regulatory organizations; proposed rule changes: Pacific Exchange, Inc.,

[Federal Register: August 29, 2002 (Volume 67, Number 168)]

[Notices]

[Page 55446-55448]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr29au02-130]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46406; File No. SR-PCX-2002-51]

Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Pacific Exchange, Inc. Relating to Listing Maintenance Standards for Options

August 23, 2002.

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 22, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filedwith the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   PCX is proposing to amend PCX Rule 3.7 to allow the Exchange to add new series of options when such series are available for trading on one or more other options exchanges and the underlying security met the market price per share requirements at the time that a competing exchange added such series. The text of the proposed rule change is below; new language is italicized. * * * * * Withdrawal of Approval of Underlying Securities

   Rule 3.7(a) The approval of an underlying security for exchange transactions shall be withdrawn by the Exchange if the underlying security fails to meet the then current requirements necessary to maintain such approval or for any reason the Exchange deems necessary. In the event the Exchange withdraws approval, no additional series of option contracts of the class covering that underlying security shall be opened; provided, however, that where exceptional circumstances have caused the noncompliance of an underlying security with Subsection (B) or (C) of Section 1 of Commentary .01 or Section 2 or 3 of Commentary .01 hereunder, the Exchange may, in the interest of maintaining a fair and orderly market or for the protection of investors, open additional series of option contracts of the class covering the subject underlying security.

   (b) No change.

   Commentary:

   .01--No change.

   .02--In connection with Rule 3.7(a) and Commentary .01.3 thereto, the Exchange shall direct that no additional series of options contracts of the class covering an underlying security be opened at any time when the market price per share of the subject underlying security is less than $3.00. Subject to Paragraph 3 of Commentary .01 above, the market price per share of the underlying security will be determined as follows:

   1. For intra-day series additions, the last reported trade in the primary market in which the security is traded at the time the Exchange determines to add these additional series intra-day;

   2. For next-day series additions, the closing price reported in the primary market in which the security is traded on the last trading day preceding the day on which such series additions are authorized; and

   3. for expiration series additions, the closing price reported in the primary market in which the security is traded on the last trading day preceding expiration Friday.

   Notwithstanding this Commentary .02, the Exchange may add series of

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   options covering an underlying security when such series are available for trading on one or more other options exchanges provided that the underlying security met the market price per share requirements at the time that such series were added by a competing registered national securities exchange.

   .03-.11--No change. * * * * *

2. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

   In its filing with the Commission, 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 III below. PCX has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

   1. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

      1. Purpose

      PCX Rule 3.7 (Withdrawal of Approval of Underlying Securities) specifies continued listing requirements for securities underlying options traded on the Exchange and restricts the Exchange from adding new series of options in the event that the underlying security fails to meet certain criteria. The rule currently provides that the Exchange may not list additional series if, inter alia: (1) for next day series additions, the underlying security closed below $3 on the previous trading day in the primary market in which the security is traded; (2) for intra-day series additions, the last reported trade in the underlying security was below $3 on the primary market in which the security is traded at the time the Exchange determines to add the new series; and (3) for new series following an options expiration, the closing price of the underlying is below $3 on the last trading day preceding expiration Friday on the primary market in which the security is traded.\3\

      \3\ The Exchange's other continued listing guidelines require that the Exchange take action to withdraw an option from listing unless the issuer makes timely reports as required by any applicable sections of the Securities Exchange Act of 1934; maintains a minimum of 6,300,000 shares of the underlying security held by persons other than those who are subject to the requirement of Section 16(a) of the Securities Exchange Act of 1934, as amended; maintains a minimum of 1,600 holders of the underlying security; and maintains a volume of trading in the underlying security of at least 1,800,000 shares in the preceding twelve months.

      Although the continued listing requirements are uniform among the five options exchanges, the application of those standards in the current market environment has resulted in situations where not all exchanges may compete in the same options series. For example, if one exchange adds a new options series when the underlying security trades above the $3.00 price threshold, it may continue to trade options on that series even if the price of the underlying security subsequently falls below $3.00. If no other options exchange had added that series when it was eligible for listing, then the first exchange to add the series would be the only one authorized to trade that series despite the fact that members of other exchanges have customer orders to trade that series. Due to the extreme volatility of prices in the marketplace, the PCX would not be able to list actively-traded options series where the price of the underlying security falls below the $3.00 threshold before the Exchange elects to add the series.

      To address this situation, the Exchange proposes to adopt a new rule change that would allow it to list additional series that are being quoted by at least one other exchange. The Exchange has narrowly drafted this proposed rule change to address the circumstances where an option series is already available to the investing public, but cannot be added by the Exchange due to timing.\4\ Therefore, the Exchanges proposal will not add any new series for trading that are not already available to investors on a competing exchange.

      \4\ The Exchange does not propose to change other requirements currently contained in Rule 3.7 (such as the number of shares that must be held by non-insiders, number of holders and trading volume).

      The Exchange believes that this proposal will promote competition in the marketplace by assuring that the Exchange may compete in all series that are quoted by other options exchanges. This will place the Exchange on a level playing field with its competitors. 2. Statutory Basis

      The Exchange believes that this proposal is consistent with Section 6(b) of the Act,\5\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\6\ in particular, in that it is designed to facilitate transactions in securities, to promote just and equitable principles of trade, and to protect investors and the public interest.

      \5\ 15 U.S.C. 78(f)(b).

      \6\ 15 U.S.C. 78f(b)(5).

   2. Self-Regulatory Organization's Statement on Burden on Competition

      The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

   3. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

      The Exchange has not received any written comments from members or other interested parties.

3. Solicitation of Comments

   Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the 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. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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-2002-51 and should be submitted by September 19, 2002.

4. Commissions' Findings and Order Granting Accelerated Approval of Proposed Rule Change

   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, and in particular, the requirements of Section 6(b)(5) of the Act.\7\ The Commission believes investors benefit from the competition among options exchanges that results when options are listed on more than one options exchange; and that investors are sufficiently protected, even though PCX will be permitted to list a series of option contracts when the market price of the underlying security is below $3, because all of the other maintenance listing requirements of the

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   Exchange must still be complied with, and the market price of the underlying security was at or above $3 when it was listed on the first options exchange. Therefore, the Commission finds that proposed rule change will promote just and equitable principles of trade, and, in general, protect investors and the public interest consistent with Section 6(b)(5) of the Act.\8\

   \7\ 15 U.S.C. 78f(b)(5).

   \8\ 15 U.S.C. 78f(b)(5). In approving this proposed rule change, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

   PCX has requested that the proposed rule change be given accelerated approval pursuant to Section 19(b)(2) of the Act.\9\ The Commission believes accelerated approval of the proposal would enhance competition among the options exchanges. Accordingly, the Commission finds good cause, consistent with Section 6(b)(5) of the Act,\10\ to approve the proposed rule change prior to the thirtieth day after the date of publication of the notice of filing thereof in the Federal Register.

   \9\ 15 U.S.C. 78s(b)(2).

   \10\ 15 U.S.C. 78f(b)(5).

   It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\11\ that the proposed rule change (SR-PCX-2002-51) is hereby approved on an accelerated basis.

   \11\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\12\

   \12\ 17 CFR 240.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 02-22095Filed8-28-02; 8:45 am]

   BILLING CODE 8010-01-P