[Federal Register Volume 60, Number 146 (Monday, July 31, 1995)]
[Notices]
[Pages 39035-39037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18706]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36019; File No. SR-NYSE-95-16]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment to a Proposed Rule Change Relating to the Options
Market Maker Exemption From the NASD Short Sale Bid Test for Certain
Merger and Acquisition Securities
July 24, 1995.
I. Introduction
On April 21, 1995, the New York Stock Exchange, Inc. (``NYSE'' or
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``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposal to extend the market maker exemption from the
NASD's bid test rule to Nasdaq National Market (``Nasdaq/NM'' or
``NM'') securities involved in merger and acquisition (``M&A'')
transactions. The proposed rule change was published for comment and
appeared in the Federal Register on May 10, 1995.\3\ On May 31, 1995,
the NYSE filed Amendment No. 1 to its proposal.\4\ This order approves
the proposal, as amended.
\1\ 15 U.S.C. 78s(b)(1)(1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 35672 (May 4, 1995),
60 FR 24942.
\4\ In Amendment No. 1, the Exchange modifies its proposal to
clarify that to qualify as an exempt hedge transaction, a short sale
in an M&A security must in fact serve to hedge a market maker's
position. In addition, Amendment No. 1 includes a revised Exhibit 1
that incorporates certain non-substantive language inadvertently
omitted from the original filing. Letter from James E. Buck, Senior
Vice President and Secretary, NYSE, to Francois Mazur, Staff
Attorney, Division of Market Regulation, Commission, dated May 26,
1995 (``Amendment No. 1'').
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II. Description of the Proposal
In November 1994, the Commission approved proposals submitted by
the options exchanges concerning a market maker exemption \5\ to the
NASD bid test rule \6\ applicable to short sales of NM securities
traded through Nasdaq. The Exchanges' proposals were approved on a
temporary basis to remain in effect concurrently with the NASD's bid
test rule pilot program.\7\
\5\ Securities Exchange Act Release No. 34632 (September 2,
1994), 59 FR 46999 (approving proposals by the American Stock
Exchange, Inc. (``Amex''), Chicago Board Options Exchange, Inc.
(``CBOE''), NYSE, Pacific Stock Exchange, Inc., and Philadelphia
Stock Exchange, Inc.).
\6\ The NASD bid test rule prohibits broker-dealers from
effecting short sales, for themselves or their customers, at or
below the ``bid'' when the current ``inside'' or best bid is below
the previous inside bid. NASD Rules of Fair Practice (``NASD
Rules''), Art. III, Sec. 48. See Securities Exchange Act Release No.
34277 (June 6, 1994), 59 FR 34885 (amending the NASD Rules to add
the short sale rule). The NASD bid test rule is also referred to as
the ``short sale rule.''
\7\ See Securities Exchange Act Release No. 34632, supra note 5.
The Commission approved the NASD's short sale rule on an eighteen
month temporary basis, effective September 6, 1994, through March 5,
1996. Id.
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The NYSE's market maker exemption from the NASD short sale rule is
codified as Rule 759A. NYSE Rule 759A allows each exchange options
specialist and Competitive Options Trader (``COT'') to rely on the
NASD's options market maker exemption to effect short sales in Nasdaq/
NM securities at or below the best bid when the displayed bid is below
the preceding best bid if the short sale qualifies as an ``exempt hedge
transaction.'' \8\ The NYSE now proposes to expand the definition of
``exempt hedge transaction'' to include certain short sales in M&A
securities, defined as the securities of a company that is a party (or
a prospective party) to a publicly announced M&A with an issuer of a
Nasdaq/NM security that underlies an Exchange-listed option.\9\
Specifically, exempt hedge transactions would include short sales in
M&A securities effected by a qualified Exchange options market maker to
hedge, and which in fact serves to hedge, an existing or prospective
position\10\ in an Exchange-listed option overlying an NM security of
another company that is a party to the M&A.\11\ Thus, with respect to
an Exchange options specialist, the exemption would apply to short
sales of a company that is a party to an M&A with a company whose
Nasdaq/NM security underlies a speciality stock option; with respect to
a COT, the exemption would apply to short sales of a company that is a
party to an M&A with a company whose Nasdaq/NM security underlies an
Exchange-listed stock option.
\8\ The NYSE currently defines an ``exempt hedge transaction,''
in relevant part, as a short sale in an NM security effected to
hedge, and which in fact serves to hedge, an existing offsetting
options position or an offsetting options position that was created
in one or more transactions contemporaneous with the short sale. See
NYSE Rule 759A(a)(i).
\9\ Proposed NYSE Rule 759A(a)(ii).
\10\ A ``prospective position'' refers to a position that might
be created as the result of specific, communicated indications of
interest that the specialist or COT has initiated prior to the hedge
transaction.
\11\ The NASD provides an exemption from the bid test rule for
risk arbitragers (and other NASD members) who take positions in
stocks involved in M&A transactions. See Securities Exchange Act
Release No. 34277, supra note 6. The NASD short sale rule states
that once an M&A has been publicly announced, a qualified market
maker in one of the two affected securities may immediately register
as a qualified market maker in the other M&A security. See NASD
Rules, Article III, Sec. 48(1)(3)(iii). Consequently, such a market
maker may rely on the market maker exemption for short sales of the
other M&A security.
Recently, the Amex, CBOE, and PSE amended their respective rules
to extend the market maker exemption from the bid test rule to
certain short sales of the stock of a company that is involved in a
publicly announced M&A with a company whose stock is a designated
Nasdaq/NM security. Securities Exchange Act Release No. 35211
(January 10, 1995), 60 FR 3887. A ``designated NM security'' is an
NY security which the market maker has designated as qualifying for
the bid test exemption. See e.g., CBOE Rule 15.10(c)(2)(B).
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Finally, the Exchange's proposal effects certain minor technical
changes to the wording of its Rule 759A.
III. Discussion
The Commission believes that the Exchange's proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to national securities exchanges. In
particular, the Commission believes the Exchange's proposal is
consistent with the requirements of Section 6(b)(5) of the Act \12\ in
that it is designed to remove impediments to, and perfect the mechanism
of, a free and open market, and to protect investors and the public
interest.
\12\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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The Commission approved the NASD's short sale rule on a temporary
basis on June 29, 1994.\13\ In so doing, the Commission stated that the
short sale rule, together with the market maker exemption, is a
reasonable approach to regulating short sales of Nasdaq/NM securities.
The Commission believes that the Exchange's proposal is consistent with
the NASD's bid test rule and addresses the limitations established by
the NASD concerning the applicability of the market maker exemption.
\13\ Securities Exchange Act Release No. 34277, supra note 6.
Specifically, the Exchange's proposal is designed to extend the
market maker exemption to the stock of a company that is involved in a
publicly announced M&A with a company whose stock is designated Nasdaq/
NM security. The Commission believes that when a designated Nasdaq/NM
security becomes involved in an M&A, options specialists and COTs may
need to hedge positions in options overlying such a designated Nasdaq/
NM security by buying or selling the securities of the other company
involved in the M&A, whether or not the other company's stock has
listed overlying options. Indeed, where there are no options on the
other company's stock, buying or selling that company's stock at times
may be the only feasible way for an options specialist or COT to hedge
positions in options on the designated Nasdaq/NM security, given the
risk arbitrage relationship that is likely to exist between the two
stocks. Therefore, the Commission believes that by allowing options
specialists and COTs to sell short, for hedging purposes, shares of a
company that is involved in an M&A with a company whose stock is a
designated Nasdaq/NM security, and by designating such sales as bid
test exempt, the Exchange's proposal will enhance the ability of its
options specialists and COTs to perform their market making functions,
thereby
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contributing to the liquidity of the market for options, as well as the
liquidity of the market for the stocks of both companies.
The Commission notes that the proposed extension of the market
maker exemption from the short sale rule is limited to publicly
announced M&As. Moreover, the Exchange's options specialists and COTs
may avail themselves of the M&A extension to the exemption only if the
short sales are made to hedge existing or prospective positions in
Exchange-listed options on a security of another company involved in
the M&A, and the short sales are or will be ``exempt hedge
transactions'' as defined by the Exchange.\14\
\14\ See supra note 8.
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Amendment No. 1 states that to qualify
as an exempt hedge transaction, a short sale in a Nasdaq/NM security
must in fact serve to hedge an overlying options position. Amendment
No. 1 also includes certain non-substantive language inadvertently
omitted from the original filing.
The Commission believes that these changes serve to clarify the
Exchange's proposal and make it consistent with the provisions of the
other Exchanges relating to the market maker short sale exemption for
certain M&A securities. Accordingly, the Commission believes the
Amendment raises no new or unique regulatory issues. Therefore, the
Commission believes it is consistent with Sections 6(b)(5) and 19(b)(2)
of the Act \15\ to approve Amendment No. 1 to the proposal on an
accelerated basis.
\15\ 15 U.S.C. 78f(b)(5) and 78s(b)(2) (1988).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. 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. Sec. 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 will also be available
for inspection and copying at the principal office of the NYSE. All
submissions should refer to File No. SR-NYSE-95-16 and should be
submitted by August 21, 1995.
V. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 6 of
the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (File No. SR-NYSE-95-16), as
amended, is approved.
\16\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
\17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18706 Filed 7-28-95; 8:45 am]
BILLING CODE 8010-01-M