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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by International Securities Exchange LLC, Relating to Market Maker Financial Requirements

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Information about this document as published in the Federal Register.

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Start Preamble February 2, 2001.

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 November 28, 2000, the International Securities Exchange LLC (“Exchange” or “ISE”) filed with the Securities and Exchange Commission (“SEC” or “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 Start Printed Page 9736notice to solicit comments on the proposed rule change from interested persons.

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

ISE is proposing to amend Exchange Rule 809 regarding “Financial Requirements for Market Makers.” Specifically, the proposal would 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 text of the proposed rule change follows. New text is italicized and deleted text is bracketed.

Rule 809. Financial Requirements for Market Makers

(a) Primary Market Makers. Every Primary Market Maker shall maintain [a cash or liquid asset position equal to the greater of] net liquidating equity of not less than $3,250,000 plus $25,000 excess equity for each underlying security upon which appointed options are open for trading in excess of the initial ten (10) underlying securities [$5,000,000 or an amount sufficient to assume a position of twenty (20) options contracts of each class in which such Primary Market Maker is appointed (as computed on the basis of that series within each such class having the highest current premium)].

(b) Competitive Market Makers. Every Competitive Market Maker shall maintain [a cash or liquid asset position equal to the greater of] net liquidating equity of not less than $1,000,000 [or an amount sufficient to assume a position of ten (10) options contracts in each class of options to which the Competitive Market Maker is appointed (as computed on the basis of that series within each such class having the highest current premium)].

(c) Each market maker that makes an arrangement to finance his transactions as a market maker must identify to the Exchange the source of the financing and its terms. The Exchange must be informed immediately of the intention of any party to terminate or change any such arrangement.

Supplemental Material to Rule 809

.01 For purposes of Rule 809, the term “net liquidating equity” means the sum of positive cash balances and long securities positions less negative cash balances and short securities positions.

.02 Each day that a Member's net liquidating equity is less than 120% of the minimum level required by Rule 809, the Member must notify the Exchange of its equity level on a daily basis from the date the net liquidating equity first comes below this level until and including three days following the date that the equity first comes above this level.

.03 If a Member's net liquidating equity falls below the minimum level required by this Rule, the Member must immediately notify the Exchange of the deficiency and must submit within five (5) business days a business plan for raising its equity to the appropriate level. The Exchange may determine to appoint an interim Primary Market Maker when, in its discretion, the Member's failure to maintain the minimum level required by this Rule limits its ability to comply with market making obligations under the Rules.

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 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. ISE 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

Exchange Rule 809 sets forth the minimum financial requirements for market makers. Currently, Exchange Rule 809 provides that every Primary Market Maker (“PMM”) maintain a cash or liquid asset position equal to the greater of $5,000,000 or an amount sufficient to assume a position of twenty (20) options contracts of each class in which the PMM is appointed. Exchange Rule 809 similarly provides that every Competitive Market Maker (“CMM”) maintain a cash or liquid asset position equal to the greater of $1,000,000 or an amount sufficient to assume a position of ten (10) 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 Exchange believes that the option position component in the current rule places an unnecessary burden on its members to make the variable calculation on a daily basis. The flat $1 million requirements far exceeds the minimum equity requirements for market makers on the other four options exchanges, and it is unlikely that the option position component would exceed $1 million. With respect to PMMs, the proposed amendment would require PMMs to maintain $3.25 million plus $25,000 for each issue over 10. 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.[3]

The Exchange also proposes to update its rule to replace the phrase “cash or liquid asset position” with “net liquidating equity,” and to define the later term. This will conform our rule to the Chicago Board Options Exchange's (“CBOE”) rule.[4] 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).

The Exchange further proposes to adopt notification requirements. Market makers would be required to notify the Exchange if their equity fails to exceed the minimum requirement by at least 20 percent. 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. 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.

Finally, in the case of a PMM with deficient equity, the Exchange may determine to appoint an interim PMM. The Exchange will do so when, in its discretion, the Member's failure to maintain the minimum level limits its ability to comply with market making obligations.

2. Statutory Basis

The basis under the Act for this proposed rule change is the requirement under section 6(b)(5) [5] that an exchange Start Printed Page 9737have rules that are designed to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.

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

The proposed rule change does not impose any burden on competition 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

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:

(a) By order approve such proposed rule change; or

(b) Institute proceedings to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change 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 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 March 2, 2001.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[6]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  Pursuant to Exchange Rule 317(a), a member cannot be approved to trade in more than two bins as a PMM.

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4.  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.”

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[FR Doc. 01-3340 Filed 2-8-01; 8:45 am]

BILLING CODE 8010-01-M