68 FR 90 pgs. 25074-25076 - Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc. Relating to Elimination of the Lead Market Maker Concentration Level of 15% of the Issues Traded on the Exchange's Options Floor
Type: NOTICEVolume: 68Number: 90Pages: 25074 - 25076
Docket number: [Release No. 34-47795; File No. SR-PCX-2002-25]
FR document: [FR Doc. 03-11586 Filed 5-8-03; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47795; File No. SR-PCX-2002-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc. Relating to Elimination of the Lead Market Maker Concentration Level of 15% of the Issues Traded on the Exchange's Options Floor
May 5, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"),1and Rule 19b-4 thereunder,2notice is hereby given that on April 22, 2002, the Pacific Exchange, Inc. ("PCX" or "Exchange"), filed with the Securities and Exchange Commission ("Commission" or "SEC") the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. On April 29, 2003, the Exchange filed Amendment No. 1 to the proposed rule change.3The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
1 15 U.S.C. 78s(b)(1)
2 17 CFR 240.19b-4.
3 See letter from Mai Shiver, Senior Attorney, Regulatory Policy, PCX, to Nancy Sanow, Assistant Director, Division of Market Regulation, SEC, dated April 28, 2003.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is proposing to eliminate the concentration limit for the number of issues that a Lead Market Maker ("LMM") on the Exchange may be allocated. Below is the text of the proposed rule change. Proposed new language is italicized. Proposed deletions are in [brackets].
Pacific Exchange, Inc. Rules of the Board of Governors
Rule 6.82 (a)-(d)-No change.
(e) Allocation:
(1) Allocation. The allocation of option issues to LMMs [shall] will be effected by the Options Allocation Committee. The Options Allocation Committee [shall] will select that candidate who appears best able to perform the function of an LMM in the designated option issue. Factors to be considered for selection include, but are not limited to, the following: experience with trading the option issue; adequacy of capital; willingness to promote the Exchange as a marketplace; operational capacity; support personnel; history of adherence to Exchange rules and securities laws; trading crowd evaluations made pursuant to [OFPA B-13] Rule 6.100; and any other criteria specified in this Rule. The Options Allocation Committee will also consider the number and quality of issues that have been allocated, reallocated or transferred to a Lead Market Maker.
(2) Transfer of Issues. Issues allocated to an LMM may not be transferred to another firm or between nominees without the express approval of the Options Allocation Committee.
[(3) Concentration of Issues. In the absence of extraordinary circumstances, as determined by the Options Allocation Committee, no LMM may be allocated more than fifteen percent (15%) of the number of issues traded on the Options Floor.]
[(4)] ( 3 ) Evaluation of LMMs. The Options Allocation Committee shall monitor and evaluate the performance of LMMs with regard to quality of markets and shall do so at least semiannually. In reviewing and evaluating an LMM's performance, the Committee will consider, among other things, the LMM's evaluation conducted pursuant to [Options Floor Procedure Advice B-13] Rule 6.100, the LMM's compliance with Exchange Rules, including, but not limited to, Rule 6.32 through 6.40 and Article XI, Section 2 of the Exchange Constitution.
Guidelines of the Options Allocation Committee
The Options Allocation Committee has developed a guideline to assist the Committee in its review of matters that affect the level of LMM concentration on the Exchange. The Committee intends to evaluate matters related to the LMM concentration by considering a number of factors, including the number of issues allocated to an LMM and the contract volume in the products allocated to a LMM.
Under the Committee's guidelines, the Committee intends to take into consideration an LMM's level of concentration if there is an event or proposal that would cause an LMM to meet either of the following criteria:
1. The number of issues allocated to an LMM (and any affiliated LMM) is 25% or more of the total number of issues traded on the PCX;
2. The volume in the issues allocated to an LMM (and any affiliated LMM) is 50% or more of the total volume of the PCX or 25% or more of the total volume in equity option issues of the PCX.
If there is an event or proposal that would cause an LMM to reach either of the two above criteria (such as, for example, the allocation to an LMM of additional issues or a proposal involving a transfer of interest in an LMM organization), the Committee will carefully evaluate the level of concentration that would result. If the Committee determines that the event or proposal would result in an unacceptable level of concentration, the Committee could exercise its discretion and take action to lower the resulting level of concentration or to deny the applicable proposal. The Committee retains the discretion to review an LMM's level of concentration at any time regardless of whether the above criteria are satisfied.
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
Current PCX Rule 6.82(e) provides that the allocation of option issues to an LMM is effected by the Options Allocations Committee ("OAC"). Under this rule, the OAC selects the candidate who appears best able to perform the function of an LMM in a particular designated option issue. Factors to be considered for selection include, but are not limited to: experience with trading the option issue; adequacy of capital; willingness to promote the Exchange as a marketplace; operational capacity; support personnel; history of adherence to Exchange rules and securities laws; trading crowd evaluations made pursuant to Options Floor Procedure Advice ("OFPA") B-13 (renumbered Rule 6.100)4, and any other criteria specified in Rule 6.82. In addition to the above, the rule provides that in the absence of extraordinary circumstances, as determined by the OAC, the OAC may not allocate more than 15% of the number of issues traded on the Options Floor to any LMM.5
Footnotes:
4 See Securities and Exchange Act Release No. 44345 (May 23, 2001), 66 FR 30037 (June 4, 2001).
5 In 2000, the Commission approved a PCX proposal to increase the cap on the percentage of issues per LMM from 10% to 15%. See Securities and Exchange Act Release No. 42583 (March 28, 2000), 65 FR 17689 (April 4, 2000).
The options industry continues to experience a consolidation and withdrawal of liquidity providers and therefore, the Exchange is proposing a rule change that would eliminate the 15% LMM concentration limit and replace it with a provision that would require the OAC to consider the number and quality of issues that it has allocated, reallocated or transferred to an LMM. Consistently, the Exchange seeks to apply a guideline developed by the OAC in order to assist it in its review of matters that affect the level of LMM concentration on the Exchange. The guideline requires the OAC to take into consideration the concentration of an LMM's issues if there is an event or proposal that would cause an LMM to meet either of the following criteria: (i) the number of issues allocated to an LMM (and any affiliated LMM) is 25% or more of the total number of issues traded on the PCX; or (ii) the volume in the issues allocated to an LMM (and any affiliated LMM) is 50% or more of the total volume of the PCX or 25% or more of the total volume in equity option issues of the PCX. If an LMM meets either of the two above criteria, the guideline requires the OAC to evaluate the level of concentration and determine whether the event or proposal would result in an unacceptable level of concentration. If so, the OAC could exercise its discretion and take action to lower the resulting level of concentration or to deny the applicable proposal. Pursuant to the guideline, the OAC will retain the discretion to review an LMM's level of concentration at any time regardless of whether the above criteria are satisfied.
The Exchange believes that the rule change and accompanying guideline are necessary to assure not only that the OAC has the discretion to allocate an issue to the most qualified LMM, but also to maintain a competitive advantage relative to other options exchanges with respect to the number of issues that an LMM may be allocated.6
Footnotes:
6 The Exchange notes that the Chicago Board Options Exchange ("CBOE") has a guideline, which dates back to 1999, that has no mandatory cap on the number of issues that may be allocated to a Designated Primary Market-Maker ("DPM"). The CBOE guideline may trigger a review with the relevant committee when, inter alia, the number of classes allocated to a DPM is 25% or more of the total number of classes traded on CBOE. See CBOE Regulatory Guideline 99-135.
2. Statutory Basis
The Exchange believes that the proposed rule changes are consistent with section 6(b)7of the Act, in general, and further the objectives of section 6(b)(5),8in particular, in that they are designed to facilitate transactions in securities, to promote just and equitable principles of trade, to enhance competition, to perfect the mechanism of a free and open market and to protect investors and the public interest.
Footnotes:
7 15 U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(5).
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
The PCX neither solicited nor received written comments on the proposed rule change.
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 self-regulatory organization consents, the Commission will:
(A) by order approve such proposed 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 proposal is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 Room. Copies of such filing will also be available for inspection and copying at the principal office of PCX. All submissions should refer to File No. PCX-2002-25 and should be submitted by May 30, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.9
Footnotes:
9 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-11586 Filed 5-8-03; 8:45 am]
BILLING CODE 8010-01-P