[Federal Register Volume 59, Number 26 (Tuesday, February 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2824]
[[Page Unknown]]
[Federal Register: February 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33571; File No. SR-CHX-94-01]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to Proposed Rule Change by Chicago Stock
Exchange, Inc. Relating to the Capital Requirement for the Designated
Primary Market Maker in the Chicago Stock Basket
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 January 22, 1994, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The CHX has requested accelerated approval of
the proposal. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Interpretation and Policy .01 to
Rule 3 of Article XXXVI that describes the capital requirement for the
Designated Primary Market Maker (``DPM'') of the Chicago Stock Basket
(``CXM'').\3\
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\3\The Commission notes that the CXM is a standardized basket
product consisting of twenty-five shares of each of the stocks
included in the Chicago Mercantile Exchange's futures contract that
is based on the American Stock Exchange's Major Market Index
(``MMI''). The MMI is a broad-based price-weighted index of twenty
stocks listed on the New York Stock Exchange. See Securities
Exchange Act Release No. 33053 (October 15, 1993), 58 FR 54610
(October 22, 1993) (File No. SR-CHX-93-18) (``CXM Approval Order'').
the DPM acts as the specialist in the basket and is required to
quote continuously a two-sided market in four CXM contracts. The DPM
must be an Exchange member registered as a specialist in securities
underlying the basket. Id.
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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 self-regulatory organization
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 III below. The self-regulatory
organization 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 rule change is to reduce the capital
requirement of the DPM for the CXM, and clarify that the excess
capital\4\ required to be maintained by the DPM is not excess net
capital\5\ and therefore does not include haircuts. Specifically, the
proposed rule change would reduce the DPM's excess capital requirement
to $150,000 from $250,000. Because of the low trading volume in the
CXM, the Exchange believes that the current capital requirement is too
burdensome and not commensurate with the risk involved.
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\4\The text of the proposed rule would specify that this capital
is to be maintained in excess of the DPM's required regulatory
capital levels, i.e., as set forth in SEC Rule 15c3-1 and Article
XI, Rule 3(b) (Specialist Capital Requirement) of the CHX rules.
\5\Under SEC Rule 15c3-1, the term ``net capital'' typically is
deemed to mean the net worth of a broker-dealer adjusted by, among
other things, deducting a specified percentage of the value of each
securities position (i.e., the ``haircut'').
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2. Statutory Basis
The proposed rule change is consistent with section 6(b)(5) of the
Act in that it is designated 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.
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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
No comments were solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the CHX. All
submissions should refer to File No. SR-CHX-94-01 and should be
submitted by March 1, 1994.
IV. Commission's Findings and Order Granting Accelerated Approval of
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, and, in
particular, with the requirements of Section 6(b).\6\ In particular,
the Commission believes the proposal is consistent with the section
6(b)(5) requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest.
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\6\15 U.S.C. 78f(b) (1988).
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In its order approving the CXM,\7\ the Commission found that, in
comparison to other methods of portfolio trading, basket products, such
as the CXM, are an efficient means to make investment decisions based
on the direction of standardized measures of stock market performance,
and may enhance the market's ability to absorb program trading. As part
of its review, the Commission evaluated, among other things, the
trading structure for market basket contracts and, in particular, the
responsibilities assigned to the DPM\8\ and Exchange oversight of the
DPM's performance. The Commission concluded that the CHX's financial
standards, including the requirement that the DPM set aside an extra
cushion of capital above that otherwise required for a specialist under
relevant Commission and Exchange rules,\9\ should help to ensure that
the DPM has sufficient resources to perform his or her market making
obligations effectively.
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\7\See CXM Approval Order, supra, note 3.
\8\See supra, note 3.
\9\See supra, note 4.
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To the extent that trading volume in the CXM may be lower than
originally was forseen, the Exchange argues that the current capital
requirements is too burdensome for the DPM and should be lowered to a
level that is more commensurate with the DPM's actual exposure to risk.
After careful review of the proposed rule change, the Commission
continues to believe that the DPM should have adequate capital to
conduct his or her market making activities. Accordingly, in these
particular circumstances, the Commission believes that it is not
inconsistent with the Act for the CHX to reduce the DPM's capital
requirement that is set forth in the Exchange rules governing basket
trading.
In reaching the above conclusion, however, the Commission placed
great weight on the CHX's representations regarding the depth and
liquidity of the prevailing market for the CXM. The Commission expects
and the Exchange has agreed that, if there is a significant increase in
basket trading volume, then the CHX will reconsider the adequacy of its
reduced capital requirement and, if appropriate, submit another
proposed rule change to the Commission.\10\
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\10\Telephone conversation between David T. Rusoff, Foley &
Larnder, and Beth A. Stekler, Attorney, Division of Market
Regulation, SEC, on February 1, 1994.
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The Commission finds good cause for approving the proposed rule
change prior the thirtieth day after the date of publication of notice
of filing thereof in the Federal Register. The Commission believes that
accelerated approval of this proposal should allow a regulatory burden
to be reduced immediately, thereby facilitating the efficient
allocation of market making capital.
It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act\11\ that the proposed rule change (File No. SR-CHX-94-01) is hereby
approved.
\11\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-2824 Filed 2-7-94; 8:45 am]
BILLING CODE 8010-01-M
