[Federal Register Volume 68, Number 120 (Monday, June 23, 2003)]
[Notices]
[Pages 37187-37188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15712]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48029; File No. SR-PCX-2002-25]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change by the Pacific Exchange, Inc., To Eliminate the
Lead Market Maker Concentration Limit of 15% of the Issues Traded on
the Exchange's Options Floor
June 13, 2003.
On April 22, 2002, the Pacific Exchange, Inc. (``PCX'' or
``Exchange''), filed with the Securities and Exchange Commission
(``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 eliminate the concentration limit for the
number of issues that a Lead Market Maker (``LMM'') on the Exchange may
be allocated. Notice of the proposed rule change was published
[[Page 37188]]
for comment in the Federal Register on May 9, 2003.\3\ No comments were
received on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 47795 (May 5, 2003),
68 FR 25074.
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Current PCX Rule 6.82 requires the Options Allocations Committee
(``OAC'') to allocate option issues to LMMs based on an overall
evaluation of such factors as a candidate's adequacy of capital,
operational capacity, support personnel, trading crowd evaluations and
history of adherence to Exchange rules and securities laws. However,
absent extraordinary circumstances, no LMM may be allocated more than
15% of the number of issues traded on the options floor.
The Exchange now proposes to eliminate this fixed concentration
limit. Instead, PCX would add the number and quality of issues already
allocated to an LMM to the list of factors considered by the OAC.
Additionally, PCX would adopt a guideline requiring the OAC to consider
the concentration of an LMM's issues if an event or proposal would
cause the LMM to meet either of the following criteria: (i) The number
of issues allocated to it (and any affiliated LMM) is 25% or more of
the total number of issues traded on the PCX; or (ii) the volume in the
issues allocated to it (and any affiliated LMM) is 50% or more of the
total volume of the PCX or 25% or more of the total volume in equity
option issues of the PCX. If an LMM met either of these criteria, the
guideline would require the OAC to evaluate whether the event or
proposal would result in an unacceptable level of concentration. If so,
the OAC could exercise its discretion and take action to lower the
resulting level of concentration or to deny the subject proposal. The
OAC would also retain the discretion to review an LMM's level of
concentration at any time, regardless of whether the above criteria are
met.
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.\4\
Specifically, the Commission finds that the proposal is consistent with
section 6(b)(5) of the Act,\5\ which requires, among other things, that
the rules of an exchange be designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market, and
to protect investors and the public interest.
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\4\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78(c)(f).
\5\ 15 U.S.C. 78f(b)(5).
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The Commission has previously noted that PCX's concentration limits
serve the purpose of minimizing the disturbance to a fair and orderly
market that might otherwise result from the failure of an LMM.\6\
However, as the Commission has also noted, other exchanges do not
impose specified mandatory limits on the number of options that may be
allocated to specialists.\7\ The Commission believes that the approach
proposed by PCX is similar to one employed by the Chicago Board Options
Exchange (``CBOE''). Like the proposed PCX Rule and Guidelines, CBOE
Rule 8.84 and Regulatory Guideline 99-135 do not impose a mandatory cap
on the number of issues that may be allocated to a Designated Primary
Market-Maker (``DPM''). Instead, the CBOE guideline provides that a
review with the relevant committee may be triggered when, inter alia,
the number of classes allocated to a DPM is 25% or more of the total
number of classes traded on CBOE. The Commission believes that it is
permissible for the PCX to adopt a similar approach. The Commission
further believes that the proposed rule changes should provide PCX with
an appropriate degree of regulatory flexibility, and allow it to
compete more effectively with other exchanges. At the same time, the
proposal should preserve the Exchange's ability to minimize the risks
associated with potential LMM failures.
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\6\ See Securities Exchange Act Release No. 42583 (March 28,
2000), 65 FR 17689 (April 4, 2000).
\7\ Id. at 17690; Chicago Board Options Exchange Rule 8.84,
Regulatory Guideline 99-135; American Stock Exchange Rule 26,
Interp. 03.
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\8\ that the proposed rule change (File No. SR-PCX-2002-25) be, and
it hereby is, approved.
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\8\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-15712 Filed 6-20-03; 8:45 am]
BILLING CODE 8010-01-P