[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28956-28957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11262]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49692; File No. 4-429]


Joint Industry Plan; Notice of Filing of Joint Amendment No. 12 
to the Options Intermarket Linkage Plan Relating to the Limitation in 
Liability for Filling Satisfaction Orders Sent Through the Linkage at 
the End of the Trading Day

May 12, 2004.
    Pursuant to Section 11A of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 11Aa3-2 thereunder,\2\ notice is hereby given 
that on April 26, 2004, April 26, 2004, May 5, 2004, May 7, 2004, May 
7, 2004, and May 11, 2004, the International Securities Exchange, Inc. 
(``ISE''), the Pacific Exchange, Inc. (``PCX''), the American Stock 
Exchange LLC (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the 
Philadelphia Stock Exchange, Inc. (``Phlx''), and the Chicago Board 
Options Exchange, Inc. (``CBOE'') (collectively, the ``Participants''), 
respectively, filed with the Securities and Exchange Commission 
(``Commission'') an amendment (``Joint Amendment No. 12'') to the Plan 
for the Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan'').\3\ In proposed Joint Amendment No. 12, the 
Participants propose to extend the pilot provision limiting Trade-
Through \4\ liability at the end of the trading day for an additional 
seven months, until January 31, 2005, and to increase the limitation on 
liability from 10 contracts to 25 contracts. The Commission is 
publishing this notice to solicit comments from interested persons on 
the proposed Joint Amendment No. 12.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 240.11Aa3-2.
    \3\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by Amex, CBOE, and 
ISE. See Securities Exchange Act Release No. 43086 (July 28, 2000), 
65 FR 48023 (August 4, 2000). Subsequently, Phlx, PCX, and BSE 
joined the Linkage Plan. See Securities Exchange Act Release Nos. 
43573 (November 16, 2000), 65 FR 70850 (November 28, 2000); 43574 
(November 16, 2000), 65 FR 70851 (November 28, 2000); and 49198 
(February 5, 2004), 69 FR 7029 (February 12, 2004). On June 27, 
2001, May 30, 2002, February 3, 2003, June 25, 2003, and January 29, 
2004, the Commission approved joint amendments to the Linkage Plan. 
See Securities Exchange Act Release Nos. 44482 (June 27, 2001), 66 
FR 35470 (July 5, 2001); 46001 (May 30, 2002), 67 FR 38687 (June 5, 
2002); 47274 (January 29, 2003), 68 FR 5313 (February 3, 2003); 
48055 (June 18, 2003), 68 FR 37689 (June 25, 2003); and 49146 
(January 29, 2004), 69 FR 5618 (February 5, 2004).
    \4\ A ``Trade-Through'' is defined as a transaction in an 
options series at a price that is inferior to the national best bid 
and offer in an options series calculated by a Participant. See 
Section 2(29) of the Linkage Plan.
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I. Description and Purpose of the Amendment

    The Participants are proposing to extend for an additional seven 
months, until January 31, 2005, the pilot provision in the Linkage Plan 
\5\ that limits Trade-Through liability at the end of the trading day. 
The Participants are also seeking to increase the limitation on Trade-
Through liability for each Satisfaction Order \6\ that is sent via 
Linkage at the end of the trading day from 10 contracts to 25 contracts 
during the extended pilot period.
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    \5\ See Section 8(c)(ii)(B)(2)(c) of the Linkage Plan.
    \6\ A ``Satisfaction Order'' is an order sent through the 
Linkage to notify a Participants of a Trade-Through and to seek 
satisfaction of the liability arising from that Trade-Through.
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    The Participants originally proposed a 10-contract limitation on 
liability during the last seven minutes of the trading day as a one-
year pilot in Joint Amendment No. 4 to the Plan.\7\ In Joint Amendment 
No. 4, the Participants represented that members of various exchanges 
had raised concerns regarding their obligation to fill Satisfaction 
Orders (which they receive when an options exchange disseminating a 
better price complains about a Trade-Through) at the close of trading 
in the underlying security. Specifically, members expressed concern 
that they may not have time to hedge the positions they acquire.\8\ 
Thus, the Participants proposed to limit liability for Trade-Throughs 
for the period between five minutes prior to the close of trading in 
the underlying security and the close of trading in the options class 
to the filling of 10 contracts per Participant, per transaction. The 
Participants represented that they believed that the proposal would 
protect small customer orders, yet establish a reasonable limit for 
their members' liability. Further, the Participants represented that 
the proposal would not affect a member's potential liability under an 
exchange's disciplinary rule for engaging in a pattern or practice of 
trading through other markets under Section 8(c)(i)(C) of the Linkage 
Plan.
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    \7\ The Commission approved the pilot on a 120-day temporary 
basis on January 31, 2003. See Securities Exchange Act Release No. 
47298, 68 FR 6524 (February 7, 2003). On June 18, 2003, the 
Commission approved the pilot until January 31, 2004. See Securities 
Exchange Act Release No. 48055, 68 FR 37869 (June 25, 2003) (Order 
approving ``Joint Amendment No. 4''). The Commission subsequently 
extended the pilot until June 30, 2004. See Securities Exchange Act 
Release No. 49146 (January 29, 2004), 69 FR 5618 (February 5, 2004) 
(Order approving ``Joint Amendment No. 8'').
    \8\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Annette Nazareth, Director, Division of 
Market Regulation, Commission, dated November 19, 2002.
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    In the order approving Joint Amendment No. 4, Commission stated 
that in the event the Participants chose to seek permanent approval of 
this limitation, the Participants must provide the Commission with a 
report regarding data on the use of the exemption no later than 60 days 
before seeking permanent approval (the ``Report'').\9\ In a subsequent 
amendment to the Linkage Plan for the purpose of extending the pilot, 
Joint Amendment No. 8, the Participants represented that if they were 
to seek to make the limitations on Trade-Throughs permanent, they would 
submit the Report to the Commission no later than March 31, 2004.\10\ 
With respect to the Report, the Participants represented in Joint 
Amendment No. 8 that they planned to submit individual Reports 
regarding the requested data as it pertained to their own exchange. 
They further represented that these Reports would detail the number of 
Trade-Throughs in the last seven minutes and the rest of the day, as 
well as the number and size of Satisfaction Orders that would have been 
filled absent the current exemption. In addition, the Participants 
represented that the Reports would provide information on the extent to 
which the exchange's members hedged their options trading during the 
day as part of their overall risk management. Finally, the Participants 
represented that they would make every effort to provide specific 
information regarding hedging activity at the end of the trading 
day.\11\
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    \9\ See supra note 7.
    \10\ See Securities Exchange Act Release No. 49010 (December 30, 
2003), 69 FR 706 (January 6, 2004) (Notice of Filing Joint Amendment 
No. 8).
    \11\ Id.
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    Following the extension of the pilot program, certain Participants 
provided the Commission with portions of the information required in 
the Report, but were unable to provide sufficient information to enable 
the Commission to evaluate whether permanent approval would be 
appropriate. Extending the pilot through January 31, 2005 would allow 
the limitation to continue in

[[Page 28957]]

effect, with the increase in liability to 25 contracts, while the 
Participants continue to discuss with Commission staff the information 
necessary to permit the Commission to evaluate possible permanent 
approval of the Trade-Through limitation. The proposed increase in the 
limit on liability would become effective on July 1, 2004, when the 
current pilot expires. The Participants propose no change to the time 
period in the trading day during which the limit would apply.

II. Implementation of the Plan Amendment

    The Participants propose to make the proposed amendment to the 
Linkage Plan reflected in this filing effective on July 1, 2004.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed 
Joint Amendment No. 12 is consistent with the Act. Comments may be 
submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number 4-429 on the subject line.
    Paper comments
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to Joint Amendment No. 12 to File 
Number 4-429. 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, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed Linkage 
Plan amendment that are filed with the Commission, and all written 
communications relating to the proposed Linkage Plan amendment 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Participants. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    All submissions should refer to Joint Amendment 12 to File Number 
4-429 and should be submitted on or before June 9, 2004.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(29).

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11262 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P