[Federal Register Volume 68, Number 244 (Friday, December 19, 2003)]
[Notices]
[Pages 70857-70859]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31264]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48923; File No. SR-OC-2003-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by OneChicago, LLC To Adopt 
OneChicago Rule 616 Relating to ``Chinese Walls''

December 12, 2003.
    Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on December 8, 2003, OneChicago, LLC (``OneChicago'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule changes described in 
Items I, II, and III below, which Items have been prepared by 
OneChicago. 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)(7).
    \2\ 17 CFR 240.19b-7.
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    OneChicago also has filed the proposed rule change with the 
Commodity Futures Trading Commission (``CFTC''). OneChicago filed a 
written certification with the CFTC under section 5c(c) of the 
Commodity Exchange Act \3\ on December 5, 2003, which stated that the 
effective date of the proposed rule change is December 8, 2003.
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    \3\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change

    OneChicago proposes to add new OneChicago Rule 616, attached hereto 
as Exhibit 4, to create a safe harbor for OneChicago market makers so 
that they may engage in Other Business Activities described below which 
may result in inadvertent cross trades without violating OneChicago 
Rule 604, provided that OneChicago confirms that each such market maker 
has implemented and maintains ``Chinese Wall'' procedures in 
conformance with the Rule. The text of the proposed rule change appears 
below. New text is in italics. Deleted text is in [brackets].
* * * * *

Rule 616. Safe Harbor for Inadvertent Cross Trades

    (a) An Entity acting as a market maker for any Exchange product (an 
``Exchange Market Maker'') may engage in Other Business Activities, or 
it may be affiliated with a broker-dealer that engages in Other 
Business Activities, and shall not be in violation of Exchange Rule 604 
due to inadvertent cross trades with respect to any trades that are 
matched by the OneChicago System against trades entered for or on 
behalf of the Other Business Activities, provided that the Exchange 
Market Maker implements and maintains a Chinese Wall between its 
market-making operations and such Other Business Activities that meets 
the requirements below.
    (b) Definitions: For purposes of this rule, (1) ``Other Business 
Activities'' means:
    (A) conducting an investment or banking or public securities 
business;
    (B) making markets in the securities underlying the security 
futures or options on the securities or indexes underlying the security 
futures in which it makes markets; or
    (C) entering agency orders or proprietary orders (other than market 
making transactions for Exchange products) into the OneChicago System.
    (2)``Chinese Wall'' means an organizational structure that 
satisfies each of the following conditions:
    (A) The market-making activities are conducted in a location 
physically separated from the locations in which the Other Business 
Activities are conducted in a manner that effectively impedes 
communications between persons conducting the market-making function 
and persons conducting the Other Business Activities.
    (B) Procedures are implemented and maintained to prevent persons in 
possession of material, non-public corporate or market information on 
one side of the Chinese Wall from divulging such information to persons 
on the other side of the Chinese Wall.
    (C) Persons on one side of the Chinese Wall may not exercise 
influence or control over persons on the other side of the Chinese 
Wall, except that:
    (i) the market-making operations and the Other Business Activities 
may be under common management provided such managerial oversight (a) 
does not conflict with or compromise the Entity's responsibilities 
under the Rules of the Exchange and (b) persons occupying managerial 
positions do not divulge information or allow information to be 
divulged pertaining to market maker positions and trading activities to 
any other person so that any person on one side of the Chinese Wall 
becomes aware of pending or anticipated quotes or unfilled orders on 
the other side of the Chinese Wall; and
    (ii) the common supervisor or any individual responsible for 
monitoring the overall risk exposure of the Entity (the ``Risk Exposure 
Supervisor'') may establish general trading parameters with respect to 
both market-making and other proprietary trading other than on an order 
specific basis, provided that the Risk Exposure Supervisor does not:
    (a) enter orders into the OneChicago System or make trading 
decisions for either the Entity's market-making account or proprietary 
account;
    (b) provide to any person performing the Other Business Activities 
described in paragraph (b)(1)(c) of this Rule any information relating 
to market-making activity; nor
    (c) provide a person performing the market-making function with 
information regarding the firm's pending transactions or order flow 
arising out of its activities described in paragraph (b)(1)(c) of this 
Rule.
    (3) An ``Entity'' means an inanimate business organization, 
including a corporation, a partnership or other legal business 
organization. It does not include animate beings.
    (c) An Entity implementing a Chinese Wall pursuant to this Rule 
shall submit to the Exchange a written statement setting forth:
    (1) The manner in which it intends to satisfy the conditions in 
paragraph (b)

[[Page 70858]]

of this Rule and the compliance and audit procedures it proposes to 
implement to ensure that the Chinese Wall is maintained;
    (2) The names and titles of the person or persons responsible for 
maintenance and surveillance of the procedures;
    (3) A commitment to provide the Exchange with such information and 
reports as the Exchange may request relating to the transactions of the 
Entity and its affiliates;
    (4) A commitment to take appropriate disciplinary action against 
any person violating this Rule or the Entity's internal compliance and 
audit procedures adopted pursuant to subparagraph (c)(1) of this Rule, 
and an acknowledgement that the Exchange may take appropriate 
disciplinary action, including (without limitation) reallocation of any 
or all Contracts in which it serves as a market maker, in the event of 
such a violation;
    (5) Whether the Entity or an affiliate of the Entity intends to 
clear the Entity's proprietary trades and, if so, the procedures 
established to ensure that information with respect to such clearing 
activities will not be used in a way that would compromise the Entity's 
Chinese Wall, which procedures, at a minimum, must be the same as those 
used by the Entity or the affiliate to clear for unaffiliated third 
parties; and
    (6) An acknowledgement that any trading by a person while in 
possession of material, non-public information received as a result of 
the breach of the internal controls required under this Rule may be a 
violation of the CEA, the Commission's Regulations, the Exchange Act, 
the rules thereunder or the Rules of the Exchange.
    (d) An Exchange Market Maker cannot avail itself of this Rule until 
it has received written confirmation from the Exchange that the 
organizational structure and the compliance and audit procedures 
described in the statement submitted by such Exchange Market Maker in 
accordance with paragraph (c) above comply with this Rule.
    (e) Subparagraph (c)(5) permits an Entity or an affiliate of the 
Entity to clear the Entity's market maker transactions if it 
establishes procedures to ensure that information with respect to such 
clearing activities will not be used to compromise the Chinese Wall. 
Such procedures must provide that any information pertaining to market 
maker positions and trading activities, and information derived from 
any clearing and margin financing arrangements, may be made available 
only to those employees (other than employees actually performing 
clearing and margin functions) specifically authorized under this Rule 
to have access to such information or to other employees in senior 
management positions, including common management as described in 
clause (b)(2)(C)(i) of this Rule, who are involved in exercising 
managerial oversight with respect to the market making activity.
    (f) Notwithstanding paragraph (a) of this Rule, an Entity shall not 
be required to maintain a Chinese Wall to obtain safe harbor from 
violating Rule 604 due to inadvertent cross trades under the following 
conditions:
    (1) the Entity functions as a non-market market Exchange Member in 
the OneChicago System solely in Contracts in which the Entity is not 
appointed as a market market pursuant to Rule 515(n); and
    (2) the Entity enters orders into the OneChicago System as a non-
market marker Exchange Member only for (i) the proprietary account of 
such Entity or (ii) the account of entities that are affiliated with 
such Entity.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    OneChicago has prepared statements concerning the purpose of, and 
basis for, the proposed rule change, burdens on competition, and 
comments received from members, participants, and others. The text of 
these statements may be examined at the places specified in Item IV 
below. These statements are set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    OneChicago proposes to add new OneChicago Rule 616 to provide a 
safe harbor to market makers for inadvertent cross trades that may 
occur between their market-making operations in OneChicago's products 
and their ``Other Business Activities'' (as defined below) on the 
condition that OneChicago confirms that each such market maker has 
implemented and maintains ``Chinese Wall'' procedures in conformance 
with OneChicago Rule 616. For purposes of this Rule, ``Other Business 
Activities'' means (1) conducting an investment or banking or public 
securities business; (2) making markets in the securities underlying 
the security futures or options on the securities or indexes underlying 
the security futures in which the market maker makes markets; or (3) 
entering agency orders or proprietary orders (other than market-making 
transactions for OneChicago products) into the OneChicago system. 
OneChicago Rule 616 would also permit members to conduct proprietary 
trading in the same physical space as their market-making activities, 
but only in security futures products that are not within their market-
making assignments.\4\
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    \4\ The Commission approved a similar provision in International 
Securities Exchange, Inc. Rule 810 in December 2000. See Securities 
Exchange Act Release No. 43729 (December 15, 2000), 65 FR 81551 
(December 26, 2000).
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    To qualify for the protection afforded by the OneChicago Rule 616 
safe harbor, a OneChicago market maker must meet the following 
conditions: Have an organizational structure that has physical 
separation between the persons engaged in its market making activities 
on the Exchange and the persons conducting its ``Other Business 
Activities''; implement ``Chinese Wall'' procedures to prevent the use 
of material non-public, corporate or market information in possession 
of persons on one side of the wall from divulging such information to 
persons on the other side of the wall; and restrict, with some 
exceptions,\5\ persons from one side of the wall from exercising 
influence or control over persons on the other side of the wall. As a 
precondition to relying on proposed OneChicago Rule 616 as a safe 
harbor for inadvertent cross trades, an Exchange market maker would be 
required to submit to the Exchange a written statement that sets forth 
the manner in which it intends to satisfy the conditions described 
above; the names and titles of the person or persons responsible for 
maintenance and surveillance of the Chinese Wall procedures; a 
commitment to provide the Exchange with such information and reports as 
the Exchange may request; a commitment to take appropriate

[[Page 70859]]

disciplinary action against any person violating proposed OneChicago 
Rule 616 or the member's internal compliance and audit procedures 
adopted pursuant to proposed OneChicago Rule 616; the procedures 
established to ensure that information with respect to clearing 
activities will not be used to compromise the entity's Chinese Wall; 
and an acknowledgement that any trading by a person while in possession 
of material non-public information received as a result of the breach 
of the internal controls required under proposed OneChicago Rule 616 
may be a violation of the Act, the rules and regulations thereunder, 
the CEA, the CFTC Regulations, or the Rules of the Exchange.
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    \5\ OneChicago proposes two exceptions to OneChicago's Rule 616 
Chinese Wall requirement that persons on one side of the wall may 
not exercise influence or control over persons on the other side of 
the wall. The first exception permits the market making function and 
Other Business Activities to be under common management as long as 
any management oversight does not conflict with or compromise the 
market maker's responsibilities under OneChicago Rules. The second 
exception permits the same person or persons to supervise the 
market-making functions and Other Business Activities to monitor the 
overall risk exposure of the firm or affiliated firms. This 
exception does not, however, permit such supervisor to enter orders 
in the OneChicago System or make trading decisions for either the 
market-making account or any other proprietary account; provide 
information to any person performing Other Business Activities with 
information relating to market-making activity; or provide a person 
performing the market maker function with information regarding the 
firm's pending transactions or order flow arising out of its Other 
Business Activities.
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    Under paragraph (f) of proposed OneChicago Rule 616, an OneChicago 
market maker would not be in violation of OneChicago Rules 604, if the 
Exchange market maker functions as a non-market maker Exchange member 
exclusively in contracts in which such member is not appointed as a 
market maker pursuant to OneChicago Rule 515(n) and such member enters 
orders only for its proprietary account or the accounts of its 
affiliated entities.
2. Statutory Basis
    OneChicago believes that the proposed rule change is consistent 
with section 6(b)(5) of the Act \6\ because it promotes just and 
equitable principles of trade and is designed to prevent fraudulent and 
manipulative practices.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OneChicago believes that the proposed new rule will promote 
competition by offering a safe harbor for market makers executing 
inadvertent cross trades on the Exchange and thereby removing a 
significant deterrent to potential market makers for the Exchange's 
products.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments on the proposed rule change have not been solicited and 
none have been received.

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

    The proposed rule change has become effective on December 8, 2003. 
Within 60 days of the date of effectiveness of the proposed rule 
change, the Commission, after consultation with the CFTC, may summarily 
abrogate the proposed rule change and require that the proposed rule 
change be refiled in accordance with the provisions of section 19(b)(1) 
of the Act.\7\
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    \7\ 15 U.S.C. 78s(b)(1).
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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 proposed rule 
change conflicts with the Act. Persons making written submissions 
should file nine copies of the submission with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments also may be submitted electronically to the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-NASD-2003-174. 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 these filings also will be available 
for inspection and copying at the principal office of OneChicago. All 
submissions should refer to File No. SR-OC-2003-09 and should be 
submitted by January 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(75).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31264 Filed 12-18-03; 8:45 am]
BILLING CODE 8010-01-P