[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17953]


[[Page Unknown]]

[Federal Register: July 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34396; File No. SR-CBOE-94-16]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Expanding the Services Provided by Members Registered as ``Stock 
Services''

July 18, 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 June 1, 
1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') 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

    Currently CBOE Rule 6.77, ``Stock Execution Services,'' states that 
a stock service is a member registered with the Exchange for the 
purpose of providing stock execution services to market makers on the 
CBOE's floor. The CBOE proposes to amend CBOE Rule 6.77 to replace 
``stock service'' with ``order service firm'' and to allow order 
service firms to take market maker orders for the purchase or sale of 
commodity futures contracts and options thereon and forward the orders 
to the appropriate futures exchange. In addition, the CBOE proposes to 
adopt CBOE Rule 6.78, ``Letters of Guarantee Required of Order Service 
Firms,'' which requires an order service firm to have on file with the 
Exchange and in effect an Order Service Firm Letter of Guarantee issued 
for the service firm by a member of the Options Clearing Corporation 
(``OCC''). Under proposed CBOE rule 6.78(b), the letter of guarantee 
must provide that the issuing clearing member accepts financial 
responsibility for all orders handled by the order service firm on the 
CBOE floor and for all financial obligations of the order service firm 
to the Exchange.
    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

    The CBOE states that the purpose of the proposal is to permit 
members that are registered as ``stock services'' under CBOE Rule 6.77 
to expand the scope of their activity on the floor of the CBOE to 
encompass order handling services in connection with commodity 
interests. Currently CBOE Rule 6.77 provides that a member organization 
that is registered with the CBOE as a ``stock service'' may provide 
stock execution services to market makers on the floor of the 
Exchange.\1\ The proposal would revise CBOE Rule 6.77 to permit 
designated member organizations also to take orders for the purchase or 
sale of commodity interests from market makers on the floor of the 
Exchange and forward such orders to the appropriate futures exchange. 
The execution of all orders to purchase or sell commodity interests 
would occur on a futures exchange that has been designated as a 
contract market by the Commodity Futures Trading Commission (``CFTC''). 
To reflect more accurately the expanded scope of activities permitted 
under CBOE Rule 6.77, the term ``stock service'' would be deleted from 
CBOE Rules 3.1, ``Public Securities Business,'' 6.20, ``Admission to 
and Conduct on the Trading Floor,'' and 6.77 and replaced with the term 
``order service firm.''
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    \1\The services provided by these firms generally consist of 
taking orders for the purchase or sale of stocks and forwarding 
these orders to broker-dealers for execution.
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    The CBOE believes that the proposed rule change will facilitate 
market making capacity in stock index options. Market makers in stock 
index options are subject to the risk that market price will change 
before they can liquidate their positions, and hedge this risk by 
executing transactions in related commodity interests.\2\ The proposed 
rule change would facilitate the ability of market makers in stock 
index options to execute hedging transactions by providing them with a 
more efficient means of effecting such transactions.
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    \2\See Division of Market Regulation, Market Analysis of October 
13 and 16, 1989 (December 1990) at 73-74.
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    Order service firms that accept orders to buy or sell commodity 
interests may be required to comply with certain provisions of the 
Commodity Exchange Act of 1974, as amended (``CEA''). For example, 
Section 4(a)(1) of the CEA generally provides that transactions in 
commodity futures contracts may be executed only on a board of trade 
which has been designated as a ``contract market'' in the underlying 
commodity by the CFTC. In addition, Sections 4d and 4k of the CEA 
generally provide that any person that is engaged in soliciting or 
accepting orders for the purchase or sale of commodity interests must 
be registered as an introducing broker or as an associated person. The 
proposed rule change adds section (d) to CBOE Rule 6.77 to state 
expressly that to the extent an order service firm accepts and forwards 
orders for the purchase or sale of commodity interests, such firms must 
comply with the CEA and the rules and regulations promulgated 
thereunder. Additionally, the proposal requires such firms to keep the 
CBOE's Department of Financial Compliance (``Department'') apprised of 
its registration status under the CEA on an ongoing basis, including 
any financial reporting or capital requirements.
    In addition to revising CBOE Rule 6.77, the proposed rule change 
adds CBOE Rule 6.78 to the Exchange's rules. Under proposed Rule 6.78, 
any member organization that intends to act as an order service firm 
must file with the Exchange a letter of guarantee issued by a member of 
the OCC. Pursuant to this letter of guarantee, the clearing member must 
accept financial responsibility for all orders handled by the order 
service firm on behalf of Exchange market makers and all financial 
obligations of the order service firm to the Exchange. In order to 
limit the potential risk to any single clearing member, no clearing 
member shall be permitted to guarantee more than three order service 
firms without the prior written approval of the Department. In 
considering a request to guarantee more than three such firms, the 
Department shall consider the clearing member's level of excess net 
capital, additional financial resources, and such other facts as the 
Department deems appropriate.
    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that it would facilitate the ability 
of options market makers for which there are related commodity 
interests to reduce their exposure to market risk by providing them 
with a more efficient means of effecting hedging transactions in such 
commodity interests.

(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 reason 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, N.W., Washington, D.C. 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, N.W., 
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 August 15, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\17 CFR 200.30-3(a) (12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17953 Filed 7-22-94; 8:45am]
BILLING CODE 8010-01-M