[Federal Register Volume 63, Number 149 (Tuesday, August 4, 1998)]
[Notices]
[Pages 41610-41612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20692]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40270; File No. SR-CHX-98-19]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by The Chicago Stock Exchange, Inc. Relating to the
Qualification by Market Makers for Exempt Credit
July 28, 1998.
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 July 2, 1998, 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, II and III below, which Items have been prepared by the CHX.
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) (1994).
\2\ 17 CFR 240.19b-4 (1997).
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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 an interpretation to Article XXXIV,
Rule 16 of the CHX Rules relating to registered market makers'
eligibility to receive exempt credit.
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 CHX 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 CHX 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 modify an
interpretation regarding the use of exempt credit by market makers.
Interpretation .01 to Article XXXIV, Rule 16 sets forth certain
requirements that must be met for market makers to be eligible to
receive exempt credit for financing their market maker transactions.
One requirement for
[[Page 41611]]
receiving exempt credit for a particular issue is that 50% of the
quarterly share volume in that issue recorded in a market maker account
must result from transactions consummated on the Exchange or sent from
the Exchange floor for execution in another market via ITS.\3\
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\3\ Securities Exchange Act Release No. 40016 (May 20, 1998), 63
FR 29276 (May 28, 1998) and Securities Exchange Act Release No.
40152, (July 1, 1998), 63 FR 37159 (July 9, 1998) (clarifying the
prior approval order).
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The Exchange seeks to include in the Interpretation the
consequences for failing to meet the fifty percent requirement. The
proposed rule change would suspend a market maker's eligibility to
receive exempt credit in the calendar quarter immediately following the
calendar quarter in which a violation occurred for all issues in which
the fifty percent requirement was not met (a ``non-qualifying
issue'').\4\
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\4\ In the event that a member registers as a market maker at
any time during a calendar quarter, the fifty percent requirement
would apply from the date of registration to the end of that
quarter.
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At the beginning of every calendar quarter, the Exchange will
notify market makers who fail to meet the 50% test for a particular
issue or issues during the previous quarter. Market makers who are so
notified by the Exchange must notify their lender in writing, with a
copy to the Exchange, within three trading days of receiving such
notification from the Exchange, that they are not entitled to exempt
credit for non-qualifying issues for the remainder of the current
quarter. If the lender is unable to distinguish between issues or is
unable to verify that exempt credit is not being granted in non-
qualifying issues, such market makers must transfer, within three
trading days of the date the lender receives notification, all non-
qualifying issues in their V-account to an account not entitled to
exempt credit and confirm with the Exchange that such action has been
taken. Market makers who are not using exempt credit must notify the
Exchange of such in writing within three trading days of receiving
notification and ask their lender to verify the same with the Exchange.
Once an issue becomes a non-qualifying issue for a market maker,
the issue will remain a non-qualifying issue for one calendar quarter.
At the end of that quarter, the market maker would be permitted to seek
exempt credit for the issue beginning the following quarter (assuming
the market maker complies with all of the other requirements in
interpretation .01). If the market maker again fails to meet the 50%
requirement for that issue, the issue will again become a non-
qualifying issue.
A market maker the exhibits chronic non-compliance with the 50%
threshold may be subject to disciplinary action by the Exchange. The
text of the proposed rule change is as follows:
Additions are italicized; deletions [bracketed].
ARTICLE XXXIV
Registered Market Makers--Equity Floor
Regulatory Status
RULE 16. No text change.
* * * Interpretations and Policies:
.01 Utilization of Exempt Credit. Exchange Members registered as
equity market makers are members registered as specialists for purposes
of the Securities Exchange Act of 1934 and as such are entitled to
obtain exempt credit for financing their market maker transactions.
Members and/or prospective members who are anticipating becoming
registered as equity market makers as well as those clearing firms who
are or will be carrying the accounts of market makers should be aware
of the following interpretation relative to the use of such credit:
1. Only those transactions initiated on the Exchange Floor qualify
as market maker transactions. This restriction prohibits the use of
exempt credit where market maker orders are routed to the Floor from
locations off the Floor.
2. Fifty per cent (50%) of the quarterly share volume in each [an]
issue in a market maker account must result from transactions which are
either consummated on the Exchange or sent from the Exchange Floor for
execution in another market via ITS in order for the market maker to be
entitled to exempt credit for such issue. Members who do not meet this
50% volume threshold for a particular issue in a calendar quarter will
not be entitled to exempt credit for such issue for the following
calendar quarter.
3. Only those positions which have been established as a direct
result of bonafide equity market maker activity qualify for exempt
credit treatment. This restriction precludes exempt credit financing
based on an equity market maker registration for positions resulting
from options exercises and assignments.
4. Members who are notified by the Exchange that they are not
entitled to exempt credit for a particular issue (because they failed
to meet the 50% threshold for that issue in the previous calendar
quarter as outlined in paragraph 2 above) must notify their lender in
writing, within three trading days of receiving such notification, that
they are not entitled to exempt credit for those specific issues
(``non-qualifying issues'') both on existing positions and new
transactions, for the remainder of the current calendar quarter. A copy
of the notification letter sent to the lender must also be sent
concurrently to the Exchange. If the lender is unable to distinguish
between issues or verify that exempt credit is not being granted in
non-qualifying issues, then, within three trading days of the date the
lender receives notification, such Members must transfer, to a customer
account or to an account not entitled to exempt credit, all non-
qualifying issues in their V-account and confirm with the Exchange that
such action has been taken. If such Members are not utilizing exempt
credit, they must send the Exchange a letter to that effect, within
three trading days of receiving notification that they are not entitled
to exempt credit for a particular issue, and request their lender to
verify the same with the Exchange.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act \5\ in that it is designed to promote just and equitable principles
of trade, to remove impediments and to 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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\5\ 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 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
The Exchange has 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 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 funding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
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(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 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. 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 Room. 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-98-19 and should
be submitted by August 25, 1998.
For the Commission, the Division of Market Regulation, pursuant
to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20692 Filed 8-3-98; 8:45 am]
BILLING CODE 8010-01-M
