[Federal Register Volume 61, Number 95 (Wednesday, May 15, 1996)]
[Notices]
[Pages 24523-24525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12173]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37178; File No. SR-PSE-96-10]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Stock Exchange, Inc., To Establish a Firm Facilitation Exemption
May 8, 1996.
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 April 4, 1996, the Pacific Stock Exchange, Inc. (``PSE'' 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 self-regulatory
organization. The PSE subsequently filed Amendment No. 1 to the
proposed rule change on May 2, 1996.\3\ The PSE has requested
accelerated approval for the proposal. This order approves the PSE's
proposal, as amended, on an accelerated basis and solicits comments
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ On May 2, 1996, the PSE filed Amendment No. 1 to the
proposed rule change to include within the rule text the requirement
that if the Exchange grants a facilitation exemption on the basis of
oral representations, the member organization must file the
appropriate forms and documentation substantiating the basis for the
exemption within either two businesses days or a period of time to
be designated by the Exchange (``Amendment No. 1''). See Letter from
Michael D. Pierson, Senior Attorney, Market Regulation, PSE, to
Matthew S. Morris, Attorney, Office of Market Supervision, Division
of Market Regulation, Commission, dated May 2, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE is proposing to amend its rules on option position limits
in order to establish a firm facilitation exemption to such limits.
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 PSE 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 PSE 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 PSE is proposing to establish a firm facilitation exemption \4\
for all non-multiply-listed Exchange option issues by adding new
Commentary .08 to Exchange Rule 6.8, the general options position limit
rule.\5\ The exemption would be available to equity, broad-based index,
narrow-based index, Flexible Exchange (``FLEX''), interest rate, and
government securities option issues to the extent and at the levels
specified therein.
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\4\ The Commission notes that a facilitation trade is defined as
a transaction that involves crossing an order of a member firm's
public customer with an order for the member firm's proprietary
account.
\5\ The PSE's exercise limit provisions will correspond to the
increase in position limit levels permitted by the firm facilitation
exemption.
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Under the proposal, the procedures in Exchange Rule 6.47(b) and
Options Floor Procedure Advice A-6 for crossing a customer order with a
firm facilitation order must be followed. In this regard, before a
customer order can be crossed with a firm facilitation order, the
trading crowd must be given a reasonable opportunity to participate.
Moreover, only after it has been determined that the trading crowd will
not fill the order, may the firm's customer order be crossed with the
firm's facilitation order.
In addition, except for an interest rate firm facilitation
exemption, which is set at a higher level, the firm facilitation
exemption will be twice the standard limit.
The PSE notes that the firm facilitation exemption will be in
addition to and separate from the standard limit, as well as other
exemptions available under Exchange position limit rules. For example,
if a firm desires to facilitate customer orders in the XYZ option
issue, which is assumed not to be multiply-listed and also assumed to
have a 25,000 contract standard position limit, the firm may qualify
for a firm facilitation exemption of up to twice the standard limit
(50,000 contracts), as well as an equity hedge exemption of up to twice
the standard limit (50,000 contracts), in addition to
[[Page 24524]]
the 25,000 contract standard limit. If both exemptions are allowed, the
facilitation firm may hold or control a combined position of up to
125,000 XYZ contracts on the same-side of the market.
The PSE notes, however, that the firm facilitation exemption will
not presently extend to all option issues listed on the Exchange.
Rather, until coordinated intermarket procedures are developed, the
exemption will be extended only to non-multiply-listed option
issues.\6\
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\6\ The PSE notes, however, that the Intermarket Surveillance
Group (``ISG'') is currently working on developing such procedures.
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Under the proposal, the facilitation firm must receive approval
from the Exchange prior to executing facilitating trades. Although
Exchange approval may be granted on the basis of verbal
representations, the facilitation firm is required to furnish to the
Exchange's Department of Options Surveillance, within two business days
or such other time period designated by the Exchange, forms and
documentation substantiating the basis for the exemption. Within five
business days after the execution of a facilitation exemption order, a
facilitation firm must hedge all exempt option positions that have not
previously been liquidated, and furnish to the Exchange's Department of
Options Surveillance documentation reflecting the resulting hedging
positions. In meeting this requirement, the facilitation firm must
liquidate and establish its customer's and its own option and stock
positions or their equivalent in an orderly fashion, and not in a
manner calculated to cause unreasonable price fluctuations or
unwarranted price changes. In addition, a facilitation firm is not
permitted to use the facilitation exemption for the purpose of engaging
in index arbitrage. Moreover, the facilitation firm is required to
promptly provide to the Exchange any information or documents requested
concerning the exempted option positions and the positions hedging
them, as well as to promptly notify the Exchange of any material change
in the exempted options position or the hedge.
Lastly, to aid in understanding the scope of the firm facilitation
exemption, Commentary .08 will include both a table and an example
showing how the exemption will be applied.
2. Statutory Basis
The PSE believes that the proposal is consistent with Section 6(b)
of the Act, in general, and furthers the objectives of Section 6(b)(5),
in particular, in that it is designed to facilitate transactions in
securities while continuing to further investor protection and the
public interest, and will accommodate the needs of investors and other
market participants without substantially increasing concerns regarding
manipulation and other trading abuses.
B. Self-Regulatory Organization's Statement on Burden on Competition
The PSE does not believe that the proposed rule change 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
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filings also will be
available for inspection and copying at the principal office of the
PSE. All submissions should refer to File No. SR-PSE-96-10 and should
be submitted by [insert date 21 days from date of publication].
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)(5).\7\ Specifically,
the Commission believes that the PSE's proposal is reasonably designed
to accommodate the needs of investors and other market participants
without substantially increasing concerns regarding the potential for
manipulation and other trading abuses. The Commission also believes
that the proposed rule change has the potential to enhance the depth
and liquidity of the options market by providing Exchange members
greater flexibility in executing large customer orders. Accordingly, as
discussed below, the Commission believes that the rule proposal is
consistent with the requirements of Section 6(b)(5) that exchange rules
facilitate transactions in securities while continuing to further
investor protection and the public interest.
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\7\ 15 U.S.C. 78f(b)(5) (1988).
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The PSE proposal contains several safeguards that will serve to
minimize any potential disruption or manipulation concerns. First, the
facilitation firm must receive approval from the Exchange prior to
executing facilitating trades. Although Exchange approval may be
granted on the basis of verbal representations, the Commission believes
that trading abuses are unlikely because the facilitation firm is
required to furnish to the Exchange's Department of Options
Surveillance, within two business days or such other time period
designated by the Exchange, forms and documentation substantiating the
basis for the exemption.
Second, a facilitation firm must, within five business days after
the execution of a facilitation exemption order, hedge all exempt
options positions that have not previously been liquidated, and furnish
to the Exchange's Department of Options Surveillance documentation
reflecting the resulting hedging positions. In meeting this
requirement, the facilitation firm must liquidate and establish its
customer's and its own options and stock positions or their equivalent
in an orderly fashion, and not in a manner calculated to cause
unreasonable price fluctuations or unwarranted price changes. In
addition, a facilitation firm is not permitted to use the facilitation
exemption for the purpose of engaging in index arbitrage. The
Commission believes that these requirements will help to ensure that
the facilitation exemption will not have an undue market impact on the
options or any underlying stock positions.
Third, the facilitation firm is required to promptly provide to the
Exchange any information or documents requested concerning the exempted
options positions and the positions hedging them, as well as to
promptly notify the Exchange of any material change in the exempted
options position or the hedge.
Fourth, neither the member's nor the customer's order may be
contingent on
[[Page 24525]]
``all or none'' or ``fill or kill'' instructions, and the orders may
not be executed until the procedures in Exchange Rule 6.47(b) and
Options Floor Procedure Advice A-6 have been satisfied, and crowd
members have been given a reasonable time to participate in the trade.
Fifth, in no event may the aggregate exempted position under
Commentary .08 exceed the number of contracts specified in the
exemption's table, i.e., twice the applicable standard limit, excluding
interest rate options which are set at three times the applicable
standard limit.
Sixth, the facilitation firm may not increase the exempted options
position once it is closed, unless approval from the Exchange is again
received pursuant to a reapplication under Commentary .08.
In summary, the Commission believes that the safeguards built into
the facilitation exemption process discussed above should serve to
minimize the potential for disruption and manipulation, while at the
same time benefitting market participants by allowing member firms
greater flexibility to facilitate large customer orders. This structure
substantially mirrors the firm facilitation exemption process that was
recently approved for the Chicago Board Options Exchange, Inc.
(``CBOE'').\8\ The PSE also has surveillance procedures to surveil for
compliance with the rule's requirements. Accordingly, the Commission
believes it is appropriate to extend the benefits of a firm
facilitation exemption to non-multiply-listed PSE option issues.
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\8\ See Securities Exchange Act Release No. 36964 (March 13,
1996), 61 FR 11453 (March 20, 1996) (File No. SR-CBOE-95-68).
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The Commission finds good cause to approve the proposed rule
change, including Amendment No. 1, prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal
Register. Specifically, by accelerating the approval of the Exchange's
rule proposal, as amended, the Commission is conforming the Exchange's
firm facilitation exemption to the relief recently approved for the
CBOE. Accelerated approval of the proposed rule change will thereby
provide for the desired uniformity of the exchanges' position limit
exemptions. Any other course of action could lead to unnecessary
investor confusion. In addition, the CBOE's proposal was noticed for
the entire twenty-one day comment period and generated no responses.
Accordingly, the Commission believes that it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule
change, as amended, on an accelerated basis.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the
Act, that the proposed rule change (File No. SR-PSE-96-10), as amended,
is hereby approved on an accelerated basis.
\9\ 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. \10\
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\10\ 17 CFR 200.30-3(a) (12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12173 Filed 5-14-96; 8:45 am]
BILLING CODE 8010-01-M
