[Federal Register Volume 59, Number 223 (Monday, November 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28675]


[[Page Unknown]]

[Federal Register: November 21, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34972; File No. SR-CBOE-94-27]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to the Options Market Maker Exemption From the 
Nasdaq Short Sale Bid Test

November 14, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 4, 1994, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. On 
September 29, 1994, the Exchange filed Amendment No. 1 to the proposed 
rule change.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\15 U.S.C. 78s(b)(1).
    \2\In Amendment No. 1, the CBOE adds the express requirement 
that the merger or acquisition must be ``publicly announced'' to 
qualify as an exempt hedge transaction in an ``M&A'' security. See 
letter from Michael L. Meyer, Schiff Hardin & Waite, to Francois 
Mazur, Attorney, Office of Market Supervision, Commission, dated 
September 29, 1994 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its Rule 15.10\3\ concerning the 
designation of certain short sales of Nasdaq National Market Securities 
(``Nasdaq/NM securities'') by market makers as exempt from the bid test 
imposed under NASD Rules of Fair Practice.\4\
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    \3\CBOE Rule 15.10 recently was approved as an 18-month pilot. 
See Securities Exchange Act Release No. 34632 (September 2, 1994), 
59 FR 46999. The rule change proposed herein is intended to apply 
only so long as Rule 15.10 is effective.
    \4\See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 34885.
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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 purpose of the proposed rule change is to permit CBOE options 
market makers to designate as ``bid test exempt'' under CBOE Rule 15.10 
certain short sales of the stock of a company that is involved in a 
merger or acquisition with the issuer of a stock underlying an option 
that has been designated as a ``designated Nasdaq/NM security'' in 
accordance with CBOE Rule 15.10(c)(2)(ii)(B). To qualify as bid test 
exempt under this proposal, a short sale must serve to hedge a position 
in an option covering the designated Nasdaq/NM security, where the 
option position was or will be established in the course of bona fide 
market making activity.
    This proposal recognizes that when a designated Nasdaq/NM security 
becomes involved in a merger or acquisition, CBOE market makers may 
need to hedge positions in options on the designated Nasdaq/NM security 
by buying or selling shares of stock of the other company involved in 
the merger or acquisition, whether or not the other company's stock has 
listed overlying options. Indeed, where there are no options on that 
stock, buying or selling the stock itself may at times be the only 
feasible way for a market maker to hedge positions in options on the 
designated Nasdaq/NM security, given the risk arbitrage relationship 
that is likely to exist between the two stocks. The proposed rule 
change will facilitate hedging by options market makers in this 
circumstance, by allowing them to sell short shares of the other 
company involved in the merger for hedging purposes, and to designate 
those short sales as bid test exempt. The CBOE believes that its 
proposal will enhance the ability of CBOE market makers to perform 
their market making functions, thereby contributing to the liquidity of 
the market for options, as well as the market for the stocks of both 
companies. This proposed rule change, like the remainder of Rule 15.10, 
is intended to operate in coordination with an exemption from the bid 
test provided for in the NASD Rules of Fair Practice. It is CBOE's 
understanding that the NASD intends to publish an interpretation of its 
bid test rule that is consistent with the amendment to CBOE Rule 15.10 
proposed herein.
    CBOE believes that the proposed rule change will enhance the 
ability of market makers to perform their market making activities, 
thereby contributing to the depth and liquidity of the options market, 
and thus will serve in furtherance of the objectives of Section 6(b)(5) 
of the Act to promote just and equitable principles of trade and to 
protect investors and promote the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 in 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 File No. 
SR-CBOE-94-27 and should be submitted by December 12, 1994.

    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. 94-28675 Filed 11-18-94; 8:45 am]
BILLING CODE 8010-01-M