[Federal Register Volume 69, Number 152 (Monday, August 9, 2004)]
[Notices]
[Pages 48261-48265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18125]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50115; File No. SR-OC-2004-01]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the 
OneChicago, LLC Relating to its Market Maker Registration Policy and 
Procedures

July 29, 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 July 23, 2004, OneChicago, LLC (``OneChicago'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as 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, and to grant accelerated approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    OneChicago proposes to adopt new Market Maker Registration Policy 
and Procedures. The text of the proposed rule change appears below. New 
language is in italics.
* * * * *

[[Page 48262]]

OneChicago

Market Maker Registration Policy and Procedures

OneChicago Market Maker Program

    Pursuant to OneChicago Rule 514, the Exchange has adopted a market 
maker program under which clearing members or exchange members 
(collectively, ``members'') may be designated as market makers in 
respect of one or more OneChicago contracts (``Contracts'') to provide 
liquidity and orderliness in the market for such Contracts. To be 
designated as a OneChicago market maker, a member must complete and 
file with the Exchange a OneChicago Market Maker Registration Form 
(attached below). By signing the registration form, the member will 
confirm that it meets and will continue to meet the qualifications to 
act as market maker in accordance with OneChicago Rules. The member 
will be required to identify all OneChicago Contracts for which it 
seeks to be designated as a market maker and elect which of the three 
alternative sets of market maker obligations specified in OneChicago 
Rule 515(n) it intends to undertake.

Market Maker Exclusion from OneChicago Customer Margin Requirements

    To qualify for the market maker exclusion for purposes of 
OneChicago's customer margin rules, a person must:
    (1) be a OneChicago member that is registered with OneChicago as a 
dealer in security futures as defined in Section 3(a)(5) of the 
Securities Exchange Act of 1934 (``Exchange Act'');
    (2) be registered as a floor trader or a floor broker under Section 
4f(a)(1) of the Commodity Exchange Act (``CEA'') or as a dealer with 
the Securities and Exchange Commission (``SEC'') under Section 15(b) of 
the Exchange Act;
    (3) maintain records sufficient to prove compliance with the 
requirements of OneChicago Rule 515(n) and the Commodity Futures 
Trading Commission (``CFTC'') Rule 41.42(c)(2)(v) and SEC Rule 
400(c)(2)(v) under the Exchange Act as applicable, including without 
limitation trading account statements and other financial records 
sufficient to detail activity; and
    (4) hold itself out as being willing to buy and sell security 
futures for its own account on a regular or continuous basis.
    In addition, the market maker exclusion provides that any market 
maker that fails to comply with the rules of OneChicago or the margin 
rules adopted by the SEC and the CFTC shall be subject to disciplinary 
action in accordance with Chapter 7 of OneChicago's Rules, and that 
appropriate sanctions in the case of any such failure shall include, 
without limitation, a revocation of such market maker's registration as 
a dealer in security futures.

Market Maker Categories

    OneChicago Rule 515(n) specifies three alternative ways for a 
member to satisfy the requirement that a market maker hold itself out 
as being willing to buy and sell security futures for its own account 
on a regular or continuous basis. Each member seeking market maker 
designation must register for one of the following three market maker 
categories and will undertake to perform all of the obligations set 
forth in the elected category:
    Category 1. The market maker will provide continuous two-sided 
quotations throughout the trading day for all delivery months of 
Contracts representing a meaningful proportion of the total trading 
volume on the Exchange,\3\ subject to relaxation during unusual market 
conditions as determined by OneChicago (such as a fast market in either 
a Contract or a security underlying such Contract) at which times such 
market maker must use its best efforts to quote continuously and 
competitively; and when providing quotations, quotes for a minimum of 
one Contract with a maximum bid/ask spread of no more than the greater 
of $0.20 or 150 per cent of the bid/ask spread in the primary market 
for the security underlying each Contract; or
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    \3\ * A ``meaningful proportion of the total trading volume on 
the Exchange'' shall mean a minimum of 20 per cent of such trading 
volume.
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    Category 2. The market maker will respond to at least 75 per cent 
of the requests for quotations for all delivery months of Contracts 
representing a meaningful proportion of the total trading volume on the 
Exchange, subject to relaxation during unusual market conditions as 
determined by the Exchange (such as fast market in either a Contract or 
a security underlying such Contract) at which times such market maker 
must use its best efforts to quote competitively; and when responding 
to requests for quotation, quotes within five seconds for a minimum of 
one Contract with a maximum bid/ask spread of no more than the greater 
of $0.20 or 150 per cent of the bid/ask spread in the primary market 
for the security underlying each Contract; or
    Category 3. The market maker will be (i) assigned to a group of 
Contracts that is either unlimited in nature (``Unlimited Assignment'') 
or is assigned to no more than 20 per cent of the Contracts listed on 
OneChicago (``Limited Assignment''); (ii) at least 75 per cent of such 
market maker's total trading activity in Exchange products is in its 
assigned Contracts, measured on a quarterly basis; (iii) during at 
least 50 per cent of the trading day such market maker has bids or 
offers in the market that are at or near the best market, except in 
unusual market conditions as determined by OneChicago (such as fast 
market in either a Contract or a security underlying such Contract), 
with respect to at least 25 per cent (in the case of an Unlimited 
Assignment) or at least one (in the case of a Limited Assignment) of 
its assigned Contracts; and (iv) the requirements set forth in (ii) and 
(iii) are satisfied on at least 90 per cent (in the case of an 
Unlimited Assignment) or 80 per cent (in the case of a Limited 
Assignment) of the trading days in each calendar quarter.

Qualification for ``60/40'' Tax Treatment

    To qualify as a ``dealer'' in security futures contracts within the 
meaning of Section 1256(g)(9) of the Internal Revenue Code of 1986, as 
amended, (the ``Code'') a member is required (i) to register as a 
market maker for purposes of OneChicago's margin rules under Category 1 
or Category 2 above; (ii) to undertake in its registration form to 
provide quotations for all products specified for the market maker 
exclusion from the OneChicago margin rules; and (iii) to quote a 
minimum size of
    (A) ten (10) contracts for each product not covered by (B) or (C) 
below;
    (B) five (5) contracts for each product specified by the member to 
the extent such quotations are provided for delivery months other than 
the next two delivery months then trading; and
    (C) one (1) contract for any single stock futures Contract where 
the average market price for the underlying stock was $100 or higher 
for the preceding calendar month or for any futures contract on a 
narrow-based security index, as defined by Section 1a(25) of the CEA.

Products

    As noted above in completing the OneChicago Market Maker 
Registration Form, a member must specify all OneChicago Contracts for 
which it intends to act as a market maker. The Exchange will assign to 
the member all of the Contracts listed on its registration form, unless 
the Exchange provides written notice to the member identifying any 
Contracts for which such

[[Page 48263]]

assignment is withheld. A member may change the list of Contracts for 
which he undertakes to act as market maker for any calendar quarter by 
filing a revised Market Maker Registration Form with the Exchange on 
any business day prior to the last trading day of such quarter, and 
such change shall be effective retroactive to the first trading day of 
such quarter. Each market maker shall be responsible for maintaining 
books and records that confirm that it has fulfilled its quarterly 
obligations under the market maker category elected on its Market Maker 
Registration Form in respect of all Contracts designated for that 
calendar quarter.
* * * * *

514. Market Maker Programs

    The Exchange may from time to time adopt one or more programs under 
which one or more Clearing Members or Exchange Members may be 
designated as market makers with respect to one or more Contracts in 
order to provide liquidity and orderliness in the market or markets for 
such Contract or Contracts. Any such program may provide for any or all 
of the following:
    (a) Qualifications, including any minimum net capital requirements, 
that any such market maker must satisfy;
    (b) the procedure by which Clearing Members or Exchange Members may 
seek and receive designation as market makers;
    (c) the obligations of such market makers, including any applicable 
minimum bid and offer commitments; and
    (d) the benefits accruing to such market makers, including priority 
in the execution of transactions effected by Clearing Members or 
Exchange Members in their capacity as market makers, reduced 
transaction fees or the receipt of compensatory payments from the 
Exchange.
    Without limiting the generality of the foregoing, the Exchange may 
adopt a program under which one or more Clearing Members or Exchange 
Members may be designated as lead market makers, and as such, allocated 
certain numbers and types of Contracts with respect to which they are 
required to make two-sided markets. For further details see ``Market 
Maker Registration Policy and Procedures'' at www.onechicago.com/020000_about/oc_020400.html.
* * * * *

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

    In its filing with the Commission, OneChicago 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. OneChicago 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
    Pursuant to OneChicago Rule 514, the Exchange has adopted a market 
maker program in which clearing members or exchange members 
(collectively, ``members'') may be designated as market makers in 
respect to one or more OneChicago contracts (``Contracts'') to provide 
liquidity and orderliness in the market for such Contracts. The 
proposed rule change sets forth the procedures necessary for members to 
be designated as market makers and the policies in relation to such 
designation. In addition, the Exchange is making a corresponding 
amendment to OneChicago Rule 514.
    The proposed rule change reiterates the qualifications that members 
must meet pursuant to OneChicago Rule 515(n) to qualify for the market 
maker exclusion from customer margin.\4\ In addition, the proposed rule 
change reminds members that under Chapter 7 of the OneChicago rules, 
failure to comply with OneChicago's rules or the margin rules adopted 
by the Commission and the Commodity Futures Trading Commission 
(``CFTC'') are subject to disciplinary action. The appropriate 
sanctions for any such failure shall include, without limitation, a 
revocation of such market maker's registration as a dealer in security 
futures.
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    \4\ To qualify for the market maker exclusion for purposes of 
OneChicago's customer margin rules a person must:
    (1) Be a OneChicago member that is registered with OneChicago as 
a dealer in security futures;
    (2) Be registered as a floor trader or a floor broker under 
Section 4f(a)(1) of the Commodity Exchange Act (``CEA'') or as a 
dealer with the Commission under Section 15(b) of the Act;
    (3) Maintain records sufficient to prove compliance with the 
requirements of OneChicago Rule 515(n) and the CFTC Rule 
41.42(c)(2)(v) or Rule 400(c)(2)(v) under the Act as applicable, 
including without limitation trading account statements and other 
financial records sufficient to detail activity; and
    (4) Hold itself out as being willing to buy and sell security 
futures for its own account on a regular or continuous basis.
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    Under the proposed rule change, a member seeking a market maker 
designation must submit a Market Maker Registration Form to the 
Exchange. By signing the registration form, the member confirms that it 
meets and will continue to meet the qualifications to act as a market 
maker in accordance with the Exchange's rules. The registration form 
requires members to list all the Contracts in which they will act as 
market makers. The registration form also requires a member to identify 
the qualifying market maker category under OneChicago Rule 
515(n)(ii)(C).\5\
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    \5\ Under OneChicago Rule 515(n)(ii)(C), there are three 
alternative ways for a member to satisfy the requirement that 
security futures dealer hold itself out as being willing to buy and 
sell security futures for its own account on a regular or continuous 
basis.
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    The proposed rule change establishes that the Exchange will assign 
to the member all Contracts listed by the member on its registration 
form, unless the Exchange provides written notice to the member 
identifying any Contracts for which such assignment is withheld. Under 
the proposed rule change, for any calendar quarter, a market maker may 
change the list of Contracts for which it is designated by filing a 
revised registration form prior to the last trading day in such 
calendar quarter. Such change in Contract designation will be effective 
retroactive to the first trading day of such quarter. The proposed rule 
change also makes clear that each market maker is responsible for 
maintaining books and records that confirm that it has fulfilled its 
quarterly obligations under the market maker category as elected on its 
registration form for all designated Contracts for that quarter. Under 
the proposal, each market maker would also be required to maintain such 
books and records for every Contract and for each calendar quarter in 
which its designation as market maker is maintained.
    In addition, the proposed rule change sets forth the requirements 
that must be met to qualify as a ``dealer'' in security futures 
contracts within the meaning of Section 1256(g)(9) of the Internal 
Revenue Code of 1986 \6\, as amended (the ``Code''). Under the proposed 
rule change, to qualify as a dealer within the meaning of the Code a 
member is required (i) to register as a market maker for purposes of 
OneChicago's margin rules under Category 1 or 2 (OneChicago

[[Page 48264]]

Rule 515(n)(iii)(1) or (2)); (ii) to undertake in its registration form 
to provide quotations for all products specified for the market maker 
exclusion from the OneChicago margin rules; and (iii) for each delivery 
month to quote a minimum size of
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    \6\ 26 U.S.C. 1256(g)(9).
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    (A) Ten contracts of a product not covered by (B) or (C) below;
    (B) five contracts of a product specified by the market maker for 
delivery months other than the next two delivery months trading at the 
time the quotations are made; \7\
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    \7\ Under this requirement a market maker must quote for at 
least five contracts when it is quoting in the back delivery months. 
For example, a market maker designated to trade Contracts on XYZ, 
Corp, which is trading two quarterly and two serial months (the 
March Contract, the April Contract, the May Contract and the June 
Contract), would be required to have a size of at least five 
Contracts for its quotes in the May and June Contracts in order for 
the market maker to qualify as a ``dealer'' for purposes of Section 
1256(g)(9) of the Code. 26 U.S.C. 1256(g)(9).
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    (C) one contract of any single stock futures product where the 
average market price for the underlying stock was $100 or higher for 
the preceding calendar month or for each delivery month of any futures 
contract on a narrow-based security index, as defined by Section 1a(25) 
of the CEA.
2. Statutory Basis
    OneChicago believes that the proposal is consistent with Section 
6(b) of the Act,\8\ in general, and Section 6(b)(5) of the Act,\9\ in 
particular, which requires, among other things, that exchange rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and in general to 
protect investors and the public interest. The Exchange believes that 
the proposed rule change establishes procedures and policies for its 
market maker program, which, according to OneChicago, is designed to 
provide liquidity and orderliness in the market for OneChicago 
Contracts. Thus, OneChicago believes that the proposed rule change 
promotes just and equitable principles of trade and protects investors 
and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OneChicago 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 were neither solicited nor received with respect 
to the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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);
     Send an e-mail to [email protected]. Please include 
File Number SR-OC-2004-01 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and OneChicago Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-OC-2004-01. 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 20549-0609. Copies of such filing also will 
be available for inspection and copying at the principal office of 
OneChicago. 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-OC-
2004-01 and should be submitted on or before August 30, 2004.

IV. Commission Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\10\ In 
particular, the Commission believes that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act,\11\ 
which requires, among other things, that the rules of the Exchange be 
designed to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest.\12\ In addition, 
the Commission believes that the proposed rule change is consistent 
with Section 7(c)(2)(B) of the Act,\13\ which provides, among other 
things, that the margin requirements for security futures must preserve 
the financial integrity of markets trading security futures and prevent 
systemic risk. The Commission also believes that the proposed rule 
change is consistent with Rule 400(c)(2)(v) under the Act,\14\ which 
permits a national securities exchange to adopt rules containing 
specified requirements for security futures dealers to qualify for an 
exclusion from the margin requirements for securities futures under 
Section 7(c)(2)(B) of the Act.\15\ The Commission believes that the 
proposed obligations for market makers satisfy this requirement. 
Specifically, the Commission believes that the Exchange's market maker 
registration policy and procedures, and the qualification requirements 
for ``60/40'' tax treatment should help ensure that market makers 
provide liquidity and orderliness in the market for OneChicago 
Contracts.
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78g(c)(2)(B).
    \14\ 17 CFR 242.400(c)(2)(v).
    \15\ 15 U.S.C. 78g(c)(2)(B).
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    OneChicago has requested that the Commission approve the proposed 
rule change prior to the thirtieth day after publication of notice of 
the filing in the Federal Register. The Commission believes that the 
market maker registration policy and procedures, and the qualification 
requirements for ``60/40'' tax treatment, are an extension of the 
obligations previously adopted in connection with OneChicago's Margin 
Rule,\16\ which sets forth the standards

[[Page 48265]]

under which a OneChicago member may be excluded from the Exchange's 
margin requirements as a ``market maker,'' and therefore should raise 
no novel regulatory issues related to margin requirements. Accordingly, 
the Commission finds good cause, consistent with Section 19(b)(2) of 
the Act,\17\ to approve the proposed rule change prior to the thirtieth 
day after publication of the notice of filing thereof in the Federal 
Register.
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    \16\ See Securities Exchange Act Release No. 47810 (May 7, 
2003), 68 FR 26369 (May 15, 2003).
    \17\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\18\, that the proposed rule change (File No. SR-OC-2004-01) is 
approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18125 Filed 8-6-04; 8:45 am]
BILLING CODE 8010-01-U