[Federal Register: December 17, 2003 (Volume 68, Number 242)]
[Notices]
[Page 70328-70331]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17de03-118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48894; File No. SR-PCX-2003-42]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by
the Pacific Exchange, Inc. To Amend its Rules Governing the Execution
of Complex Orders Involving Options and Single Stock Futures
December 8, 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 August 15, 2003, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule
[[Page 70329]]
change as described in items I, II and III below, which items have been
substantially prepared by the PCX. On November 14, 2003, the PCX filed
Amendment No. 1 to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Mai Sharif Shiver, Senior Attorney,
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director,
Division of Market Regulation, Commission, dated November 13, 2003
(``Amendment No. 1'') (replacing the form 19b-4 in its entirety). In
Amendment No. 1, the Exchange, in part, clarified the margin
requirements for members, requiring members who effect SSF/option
order transactions to elect to be bound by the initial and
maintenance margin requirements of either the Chicago Board Options
Exchange (``CBOE'') or the New York Stock Exchange (``NYSE''), as
those rules may be in effect from time to time. In addition, the
Exchange amended the filing to make it immediately effective. For
purposes of calculating the 60-day abrogation period, the Commission
considers the period to have commenced on November 14, 2003, the
date the PCX filed Amendment No. 1. In addition, the Exchange made a
technical correction to its rule text and amended its discussion of
its change to its proposed rule 6.62. Telephone conversation between
Mai Sharif Shiver, Senior Attorney, Regulatory Policy, PCX, and
Elizabeth MacDonald, Attorney, Division of Market Regulation,
Commission, December 8, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PCX proposes to amend its rules governing the execution of
complex orders involving options and single stock futures (``SSF'').
The text of the proposed rule change is set forth below. Proposed new
language is in italics; proposed deletions are in [brackets].
* * * * *
Rules of the Board of Governors
Rule 6
Options Trading
``Crossing'' Orders and Stock/Option, SSF/Option Orders
Rule 6.47(a)-(e)--No change.
(f) Stock/Option and SSF/Option Orders.
(1) When a stock/option or SSF/option order is taken to a crowd for
execution, the stock transaction or SSF transaction must be effected
prior to the option transaction pursuant to Rule 6.47, Commentary .04.
The following procedure applies to all executions of stock/option and
SSF/option orders: After an agreement with other members of the crowd
has been reached as to the terms of the transaction, the option order
tickets must be written up and time stamped. However, the order tickets
should not be turned in to the Order Book Official at this time. The
members shall attempt to immediately effect the transaction in the
underlying or related security or SSF. If the stock or SSF transaction
cannot be executed immediately or is effected at a price other than the
agreed-upon price, the members shall not be held to the option
transaction. If the stock or SSF transaction is effected at the agreed-
upon price, then all the members who participated in the option
transaction shall be held to their agreed-upon price. At the time the
stock or SSF transaction is effected, the option trade tickets should
be given to the Order Book Official.
(2) SSF/Option Orders Margin Requirements
(a) Any Member or Member Organization must elect to be bound by the
initial and maintenance margin requirements of either the Chicago Board
of Options Exchange or the New York Stock Exchange as the same may be
in effect from time to time;
(b) Such election shall be made in writing by a notice filed with
the Exchange.
(c) Upon the filing of such election, a Member will be bound to
comply with the margin rules of the Chicago Board of Options Exchange
or the New York Stock Exchange, as applicable, as though such rules
were part of these rules.
Commentary:
.01-.06--No change.
Certain Types of Orders Defined
Rule 6.62(a)-(i)--No change.
(j) Combination orders [with no-equity options legs]. One or more
legs of a combination order may be to purchase or sell a stated number
of units of another security.
(1) Stock/option order. A stock/option order is an order to buy or
sell a stated number of units of an underlying stock or a [related]
security convertible into the underlying stock (``convertible
security'') coupled with either (A)[(i)] the purchase or sale of option
contract(s) [of the same series] on the opposite side of the market
representing either the same number of units of the underlying stock or
convertible security or the number of units of the underlying stock
necessary to create a delta neutral position; [or related security] or
(B)[(ii)] the purchase [and] or sale of an equal number of put and call
option contracts, each having the same exercise price, expiration date
and each representing the same number of units of [the underlying or
related security,] stock as, and on the opposite side of the market
from, the stock or convertible security portion of the order.
[representing in aggregate twice the number of units of the underlying
or related security.]
(2) Single Stock Future (``SSF'')/Option Order. An SSF/option order
is an order to buy or sell a stated number of units of a single stock
future or a security convertible into a single stock future
(``convertible SSF'') coupled with either (A) the purchase or sale of
option contract(s) on the opposite side of the market representing
either the same number of units of stock underlying the single stock
future or convertible SSF, or the number of units of stock underlying
the single stock future or convertible SSF necessary to create a delta
neutral position; or (B) the purchase or sale of an equal number of put
and call option contracts, each having the same exercise price,
expiration date, and each representing the same number of units of
underlying stock, as and on the opposite side of the market from, the
stock underlying the single stock future or convertible SSF portion of
the order.
Priority and Order Allocation Procedures
Rule 6.75. Except as provided by Rule 6.76 below, the following
rules of priority shall be observed with respect to bids and offers:
(a)-(d)--No change.
(e) Notwithstanding anything in paragraphs (a) and (b) to the
contrary, when a member holding a spread order, a straddle order, or a
combination order and bidding or offering on the basis of a total
credit or debit for the order has determined that the order may not be
executed by a combination of transactions with or within the bids and
offers displayed by the Order Book Official or other members, in
procedures determined by the Options Floor Trading Committee, then the
order may be executed as a spread, straddle, or combination at the
total credit or debit with one or more members without giving priority
to bids or offers for the individual option series of the Order Book
Official or of other members at the post that are no better than the
bids or offers comprising such total credit or debit. Under the
circumstances described above, a stock/option or SSF/option order has
priority over the bids and offers of members in the trading crowd but
not over the bids and offers of the Order Book Official.
(f)-(h)--No change.
Commentary:
.01-.04--No change.
Transactions Off the Exchange
Rule 6.78 (a)-(f)--No change.
Commentary:
.01-.02--No change.
.03 To the extent applicable, all other Exchange rules, including
Rule 6.49, Solicited Transactions, will apply to the
[[Page 70330]]
transfer procedure set forth in subsections (d) through (f). The
following Rules do not apply to transfer procedures: 6.71 (Meaning of
Premium Bids and Offers); 6.74 (Bids and Offers in Relation to Units of
Trading); 6.75 (Priority of Bids and Offers); 6.76 (Priority of Split
Price Transactions); 6.47 (``Crossing'' Orders and Stock/Option, SSF/
Option Orders); and 7.9 (Meaning of Premium Bids and Offers, Index
Options).
.04--No change.
* * * * *
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 PCX 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 Exchange 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
PCX Rule 6.47(f) governs the execution process for complex orders
including stock/option orders. The Exchange is proposing to amend this
rule to authorize the execution of complex orders involving options and
SSFs. The proposed procedures for the execution of SSF/option orders
are virtually identical to the existing stock/option procedure and
would permit members to enter SSF/option orders. As with stock/option
orders, the option leg of the transaction would have priority over the
bids (offers) of members at the same price in the trading crowd but not
over bids (offers) in the limit order book.
When an SSF/option order is represented in the crowd for execution,
the SSF transaction must be effected prior to the option leg of the
trade pursuant to PCX Rule 6.47, Commentary .04. As with stock/option
orders, if the parties are unable to execute the SSF leg of the
transaction due to a change in market conditions, then they could
cancel the option leg of the transaction. If the stock or SSF
transaction is effected at the agreed-upon price, then all the members
who participated in the option transaction shall be held to their
agreed-upon price. At the time the stock or SSF transaction is
effected, the option trade tickets should be given to the Order Book
Official.
The Exchange also seeks to add a margin requirement as proposed PCX
Rule 6.47(f)(2) that would require a Member or Member Organization who
effects SSF/option order transactions to elect to be bound by the
initial and maintenance margin requirements of either the CBOE or the
NYSE as those rules may be in effect from time to time. The Member or
Member Organization will be required to make its election in writing
and file the same to the Exchange's Financial and Operational
Compliance Department. Upon filing of the election, the Member or
Member Organization will be bound to comply with the margin rules of
the CBOE or the NYSE, as applicable, as though such rules were
incorporated into the Exchange's rules.\4\
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\4\ This proposal is substantially similar to Rule 1202 of the
International Securities Exchange (``ISE'').
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The Exchange also seeks to amend its Rule 6.62 that defines certain
types of orders. Specifically, the Exchange seeks to modify PCX Rule
6.62(j) (Combination Orders) in order to: (i) Add a definition for SSF/
option order types and (ii) modify the definition of stock/option order
that correlates with the new proposed SSF definition. The Exchange
proposes new PCX Rule 6.62(j)(2) in order to define a SSF/option order
as an order to buy or sell a stated number of units of a single stock
future or a security convertible into a SSF \5\ coupled with either:
(A) the purchase or sale of option contracts on the opposite side of
the market representing the same number of units of stock underlying
the SSF or convertible SSF or the number of units of stock underlying
the SSF or convertible SSF necessary to create a delta neutral
position, or (B) the purchase or sale of an equal number of put and
call option contracts each having the same exercise price, expiration
date, and representing the same number of units of underlying stock as,
and on the opposite side of, the market from the stock underlying the
single stock future or convertible SSF portion of the order. The
proposed definition is identical to that used by the ISE.\6\
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\5\ To the extent that ``a security convertible into a SSF''
means an option on a SSF, the Commission notes that trading of such
products has not yet been approved by the Commission and the
Commodity Futures Trading Commission. Nothing in this notice should
be interpreted as granting such approval.
\6\ See ISE Rule 722.
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The Exchange also seeks to modify PCX Rule 6.62(j)(1) in order to
amend its existing definition of stock/option order so that its
provisions are parallel to its newly proposed definition for SSF/option
orders and identical to the definition used by ISE Rule 722.
The Exchange proposes to amend PCX Rule 6.75 regarding priority and
order allocation procedures in order to clarify that in addition to
stock/option orders, SSF/option orders will also have priority over the
bids and offers of members in the trading crowd but not over bids and
offers of the Order Book Official.
The Exchange proposes to amend PCX Rule 6.78, Commentary .03
regarding transactions off of the Exchange in order to clarify that SSF
will be included as a component of the rules that do not apply to
transfer procedures off the floor as set forth in sub-sections (d)
through (f) of PCX Rule 6.78.
2. Statutory Basis
The PCX believes that the rule change is consistent with section
6(b) of the Act in general \7\ and section 6(b)(5) of the Act in
particular.\8\ The Exchange believes that the proposed rule change is
intended to remove impediments to and perfect the mechanism for a free
and open market and a national market system, and, in general, to
protect investors and the public interest. The Exchange also believes
that making additional complex orders involving options and SSFs
available to investors will offer investors new trading opportunities
on the Exchange and enhance the Exchange's competitive position.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change, as amended, does not:
(i) Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on
[[Page 70331]]
competition; (iii) become operative for 30 days from the date on which
it was filed, or such shorter time as the Commission may designate if
the proposal is consistent with the protection of investors and the
public interest; and the Exchange has given the Commission written
notice of its intention to file the proposed rule change at least five
business days prior to filing, or such shorter time as designated by
the Commission, it has become effective pursuant to section 19(b)(3)(A)
of the Act \9\ and Rule 19b-4(f)(6)\10\ thereunder. At any time within
60 days of the filing of the proposed rule change, the Commission may
summarily abrogate such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act.\11\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 17 CFR 240.19b-4(f)(6).
\11\ For purposes of calculating the 60-day abrogation period,
the Commission considers the period to have commenced on November
14, 2003, the date the PCX filed Amendment No. 1.
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The PCX has requested the Commission to waive the 30-day operative
delay. The Commission has decided to waive the 30 day operative delay.
The Commission believes such waiver is consistent with the protection
of investors and the public interest. The Commission notes that PCX's
proposal is substantially similar to ISE's rules.\12\ For these
reasons, the Commission designates the proposal to be effective and
operative upon filing of Amendment No. 1 with the Commission.
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\12\ For purposes of accelerating the operative date of the
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition and capital formation. 15 U.S.C.
78c(3)(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the amended
proposal 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.
Comments may also be submitted electronically at the following e-mail
address: rule-comments@sec.gov. All comment letters should refer to
File No. SR-PCX-2003-42. This file number should be included on the
subject line if e-mail is used. To help the Commission process and
review your comments more efficiently, comments should be sent in hard
copy or by e-mail, but not by both methods. 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 filing will also be available for
inspection and copying at the principal office of the PCX. All
submissions should refer to File No. SR-PCX-2003-42 and should be
submitted by January 7, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31072 Filed 12-16-03; 8:45 am]
BILLING CODE 8010-01-P