[Federal Register Volume 60, Number 34 (Tuesday, February 21, 1995)]
[Notices]
[Pages 9702-9704]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4161]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35369; File No. SR-CBOE-95-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Changes by the Chicago Board Options Exchange, Incorporated, Amending 
Its Rules Relating to Certain Procedures Regarding Trading Rotations 
and Opening Procedures

February 14, 1995.
    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 January 
18, 1995, the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule changes as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule changes from interested persons.

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

    The Chicago Board Options Exchange, Incorporated (``CBOE'' or the 
``Exchange'') proposes to amend its rules relating to certain 
procedures regarding trading rotations and opening procedures. These 
amendments would: (i) Amend Rule 6.2; (ii) amend Interpretations .02 
and .03 to Rule 6.2; (iii) add an Interpretation to Rule 6.2; (iv) 
amend Rule 24.13; and (v) amend Interpretation .03 to Rule 24.13.
    The text of the proposed rule changes 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 Changes

    In its filing with the Commission, CBOE included statements 
concerning the purpose of and the basis for the proposed rule changes 
and discussed any comments it received on the proposed rule changes. 
The text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries set forth in Sections 
(A), (B) and (C) below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    The purpose of the proposed rule changes is first to grant two 
Floor Officials the authority to call for a trading rotation and to 
delay the commencement of an opening rotation if the Floor Officials 
believe this will aid in producing a fair and orderly market. The rule 
changes further allow the Order Book Official to deviate from the 
rotation order and manner which the Floor Procedures Committee may have 
established, as long as two Floor Officials first approve such a 
deviation. If the appropriate Floor Procedures Committee has not 
established the rotation order and manner for the options under its 
purview in a particular situation, then the Order Book Official may 
determine the order and manner of the rotation.
Trading Rotations
    Specifically, the proposal would amend Rule 6.2 to grant two Floor 
Officials discretion to direct that one or more trading rotations be 
employed on any business day. Presently, pursuant to Rule 6.2, only the 
Floor Procedures Committee has this discretion. Consequently, if 
circumstances arose during the day that made an additional rotation 
appropriate, such as either a rotation following a trading halt or a 
closing rotation, then the Floor Procedures Committee would have to 
assemble to make the decision to employ a rotation. CBOE believes it is 
impractical to assemble the entire Floor Procedures Committee for such 
an intra-day decision. Furthermore, under Rule 6.6(b)(iii), two Floor 
Officials already have the discretion to direct that one or more 
trading rotations be employed on any business day, but only when a fast 
market has been declared. CBOE believes that this discretion should not 
be limited only to fast market conditions. By amending Rule 6.2, two 
Floor Officials would have the discretion to direct that one or more 
trading rotations be employed, and this discretion would not be limited 
to a fast market situation.
    The proposed rule would further amend Rule 6.2 to grant Order Book 
Officials more discretion regarding the rotation order and manner. This 
discretion may be exercised before the rotation begins as well as 
during a rotation. Presently Rule 6.2 provides that the Floor 
Procedures Committee shall specify both the particular option contracts 
to be included in each rotation and the sequence of such option 
contracts in that rotation. Under the proposed amendment to Rule 6.2, 
the ``appropriate'' Floor Procedures Committee, meaning the Floor 
Procedures Committee that makes policy regarding the particular class 
of options in question, would still have authority to set policy 
regarding the rotation order and manner. However, if the appropriate 
Floor Procedures Committee has not acted to establish any policy 
applicable to a particular situation, then the Order Book Official 
would be authorized to determine the appropriate order and manner for 
conducting the rotation. CBOE believes that the proposed amended Rule 
6.2 would allow Order Book Officials to respond to particular 
circumstances the Floor Procedures Committee has not considered and to 
conduct the rotation as is appropriate under those circumstances.
    In addition, pursuant to amended Rule 6.2, the Order Book Official, 
with the approval of two Floor Officials, would be permitted to deviate 
from a rotation policy or procedure previously established by the 
appropriate Floor Procedures Committee. In certain circumstances, it 
may be appropriate to deviate from the established procedure, but, as 
stated above, it would be impractical to assemble the Floor Procedures 
Committee for an intra-day decision allowing such a deviation. Instead 
of assembling the entire committee, two Floor Officials could act for 
the entire committee and approve or disapprove an Order Book Official's 
[[Page 9703]] proposed deviation from the previously established 
rotation policy or procedure. Presently, pursuant to Interpretation 
.01(b) to Rule 6.2, with the approval of two Floor Officials or the 
Floor Procedures Committee, the opening rotation may be conducted in a 
manner other than that set forth in Interpretation .01(b). Therefore, 
the proposed amendment would extend this existing policy to all 
rotations. The proposal would further amend Rule 6.2 so that the Order 
Book Official, rather than the committee, may prescribe that two or 
more trading rotations be employed simultaneously. CBOE believes that 
it would be impractical to assemble the Floor Procedures Committee for 
an intra-day decision regarding simultaneous trading rotations.
    The proposal would further add Interpretation .04 to Rule 6.2 to 
specify that the decision to conduct an abbreviated rotation is one of 
the deviations from rotation policy or procedure and one of the 
modifications of rotation order and manner that is permitted under the 
amended rule. This change provides only an example of a type of 
rotation modifications or deviations that may be employed.
    The proposal would further amend Rule 6.2 to give two Floor 
Officials the discretion to delay commencement of the opening rotation 
in any class of options in the interests of a fair and orderly market. 
It is CBOE's practice to allow Floor Officials to delay an opening, but 
no rule explicitly states this practice. CBOE believes that the rules 
should grant Floor Officials the power to react to market conditions 
and circumstances by delaying an opening rotation when it is in the 
interests of a fair and orderly market to do so, for the same reasons 
that the rules need to grant Floor Officials authority to modify the 
rotation order or manner. As explained above, pursuant to 
Interpretation .01(b) to Rule 6.2, two Floor Officials now have the 
authority to conduct the rotation in a manner other than that set forth 
in the Rule, but the Rule does not expressly state that the Floor 
Officials also may delay the opening rotation.
    Interpretation .02 to Rule 6.2 lists reasons why it is permissible 
to conduct a rotation after the end of normal trading hours. CBOE 
believes that the proposed amendment to Interpretation .02 would 
clarify both that the reasons listed are not the exclusive reasons why 
a trading rotation may be employed after the close and that two Floor 
Officials have the discretion to conduct a rotation after the close for 
a number of reasons. The proposed amendment also would permit the 
commencement of more than one trading rotation after 3:10 p.m. (central 
time), but would make it clear that, in general, no more than one 
trading rotation will be commenced after 3:10 p.m. (central time). 
Again, CBOE believes that it is in the interests of a fair and orderly 
market to allow two Floor Officials to exercise their judgment in 
response to market conditions or circumstances and that not all of 
these conditions or circumstances can be enumerated in advance. 
Nonetheless, the proposal would amend Interpretation .02 to state the 
current practice of employing a trading rotation after the end of 
normal trading hours if it is in connection with a year-end rotation or 
due to the restart of a rotation which is already in progress. In these 
circumstances, CBOE believes it may be necessary to continue the 
rotation after the normal close of trading in order to complete the 
rotation.
Index Options Trading Rotations
    Presently, Interpretation .03 to Rule 6.2 provides that ``a closing 
rotation for an expiring series of index options shall not be 
employed.'' (Emphasis added). This limitation is not in Interpretation 
.02 to Rule 6.2 as it is presently written or in the proposed amendment 
to Interpretation .02. Although closing rotations are not ordinarily 
employed in expiring series of index options, CBOE believes it is 
inappropriate to absolutely prohibit closing rotations for such series. 
CBOE believes the use of the word ``shall'' could be interpreted to 
prohibit closing rotations for expiring series of index options in all 
circumstances. CBOE, therefore, proposes to amend the interpretation to 
state that a closing rotation for such expiring series is not 
ordinarily employed. CBOE believes the proposed amendment to 
Interpretation .03 is necessary to clarify that, unlike the case with 
equity options, closing rotations are not ordinarily conducted in 
expiring series of index options, but that such closing rotations are 
not absolutely prohibited.\1\ In addition, Interpretation .03 to rule 
6.2 would be amended to give two Floor Officials the ability to deviate 
from the procedures for closing rotations if they determine such 
deviation is in the interests of a fair and orderly market. Again, CBOE 
believes that it is in the interests of a fair and orderly market to 
allow two Floor Officials to exercise their judgment in response to 
market conditions or circumstances.

    \1\CBOE believes that a system malfunction or a major 
announcement in the markets late in the trading days, among other 
things, may require a closing rotation for expiring series of index 
options in order to accommodate any order flow problems resulting 
from such occurrences. Telephone conversation between Edward Joyce, 
CBOE, Michael Meyer, Attorney, Schiff, Hardin, and Waite, Michael 
Walinskas, Branch Chief, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Division''), Commission, and John 
Ayanian, Attorney, OMS, Division, Commission, on Monday, February 
13, 1995.
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    Consistent with the above changes to Rule 6.2 regarding the order 
and manner of the rotation, the proposal would amend Rule 24.13 to give 
the Order Book Official the same discretion to determine the 
appropriate order and manner for conducting the rotation for index 
options when the appropriate Floor Procedures Committees not acted to 
establish a policy applicable to a particular situation. Just as in 
amended Rule 6.2, the Floor Procedures Committee that make policy for 
index options would have the authority to set policy regarding the 
order and manner of the opening rotation. However, if a Floor 
Procedures Committee has not acted to establish a policy applicable to 
a particular situation, then the Order Book Official would be permitted 
to determine the appropriate order and manner for conducting the 
opening rotation.
    Consistent with the underlying reasoning for amended Rule 6.2, Rule 
24.13 would also be amended by deleting the two sentences that provide 
that the Order Book Official shall open the nearest expiration series 
first and thereafter shall open the remaining series in a manner he 
deems appropriate. CBOE believes that the word ``shall'' could be 
interpreted as requiring the Order Book Official to open with the 
nearest expiration series even if a different order would be 
appropriate under the circumstances.
    Again, just as amended Rule 6.2 provides, the proposal would 
further amend Rule 24.13 so that Order Book Officials could deviate 
from the appropriate Floor Procedures Committee's established procedure 
regarding the order and manner of the opening rotation so long as two 
Floor Officials approved such deviation. CBOE believes that it would be 
impractical to assemble a Floor Procedures Committee for an intra-day 
decision allowing a deviation from establish opening rotation policy or 
procedure. CBOE proposes to allow two Floor Officials to act for the 
entire committee and approve or disapprove of such deviation.
    Presently, under Interpretation .03 to Rule 24.13, two Floor 
Officials may delay the commencement of the opening rotation in an 
index option for one or more five (5) minute intervals under certain 
specified unusual market conditions. The proposal would amend 
[[Page 9704]] Interpretation .03 to Rule 24.13 to delete the 
requirement that any delays in the opening rotation must be in five (5) 
minute intervals and to give two Floor Officials greater discretion to 
delay the commencement of the opening rotation. Rather than limiting 
the circumstances under which two Floor Officials may delay the 
opening, amended Interpretation .03 would permit Floor Officials to 
delay the opening rotation at their discretion in the interests of a 
fair and orderly market. The circumstances outlined in current 
Interpretation .03 to Rule 24.13, under which two Floor Officials may 
delay the opening, would remain as factors that Floor Officials may 
consider in deciding whether to delay the opening rotation. CBOE 
believes that these amendments to Interpretation .03 are consistent 
with the amendment proposed for Rule 6.2, which grants two Floor 
Officials the authority to delay the opening rotation in any class of 
options in the interests of a fair and orderly market. Current 
Interpretation .01 to Rule 24.13 provides that the procedures for 
modification of a rotation and other aspects of the rotation set forth 
in Rule 6.2 are applicable to index options. CBOE believes that the 
authority regarding delays in opening contained in Rule 6.2 should 
therefore apply to index options, so that Floor Officials' discretion 
to delay the opening is not more restricted in the case of index 
options.
    The present requirement that the delay in the opening rotation for 
index options may only be in five (5) minute intervals would be deleted 
because CBOE believes the interests of a fair and orderly market are 
better served if the Floor Officials may end the delay and commence the 
opening when it is appropriate to do so, without having to wait until 
the prescribed five minutes has lapsed. In addition, CBOE believes that 
for lengthy delays, it is impractical to require two Floor Officials to 
remain at the index options post for the sole purpose of declaring 
successive five minute delays.
Conclusion
    The proposed rule changes are intended to give Order Book 
Officials, with the approval of two Floor Officials, the discretion to 
conduct a trading rotation during the day and to structure the order 
and manner of the rotation as they consider appropriate under the 
circumstances. The rule changes would further allow any two Floor 
Officials to delay the opening rotation if it is in the interests of a 
fair and orderly market to do so. CBOE believes that the proposed rule 
changes are consistent with and further the objectives of section 
6(b)(5) of the Act, in that the rule changes are designed to perfect 
the mechanism of free and open market and to protect investors and the 
public interest by enabling Floor Officials and Order Book Officials to 
evaluate and consider market conditions and circumstances in 
determining the appropriate order and manner of the rotation and 
whether to delay the opening rotation.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule changes will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Changes Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule changes.

III. Date of Effectiveness of the Proposed Rule Changes 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 funding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule changes, or
    (B) institute proceedings to determine whether the proposed rule 
changes 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 changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of CBOE. All 
submissions should refer to the file number SR-CBOE-95-04 and should be 
submitted by March 14, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\

    \2\17 CFR 200.30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4161 Filed 2-17-95; 8:45 am]
BILLING CODE 8010-01-M