Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto by the Boston Stock Exchange, Inc., Relating to the Reporting of Riskless Principal Transactions, 10439-10442 [E5-847]
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Federal Register / Vol. 70, No. 41 / Thursday, March 3, 2005 / Notices
manipulative acts and practices, to
promote just and equitable principles of
trade, 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.11 New
Amex Rule 135A will set forth formal
procedures to be followed by an
Paper Comments
Exchange member that seeks to have a
• Send paper comments in triplicate
trade nullified or revised when the
to Jonathan G. Katz, Secretary,
parties to the trade have not agreed that
Securities and Exchange Commission,
the trade should be cancelled or revised,
450 Fifth Street, NW., Washington, DC
or by an Amex Floor Governor who
20549–0609.
seeks to nullify or revise trades on his
All submissions should refer to File
or her own motion. The Commission
Number SR–Amex–2004–11. This file
believes that it is proper for trade
number should be included on the
nullification and revision procedures to
subject line if e-mail is used. To help the be codified and thus made transparent
Commission process and review your
to Amex members who are parties to
comments more efficiently, please use
trades that are deemed to be clearly
only one method. The Commission will
erroneous and to Amex Floor Officials
post all comments on the Commission’s
who are called upon to review such
Internet Web site (https://www.sec.gov/
trades. The new rule also sets forth the
rules/sro.shtml). Copies of the
procedure to be followed in the event of
submission, all subsequent
any appeal of a determination made by
amendments, all written statements
an Exchange Floor Official or Floor
with respect to the proposed rule
Governor pursuant to proposed Amex
change that are filed with the
Rule 135A. The Commission believes
Commission, and all written
that this procedure is designed to help
communications relating to the
ensure that Amex Rule 135A is
proposed rule change between the
Commission and any person, other than exercised in a fair and reasonable
manner. In addition, the Commission
those that may be withheld from the
believes that proposed Amex Rules
public in accordance with the
135(b) and 135A(d), which allow a
provisions of 5 U.S.C. 552, will be
member to share in customer losses that
available for inspection and copying in
were caused in whole or in part by the
the Commission’s Public Reference
member’s action or inaction, are
Section, 450 Fifth Street, NW.,
consistent with the Act.
Washington, DC 20549. Copies of this
filing also will be available for
The Commission finds good cause for
inspection and copying at the principal
approving the proposed rule change
office of the Amex. All comments
prior to the 30th day after the date of
received will be posted without change; publication of the notice of filing thereof
the Commission does not edit personal
in the Federal Register. The
identifying information from
Commission notes that the proposed
submissions. You should submit only
rule change would provide members
information that you wish to make
trading non-Nasdaq equity securities
available publicly. All submissions
with essentially the same procedures
should refer to File Number SR–Amex–
recently approved by the Commission
2004–11 and should be submitted on or for the nullification or adjustment of
before March 24, 2005.
clearly erroneous transactions involving
Nasdaq National Market Securities.12
IV. Commission’s Findings and Order
The Commission believes that because
Granting Accelerated Approval of
the proposal raises no new issues of
Proposed Rule Change
regulatory concern, it is appropriate to
The Commission finds that the
proposed rule change is consistent with accelerate approval of the proposed rule
change so that members who trade any
the requirements of the Act and the
kind of equity securities that are
rules and regulations thereunder, that
admitted to dealings on the Exchange
are applicable to a national securities
exchange. In particular, the Commission will be afforded similar processes in the
event that a particular trade to which
finds that the proposed rule change is
consistent with the requirements of
11 In approving this proposed rule change, the
section 6(b)(5) of the Act,10 which
requires that the rules of an exchange be Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
designed to prevent fraudulent and
and capital formation. 15 U.S.C. 78c(f).
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Amex–2004–11 on the
subject line.
12 See Securities Exchange Act Release No. 49941,
supra note 6.
10 Id.
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10439
they are a party is claimed to be clearly
erroneous.
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,13 that the
proposed rule change, as amended (SR–
Amex–2004–11), is hereby approved, on
an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.14
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–845 Filed 3–2–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51251; File No. SR–BSE–
2004–27]
Self-Regulatory Organizations; Notice
of Filing and Order Granting
Accelerated Approval of Proposed
Rule Change and Amendment No. 1
Thereto by the Boston Stock
Exchange, Inc., Relating to the
Reporting of Riskless Principal
Transactions
February 24, 2005.
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 December
3, 2004, the the Boston Stock Exchange,
Inc. (‘‘BSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
items I and II below, which items have
been prepared by the Exchange. On
December 23, 2004, the Exchange
submitted Amendment No. 1 to the
proposed rule change.3 The Commission
is publishing this notice and order to
solicit comments on the proposed rule
change, as amended, from interested
persons and to grant accelerated
approval to the proposal.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
BSE is proposing to adopt a rule
pertaining to the reporting of riskless
principal transactions. Proposed new
language is italicized.
*
*
*
*
*
13 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
1 17 CFR 240.19b–4.
3 Amendment No.1 superseded and replaced the
original proposal in its entirety.
14 17
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Federal Register / Vol. 70, No. 41 / Thursday, March 3, 2005 / Notices
Chapter II
Dealings on the Exchange
Secs. 1–43 No change.
Riskless Principal Transactions
Sec. 43
(1) A ‘‘riskless principal transaction’’
is a two-legged transaction in which a
member, (i) after having received an
order to buy a security that it holds for
execution on the Exchange,
contemporaneously purchases the
security as principal at the same price,
exclusive of markups, markdowns,
commissions and other fees, to satisfy
all or a portion of the order to buy or
(ii) after having received an order to sell
a security that it holds for execution on
the Exchange, contemporaneously sells
the security as principal at the same
price, exclusive of markups,
markdowns, commissions and other
fees, to satisfy all or a portion of the
order to sell.
(2) A last sale report for only the
initial principal leg of the transaction
shall be submitted in accordance with
the rules and procedures of the market
where the transaction occurred. The
second ‘‘riskless principal’’ leg of the
transaction must still be submitted and
executed on the Exchange as with any
other order, but the Exchange will not
report that leg of the transaction to the
respective consolidated tape. As
applicable, the riskless principal leg
may be submitted to the Exchange for
execution as either (i) a non-tape,
clearing-only order with a ‘‘CTA noprint’’ indicator if a clearing report is
necessary to clear the transaction; or (ii)
a non-tape, non-clearing order with a
‘‘CTA no-print’’ indicator if a clearing
report is not necessary to clear the
transaction.
(3) A member must have written
policies and procedures to assure that
its riskless principal transactions
comply with this Section. At a minimum
these policies and procedures must
require that the customer order be
received prior to the offsetting
transactions, and that the offsetting
transactions be executed
contemporaneously with the original
transaction. A member must also have
supervisory systems in place that
produce records that enable the member
and the Exchange to accurately and
readily reconstruct, in a time-sequenced
manner, all orders for which a member
relies on the riskless principal
exemption.
*
*
*
*
*
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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, as amended,
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
Under the proposed rule change, if a
member of the Exchange is acting as
principal for its own account, its trade
would be considered a ‘‘riskless
principal transaction’’ to the extent that:
(i) After having received an order to buy
a security that the member holds for
execution on the Exchange, the member
purchases the security from another
firm or market to offset a
contemporaneous sale to satisfy all or a
portion of the original buy order at the
same price, exclusive of any markup,
markdown, commission, or other fee; or
(ii) after having received an order to sell
a security that the member holds for
execution on the Exchange, the member
sells the security to another firm or
market to offset a contemporaneous
purchase to satisfy all or a portion of the
original sell order at the same price,
exclusive of any markup, markdown,
commission, or other fee.
The Exchange is proposing to adopt a
trade reporting rule applicable to
riskless principal transactions in any
securities traded on the Exchange.4
Under this proposal, the ‘‘initial
principal’’ leg (the ‘‘first leg’’) of the
transaction is reported to the
consolidated tape by whichever market
on which the trade occurs. Pursuant to
this rule filing, the BSE member would
apply a special marker to the second
‘‘riskless principal’’ leg (the ‘‘second
leg’’) and the BSE would not report that
leg to the consolidated tape. The first leg
of the transaction will continue to be
matched and executed on the Exchange
or on another market, whichever the
Exchange currently trades on an unlisted
trading privilege basis securities that are listed on
the New York Stock Exchange or ‘‘Tape A’’
program, the American Stock Exchange or the
‘‘Tape B’’ program, and the Nasdaq Stock Market or
‘‘Tape C’’ program.
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4 The
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case may be, and disseminated for
publication to the respective
consolidated tape in accordance with
the relevant market’s requirements. For
the second leg of the transaction, to the
extent that any of the order is offset by
the initial principal execution, the
member would designate in its trade
report to the BSE the proprietary order
as riskless. According to BSE, this
BEACON 5 modification will
contemporaneously prevent priority
violations.
The Exchange represents that
BEACON will systematically capture
every first leg of every transaction even
if it occurs on another market.6
BEACON will automatically match the
first and second leg of the transaction by
utilizing tag numbers to ensure that the
special marker was used in a riskless
principal transaction. More specifically,
where a BSE member is executing a
trade on another market, BEACON will
automatically attach a tag number. This
tag number will be matched to the
second leg of the transaction. The
Exchange will not report the second leg
of the transaction to the respective
consolidated tape.
Example: A member receives an order to
sell 100 shares at $50 and holds that order
for execution on the Exchange. Thereafter the
member, as principal, sells 100 shares to
another firm at $50 (the first leg) and then,
as principal, fills the original order at $50
(the second leg). The member designates the
filling of the customer order (the second leg)
as the ‘‘riskless principal’’ leg of a riskless
principal transaction. The Exchange reports
the first leg of the transaction to the
consolidated tape, but not the second leg.
Procedurally, if the first leg of the
transaction occurs on the Exchange, the
Exchange will report the first leg of the
transaction to the consolidated tape
pursuant to its rules. If the first leg of
the transaction occurs on another
market, that market would report the
trade to the consolidated tape according
to its rules. The BSE member who has
a duty to report the execution 7 shall
report the execution as either: (i) a nontape, clearing-only order with a capacity
indicator of ‘‘CTA no-print,’’ if a
clearing report is necessary to clear the
transaction; or (ii) a non-tape, nonclearing order with a capacity indicator
5 The Boston Exchange Automated
Communication Order-routing Network, which is
known as BEACON, is the order-routing and
execution system utilized on the Exchange.
6 See Letter from John Boese, Chief Regulatory
Officer, BSE, to Michael Gaw, Senior Special
Counsel, Division of Market Regulation,
Commission, dated February 10, 2005.
7 See Rules of the Board of Governors of the
Boston Stock Exchange, Chapter II, Dealings on the
Exchange, Section 2.
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Federal Register / Vol. 70, No. 41 / Thursday, March 3, 2005 / Notices
of ‘‘CTA no-print,’’ if a clearing report
is not necessary to clear the transaction.
In addition to the automatic matching
of orders, the Exchange will conduct
surveillance to determine that both legs
of a riskless principal transaction
correlate to each other, particularly if
one leg occurs on another market. The
Exchange will also review to see that
members implement written policies
and procedures as described below to
assure compliance with this proposed
rule. To determine that there is a
matched order, the two legs of the
riskless principal transaction would be
electronically reviewed as part of the
audit trail used by the Exchange to
surveil and regulate trading. On a daily
basis, for each execution with an
indicator of ‘‘CTA no-print,’’ the
electronic review will confirm that a
contemporaneous order was placed after
the customer order was received and the
order was executed prior to the
execution of the customer order. The
electronic review will also confirm that
each leg of the riskless principal
transaction was executed at the
identical price and size. If there is no
corresponding matched order, an
exception will be generated, and
surveillance will conduct a manual
review to determine whether the
execution was actually a riskless
principal transaction and whether the
execution should be considered a
covered sale.
The Exchange believes that, if the
member complies with all aspects of the
proposed rule, the sell side of the
second leg would be a ‘‘recognized
riskless principal sale,’’ as defined in
Rule 31(a)(14) of the Act.8 Therefore,
this sale would not be a ‘‘covered sale’’
as defined in Rule 31(a)(6) under the
Act 9 for which the Exchange would
incur a liability to the Commission
under section 31 of the Act.10
Accordingly, the second ‘‘riskless
principal’’ leg would not increase the
amount of fees that the member owes
the Exchange pursuant to Chapter XXIII,
section 2, of the Exchange’s rules.
2. Statutory Basis
The Exchange believes that the
proposed rule change, as amended,
consistent with section 6(b) of the Act,11
in general, and section 6(b)(5) of the
Act,12 in particular, in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and to
8 17
CFR 240.31(a)(14).
CFR 240.31(a)(6).
10 15 U.S.C. 78ee.
11 15 U.S.C. 78f(b).
12 15 U.S.C. 78f(b)(5).
9 17
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16:38 Mar 02, 2005
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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.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
BSE does not believe that the
proposed rule change, as amended, will
impose any inappropriate 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 in connection with the
proposed rule change, as amended.
10441
Washington, DC 20549. Copies of such
filing also will be available for
inspection and copying at the principal
office of BSE. 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 File Number SR–BSE–
2004–27 and should be submitted on or
before March 24, 2005.
IV. Commission Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the
proposed rule change, as amended, is
consistent with the requirements of the
Act and the rules and regulations
III. Solicitation of Comments
thereunder applicable to a national
Interested persons are invited to
securities exchange.13 Specifically, the
submit written data, views, and
Commission believes the proposal is
arguments concerning the foregoing,
consistent with section 6(b)(5) of the
including whether the proposed rule
Act,14 which requires that the rules of
change, as amended, is consistent with
an exchange be designed, among other
the Act. Comments may be submitted by things, to prevent fraudulent and
any of the following methods:
manipulative acts and practices, to
promote just and equitable principles of
Electronic Comments
trade, to remove impediments to and
• Use the Commission’s Internet
perfect the mechanism of a free and
comment form (https://www.sec.gov/
open market and a national market
rules/sro.shtml); or
system, and, in general, to protect
• Send an e-mail to ruleinvestors and the public interest.
comments@sec.gov. Please include File
The rule proposed by BSE is
Number SR–BSE–2004–27 on the
substantially similar to NASD Rule
subject line.
6420(d)(3)(B) relating to the reporting of
Paper Comments
riskless principal transactions. The
Commission previously has found the
• Send paper comments in triplicate
NASD riskless principal rule to be
to Jonathan G. Katz, Secretary,
consistent with the Act.15 The
Securities and Exchange Commission,
Commission believes that BSE’s
450 Fifth Street, NW., Washington, DC
proposal raises no new or significant
20549–0609.
regulatory issues and is also, therefore,
All submissions should refer to File
consistent with the Act. Based on the
Number SR–BSE–2004–27. This file
information provided by BSE in support
number should be included on the
subject line if e-mail is used. To help the of this proposed rule change, the
proposal appears reasonably designed to
Commission process and review your
ensure that the two contemporaneous
comments more efficiently, please use
only one method. The Commission will trades for which an Exchange member
post all comments on the Commission’s acts as principal can be matched and are
indeed riskless for the member.
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
Assuming all the requirements of
submission, all subsequent
BSE’s rule are met, a second offsetting
amendments, all written statements
sale occurring on the Exchange would
with respect to the proposed rule
be a ‘‘recognized riskless principal sale’’
change that are filed with the
as defined in Rule 31(a)(14) under the
Commission, and all written
Act.16 Therefore, the sale also would be
communications relating to the
an ‘‘exempt sale’’ as defined in Rule
proposed rule change between the
13 In approving this proposed rule change, the
Commission and any person, other than
Commission notes that it has considered the
those that may be withheld from the
proposed rule’s impact on efficiency, competition,
public in accordance with the
and capital formation. See 15 U.S.C. 78c(f).
provisions of 5 U.S.C. 552, will be
14 15 U.S.C. 78f(b)(5).
available for inspection and copying in
15 See, e.g., Securities Exchange Act Release No.
the Commission’s Public Reference
41606 (July 8, 1999), 64 FR 38226 (July 15, 1999).
16 17 CFR 240.31(a)(14).
Section, 450 Fifth Street, NW.,
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Federal Register / Vol. 70, No. 41 / Thursday, March 3, 2005 / Notices
31(a)(11) under the Act 17 and not a
‘‘covered sale’’ as defined in Rule
31(a)(6) under the Act.18 The
Commission notes, however, that BSE
members must have written policies and
procedures and supervisory systems in
place before reporting trades as riskless
pursuant to Chapter II, Section 43 of the
Exchange’s rules.
The Commission finds good cause for
approving the proposed rule change, as
amended, prior to the 30th day after
publication in the Federal Register. The
Commission believes that the rule
proposed by BSE is substantially similar
to NASD Rule 6420(d)(3)(B) and thus
raises no new or significant regulatory
issues. As such, the Commission
believes that accelerated approval is
appropriate.
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,19 that the
proposed rule change (File No. SR–
BSE–2004–27), as amended, is approved
on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.20
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–847 Filed 3–2–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51252; File No. SR–CBOE–
2004–16]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Inc.; Order Setting Aside Earlier Order
Issued by Delegated Authority and
Granting Approval to a Proposed Rule
Change and Amendment No. 1 Thereto
Relating to an Interpretation of
Paragraph (b) of Article Fifth of Its
Certificate of Incorporation and an
Amendment to Rule 3.16(b)
February 25, 2005.
I. Introduction
On March 4, 2004, the Chicago Board
Options Exchange, Inc. (‘‘CBOE’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’),1 and Rule 19b–4 thereunder,2 a
17 17
CFR 240.31(a)(11).
CFR 240.31(a)(6).
19 15 U.S.C. 78s(b)(2).
20 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Letter from Arthur B. Reinstein, Deputy General
Counsel, CBOE, to Lisa N. Jones, Special Counsel,
18 17
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16:38 Mar 02, 2005
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proposed rule change to amend CBOE
Rule 3.16(b). The proposed amendment
would interpret certain terms used in
paragraph (b) of Article Fifth of the
CBOE Certificate of Incorporation
(‘‘Article Fifth(b)’’). On April 9, 2004,
the CBOE filed Amendment No. 1 to the
proposed rule change.3 The proposed
rule change, as amended, was published
for comment in the Federal Register on
May 3, 2004.4 The Commission received
one comment letter on the proposed
rule change.5 On May 25, 2004, the
CBOE submitted a response to the
comment letter,6 and two of the original
commenters replied to CBOE’s response
in a letter submitted on June 14, 2004.7
On July 15, 2004, the Commission
approved, by authority delegated to the
Division of Market Regulation, the
proposed rule change, as amended.8
On August 23, 2004, Marshall Spiegel
(‘‘Petitioner’’) filed with the
Commission a notice of intention to file
a petition for review of the
Commission’s approval by delegated
authority,9 and on September 13, 2004,
Petitioner filed a petition for review.10
On September 17, 2004, the
Commission acknowledged receipt of
these documents from Petitioner and
confirmed that the automatic stay
provided in Rule 431(e) of the
Division of Market Regulation (‘‘Division’’),
Commission, dated April 8, 2004 (‘‘Amendment No.
1’’).
4 Securities Exchange Act Release No. 49620
(April 26, 2004), 69 FR 24205 (May 3, 2004).
5 Letter from Thomas A. Bond, Norman
Friedland, Gary P. Lahey, Marshall Spiegel,
Anthony Arciero, Peter C. Guth, Robert Kalmin,
Sheldon Weinberg, David Carman and Jeffrey T.
Kaufmann, Members, CBOE, to Jonathan G. Katz,
Secretary, Commission, dated April 28, 2004
(‘‘April 28th Comment Letter’’). This comment
letter includes comments on another CBOE
proposed rule change, SR–CBOE–2002–01, that was
withdrawn on April 7, 2004. See Letter from Arthur
B. Reinstein, Deputy General Counsel, CBOE, to
Lisa N. Jones, Special Counsel, Division,
Commission, dated April 6, 2004. See also letters
from Marshall Spiegel to Margaret H. McFarland,
dated November 4, 2004 (‘‘November 2004 Letter’’)
and December 22, 2004 (‘‘December 2004 Letter’’).
6 Letter from Joanne Moffic-Silver, General
Counsel and Corporate Secretary, CBOE, to
Jonathan G. Katz, Secretary, Commission, dated
May 24, 2003.
7 Letter from Thomas A. Bond and Gary P. Lahey,
Members, CBOE, to Jonathan G. Katz, Secretary,
Commission, dated June 8, 2004 (‘‘June 8th Letter’’).
8 Securities Exchange Act Release No. 50028 (July
15, 2004), 69 FR 43644 (July 21, 2004) (‘‘July 15th
Order’’).
9 Letter from Marshall Spiegel, CBOE Equity
Member, to Margaret H. McFarland, Deputy
Secretary, Office of Secretary, Commission, dated
August 23, 2004.
10 Letter from Marshall Spiegel, CBOE Equity
Member, to Margaret H. McFarland, Deputy
Secretary, Office of the Secretary, Commission,
dated September 13, 2004 (‘‘Petition for Review’’).
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Commission’s Rules of Practice was in
effect.11
The Commission has considered the
petition and for the reasons described
below, has determined to set aside the
earlier action taken by delegated
authority and grant approval of the
proposed rule change, as amended.12
II. Description of the Proposed Rule
Change
A. Background
As compensation for the time and
money that the Board of Trade of the
City of Chicago (‘‘CBOT’’) had expended
in the development of the CBOE, a
member of the CBOT is entitled to
become a member of the CBOE without
having to acquire a separate CBOE
membership. This entitlement is
established by Article Fifth(b) of the
CBOE’s Certificate of Incorporation
(‘‘Article Fifth(b)’’). Article Fifth(b)
provides, in relevant part:
[E]very present and future member of the
[CBOT] who applies for membership in the
[CBOE] and who otherwise qualifies shall, so
long as he remains a member of [the CBOT],
be entitled to be a member of the [CBOE]
notwithstanding any limitation on the
number of members and without the
necessity of acquiring such membership for
consideration or value from the [CBOE]
(‘‘Exercise Rights’’).
Article Fifth(b) also explicitly states
that no amendment may be made to it
without the approval of at least 80% of
those CBOT members who have
‘‘exercised’’ their right to be CBOE
members and 80% of all other CBOE
members.
In 1992, the Commission approved
the CBOE’s proposed interpretation of
the meaning of the term ‘‘member of the
[CBOT]’’ as used in Article Fifth(b). The
interpretation proposed by the CBOE
was one agreed upon by the CBOE and
the CBOT, is embodied in an agreement
dated September 1, 1992 (‘‘1992
Agreement’’), and is reflected in CBOE
Rule 3.16(b). CBOE Rule 3.16(b) states
that ‘‘for the purpose of entitlement to
membership on the [CBOE] in
accordance with * * * [Article Fifth(b)]
* * * the term ‘‘member of the
[CBOT],’’ as used in Article Fifth(b), is
interpreted to mean an individual who
is either an ‘‘Eligible CBOT Full
Member’’ or an ‘‘Eligible CBOT Full
Member Delegate,’’ as those terms are
defined in the [1992 Agreement]
* * * 13
11 Letter from Margaret H. McFarland, Deputy
Secretary, Office of the Secretary, Commission, to
Marshall Spiegel, CBOE Equity Member, dated
September 17, 2004.
12 See July 15th Order, supra note 8.
13 In the 1992 Agreement, an ‘‘Eligible CBOT Full
Member’’ is defined as an individual who at the
E:\FR\FM\03MRN1.SGM
03MRN1
]]>Agencies
[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10439-10442]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-847]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51251; File No. SR-BSE-2004-27]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 Thereto by the Boston Stock Exchange, Inc., Relating to the Reporting
of Riskless Principal Transactions
February 24, 2005.
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 December 3, 2004, the the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in items I and
II below, which items have been prepared by the Exchange. On December
23, 2004, the Exchange submitted Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice and order to
solicit comments on the proposed rule change, as amended, from
interested persons and to grant accelerated approval to the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\1\ 17 CFR 240.19b-4.
\3\ Amendment No.1 superseded and replaced the original proposal
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
BSE is proposing to adopt a rule pertaining to the reporting of
riskless principal transactions. Proposed new language is italicized.
* * * * *
[[Page 10440]]
Chapter II
Dealings on the Exchange
Secs. 1-43 No change.
Riskless Principal Transactions
Sec. 43
(1) A ``riskless principal transaction'' is a two-legged
transaction in which a member, (i) after having received an order to
buy a security that it holds for execution on the Exchange,
contemporaneously purchases the security as principal at the same
price, exclusive of markups, markdowns, commissions and other fees, to
satisfy all or a portion of the order to buy or (ii) after having
received an order to sell a security that it holds for execution on the
Exchange, contemporaneously sells the security as principal at the same
price, exclusive of markups, markdowns, commissions and other fees, to
satisfy all or a portion of the order to sell.
(2) A last sale report for only the initial principal leg of the
transaction shall be submitted in accordance with the rules and
procedures of the market where the transaction occurred. The second
``riskless principal'' leg of the transaction must still be submitted
and executed on the Exchange as with any other order, but the Exchange
will not report that leg of the transaction to the respective
consolidated tape. As applicable, the riskless principal leg may be
submitted to the Exchange for execution as either (i) a non-tape,
clearing-only order with a ``CTA no-print'' indicator if a clearing
report is necessary to clear the transaction; or (ii) a non-tape, non-
clearing order with a ``CTA no-print'' indicator if a clearing report
is not necessary to clear the transaction.
(3) A member must have written policies and procedures to assure
that its riskless principal transactions comply with this Section. At a
minimum these policies and procedures must require that the customer
order be received prior to the offsetting transactions, and that the
offsetting transactions be executed contemporaneously with the original
transaction. A member must also have supervisory systems in place that
produce records that enable the member and the Exchange to accurately
and readily reconstruct, in a time-sequenced manner, all orders for
which a member relies on the riskless principal exemption.
* * * * *
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, as
amended, 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
Under the proposed rule change, if a member of the Exchange is
acting as principal for its own account, its trade would be considered
a ``riskless principal transaction'' to the extent that: (i) After
having received an order to buy a security that the member holds for
execution on the Exchange, the member purchases the security from
another firm or market to offset a contemporaneous sale to satisfy all
or a portion of the original buy order at the same price, exclusive of
any markup, markdown, commission, or other fee; or (ii) after having
received an order to sell a security that the member holds for
execution on the Exchange, the member sells the security to another
firm or market to offset a contemporaneous purchase to satisfy all or a
portion of the original sell order at the same price, exclusive of any
markup, markdown, commission, or other fee.
The Exchange is proposing to adopt a trade reporting rule
applicable to riskless principal transactions in any securities traded
on the Exchange.\4\ Under this proposal, the ``initial principal'' leg
(the ``first leg'') of the transaction is reported to the consolidated
tape by whichever market on which the trade occurs. Pursuant to this
rule filing, the BSE member would apply a special marker to the second
``riskless principal'' leg (the ``second leg'') and the BSE would not
report that leg to the consolidated tape. The first leg of the
transaction will continue to be matched and executed on the Exchange or
on another market, whichever the case may be, and disseminated for
publication to the respective consolidated tape in accordance with the
relevant market's requirements. For the second leg of the transaction,
to the extent that any of the order is offset by the initial principal
execution, the member would designate in its trade report to the BSE
the proprietary order as riskless. According to BSE, this BEACON \5\
modification will contemporaneously prevent priority violations.
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\4\ The Exchange currently trades on an unlisted trading
privilege basis securities that are listed on the New York Stock
Exchange or ``Tape A'' program, the American Stock Exchange or the
``Tape B'' program, and the Nasdaq Stock Market or ``Tape C''
program.
\5\ The Boston Exchange Automated Communication Order-routing
Network, which is known as BEACON, is the order-routing and
execution system utilized on the Exchange.
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The Exchange represents that BEACON will systematically capture
every first leg of every transaction even if it occurs on another
market.\6\ BEACON will automatically match the first and second leg of
the transaction by utilizing tag numbers to ensure that the special
marker was used in a riskless principal transaction. More specifically,
where a BSE member is executing a trade on another market, BEACON will
automatically attach a tag number. This tag number will be matched to
the second leg of the transaction. The Exchange will not report the
second leg of the transaction to the respective consolidated tape.
\6\ See Letter from John Boese, Chief Regulatory Officer, BSE,
to Michael Gaw, Senior Special Counsel, Division of Market
Regulation, Commission, dated February 10, 2005.
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Example: A member receives an order to sell 100 shares at $50
and holds that order for execution on the Exchange. Thereafter the
member, as principal, sells 100 shares to another firm at $50 (the
first leg) and then, as principal, fills the original order at $50
(the second leg). The member designates the filling of the customer
order (the second leg) as the ``riskless principal'' leg of a
riskless principal transaction. The Exchange reports the first leg
of the transaction to the consolidated tape, but not the second leg.
Procedurally, if the first leg of the transaction occurs on the
Exchange, the Exchange will report the first leg of the transaction to
the consolidated tape pursuant to its rules. If the first leg of the
transaction occurs on another market, that market would report the
trade to the consolidated tape according to its rules. The BSE member
who has a duty to report the execution \7\ shall report the execution
as either: (i) a non-tape, clearing-only order with a capacity
indicator of ``CTA no-print,'' if a clearing report is necessary to
clear the transaction; or (ii) a non-tape, non-clearing order with a
capacity indicator
[[Page 10441]]
of ``CTA no-print,'' if a clearing report is not necessary to clear the
transaction.
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\7\ See Rules of the Board of Governors of the Boston Stock
Exchange, Chapter II, Dealings on the Exchange, Section 2.
---------------------------------------------------------------------------
In addition to the automatic matching of orders, the Exchange will
conduct surveillance to determine that both legs of a riskless
principal transaction correlate to each other, particularly if one leg
occurs on another market. The Exchange will also review to see that
members implement written policies and procedures as described below to
assure compliance with this proposed rule. To determine that there is a
matched order, the two legs of the riskless principal transaction would
be electronically reviewed as part of the audit trail used by the
Exchange to surveil and regulate trading. On a daily basis, for each
execution with an indicator of ``CTA no-print,'' the electronic review
will confirm that a contemporaneous order was placed after the customer
order was received and the order was executed prior to the execution of
the customer order. The electronic review will also confirm that each
leg of the riskless principal transaction was executed at the identical
price and size. If there is no corresponding matched order, an
exception will be generated, and surveillance will conduct a manual
review to determine whether the execution was actually a riskless
principal transaction and whether the execution should be considered a
covered sale.
The Exchange believes that, if the member complies with all aspects
of the proposed rule, the sell side of the second leg would be a
``recognized riskless principal sale,'' as defined in Rule 31(a)(14) of
the Act.\8\ Therefore, this sale would not be a ``covered sale'' as
defined in Rule 31(a)(6) under the Act \9\ for which the Exchange would
incur a liability to the Commission under section 31 of the Act.\10\
Accordingly, the second ``riskless principal'' leg would not increase
the amount of fees that the member owes the Exchange pursuant to
Chapter XXIII, section 2, of the Exchange's rules.
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\8\ 17 CFR 240.31(a)(14).
\9\ 17 CFR 240.31(a)(6).
\10\ 15 U.S.C. 78ee.
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2. Statutory Basis
The Exchange believes that the proposed rule change, as amended,
consistent with section 6(b) of the Act,\11\ in general, and section
6(b)(5) of the Act,\12\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and 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.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
BSE does not believe that the proposed rule change, as amended,
will impose any inappropriate 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 in connection with
the proposed rule change, as amended.
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. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-BSE-2004-27 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 File Number SR-BSE-2004-27. 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 (https://www.sec.gov/
rules/sro.shtml). 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 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 BSE.
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 File Number SR-BSE-2004-27
and should be submitted on or before March 24, 2005.
IV. Commission Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\13\ Specifically, the Commission believes the proposal is
consistent with section 6(b)(5) of the Act,\14\ which requires that the
rules of an exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, 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.
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\13\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\14\ 15 U.S.C. 78f(b)(5).
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The rule proposed by BSE is substantially similar to NASD Rule
6420(d)(3)(B) relating to the reporting of riskless principal
transactions. The Commission previously has found the NASD riskless
principal rule to be consistent with the Act.\15\ The Commission
believes that BSE's proposal raises no new or significant regulatory
issues and is also, therefore, consistent with the Act. Based on the
information provided by BSE in support of this proposed rule change,
the proposal appears reasonably designed to ensure that the two
contemporaneous trades for which an Exchange member acts as principal
can be matched and are indeed riskless for the member.
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\15\ See, e.g., Securities Exchange Act Release No. 41606 (July
8, 1999), 64 FR 38226 (July 15, 1999).
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Assuming all the requirements of BSE's rule are met, a second
offsetting sale occurring on the Exchange would be a ``recognized
riskless principal sale'' as defined in Rule 31(a)(14) under the
Act.\16\ Therefore, the sale also would be an ``exempt sale'' as
defined in Rule
[[Page 10442]]
31(a)(11) under the Act \17\ and not a ``covered sale'' as defined in
Rule 31(a)(6) under the Act.\18\ The Commission notes, however, that
BSE members must have written policies and procedures and supervisory
systems in place before reporting trades as riskless pursuant to
Chapter II, Section 43 of the Exchange's rules.
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\16\ 17 CFR 240.31(a)(14).
\17\ 17 CFR 240.31(a)(11).
\18\ 17 CFR 240.31(a)(6).
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The Commission finds good cause for approving the proposed rule
change, as amended, prior to the 30th day after publication in the
Federal Register. The Commission believes that the rule proposed by BSE
is substantially similar to NASD Rule 6420(d)(3)(B) and thus raises no
new or significant regulatory issues. As such, the Commission believes
that accelerated approval is appropriate.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\19\ that the proposed rule change (File No. SR-BSE-2004-27), as
amended, is approved on an accelerated basis.
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\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-847 Filed 3-2-05; 8:45 am]
BILLING CODE 8010-01-P
