[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4425]


[Federal Register: February 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33641; File No. SR-CBOE-93-48]


Self-Regulatory Organizations; Order Approving Proposal Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to Fines 
for Position Limit Infractions

February 18, 1994.
    On October 25, 1993, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange``) submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend paragraph (g)(1) of Exchange Rule 
17.50, ``Imposition of Fines for Minor Rule Violations,'' to establish 
a separate fine schedule for position limit violations which occur in 
non-CBOE member customer accounts carried by CBOE member firms, 
including the accounts of non-member broker-dealers.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 249.19b-4 (1993).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33291 (December 6, 1993), 58 FR 65207. No 
comments were received on the proposed rule change.
    Currently, paragraph (g)(1) of Exchange Rule 17.50 provides the 
following fine schedule for persons who violate the position limits 
established in CBOE Rule 4.11, ``Position Limits,'' and 24.4, 
``Position Limits for Board-Based Index Options:'' (1) A letter of 
caution plus $1 per contract over 5% of the applicable limit for one to 
three position limit violations within one calendar year; (2) $1 per 
contract over the limit for four to six position limit violations 
within one calendar year; and (3) $5 per contract over the applicable 
limit for seven or more position limit violations within one calendar 
year. The CBOE proposes to amend paragraph (g)(1) to establish a 
separate fine schedule for position limit violations which occur in 
non-CBOE member customer accounts (i.e., accounts of customers who are 
not CBOE members) carried by CBOE member firms, including the accounts 
of non-member broker-dealers. The proposal will increase the number of 
cumulative infractions that may occur in non-member customer accounts 
before a fine is triggered. Specifically, under new subparagraph (a), 
the following fines, which will be imposed on CBOE member firms, will 
apply to position limit violations occurring in non-member customer 
accounts: (1) A letter of caution for position limit violations up to 
5% in excess of the applicable limit plus $1 per contract above that 
level for one to six violations within one calendar year; (2) $1 per 
contract over the applicable limit for seven to 12 position limit 
violations within one calendar year; and (3) $5 per contract over the 
applicable limit for 13 or more position limit violations within one 
calendar year. In calculating the fine thresholds for each CBOE member, 
all non-member customer account position limit violations occurring 
within a single calendar year in all of the member's non-member 
customer accounts will be added together.
    In addition, the Exchange proposes to rephrase the current language 
of subparagraph (b) to indicate more clearly that a letter of caution 
is given for position limit violations of up to 5% of the applicable 
limit for one to three position limit violations occurring within a 
single calendar year, and that a fine of $1 per contract applies to 
violations exceeding that limit.
    The Exchange believes that the proposal accommodates key 
monitoring-related differences between non-member customer accounts and 
the accounts of members. The CBOE states that although CBOE members are 
well positioned generally to prevent, or to detect and promptly 
correct, position limit infractions in their own accounts or in 
accounts they carry for CBOE market makers, the CBOE and its member are 
positioned less effectively to monitor the aggregate trading 
commitments of non-CBOE broker-dealers or customers and to ensure the 
prompt correction of position limit violations by such persons. The 
CBOE states that factors such as customers trading through multiple 
firms, customers entering into Clearing Member Trade Assignment 
(``CMTA'') agreements,\3\ firms having multiple registered 
representatives, and investment advisors managing several accounts make 
it more difficult as a practical matter for member firms to prevent, or 
to detect and correct, a position limit violation by a customer, 
including a broker-dealer ``customer,'' who is not a CBOE member. As a 
result, the CBOE believes that the fine tiers suitable with respect to 
CBOE members' own accounts can be inappropriately strict when applied 
to firms carrying a number of non-member customer accounts.
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    \3\The CMTA is a process offered by the Options Clearing 
Corporation (``OCC'') which enables an OCC clearing member to have 
trades executed on its behalf on an exchange without holding 
exchange membership. In order to participate in this process, the 
OCC clearing member who has authorized an exchange member to execute 
trades on its behalf must file a CMTA agreement with the OCC.
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    The Exchange believes that the proposal will permit the effective 
enforcement of the Exchange's position limit rules while taking into 
account compliance and monitoring realities. The CBOE states that 
situations involving numerous violations and/or substantial overages 
will continue to be referred to the CBOE's Business Conduct Committee 
(``BCC'') for appropriate sanctions on a case by case basis.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of section 6(b)(5) in that it is 
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. In addition, the Commission 
believes that the proposal is consistent with the section 6(b)(6) 
requirement that the rules of an exchange provide that its members, and 
persons associated with its members, be appropriately disciplined for 
violation of the rules of the exchange. Specifically, the Commission 
believes that the proposal, in this limited context, should provide the 
CBOE with a prompt and effective means to enforce compliance with 
position limits while taking into account the difficulties of CBOE 
members in detecting and correcting position limit infractions by non-
member customers.
    The Commission believes that the CBOE's proposal strikes a 
reasonable balance between the Exchange's need to enforce its position 
limit rules and its desire to take into consideration the difficulties 
of CBOE members in detecting position limit violations that occur in 
non-member customer accounts. Further, the Commission believes that the 
revised fine schedule will prove sufficient to deter position limit 
violations. In this regard, by tallying the infractions in all of a 
member's non-member customer accounts cumulatively for purposes of the 
fine schedule, the proposal will require members to continually monitor 
compliance for position limit violations in non-member customer 
accounts. In addition, the Commission notes that the CBOE plans to 
refer cases involving numerous violations and/or substantial overages 
to the Exchange's BCC, thus providing the Exchange with the flexibility 
to impose a stricter sanction for more egregious infractions.
    The Commission finds that the CBOE's rephrasing of the current 
language of new subparagraph (b) is consistent with the Act in that it 
clarifies Exchange Rule 17.50(b), thereby facilitating the enforcement 
of the rule.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\4\ that the proposed rule change (File No. SR-CBOE-93-48) is 
approved.

    \4\15 U.S.C. 72s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4425 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M