Fed. Reg. Notices — SECURITIES AND EXCHANGE COMMISSION

BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50525; File No. SR-Amex-2004-77] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the American Stock Exchange LLC Relating to the Trading of Ratio Orders October 13, 2004. 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 September 23, 2004, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in items I and II below, which items have been prepared by the Amex.

The Amex filed the proposal pursuant to section 19(b)(3)(A) under the Act, 3 and Rule 19b-4(f)(6) thereunder, 4 which renders the proposal effective upon filing with the Commission. 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. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Amex Rule 950, “Rules of General Applicability,” and Amex Rule 950-ANTE, “Rules of General Applicability” to allow ratio orders with certain permissible ratio limits, as defined below, to be executed through the Amex.

In addition, the Amex proposes to amend Commentary .01 to Amex Rule 950(d) and Commentary .01 to Amex Rule 950-ANTE(d) to include these types of permissible ratio orders in the same exception to the priority rules that Amex Rule 950(d), Commentary .01, and Amex Rule 950-ANTE(d), Commentary .01, currently provide for spread, straddle, and combination orders. The text of the proposed rule change appears below. Additions are *italicized.* Rule 950 “Rules of General Applicability” (a)-(d) No Change Commentary to

(d).01 When a member holding a spread order, a straddle order, *ratio order,* or a combination order and bidding or offering on the basis of a total credit or debit for the order has determined that the order may not be executed by a combination of transactions with or within the bids and offers established in the marketplace, then the order may be executed as a spread, straddle, or combination at the total credit or debit with one other member without giving priority to either bids or offers established in the marketplace that are not better than the bids or offers comprising such total credit or debit, provided that,

(i)in executing a spread order, the member does not buy at the established bid for the option contract to be bought and sell at the established offer for the option contract to be sold or,

(ii)in executing a straddle or combination order, the member does not either buy both sides of the order at the established bids or sell both sides of the order at the established offers. Commentary .02-.07 No Change (e)-(e)(iv) No Change * (e)(v) Ratio Order—A Ratio Order is a spread, straddle, or combination order in which the stated number of option contracts to buy

(sell)is not equal to the stated number of option contracts to sell (buy), provided that the number of contracts differ by a permissible ratio. For purposes of this section, a permissible ratio is any ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00). For example, a one-to-two (.5) ratio, a two-to-three (.667) ratio, or a two-to-one (2.00) ratio is permissible, whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is not. * (f)-(n) No Change Rule 950-ANTE “Rules of General Applicability” (a)-(d) No Change Commentary to

(d).01 When a member holding a spread order, a straddle order, *ratio order,* or a combination order and bidding or offering on the basis of a total credit or debit for the order has determined that the order may not be executed by a combination of transactions with or within the bids and offers established in the marketplace, then the order may be executed as a spread, straddle, or combination at the total credit or debit with one other member without giving priority to either bids or offers established in the marketplace that are not better than the bids or offers comprising such total credit or debit, provided that,

(i)in executing a spread order, the member does not buy at the established bid for the option contract to be bought and sell at the established offer for the option contract to be sold or,

(ii)in executing a straddle or combination order, the member does not either buy both sides of the order at the established bids or sell both sides of the order at the established offers. Commentary .02-.07 No Change (e)-(e)(iv) No Change *(e)(v) Ratio Order—A Ratio Order is a spread, straddle, or combination order in which the stated number of option contracts to buy

(sell)is not equal to the stated number of option contracts to sell (buy), provided that the number of contracts differ by a permissible ratio. For purposes of this section, a permissible ratio is any ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00). For example, a one-to-two (.5) ratio, a two-to-three (.667) ratio, or a two-to-one (2.00) ratio is permissible, whereas a one-to-four (.25) ratio or a four-to-one (4.0) ratio is not.* (f)-(n) No Change 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 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 IV below. The Amex 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 Amex Rules 950(e) and 950-ANTE(e) list and define several types of orders that are executed through the Amex including, among others, three types of complex orders: Spread orders, combination orders, and straddle orders. The Amex proposes to add certain ratio orders within permissible established limits to the list of orders included in Amex Rules 950(e) and 950-ANTE(e). Proposed Amex Rules 950(e)(v) and 950-ANTE(e)(v) would define a ratio order as either a spread, straddle, or combination order in which the stated number of option contracts to buy

(sell)is not equal to the stated number of option contracts to sell (buy), provided that the number of contracts differs by a permissible ratio. Under Amex Rules 950(e)(v) and 950-ANTE(e)(v), a permissible ratio would be any ratio that is equal to or greater than one-to-three (.333) or less than or equal to three-to-one (3.0). Additionally, the Amex proposes to revise paragraph .01 of the Commentary to both Amex Rules 950(d) and 950-ANTE(d) to include these types of permissible ratio orders so that they may be afforded the same exception to the priority rules that Amex Rules 950(d), Commentary .01, and 950-ANTE(d), Commentary .01, currently provide for spread, straddle, and combination orders. 5 The Amex believes that because ratio orders are slight variations on the types of complex orders currently permitted on the Amex, it is appropriate to treat ratio orders like spread, straddle, and combination orders for purposes of Amex Rules 950(d), Commentary .01, and 950-ANTE(d), Commentary .01. 5 This proposed rule is based on Chicago Board Options Exchange, Inc. (“CBOE”) Rule 6.45(e). *See* Securities Exchange Act Release No. 48858 (December 1, 2003), 68 FR 68128 (December 5, 2003) (order approving File No. SR-CBOE-2003-07) (“CBOE Order”). Furthermore, the Amex believes that ratio orders within certain permissible ratios may provide market participants with greater flexibility and precision in effectuating trading and hedging strategies. According to the Amex, including ratio orders in the exception to the priority rules provided in Amex Rules 950(d), Commentary .01, and 950-ANTE(d), Commentary .01, serves to reduce the risk of incomplete or inadequate executions while increasing efficiency and competitive pricing by requiring price improvement before an order can receive priority over other orders. The Amex believes it is important to include the definition of ratio orders within the ANTE rules because, while spreads cannot currently be executed through the ANTE system, the Amex anticipates that such transactions will be executed through the ANTE system in the future. The ANTE rules currently include definitions of spread, straddle, and combination orders and provide for the priority of these orders in certain circumstances. As discussed above, ratio orders are a form of a spread, straddle or combination order, and the Amex believes that in the interest of consistency it is important to update all of the effected rules, which encompass the ANTE rules. The Amex notes that the Commission recently has approved similar rule amendments and revisions for other options exchanges, including permitting ratio orders to have ratios equal to or greater than one-to-three (.333) or less than or equal to three-to-one (3.0). 6 6 *See* CBOE Order, *supra* , note 5. *See also* Securities Exchange Act Release No. 50184 (August 12, 2004), 69 FR 51498 (August 19, 2004) (notice of filing and immediate effectiveness of File No. SR-ISE-2004-20). 2. Statutory Basis The Amex believes that the proposed rule change is consistent with section 6(b) of the Act, 7 in general, and furthers the objectives of section 6(b)(5) of the Act, 8 in particular, in that it is designed to promote just and equitable principles of trade and to remove impediments to and perfect the mechanisms of a free and open market. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The Amex 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 No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Amex has filed the proposed rule change pursuant to section 19(b)(3)(A) of the Act 9 and subparagraph (f)(6) of Rule 19b-4 thereunder. 10 Because the foregoing proposed rule change:

(1)Does not significantly affect the protection of investors or the public interest;

(2)does not impose any significant burden on competition; and

(3)does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder. As required under Rule 19b-4(f)(6)(iii), the Amex provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to filing the proposal with the Commission or such shorter period as designated by the Commission. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b-4(f)(6). At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-Amex-2004-77 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-Amex-2004-77. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of this filing also will be available for inspection and copying at the principal office of the Amex. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Amex-2004-77 and should be submitted on or before November 12, 2004. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 11 11 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2733 Filed 10-20-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50540; File No. SR-CBOE-2004-57] Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Incorporated Relating to the Permanent Approval of Autobook October 14, 2004. 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 17, 2004, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in items I and II below, which items have been prepared by the CBOE. The Exchange filed Amendment No. 1 to the proposed rule change on October 8, 2004. 3 The Commission is publishing this notice, as amended, to solicit comments on the proposed rule change from interested persons and to grant accelerated approval to the proposed rule change, as amended. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* letter from Patrick Sexton, Assistant General Counsel, CBOE, to Deborah Flynn, Assistant Director, Division of Market Regulation, Commission, dated October 8, 2004 (“Amendment No. 1”). Amendment No. 1 amends the proposed rule change by deleting the word “all” in the second sentence of the seventh paragraph in Item 3. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The CBOE proposes to adopt the Exchange's automated limit order display facility (“Autobook”) on a permanent basis. The text of the proposed rule change is set forth below. Deletions are in brackets. Rule 8.85 DPM Obligations

(a)No change (b)(i)-(vi) No Change.

(vii)*Autobook Pilot* . Maintain and keep active on the DPM's PAR workstation at all times the automated limit order display facility (“Autobook”) provided by the Exchange. The appropriate Exchange Floor Procedure Committee will determine the Autobook timer in all classes under that Committee's jurisdiction. A DPM may deactivate Autobook as to a class or classes provided that Floor Official approval is obtained. The DPM must obtain such approval no later than three minutes after deactivation. [The Autobook Pilot expires on October 19, 2004, or such earlier time as the Commission has approved Autobook on a permanent basis.] To the extent that there is any inconsistency between the specific obligations of a DPM set forth in subparagraph (b)(i) through (b)(vii) of this Rule and the general obligations of a Floor Broker or of an Order Book Official under the Rules, subparagraph (b)(i) through (b)(vii) of this Rule shall govern. (c)-(e) No change. 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 III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Autobook is an enhancement to the Designated Primary Market-Maker's (“DPM's”) PAR workstation that automatically facilitates the entry of eligible customer limit orders into the limit order book at the end of a configurable period of time provided such limit orders have not previously been addressed manually by the DPM. As such, CBOE believes that Autobook assists and facilitates DPMs' compliance with their regulatory obligation relating to the display of eligible customer limit orders that improve the price or increase the size of the best disseminated CBOE quote as required by CBOE Rule 8.85(b). On April 18, 2003, the Commission approved the implementation of Autobook on a one-year pilot basis. 4 Subsequently, on April 20, 2004, the Commission extended the Autobook pilot until October 19, 2004 or such earlier time as the Commission has approved Autobook on a permanent basis. 5 4 *See* Securities Exchange Act Release No. 47701, 68 FR 22426 (April 28, 2003) (approving SR-CBOE-2003-16.) 5 *See* Securities Exchange Act Release No. 49584, 69 FR 22893 (April 27, 2004) (granting accelerated approval to SR-CBOE-2004-22). The Exchange believes that Autobook has been an effective tool for DPMs in that it has assisted DPMs to comply with their regulatory obligations relating to the display of eligible customer limit orders as required by CBOE rules. Accordingly, CBOE seeks permanent approval of Autobook. As was previously described in CBOE's rule filing that initiated the Autobook pilot, Autobook does not relieve DPMs of their obligations to book eligible customer limit orders on their PAR workstations immediately per CBOE Rule 8.85. 6 To the extent a DPM excessively relies on Autobook to display eligible limit orders without attempting to address these orders immediately, it could violate its due diligence obligation. Brief or intermittent periods of reliance on Autobook out of necessity, however, would not violate the obligation. 7 The Exchange periodically issues regulatory circulars discussing the issue of excessive reliance upon Autobook. 8 6 In its Adopting Release for the Display Rule in the equities markets, the Commission stated that to comply with the requirement that display take place “immediately,” specialists must display (or execute or re-route) eligible customer limit orders “as soon as practicable after receipt which under normal market conditions would require display no later than 30 seconds after receipt.” Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996). 7 For example, a DPM for a class that experiences an unexpected surge in trading activity would not violate its obligations if, because the DPM is not physically able to address eligible limit orders within 30 seconds, Autobook displays such orders at the end of the time period. 8 The Exchange has provided statistics to Commission staff that demonstrate that DPMs have not excessively relied upon Autobook to display eligible limit orders without attempting to address these orders immediately. The Exchange will continue to surveil DPMs for excessive reliance on Autobook. Autobook is an exchange-mandated facility that operates only on DPM PAR workstations. The appropriate Exchange Committee is responsible for establishing the Autobook timer in all classes under that Committee's jurisdiction, and the timer may not exceed the customer limit order display requirement then in effect on the Exchange. The appropriate Exchange Committee also has the authority to determine whether to utilize Autobook to automatically display any other types of orders that are not subject to CBOE's limit order display requirements. A DPM may deactivate Autobook as to a class or classes only upon approval by a floor official. The DPM must obtain floor official approval as soon as practicable but in no event later than three minutes from the time of deactivation. If the DPM does not receive approval within three minutes after deactivation, the Exchange will review the matter as a regulatory issue. 9 Floor officials would grant approval only in instances when there is an unusual influx of orders or movement of the underlying that would result in gap pricing or other unusual circumstances. 10 The Exchange would document all instances where a floor official grants approval. 9 The Exchange believes that this is consistent with NYSE treatment. *See* Securities Exchange Act Release No. 41386 (May 10, 1999), 64 FR 26809 (May 17, 1999). 10 The Exchange believes that this is consistent with Amex Rule 170, Commentary .10. *See* Securities Exchange Act Release No. 42952 (June 16, 2000), 65 FR 39210 (June 23, 2000). The Exchange would continue to conduct surveillance to ensure that DPMs comply with their obligation to execute or book all eligible limit orders as required by CBOE rules. CBOE also commits to conducting surveillance designed to detect whether DPMs as a matter of course rely on Autobook to display eligible limit orders. A practice of excessive reliance upon Autobook would be reviewed by CBOE's Regulatory Division as a possible due diligence violation. 2. Statutory Basis Because Autobook assists and facilitates DPMs' compliance with their regulatory obligations concerning the display of eligible customer limit orders as required by CBOE rules, the Exchange believes that the proposed rule change, as amended, is consistent with section 6(b) of the Act 11 in general and furthers the objectives of section 6(b)(5) 12 in particular in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest. Furthermore, the Exchange believes that the proposed changes are consistent with the requirement that an exchange's rules not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. 11 15 U.S.C. 78f(b). 12 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition CBOE does not believe that the proposed rule change, as amended, will 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 neither solicited nor received comments on the proposal. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-CBOE-2004-57 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-CBOE-2004-57. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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 the filing also will be available for inspection and copying at the principal offices of the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2004-57 and should be submitted on or before November 12, 2004. IV. Commission Findings and Order Granting Accelerated Approval of Proposed Rule Change The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission believes that the proposed rule change is consistent with the requirements of sections 6(b)(5) of the Act 13 and the objectives of section 11A(a)(1)(c) of the Act. 14 Section 6(b)(5) requires, among other things, that the rules of the Exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. 15 With respect to section 11A, Congress found that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities, and to assure the practicability of brokers investing investors' orders in the best market. 13 15 U.S.C. 78f(b)(5). 14 15 U.S.C. 78k-1(a)(1)(C). 15 In approving the proposed rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). Specifically, the Commission believes that the proposed rule change should help to ensure the availability of information with respect to quotations by assisting DPMs in displaying limit orders in a timely fashion. The Commission notes that Autobook is a tool designed to ensure that all customer limit orders are displayed no later than 30 seconds after receipt. Nonetheless, the Commission emphasizes that its approval of Autobook on a permanent basis does not relieve DPMs of their obligations to immediately display customer limit orders. To that end, the Commission expects the Exchange to actively surveil and appropriately discipline its members for excessive reliance on this tool. The Commission finds good cause for accelerating approval of the proposed rule change, as amended, prior to the thirtieth day after publication in the **Federal Register** . The Commission notes the substance of the proposed rule change has previously been published for public comment and no comments were received. The Commission also notes that the proposal is substantially similar to the rules of another self-regulatory organization. In addition, the Commission notes that accelerated approval of the proposed rule change will permit the continued use, without interruption, of Autobook, the pilot for which is scheduled to expire on October 19, 2004. Accordingly, the Commission finds good cause, consistent with section 19(b)(2) of the Act, 16 to approve the proposed rule change, as amended, prior to the thirtieth day after publication of the notice of filing. 16 15 U.S.C. 78s(b)(2). V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act, 17 that the proposed rule change (File No. SR-CBOE-2004-57), as amended, is approved. 17 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 18 18 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2735 Filed 10-20-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50542; File No. SR-CBOE-2004-50] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Inc. To Amend Its Rules Regarding Limitations on Designated Primary Market-Makers Putting Into Effect Stop and Stop-Limit Orders October 14, 2004. 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 July 29, 2004, the Chicago Board Options Exchange, Inc. (“CBOE” 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 CBOE. CBOE amended the proposal on October 8, 2004. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* letter from Angelo Evangelou, Managing Senior Attorney, Legal Division, CBOE, to John Roeser, Senior Special Counsel, Division of Market Regulation, Commission, dated October 6, 2004 (“Amendment No. 1”). In Amendment No. 1, CBOE amended the text of CBOE Rule 8.85(a)(viii) to clarify its proposed scope and application. Amendment No. 1 is incorporated in this notice. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change CBOE proposes to amend its rules regarding limitations on Designated Primary Market-Makers (“DPMs”) putting into effect stop and stop-limit orders. New text is in italics. Chicago Board Options Exchange, Incorporated Rules 8.85 DPM Obligations

(a)Dealer Transactions. Each DPM shall fulfill all of the obligations of a Market-Maker under the Rules, and shall satisfy each of the following requirements in respect of each of the securities allocated to the DPM. To the extent that there is any inconsistency between the specific obligations of a DPM set forth in subparagraphs (a)(i) through (a)(x) of this Rule and the general obligations of a Market Maker under the Rules, subparagraphs (a)(i) through (a)(x) of this Rule shall govern. Each DPM shall: (i)-(vii) No change.

(viii)Not initiate a transaction for the DPM's own account that would result in putting into effect any stop or stop limit order which may be in the book or which the DPM represents as Floor Broker except with the approval of a Floor Official and when the DPM guarantees that the stop or stop limit order will be executed at the same price as the electing transaction. *The restrictions set forth in this paragraph do not apply to stop or stop limit orders received through the Hybrid System unless the terms of such orders are visible to the DPM, or unless such orders are handled by the DPM;* (ix)-(xi) No change. (b)-(e) No change. * * * Interpretations and Policies: .01-.04 No change. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, CBOE 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. CBOE 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 CBOE Rule 6.53 defines a stop order as a contingency order to buy

(sell)that becomes a market order to buy

(sell)when the option contract trades or is bid (offered) at or above (below) the stop price on CBOE. The sender of the stop order determines the stop price. Similarly, a stop-limit order becomes a limit order when the stop price is triggered. CBOE Rule 8.85(a)(viii) currently prohibits DPMs from initiating a transaction for the DPM's own account that would result in putting into effect any stop or stop-limit order which may be in the book or which the DPM represents as Floor Broker except with the approval of a Floor Official and when the DPM guarantees that the stop or stop-limit will be executed at the same price as the electing transaction. Currently, stop and stop-limit orders route to PAR terminals in the trading station for representation by the DPM as Floor Broker. This is the case for classes on CBOE's Hybrid trading system and for classes that are not on Hybrid. Thus, DPMs need to monitor for quotes and/or trades at the stop price to ensure that stop orders are properly elected when the stop price is triggered. CBOE proposes to automate the handling of stop and stop-limit orders as an enhancement to CBOE's Hybrid trading system. According to CBOE, this will involve routing any electronic (non-paper) stop order to the Hybrid system (not to a PAR terminal) which will, in turn, elect the stop or stop-limit order when the stop price is triggered and automatically convert the order to a market order or limit order, as applicable. CBOE states that the purpose of this filing is to provide that the stop and stop-limit order DPM restrictions in CBOE Rule 8.85(a)(viii) should not apply to orders in classes that are on the Hybrid system that are routed to CBOE electronically, and not visible to or handled by the DPM. CBOE, in general, believes that the restrictions in CBOE Rule 8.85(a)(viii) are overly cumbersome and unnecessary. CBOE believes that the proposed Hybrid stop and stop-limit order handling enhancement will obviate the need for the restrictions in Hybrid classes. The stop and stop-limit orders will reside on the Hybrid system invisibly so that no DPM would know that it is triggering a stop or stop-limit order when with a trade or quote. Since according to the CBOE, the handling of the stop and stop-limit orders will be entirely automated, the DPM will no longer handle the stop order at any point or have any influence to purposefully affect triggering the stop or the ultimate execution price of the order. 2. Statutory Basis CBOE believes that the proposed rule change is consistent with section 6(b) of the Act, 4 in general, and furthers the objectives of section 6(b)(5) of the Act, 5 in particular, in that it is designed to promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanisms of a free and open market and a national market system, and to protect investors and the public interest. 4 15 U.S.C. 78(b). 5 15 U.S.C. 78(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition CBOE 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 No written comments were solicited or received with respect to the proposed rule change. 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 Exchange 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, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-CBOE-2004-50 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-CBOE-2004-50. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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 also will be available for inspection and copying at the principal office of the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2004-50 and should be submitted on or before November 12, 2004. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 6 6 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2736 Filed 10-20-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50548; File No. SR-CBOE-2004-25] Self-Regulatory Organizations; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto by the Chicago Board Options Exchange, Incorporated Relating to Designated Primary Market-Makers Obligations October 15, 2004. 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 April 23, 2004, the Chicago Board Options Exchange, Incorporated (“CBOE” 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 CBOE. On September 30, 2004, the CBOE filed Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 Amendment No. 1 replaces and supercedes the CBOE's original 19b-4 filing in its entirety. The CBOE proposes to amend its rules to clarify that CBOE Designated Primary Market-Makers (“DPMs”) are required to make competitive markets on the Exchange and to otherwise promote the Exchange in a manner that is likely to enhance the ability of the Exchange to compete successfully for order flow in the classes they trade. 4 4 Telephone conversation between James M. Flynn, Attorney, CBOE, and Sapna C. Patel, Special Counsel, and Angela Muehr, Attorney, Division of Market Regulation, Commission, on October 14, 2004. Below is the text of the proposed rule change, as amended. Proposed new language is *italicized;* proposed deletions are in [brackets]. Chapter VIII Market-Makers, Trading Crowds and Modified Trading Systems (Rules 8.1-8.95) Rule 8.85—DPM Obligations Rule 8.85 (a)-(b) No Change.

(c)Other Obligations. In addition to the obligations described in paragraphs

(a)and

(b)of this Rule, a DPM shall fulfill each of the following obligations:

(i)Resolve disputes relating to transactions in the securities allocated to the DPM, subject to Floor Official review, upon the request of any party to the dispute;

(ii)*Make competitive markets on the Exchange and otherwise promote the Exchange in a manner that is likely to enhance the ability of the Exchange to compete successfully for order flow in the classes it trades* [provide high quality markets and services and promote the Exchange as a marketplace to customers and other market participants];

(iii)Promptly inform the MTS Committee of any desired change in the DPM Designees who represent the DPM in its capacity as a DPM and of any material change in the financial or operational condition of the DPM;

(iv)Supervise all persons associated with the DPM to assure compliance with the Rules;

(v)Segregate in a manner prescribed by the MTS Committee the DPM's business and activities as a DPM from the DPM's other businesses and activities; and

(vi)Continue to act as a DPM and to fulfill all of the DPM's obligations as a DPM or the MTS Committee terminates the DPM's approval to act as a DPM pursuant to Rule 8.90. (d)-(e) No Change. 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 CBOE 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. The CBOE 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 The Exchange proposes to amend its rules governing DPMs in order to create an obligation that would require a DPM to make competitive markets on the Exchange and otherwise to promote the Exchange in a manner that is likely to enhance the ability of the Exchange to compete successfully for order flow in the classes it trades. This is identical to an obligation that is currently imposed on CBOE electronic DPMs (“e-DPMs”) under CBOE Rule 8.93(vi). 5 5 *See* Securities Exchange Act Release No. 50003 (July 12, 2004), 69 FR 43208 (July 19, 2004) (order approving e-DPMs on the Exchange). This proposed rule language would replace an existing DPM obligation under CBOE Rule 8.85(c)(ii), that is more of a generalized statement of the e-DPM obligation. CBOE Rule 8.85(c)(ii) currently requires a DPM to commit to “provid[ing] high quality markets and services and promot[ing] the Exchange as a marketplace to customers and other market participants * * *.” The Exchange believes that the proposed new language would provide a more specific statement of what is currently expected of a DPM. Additionally, the CBOE represents that this proposed new language is consistent with the standards of measurement used by the Exchange in determining whether a DPM is meeting its overall market performance standards. CBOE Rule 8.88 (Review of DPM Operations and Performance) requires the Exchange's Modified Trading System Appointments Committee (“MTS Committee”) to conduct an annual review of a DPM's operations and performance. Under CBOE Rule 8.88, the review shall include an evaluation of how a DPM has acted to make the Exchange competitive with other markets trading the same securities as those allocated to the DPM, taking into account the Exchange's market share in those allocated securities. In addition to making the DPM and e-DPM obligations more uniform, this proposal amends CBOE Rule 8.85(c) (Other Obligations) to expressly state that a DPM has the obligation to act to meet the levels of market performance that are currently expected of a DPM and that the MTS Committee currently considers when reviewing a DPM's market performance. 2. Statutory Basis By clarifying a DPM's obligations and making them more consistent with the obligations required of e-DPMs, the Exchange believes that this proposed rule change, as amended, is consistent with section 6(b) of the Act, 6 in general, and further the objectives of section 6(b)(5) of the Act, 7 in particular, in that it should promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The CBOE does not believe that the proposed rule change will 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 No written comments were solicited or received with respect to the proposed rule change. 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 Exchange 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, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-CBOE-2004-25 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-CBOE-2004-25. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2004-25 and should be submitted on or before November 12, 2004. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 8 8 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2785 Filed 10-20-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50528; File No. SR-CHX-2004-33] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to Floor Broker Network and Connectivity Charges October 13, 2004. 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 September 28, 2004, the Chicago Stock Exchange, Incorporated (“CHX” 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 Exchange. Pursuant to section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b-4(f)(2) thereunder, 4 the Exchange has designated this proposal as establishing or changing a due, fee, or other charge, which renders the proposed rule change effective immediately upon filing. 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. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b-4(f)(2). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its membership dues and fees schedule (the “Fee Schedule”), to bill its floor brokers for certain network and connectivity charges. The text of the proposed rule change is available upon request at the CHX or the Commission. 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. The Exchange 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 CHX floor brokers and their institutional customers use the NYFIX networks to route orders and process trade-related data. These types of networks are becoming an increasingly important tool for floor brokers as the institutional brokerage community continues to increase its use of technology. Although the Exchange currently pays the network and connectivity charges associated with NYFIX, the Exchange believes that it is appropriate for its floor brokers who use these services to begin paying for a significant percentage of these costs. 5 Accordingly, the Exchange is proposing to rebill all but a small portion of these network and connectivity charges to the floor brokers who use this technology, based on the proportion of each firm's use of the networks during each month. 5 The Exchange currently rebills its on-floor member firms for other technology-related costs. *See e.g.* , CHX Fee Schedule, Section H (Equipment, Information Services and Technology Charges) (rebilling for telephone charges, access and connection to financial information services or research and analytics providers and execution quality reports prepared by third parties). At the same time, the Exchange would establish a separate connectivity charge credit, which would provide each floor broker firm that uses the networks with a credit of the firm's share of $15,000. 6 This credit allows the Exchange to pay $15,000 of the floor broker network and connectivity charges each month and to rebill its floor broker firms for the remaining charges. 7 6 Each firm's share of the total $15,000 credit would be based on its percentage of the total monthly earned credits generated by that firm. Earned credits are generated by floor broker firms based, in general terms, on the number of billable shares executed by that floor broker in a given month. *See* CHX Fee Schedule, Section M(2)(a). The Exchange believes that it is appropriate to calculate the connectivity charge credit in this manner to reward firms that efficiently and effectively use technology to execute trades on the Exchange. 7 The Exchange also is proposing to delete an obsolete provision relating to credits for E-Session trading activity. The Exchange ended its E-Session in 2001. See Release No. 34-44705 (August 15, 2001); 66 FR 43939 (August 21, 2001). These fee changes are designed to take effect on October 1, 2004. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with section 6(b) of the Act 8 in general and furthers the objectives of section 6(b)(4) of the Act 9 in particular in that it provides for the equitable allocation of reasonable dues, fees, and other charges among its members. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in 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 neither solicited nor received written comments with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange asserts that the foregoing proposed rule change has become effective upon filing pursuant to section 19(b)(3)(A) of the Act 10 and Rule 19b-4(f)(2) 11 thereunder because it establishes or changes a due, fee or other charge imposed by the Exchange. At any time within 60 days of the filing of such rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purpose of the Act. 10 15 U.S.C. 78s(b)(3)(A). 11 17 CFR 240.19b-4(f)(6). 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. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form *(http://www.sec.gov/rules/sro.shtml);* or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-CHX-2004-33 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-CHX-2004-33. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the CHX. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CHX- 2004-33 and should be submitted on or before November 12, 2004. 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. E4-2739 Filed 10-20-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50539; File No. SR-NASD-2004-153] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to a Conditional Exemption From Stock Option Position Limits for OTC Derivatives Dealers October 14, 2004. Pursuant to section 19(b)(1) of the Securities Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on October 12, 2004, the National Association of Securities Dealers, Inc. (“NASD”) 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 NASD. 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. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposed to amend NASD Rule 2860 to provide an exemption from stock options position limits for OTC Derivatives Dealers provided that certain conditions have been satisfied. Below is the text of the proposed rule change. Proposed new language is in *italics* ; proposed deletions are in brackets. **2800. SPECIAL PRODUCTS** **2860. Options**

(a)No Change. **(b) Requirements**

(1)No Change. **(2) Definitions**

(A)through

(Q)No Change. *(R) Delta Neutral—The term “delta neutral” described a stock options position that has been hedged, in accordance with an SEC-approved pricing model, with a portfolio of instruments relating to the same underlying stock to offset the risk that the value of the options position will change with changes in the price of the stock underlying the options position.* Current

(R)through

(FF)Renumbered as

(S)through (GG). *(HH) Net Delta—The term “net delta” means the number of shares that must be maintained (either long or short) to offset the risk that the value of a stock options position will change with changes in the price of the stock underlying the options position.* Current

(GG)through

(BBB)Renumbered as

(II)through (DDD). **(3) Position Limits**

(A)Stock Options—Except in highly unusual circumstances, and with the prior written approval of NASD pursuant to the Rule 9600 Series for good cause shown in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, non-member broker, or non-member dealer, an opening transaction through Nasdaq, the over-the-counter market or on any exchange in a stock option contract of any class of stock options if the member has reason to believe that as a result of such transaction the member or partner, officer, director or employee thereof, or customer, non-member broker, or non-member dealer, would, acting along or in concert with others, directly or indirectly, hold or control or be obligated in respect of an aggregate equity options position in excess of:

(i)through

(vi)No Change.

(vii)Equity Options Hedge Exemptions a. No Change. *b. Delta Hedging Exemption for OTC Derivatives Dealer A stock options position of an OTC Derivatives Dealer (as that term is defined in Rule 3b-12 under the Act) affiliated with a member, in standardized or conventional options that is delta neutral, shall be exempt from position limits under this rule if the following conditions are satisfied:* *1. The member has obtained a written representation from its affiliated OTC Derivatives Dealer that such entity is hedging its stock options positions in accordance with its internal risk management control systems and pricing models approved by the SEC pursuant to Rules 15c3-1(a)(5) and 15c3-1f under the Act and that if it ceases to hedge stock options positions in accordance with such systems and models, that it will provide immediate written notice to the member.* *2. The member must report in accordance with the paragraph (b)(5), all stock options positions (including those that are delta neutral) of 200 or more contracts (whether long or short) on the same side of the market covering the same underlying stock that are effected by the member.* *3. Any stock options position of an OTC Derivatives Dealer that is not delta neutral shall be subject to position limits in accordance with this section (subject, however, to the availability of other exemptions). For these purpose, only the option contract equivalent of the net delta of such positions is subject to position limits. The options contract equivalent of the net delta is the net delta divided by 100.*

(viii)No change. 3 3 Reference to subparagraph (b)(3)(viii) as unchanged was added pursuant to telephone conversion between Gary Goldsholle, Office of General counsel, Regulatory Policy and Oversight, NASD, and Ira Brandriss, Division of Market Regulation, Commission, on October 14, 2004.

(B)through

(D)No Change.

(4)through

(24)No Change. II. Self-Regulatory Organization's Statement of the Purpose of, and statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it had received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD 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 Over the past several years, NASD has increased in absolute terms the size of the options position and exercise limits as well as the size and scope of available exemptions for “hedged” positions. 4 These increases, however, have generally required a one-to-one hedge ( *e.g.* , one stock option contract must be hedged by one-hundred shares of stock). In practice, however, many firms and customers do not hedge their options positions in this way. Rather, these firms engage in what is known as “delta hedging,” which varies the number of shares of stock used to hedge an options position based upon the relative sensitivity of the value of the option contract to a change in the price of the underlying stock. 5 Delta hedging is a widely accepted risk management tool. 4 *See* Securities Exchange Act Release No. 47307 (February 3, 2003), 68 FR 6977 (February 11, 2003) (SR-NASD-2002-134); Securities Exchange Act Release No. 40932 (Jan 11, 1999), 64 FR 2930 (January 19, 1999) (SR-NASD -98-92); Securities Exchange Act Release No. 40087 (June 12, 1998), 63 FR 33746 (June 19, 1998), (SR-NASD -98-23); Securities Exchange Act Release No. 39771 (March 19, 1998), 63 FR 14743 (March 26, 1998) (SR-NASD -98-15). 5 For example, an option with a delta of .5 will move $0.50 for every $1.00 move in the underlying stock. In 1998, the Commission approved rules allowing U.S. securities firms to establish a separately capitalized entity to engage in dealer activities in eligible over-the-counter (“OTC”) derivative instruments. 6 This separately capitalized entity, known as an OTC Derivatives Dealer, receives preferential capital treatment and is exempt from self-regulatory organization (“SRO”) membership. In general, however, most transactions of an OTC Derivatives Dealer (including stock options transactions) must be effected through its fully regulated broker-dealer affiliate, except to the extent otherwise permitted by Rule 15a-1 under the Act. 7 Thus, SRO rules, including stock, options position and exercise limits, continue to apply to transactions where a member must effect the transaction between the OTC Derivatives Dealer and the counterparty. As a consequence, the application of these position and exercise limits often deters parties from entering into transactions they otherwise would seek to conduct with an OTC Derivatives Dealer in the absence of such limits. Indeed, the Commission recognized this issue at the time it approved rules applicable to OTC Derivatives Dealers. 8 Specifically, the Commission encouraged NASD to revise its rules to recognize as “hedged” those option positions of an OTC Derivatives Dealer that are hedged on a “delta neutral basis” ( *i.e.* , the position is delta neutral or fully hedged with regard to the risk that the price of the stock underlying the options position might change). 9 6 Securities Exchange Act Release No. 40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998) (SEC File No. S7-30-97) (“OTC Derivatives Dealer release”). 7 17 CFR 240.15a-1. 8 OTC Derivatives Dealer release, *supra* note 6, at 63 FR 59380. 9 *Id.* In June 2003, NASD received a request on behalf of several member firms affiliated with OTC Derivatives Dealers to amend its rule imposing stock options position and exercise limits so that it applied only to a stock options position's net delta. 10 10 The proposed rule change does not expressly amend NASD's options exercise limits in NASD Rule 2860(b)(4) because such exercise limits apply only to the extent NASD Rule 2860(b)(3) imposes position limits. Thus, as delta neutral positions of an OTC Derivatives Dealer would be exempt from position limits under the proposed rule change, such positions also would be exempt from exercise limits. *See* NASD *Notice to Members* 94-46 at 2 (“* * * exercise limits correspond to position limits, such that investors in options classes on the same side of the market are allowed to exercise * * * only the number of options contracts set forth as the applicable position limit for those options classes.”). Similarly, for positions held by an OTC Derivatives Dealer that are not delta neutral, only the option contract equivalent of the net delta of such positions would be subject to exercise limits. NASD believes that the rigor of the OTC Derivatives Dealer approval process and the ongoing oversight by the Commission staff provides an appropriate basis for exempting delta neutral positions in stock options at such entities from position limits. The proposed rule change would exempt from NASD Rule 2860 delta neutral stock options positions of an OTC Derivatives Dealer and would provide that only the option contract equivalent of the net delta of a stock options position is subject to position limits provided that the member satisfies three conditions. The first condition would require a member to receive a written representation from its affiliated OTC Derivatives Dealer stating that the OTC Derivatives Dealer is hedging its stock options positions in accordance with risk management and pricing models approved by the Commission. This written representation would enable NASD to identify those firms that will be relying on the delta hedging exemption on behalf of their OTC Derivatives Dealer affiliates and would be required to be maintained in accordance with the recordkeeping provisions of NASD Rule 3110. The second condition would require that the member must report stock options positions of the OTC Derivatives Dealer, including those that are delta neutral, in accordance with NASD Rule 2860(b)(5). These reports would inform NASD of the OTC Derivatives Dealer's aggregate stock options positions and permit NASD to conduct surveillance for market manipulation, insider trading, and other trading abuses. The third condition would provide that any stock options position that is not delta neutral must remain subject to position and, by extension, exercise limits (subject, however, to the availability of other exemptions). An OTC Derivatives Dealer generally employs delta hedging as part of its risk management program, but it is nevertheless possible that an OTC Derivatives Dealer may maintain some positions that are not fully hedged, so long as the entity as a whole meets the conditions imposed by the Commission. In such cases, only the option contract equivalent of the “net delta” of any such stock options positions, which is the net delta divided by 100, would be subject to position limits. This calculation of an options contract equivalent conforms to existing NASD Rule 2860(b)(2)(JJ), which provides that, for purposes of subparagraphs

(3)through

(12)of NASD Rule 2860(b), a stock option overlying more or less than 100 shares “shall be deemed to constitute as many option contracts as that other number of shares divided by 100 ( *e.g.* , an option to buy or sell five hundred shares of common stocks shall be considered as five option contracts).” It is important to note that, for purposes of the proposed rule change, only financial instruments relating to the stock underlying a stock options position could be included in any determination of a stock options position's net delta or whether the stock options position is delta neutral. For example, warrants granting the right to purchase Microsoft stock might be used to offset the risk associated with a position in Microsoft puts granting the holder the right to sell Microsoft stock. However, for purposes of the proposed rule change, a position in Microsoft calls granting the holder the right to purchase Microsoft stock may not be hedged by puts (or any other financial instrument) overlying any security other than Microsoft stock. NASD will announce the effective date of the proposed rule change in a *Notice to Members* to be published no later than 60 days following Commission approval. The effective date will be no later than 30 days following publication of the *Notice to Members* announcing Commission approval. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act, 11 which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that it is appropriate, subject to certain conditions, to exempt stock options positions of OTC Derivatives Dealers from position limits and require that only the option contract equivalent of the net delta of a stock options position be subject to position limits. Moreover, NASD's proposed rule change would implement an approach that the Commission encouraged NASD to adopt at the time the Commission approved the regulatory model for OTC Derivatives Dealers. 12 11 15 U.S.C. 78 *o* -3(b)(6). 12 OTC Derivatives Dealer release, *supra* note 6, at 63 FR 59380. B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change could result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. 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 NASD 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. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-NASD-2004-153 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-NASD-2004-153. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR-NASD-2004-153 and should be submitted on or before November 12, 2004. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 13 13 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. 04-23558 Filed 10-20-04; 8:45 am]

Notices. SECURITIES AND EXCHANGE COMMISSION