[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10439-10442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-847]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51251; File No. SR-BSE-2004-27]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Boston Stock Exchange, Inc., Relating to the Reporting 
of Riskless Principal Transactions

February 24, 2005.
    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 December 3, 2004, the the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in items I and 
II below, which items have been prepared by the Exchange. On December 
23, 2004, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice and order to 
solicit comments on the proposed rule change, as amended, from 
interested persons and to grant accelerated approval to the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \1\ 17 CFR 240.19b-4.
    \3\ Amendment No.1 superseded and replaced the original proposal 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BSE is proposing to adopt a rule pertaining to the reporting of 
riskless principal transactions. Proposed new language is italicized.
* * * * *

[[Page 10440]]

Chapter II

Dealings on the Exchange

    Secs. 1-43 No change.

Riskless Principal Transactions

Sec. 43

    (1) A ``riskless principal transaction'' is a two-legged 
transaction in which a member, (i) after having received an order to 
buy a security that it holds for execution on the Exchange, 
contemporaneously purchases the security as principal at the same 
price, exclusive of markups, markdowns, commissions and other fees, to 
satisfy all or a portion of the order to buy or (ii) after having 
received an order to sell a security that it holds for execution on the 
Exchange, contemporaneously sells the security as principal at the same 
price, exclusive of markups, markdowns, commissions and other fees, to 
satisfy all or a portion of the order to sell.
    (2) A last sale report for only the initial principal leg of the 
transaction shall be submitted in accordance with the rules and 
procedures of the market where the transaction occurred. The second 
``riskless principal'' leg of the transaction must still be submitted 
and executed on the Exchange as with any other order, but the Exchange 
will not report that leg of the transaction to the respective 
consolidated tape. As applicable, the riskless principal leg may be 
submitted to the Exchange for execution as either (i) a non-tape, 
clearing-only order with a ``CTA no-print'' indicator if a clearing 
report is necessary to clear the transaction; or (ii) a non-tape, non-
clearing order with a ``CTA no-print'' indicator if a clearing report 
is not necessary to clear the transaction.
    (3) A member must have written policies and procedures to assure 
that its riskless principal transactions comply with this Section. At a 
minimum these policies and procedures must require that the customer 
order be received prior to the offsetting transactions, and that the 
offsetting transactions be executed contemporaneously with the original 
transaction. A member must also have supervisory systems in place that 
produce records that enable the member and the Exchange to accurately 
and readily reconstruct, in a time-sequenced manner, all orders for 
which a member relies on the riskless principal exemption.
* * * * *

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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 III below. The Exchange 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
    Under the proposed rule change, if a member of the Exchange is 
acting as principal for its own account, its trade would be considered 
a ``riskless principal transaction'' to the extent that: (i) After 
having received an order to buy a security that the member holds for 
execution on the Exchange, the member purchases the security from 
another firm or market to offset a contemporaneous sale to satisfy all 
or a portion of the original buy order at the same price, exclusive of 
any markup, markdown, commission, or other fee; or (ii) after having 
received an order to sell a security that the member holds for 
execution on the Exchange, the member sells the security to another 
firm or market to offset a contemporaneous purchase to satisfy all or a 
portion of the original sell order at the same price, exclusive of any 
markup, markdown, commission, or other fee.
    The Exchange is proposing to adopt a trade reporting rule 
applicable to riskless principal transactions in any securities traded 
on the Exchange.\4\ Under this proposal, the ``initial principal'' leg 
(the ``first leg'') of the transaction is reported to the consolidated 
tape by whichever market on which the trade occurs. Pursuant to this 
rule filing, the BSE member would apply a special marker to the second 
``riskless principal'' leg (the ``second leg'') and the BSE would not 
report that leg to the consolidated tape. The first leg of the 
transaction will continue to be matched and executed on the Exchange or 
on another market, whichever the case may be, and disseminated for 
publication to the respective consolidated tape in accordance with the 
relevant market's requirements. For the second leg of the transaction, 
to the extent that any of the order is offset by the initial principal 
execution, the member would designate in its trade report to the BSE 
the proprietary order as riskless. According to BSE, this BEACON \5\ 
modification will contemporaneously prevent priority violations.
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    \4\ The Exchange currently trades on an unlisted trading 
privilege basis securities that are listed on the New York Stock 
Exchange or ``Tape A'' program, the American Stock Exchange or the 
``Tape B'' program, and the Nasdaq Stock Market or ``Tape C'' 
program.
    \5\ The Boston Exchange Automated Communication Order-routing 
Network, which is known as BEACON, is the order-routing and 
execution system utilized on the Exchange.
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    The Exchange represents that BEACON will systematically capture 
every first leg of every transaction even if it occurs on another 
market.\6\ BEACON will automatically match the first and second leg of 
the transaction by utilizing tag numbers to ensure that the special 
marker was used in a riskless principal transaction. More specifically, 
where a BSE member is executing a trade on another market, BEACON will 
automatically attach a tag number. This tag number will be matched to 
the second leg of the transaction. The Exchange will not report the 
second leg of the transaction to the respective consolidated tape.

    \6\ See Letter from John Boese, Chief Regulatory Officer, BSE, 
to Michael Gaw, Senior Special Counsel, Division of Market 
Regulation, Commission, dated February 10, 2005.
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    Example: A member receives an order to sell 100 shares at $50 
and holds that order for execution on the Exchange. Thereafter the 
member, as principal, sells 100 shares to another firm at $50 (the 
first leg) and then, as principal, fills the original order at $50 
(the second leg). The member designates the filling of the customer 
order (the second leg) as the ``riskless principal'' leg of a 
riskless principal transaction. The Exchange reports the first leg 
of the transaction to the consolidated tape, but not the second leg.

    Procedurally, if the first leg of the transaction occurs on the 
Exchange, the Exchange will report the first leg of the transaction to 
the consolidated tape pursuant to its rules. If the first leg of the 
transaction occurs on another market, that market would report the 
trade to the consolidated tape according to its rules. The BSE member 
who has a duty to report the execution \7\ shall report the execution 
as either: (i) a non-tape, clearing-only order with a capacity 
indicator of ``CTA no-print,'' if a clearing report is necessary to 
clear the transaction; or (ii) a non-tape, non-clearing order with a 
capacity indicator

[[Page 10441]]

of ``CTA no-print,'' if a clearing report is not necessary to clear the 
transaction.
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    \7\ See Rules of the Board of Governors of the Boston Stock 
Exchange, Chapter II, Dealings on the Exchange, Section 2.
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    In addition to the automatic matching of orders, the Exchange will 
conduct surveillance to determine that both legs of a riskless 
principal transaction correlate to each other, particularly if one leg 
occurs on another market. The Exchange will also review to see that 
members implement written policies and procedures as described below to 
assure compliance with this proposed rule. To determine that there is a 
matched order, the two legs of the riskless principal transaction would 
be electronically reviewed as part of the audit trail used by the 
Exchange to surveil and regulate trading. On a daily basis, for each 
execution with an indicator of ``CTA no-print,'' the electronic review 
will confirm that a contemporaneous order was placed after the customer 
order was received and the order was executed prior to the execution of 
the customer order. The electronic review will also confirm that each 
leg of the riskless principal transaction was executed at the identical 
price and size. If there is no corresponding matched order, an 
exception will be generated, and surveillance will conduct a manual 
review to determine whether the execution was actually a riskless 
principal transaction and whether the execution should be considered a 
covered sale.
    The Exchange believes that, if the member complies with all aspects 
of the proposed rule, the sell side of the second leg would be a 
``recognized riskless principal sale,'' as defined in Rule 31(a)(14) of 
the Act.\8\ Therefore, this sale would not be a ``covered sale'' as 
defined in Rule 31(a)(6) under the Act \9\ for which the Exchange would 
incur a liability to the Commission under section 31 of the Act.\10\ 
Accordingly, the second ``riskless principal'' leg would not increase 
the amount of fees that the member owes the Exchange pursuant to 
Chapter XXIII, section 2, of the Exchange's rules.
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    \8\ 17 CFR 240.31(a)(14).
    \9\ 17 CFR 240.31(a)(6).
    \10\ 15 U.S.C. 78ee.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, 
consistent with section 6(b) of the Act,\11\ in general, and section 
6(b)(5) of the Act,\12\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    BSE does not believe that the proposed rule change, as amended, 
will impose any inappropriate burden on competition.

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

    No written comments were solicited or received in connection with 
the proposed rule change, as amended.

III. 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-BSE-2004-27 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-BSE-2004-27. 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 BSE. 
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-BSE-2004-27 
and should be submitted on or before March 24, 2005.

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

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ Specifically, the Commission believes the proposal is 
consistent with section 6(b)(5) of the Act,\14\ which requires that the 
rules of an exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The rule proposed by BSE is substantially similar to NASD Rule 
6420(d)(3)(B) relating to the reporting of riskless principal 
transactions. The Commission previously has found the NASD riskless 
principal rule to be consistent with the Act.\15\ The Commission 
believes that BSE's proposal raises no new or significant regulatory 
issues and is also, therefore, consistent with the Act. Based on the 
information provided by BSE in support of this proposed rule change, 
the proposal appears reasonably designed to ensure that the two 
contemporaneous trades for which an Exchange member acts as principal 
can be matched and are indeed riskless for the member.
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    \15\ See, e.g., Securities Exchange Act Release No. 41606 (July 
8, 1999), 64 FR 38226 (July 15, 1999).
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    Assuming all the requirements of BSE's rule are met, a second 
offsetting sale occurring on the Exchange would be a ``recognized 
riskless principal sale'' as defined in Rule 31(a)(14) under the 
Act.\16\ Therefore, the sale also would be an ``exempt sale'' as 
defined in Rule

[[Page 10442]]

31(a)(11) under the Act \17\ and not a ``covered sale'' as defined in 
Rule 31(a)(6) under the Act.\18\ The Commission notes, however, that 
BSE members must have written policies and procedures and supervisory 
systems in place before reporting trades as riskless pursuant to 
Chapter II, Section 43 of the Exchange's rules.
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    \16\ 17 CFR 240.31(a)(14).
    \17\ 17 CFR 240.31(a)(11).
    \18\ 17 CFR 240.31(a)(6).
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    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the 30th day after publication in the 
Federal Register. The Commission believes that the rule proposed by BSE 
is substantially similar to NASD Rule 6420(d)(3)(B) and thus raises no 
new or significant regulatory issues. As such, the Commission believes 
that accelerated approval is appropriate.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\19\ that the proposed rule change (File No. SR-BSE-2004-27), as 
amended, is approved on an accelerated basis. 
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    \19\ 15 U.S.C. 78s(b)(2).

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-847 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P