[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Notices]
[Pages 32087-32090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49786; File No. SR-PCX-2004-40]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change, and Amendment No. 1 Thereto, by 
the Pacific Exchange, Inc. Relating to Post-Trade Anonymity to its ETP 
Holders.

May 28, 2004.
    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 April 28, 2004, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE''), submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed

[[Page 32088]]

rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Exchange filed Amendment No. 1 to the 
proposed rule change on May 28, 2004.\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 S. Shiver, Acting Director Senior 
Counsel, Regulatory Policy, PCX, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated May 27, 2004 (``Amendment No. 1''). Amendment No. 1 replaces 
and supercedes the original 19b-4 filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX is proposing to provide post-trade anonymity to its ETP 
Holders \4\ and to modify PCXE Rule 7.41 accordingly. The text of the 
proposed rule change is as follows: Proposed rule language is 
italicized.
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    \4\ See PCXE Rule 1.1(n) (definition of ``ETP Holder'').
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Rule 7.41, Clearance and Settlement
    Rule 7.41. (a) The details of each transaction executed within the 
Archipelago Exchange shall be automatically processed for clearance and 
settlement on a locked-in basis. ETP Holders need not separately report 
their transactions to the Corporation for trade comparison purposes. 
All transactions effected by a Sponsored Participant shall be cleared 
and settled, using the relevant Sponsoring ETP Holder's mnemonic (or 
its clearing firm's mnemonic as applicable).
    (b) Except as provided herein, transactions executed on the 
Archipelago Exchange will be processed anonymously. The transaction 
reports will indicate the details of the transaction, but will not 
reveal contra party identities. The anonymity process is not available 
for Directed Orders.
    (c) The Archipelago Exchange will reveal the identity of an ETP 
Holder or ETP Holder's clearing firm in the following circumstances:
    (1) For regulatory purposes or to comply with an order of a court 
or arbitrator;
    (2) when the National Securities Clearing Corporation (``NSCC'') 
ceases to act for an ETP Holder or the ETP Holder's clearing firm; and 
NSCC determines not to guarantee the settlement of the ETP Holder's 
trades; or
    (3) on risk management reports provided to the contra party of the 
ETP Holder or ETP Holder's clearing firm each day by 4 p.m. (E.S.T.) 
which disclose trading activity on an aggregate dollar value basis.
    (d) The Archipelago Exchange will reveal to an ETP Holder, no later 
than the end of the day on the date an anonymous trade was executed, 
when that ETP Holder submits an order that has executed against an 
order submitted by that same ETP Holder.
    (e) In order to satisfy the ETP Holder's record keeping obligations 
under SEC Rules 17a-3(a)(1) and 17a-4(a), (i) the Archipelago Exchange 
shall, with the exception of those circumstances described below in 
(ii), retain for the period specified in Rule 17a-4(a) the identity of 
each ETP Holder that executes an anonymous transaction described in 
paragraph (b) of this rule, and (ii) ETP Holders shall retain the 
obligation to comply with SEC Rule 17-3(a)(1) and 17-4(a) whenever they 
possess the identity of their contra-party. In either case, the 
information shall be retained in its original form or a form approved 
under Rule 17a-6.

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 PCX has 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
    As part of its continuing efforts to enhance participation on the 
Archipelago Exchange (``ArcaEx'') facility, the Exchange is proposing 
to extend anonymity through to post settlement. Currently, Users \5\ 
may display and execute orders on an anonymous basis pursuant to PCXE 
Rules 7.36 and 7.37, respectively. Accordingly, during the execution 
process, Users' orders are executed without knowledge of the contra-
party's identity. At the end of the trading day, the contra-party's 
identity on a trade-by-trade basis is revealed to ETP Holders for their 
respective trades through web-based reports.\6\ Therefore, anonymity is 
maintained through execution, but not through the end-of-day settlement 
process.
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    \5\ See PCXE Rule 1.1(yy) for the definition of ``User'' which 
includes Sponsored Participants (as defined in PCXE Rule 1.1 (tt)).
    \6\ Currently, only the identity of an ETP Holder or the ETP 
Holder's clearing firm is revealed at the end of the trading day, 
not the identity of a Sponsored Participant, since Sponsored 
Participants trade on the Exchange using the Sponsoring ETP Holder's 
mnemonic. The proposed rule change intends to retain this process, 
by not revealing the identity of the Sponsored Participant in the 
limited circumstances where the identity of the contra-party is 
revealed. Therefore, all references to ETP Holder in the proposed 
rule would also include trades by Sponsored Participants using the 
ETP Holder's mnemonic. Footnote added pursuant to telephone 
conversation between Mai S. Shiver, Acting Director/Senior Counsel, 
PCX, and Marc McKayle, Special Counsel, Division, Commission, on May 
28, 2004.
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    The Exchange proposes to modify PCXE Rule 7.41 to clarify that 
except as specifically provided, the transactions executed on the 
Exchange will be processed anonymously and that transaction reports 
will indicate the details of the transaction, but will not reveal 
contra party identities.\7\ Rule 7.41 expressly provides that the 
anonymity process is not available for Directed Orders. In the Directed 
Order Process as provided in PCXE Rule 7.37, any market or limit order 
to buy or sell could be directed to a particular market maker as a 
``Directed Order.'' At the present time, Users are not permitted by 
ArcaEx's functionality to direct or ``preference'' orders to ETP 
Holders. If in the future Users are permitted to direct or preference 
orders to ETP Holders through ArcaEx, PCX understands that any 
exemptive relief \8\ provided by the Commission would not apply to ETP 
Holders engaging directly (or indirectly through a Sponsored 
Participant) in any such activity.\9\ The Exchange also understands 
that it would be required to

[[Page 32089]]

notify the Commission and amend its rules to address the applicability 
of the anonymity feature to Directed Orders.
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    \7\ Currently, where an Attributed Order on ArcaEx is executed 
against another Attributed Order, these executions are treated like 
other orders in that they receive post-trade anonymity until the end 
of the trading day. Under the proposed rule change, Attributable 
Orders will continue to be treated like other orders and receive 
post-trade anonymity through clearance and settlement. Footnote 
added pursuant to telephone conversation between Mai S. Shiver, 
Acting Director/Senior Counsel, Regulatory Policy, PCX, and Marc 
McKayle, Special Counsel, Division, Commission, on May 28, 2004.
    \8\ In connection with this rule filing, the Commission has 
granted ETP Holders of the Exchange a limited exemption pursuant to 
Rule 10b-10(f) under the Act from the requirements in Rule 10b-
10(a)(2)(i)(A) to disclose to their customers the name of the person 
from whom a security was purchased, or to whom it was sold or the 
fact that such information will be provided upon a customer's 
written request. See letter from Brian A. Bussey, Assistant Chief 
Counsel, Division, Commission, to Mai S. Shiver, Acting Director/
Senior Counsel, Regulatory Policy, PCX, dated April 30, 2004.
    \9\ It would also not apply if a Sponsored Participant engaged 
in such activity. Footnote added pursuant to telephone conversation 
between Mai S. Shiver, Acting Director/Senior Counsel, Regulatory 
Policy, PCX, and Terri Evans, Assistant Director, Division, 
Commission, on May 28, 2004.
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    As proposed, the Exchange will reveal the identity of an ETP Holder 
or ETP Holder's clearing firm \10\ in the following circumstances: (1) 
For regulatory purposes or to comply with an order of a court or 
arbitrator; (2) when the National Securities Clearing Corporation 
(``NSCC'') \11\ ceases to act for an ETP Holder or the ETP Holder's 
clearing firm, and NSCC determines not to guarantee the settlement of 
the ETP Holder's trades; or (3) on risk management reports provided to 
the contra party of the ETP Holder or ETP Holder's clearing firm each 
day by 4 p.m. (E.S.T.) which disclose trading activity on an aggregate 
dollar value basis. In the event an ETP Holder submits an order that 
happens to execute against an order submitted by that same ETP Holder, 
the Exchange will disclose this information to the ETP Holder no later 
than the end of the day on the date the trade was executed. The 
Exchange will be able to maintain anonymity with respect to disputed or 
erroneous trades because the Exchange resolves disputes through a 
centralized process and conducts the process on behalf of its ETP 
Holders.\12\
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    \10\ PCXE Rule 7.14 requires that each ETP Holder either be a 
clearing firm or clear transactions through a clearing firm. Each 
ETP Holder has an obligation to disclose the name of the clearing 
firm to the Exchange.
    \11\ ArcaEx will submit clearing records to NSCC, which, 
pursuant to its rules (SR-NSCC-2003-14), will report trades executed 
on ArcaEx back to its clearing firms utilizing the unique clearing 
number for the contra-party rather than reveal that contra-party's 
acronym.
    \12\ See PCXE Rules 7.10 and 7.11 (Revisions of Transactions and 
Clearly Erroneous Policy). The Exchange represents that revealing a 
contra-party's identity so that an ETP Holder may pursue its right 
to arbitrate is consistent with the Exchange's authority under 
proposed rule PCXE 7.41(c)(1) to reveal a contra-party's identity 
for regulatory purposes.
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    The trade reports that the NSCC receives from ArcaEx for anonymous 
trades contain the identities of the parties to the trade. This measure 
enables the NSCC to conduct its risk management functions and settle 
anonymous trades. The trade report sent to the NSCC will contain an 
indicator noting that the trade is anonymous. On the contract sheets 
the NSCC issues to its participants, the NSCC will substitute ANON for 
the acronym of the contra-party. The purpose of this masking is to 
preserve anonymity through settlement.
    ArcaEx offers ETP Holders additional risk management tools for 
monitoring their exposure to members with whom they trade on an 
anonymous basis. First, ArcaEx provides ETP Holders or ETP Holders' 
clearing firms with intra-day concentration reports that disclose an 
ETP Holder's aggregate dollar value of purchases and sales with other 
members with whom it has traded anonymously. Second, ArcaEx will reveal 
by 4 p.m. Eastern Time the identities of the ETP Holders or ETP 
Holders' clearing firms listed on the intra-day concentration report. 
With this information, ETP Holders would know the exact dollar value of 
their aggregate purchases and sales with individual contra-parties. 
Third, once the NSCC ceases to act for a participant, that firm, and 
any other firm that clears through the participant, would not be able 
to continue trading. When the NSCC has ceased to act for a participant 
and determined not to guarantee the settlement of the participant's 
trades, ArcaEx would coordinate actions with NSCC to suspend the ETP 
Holder's trading privileges or the trading privileges of all ETP 
Holders that clear through that particular clearing firm. ArcaEx would 
promptly disclose to other ETP Holders and clearing firms that the NSCC 
has ceased to act via an ArcaEx Bulletin disseminated via email and 
through ArcaEx Clearing Updates disseminated via the ArcaEx's website. 
ArcaEx would also promptly disclose each trade executed anonymously 
with the firm that NSCC ceased to act for as well as for any firms 
clearing through that NSCC participant. Such information would be 
disclosed through web-based reports.
    In order to satisfy the ETP Holder's record keeping obligations 
under SEC Rules 17a-3(a)(1) and 17a-4, (i) the Exchange shall, with the 
exception of the stated circumstances above, retain for a period 
specified in Rule 17a-4(a), the identity of each ETP Holder that 
executes an anonymous transaction. As proposed, the ETP Holders shall 
retain the obligation to comply with SEC Rule 17a-3(a)(1) and 17-4(a) 
whenever they possess the identity of their contra-party. In either 
case, the information must be retained in its original form or a form 
approved under Rule 17a-6.
    The Exchange believes that post-trade anonymity will benefit 
investors because preserving anonymity through settlement limits the 
potential market impact that disclosing the Users' identity may have. 
Specifically, when the contra-party's identity is revealed, Users can 
detect trading patterns and make assumptions about the potential 
direction of the market based on the User's presumed client-base. By 
eliminating the User's identity and mitigating market impact, the 
Exchange believes that it will help Users meet best execution 
obligations.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) \13\ of 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\14\ in particular, because it is designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act,\15\ and subparagraph (f)(6) of Rule 19b-4,\16\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate. 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.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ For the purposes of determining the effective date and 
calculating the 60-day abrogation period, the Commission considers 
the proposed rule change to have been filed on May 28, 2004; the 
date PCX filed Amendment No. 1.

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[[Page 32090]]

    The PCX has requested that the Commission waive the five-day pre-
filing requirement and the 30-day operative delay so that the proposed 
rule change will become immediately effective upon filing. The 
Commission believes waiving the five-day pre-filing notice and the 30-
day operative delay is consistent with the protection of investors and 
the public interest. The Commission believes that waiving the pre-
filing requirement and accelerating the operative date will permit the 
Exchange to implement its post trade anonymity feature without undue 
delay. The Commission notes that it previously approved a proposed rule 
change providing post-trade anonymity through clearance and settlement 
and therefore the instant proposed rule change should not raise any new 
regulatory issues.\18\ Accordingly, the Commission designates the 
proposal to be effective and operative upon filing with the 
Commission.\19\
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    \18\ See Securities Exchange Act Release No. 48527 (September 
23, 2003), 68 FR 56361 (September 30, 2003)(SR-NASD 2003-85).
    \19\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(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 proposed rule 
change, as amended, 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 SR-PCX-2004-40 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 File Number SR-PCX-2004-40. 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 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 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 PCX. 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 File Number SR-PCX-2004-40 and should be 
submitted on or before June 29, 2004.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-12902 Filed 6-7-04; 8:45 am]
BILLING CODE 8010-01-P