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Merrill Lynch considers futures and options a core component of
the multiple products and services offered to institutional clients.
Over the last few years, we have increased our exchange memberships,
as well as market access via third party brokers. We are also constantly
evaluating new markets and exchanges, paying particular attention
to the opinions and needs of our clients.
Over the last four years, Merrill Lynch has made major changes to the execution, client service and clearing operation components of the Futures and Options business. We have made substantial investments on internal processing systems and tools that are available to our clients. These enhancements allow Merrill Lynch to provide a superior product.
Further, we anticipate a further consolidation of clearing firms due to increased competition and a high level of capital commitment. Accordingly, Merrill Lynch recognizes this development as an opportunity to build on its leadership in the futures industry.
Special Notice to Clients Regarding SEC Emergency Order Temporarily Banning Short Sales in Financial Stocks (September 22, 2008)
On September 18, 2008, the SEC issued an Emergency Order prohibiting the short selling of securities issued by certain financial firms ("Covered Securities"). The Emergency Order, as amended on September 21, 2008, provides an exception to the prohibition for bona fide market makers in derivatives, including over-the-counter market makers, that effect short sales as part of their bona fide market making and hedging activity related directly to bona fide market making in: (a) derivative securities based on Covered Securities, or (b) exchange traded funds and exchange traded notes of which Covered Securities are a component.
Importantly, the exception for derivatives market makers does not apply to market maker short sales if the market maker knows the customer's/counterparty's transaction will result in the customer/counterparty establishing or increasing an "economic net short position" in the Covered Securities. In determining an economic net position, a person should include positions in the physical common shares, as well as positions/exposures arising from derivative instruments such as options, convertible bonds, or equity swaps relating to a Covered Security.
In its capacity as a market maker in derivatives, Merrill Lynch is relying upon the market maker exception under the amended Emergency Order. Merrill Lynch's derivatives customers/counterparties are hereby advised that Merrill Lynch may not knowingly effect a short sale as part of Merrill Lynch's bona fide market making and hedging activity in a derivative security based on a Covered Security or ETF/ETN, if the transaction will result in the customer/counterparty either establishing or increasing an economic net short position in a Covered Security. Therefore, any customer/counterparty seeking to transact in a manner inconsistent with this limitation should NOT contact or solicit Merrill Lynch for quotes or prices.
For transactions in which Merrill Lynch acts as a derivatives market maker, customers/counterparties should presume that Merrill Lynch will effect short sales in the underlying securities to hedge its exposure. Therefore, customers/counterparties to Merrill Lynch market maker transactions in Covered Securities will be deemed to have represented and warranted that the transaction will NOT result in the customer/counterparty establishing or increasing an "economic net short position" in the Covered Securities and that the customer/counterparty is complying with the terms of the SEC's Emergency Order, as amended
In addition, customers/counterparties entering into any derivative transaction with Merrill Lynch will be deemed to have represented and warranted that: (i) on or prior to the date of the derivative transaction in Covered Securities, customer/counterparty has consulted with its legal advisors regarding the SEC Emergency Order requiring the disclosure of short positions in certain publicly traded securities (the "Disclosure Order"); and (ii) customer/counterparty is not entering into the derivative transaction with the intent to avoid or circumvent the disclosure obligations imposed by the Disclosure Order. Customers/counterparties to derivative transactions will also be deemed to have acknowledged that Merrill Lynch may determine to: (i) disclose sales of Covered Securities sold short to hedge the Merrill Lynch exposure related to the derivative transaction on any disclosure form provided under the Disclosure Order; (ii) identify in such disclosure form that any short position in the Covered Securities is a hedge for Merrill Lynch's exposure under a derivative transaction; and (iii) notwithstanding any other agreement between or among customer/counterparty and Merrill Lynch to the contrary, if requested by a regulator having jurisdiction over Merrill Lynch or the Disclosure Order, provide such other information related to such short position or disclosure as such regulator may request.
The amended Emergency Order may be found at http://www.sec.gov/rules/other/2008/34-58611.pdf. The Disclosure Order may be found at http://www.sec.gov/rules/other/2008/34-58591a.pdf
We encourage you to consult your own legal counsel regarding the scope and application of the Emergency Order and the Disclosure Order. Please contact your Merrill Lynch representative if you have any questions regarding this Special Notice.
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