[Federal Register Volume 63, Number 177 (Monday, September 14, 1998)]
[Notices]
[Pages 49142-49144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24524]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40407; File No. SR-CHX-98-19]
Self-Regulatory Organizations; Chicago Stock Exchange, Inc; Order
Approving Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment No. 1 and Amendment No. 2 to Proposed
Rule Change Relating to the Qualification by Market Makers for Exempt
Credit
September 4, 1998.
I. Introduction
On July 2, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or
``Exchange'')
[[Page 49143]]
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act''), \1\ and Rule 19b-4 thereunder, \2\ a proposed
rule change to amend an interpretation to Article XXXIV, Rule 26 of the
CHX Rules relating to registered market makers' eligibility to receive
exempt credit. The proposed rule change was published for comment in
the Federal Register on August 4, 1998. \3\ On July 24, 1998, the
Exchange filed Amendment No. 1. \4\ On August 28, 1998, the Exchange
filed Amendment No. 2. \5\ The Commission received no comments on the
proposal. This order approves the proposed rule change. Also Amendment
Nos. 1 and 2 are approved on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 40270 (July 28, 1998),
63 FR 41610.
\4\ The substance of this amendment is incorporated into this
order. See Letter from David T. Rusoff, Counsel, Foley & Lardner, to
Katherine England, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated July 23, 1998 (``Amendment No.
1'').
\5\ The substance of this amendment is incorporated into this
order. See Letter from Patricia L. Levy, Senior Vice President and
General Counsel, CHX, to Karl Varner, Attorney, Division,
Commission, dated August 27, 1998 (``Amendment No. 2'').
---------------------------------------------------------------------------
II. Description of the Proposal
The purpose of the proposed rule change is to modify an
interpretation regarding the use of exempt credit by market makers.\6\
Interpretation .01 to Article XXXIV, Rule 16 sets forth certain
requirements that must be met for market makers to be eligible to
receive market maker exempt credit for financing their market maker
transactions. Currently, one requirement for receiving market maker
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 the Intermarket Trading
System.\7\
---------------------------------------------------------------------------
\6\ In Amendment No. 2 the Exchange modified the rule language
to account for Regulation T and Exchange rules. As previously
drafted, the rule would have prohibited a market maker from
utilizing exempt credit for all non-qualifying issues, even if
exempt credit is otherwise available under Regulation T. Regulation
T permits the use of exempt credit for certain broker-dealers
irrespective of whether the broker-dealer is a market maker.
Amendment No. 2 makes clear that once a market maker has been
notified by the Exchange that an issue is a non-qualifying issue the
procedures prohibit the market maker from receiving exempt credit in
a market making account, but the market maker remains eligible to
receive exempt credit under non-market maker accounts as provided by
Regulation T and Exchange rules.
\7\ 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).
---------------------------------------------------------------------------
The proposed rule change will include in the Interpretation the
consequences for failing to meet the 50% requirement. The proposed rule
change would suspend a market maker's eligibility to receive market
maker exempt credit in the calendar quarter immediately following the
calendar quarter in which a violation occurred for all issues in which
the 50% requirement was not meet (a ``non-qualifying issue'').\8\
---------------------------------------------------------------------------
\8\ 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.
---------------------------------------------------------------------------
At the beginning of every calendar quarter, the Exchange will
notify market makers who failed 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 of the Exchange, within three trading days of receiving such
notification from the Exchange, that they are not entitled to market
maker exempt credit for non-qualifying issues for 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
tradings days of the date the lender receives notification, all non-
qualifying issues in their V-account to an account not entitled to
market maker exempt credit and confirm with the Exchange that such
action has been taken. Members that are not using market maker exempt
credit and confirm with the Exchange that such action has been taken.
Members that are not using market maker exempt credit must notify the
Exchange of such in writing within three tradings 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
market maker 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.\9\ A market maker that exhibits chronic non-
compliance with the 50% threshold may be subject to disciplinary action
by the Exchange.
---------------------------------------------------------------------------
\9\ In order to clarify the quarterly transition from a non-
qualifying issue to a qualifying issue the Exchange offers the
following example in Amendment No. 1:
Suppose a market is eligible to receive market maker exempt
credit in Stock A on January 1. Suppose further that on March 31, at
the end of the quarter, the market maker has not met the 50%
threshold. Then, Stock A will be a non-qualifying issue from the
date upon which lender notification is required through June 30th.
On July 1, the member would once again be eligible to receive market
maker exempt credit for Stock A (so long as other requirements of
Interpretation .01 are met). If the member is notified that he did
not meet the 50% threshold for the quarter ending September 30th,
the issue would then become a non-qualifying issue again from the
date upon which lender notification is required until December 31st.
On January 1 of the following year, the process would start all over
again.
---------------------------------------------------------------------------
III. Discussion
After careful review, 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.
The Commission believes that the proposed rule change is consistent
with Section 6 of the Act, in general,\10\ and Section 6(b)(5),\11\ in
particular, in that it is designed to promote just and equitable
principles of trade, to prevent fraudulent and manipulative acts and
practices, to foster cooperation and coordination with persons engaged
in regulating and facilitating transactions in securities, 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.\12\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f.
\11\ U.S.C. 78f(b)(5).
\12\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission believes that registered market makers on the
Exchange serve an important function inasmuch as they add depth and
liquidity to the market for CHX-traded securities. Pursuant to Article
XXXIV of the CHX Rules, market makers are subject to both affirmative
and negative obligations,\13\ and, in return, are accorded certain
privileges, including exempt credit financing.\14\ Accordingly,
[[Page 49144]]
the Commission believes it is appropriate for the Exchange to
temporarily discontinue a privilege if the market maker fails to meet
the minimum threshold of an affirmative obligation upon which the
privilege is based.
---------------------------------------------------------------------------
\13\ For example, under Article XXXIV, a registered market maker
on the Exchange has the duty to maintain fair and orderly markets in
assigned issues (Rule 1); the duty to execute at least 50% of
quarterly share volume in assigned issues (Rule 3); and the duty to
register separately for each security to be traded as a market maker
(Rule 4).
\14\ Under the federal securities laws and the Exchange's Rules
as set forth in Article XXXIV, market makers are also granted
special treatment and exemptions from requirements regarding net
capital, position financing, and short sales for transaction
effected during the course of bona fide market making.
---------------------------------------------------------------------------
The proposed rule change permits the Exchange to suspend a market
maker's eligibility to receive market maker exempt credit in the
calendar quarter immediately following the calendar quarter in which a
violation occurred for all issues in which the 50% requirement was not
met. The Exchange's ability to discipline market makers for failure to
meet minimum quarterly share volume requirement should help ensure
greater market maker compliance with the rule in the future. The
Commission believes that greater compliance with the 50% minimum
quarterly share volume should enhance the quality of the market for
CHX-traded securities, and in turn foster investor confidence and
participation in the market as well as protect investors and the public
interest.
The Commission finds good cause for approving proposed Amendments
Nos. 1 and 2 prior to the thirtieth day after the date of publication
of notice of filing thereof in the Federal Register. Amendment No. 1
merely clarifies the quarterly transition from a qualifying to a non-
qualifying issue by means of an example.\15\ Amendment No. 2 clarifies
that a market maker who does not achieve the 50% minimum quarterly
share volume, while ineligible for market maker exempt credit, may
still be eligible for other forms of exempt credit pursuant to
Regulation T and Exchange Rules.\16\ Amendment Nos. 1 and 2 have no
substantive or procedural effect on the application of the proposed
rule change, and serve to obviate potential confusion in the
administration of the proposed rule change for Exchange officials,
Exchange members and investors alike. For these reasons, the Commission
finds good cause for accelerating approval of the proposed rule change,
as amended.
---------------------------------------------------------------------------
\15\ Supra, note 9.
\16\ Supra, note 6.
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views and
arguments concerning Amendments Nos. 1 and 2, 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, N.W., Washington
D.C. 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. Sec. 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 Exchange. All submissions should refer to File
No. SR-CHX-98-19 and should be submitted by October 5, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-CHX-98-19) is approved.
\17\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24524 Filed 9-11-98; 8:45 am]
BILLING CODE 8010-01-M
