SEC Division of Trading and Markets no-action letter: London International Financial Futures Exchange and London Traded Options Market

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON. D.C. 20549 OlVlSlOW OF MARKET RECULATIOY May 1, 1992

Davis, Polk & Wardwell

1 Chase Manhattan Plaza

New York, New York 10005

Re: plrerqer of The London International Financial Futures

Exchanse fwLIFFEw) and The London Traded Options Market I f "LTOM" Dear Mr. Lynch:

This responds to your letters, dated March 18 and 19, 1992, on behalf of The London International Financial Futures Exchange (Administration and Management) ("LIFFE (AtM) n, , LIFFE, and The London Clearing House Limited (nLCHw), in which you request advice that the Division of Market Regulation (the "Divisionm) will not recommend enforcement action to the Commission against LIFFE (AtM) or LIFFE under Section 6 of the Securities Exchange Act of 1934 (the "Exchange Actw), against LCH under Section 17A of the Exchange Act, or against LIFFE or LIFFE members that are members of the LIFFE's London Traded Options Market ("LTOM") under Section 15(a) of the Exchange Act, if LIFFE and LTOM members act as described below to familiarize certain registered broker-dealers and large financial institutions in the United States with the LTOM, without LIFFE registering with the Commission as a national securities exchange, without LCH registering with the Commission as a clearing agency, and without LIFFE or LTOM members registering with the Commission as broker￾dealers. We understand the facts to be as follows:

LIFFE (AtM) is an entity organized under the laws of England

and Wales which was re-registered in August 1989 under the

(British) Companies Act 1985 as a company having a share capital

with unlimited liability for its shareholders. LIFFE (AtM) is

incorporated as The London International Financial Futures

Exchange Limited ("LIFFE Ltd") under the (British) Companies Acts

1949-1980. LIFFE Ltd established LIFFE in 1982 and has

administered LIFFE since then. Ir 1989 a public limited colttpany

was established (LIFFE (Holdings) plc) as a holding company for

the LIFFE corporate structure. LIFFE (AtM) is a wholly-owned

---_- subsidiary of LIFFE (Holdings) plc.
LIFFE Ltd is regulated in the United Kingdom as a ~ecognized

May 1, 1992

Investment Exchange under the U.K. Financial Services Act 1986 (the "FSAe') . LIFFE (A&M) and LIFFE, as the market administered by LIFFE (AtM), are subject to the jurisdiction of the Securities and Investments Board, established under the FSA. LIFFE (A&M)@s offices, facilities, and operations are located in London, England, with a representative office in New York City. Neither LIFFE (A&M) nor LIFFE is registered under the Exchange Act in any capacity, In June 1990, the Joint Action Group, comprising representatives of the Bank of England, LIFFE, LTOM, and the London Stock Exchange (formerly the International Stock Exchange) recommended the creation of a unified financial derivatives exchange in London. The Joint Action Group proposals, subsequently accepted by the London Stock Exchange, LTOM, and LIFFE, included the establishment of a merged market whose membership, governance, and corporate framework would be based on LIFFE8s existing structure. The London Stock Exchange and LIFFE (A&M) have entered into an agreement dated as of October 23, 1991, pursuant to which thz London Stock Exchange would transfer to LIFFE (A&M) the business of LTOM as a going concern. Such transfer occurred on or about March 22, 1992. The London Stock Exchange has undertaken that subsequent to the transfer it will cease to administer a market in respect of the contracts currently traded on LTOM. LIFFE was established in 1982 as a market for financial derivative products and currently lists 13 futures and 7 option contracts. Currently, fixed interest and bond options on futures are traded on LIFFE. References herein to @@optionse8 are only references to equity and equity index options. The London Stock Exchange created the LTOM in 1978 for the purpose of options trading. Trading now occurs in standardized put and call options, called UK Equity Options, on approximately 70 equity securities of leading U.K. companies. All the underlying securitix for LIFFE equity and index options iire stocks listed and traded on the London Stock Exchange's SEAQ system (Stock Exchange Automated Quotation system for UK Equities). Trading on the LTOM also occurs in standardized put and call options on the FT-SE 100 Index and on the FT-SE Eurotrack 100 Index (options on the FT-SE Eurotrack 100 Index will not be made available to U.S. investors; therefore, all references to options exclude options on the FT-SE Eurotrack 100 Index), The FT-SE 100 Index is composed of the stocks of one hundred leading U.K. companies listed and traded .:;i the London Stack Exchange. All options are American-style in that they are exercisable at any time prior to expiration, with the exception of certain of the FT-SE 100 Index Options which are European-style and thus exercisable only on the day of expiration.

May 1, 1992

LIFFE option trading will take place on a face-to-face,

open-outcry basis on LIFFE's trading floor at Cannon Eridge in

the City of London. Only LIFFE members who hold appropriate

pennits will be permitted to execute transactions there. All

LIFFE option transactions will be settled in London in pounds

sterling. LIFFE options will not be fungible or interchangeable

with options that are traded on any other market. Thus, any

LIFFE option position opened can be closed only on LIFFE or

exercised through LCH.

Registration and clearing of all options transactions on

LIFFE will be performed by LCH. You describe the LCH as

comparable in function to a clearing agency for a U.S. options

market. LCH will be the counterparty to clearing members of the

merged market, all acting as principals, in respect of, inter

alia, equity and index option contracts registered by such

clearing members with LCH. LCH will maintain a balance of open

positions between all (clearing members as) writers and all

(clearing members as) buyers of the contracts registered with

LCH. Non-clearing members and non-member customers are-not party

to any contracts registered by clearing members with LCH. When

such persons enter into equity or index option contracts with a

clearing member (or another member) of LIFFE, the clearing member

(or such other member) acts as a principal in relation to the

non-clearing member or non-member customer and makes a matching

contract on the market which, in the case of a clearing member,

is registered with LCH or, in the case of a non-clearing member,

leads to the registration with LCH of a related contract by the

clearing member with whom the nonclearing member has a clearing

arrangement. Settlement of option transactions, and daily mark-

to-market margin payments for (clearing members as) writers, will

be required to be made to LCH in London by LIFFE clearing

members. Exercises will also be required to be effected in

London with LCH, which will randomly allocate (i.e., assign)

exercises to writers. Once equity options are allocated, the

comparison, clearing, and settlement of the transaction in the

underlying security will take place within the London Stock

Exchange's standard equity settlement system. The FT-SE 100

Index Options will be cash settled only.

LIFFE (A&M) wishes to continue to familiarize certain

registered broker-dealers and large financial institutions in the

United States with the equity and index options to be traded on

LIFFE on the same basis that LTOM and the London Stock Exchange

currently 40 with respect to equity and index options tr&%d on

LTOM. To do this it proposes to take the limited steps described

below with respect only to "Qualified Broker-Dealers" and

"Qualified institution^.^ To be Qualified, each such entity must

meet the following standards:

i

Hay 1, 1992

(a) it must be a nqualified institutional buyerw as defined

in Rule 144A(a) 11) under the Securities Act of 1933

(the "Securities Actag), or an international

organization excluded from the definition of "U.S.

personn in Rille 902 (0) (7) of ~egulation S under the

Securities Act; and

(b) it must have had prior actual experience with traded

options in the United States options markets, and,

therefore, have received the options disclosure

document for U.S, standardized options required by Rule

9b-1 under the Exchange Act,

Members of LIFFE will be required under LIFFE rules to take

reasons-ble steps to assure themselves, before effecting any LIFFE

equity or index option transactions for or with a customer

located in the United States, that the customer is a Qualified

Broker-Dealer or a Qualified Institution, that the customer is

acting for its own account or the account of another Qualified

Broker-Dealer or Qualified Institution or the managed account of

a non-U.S, person (within the meaning of Rule 902(0)(2) of

Regulation S under the Securities Act), and that the customer has

received the LIFFE option disclosure document referred to below.

Specifically, you represent that LIFFE will institute rules

requ'iring its members to furnish each ~ualified Broker-Dealer and

Qualified Institution with a LIFFE option disclosure document

before accepting an order from that Qualified Broker-Dealer or

Qualified Institution to purchase or sell a LIFFE option

contract. You state that these LIFFE rules wi.11 also require

each LIFFE member to obtain from each Qualified Broker-Dealer or

Qualified Institution the following written representations,

signed by an appropriate officer of the Qualified Broker-Dealer

or Qualified Institution:

(1) that it is a Qualified Broker-Dealer or Qualified

Institution, and that as such (a) it owns and invests

on a discretionary basis a specified amount of eligible

securities sufficient for it to be deemed a 'qualified

institutional buyer under Rule 144A under the

Securities Act and, if it is a bank, savings and loan

association, or other thrift institution, that it has a

net worth meeting the requirements of Rule 144A under

the Securities Act, and (b) it has had prior actual. a e~per'ience in the 'J.S. traded options xarkets, and as a

result thereof has received the options disclosure

document entitled "Understanding the Risks and Uses of

Listed Optionsw ("Options Disclosure Documentw or

"ODD") that is prepared by the Options Clearing

Corporation'and U,S, options exchanges;

May 1, 1992

(2) that it has receive8 the LIFFE option disclosure document; (3) that its transactions in LIFFE equity and index options

are for its own account or for the account of another

Qualified Broker-Dealer or another Qualified

Institution, or for the managed account of a non-U.S.

person within the meaning of Rule 902(0)(2) of

Regulation S under the Securities Act;

(4) that it will not transfer any interest or participation

in a LIFFE equity or index option contract that it has

purchased orwritten to any other U.S. person, or to

any person in the United States, that is not a

~ualified Broker-Dealer or Qualified Institution;

(5) that (a) it will cause any disposition of a LIFFE

option contract by instruction to the LIFFE member with

whom it has the contract, and the disposition of the

option by the LIFFE member shall be effected only on

LIFFE and settled at LCH in London; (b) it understands

that any required payments for premiums, settlement,

exercise, or closing of any LIFFE option contract must

be made in London and in pounds sterling; and (c) it

understands that, if it is a writer of LIFFE option

contracts, margin must be provided to the LIFFE member,

and maintained, measured in pounds sterling;

(6) that, if it is a Qualified Broker-Dealer or Qualified Institution acting on behalf of another Qualified Broker-Dealer or Qualified Institution that is not a managed account, it has obtained from the other Qualified Broker-Dealer or Qualified Institution . written representations to the same effect as these representations, and that it will provide those written representations to the LIFFE member on demand; and (7) that it will notify the LIFFE member of any change in the foregoing representations prior to placing any future order, and that the foregoing representations will be deemed to be made with respect to each order that it gives to the LIFFE member. LIFFE: (A&M) will also advise IJFFE members that, under U.S. law,

Qualified Institutions may be dealt with only in accordance with

Rule 15a-6, principally through U.S. registered broker-dealers as

provided in the Rule.

A LIFFE option disclosure document, in the form submitted to

1

May 1, 1992

and reviewed by the Division, will be provided or1.y to Qualified

Broker-Dealers and Qualified Institutions. The document provides

an overview of that part of LIFFE which consists of an equity and

index option market, with attention to significant differences

from standardized options in the U.S. domestic options market,

and sets forth special factors relevant to U.S. entities

transacting in LIFFE equity and index options.

LIFFE (ALM) maintains an office in New York City which will

act as a representative office in the U.S. A representative in

this office or a representative of LIFFE (A&M) outside the U.S.

may be available to respond to inquiries zoncerning LIFFE from

Qualified Broker-Dealers and Qualified Institutions. Any such

representative may make personal calls on and correspond with

entities whom the representative reasonably believes to be

Qualified Broker-Dealers and Qualified Institutions to

familiarize them with the existence of LIFFE and the operations

of LIFFE (A&M). Any Qualified Broker-Dealer or Qualified

Institution would be provided with the LIFFE option disclosure

document upon its first visit, communication, or inquiry. The

representative office will maintain a reasonable supply of that

document, and of the most recently published annual report of

LIFFE (Holdings) plc and of LCH, for distribution to Qualified

Broker-Dealers and Qualified Institutions upon request. A

representative may also participate in programs and seminars in

the U.S.

Representatives will not give investment advice or make any

recommendations with respect to specific LIFFE equity or index

options, nor will representatives solicit, take, or direct

orders, nor refer Qualified Broker-Dealers or Qualified

Institutions to particular LIFFE members. If requested by a

Qualified Broker-Dealer or Qualified Institution, the

representative office or LIFFE (A&M) from outside the U.S. may

make available to the requester a list of all LIFFE members

permitted to take orders from the public and any registered U.S.

broker-dealer affiliates of such LIFFE members. LIFFE (Am) will

not.engage in any general advertisement concerning LIFFE equity

or index options in the United States,

LIFFE is an organized securities exchange administered by

LIFFE (A&M), operating and regulated abroad. LIFFE (A&M) will

establish careft-2 limitations to assure compliance with

applicable U.S. securities laws. You represent that makitlg

information concerning LIFFE ava2able in the Unlted St~~es as described in this letter will serve to increase, in a responsible manner, information concerning an important and growing marketplace in Europe that will be of benefit to appropriate U,Sr professionals,

I

May 1, 1992

Finally, you also request that the ~ivision confirm (a) that

furnishhg the LIFFE option disclosure document by LIFFE-(A&M)'s

U.S. representative office, by LIFFE (A&M) from outside the U.S.,

by a LIFFE member, or by a Qualified Broker-Dealer, in each case,

to a Qualified Broker-Dealer or Qualified Institution will

satisfy the obligation of a broker or dealer under Rule 9b-l(d)

to furnish an options disclosure document before accepting an

order from a customer to purchase or sell a LIFFE equity or index

option contract, and (b) that neither the furnishing of the LIFFE

option disclosure document to a Qualified Broker-Dealer or

Qualified Institution by LIFFE (A&M) from outside the U.S. or by

LIFFE (A&M)'s New York City representative office, nor a LIFFE

member's furnishing of the disclosure document to a Qualified

Broker-Dealer or, in response to an unsolicited inqui~y

concerning equity or index options, to a Qualified Institution,

will constitute solicitation or the provision of a research

report as those terms are used in Rule 15a-6(a).

Response:
Based on the facts and representations set forth above, the

Division will not recommend enforcement action to the Commission

against LIFFE (A&M), LIFFE, or LIFFE members under Section 15(a) of the Exchange Act if LIFFE (ACM) and LIFFE act as you describe to familiarize Qualified Broker-Dealers and Qualified Institutions in the United States with equity and index options traded on LIFFE, without LIFFE (ACM), LIFFE, or LIFFE members registering with the Commission as broker-dealers under Section 15(b) of the Exchange Act. Also, the Division will not recommend enforcement action to the Commission against LIFFE members under
Section 15(a) of the Exchange Act if, solely in connection with
the satisfaction of a LIFFE member's obligation under Exchange Act Rule 9b-l(d) and under the limited circumstances set forth above, (1) the U.S. representative office, LIFFE (ACM) from outside the United States, or a LIFFE member provides the LIFFE option disclosure document for equity and index options to a Qualified Broker-Dealer and the LIFFE member effects transactions in equity or index options traded on LIFFE with or for that Qualified Broker-Dealer pursuant to Rule 15a-6(a) (4), or (2) the U. S. representatisre off ice or LIFFE (A&M) provides the' LIFFE option disclosure document to a Qualified Institution, or a LIFFE member provides the LIFFE option disclosure document to a Qualified Institution in response to an otherwise unsolicited inquiry concernizg equity or index options, and the LIFFE member effects transacticns in equity or index options traded on LIFFE with or tor that Qualified Institution pursuant to Rule 15a￾6(a) (1) - 1- -.-- ---- Based on the foregoing, the ~ivision also will not recommend

that the Commission take enforcement action against the LCH under

May 1, 1992

Section 17A of the Exchange Act if the LCH operates solely in the

manner described above for equity and index options trlded on

LIFFE, without registering with the commission as a clearing

agency. In addition, the Division will not recommend that the

Commission take enforcement action against LIFFE (A&M) or LIFFE

under Section 5 of the Exchange Act if LIFFE (A&M) and LIFFE

operate solely in the manner described above with respect to

equity and index options traded on LIFFE, without registering

with the Commission as a national securities exchange under

Section 6 of the Exchange Act.

Finally, the Division has reviewed the proposed LIFFE option

disclosure document. Based on our review of that document, the

Division wishes to advise you that it will not recommend that the

Commission take enforcement action against a Qualified Broker-

Dealer or a LIFFE member pursuant to Rule 9b-l(d) under the

Exchange Act, if the Qualified Broker-Dealer, LIFFE member, U.S.

representative office, or LIFFE (A&M) from outside the United

States furnishes the LIFFE option.disclosure document to a

Qualified Broker-Dealer or Qualified Institution before the

Qualified Broker-Dealer or Qualified Institu'tion effects a

transaction in equity or index options traded on LIFFE, subject

to the following conditions:

(1) The Qualified Broker-Dealer or Qualified Institution

previously has received the ODD;

(2) LIFFE requires that LIFPE members, before effecting a

transaction with or for a Qualified Broker-Dealer or

Qualified Institution in equity or index options traded on

LIFFE, determine as described above that the ~ualified

Broker-Dealer or Qualified Institution has received the ODD

and the LIFFE option disclosure document and maintain a

record of that determination; and

• 1, --
  (3) LIFFE furnishes the Division, a? least 30 days prior to

the date definitive copies are furnished to ~ualified

Broker-Dealers or Qualified Institutions, with a copy of any

amendment made to the LIFFE option disclosure document

because the information contained in that document becomes

or will become materially inaccurate or incomplete, or

because there is or will be an omission of material

information necessary to ensure that the document is nct

misleading.

These positions of the Division concern enforcement action

only and do not represent conclusions on the applicability of

statutory or regulatory provisions of the federal securities

laws. The Division has taken these positions based, in part, on

the fact that the Commission has entered into a Memorandum of

May 1, 1992

I
Understanding with the U.K. Department of Trade and industryi

regarding the sharing of investigative information, and that

foreign broker-dealers, including LIFFE members, electing to deal

with U.S. institutional investors under Rule 15a-6(a)(3) are

required to provide directly to the Commission, upon request,

information, documents, testimony, and assistance in taking the

evidence of persons that relates to transactions under Rule 15a-

6(a)(3). These positions also are based on the representations

that you have made; any different facts or conditions might

require a different response, and these positions are subject to

modification or revocation if the facts and representations set

forth above are altered. This Division expresses no view with

respect to other questions that this transaction may raise,

including the applicability of any other federal or state laws to

the merger.

Sincerely,

William H. Heyman

Director

herorandum qf Understandirq on Mutual Assistanee dnd the

Exchange of Information Between the United States Securities and

Exchange Commission and the Commodities Futures Trading commission

and the United Kingdom Department of Trade and Industry and the

Securities and Investments Board, International Series Release No.

323 (Sept. 30, 1991).

March 19, 1992
Division of Market Regulation
Securities and Exchange Commission 450 5th Street, N.W. Judiciary Plaza Washington, D.C. 20549 Attention: Robert L.D. Colby, Chief Counsel Re: Merger of The London International Financial Futures Exchange ("LIFFE") and The London Traded Options Market ("LTOM") Dear Sirs:
This is to confirm to you that LIFFE will institute rules requiring its members to furnish to Qualified Broker￾Dealers and Qualified Institutions a LIFFE disclosure docu￾ment before accepting an order from such entity to purchase or sell a LIFFE option contract. The rules will also require the LIFFE member to obtain from the Qualified Broker-Dealer or Qualified Institution a written reprezentation, signed by an appropriate officer, to the following effects:

1. It is a Qualified Broker-Dealer or
   Qualified Institution, and as such it (i)owns and invests a specified amount of eligible securities, and where applicable has a specified net worth, sufficient to be a qualified institutional buyer under Rule 144A, and (ii) has had prior actual experience in the U.S. traded options markets and as a res-it thereof has received the options dis￾closure document entitled "Understanding the Risks and Uses of Listed Options" that is prepared by the

Division of Market Regulation - 2 - March 19, 1992 Options Clearing Corporation and U.S. options exchanges.
2. It has received the LIFFE disclosure
document.
3. Its transactions in LIFFE equity or index
options will be for its own account or for the account of another Qualified Broker-Dealer or Qualified Institution or for the managed account of a non-U.S. person within the meaning of Rule 902(0)(2).
4. It will not transfer any interest or
participation in a LIFFE equity or index option it has purchased or written to any other U.S. person, or to any person in the U.S., who is not a Qualified Broker-Dealer or Qualified Institution.
5. It will cause any disposition of a LIFFE
option by instruction to the LIFFE member wi'th whom it has a contract in respect of the LIFFE option, and the disposition of the LIFFE option by the LIFFE member shall be effected only on LIFFE and, by the actions of the LIFFE member directly or indirectly, there shall be a settlement of the LIFFE option at LCH in London. It understands that any required payments for premium, settlement, exercise or closing of any LIFFE option in respect of which it has a contract with the LIFFE member must be made in London and in pounds sterling. It also understands that, if in relation to a LIFFE option it has a contract as a writer with the LIFFE member, margin must be provided-to the LIFFE mem￾ber, and maintained, measured in pounds sterling.
6. If it is a Qualified Broker-Dezler or
Qualified Institution acting on behalf of another Qualified Broker-Dealer or Qualified Institution that is not a managed account, it has obtained from the other written representation to the same effect as the foregoing and will provide it to' the LIFFE member upon demand.
7. It will notify the LIFFE member of aqy
change in the foregoin7 representations prior LO placing any future order, and the foregoing repre￾sentations will be deemed to be made with respect to each order it gives to the LIFFE member.

Division of Market Regulation - 3 - March 19, 1992 If you require any further information or have any questions concerning the foregoing, do not hesitate to call me. Very truly yours, cc: Howard Kramer, Assistant Director Division of Market Regulation Abigail Arms, Deputy Chief Counsel, Division of Corporation Finance

L-I. YAIUYOUCUI I.CYOYC
C.llT00A-UU. TOUT0 I00
-
YLSSLTUIY eooo CRAU~CUIT AM YAIW I C!'i'ISIOP! OF MARKET REGULATION March 18, 1992 Division of Market Regulation

Securities and Exchange Commission

450 5th Street, N.W.

Judiciary Plaza

Washington, D.C. 20549

Attention: Robert L.D. Colby, Chief Counsel Re: Merger of The London International Financial Futures Exchange ("LIFFE") and The London Traded Options Market ("LTOM") Dear Sirs:
On behalf of The London International Financial Futures Exchange (Administration and Management) ("LIFFE (ALM)"), LIFFE and The London Clearing House Limited ("LCH"), we request your advice that, based on the circumstances stated in this letter, the Division will not recommend to the Commission any enforcement action against LIFFE (ALM) or LIFFE under Section 6 or Section 15 of the S-ecurities Exchange Act of 1934, as amended (the "Act"), by reason of neither LIFFE (A&M) nor LIFFE registering under the Act as a securities exchange or a broker-dealer, or against LCH under
Section 17A of the Act, by reason of its not registering
under the Act as a clearing agency.
On or about March 22, 1992, LIFFE (A&M) will acquire as a going concern the business of LTOM which is currently part of The International Stock Exchange of the -'xited Kingd~m and the R?public of Ireland Limited (the "London Stock Exchange" (formerly known as the "ISE")). At such time, the London Option Clearing House Limited ("LOCH"), ,--

Division of Market Regulation - 2 - March 18, 1992 which is a wholly owned subsidiary of the London Stock Exchange, will discharge or novate London ~raded Option contracts reflecting open positions registered -:ith it, provided that arrangements have been made by the users of LOCH (known as "LOCH Account Holders") for contracts reflect￾ing open positions at LOCH to be registered with LCH. LCH will be clearing the equity and index option contracts which will be listed on LIFFE following the merger with LTOM. Such contracts will replace London Traded Option contracts. By letter dated September 4, 1990 (the "London Stock Exchange No-action Lettera), the staff indicated that it would not recommend to the Commission enforcement action against the London Stock Exchange or LTOK under Section 6 or Section 15 of the Act, by reason of their not registering under the Act as a securities exchange or a broker-dealer, or against LOCH under Section 17A of the ~ct,by reason of its not register￾ing under the Act as a clearing agency. Because the business of LTOM is scheduled to be transferred to LIFFE (A&M), and the clearing arrangements provided by LOCH are scheduled to be replaced by those of LCH, on or about March 22, 1992, we are hereby requesting the same'relief on behalf of LIFFE, LIFFE (A&M) and LCH. Although the business of LTOM is to be transferred to LIFFE (A&M) there will be changes in the way in which the market in the contracts which are being trans￾ferred as part of the business will be organized. There will be changes to the procedures governing the conduct cf trading on the floor, including changes to commitments undertaken by those members (of the market formed by the merger of LIFFE and LTOM) who wish to make markets in the contracts which are transferred as aforesaid. A description of the clearing arrangements to be provided by LCH is set out below. The terms and conditions of each contract which is to be trans￾ferred as aforesaid will be amended on or about March 22, 1992 to the extent that each such contract will have a detailed contract specification which will set forth in one document a number of matters which have not previously been so set forth, such as, for example, the procedures for exer￾cise and delivery under an equity option contract and the calculation of the exchange delivery settlement price for cash settled index option contracts. LIFFE (A&M) is an entity organized under the laws of England and Wales which was re-registered in August 1989 under the (British) Companies Act 1985 as a company having a share capital with unlimited liability for its shareholders. LTFFE (A&M) was incorporated Zn September 1981 as The Toondon International Financial Futures Exchange Limited ("LIFFE Ltd") under the (British) Companies Acts 1949-1980 as a company limited by guarantee. LIFFE Ltd established LIFFE in

Division of Harket Regulation - 3 - March 18, 1992 1982 and has.administered LIFFE since then. In 1989 a re￾organization of LIFFE4s corporate and market structure was under~aken, owing to matters of UK taxation law. A public limitea company was established (LIFFE (Holdings) plc) as a holding company for the LIFFE corporate structure. In July 1989, holders of seats on LIFFE gave up their seats in con￾sideration of the allotment of shares in LIFFE (Holdings) plc. LIFFE Ltd was converted under the (British) Companies Act 1985 from a company limited by guarantee to a company with a share capital and unlimited liability for its shareholders (the relevant provision of the Companies Act .I985 stipulates unlimited liability for the share capital of a company which undergoes such a conversion). LIFFE (A&M) is a wholly-owned subsidiary of SIFFE (Holdings) plc. LIFFE Ltd was granted Recognized Investment Exchange status in 1988 in advance of the implementation of the primary parts of the UK Financial Services Act 1986. Recognized Investment Exchange status was retained by the same entity following its corporate reorganization, which has been described above. 1,IFFE (A&M) and LIFFE, being the market administered by LIFFE (AcM), are subject to regulation by the Securities and Investments Board, an entity organized under the laws of England and Wales as a company limited by guarantee under the (~ritish) Companies Act 1985, which was given the status of the "designated agency" by the Secretary of State for Trade and Industry for the purposes of, and pursuant to, the UK Financial Services Act 1986. LIFFE (A&M)'s offices, facilities and operations are located in London, England with a representative office in New York City. Neither LIFFE (A&M) nor LIFFE, subject to U.K. law, are registered under the Act in any capacity. In June 1990, the Joint Action Group, comprising representatives of the Bank of England, LIFFE, LTOM and the London Stock Exchange recommended the creation of a unified financial derivatives exchange in London. The Joint Action Group proposals, subsequently accepted by the London Stock Exchange, LTOM and LIFFE, included the establishment of a merged market whose membership, governance and corporate framework would be based on LIFFE4s existing structure. The London Stock Exchange and LIFFE (A&M) have entered into an agreement dated as of October 23, 1991 pursuant to which the London Stock Exchange will transfer to LIFFE (A&M) the busi￾ness of LTOM as a going concern. Such transfer is expected to occur on -r about March 22, 1992. The London Stock Exchange has undertaken that subsequent to the transfer it will cease to administer a market in respect of the contracts currently traded on LTOM.

' Division of Market Regulation - 4 - March 18, 1992 LIFFE was established in 1982 as a market for financtal derivative products and currently lists 13 futures and 7 option contracts. Currently, fixed interest, bond and stock index futures and options on futures are traded on LIFFE. References herein to "options" are only references to equity and index options. The London Stock Exchange operates several markets, one of which is the LTOM. The London Stock Exchange created the LTOM in 1978 for the purpose of options trading. Trading now occurs in standardized put and call options, called UK Equity Options, on approximately 70 equity securities of leading U.K. companies. All the underlying securities for LIFFE equity and index options are stocks listed and traded on the London Stock Exchange's SEAQ system (Stock Exchange Automated Quotation system for UK Equities). Trading on the LTOM also occurs in standardized put and call optima on the FT-SE 100 Index and the FT-SE Eurotrack 100 Index (options on the FT-SE Eurotrack 100 Index will not be made available to US investors, however, and all references herein to options excludes options on the FT-SE Eurotrack 100 Index). The FT-SE 100 Index is composed of the stocks of one hundred leading U.K. companies listed and traded on the London Stock Exchange. All of such options are American￾style in that they are exercisable at any time prior to expiration, with the exception of certain of the FT-SE 100 Index Options which are European-style. LIFFE option trading will take place on a face-to-face open-outcry basis on LIFFE's trading floor at Cannon Bridge in the City of London. Only LIFFE members who hold appropriate permits will be permitted to execute transactions there. All LIFFE option transactions will be settled in London in pounds sterling. LIFPE options will not be fungible or interchangeable with options that are traded on any other market. Thus, any LIFFE option position opened can be closed only on LIFFE or exer￾cised through LCH. Registration and clearing of all options transac￾tions on LIFFE will be performed by The London Clearing House Limited ("LCH"). LCH is owned by six of the U.K.*s largest clearing banks: Barclays Bank PLC, Lloyds Bank PLC, Midland Bank plc, National Westminster Bank PLC, The Royal 'Bank of Scotland pic and Standard Chartered PLC. In addition to clearing trades on LIFFE, LCH clears transactions on the International Petroleum Exchange of London (IPE), the London Futures and Options Exchange (London Fox) and the London Metal Exchange (LME). Comparable in its function, if not in the detailed aspects of its operation, to a clearing aglncy for a US options market, LCH will be the counterparty to clearing members of the merged market, all acting as prin￾cipals, in respect of, inter alia, equity and index option

Division of Market Regulation - 5 - March 18, 1992 contracts registered by such clearing members with LCH. LCH

will maintain a balance of open positions between all (clear￾ing members as) writers and all (clearing members as).buyers of the ccrrtracts registered with LCH. on-clearing members and non-member customers are not party to any contracts registered by clearing members with LCH. When such persons enter into equity or index option contracts with a clearing member (or another member) of LIFFE, the clearing member (or such other member) acts as a principal in relation to the non-clearing member or non-member customer and makes a match￾ing contract on the market which, in the case of a clearing member, is registered with LCH or, in the case of a non￾clearing member, leads to the registration with LCH of a related contract by the clearing member with whom the non￾clearing member has a clearing arrangement. Settlement of option transactions, and daily mark-to-market margin payments for (clearing members as) writers, will be required to be made to LCH in London by LIFFE clearing members. Exercises will also be required to be effected in London with LCH, which will randomly allocate (i.e. assign) exercises to writers. Once equity options are allocated, the comparison, clearing and settlement of the transaction in the underlying security will take place within the London Stock Exchange's standard equity settlement system. The FT-SE 100 Index Options will be cash settled only. LIFFE (ALM) wishes to continue to familiarize

certain registered broker-dealers and large financial

institutions in the U.S. with the equity and index options to

be traded on LIFFE on the same basis that LTOM currently does

with respect to equity and index options traded on LTOM. To

do this it proposes to take the limited steps described below

with respect only to "Qualified Broker-Dealers" and

"Qualified Institutions". To be Qualkfied, each such entity

must meet the following standards:

(a) it must be a "qualified institutional

buyer" as defined in Rule 144A, or an

international organization excluded from

the definition of "U.S. person" in Rule

902(0)(7), and

(b) it must have had prior actual experience

with traded options in the United States

options market (and, therefore, would

have received the disclosure document

for U.S. standardized options called for

by Rule 9b-1).

Division of Market Regulation - 6 - March 18, 1992 Members of LIFFE will be required under LIFFE Rules to take

reasonable steps to assure themselves, before effecting any

LIFFE eqdity or index option transaction for or with a cus-

tomer located in the United States, that the customer is a

Qualified Broker-Dealer or a Qualified Institution, that the

customer is acting for its own account or the account of

another Qualified Broker-Dealer or Qualified Institution or

the managed account of a non-U.S. person (within the meaning

of Rule 902(0)(2)), and that the customer has received the

LIFFE disclosure document referred to below. LIFFE (A&M)

will advise LIFFE members that it has been advised that under

U.S. law Qualified Institutions may be dealt with only in

accordance with Rule 1Sa-6, principally through U.S.

registered broker-dealers as provided in the Rule.

A LIFFE disclosure document, in the form submitted

to and reviewed by the Division, will be provided only to

Qualified Broker-Dealers and Qualified Institutions. The

document provides an overview of that part of LIFFE which

consists of an equity and index option market, with attention

to significant differences from standardized options in the

U.S. domestic options market, and sets forth special factors

relevant to U.S. entities transacting in LIFFE equity and

index options.

LISFE (A&M) maintains a representative office located in New York City which will act as a representative office in the U.S. A representative in this office or a representative of LIFFE (A&M) outside the U.S. may be avail￾able to respond to inquiries concerning LIFFE from Qualified Broker-Dealers and Qualified Institutions. Any such repre￾sentative may make personal calls on and correspond with entities whom the representative reasonably believes to be Qualified Broker-Dealers and Qualified Institutions to familiarize them with the existence of LIFFE and the opera￾tions of LIFFE (A&M). Any Qualified Broker-Dealer or Qualified Institution would be provided, upon first visit, communication or inquiry, with the LIFFE option disclosure document. The representative office will maintain a reasonable supply of that document, and of the most- recently published annual report of LIFFE (Holdings) plc and of LCH, to respond to requests therefor from Qualified Broker-Dealers and Qualified Institutions. A representative may also par￾ticipate in programs and seminars in the U.S. Repre￾sentatives will not give investment advice or make any recom￾mendat,ons with respect to specific LIFFE equity or index options, nor will representatives solicit, take, or direct orders, nor recommend or refer particular LIFFE members. If requested by a Qualified Broker-Dealer or Qualified Institu- -

Division of Market Regulation - 7 - March 18, 1992 tion, the representative office or LIFFE (A&M) from outside

the U.S. may make available to the requester a list of all

LIFFE members empowered to take orders from the public,and

any registered U.S. broker-dealer affiliates of such LIFFE

members.

LIFFE (A&M) will not engage in any general adver-

tisement concerning LIFFE equity or index options in the

United States.

Following the merger, LIFFE will be an organized

securities exchange administered by LIFFE (A&M) operating and

regulated abroad, and in LIFFE (A&M) making this known to a

particular sophisticated segment of the U.S. financial com-

munity it will not be altering this fact. LIFFE (A&M) will

establish careful limitations to assure to the extent

feasible compliance with applicable U.S. securities laws.

Making information concerning LIFFE available in the United

States as described in this letter will serve to increase, in

a responsible manner, information concerning an important and

growing marketplace in Exope that will be of benefit to

appropriate U.S. professionals.

We, therefore, request on behalf of LIFFE and LIFFE

(A&M) that you advise us you will not recommend that the

Commission take enforcement action against LIFFE or LIFFE

(A&M) separately or jointly under Section 6 or 15 of the Act,

by reason of neither LIFFE nor LIFFE (A&M) registering under

the Act as a securities exchange or a broker-dealer, or

against LCH under Section 17A of the Act, by reason of its

not registering as a clearing agency.

We also request that you advise us (a) that fur-

nishing of the LIFFE disclosure document by LIFFE (~hM)'s

U.S. representative office, by LIFFE (A&M) from outside the

U.S., by a LIFFE member or by a Qualified Broker-Dealer, in

each case, to a Qualified Broker-Dealer ur Qualified Institu-

tion will satisfy any obligation of a broker or dealer under

Rule 9b-l(d) to furnish an options disclosure document before

accepting an order from a customer to purchase or sell a

LIFFE equity ox index option contract,'and (b) that'neither

LIFFE (A&M) from outside the U.S. nor LIFFE (A&M)'s New York

City representative office's furnishing to a Qualified

Broker-Dealer or Qualified Institution, nor a LIFFE member's

furnishing to a Qualified Broker-Dealer or, in response to an

unsolicited inquiry concerning equity or index options, to a

Qualified Institution, will constitute soliciting or a

research report as those terms are used in Rule 15a-6(a).

'. Division of Market Regulation - 8 - March 18, 1992 If you need any further information concerning this

request, please call me collect at (212) 530-4582.

Very truly yours,

R";tAqLAy&~ Gary G. Lync