[Federal Register Volume 68, Number 117 (Wednesday, June 18, 2003)]
[Notices]
[Pages 36617-36621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15353]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48024; File No. SR-Amex-2003-36]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendments
No. 1 and 2 by the American Stock Exchange LLC To Initiate a Pilot
Program That Allows the Listing of Strike Prices at One-Point Intervals
for Certain Stocks Trading Under $20
June 12, 2003.
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 29, 2003, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Exchange filed Amendments No. 1 and 2 to the proposal on June 3,
2003,\3\ and June 11, 2003,\4\ respectively. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons and to grant accelerated approval
to the proposed rule change, as amended, through June 5, 2004.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 replaces and supersedes the original filing
in its entirety.
\4\ See letter from Jeffrey P. Burns, Associate General Counsel,
Amex, to Nancy Sanow, Division of Market Regulation, Commission,
dated June 10, 2003 (``Amendment No. 2''). Amendment No. 2 revises
the proposal to indicate that: (1) The pilot program will expire on
June 5, 2004; (2) the strike price interval for options on
individual stocks will be $5 or greater where the strike price is
greater than $25 but less than $200 and $10 or greater where the
strike price is greater than or equal to $200; and (3) the strike
price interval for options on Exchange-Traded Fund Shares (``ETFs'')
will be $5 or greater where the strike price is over $200.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to initiate a pilot program (``Pilot
Program'') that will allow the Exchange to list options on selected
stocks trading below $20 at one-point intervals. The text of the
proposed rule change appears below. Additions are in italics.
Rule 903. Series of Options Open for Trading
(a)-(d) No Change.
Commentary
.01-.03 No Change.
[[Page 36618]]
.04 The interval between strike prices of series of options on
individual stocks may be (a) $2.50 or greater where the strike price is
$25 or less, provided however, that the Exchange may not list $2.50
intervals below $20 (e.g. $12.50, $17.50) for any class included within
the $1 Strike Price Pilot Program, as detailed below in Commentary .05,
if the addition of $2.50 intervals would cause the class to have strike
price intervals that are $0.50 apart; (b) $5 or greater where the
strike price is greater than $25 but less than $200; or (c) $10 or
greater where the strike price is greater than or equal to $200. For
series of options on Exchange-Traded Fund Shares that satisfy the
criteria set forth in Commentary .06 to Rule 915, the interval of
strike prices may be $1 or greater where the strike price is $200 or
less or $5 or greater where the strike price is over $200. Exceptions
to the strike price intervals above are set forth in Commentaries .05
and .06 below.
.05 The interval between strike prices of series of options on
individual stocks may be:
a. $1.00 or greater (``$1 Strike Prices'') provided the strike
price is $20 or less, but not less than $3. The listing of $1 strike
prices shall be limited to option classes overlying no more than five
(5) individual stocks (the ``$1 Strike Price Pilot Program'') as
specifically designated by the Exchange. The Exchange may list $1
Strike Prices on any other option classes if those classes are
specifically designated by other national securities exchanges that
employ a similar $1 Strike Price Pilot Program under their respective
rules.
b. To be eligible for inclusion into the $1 Strike Price Pilot
Program, an underlying security must close below $20 in the primary
market on the previous trading day. After a security is added to the $1
Strike Price Pilot Program, the Exchange may list $1 Strike Prices from
$3 to $20 that are no more than $5 from the closing price of the
underlying on the preceding day. For example, if the underlying
security closes at $13, the Exchange may list strike prices from $8 to
$18. The Exchange may not list series with $1 intervals within $0.50 of
an existing $2.50 strike price (e.g. $12.50, $17.50) in the same
series. Additionally, for an option class selected for the $1 Strike
Price Pilot Program, the Exchange may not list $1 Strike Prices on any
series having greater than nine (9) months until expiration.
c. A security shall remain in the $1 Strike Price Pilot Program
until otherwise designated by the Exchange. The $1 Strike Price Pilot
Program shall expire on June 5, 2004.
.06 The options exchanges may select up to 200 options classes on
individual stocks for which the interval of strike prices will be $2.50
where the strike price is greater than $25 but less than $50. The 200
options classes are selected by the various options exchanges pursuant
to any agreement mutually agreed to by the individual exchanges and
approved by the Commission. In addition to those options selected by
the Exchange, the strike price interval may be $2.50 in any multiply-
traded option once another exchange trading that option selects such
option, as part of this program. The Exchange and any of the other
options exchanges may also list strike prices of $2.50 on any option
class that was selected by the NYSE pursuant to this program.
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 Exchange 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 Exchange 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 Amex proposes to amend Amex Rule 903, ``Series of Options Open
for Trading,'' to implement the Pilot Program, which will operate until
June 5, 2004. The Pilot Program will allow the Amex to list options on
up to five underlying equities trading below $20 at one-point intervals
and to list $1 strike prices on any equity option included in the $1
strike price pilot program of any other options exchange.
In addition to implementing the Pilot Program, the Amex proposes to
amend Amex Rule 903 to codify certain existing strike price interval
guidelines that the Commission approved but that have not been codified
in Amex Rule 903.\5\ In this regard, the Amex proposes to amend Amex
Rule 903 to indicate that: (1) the strike price interval for series of
options on individual stocks may be $2.50 or greater where the strike
price is $25 or less,\6\ $5 or greater where the strike price is
greater than $25 but less than $200 (except for options included in the
options exchanges' $2 \1/2\-point strike price program, as described
below), or $10 or greater where the strike price is greater than or
equal to $200; and (2) the strike price interval for series of options
on ETFs may be $1 or greater where the strike price is $200 or less or
$5 or greater where the strike price is over $200. In addition, the
Amex proposes to revise Amex Rule 903 to describe more specifically the
options exchanges' 2\1/2\-point strike price program.\7\
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\5\ See Securities Exchange Act Release Nos. 21929 (April 10,
1985), 50 FR 15258 (April 17, 1985) (File No. SR-Amex-85-6) (order
approving $2.50 strike price intervals for options on individual
stocks where the strike price is $25 or less) (``April 1985
Order''); 21644 (January 9, 1985), 50 FR 2360 (January 16, 1985)
(File No. SR-Amex-84-31) (order approving $5 strike price intervals
for options on stocks trading below $200); and 40157 (July 1, 1998),
63 FR 37426 ((July 10, 1998) (File No. SR-Amex-96-44) (order
approving strike price intervals of $1 or greater for options on
ETFs up to a strike price of $200 and strike price intervals of $5
or greater for ETF options where the strike price is over $200).
\6\ As discussed more fully below, the Pilot Program will impose
certain limitations on the Amex's ability to list $2\1/2\-point
strike prices on options included in the Pilot Program.
\7\ See Securities Exchange Act Release No. 40662 (November 12,
1998), 63 FR 64297 (November 19, 1998) (File Nos. SR-Amex-98-21; SR-
CBOE-98-29; SR-PCX-98-31; and SR-PHLX-98-26) (order permanently
approving the 2\1/2\-point strike price pilot program). The 2\1/2\-
point strike price program allows the Amex, the Chicago Board
Options Exchange, Inc. (``CBOE''), the Pacific Exchange, Inc., and
the Philadelphia Stock Exchange, Inc. to list up to 200 equity
options trading at a strike price greater than $25 but less than $50
at 2\1/2\-point intervals.
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Pilot Program
The Amex notes that stock prices in general have dropped over the
past few years, with many listings suffering severe declines. As a
result, there has been a proliferation of stocks trading below $20. The
Amex lists options on more than 900 of these stocks. Some of these
stocks are among the most widely held and actively traded equity
securities listed on the New York Stock Exchange, Inc., the Amex, and
Nasdaq, including, for example, Cisco, Oracle, Lucent, JDS Uniphase,
AT&T, and Motorola. Accordingly, the options overlying these stocks are
among the most actively traded options.
When a stock underlying an option trades at a lower price, it
requires a larger percentage gain in the price of the stock for an
option to become in-the-money. For example, when a stock trades at $10
an investor that wants to purchase a slightly out-of-the-money call
option would have to buy the $12.50 call. At these levels, the stock
[[Page 36619]]
price would need to increase by 25% to reach in-the-money status.
According to the Amex, a 25% or higher gain in the price of the
underlying stock is especially large given the lessened degree of
volatility that has accompanied many stocks and options over the past
several months. Accordingly, Amex member firms have expressed an
interest in listing additional strike prices on these classes so that
they can provide their customers with greater flexibility in achieving
their investment strategies. For this reason, the Exchange proposes to
implement the proposed Pilot Program.
1. Pilot Program Eligibility: The Exchange proposes to amend Amex
Rule 903 to allow the Exchange to list options on selected stocks
trading below $20 at one-point intervals, provided that the strike
prices are $20 or less, but not less than $3. An option would become
eligible for inclusion in the Pilot Program provided that the
underlying stock closed below $20 in its primary market on the
preceding trading day. Once the underlying stock is part of the Pilot
Program, the Exchange may continue to list $1 strike prices provided
the underlying stock remains below $20. As described more fully below,
although an option class will not be removed automatically from the
Pilot Program if the underlying stock trades at or above $20, the Amex
will not add $1 strike prices when the underlying stock closes above
$20. Once the stock closes below $20, it will again be eligible for the
addition of $1 strike prices. An underlying stock will remain in the
Pilot Program until the Amex removes it from the Pilot Program. Options
on stocks trading under $20 that are not included in the Pilot Program
may continue to trade in $2.50 and $5.00 strike price intervals.
Although the Amex may only select up to five individual stock options
for its Pilot Program, the Exchange will not be precluded from also
listing at $1 strike price intervals equity options included in the $1
strike price programs of other option exchanges.
2. Procedure for Adding $1 Strike Price Intervals: The Exchange
proposes to amend Amex Rule 903 to set forth the standards regarding
the addition of $1 strike price intervals. Under the Pilot Program, the
closing price of the underlying stock serves as the reference point for
determining which $1 strike prices the Exchange may open for trading.
To minimize the proliferation of options series, the Exchange intends
to restrict the number of $1 strike prices that may be added to those
strikes that fall within a $5 range of the price of the underlying
stock. The Amex will not add strike prices outside of the $5 range. For
example, if the underlying stock trades at $6, the Exchange could list
$1 strike prices from $3 to $11, while if the underlying stock trades
at $10, the Exchange could list $1 strikes from $5 to $15. By
restricting the number of strike prices that may be listed to a
predetermined $5 range, the Exchange believes it will be able to
provide investors with more flexibility without burdening The Options
Price Reporting Authority (``OPRA'') capacity by bringing up strike
prices that are not reasonably related to the price of the underlying
stock.
Currently, when an underlying stock trades below $25, the Exchange
may list strike prices with $2.50 intervals.\8\ For this reason,
several classes have $7.50, $12.50, and $17.50 strike prices. To
further avoid the proliferation of series, the Exchange does not intend
to list $1 strike prices at levels that ``bracket'' existing $2.50
intervals (e.g., $7 and $8 strikes around a $7.50 strike). Accordingly,
the Exchange does not intend to list $7, $8, $12, $13, $17, and $18
levels in an expiration month where there is a corresponding $2.50
level. As the $2.50 intervals are ``phased-out,'' as described below,
the Exchange will introduce the $1 levels that bracket the phased-out
price. For example, when a $7.50 series expires, the Exchange will
replace it by issuing a new expiration month with $7 and $8 strike
price intervals.
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\8\ See April 1985 Order, supra note 5.
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3. Procedures for Phasing-Out $2.50 Strike Price Intervals: When an
individual stock becomes a part of the Pilot Program, the Exchange will
begin to phase-out the existing $2.50 strike price intervals for
options on that stock in favor of the $1 strike price intervals. To
phase-out the $2.50 strike price intervals, the Exchange first will
delist any $2.50 series for which there is no open interest. Second,
the Exchange will no longer add new expiration months at $2.50 strike
price intervals below $20 when existing months expire. This will cause
the $2.50 strike price intervals below $20 to be phased-out when the
farthest-out month with a $2.50 interval expires.
4. $1 Strikes for Longer Dated Options: The Exchange will not list
$1 strikes on any series of individual equity option classes that have
greater than nine months until expiration.
5. Procedures for Adding Expiration Months: Amex Rule 903(a)(i)
will govern the addition of expiration months for $1 strikes series.
Pursuant to this rule, the Exchange generally opens up to four
expiration months for each class upon the initial listing of an options
class for trading. Thus, for options included in the Pilot Program, the
Amex will list an additional expiration month upon expiration of the
near-term month, provided that the underlying stock prices closes below
$20 on Expiration Friday. If the underlying closes at or above $20 on
its primary market on Expiration Friday, the Exchange will not list an
additional month of $1 strike price series until the stock again closes
below $20.
6. Procedures for Delisting $1 Strike Price Intervals: At any time,
the Exchange may cease listing $1 strike prices on existing series by
submitting a cessation notice to The Options Clearing Corporation
(``OCC'').\9\ As discussed above, if the underlying closes at or above
$20 on its primary market on Expiration Friday, the Amex will not list
any additional months with $1 strike prices until the stock
subsequently closes below $20. If the underlying stock does not
subsequently close below $20, thereby precluding the listing of
additional strike prices and months, the existing $1 series eventually
will expire. When the near-term month is the only series available for
trading, the Exchange may submit a cessation notice to OCC. Upon
submission of that notice, the underlying stock would no longer count
towards the five option classes available on the Exchange pursuant to
the Pilot Program, thereby allowing the Exchange to list options on an
additional stock at $1 strike price intervals. Once the Exchange
submits the cessation notice it will not list any additional months
pursuant to the Pilot Program for trading with strikes below $20,
unless the underlying stock again closes below $20.\10\
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\9\ The reasons for submitting a cessation notice are as
follows: (1) Expiration of available $1 strikes (i.e. the underlying
stock price remains at or above $20); (2) series proliferation
concerns; and (3) delisting because of, among other things, low
price, merger, or takeover. In any event, with prior notice to the
membership and customers, the Amex will continue to have the ability
to cease trading any series that has became inactive and has no open
interest.
\10\ If the underlying stock trades below $20 after the Amex
submits a cessation notice, the Amex could again list options on
that stock at $1 strike prices provided the Amex included the class
as one of its five allowable classes.
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7. OPRA Capacity: The Exchange believes that OPRA has the capacity
to accommodate the increase in the number of series that could be added
pursuant to the Pilot Program. In this regard, the Amex notes that, on
a daily basis, the options exchanges use an average of less than 7,000
messages per second (``mps'') during peak periods,
[[Page 36620]]
which is less than 25% of the total system capacity of 32,000 mps.
According to the Amex, the Amex listed approximately 108,094 series in
December 2000, approximately 100,632 series in September 2001, and
approximately 88,494 series in April 2003. The Amex believes that the
increase in the number of series resulting from the Pilot Program
should be substantially less than the decreases in listed series
experienced by the Exchange.
Furthermore, the Amex states that, to date, the options exchanges
have not exceeded 11,000 mps for any extended period of time.\11\
Therefore, the Amex believes that implementing the Pilot Program would
not have a negative impact on OPRA system capacity.
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\11\ According to the Amex, on November 6, 2002, the OPRA five-
minute message peak was 8,203 mps and on November 13, 2002, the one-
minute peak was 10,091 mps.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
section 6(b) of the Act \12\ in general and furthers the objectives of
section 6(b)(5),\13\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of change, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or 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, including whether the proposed rule
change, as amended, 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
filings will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-Amex-2003-36 and should be submitted by July 9, 2003.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
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.\14\ In particular, the Commission finds that the proposed
rule change is consistent with section 6(b)(5) of the Act,\15\ which
requires, among other things, that the rules of a national securities
exchange be designed 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. Specifically,
the Commission believes that the proposed listing of one point strike
price intervals in selected equity options on a pilot basis should
provide investors with more flexibility in the trading of equity
options overlying stocks trading at more than $3 but less than $20,
thereby furthering the public interest by allowing investors to
establish equity options positions that are better tailored to meet
their investment objectives. The Commission also believes that the
Exchange's limited Pilot Program strikes a reasonable balance between
the Exchange's desire to accommodate market participants by offering a
wide array of investment opportunities and the need to avoid
unnecessary proliferation of options series. The Commission expects the
Exchange to monitor the applicable equity options activity closely to
detect any proliferation of illiquid options series resulting from the
narrower strike price intervals and to act promptly to remedy this
situation should it occur. In addition, the Commission requests that
the Amex monitor the trading volume associated with the additional
options series listed as a result of the Pilot Program and the effect
of these additional series on market fragmentation and on the capacity
of the Exchange's, OPRA's, and vendors' automated systems.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
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As noted above, the Commission is approving the Amex's proposal on
a pilot basis. In the event that Amex proposes to extend the Pilot
Program beyond June 5, 2004, expand the number of options eligible for
inclusion in the Pilot Program, or seek permanent approval of the Pilot
Program, it should submit a Pilot Program report to the Commission
along with the filing of such proposal.\16\ The report must cover the
entire time the Pilot Program was in effect, and must include: (1) Data
and written analysis on the open interest and trading volume for
options (at all strike price intervals) selected for the Pilot Program;
(2) delisted options series (for all strike price intervals) for all
options selected for the Pilot Program; (3) an assessment of the
appropriateness of $1 strike price intervals for the options the Amex
selected for the Pilot Program; (4) an assessment of the impact of the
Pilot Program on the capacity of the Amex's, OPRA's, and vendors'
automated systems; (5) any capacity problems or other problems that
arose during the operation of the Pilot Program and how the Amex
addressed them; (6) any complaints that the Amex received during the
operation of the Pilot Program and how the Amex addressed them; and (7)
any additional information that would help to assess the operation of
the Pilot Program.
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\16\ The Commission expects the Amex to submit a proposed rule
change at least 60 days before the expiration of the Pilot Program
in the event the Amex wishes to extend, expand, or seek permanent
approval of the Pilot Program.
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The Commission believes that the proposal to codify previously
approved options strike price interval guidelines in Amex Rule 903 and
to revise Amex Rule 903 to describe the options' exchanges existing
2\1/2\-point strike price program with greater specificity should help
to clarify the Amex's rules and facilitate compliance with them,
thereby protecting investors and the public interest.
The Commission finds good cause for approving the proposal, as
amended, prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Amex's Pilot
Program is identical to a CBOE pilot program (``CBOE Pilot'') that the
[[Page 36621]]
Commission approved.\17\ Notice of the CBOE Pilot was published for
comment \18\ and the Commission received one comment letter, which
supported the CBOE's proposal. Accordingly, the Commission believes
that the Amex's Pilot Program raises no issues of regulatory concern.
Amendment No. 2 clarifies the proposal by specifying the expiration
date for the Pilot Program and the strike price intervals for options
on individual stocks and ETFs. For these reasons, the Commission
believes that there is good cause, consistent with sections 6(b)(5) and
19(b) of the Act,\19\ to approve the Amex's proposal, as amended, on an
accelerated basis, through June 5, 2004.
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\17\ See Securities Exchange Act Release No. 47991 (June 5,
2003) (order approving File No. SR-CBOE-2001-60).
\18\ See Securities Exchange Act Release No. 47753 (April 29,
2003), 68 FR 23784 (May 5, 2003).
\19\ 15 U.S.C. 78f(b)(5) and 78s(b).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-Amex-2003-36) and Amendments
No. 1 and 2 thereto are hereby approved, on an accelerated basis and as
a pilot program, through June 5, 2004.
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\20\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-15353 Filed 6-17-03; 8:45 am]
BILLING CODE 8010-01-P