[Federal Register Volume 69, Number 120 (Wednesday, June 23, 2004)]
[Notices]
[Pages 35081-35082]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14142]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49863; File No. 4-429]


Joint Industry Plan; Order Approving Joint Amendment No. 12 to 
the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage Relating to the Limitation in Liability for Filling 
Satisfaction Orders Sent Through the Linkage at the End of the Trading 
Day

June 15, 2004.

I. Introduction

    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'').\1\ In Joint Amendment No. 12, the Participants 
propose to extend the pilot provision limiting Trade-Through \2\ 
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.
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    \1\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
option 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, January 29, 
2003, June 18, 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 
37869 (June 25, 2003); and 49146 (January 29, 2004), 69 FR 5618 
(February 5, 2004).
    \2\ 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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    The proposed amendment to the Linkage Plan was published in the 
Federal Register on May 19, 2004.\3\ No comments were received on the 
proposed amendment. This order approves the proposed amendment to the 
Linkage Plan.
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    \3\ See Securities Exchange Act Release No. 49692 (May 12, 
2004), 69 FR 28956.
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II. Description of the Proposed Amendment

    In Joint Amendment No. 12, the Participants propose to extend the 
pilot provision contained in Section 8(c)(ii)(B)(2)(c) of the Linkage 
Plan, which limits Trade-Through liability for the last seven minutes 
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, per Satisfaction Order.\4\ The proposed increase in the 
limit on liability would become effective on July 1, 2004, when the 
current pilot expires. Pursuant to the pilot as currently in effect, 
the Trade-Through liability of a member of a Participant is limited to 
10 contracts per Satisfaction Order 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.
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    \4\ A ``Satisfaction Order'' is defined as an order sent through 
the Intermarket Options Linkage to notify a Participant of a Trade-
Through and to seek satisfaction of the liability arising from that 
Trade-Through. See Section 2(16)(c) of the Linkage Plan.
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III. Discussion

    When this pilot was originally proposed in Joint Amendment No. 4 to 
the Linkage Plan,\5\ the Participants represented to the Commission 
that their members had expressed concerns regarding their obligations 
to fill Satisfaction Orders (which may be sent by a Participant's 
member that is traded through) at the close of trading in the 
underlying security. Specifically, the Participants represented that 
their members were concerned that they may not have sufficient time to 
hedge the positions they acquire.\6\ The Participants stated that they 
believed that their proposal to limit liability at the end of the 
options trading day to the filling of 10 contracts per exchange, per 
transaction would protect small customer orders, but still establish a 
reasonable limit for their members' liability. The Participants further 
represented that the proposal should not affect a member's potential 
liability under an exchange disciplinary rule for engaging in a pattern 
or practice of

[[Page 35082]]

trading through other markets under Section 8(c)(i)(C) of the Linkage 
Plan.
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    \5\ See Securities Exchange Act Release No. 47028 (December 18, 
2002), 67 FR 79171 (December 27, 2002) (Notice of Proposed Joint 
Amendment No. 4).
    \6\ 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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    The Commission approved the proposed amendment for a one-year pilot 
\7\ to give the Participants and the Commission an opportunity to 
evaluate: (1) The need for the limitation on liability for Trade-
Throughs near the end of the trading day; (2) whether 10 contracts per 
Satisfaction Order is the appropriate limitation; and (3) whether the 
opportunity to limit liability for Trade-Throughs near the end of the 
trading day leads to an increase in the number of Trade-Throughs.
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    \7\ See Securities Exchange Act Release No. 47298 (January 31, 
2003), 68 FR 6524 (February 7, 2003) (approval of the pilot program 
on a 120-day basis); see also Securities Exchange Act Release No. 
48055 (June 18, 2003), 68 FR 37869 (June 25, 2003) (Order approving 
Joint Amendment No. 4).
    The Commission subsequently extended the pilot program for five 
months until June 30, 2004. See Securities Exchange Act Release No. 
49010 (December 30, 2003), 69 FR 706 (January 6, 2004) (Order 
approving Joint Amendment No. 8).
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    In the order approving Joint Amendment No. 4, the 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'').\8\ The Commission 
specified that the Report should include information about the number 
and size of Trade-Throughs that occur during the last seven minutes of 
the options trading day and during the remainder of the trading day, 
the number and size of Satisfaction Orders that Participants might be 
required to fill without the limitation on liability and how those 
amounts are affected by the limitation on liability, and the extent to 
which the Participants use the underlying market to hedge their options 
positions.\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 limitation on Trade-
Through liability permanent, they would submit the Report to the 
Commission no later than March 31, 2004.\10\
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    \8\ See Order approving Joint Amendment No. 4, supra note 7.
    \9\ Id.
    \10\ See Order approving Joint Amendment No. 8, supra note 7.
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    Following the most recent extension of the pilot program, certain 
Participants provided the Commission with portions of the data 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 effect, with the increase in liability to 
25 contracts, while the Participants continue to compile the data 
necessary to permit the Commission to evaluate the propriety of 
permanent approval of the Trade-Through liability limitation.
    After careful consideration, the Commission finds that the proposed 
amendment to the Linkage Plan seeking to extend the pilot provision 
limiting Trade-Through liability for the last seven minutes of the 
trading day in the options markets for an additional seven months, and 
to increase the limitation on liability from 10 contracts to 25 
contracts per Satisfaction Order is consistent with the requirements of 
the Act and the rules and regulations thereunder. Specifically, the 
Commission finds that the proposed amendment to the Linkage Plan is 
consistent with Section 11A of the Act \11\ and Rule 11Aa3-2 
thereunder,\12\ in that extending the pilot while the Participants 
gather and the Commission evaluates data relating to the effect of the 
operation of the pilot, is appropriate in the public interest, for the 
protection of investors and the maintenance of fair and orderly 
markets. The Commission further finds that raising the limitation on 
liability to 25 contracts per Satisfaction Order, which should increase 
the average size of Satisfaction Order fills during the last seven 
minutes of the options trading day, is appropriate in the public 
interest, for the protection of investors and the maintenance of fair 
and orderly markets. Therefore, the Commission is extending the 
effectiveness of Section 8(c)(ii)(B)(2)(c) of the Linkage Plan, with 
the increase in the limitation in liability to 25 contracts per 
Satisfaction Order, for an additional seven months, until January 31, 
2005.
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    \11\ 15 U.S.C. 78k-1.
    \12\ 17 CFR 240.11Aa3-2.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \13\ 
and Rule 11Aa3-2 thereunder,\14\ that the proposed Joint Amendment No. 
12 is approved on a pilot basis from July 1, 2004 until January 31, 
2005.

    \13\ See supra note 11.
    \14\ See supra note 12.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-14142 Filed 6-22-04; 8:45 am]
BILLING CODE 8010-01-P