[(i)] the purchase or sale of option 
contract(s) [of the same series] on the opposite side of the market 
representing either the same number of units of the underlying stock or 
convertible security or the number of units of the underlying stock 
necessary to create a delta neutral position; [or related security] or 
(B)[(ii)] the purchase [and] or sale of an equal number of put and call 
option contracts, each having the same exercise price, expiration date 
and each representing the same number of units of [the underlying or 
related security,] stock as, and on the opposite side of the market 
from, the stock or convertible security portion of the order. 
[representing in aggregate twice the number of units of the underlying 
or related security.]
    (2) Single Stock Future (``SSF'')/Option Order. An SSF/option order 
is an order to buy or sell a stated number of units of a single stock 
future or a security convertible into a single stock future 
(``convertible SSF'') coupled with either (A) the purchase or sale of 
option contract(s) on the opposite side of the market representing 
either the same number of units of stock underlying the single stock 
future or convertible SSF, or the number of units of stock underlying 
the single stock future or convertible SSF necessary to create a delta 
neutral position; or (B) the purchase or sale of an equal number of put 
and call option contracts, each having the same exercise price, 
expiration date, and each representing the same number of units of 
underlying stock, as and on the opposite side of the market from, the 
stock underlying the single stock future or convertible SSF portion of 
the order.
Priority and Order Allocation Procedures
    Rule 6.75. Except as provided by Rule 6.76 below, the following 
rules of priority shall be observed with respect to bids and offers:
    (a)-(d)--No change.
    (e) Notwithstanding anything in paragraphs (a) and (b) to the 
contrary, when a member holding a spread order, a straddle order, or a 
combination order and bidding or offering on the basis of a total 
credit or debit for the order has determined that the order may not be 
executed by a combination of transactions with or within the bids and 
offers displayed by the Order Book Official or other members, in 
procedures determined by the Options Floor Trading Committee, then the 
order may be executed as a spread, straddle, or combination at the 
total credit or debit with one or more members without giving priority 
to bids or offers for the individual option series of the Order Book 
Official or of other members at the post that are no better than the 
bids or offers comprising such total credit or debit. Under the 
circumstances described above, a stock/option or SSF/option order has 
priority over the bids and offers of members in the trading crowd but 
not over the bids and offers of the Order Book Official.
    (f)-(h)--No change.
    Commentary:
    .01-.04--No change.
Transactions Off the Exchange
    Rule 6.78 (a)-(f)--No change.
    Commentary:
    .01-.02--No change.
    .03 To the extent applicable, all other Exchange rules, including 
Rule 6.49, Solicited Transactions, will apply to the

[[Page 70330]]

transfer procedure set forth in subsections (d) through (f). The 
following Rules do not apply to transfer procedures: 6.71 (Meaning of 
Premium Bids and Offers); 6.74 (Bids and Offers in Relation to Units of 
Trading); 6.75 (Priority of Bids and Offers); 6.76 (Priority of Split 
Price Transactions); 6.47 (``Crossing'' Orders and Stock/Option, SSF/
Option Orders); and 7.9 (Meaning of Premium Bids and Offers, Index 
Options).
    .04--No change.
* * * * *

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 Exchange 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
    PCX Rule 6.47(f) governs the execution process for complex orders 
including stock/option orders. The Exchange is proposing to amend this 
rule to authorize the execution of complex orders involving options and 
SSFs. The proposed procedures for the execution of SSF/option orders 
are virtually identical to the existing stock/option procedure and 
would permit members to enter SSF/option orders. As with stock/option 
orders, the option leg of the transaction would have priority over the 
bids (offers) of members at the same price in the trading crowd but not 
over bids (offers) in the limit order book.
    When an SSF/option order is represented in the crowd for execution, 
the SSF transaction must be effected prior to the option leg of the 
trade pursuant to PCX Rule 6.47, Commentary .04. As with stock/option 
orders, if the parties are unable to execute the SSF leg of the 
transaction due to a change in market conditions, then they could 
cancel the option leg of the transaction. If the stock or SSF 
transaction is effected at the agreed-upon price, then all the members 
who participated in the option transaction shall be held to their 
agreed-upon price. At the time the stock or SSF transaction is 
effected, the option trade tickets should be given to the Order Book 
Official.
    The Exchange also seeks to add a margin requirement as proposed PCX 
Rule 6.47(f)(2) that would require a Member or Member Organization who 
effects SSF/option order transactions to elect to be bound by the 
initial and maintenance margin requirements of either the CBOE or the 
NYSE as those rules may be in effect from time to time. The Member or 
Member Organization will be required to make its election in writing 
and file the same to the Exchange's Financial and Operational 
Compliance Department. Upon filing of the election, the Member or 
Member Organization will be bound to comply with the margin rules of 
the CBOE or the NYSE, as applicable, as though such rules were 
incorporated into the Exchange's rules.\4\
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    \4\ This proposal is substantially similar to Rule 1202 of the 
International Securities Exchange (``ISE'').
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    The Exchange also seeks to amend its Rule 6.62 that defines certain 
types of orders. Specifically, the Exchange seeks to modify PCX Rule 
6.62(j) (Combination Orders) in order to: (i) Add a definition for SSF/
option order types and (ii) modify the definition of stock/option order 
that correlates with the new proposed SSF definition. The Exchange 
proposes new PCX Rule 6.62(j)(2) in order to define a SSF/option order 
as an order to buy or sell a stated number of units of a single stock 
future or a security convertible into a SSF \5\ coupled with either: 
(A) the purchase or sale of option contracts on the opposite side of 
the market representing the same number of units of stock underlying 
the SSF or convertible SSF or the number of units of stock underlying 
the SSF or convertible SSF necessary to create a delta neutral 
position, or (B) the purchase or sale of an equal number of put and 
call option contracts each having the same exercise price, expiration 
date, and representing the same number of units of underlying stock as, 
and on the opposite side of, the market from the stock underlying the 
single stock future or convertible SSF portion of the order. The 
proposed definition is identical to that used by the ISE.\6\
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    \5\ To the extent that ``a security convertible into a SSF'' 
means an option on a SSF, the Commission notes that trading of such 
products has not yet been approved by the Commission and the 
Commodity Futures Trading Commission. Nothing in this notice should 
be interpreted as granting such approval.
    \6\ See ISE Rule 722.
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    The Exchange also seeks to modify PCX Rule 6.62(j)(1) in order to 
amend its existing definition of stock/option order so that its 
provisions are parallel to its newly proposed definition for SSF/option 
orders and identical to the definition used by ISE Rule 722.
    The Exchange proposes to amend PCX Rule 6.75 regarding priority and 
order allocation procedures in order to clarify that in addition to 
stock/option orders, SSF/option orders will also have priority over the 
bids and offers of members in the trading crowd but not over bids and 
offers of the Order Book Official.
    The Exchange proposes to amend PCX Rule 6.78, Commentary .03 
regarding transactions off of the Exchange in order to clarify that SSF 
will be included as a component of the rules that do not apply to 
transfer procedures off the floor as set forth in sub-sections (d) 
through (f) of PCX Rule 6.78.
2. Statutory Basis
    The PCX believes that the rule change is consistent with section 
6(b) of the Act in general \7\ and section 6(b)(5) of the Act in 
particular.\8\ The Exchange believes that the proposed rule change is 
intended to remove impediments to and perfect the mechanism for a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. The Exchange also believes 
that making additional complex orders involving options and SSFs 
available to investors will offer investors new trading opportunities 
on the Exchange and enhance the Exchange's competitive position.
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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 proposed rule change does not impose 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Because the foregoing proposed rule change, as amended, does not: 
(i) Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on

[[Page 70331]]

competition; (iii) become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate if 
the proposal is consistent with the protection of investors and the 
public interest; and the Exchange has given the Commission written 
notice of its intention to file the proposed rule change at least five 
business days prior to filing, or such shorter time as designated by 
the Commission, it has become effective pursuant to section 19(b)(3)(A) 
of the Act \9\ and Rule 19b-4(f)(6)\10\ thereunder. At any time within 
60 days of the filing of the proposed rule change, the Commission may 
summarily abrogate such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the period to have commenced on November 
14, 2003, the date the PCX filed Amendment No. 1.
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    The PCX has requested the Commission to waive the 30-day operative 
delay. The Commission has decided to waive the 30 day operative delay. 
The Commission believes such waiver is consistent with the protection 
of investors and the public interest. The Commission notes that PCX's 
proposal is substantially similar to ISE's rules.\12\ For these 
reasons, the Commission designates the proposal to be effective and 
operative upon filing of Amendment No. 1 with the Commission.
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    \12\ For purposes of accelerating the operative date of the 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition and capital formation. 15 U.S.C. 
78c(3)(f).
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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 amended 
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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-PCX-2003-42. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail, but not by both methods. 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 the PCX. All 
submissions should refer to File No. SR-PCX-2003-42 and should be 
submitted by January 7, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31072 Filed 12-16-03; 8:45 am]
BILLING CODE 8010-01-P