[Federal Register Volume 70, Number 128 (Wednesday, July 6, 2005)]
[Notices]
[Pages 38997-39000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51937; File No. SR-PCX-2005-31]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change and Amendments No. 1, 2, and 3 Thereto 
To Permit Lead Market Makers To Operate From a Remote Location

June 29, 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 March 15, 2005, the Pacific Exchange, Inc. (``PCX'' 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 the Exchange. The Exchange submitted 
Amendments No. 1, 2, and 3 on May 27, 2005,\3\ June 6, 2005,\4\ and 
June 22, 2005,\5\ respectively. 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\ CFR 240.19b-4.
    \3\ Amendment No. 1 makes clarifying changes to the purpose 
statement and rule text. Amendment No. 1 replaces the original rule 
filing in its entirety.
    \4\ Amendment No. 2 makes a technical correction to the rule 
text in Exhibit 5.
    \5\ Amendment No. 3 clarifies how a Lead Market Maker will 
garner their guaranteed trade allocations to the PCX by adding the 
words ``via the PCX Plus system'' at the end of the second paragraph 
in the purpose statement. Amendment No. 3 also eliminates the 
deletion of PCX Rule 6.37(f)(1).
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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 amend PCX trading rules in order to allow 
OTP Holders and OTP Firms who conduct Lead Market Making activity to do 
so whether on the trading floor or from a remote location. The text of 
the proposed rule change is set forth below. Additions are in italics; 
deletions are in brackets.

Rules of the Pacific Exchange, Inc.

Rule 6 Options Trading

    Rule 6.32(a). A Market Maker is an individual who is registered 
with the Exchange for the purpose of making transactions as a dealer-
specialist on the Floor of the Exchange or, in the case of a Remote 
Market Maker or a Lead Market Maker, through the facilities of the 
Exchange in accordance with the provisions of this subsection. 
Registered Market Makers are designated as specialists on the Exchange 
for all purposes under the Securities Exchange Act of 1934 and the 
Rules and Regulations thereunder. Except as provided in subsection (c) 
below, only transactions that are initiated on the Floor of the 
Exchange or executed through the facilities of the Exchange [by a 
Remote Market Maker] will count as Market Maker transactions for the 
purposes of Rule 6.32. A Market Maker on the Exchange must be either a 
Lead Market Maker, a Remote Market Maker, a Supplemental Market Maker, 
or a Floor Market Maker.
    (1) A Lead Market Maker is a registered Market Maker who makes 
transactions as dealer-specialist [while] on [the Floor of] the 
Exchange and who meets the qualification requirements of Rule 6.82(b).
    (2)-(4)--No change.
    (b) Market Makers and Floor Brokers effecting transactions as 
Market Makers are instructed that, except as specified in subsection 
(c) below, only transactions that are initiated on the Floor of the 
Exchange or[, in the case of a Remote Market Maker,] through the 
facilities of the Exchange by that person shall count as Market Maker 
transactions and be entitled to special margin treatment, pursuant to 
the net capital requirements of Rule 15c3-1 under the Securities 
Exchange Act of 1934 and Regulation T of the Board of Governors of the 
Federal Reserve system. Accordingly, any position established for the 
account of a Market Maker [other than a Remote Market Maker] which has 
been ``entered [from off the floor] through an OTP Firm acting as a 
Floor Broker'' must be placed in the Market Maker's investment account 
and be subject to applicable customer margin.
    (c) A Market Maker may enter opening orders from off the Floor of 
the Exchange for execution by Floor Brokers and receive special margin 
treatment for such orders during any calendar quarter, provided that 
such Market Maker executes in person or through a facility of the 
exchange, and not through the use of orders, at least 80% of his or her 
total transactions during that calendar quarter. This provision, if 
applicable, shall supersede the 60% in-person requirement of Rule 6.37. 
In addition, the [off-floor] orders executed by a Floor Broker for 
which a Market Maker received market-maker treatment shall be 
consistent with a Market Maker's duty to maintain fair and orderly 
markets and in general shall be effected for the purpose of hedging, 
reducing the risk of, or rebalancing open positions of the Market 
Maker. Remote Market Makers may enter opening orders from off the Floor 
of the Exchange for execution by Floor Brokers and receive special 
margin treatment for them as long as the entry of such orders is 
consistent with the Remote Market Maker's duty to maintain fair and 
orderly markets and such orders are entered for the purpose of hedging, 
reducing the risk of, or rebalancing open positions of the Remote 
Market Maker.
    (d)-(e)--No change.
    Rule 6.33-6.35(h)(3)--No Change.
    Rule 6.35(h)(4) at no time will a Remote Market Maker concurrently 
trade or quote the same option issue as a Remote Market Maker or Lead 
Market Maker who is a Nominee for the same OTP Holder or OTP Firm.
    Rule 6.36(a). Required of Each OTP Holder. No Market Maker may make 
any transaction on the floor of the Exchange or, in the case of a 
Remote Market Maker or a Lead Market Maker, through the facilities of 
the Exchange unless there is in effect a Letter of Guarantee which has 
been issued for such OTP Holder or OTP Firm by a Clearing Member and 
approved by the Options Clearing Corporation and the Exchange. An OTP 
Holder or OTP Firm may not have more than one such Letter in effect at 
the same time except for the purpose of facilitating the transfer of 
that OTP Holder or OTP Firm's Market Maker account from one Clearing 
Member to another or unless the Exchange determines otherwise.
    Rule 6.36(b)-6.37(c)--No Change.
    Rule 6.37(d) In-Person Requirements for Market Makers [(other than 
Remote

[[Page 38998]]

Market Makers who are not present on the Trading Floor)]. In order to 
meet the obligations of this rule, and in the interest of a fair and 
orderly market, an adequate number of Market Makers must be available 
throughout each trading session. In acknowledgement thereof, the 
following minimum in-person trading requirements shall be in effect: At 
least 60% of a Market Makers transactions must be executed by the 
Market Maker in-person or through an approved facility of the exchange 
[, while he is present on the Options Trading Floor of the Exchange]. 
Orders executed for a Market Maker through a Floor Broker will not be 
credited toward the 60% requirement. A failure to comply with this 60% 
in-person trading requirement may result in a fine pursuant to Rule 
10.13; however, if aggravating circumstances are present, formal 
disciplinary action may be taken pursuant to Rule 10.4.
    Rule 6.37(e)--Rule 6.37 Commentary .02--No Change.
    Rule 6.37 Commentary .03(a)--When a Market Maker other than a 
Remote Market Maker or a Lead Market Maker operating from off the 
trading floor, displays a market on the screen that is the best market 
in that crowd, the Market Maker is obligated to ensure that its market 
is removed from the screen when the Market Maker leaves the crowd.
    Rule 6.37 Commentary .04--Rule 6.81--No Change.
    Rule 6.82(a). General Provisions
    (1) Lead Market Maker Defined. A Lead Market Maker (``LMM'') is an 
individual or entity that has been deemed qualified by the Exchange 
[Options Allocation Committee] for the purpose of making transactions 
on [the Options Floor of] the Exchange in accordance with the 
provisions of Rule 6.82. Each LMM or nominee thereof must be registered 
with the Exchange as a Market Maker. Any OTP Holder or OTP Firm 
registered as a Market Maker with the Exchange is eligible to be 
qualified as an LMM. [Remote Market Makers are not eligible to act as 
LMMs from a location off the trading floor.]
    Rule 6.82(a)(2)-(c)(4)--No Change.
    Rule 6.82(c)(5) Be [present at the trading post] accessible 
throughout every business day and, in addition, designate an approved 
LMM to act as a back-up LMM and notify Book Staff of such designation;
    Rule 6.82(c)(6)-(g)--No Change.
    Rule 6.82(h)(1)--Reserved. [LMM Performance of Order Book Official 
Functions.
    (a) The LMM may, subject to the approval of the Exchange, perform 
all functions of the Order Book Official (``OBO'') in designated option 
issues pursuant to Rules 6.51 through 6.59.
    (b) The Exchange shall make personnel available to assist the LMM 
as the LMM shall reasonably require in performing the OBO function. The 
Exchange may charge the LMM a reasonable fee for such use of Exchange 
personnel.
    (c) Subject to the review of two Trading Officials or the Exchange, 
the LMM shall resolve trading disputes upon request of any party to 
such dispute.
    (d) The LMM shall disclose Book information to OTP Holders or OTP 
Firms upon request, pursuant to Rule 6.57.
    (e) If the Exchange decides to reallocate an issue to the Market 
Maker system pursuant to Section (f)(2) of this Rule, the terminated 
LMM may receive a share of the net Book revenues, not to exceed one-
half, for any period specified by the Exchange up to a maximum of five 
years. Such award shall take into account the length of time of LMM 
service, the LMM's capital commitment, efforts expended as LMM and any 
other relevant factors.]
    Rule 6.82(h)(2)-(h)(3)--No Change.
    Commentary:
    .01 It shall be the duty of the Exchange to promulgate and 
recommend to the Board of Directors rules and policies with regard to 
the [Options Floor] trading activities of the LMM.
    [.02 LMMs who perform the function of an Order Book Official 
pursuant to Rule 6.82(h) shall maintain ``minimum net capital'' as 
provided in SEC Rule 15c3-1, and shall also maintain a cash or liquid 
asset position of at least $500,000, plus $25,000 for each issue over 5 
issues for which they perform the function of Order Book Official.]
* * * * *
    Rule 7.1. Unless otherwise ruled by the Board of Directs, the 
Exchange shall be open for the transactions of business daily except on 
Saturdays and Sundays. The hours at which trading sessions shall open 
and close shall be established by the Board of Directors.
    Dealings upon the Exchange shall be limited to the hours during 
which the Exchange is open for the transaction of business. No OTP 
Holder or OTP Firm shall make any bid, offer or transaction upon the 
Floor or in the case of Remote Market Makers or Lead Market Makers 
operating from off the Floor, through the facilities of the Exchange 
before the official opening of the Exchange and loans of securities may 
be made after those hours.
    Commentary:
    .01 The Board of Directors has resolved that transactions may be 
effected on the Options Floor of the Exchange or in the case of Remote 
Market Makers or Lead Market Makers operating from off the Floor, 
through the facilities of the Exchange until 1:02 p.m. for equity 
options and until 1:15 p.m. for index options at which time no further 
transactions may be made.
    .02--No Change.
* * * * *

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 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 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
    The purpose of the proposed filing is to modify the Exchange 
trading rules in order to allow OTP Holders and OTP Firms who conduct 
Lead Market Making activity to do so whether on the trading floor or 
from a remote location. Currently, the PCX rules require a Lead Market 
Maker be physically present on the trading floor in order to conduct 
Lead Market Maker activities. With the roll out of PCX Plus, the 
Exchange's electronic trading system, the Exchange seeks to introduce a 
platform by which Lead Market Makers may either be present on the 
trading floor or may serve their role from a remote location.
    To permit a Lead Market Maker to work from remote locations, the 
Exchange is proposing to modify its trading rules to remove the current 
restrictions that require a Lead Market Maker to be physically present 
on the trading floor. The proposed changes will not affect any rights 
of the Lead Market Maker. They will retain their guaranteed 
participation allowances and opportunities to participate in open 
outcry should they choose to work from the physical trading floor. For 
those Lead Market Makers who choose to conduct their business from 
remote locations, they will not be able to inure

[[Page 38999]]

the benefits of the current open outcry strategies and will be granted 
their guaranteed participation rights solely based upon the size and 
price that they disseminate via the PCX Plus System.
    In order to allow Lead Market Makers to operate from a remote 
location, the Exchange is proposing a number of changes to its Rules. 
First, PCX Rule 6.32 is being amended to add Lead Market Makers to the 
definition of who may make transactions through the facilities of the 
Exchange. This change will allow Lead Market Makers who are not 
physically present on the trading floor to perform the duties and 
obligations from a remote location. Language in PCX Rule 6.32 is also 
being changed to allow for trades executed by a Lead Market Maker 
through a facility of the Exchange, in addition to in-person trades, to 
be eligible to receive market maker margin. Presently only Lead Market 
Maker trades that are executed on the floor of the Exchange or those 
that meet the criteria of PCX Rule 6.32(c) are eligible for market 
maker margin. Under the proposal, a Lead Market Maker acting from a 
remote location would still be required to meet all of the obligations 
of a Lead Market Maker as stated in PCX Rule 6.82 and therefore the PCX 
believes such LMMs should be entitled to market maker margin on all 
qualified trades.
    Second, the Exchange is proposing to eliminate the prohibition in 
PCX Rule 6.82(a)(1) that Remote Market Makers are not eligible to act 
as Lead Market Makers from a location off the trading floor. This 
change is necessary to permit Lead Market Makers to operate from a 
remote location and to eliminate any uncertainty that may exist in 
interpreting PCX Rules. A firm that operates at the PCX can have 
different employees who function as Remote Market Makers and Lead 
Market Maker, however under the proposed new rules these individuals 
are prohibited from trading the same option issues.\6\ Without 
eliminating this restriction, PCX Rule 6.82(a)(1) would prohibit a PCX 
firm from having different employees functioning as both a Remote 
Market Maker and a Lead Market Maker from off the trading floor. Firms 
would be only allowed to have an employee in one of these categories 
and thus this would restrict a firm's ability to operate remotely and 
in turn reduce the amount of liquidity available to the PCX markets.
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    \6\ See Proposed PCX Rule 6.35(h)(4).
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    Fourth, as part of allowing Lead Market Makers to operate from a 
remote location, the Exchange is proposing to eliminate PCX Rule 
6.82(h)(1). This rule currently allows the Lead Market Maker to perform 
Order Book Official functions. Since an Order Book Official is only 
present on the trading floor (PCX Plus does not contain a functionality 
similar to that which is performed by an Order Book Official), this 
function is not needed should a Lead Market Maker choose to operate 
from a remote location. The Exchange represents that at this time no 
Lead Market Maker is currently performing the functions of an Order 
Book Official nor has any Lead Market Maker expressed an interest in 
doing so. The Exchange further represents that for those individuals 
who continue to trade via open outcry on the trading floor, the 
Exchange will provide the necessary staff to effectively supervise 
trading.
    Finally, the Exchange notes that provisions of the PCX Rules that 
permit Lead Market Makers to perform certain functions that require 
them to be physically present on the trading floor (i.e. PCX Rule 
6.82(h)(3)) will only be permitted should the Lead Market Maker remain 
physically present on the trading floor. These functions will not be 
permitted should the Lead Market Maker decide to operate from a remote 
location.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \8\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of change, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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, as 
amended, 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2005-31 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission/Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-31. 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. 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

[[Page 39000]]

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-2005-31 and should be submitted on or before July 
27, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3538 Filed 7-5-05; 8:45 am]
BILLING CODE 8010-01-P