[Federal Register Volume 60, Number 185 (Monday, September 25, 1995)]
[Notices]
[Pages 49430-49433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23717]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36241; File No. SR-CBOE-95-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Relating to 
the Transfer of Positions on the Floor of the Exchange in Cases of 
Dissolution and Other Situations

September 15, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 13, 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. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt a new rule, CBOE Rule 6.49A, which 
would establish a special procedure to permit option positions to be 
offered on the floor of the Exchange in the event that the positions 
are being transferred as part of a sale or disposition of all or 
substantially all of the assets or options positions of the 
transferring party (``Transferor'') where the Transferor would not 
continue to be involved in managing or owning the transferred 
positions. The rule change also provides for off-floor transfers of 
positions based on certain specified exemptions, as well as with the 
approval of the Exchange's President under extraordinary circumstances. 
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

Purpose
    The Exchange has a long-standing policy of prohibiting transfers of 
option positions between accounts, individuals, or entities where a 
change in beneficial ownership would result. The Exchange, however, has 
made exceptions to this general policy under certain limited 
circumstances. The proposed rule change will formalize the Exchange's 
policies with respect to transfers of options positions and provide a 
practical mechanism whereby floor exposure of such positions is 
facilitated.
    The proposed rule change will require options positions, subject to 
the limits and exemptions described below, to be offered on the trading 
floor of the Exchange (or of another exchange which trades the 
options). In addition, in certain situations, such as acquisitions or 
dissolutions of a Transferor's business, the proposed rule will provide 
for a mechanism to facilitate the transfers. The purpose of this 
proposal is to establish a procedure that ensures that members of the 
Exchange have the opportunity to make bids and offers on 

[[Page 49431]]
positions that are being transferred under these certain situations, 
and, alternatively, to provide for off-floor transfers of positions 
under limited circumstances.
    The proposed rule will serve to expose the maximum number of 
positions to the auction market. The Exchange believes that exposing 
these positions to the auction market, in turn, benefits the public by 
increasing the liquidity and transparency of the market in the listed 
option positions. The Exchange further states that market-makers are 
benefited by being given the opportunity to bid on the positions. In 
addition, the Exchange represents that the Transferor will not be 
disadvantaged because the proposed rule provides for exemptions for 
those special circumstances, such as a market crisis situation, where 
an off-floor transfer might result in a better price.
Description of the Proposal
    The situations in which option positions will be required to be 
offered on the Exchange's trading floor pursuant to the special 
procedure established by the proposed rule, or on another exchange 
which trades the products, will include the transfers of options 
positions in the case of the sale or disposition of all or 
substantially all of the assets or options positions of the Transferor 
where the Transferor would not be included in managing or owning the 
transferred positions. In situations in which the Transferor continues 
to maintain some ownership interest or manage the positions 
transferred, the Transferor generally will not be required to offer the 
positions on the trading floor but could effect an off-floor transfer 
of these positions. Situations in which members will be permitted to 
effect off-floor transfers under the proposed rule include: (i) The 
dissolution of a joint account in which the remaining member assumes 
the positions of the joint account, (ii) the dissolution of a 
corporation or partnership in which a former nominee of the corporation 
or partnership (i.e., a shareholder or partner, respectively) assumes 
the positions, (iii) the transfer of positions as part of a member's 
capital contribution to a new joint account, partnership, or 
corporation, (iv) the donation of positions to a not-for-profit 
corporation, (v) the transfer of positions to a minor under the 
``Uniform Gifts to Minor'' law, and (vi) a merger or acquisition where 
continuity of ownership or management results. Off-floor transfers 
could also be done in other situations with the approval of the 
Exchange's President.
    The procedure established by the proposed rule may also be used by 
market-makers who, for reasons other than a forced liquidation, such as 
an extended vacation, wish to liquidate their entire, or nearly their 
entire, positions in a single set of transactions. As the procedure 
established by the proposed rule is not meant to replace the normal 
Exchange auction market, however, repeated and frequent use of the 
proposed rule by the same members will not be permitted.
    The proposed rule also will provide the Transferor with the ability 
to specify securities in his portfolio, the sale or purchase of which 
may be transacted on other markets. The price at which the options 
positions will be bought or sold will be contingent upon the price at 
which these specified companion securities are bought or sold on the 
other markets. The Exchange proposes to offer this flexibility to its 
members because the types of transactions subject to the proposed rule 
are often ones in which the Transferor is liquidating his entire 
business. As a result, the Exchange believes that the Transferor should 
generally be able to receive a more favorable bid or offer for his 
position if he is able to make the price of the options positions 
contingent upon the price at which other securities positions in his 
portfolio trade, because these other positions that he is liquidating 
may hedge or otherwise complement the options positions.
    Pursuant to the proposal, the Transferor will determine which 
securities to package with the various CBOE-traded positions of his 
portfolio. The Transferor may create any number of these Transfer 
Packages; \2\ provided, however, that an individual Transfer Package 
may not contain more than one option class. The Exchange believes that 
this limitation will ensure that smaller market-makers are able to 
compete against larger organizations in the bidding for the CBOE-traded 
positions, thus ensuring a broader participation by the Exchange 
membership. The proposed rule provides, however, that a member or 
member organization may make an aggregate bid or offer for any number 
of Transfer Packages offered by a single Transferor. In the event that 
the aggregate bid or offer is superior to the combination of the 
individual best bids or offers for the individual Transfer Packages, 
the Transferor will be allowed to accept that aggregate bid or offer 
for a combination of, or all of, the Transfer Packages. The Exchange 
believes that allowing the Transferor to accept aggregate bids or 
offers will ensure that the Transferor gets the best possible price for 
his positions.\3\

    \2\ The Exchange defines a ``Transfer Package'' as the set of 
options or other applicable financial products being offered by the 
Transferor as a package, to be bid upon at a net debit or credit for 
the entire package. A Transferor may offer multiple Transfer 
Packages on the floor at the same time or on the same day.
    \3\ Telephone conversation between Tim Thompson, Senior 
Attorney, Legal Department, CBOE, and Brad Ritter, Office of Market 
Supervision, Division of Market Regulation, Commission, on July 25, 
1995 (``July 25 Conversation'').
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Exemptions
    The Exchange recognizes that there may be circumstances where an 
off-floor transfer may be justified, such as emergency transfers of a 
firm's positions in bulk during a market crisis, such as the October 
1987 market break. In an extremely volatile market, the Transferor may 
be subject to undue risk if he were forced to subject his positions to 
the auction process established by the proposed rule because there may 
be some delay in agreeing to a price. In these circumstances, the 
Exchange's President may, at his own initiative or upon request from 
the Transferor, exempt the transfer from the proposed rule and permit 
an off-floor transfer to occur. Another basis for exempting the 
transfer from the proposed rule will be a showing by the Transferor to 
the President of the Exchange that compliance with the proposed rule 
would compromise the market value of the Transferor's business.
    There are a few other situations, for legal or other reasons, where 
the Exchange would not require the transfer to be completed on the 
Exchange floor, even in situations where the Transferor does not 
maintain ownership or management of the positions. For example, 
positions donated to a not-for-profit organization or positions donated 
to a minor under the ``Uniform Gifts to Minor'' law would not have to 
be brought to the Exchange floor pursuant to the proposed rule change.
Transfer Procedure
    The Transfer Packages offered by the Transferor will generally be 
offered at the Exchange's Flexible Exchange Options (``FLEX'') post at 
any time prior to 1:00 p.m., Chicago time,\4\ and will be 

[[Page 49432]]
subject to many of the procedures established for trading FLEX options. 
Under the proposed procedures, any Transfer Package consisting solely 
of positions in one option class that does not include stock or other 
securities will be offered by the Transferor at the post at which that 
options class is traded (``Post-Specific Transfer Packages''). 
Components of Post-Specific Transfer Packages should be individually 
priced and reported and will be subject to the Exchange's ordinary 
procedures for trading options. Any Transfer Package consisting of 
positions in an option class as well as other financial instruments 
must be offered at the FLEX post. In addition, notice must be given to 
the Order Book Official of each post (or the Designated Primary Market-
maker, as appropriate) where the option class component of the Transfer 
Package trades. Any firm submitting a Transfer Package will be required 
to designate a member of the exchange or a person associated with a 
member to represent the order on the floor of the Exchange. This 
designee must be available on the Exchange floor to answer questions 
regarding the Transfer Package during the entire Request Response Time 
(as defined below).

    \4\ Absent unusual circumstances, bids and offers on Transfer 
Packages are required to be received before 3:00 p.m., Chicago time, 
so that the CBOE portion of the trade can be completed before the 
close of trading. To the extent that the Transferor intends to trade 
any other instrument represented in the Transfer Package on a market 
that closes before the CBOE, the Transferor should offer the 
Transfer Package(s) in time to ensure the entire transaction can be 
completed by the end of the trading day.
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    Following the offer of the Transfer Packages, interested members of 
the Exchange will be given two hours to submit a bid for one or any 
combination of the Transfer Packages offered by the Transferor 
(``Response Request Time'').\5\ At the end of the Response Request 
Time, the Transferor will be allowed to accept the best bid or offer 
(``BBO'') for any individual Transfer Package, or for any combination 
of Transfer Packages if the bid or offer for the combination is 
superior to the aggregate of the individual bids or offers for the 
individual Transfer Packages.\6\ Acceptance of a BBO creates a binding 
contract under CBOE Rule 6.48, however, a Transferor is not obligated 
to accept a BBO. If the Transferor opts not to accept the BBO for the 
Transfer Packages, the Transferor may offer the positions in any 
Transfer Package the next day. Because the Exchange intends for this 
proposed procedure to be a transfer procedure and not a price discovery 
mechanism, the Transferor will need the permission of the President of 
the Exchange to offer the positions on the Exchange floor for any day 
subsequent to the second day.

    \5\ The two hour time could be shortened or lengthened with the 
approval of the President. Any Transfer Package offered after 1:00 
p.m., Chicago time, will need the prior approval of the President. 
The proposed rule will prevent the President from permitting offers 
to be brought after 2:30 p.m., Chicago time.
    \6\ For example, assume a situation where a Transferor offers 
four Transfer Packages. Further, assume that following the Request 
Response Time, the Transferor receives bids for three of the 
Transfer Packages and one aggregate bid for all four Transfer 
Packages. As long as the aggregate bid is greater than the sum of 
the best individual bids for the three Transfer Packages, the 
Transferor may accept the aggregate bid and transfer all four 
Transfer Packages. See July 25 Conversation, supra note 3.
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    Bids and offers will be made on a net debit or credit basis for 
entire Transfer Packages. In the event that a particular Transfer 
Package contains stock positions or other securities positions whose 
transfer must be transacted on another exchange pursuant to applicable 
law or regulation, then any accepted bid or offer will give rise to a 
contract for the CBOE-listed product, the price of which is contingent 
on the prices at which the other portions of the Transfer Package are 
transacted. The price at which the CBOE portion is transacted will be 
the price that is necessary to ensure that the entire Transfer Package 
is transferred at the agreed upon net debit or credit. All transactions 
that are required to be completed should be transacted by the end of 
the trading day on which the bid or offer is made and accepted. The 
proposed rule also will provide that the member submitting the accepted 
bid or offer may cancel the trade for the CBOE-listed product in the 
event that the parties are unable to complete the transaction for the 
non-CBOE-listed product due to a trading halt or some other operational 
problem outside the control of the submitting party.
    As for priority, equal bids for Transfer Packages will be split 
equally among the parties submitting the equal bids, to the extent 
possible, or will be split in such a manner as may be agreed upon by 
the submitting parties.
Statutory Basis
    The Exchange believes this proposal not only provides the 
Transferor with a procedure to obtain the best price for his positions, 
but it will also help to maintain liquidity and transparency on the 
floor for positions which may be transferred under the proposed rule. 
Consequently, the Exchange believes that the proposed rule change is 
consistent with Section 6 of the Act in general and with Section 
6(b)(5) in particular in that it is designed to promote just and 
equitable principles of trade, to foster cooperation with persons 
engaged in facilitating and clearing transactions in securities, and to 
protect 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, 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, 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-CBOE-95-36 and should be submitted by 
October 16, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23717 Filed 9-22-95; 8:45 am]
BILLING CODE 8010-01-M