[Federal Register Volume 59, Number 68 (Friday, April 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8442]


[[Page Unknown]]

[Federal Register: April 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33853; File No. SR-CBOE-93-19, Amendment No. 1]

 

Self-Regulatory Organizations; Notice of Filing of Amendment No. 
1 to Proposed Rule Change by the Chicago Board Options Exchange, Inc., 
Relating to a Proposal To Extend Market Maker Margin and Capital 
Treatment to Certain Market Maker Orders Entered Off the Trading Floor

April 1, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
16, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') Amendment No. 1 to the proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On April 20, 1993, the CBOE submitted to the Commission a proposal 
to extend market maker capital and margin treatment to orders entered 
by CBOE market makers from off the Exchange floor, provided that at 
least 75% of their total transactions on the Exchange are executed in 
person and not through the use of orders.\1\ In Amendment No. 1 the 
CBOE proposes to modify its proposal to require that 80%, rather than 
75%, of a market maker's total transactions on the Exchange be executed 
in person on the CBOE's floor. In addition, Amendment No. 1 states that 
the off-floor orders for which a market maker receives market maker 
treatment shall be subject to the obligations of CBOE 8.7(a), 
``Obligations of Market Makers,'' and in general shall be effected for 
the purpose of hedging, reducing the risk of, rebalancing or 
liquidating open positions of the market maker.
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    \1\See Securities Exchange Act Release No. 32500 (June 23, 
1993), 58 FR 35060.
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    The text of the proposal is available at the Office of the 
Secretary, CBOE, and at 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 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 self-regulatory organization 
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

    Currently, under CBOE Rule 8.1, ``Market Maker Defined,'' only 
transactions initiated on the floor of the CBOE count as market maker 
transactions. Thus, only market maker transactions initiated on the 
CBOE's floor qualify for favorable capital treatment and for favorable 
margin treatment under CBOE Rule 12.3(b)(2), even if such orders are 
entered to adjust or hedge the risk of positions of the market maker 
that result from his on-floor market making activity.\2\
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    \2\Questions of margin and capital treatment do not arise in 
connection with closing transactions initiated from off the floor, 
since they only reduce or eliminate existing positions.
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    The CBOE states that the purpose of its proposal is to accommodate 
the need of CBOE market makers occasionally to adjust or hedge options 
positions in their market maker accounts at times when they are not 
physically present on the trading floor, without diluting the 
requirement that the trading activity of market makers must fulfill 
their market making obligations and must contribute to the maintenance 
of a fair and orderly market on the Exchange. Under current CBOE Rule 
8.7, ``Obligations of Market Makers,'' and Interpretations adopted 
thereunder, all CBOE market makers are obligated to effect no less than 
75% of their total contract volume in their appointed classes of 
options, and to effect not less than 25% of their total transactions in 
person on the trading floor and not by entry of orders.
    The Exchange believes that limiting market maker treatment to on-
floor orders is contrary to the practical reality that market makers 
cannot reasonably be expected to be physically present on the trading 
floor every minute of every day that the market is open. Yet, as a 
practical matter, that is essentially what the current rules require. 
Since a market maker cannot effectively adjust his positions or engage 
in hedging or other risk limiting opening transactions from off the 
Exchange floor without incurring a significant economic penalty, CBOE 
market makers must either be physically present on the Exchange floor 
at all times while the market is open, or face significant risks of 
adverse market movements during those times when they must necessarily 
be absent from the trading floor.
    Further, CBOE Rule 8.1 currently disallows market maker treatment 
for all off-floor orders without regard to the individual market 
maker's overall level of commitment toward meeting his market making 
responsibilities, as evidenced by his record of engaging in in-person 
transactions. Thus CBOE Rule 8.1 not only disallows market maker 
treatment in circumstances where the market maker is more than 
adequately meeting his obligations, but by imposing costs on certain 
hedging or risk-adjusting transactions of market makers, the rule may 
actually prevent CBOE market makers from effectively discharging their 
market making obligations and may expose them to unacceptable levels of 
risk.
    The proposed rule change would remedy this situation by imposing a 
more stringent in-person requirement on those market makers who choose 
to receive market maker treatment for transactions executed as a result 
of off-floor orders. In place of the existing 25% in-person requirement 
of Exchange Rule 8.7, Interpretation .03, the amended proposal would 
require market makers who choose to receive market maker treatment for 
off-floor orders to satisfy the more stringent requirement that 80% of 
their total transactions must be executed in person and not through the 
use of orders. In addition, the market makers would be required to 
satisfy all of the other existing obligations imposed on market makers, 
including the requirement that 75% of their total contract volume in 
each calendar quarter be in appointed classes. Amendment No. 1 also 
clarifies that the off-floor transactions of a market maker should 
constitute a course of dealings reasonably calculated to contribute to 
the maintenance of a fair and orderly market and that no market maker 
should enter into off-floor transactions or enter off-floor orders that 
are inconsistent with such a course of dealings as prescribed in CBOE 
Rule 8.7(a) for all market maker transactions.\3\ Further, Amendment 
No. 1 states that such off-floor market maker transactions in general 
should be effected for the purpose of hedging, reducing the risk of, 
rebalancing or liquidating open market maker positions.
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    \3\CBOE Rule 8.7(a) states that the transactions of a market 
maker should constitute a course of dealings reasonably calculated 
to contribute to the maintenance of a fair and orderly market, and 
no market maker should enter into transactions or make bids or 
offers that are inconsistent with such a course of dealings.
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    The CBOE believes that the amended proposal represents a more 
appropriate and realistic treatment of market maker transactions 
initiated from off the trading floor than what is provided for under 
existing Exchange Rule 8.1. The CBOE believes that extending favorable 
margin and capital treatment for off-floor transactions only to those 
market makers who submit to an 80% in-person requirement should have 
the effect of increasing the extent to which market maker transactions 
contribute to liquidity and to the maintenance of fair and orderly 
markets on the CBOE by providing for a greater degree of in-person 
trading by market makers and by enabling market makers to better manage 
the risk of their market making activities. Thus, the CBOE believes 
that the proposed amendment is consistent with and in furtherance of 
the objectives of section 6(b)(5) and section 11(a) of the Act in that 
it will promote the maintenance of fair and orderly markets on the CBOE 
and will contribute to the protection of investors and the public 
interest.

(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.

(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 after the 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 self-regulatory organization 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by April 29, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8442 Filed 4-7-94; 8:45 am]
BILLING CODE 8010-01-M