[Federal Register Volume 60, Number 158 (Wednesday, August 16, 1995)]
[Notices]
[Pages 42636-42637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20207]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36082; File No. SR-CBOE-95-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Chicago 
Board Options Exchange, Incorporated, Related by Multi-Market Orders

August 10, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 1, 1995, the Chicago Board Options Exchange, Incorporated 
(``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 
Exchange. On June 22, 1995, the Exchange filed Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice of solicit 
comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange proposes to amend 
subparagraph (b)(ii) of CBOE Rule 6.48 to clarify that the market 
conditions that prevent the execution of the non-option leg(s) at 
the agreed upon price(s) would be the only basis for any one party 
to a trade representing the options leg of a multi-market order to 
cancel a trade. See Letter from Michael Meyer, Attorney, Schiff 
Hardin & Waite, to John Ayanian, Attorney, Office of Market 
Supervision, Division of Market Regulation, Commission, dated June 
22, 1995 (``Amendment No. 1'').
    The types of ``market conditions'' arising in a non-CBOE market 
that would be sufficient under proposed Rule 6.48(b)(ii) to justify 
cancellation of the CBOE leg(s) of a multi-market order, include, 
but are not limited to, a sudden change in the price of the 
underlying securities prior to execution of the stock trade, and a 
trading halt or systems failure that precludes immediate execution 
of the stock trade at the agreed upon price. See Letter from Dan 
Schneider, Attorney, Schiff Hardin & Waite, to John Ayanian, 
Attorney, OMS, Market Regulation, Commission, dated June 30, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.48 to specify certain duties 
of CBOE members in effecting an option transaction on the CBOE that is 
part of a combined stock-option order. The text of the proposed rule 
change is available at the Office of the Secretary, the Exchange, 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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 set forth in existing 
CBOE Rule 6.48 the duties of CBOE members executing an options order 
that is a component of a ``package'' stock-option order, the execution 
of which involves transactions in CBOE's option market and in another 
market (a ``multi-market'' order), and to specify the sole basis on 
which an options trade that is a component of a multi-market order may 
be cancelled by the members that are parties thereto. The proposed rule 
change would also make it inconsistent with just and equitable 
principles of trade, and consequently a violation of Exchange Rule 4.1, 
for a member to fail to fulfill the new requirements.
    CBOE Rule 6.48 currently provides that bids or offers made and 
accepted in accordance with Exchange rules constitute binding 
contracts, but the Rule does not address the execution and cancellation 
of complex multi-market orders. Because such orders have become more 
prevalent at the CBOE as trading strategies have become more intricate, 
and because such orders involve concurrent executions at the CBOE and 
in markets other than the CBOE, the Exchange proposes to adopt new 
paragraph (b) to Rule 6.48. The Exchange believes that this amendment 
should establish well-defined conditions and requirements in its Rules 
that members must observe in executing and cancelling such 
transactions.
    Proposed CBOE Rule 6.48(b) would apply to stock-option combination 
orders,\4\ other than orders respecting index options,\5\ and would 
impose two requirements on CBOE members who are parties to a stock-
option combination order. First, a member announcing such an order to a 
trading crowd must disclose all legs of the order and must identify the 
specific markets and prices at which the non-option leg(s) are to be 
filled. Second, concurrent with the execution of the option leg of any 
multi-market order, the initiating member and each member that is a 
counterpart to the trade must take steps immediately to execute the 
non-option leg(s) in the identified market(s). Because both of these 
requirements are essential to fair and efficient order execution, 
proposed new paragraph (c) of Rule 6.48 would provide that any failure 
to observe either requirement will constitute a violation of CBOE's 
Rule 4.1, which prohibits conduct inconsistent with just and equitable 
principles of trade. The Exchange believes that these new provisions 
will clarify members' expectations about the execution of multi-market 
orders covered by the proposed rule and will promote prompt execution 
of each non-option component of such orders.

    \4\ A stock-option order is an order to buy or sell a stated 
number of units of an underlying or a related security coupled with 
either (a) the purchase or sale of option contract(s) of the same 
series on the opposite side of the market representing the same 
number of units of the underlying or related security or (b) the 
purchase and sale of an equal number of put and call option 
contracts, each having the same exercise price, expiration date and 
number of units of the underlying or related security, on the 
opposite side of the market representing in aggregate twice the 
number of units of the underlying or related security. See CBOE Rule 
1.1(ii).
    \5\ The CBOE believes that paragraph (iii) of proposed Rule 
6.48(b) makes it clear that the proposed rule change will not apply 
to bids or offers included in combination orders that entail the 
purchase or sale of index options.
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    In addition to establishing requirements incident to execution, the 
proposed rule change sets forth one exclusive basis on which members 
may cancel an executed option transaction that is part of a multi-
market order. Proposed Rule 6.48(b)(ii) indicates that 

[[Page 42637]]
any member that is a party to an options transaction that is part of a 
multi-market order may have the options transaction cancelled only in 
the event that market conditions in any of the identified non-CBOE 
markets prevent the execution of one or more of the non-option legs of 
the order. The Exchange believes that cancellation under this exclusive 
circumstance is fair and appropriate.
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that it is designed to deal with 
special circumstances of multi-market orders in a manner that promotes 
just and equitable principles of trade and the protection of investors 
and the public interest.

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

    The Exchange 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 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, 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to SR-CBO-95-16 and should be submitted by 
September 6, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20207 Filed 8-15-95; 8:45 am]
BILLING CODE 8010-01-M