[Federal Register: May 19, 2004 (Volume 69, Number 97)]
[Notices]
[Page 28956-28957]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my04-88]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49692; File No. 4-429]
Joint Industry Plan; Notice of Filing of Joint Amendment No. 12
to the Options Intermarket Linkage Plan Relating to the Limitation in
Liability for Filling Satisfaction Orders Sent Through the Linkage at
the End of the Trading Day
May 12, 2004.
Pursuant to Section 11A of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 11Aa3-2 thereunder,\2\ notice is hereby given
that on April 26, 2004, April 26, 2004, May 5, 2004, May 7, 2004, May
7, 2004, and May 11, 2004, the International Securities Exchange, Inc.
(``ISE''), the Pacific Exchange, Inc. (``PCX''), the American Stock
Exchange LLC (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the
Philadelphia Stock Exchange, Inc. (``Phlx''), and the Chicago Board
Options Exchange, Inc. (``CBOE'') (collectively, the ``Participants''),
respectively, filed with the Securities and Exchange Commission
(``Commission'') an amendment (``Joint Amendment No. 12'') to the Plan
for the Purpose of Creating and Operating an Intermarket Option Linkage
(``Linkage Plan'').\3\ In proposed Joint Amendment No. 12, the
Participants propose to extend the pilot provision limiting Trade-
Through \4\ liability at the end of the trading day for an additional
seven months, until January 31, 2005, and to increase the limitation on
liability from 10 contracts to 25 contracts. The Commission is
publishing this notice to solicit comments from interested persons on
the proposed Joint Amendment No. 12.
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 240.11Aa3-2.
\3\ On July 28, 2000, the Commission approved a national market
system plan for the purpose of creating and operating an intermarket
options market linkage (``Linkage'') proposed by Amex, CBOE, and
ISE. See Securities Exchange Act Release No. 43086 (July 28, 2000),
65 FR 48023 (August 4, 2000). Subsequently, Phlx, PCX, and BSE
joined the Linkage Plan. See Securities Exchange Act Release Nos.
43573 (November 16, 2000), 65 FR 70850 (November 28, 2000); 43574
(November 16, 2000), 65 FR 70851 (November 28, 2000); and 49198
(February 5, 2004), 69 FR 7029 (February 12, 2004). On June 27,
2001, May 30, 2002, February 3, 2003, June 25, 2003, and January 29,
2004, the Commission approved joint amendments to the Linkage Plan.
See Securities Exchange Act Release Nos. 44482 (June 27, 2001), 66
FR 35470 (July 5, 2001); 46001 (May 30, 2002), 67 FR 38687 (June 5,
2002); 47274 (January 29, 2003), 68 FR 5313 (February 3, 2003);
48055 (June 18, 2003), 68 FR 37689 (June 25, 2003); and 49146
(January 29, 2004), 69 FR 5618 (February 5, 2004).
\4\ A ``Trade-Through'' is defined as a transaction in an
options series at a price that is inferior to the national best bid
and offer in an options series calculated by a Participant. See
Section 2(29) of the Linkage Plan.
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I. Description and Purpose of the Amendment
The Participants are proposing to extend for an additional seven
months, until January 31, 2005, the pilot provision in the Linkage Plan
\5\ that limits Trade-Through liability at the end of the trading day.
The Participants are also seeking to increase the limitation on Trade-
Through liability for each Satisfaction Order \6\ that is sent via
Linkage at the end of the trading day from 10 contracts to 25 contracts
during the extended pilot period.
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\5\ See Section 8(c)(ii)(B)(2)(c) of the Linkage Plan.
\6\ A ``Satisfaction Order'' is an order sent through the
Linkage to notify a Participants of a Trade-Through and to seek
satisfaction of the liability arising from that Trade-Through.
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The Participants originally proposed a 10-contract limitation on
liability during the last seven minutes of the trading day as a one-
year pilot in Joint Amendment No. 4 to the Plan.\7\ In Joint Amendment
No. 4, the Participants represented that members of various exchanges
had raised concerns regarding their obligation to fill Satisfaction
Orders (which they receive when an options exchange disseminating a
better price complains about a Trade-Through) at the close of trading
in the underlying security. Specifically, members expressed concern
that they may not have time to hedge the positions they acquire.\8\
Thus, the Participants proposed to limit liability for Trade-Throughs
for the period between five minutes prior to the close of trading in
the underlying security and the close of trading in the options class
to the filling of 10 contracts per Participant, per transaction. The
Participants represented that they believed that the proposal would
protect small customer orders, yet establish a reasonable limit for
their members' liability. Further, the Participants represented that
the proposal would not affect a member's potential liability under an
exchange's disciplinary rule for engaging in a pattern or practice of
trading through other markets under Section 8(c)(i)(C) of the Linkage
Plan.
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\7\ The Commission approved the pilot on a 120-day temporary
basis on January 31, 2003. See Securities Exchange Act Release No.
47298, 68 FR 6524 (February 7, 2003). On June 18, 2003, the
Commission approved the pilot until January 31, 2004. See Securities
Exchange Act Release No. 48055, 68 FR 37869 (June 25, 2003) (Order
approving ``Joint Amendment No. 4''). The Commission subsequently
extended the pilot until June 30, 2004. See Securities Exchange Act
Release No. 49146 (January 29, 2004), 69 FR 5618 (February 5, 2004)
(Order approving ``Joint Amendment No. 8'').
\8\ See letter from Michael Simon, Senior Vice President and
General Counsel, ISE, to Annette Nazareth, Director, Division of
Market Regulation, Commission, dated November 19, 2002.
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In the order approving Joint Amendment No. 4, Commission stated
that in the event the Participants chose to seek permanent approval of
this limitation, the Participants must provide the Commission with a
report regarding data on the use of the exemption no later than 60 days
before seeking permanent approval (the ``Report'').\9\ In a subsequent
amendment to the Linkage Plan for the purpose of extending the pilot,
Joint Amendment No. 8, the Participants represented that if they were
to seek to make the limitations on Trade-Throughs permanent, they would
submit the Report to the Commission no later than March 31, 2004.\10\
With respect to the Report, the Participants represented in Joint
Amendment No. 8 that they planned to submit individual Reports
regarding the requested data as it pertained to their own exchange.
They further represented that these Reports would detail the number of
Trade-Throughs in the last seven minutes and the rest of the day, as
well as the number and size of Satisfaction Orders that would have been
filled absent the current exemption. In addition, the Participants
represented that the Reports would provide information on the extent to
which the exchange's members hedged their options trading during the
day as part of their overall risk management. Finally, the Participants
represented that they would make every effort to provide specific
information regarding hedging activity at the end of the trading
day.\11\
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\9\ See supra note 7.
\10\ See Securities Exchange Act Release No. 49010 (December 30,
2003), 69 FR 706 (January 6, 2004) (Notice of Filing Joint Amendment
No. 8).
\11\ Id.
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Following the extension of the pilot program, certain Participants
provided the Commission with portions of the information required in
the Report, but were unable to provide sufficient information to enable
the Commission to evaluate whether permanent approval would be
appropriate. Extending the pilot through January 31, 2005 would allow
the limitation to continue in
[[Page 28957]]
effect, with the increase in liability to 25 contracts, while the
Participants continue to discuss with Commission staff the information
necessary to permit the Commission to evaluate possible permanent
approval of the Trade-Through limitation. The proposed increase in the
limit on liability would become effective on July 1, 2004, when the
current pilot expires. The Participants propose no change to the time
period in the trading day during which the limit would apply.
II. Implementation of the Plan Amendment
The Participants propose to make the proposed amendment to the
Linkage Plan reflected in this filing effective on July 1, 2004.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed
Joint Amendment No. 12 is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic comments:
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml
); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number 4-429 on the subject line.
Paper comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to Joint Amendment No. 12 to File
Number 4-429. 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, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed Linkage
Plan amendment that are filed with the Commission, and all written
communications relating to the proposed Linkage Plan amendment 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies
of such filing also will be available for inspection and copying at the
principal office of the Participants. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
All submissions should refer to Joint Amendment 12 to File Number
4-429 and should be submitted on or before June 9, 2004.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(29).
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11262 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P