Notice N57/99

LONDON STOCK EXCHANGE 
20 September 1999

For the attention of the
chairman/senior partner/compliance officer,
all member firms                                                      N57/99

STOCK EXCHANGE NOTICE

CONSULTATION ON PROPOSED RULE AMENDMENTS

INTER DEALER BROKER ('IDB') SERVICES

Background

1. Ahead of the introduction of the electronic order book on 20 October 1997,
Stock Exchange Notice N74/97 informed the market that, with effect from that
date, access to IDB services for securities other than gilt-edged securities
would no longer be restricted to market makers.  Member firms were informed
that, until revised rules were issued, other than in the case of gilt-edged
securities, any reference to 'market makers' in Chapter 7 of the rulebook
should be deemed to be a reference to 'member firms'. 

2. Following the introduction of the order book the rules were revised for
consultation in Stock Exchange Notice N6/98 in February 1998.

3. The Exchange received a considerable number of comments on the revised
rules, many of which suggested that a more fundamental review of the operation
of the IDB regime in the new market environment was needed.  In particular,
there were calls for IDBs to be able to offer their services to non-members.

4. In addition, the UK Debt Management Office ('DMO') indicated that it was
keen to review the operation of IDBs in the gilt market and that it was
considering whether to remove the requirement for gilt IDBs to be separately
capitalised. That requirement was subsequently removed on 29 March 1999.

Further consultation

5. As a result of these factors, the Exchange has since undertaken a further
detailed review and market consultation of the operation of IDBs in the equity
and gilt-edged markets.   In the case of the gilt-edged market review, this
work was carried out in conjunction with the DMO.

6. Responses received indicated the need for the Exchange to adopt different
approaches to the operation of the services in the equity and gilt-edged
markets.  There was agreement that the services of IDBs operating in the
equity market should be opened up to non-members as well as member firms. 
However, in the case of the gilt-edged market, which is still based on the
competing market maker system, there was strong support for the retention of
the current requirement for access to IDB services to be restricted to
gilt-edged market makers ('GEMMs') only. 

Draft rules

7. Accordingly, the Exchange has drafted a simplified set of rules for the
equity and gilt markets and the IDBs themselves.  These rules identify three
types of service:

(a) equity IDBs who, once registered with the Exchange, can act between market
makers and/or any other persons, including non members, acting as principal
traders; 

(b) gilt IDBs who, once registered with the Exchange, can only act between
GEMMs; and

(c) wholesale dealer brokers who, once registered with the Exchange, can act
between GEMMs and other principal traders, including non-members.  

8. In addition to a small number of core rules applicable to all IDBs, there
is a requirement for IDBs to have service agreements with their users which,
as a minimum, cover a specified list of items concerning the way in which the
IDB provides/operates its service.

9. The rules are intended to allow IDBs and users of their services the
maximum possible flexibility in developing such services in the future,
without the need for further major rule changes.

10. In view of the number of changes made to the rules in chapter 7, the rules
in this chapter have been completely re-written and no revision marks are
shown. In the case of changes to rules in other chapters, additions are
underlined and deletions struck-through.

11. The draft rules set out in the attachment to this Notice are subject to
consultation until Friday 15 October 1999.  A further Notice will be issued at
the end of the consultation period to confirm the finalised rules.




A E Scott-Bishop
Head of Regulatory Development


Any comments or queries on this Notice should be addressed to the Market
Regulation department, telephone [phone] (STX 33310).