[Federal Register Volume 63, Number 106 (Wednesday, June 3, 1998)]
[Pages 30279-30280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14674]



[Release No. 34-40036; File No. SR-NYSE-98-13]

Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 to Proposed Rule Change by the 
New York Stock Exchange, Inc., Relating to the Trading of Bonds

May 28, 1998.

I. Introduction

    On April 15, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its rules and procedures 
governing the trading of bonds. The proposed rule change was published 
for comment in the Federal Register on April 28, 1998.\3\ No comments 
were received regarding the proposal. On April 30, 1998, the NYSE filed 
Amendment No. 1 to the proposed rule change.\4\ This order approves the 
proposed rule change. In addition, the Commission is publishing this 
notice to solicit comments on Amendment No. 1 to the proposed rule 
change and is simultaneously approving Amendment No. 1 on an 
accelerated basis.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 39903 (April 22, 1998), 
63 FR 23324.
    \4\ In Amendment No. 1, the Exchange corrected typographical 
errors in the proposed rule change. See Letter from James E. Buck, 
Senior Vice President and Secretary, Exchange, to Michael Walinskas, 
Deputy Associate Director, Division of Market Regulation, 
Commission, dated April 29, 1998 (``Amendment No. 1'').

II. Description of the Proposal

    The NYSE proposes to amend its rules and procedures governing the 
trading of bonds. The Exchange seeks to delete obsolete provisions of 
its bond trading rules, to streamline those rules, and to consolidate 
the bond trading rules in a new Exchange Rule 86. In addition, the 
proposal would amend Exchange Rule 13, Exchange Rule 61, Exchange Rule 
70, Exchange Rule 72, Exchange Rule 76, Exchange Rule 79A, and Exchange 
Rule 85.
    The Exchange currently trades non-convertible bonds in its 
Automated Bond System (``ABS'') and convertible bonds on its bond 
floor. Later this year, the Exchange intends to move all bond trading 
into the ABS.\5\ Currently, various Exchange rules govern the trading 
of bonds, particularly Rule 85, governing the trading of ``cabinet'' 
securities. The proposed rule change provides for uniform bond trading 
procedures and consolidates those procedures in new Rule 86.\6\ The 
rule change: (i) incorporates into new Rule 86 the same price/time 
priority matching procedures as Rule 85; (ii) establishes appropriate 
cross references to new Rule 86 in other NYSE rules; and (iii) 
eliminates the rules governing trading on the bond floor, which will no 
longer be necessary.

    \5\ On March 13, 1998, the Exchange submitted a proposed rule 
change, which became effective immediately upon filing pursuant to 
Section 19(b)(3)(A) of the Act, that interpreted Exchange Rule 85 to 
make convertible bonds eligible for trading in the ABS. See 
Securities Exchange Act Release No. 39808 (March 26, 1998), 63 FR 
15908 (April 1, 1998).
    \6\ New Rule 86 specifies that these bond trading procedures 
apply only to bonds ``traded through ABS.'' The Exchange trades 
certain bonds, such as equity-linked securities, on its stock floor. 
These securities are traded pursuant to NYSE equity-trading 
procedures and are not subject to Rule 86. See Securities Exchange 
Act Release No. 32650 (July 16, 1993), 58 FR 39586 (July 23, 1993).

    The proposed rule change also alters the procedure for the crossing 
of bonds. Currently, Rule 85 requires that a member hold a proposed 
cross for a ``reasonable'' period of time before effecting the cross, 
and that the member announce the intention to effect the cross on the 
bond floor. For the purposes of the ABS, the Exchange has interpreted 
this as requiring a member to display a proposed cross in the ABS for 
two minutes prior to effecting the trade. Based on its experience, the 
Exchange represents that these crossing procedures are no longer 
    Another change to the bond trading rules moves the rules governing 
transactions at wide variations from Rule 79A.40 to new Rule 86(g). For 
non-convertible bonds, the Exchange would retain the requirement that a 
Floor Official approve all sales made two points away from the last 
sale or more than 30 days after the last transaction. The Exchange 
would not apply this requirement in all instances to convertible bonds, 
noting such bonds generally are priced in relation to the underlying 
equity security. However, new Rule 86(g) allows a Floor Governor to 
impose the same requirement on the trading of convertible bonds if 
market conditions warrant.
    Finally, Amendment No. 1 to the proposed rule change corrects 
typographical errors in the original submission.\7\

    \7\ See Amendment No. 1.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirement of Section 6 of the Act. In 
particular, the Commission believes the proposal is consistent with 
Section 6(b)(5) of the Act.\8\ Section 6(b)(5) requires, among other 
things, that the rules of the Exchange ``foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities'' and ``protect investors and the public interest.''

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

    The proposed rule change is part of a large effort to move bond 
trading from the bond floor, where trading activity has declined, to 
the ABS which should allow for the more economic and efficient trading 
of bonds.\9\ Moreover, by consolidating bond trading procedures in a 
new Rule 86 and more clearly defining aspects of the ABS in that rule, 
bond trading at the Exchange should become more transparent for 
investors and market participants.

    \9\ See supra Note 5.

    As for the proposed changes to the crossing procedures under the 
ABS, the Commission is satisfied that safeguards will prevent crosses 
from occurring in the ABS, under new Rule 86, at quotes outside of the 
spread reflecting the best bid and best offer in the ABS. The ABS will 
not allow for trading below and above the highest bid and lowest offer 
prices in the ABS without first completing orders at better prices.\10\ 
And although new Rule 86 will no longer require that a member hold a 
proposed bond cross for a ``reasonable'' period of time before 
effecting that cross, the Commission accepts that the infrequency and 
small size of crosses for bonds,--a distinct type of security traded at 
the Exchange,--makes this permissible. The Commission also notes the 
character of bond crosses on the Exchange, with most crosses involving 
bond brokers receiving matching buy and sell orders from two different

[[Page 30280]]

correspondent firms within two minutes of each other. Of course, should 
the nature of crosses on the ABS change, so that crosses become more 
significant in size and frequency, the Commission would expect the 
Exchange to consider modifying ABS crossing procedures to reflect such 

    \10\ See Letter from Fred Siesel, Director, Fixed Income 
Markets, Exchange, to Kenneth M. Rosen, Attorney, Division of Market 
Regulation, Commission, dated May 21, 1998.

    Finally, because convertible bonds generally are priced in relation 
to an underlying equity security, it is acceptable that the new Rule 86 
would not require the same approval process as that for non-convertible 
bonds for all sales made two points away from the last sale or more 
than 30 days after the last transaction. The Commission is satisfied 
that the provision allowing a Floor Governor to impose a more rigorous 
approval process when market conditions warrant should adequately 
protect investors.
    The Commission finds good cause for approving proposed Amendment 
No. 1 prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. The Amendment merely 
corrects typographical errors in the original proposal which received 
no adverse comments following its publication.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether the proposed 
Amendment is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NYSE. All submissions should refer to the File 
No. SR-NYSE-83-13 and should be submitted by June 24, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NYSE-98-13), as amended, is 

    \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 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14674 Filed 6-2-98; 8:45 am]