1. Introduction
On November 28, 2000, the International Securities Exchange LLC (“Exchange” or “ISE”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, a proposed rule change to amend and further define the calculations necessary to determine the minimum financial requirements for the Exchange's market makers, and specify certain reporting requirements when a market maker fails to maintain the minimum financial requirements. The proposed rule change was published for comment in the Federal Register on February 9, 2001. No comments were received on the proposed rule change. On March 13, 2001, ISE filed Amendment No. 1 and on August 8, 2001, ISE filed Amendment No. 2 to its proposal. This notice and order approves the proposed rule change, as amended, and solicits comments from interested persons on Amendments Nos. 1 and 2.
17 CFR 240.19b-4.
See Securities Exchange Act Release No. 43922 (February 2, 2001), 66 FR 9735.
In Amendment No. 1, the Exchange clarified that it would be reviewing the adequacy of any business plans submitted under the proposed rule change, as well as clarified why it is unnecessary for ISE to appoint interim competitive market makers (“CMMs”). See letter from Michael Simon, Senior Vice President and General Counsel, ISE, to Kathy England, Assistant Director, Division of Market Regulation (“Division”), Commission, dated March 12, 2001 (“Amendment No. 1”).
In Amendment No. 2, the Exchange deleted supplemental materials .02 and .03 to ISE Rule 809, which required, in part, that a member (1) notify the Exchange when it equity falls below the minimum requirement, and (2) submit a business plan for raising its equity to comply with ISE Rule 809, as well as allowed the Exchange to appoint an interim Primary Market Maker (“PMM”). In lieu of the supplemental materials, the Exchange submitted a draft Regulatory Information Circular specifying the foregoing requirements in greater detail. ISE has represented that it will submit any changes to the Regulatory Information Circular to the Commission pursuant to Rule 19b-4, 17 CFR 240.19b-4. See letter from Michael Simon, Senior Vice President and General Counsel, ISE, to Nancy Sanow, Assistant Director, Division, Commission, dated August 7, 2001 (“Amendment No. 2”). The Exchange also clarified that if the Exchange appoints an interim PMM, ISE will appoint the interim PMM in accordance with ISE Rule 802. An interim PMM will have the same responsibilities and obligations as a regular PMM. Telephone conversation between Jennifer M. Lamie, Assistant General Counsel, ISE, and Terri L. Evans, Special Counsel, Division, Commission, on August 15, 2001.
II. Description
Exchange Rule 809 sets forth the minimum financial requirements for market makers. Currently, Exchange Rule 809 provides that every PMM maintain a cash or liquid asset position equal to the greater of $5 million or an amount sufficient to assume a position of twenty options contracts of each class in which the PMM is appointed. Exchange Rule 809 similarly provides that every CMM maintain a cash or liquid asset position equal to the greater of $1 million or an amount sufficient to assume a position of ten options contracts in each class of options to which the CMM is appointed.
The Exchange proposes to eliminate the option position component in calculating the minimum equity. With respect to CMMs, the proposed rule change would require CMMs to maintain net liquidating equity of not less than $1 million. With respect to PMMs, the proposed amendment would require PMMs to maintain net liquidating equity of not less than $3.25 million plus $25,000 excess equity for each issue over 10. According to the Exchange, when the Exchange phases-in trading in 600 options with approximately 60 options trading in each of its 10 groups or “bins,” this requirement would equal $4.5 million for PMMs trading in one bin, and $6.0 million for a PMM trading in two bins.
Pursuant to Exchange Rule 317(a), a member cannot be approved to trade in more than two bins as a PMM.
Under the proposed rule change, the Exchange would also replace the phrase “cash or liquid asset position” with “net liquidating equity,” and define the later term to conform to the Chicago Board Options Exchange's (“CBOE”) rule. The proposed definition of net liquidating equity, which is the sum of positive cash balances and long securities positions less negative cash balances and short securities positions, is the same as the CBOE definition of the term in CBOE Rule 12.3(f)(1)(F).
See CBOE Rule 8.86, which states that “[e]ach DPM shall maintain (i) net liquidating equity in its DPM account of not less than $100,000, and in conformity with such guidelines as the MTS Committee may establish from time to time.* * *”
The Exchange further proposes to adopt notification requirements. A market maker that falls below the equity requirement must immediately notify the Exchange of the deficiency and submit a plan for raising its equity to the appropriate level if the deficiency cannot be rectified immediately. According to the Exchange, this will allow the Exchange to monitor carefully any firm that might be experiencing financial difficulties and to take actions to minimize any potential risk to the Exchange or investors. ISE will review the adequacy of all business plans submitted by a deficient market maker, as well as review a market maker's continued compliance with the provisions of the plan. Finally, in the case of a PMM with a deficient net liquidating equity, the Exchange may determine to appoint an interim PMM to assure fair and orderly markets.
ISE has represented that it also will separately monitor a market maker's net liquidating equity and notify a market maker if its net liquidating equity falls below the minimum level required by ISE Rule 809. Telephone conversation between Jennifer M. Lamie, Assistant General Counsel, ISE, and Terri L. Evans, Special Counsel, Division, Commission, on August 15, 2001.
See Amendment No. 1, supra note 4.
Telephone conversation between Jennifer M. Lamie, Assistant General Counsel, ISE, and Terri L. Evans, Special Counsel, Division, Commission, on August 15, 2001.
See Amendment No. 2, supra note 5.
III. Discussion
For the reasons discussed below, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder. Specifically, the Commission finds that the proposed rule change is consistent with the requirements of section 6(b)(5) of the Act that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and to protect investors and the public interest.
In approving this rule, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
ISE proposes to amend its rule to revise the minimum financial requirements for market makers. Under the proposal, the minimum net liquidating equity for PMMs will be $3.25 million plus $25,000 excess equity for each underlying security upon which appointed options are open for trading in excess of the initial ten underlying securities. The minimum net liquidating equity for CMMs will be $1 million.
The Commission believes that the proposed net liquidating equity requirements are designed to assure that ISE market makers are capable of making liquid and competitive markets. Although the proposal may reduce the minimum financial requirements for PMMs and CMMs, the Commission believes, based on the representations of ISE, that there are sufficient safeguards (in addition to the proposed minimum financial requirements) to assure that ISE's PMMs and CMMs are adequately capitalized. In this regard, the ISE has represented that it will separately monitor market makers to determine whether a market maker has fallen below the minimum net liquidating equity required by ISE Rule 809 and will notify the market maker if the market maker has failed to notify the Exchange of its deficiency. If the deficiency cannot be rectified immediately, the market maker must submit within five business days, a business plan for raising its equity to the appropriate level. ISE will review all business plans submitted by a deficient market maker, as well as review a market maker's continued compliance with the provisions of the plan. If the Exchange determines that summary suspension is necessary under ISE Rule 1500, given the facts and circumstances, it will appoint an interim PMM to assure that fair and orderly markets are continued in the PMM's assigned options.
See Amendment No. 2, supra note 5, and telephone conversation between Jennifer M. Lamie and Terri L. Evans, supra note 8.
See Amendment No. 1, supra note 4.
Telephone conversation between Jennifer M. Lamie, Assistant General Counsel, ISE, and Terri L. Evans, Special Counsel, Division Commission, on August 15, 2001.
See supra note 5.
The Commission also believes that the proposed financial requirements are comparable to the financial requirements at other options exchanges. For example, generally, on the American Stock Exchange (“Amex”), the financial requirement for options specialists is equal to a minimum of $600,000, plus $25,000 for each option issue in excess of the initial ten issues in which such specialist is registered, while on CBOE, a designated primary market maker (“DPM”) must maintain, in part, net liquidating equity in its DPM account of not less than $100,000, as well as conform to guidelines established by the MTS Committee, which require $350,000 plus $25,000 in excess equity for each class or product allocated in excess of the initial eight products. On the Pacific Exchange (“PCX”), lead market makers that perform the function of an Order Book Official (“OBO”) must maintain, in part, a cash or liquid asset position of at least $500,000 plus $25,000 for each issue over five issues for which they perform the function of an OBO, while LMMs that do not perform the function of an OBO must maintain a cash or liquid asset position of at least $350,000 plus $25,000 for each issue over eight issues that has been allocated to the LMM. Finally, on the Philadelphia Stock Exchange (“Phlx”) members that are exempt from Rule 15c3-1 must generally maintain net liquid assets of $25,000. Phlx also has specific provisions applicable to FLEX and foreign currency options ROTs. For example, a specialist in FLEX index options must maintain a minimum of $1 million in net capital and an assigned ROT in foreign currency options must maintain a minimum $1 million in net liquid assets. Accordingly, the Commission believes that the proposal will help ISE market makers compete effectively with specialists at other exchanges. Increased competition, in turn, should benefit investors by producing a more efficient marketplace.
See Amex Rule 950(h).
See CBOE Rule 8.86 and CBOE DPM Equity Guidelines 00-111.
See PCX Rule 6.82 Commentary .03.
See PCX Rule 6.82(c)(11).
See Phlx Rule 703.
See Phlx Rule 1079(c)(2) and Phlx Rule 1069(d), respectively.
The Commission finds good cause for accelerating approval of Amendments Nos. 1 and 2 to the proposed rule change prior to the thirtieth day after the date of publication in the Federal Register. The Commission finds that Amendments Nos. 1 and 2 clarify ISE's proposal by providing additional information and representations regarding the operation of the proposed rule and guidance to be provided to members. Accordingly, the Commission believes that granting accelerated approval of Amendments Nos. 1 and 2 is appropriate and consistent with sections 6(b)(5) and 19(b)(2) of the Act. in that it should promote just and equitable principles of trade and, in general, protect investors and the public interest.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning Amendment Nos. I and 2, including whether the Amendments are 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, D.C. 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 filing will also be available for inspection and copying at the principal office of the above-referenced self-regulatory organization. All submissions should refer to File No. SR-ISE-00-22 and should be submitted by September 19, 2001.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-NYSE-00-22), as amended, is approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-21739 Filed 8-28-01; 8:45 am]
BILLING CODE 8010-01-M