[Federal Register Volume 60, Number 68 (Monday, April 10, 1995)]
[Notices]
[Pages 18159-18160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8665]



=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35558; File No. SR-CBOE-94-40]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change Relating to the Three 
Business Day Settlement of Securities Transactions

March 31, 1995.
    On November 7, 1994, the Chicago Board Options Exchange, 
Incorporated (``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ The 
proposed rule change will amend CBOE's rules to provide for three 
business day settlement of securities transactions. The Commission 
published notice of the proposed rule change in the Federal Register on 
December 29, 1994 to solicit comment from interested persons.\2\ No 
comments were received. This order approves the proposal.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 35137 (December 22, 
1994), 59 FR 67355.
---------------------------------------------------------------------------

I. Description

    On June 7, 1995, the standard settlement time frame for most 
securities transactions will be shortened from five business days after 
the trade date (``T+5'') to three business days after the trade date 
(``T+3'').\3\ The proposal amends certain provisions of CBOE's rules 
consistent with a T+3 settlement cycle. These amendments will become 
effective on the same date as Rule 15c6-1.\4\

    \3\On October 6, 1993, the Commission adopted Rule 15c6-1 under 
the Act, which establishes T+3 instead of T+5 as the standard 
settlement time frame for most broker-dealer transactions. 
Securities Exchange Act Release No. 33023 (October 6, 1993), 58 FR 
52891. The rule becomes effective June 7, 1995. Securities Exchange 
Act Release No. 34952 (November 9, 1994), 59 FR 59137.
    \4\The transition from five day settlement to three day 
settlement will occur over a four day period. Friday, June 2, will 
be the last trading day with five business day settlement. Monday, 
June 5, and Tuesday, June 6, will be trading days with four business 
day settlement. Wednesday, June 7, will be the first trading day 
with three business day settlement. As a result, trades from June 2 
and June 5 will settle on Friday, June 9. Trades from June 6 and 
June 7 will settle on Monday, June 12.
---------------------------------------------------------------------------

    The proposed rule change will amend Chapter XXX (Stocks, Warrants 
and Other Securities) and Chapter XXXI (Approval of Securities for 
Original Listing) to reflect a three business day settlement cycle. The 
settlement time frame for regular way transactions for stocks and 
warrants contained in Rules 30.12 (a)(3), 30.31(a), and 31.40 will be 
amended to refer to the three business day settlement standard. Rules 
30.12(a)(4) and 30.31(a)(iii) will be amended to provide that seller's 
option trades may not settle in less than four business days. Rule 
30.31(b), concerning bids and offers in rights to subscribe, will be 
amended to eliminate the reference to the fourth and fifth business day 
preceding the final day for subscription. Rule 30.34(b) and (c) will be 
amended to change references to the five final business days for 
trading in warrants and the fifth business day preceding the expiration 
of a class of warrants to the three final business days and the third 
business day. Rule 12.3(b)(1)(C)(1)(iv), concerning the margin 
requirements for a call option contract, also will be amended to refer 
to the third business day prior the date on which a right to exchange 
or convert expires.
    Rules 30.32(a), 31.22(f), and 31.42 contain provisions setting 
forth ex-rights or ex-dividend dates (i.e., the dates when stocks trade 
without rights or dividends). All references to transactions in stocks 
being ex-dividend or ex-rights on the fourth business day preceding the 
record date will be changed to the second business day preceding the 
record date. For transactions when the record date occurs on a day 
other than a business day, the stock will be traded ex-divided on ex-
rights on the third preceding business day rather than on the fifth 
preceding business day.
    Four rules dealing with customer margin requirements also will be 
amended. Consistent with Regulation T,\5\ Rules 21.25(a), 23.13(a), 
24.11(a), [[Page 18160]] and 30.51(a) currently require that initial 
margin deposits be made within seven full business days after the date 
on which a transaction giving rise to a margin requirement is effected. 
Rule 21.25(a) also requires that all long options must be paid in full 
within seven business days after the purchase date. Rule 21.25(e) 
provides that no margin is required in respect of government security 
options carried in a short position if the customer provides a 
custodial or Treasury security escrow receipt or letter of guarantee 
within seven business days. Regulation T was recently amended to revise 
the time limit within which a customer margin call must be satisfied to 
``the number of business days in the standard settlement cycle in the 
United States * * * plus two business days.''\6\ Accordingly, all the 
time frames discussed above will be shortened to five business days.

    \5\12 CFR 200.1-200.19 (1994), as amended, 59 FR 53565 (October 
25, 1994).
    \6\See Federal Reserve System Release, Docket No. R-0840 
(October 18, 1994), 59 FR 53565.
---------------------------------------------------------------------------

II. Discussion

    The Commission believes the proposed rule change is consistent with 
Section 6 of the Act and, therefore, is approving the proposal. 
Specifically, the Commission believes the proposal is consistent with 
Section 6(b)(5)\7\ of the Act which requires that the rules of an 
exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.

    \7\15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------

    Currently, the rules of CBOE and other self-regulatory 
organizations control the time frame for settlement of securities 
transactions. On June 7, 1995, the new settlement cycle of T+3 will be 
established, as mandated by the Commission's Rule 15c6-1. As a result, 
CBOE's current rules establishing a T+5 settlement cycle will be 
inconsistent with Commission rules. This proposal will amend CBOE's 
rules to harmonize them with a T+3 settlement cycle.
    The Commission believes that the benefits of a three day settlement 
cycle, as outlined in the release adopting Rule 15c6-1, apply equally 
to CBOE's proposed rule change.\8\ With a T+3 settlement cycle, fewer 
unsettled trades will be subject to credit and market risk, and there 
will be less time between trade execution and settlement for the value 
of those trades to deteriorate.\9\ By reducing risk to the system, the 
proposed rule change furthers protection of investors and the public 
interest. CBOE's rules will assist the transition to a T+3 cycle by 
providing guidelines for related matters such as ex-dates. Thus, the 
proposed rule change is consistent with fostering cooperation and 
coordination with persons engaged in regulating, clearing, and settling 
transactions in securities and of perfecting the mechanism of a free 
and open market.

    \8\See supra note 7.
    \9\The adopting release stated, ``the value of securities 
positions can change suddenly causing a market participant to 
default on unsettled positions. Because the markets are interwoven 
through common members, default at one clearing corporation or by a 
major market participant or end-user could trigger additional 
failures, resulting in risk to the national clearance and settlement 
system.'' Id.
---------------------------------------------------------------------------

III. Conclusion

    For the reasons stated above, the Commission finds that the 
proposed rule change is consistent with Section 6 of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-CBOE-94-40) be and hereby is 
approved, effective June 7, 1995.
    For the Commission by the Division of Market Regulation pursuant 
to delegated authority.\10\

    \10\17 CFR 200.30-3(a)(12) (1994).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8665 Filed 4-7-95; 8:45 am]
BILLING CODE 8010-01-M