[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56987-56990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28387]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37894; File No. SR-NYSE-96-31]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. Relating to Permanent Approval of Expiration Day
Auxiliary Closing Procedures Pilot Program
October 30, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 56988]]
(``Act''),1 and Rule 19b-4 thereunder,2 notice is hereby
given that on October 23, 1996, the New York Stock Exchange, Inc.
(``NYSE'' or ``Exchange'') filed with 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 self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change seeks to make permanent the pilot program
for expiration day auxiliary closing procedures, which was originally
filed with the Commission in SR-NYSE-88-37 and amended as described
below. The current pilot program is scheduled to expire on October 31,
1996.3 The rule change set forth in SR-NYSE-88-37 specified
auxiliary closing procedures for assisting in handling the order flow
associated with the expiration or settlement of stock index futures,
stock index options and options on stock index futures in a list of so-
called ``pilot'' stocks.4 These procedures are applicable on the
one day a month that the derivative products expire and on the last
trading day of each calendar quarter when quarterly index expiration
(``QIX'') options expire.
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\3\ See Securities Exchange Act Release No. 36404 (October 20,
1995), 60 FR 55071 (approving File No. SR-NYSE-95-28).
\4\ The pilot stocks consist of the 50 most highly capitalized
Standard & Poor's (``S&P'') 500 stocks and any component stocks of
the Major Market Index (``MMI'') not included therein.
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I. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 and is set forth in Sections A,
B and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Special procedures regarding the entry of market-at-the-close
(``MOC'') orders \5\ on expiration Fridays \6\ were originally adopted
in 1986 for quarterly triple expiration of derivative products.\7\
Since November 1988, these procedures have been used for each monthly
expiration and applied to the so-called ``pilot stocks.'' \8\ In April
1992, the Exchange modified the pilot procedures and included
additional special procedures for handling MOC orders in all stocks on
expiration Fridays.\9\ In March 1993, the Exchange extended the
expiration Friday auxiliary closing procedures \10\ to days on which
quarterly index expiration (``QIX'') options expire.\11\ In September
1993, the Exchange again modified the pilot procedures to change the
cut-off time for entry, cancellation or reduction of MOC orders to 3:40
p.m.\12\ In June 1995, the Exchange put into effect modified MOC
procedures for expiration days that set a 3:40 p.m. deadline for the
entry of all MOC orders in all stocks, except to offset imbalances that
are published on the tape.\13\
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\5\ A MOC order is a market order to be executed in its entirety
at the closing price on the Exchange. See NYSE Rule 13.
\6\ The term ``expiration Friday'' refers to the trading day,
usually the third Friday of the month, when various stock index
futures, stock index options and options on stock index futures
expire or settle concurrently.
\7\ See Securities Exchange Act Release No. 24926 (September 17,
1987), 52 FR 24926 (approving File No. SR-NYSE-87-32 and nothing
that the MOC procedures described therein had been utilized on a
quarterly basis since September 1986).
\8\ The NYSE auxiliary closing procedures for expiration Fridays
were initially approved by the Commission on a pilot basis for a
one-year period beginning in November 16, 1988 and extending through
October 1989. The pilot has since been extended each year on a one-
year basis. See Securities Exchange Act Release Nos. 26293 (November
17, 1988), 53 FR 47599; 26408 (December 29, 1988), 54 FR 343
(approving File No. SR-NYSE-88-37); 27488 (November 16, 1989), 54 FR
48343 (approving File No. SR-NYSE-89-38); 28564 (October 22, 1990),
55 FR 43427 (approving File No. SR-NYSE-90-49); 29871 (October 28,
1991), 56 FR 30004 (approving File No. SR-NYSE-91-31); 31386
(October 30, 1992) 57 FR 52814 (approving File No. SR-NYSE-92-30);
32868 (September 10, 1993), 58 FR 48687 (approving File No. SR-NYSE-
93-33); 34916 (October 31, 1994), 59 FR 55507 (approving File No.
SR-NYSE-94-32); and 36404 (October 20, 1995), 60 FR 55071 (approving
File No. SR-NYSE-95-28).
\9\ In April 1992, the Commission approved the Exchange's
modified pilot MOC procedures on an accelerated temporary basis for
the April 1992 expiration Friday. See Securities Exchange Act
Release No. 30570 (April 10, 1992), 57 FR 13399 (notice of filing
and order granting partial accelerated approval of File No. SR-NYSE-
92-09). Thereafter, the Commission approved those modifications for
all expiration Fridays during the pilot period. See Securities
Exchange Act Release No. 30680 (May 8, 1992), 57 FR 20720 (order
approving File No. SR-NYSE-92-09).
\10\ See Securities Exchange Act Release No. 32066 (March 30,
1993), 58 FR 17630 (approving File No. SR-NYSE-93-16).
\11\ On quarterly expiration days, the ``pilot stocks'' include
the ten highest weighted stocks of the S&P Midcap 400 Index (in
addition to the 50 highest weighted stocks underlying the S&P 500
Index and any component stocks on the Major Market Index not
included in that group).
\12\ See Securities Exchange Act Release No. 32868 (September
13, 1993), 58 FR 48687 (order approving File No. SR-NYSE-93-33).
\13\ See Securities Exchange Act Release No. 35589 (April 10,
1995), 60 FR 19313 (April 17, 1995) (order approving File No. SR-
NYSE-94-44). Although approved by the SEC in April, the Exchange did
not put these procedures into effect until June 1995. Prior to April
1995, only MOC orders related to a strategy involving derivative
index products were required to be entered for execution by 3:40
p.m. on expiration days. See Securities Exchange Act Release No.
34916 (October 31, 1994), 59 FR 55507 (November 7, 1994) (order
approving File No. SR-NYSE-94-32).
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The current procedures require that MOC orders in any stock be
entered for execution by 3:40 p.m. and that no cancellation or
reduction of any MOC order in any stock take place after 3:40 p.m.
(except in the case of legitimate error). This applies to MOC orders in
all stocks regardless of whether such orders relate to a strategy
involving stock index futures, stock index options, or options on stock
index futures. In addition, Floor brokers representing any MOC orders
must indicate their MOC interest to the specialist by 3:40 p.m.
For the pilot stocks and stocks being added to or dropped from an
index, the current procedures require a single publication of
imbalances of 50,000 shares or more to be made as soon as practicable
after 3:40 p.m. Imbalances of 50,000 shares or more may also be
published for other stocks with a Floor Official's approval.\14\ After
the imbalance publication, MOC orders may be entered only to offset a
published imbalance. The entry of MOC orders after 3:40 p.m. to
liquidate positions related to a strategy involving expiring derivative
instruments is not permitted even if such orders might offset published
imbalances. No MOC orders may be entered if there is no imbalance
publication.
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\14\ See Securities Exchange Act Release No. 36404 (October 20,
1995), 60 FR 55071 (order approving File No. SR-NYSE-95-28).
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The auxiliary procedures utilized for expiration days have been in
effect on a pilot basis for ten years. During that period the
procedures have been refined based on the Exchange's experience and
input from constituents. The monitoring reports submitted by the
Exchange to the Commission show that these procedures have been
effective in minimizing excess volatility at the close
[[Page 56989]]
on expiration days.\15\ The expiration day procedures have become
accepted by the securities industry as an appropriate way of dampening
volatility on days in which derivative products expire. The Exchange
therefore requests that the procedures described above be made
permanent.
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\15\ The NYSE has submitted to the SEC several monitoring
reports describing its experience with the closing procedures. The
most recent report was submitted to the SEC by the NYSE on August 6,
1996.
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The Exchange also states that it continues to believe that concerns
about excess market volatility that may be associated with the
expiration or settlement of derivative index products would be most
appropriately addressed if the expiration or settlement value of all
such products were based on the NYSE opening rather than the closing
price on the last business day prior to the expiration or settlement of
the product.
2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) that an Exchange have rules that are
designed to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.\16\
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\16\ 15 U.S.C. 78f(b)(5).
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B. 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited or received written comments
with respect to the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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. 552, will be available for inspection and copying at 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 Exchange. All
submissions should refer to File No. SR-NYSE-96-31 and should be
submitted by November 26, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the NYSE's proposed rule change seeking
permanent approval of the expiration day auxiliary closing procedures
pilot program is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\17\ Specifically, the Commission believes that the proposal is
consistent with the Section 6(b)(5) requirements that the rules of an
exchange be designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts and, in general, to protect
investors and the public interest. For the reasons set forth below, the
Commission believes that the NYSE's proposal furthers the objectives of
Section 6(b)(5) of the Act.
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\17\ 15 U.S.C. 78f(b).
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In recent years, the self-regulatory organizations have instituted
certain safeguards to minimize excess market volatility that may arise
from the liquidation of stock positions on expiration and non-
expiration days. Special procedures regarding the entry of MOC orders
on expiration Fridays were first used in 1986 for assisting in handling
the order flow associated with the concurrent quarterly expiration of
stock index futures, stock index options and options on stock index
futures on expiration Fridays. Since November 1988, on a pilot basis,
the NYSE has utilized auxiliary closing procedures for MOC orders for
each monthly expiration Friday. In March 1993, the Exchange extended
the expiration Friday closing procedures to days on which Quarterly
Index Expiration options expire. The closing procedures for expiration
Fridays and quarterly expiration days (cumulatively, ``expiration
days'') require that all MOC orders be entered, reduced or canceled no
later than 3:40 p.m. As soon as practicable after 3:40 p.m., the
specialist must disseminate any MOC order imbalance of 50,000 shares or
more in pilot stocks. After 3:40 p.m., MOC orders may be entered in the
pilot stocks, but only to offset the published imbalance. That is, once
an imbalance in a pilot stock has been published, MOC orders in such
pilot stock will be accepted only to trade on the opposite side of the
market in relation to such published imbalance. These procedures allow
NYSE specialists to obtain an indication of the buying and selling
interest in MOC orders at expiration and, if there is a substantial
imbalance on one side of the market, to provide the investing public
with timely and reliable notice thereof and with an opportunity to make
appropriate investment decisions in response thereto. In October 1995,
the Exchange amended the program to allow for publication of MOC order
imbalances of 50,000 shares or more not only in pilot stocks but in
stocks added to or dropped from an index, and in any other stock if
requested by a specialist and approved by a Floor Official.
The Commission believes that these auxiliary closing procedures
have enabled market participants to gain a more accurate picture of the
buying and selling interest in MOC orders at expiration. By requiring
early submission of MOC orders and disseminating significant imbalances
(50,000 shares or more) in all stocks, the NYSE has improved its
ability to attract contra-side interest to help alleviate imbalances
caused by the liquidation of stock positions. Based on the NYSE's
experience, the Commission believes that the MOC order handling
requirements work relatively well and may result in more orderly
markets at the close on expiration days. As noted above, these
auxiliary closing procedures have been used by the Exchange since 1988
without significant difficulty. Therefore, the Commission believes that
it is appropriate at this time to approve the Exchange's pilot program
on a permanent basis.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register because there are no
changes being made to the current provisions, which originally were
subject to the full notice and comment procedures. In addition,
accelerated approval would enable the program to continue on an
uninterrupted basis.
[[Page 56990]]
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change SR-NYSE-96-31 is approved.
\18\ 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.\19\
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\19\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28387 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M