[Federal Register Volume 60, Number 242 (Monday, December 18, 1995)]
[Notices]
[Pages 65074-65076]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30661]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36568; Filed No. SR-CBOE-95-62]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Regarding Book-
Entry Settlement of Securities Transactions and Depository Eligibility 
Requirements

December 8, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 19, 1995, the 
Chicago Board Options Exchange, Incorporated (``CBOE'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change described in Items I, II, and III below, which items have been 
prepared primarily by CBOE. On October 26, 1995, CBOE filed an 
amendment to the proposed rule change.\2\ The Commission is publishing 
this notice to solicit comments on the 

[[Page 65075]]
proposed rule change from interested persons.

    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\CBOE amended its proposal to correct a typographical error in 
the filing. Letter from Michael L. Meyer, Schiff, Hardin & Waite, to 
Mark Steffensen, Division of Market Regulation (``Division''), 
Commission (October 26, 1995).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to adopt new Rules 30.136 and 30.137 in order to 
conform its rules to those of other self-regulatory organizations 
regarding book-entry settlement of transactions in depository eligible 
securities and regarding the establishment of depository eligibility 
requirements for issuers that apply to list securities on CBOE.

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

    In its filing with the Commission, CBOE 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. CBOE has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\3\

    \3\The Commission has modified the text of the summaries 
provided by CBOE.
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    The purpose of the proposed rule change is to encourage book-entry 
settlement of securities transactions by adding two new rules to 
Chapter XXX of the CBOE rules.\4\ Both of the proposed new rules are 
substantially the same as rules previously adopted by six other 
national securities exchanges and the National Association of 
Securities Dealers (``NASD'') in response to recommendations of the 
Group of Thirty, U.S. Working Committee (``U.S. Working Committee''), 
Clearance and Settlement Project (``Project''), regarding book-entry 
settlement of securities transactions.\5\ In connection with the 
Project, several years ago the U.S. Working Committee recommended that 
settlements and other movements of corporate and municipal securities 
for transactions among financial intermediaries (brokers, dealers, and 
banks) and between financial intermediaries and their institutional 
clients be effected only by book-entry movements within a depository. 
Thereafter, six national securities exchanges and the NASD adopted 
uniform rules in conformity with the U.S. Working Committee's 
recommendation.\6\

    \4\The rules in Chapter XXX govern the listing and trading of 
debt and equity securities, warrants, UIT interests, and such other 
securities as may be determined by CBOE's Board of Directors. 
Chapter XXX does not apply to the trading of option contracts.
    \5\The Group of Thirty is an independent, nonpartisan, nonprofit 
organization established in 1978. In its March 1989 report, the 
Group of Thirty made nine recommendations for harmonizing clearance 
and settlement practices worldwide. The U.S. Working Committee, 
comprised of representatives from brokerage firms, banks, other 
financial intermediaries, and major industry organizations was 
formed to study the existing U.S. clearance and settlement system 
and to recommend reforms consistent with the Group of Thirty 
recommendations. After reviewing the nine Group of Thirty 
recommendations, the U.S. Working Committee concluded that at that 
time the U.S. substantially complied with all but two of those 
recommendations, T+3 settlement and same-day funds settlement. In 
order to achieve T+3 settlement, the U.S. Working Committee 
recommended requiring book-entry settlement between financial 
intermediaries and between financial intermediaries and their 
institutional clients and depository eligibility for all new 
issuances. U.S. Working Committee, Implementing the Group of Thirty 
Recommendations in the United States (November 1990). The U.S. 
Working Committee's recommendations were supported strongly by the 
report of the Bachmann Task Force. Bachmann Task Force on Clearance 
and Settlement Reform in U.S. Securities Markets, Report Submitted 
to the Chairman of the Securities and Exchange Commission (May 
1992).
    \6\Securities Exchange Act Release No. 32455 (June 11, 1993), 58 
FR 33679 (order approving proposed rule change of the American Stock 
Exchange (``Amex''), Boston Stock Exchange (``BSE''), Midwest Stock 
Exchange (now the Chicago Stock Exchange) (``CHX''), New York Stock 
Exchange (``NYSE''), Pacific Stock Exchange (``PSE''), Philadelphia 
Stock Exchange (``PHLX''), and NASD regarding the book-entry 
settlement of securities transactions).
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    Because CBOE did not then provide a market in depository-eligible 
securities, it did not adopt the uniform rule. It now is proposing the 
adoption of Rule 30.136, which would implement such a book-entry 
settlement requirement for securities listed on CBOE. The addition of 
Rule 30.136 will conform the rules of CBOE to those of other U.S. self-
regulatory organizations, which rules are designed to ensure that the 
vast majority of securities transactions effected in the U.S. markets 
will be settled by book-entry.
    Subject to certain exceptions set forth in the text of the rule and 
described below, Rule 30.136 will require the use of the facilities of 
a registered securities depository for the book-entry settlement of all 
transactions in depository eligible securities between a member firm 
and a financial intermediary or a member of a national securities 
exchange or a registered securities association. The rule also will 
apply to transactions in depository eligible securities between member 
firms and their clients if settlement is to be effected on a delivery-
versus-payment (``DVP'') or receipt-versus-payment (``RVP'') basis. As 
is the case under comparable rules adopted by other self-regulatory 
organizations, Rule 30.136 will not apply to or affect the manner in 
which member firms settle transactions with traditional retail 
customers,\7\ the settlement of transactions in securities that are not 
depository eligible,\8\ or transactions in which settlement occurs 
outside the U.S. Rule 30.136 also will not apply to transactions where 
the securities to be delivered in settlement of a transaction are not 
on deposit at a securities depository and (1) the transaction is for 
same-day settlement and the deliverer cannot by reasonable efforts 
deposit the securities prior to a depository's cut-off time for same-
day crediting of deposited securities or (2) the deliverer cannot by 
reasonable efforts deposit the securities prior to a cut-off date time 
established for that issue of securities by the depository. The latter 
exception is intended to address corporate reorganizations and other 
extraordinary activities.

    \7\Because retail customers do not settle their trades on a DVP/
RVP basis, the rule will not alter their current method of 
settlement.
    \8\Under proposed Rule 30.136(d), depository eligible securities 
means securities that (i) are part of an issue (as identified by a 
single CUSIP number) of securities that is eligible for deposit at a 
securities depository and (ii) with respect to a particular 
transaction are eligible for book-entry transfer at the depository 
at the time of settlement of the transaction.
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    The second rule being proposed by CBOE, Rule 30.137, also reflects 
a response to a directive from the Group of Thirty to address the need 
to raise clearing and settlement standards. The rule is substantially 
identical to a uniform depository eligibility rule that was developed 
through the coordinated effort of six national securities exchanges and 
the NASD and that has been incorporated into the rules of those self-
regulatory organizations.\9\

    \9\Securities Exchange Act Release No. 35798 (June 1, 1995), 60 
FR 30909 (order approving proposed rule change of Amex, BSE, CHX, 
NYSE, PSE, PHLX, and NASD regarding uniform depository eligibility 
rules).
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    Rule 30.137 will require that before a domestic issuer's issue of 
securities is listed that the issuer represent to CBOE that the CUSIP 
number identifying the issue has been included in the file of eligible 
issues maintained by a registered securities depository. This 
requirement will not apply to a security if the terms of such security 
cannot be reasonably modified to meet the criteria for depository 
eligibility at all registered securities depositories. In addition, the 
rule will not apply to American Depository Receipts for securities of a 
foreign issuer.
    Rule 30.137 also sets forth additional requirements that must be 
met before a security will be deemed to be ``depository eligible'' 
within the meaning of the rule. The rule specifies different 
requirements for depository 

[[Page 65076]]
eligibility depending upon whether a new issue is distributed by an 
underwriting syndicate before or after the date a securities depository 
system is available for monitoring repurchases of the distributed 
shares by syndicate members (i.e., a ``flipping tracking system'').
    Currently, a flipping tracking system is being developed that will 
include a securities depository service that (i) can be activated upon 
the request of the managing underwriter for a period of time that the 
managing underwriter specifies, (ii) in certain circumstances will 
require the delivering participant to provide to the depository 
information sufficient to identify the seller of such shares as a 
precondition to the processing of book-entry delivery instructions for 
distributed shares, and (iii) will report to the managing underwriter 
the identify of any other syndicate member or selling group member 
whose customer(s) sold distributed shares (but will not report to the 
managing underwriter the identity of such customer[s]) and in certain 
circumstances will report to such syndicate member or selling group 
member the identity of such customer(s). Prior to the availability of a 
flipping tracking system, the managing underwriter may delay the date a 
security is deemed ``depository eligible'' for up to three months after 
trading has commenced in the security. After the availability of a 
flipping tracking system, a new issue must be depository eligible 
before commencement of trading on CBOE.
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that by reducing the number of transactions in depository 
eligible securities for which settlement is effected by the delivery of 
physical securities, by requiring that transactions between member 
firms and transactions between member firms and clients that settle on 
a DVP or RVP basis generally occur in a book-entry environment, and by 
requiring securities listed in CBOE be depository eligible, the 
efficiency of the U.S. clearance and settlement system will be enhanced 
and the potential for systemic risk will be reduced. Furthermore, the 
proposal is designed to foster cooperation and coordination with 
persons engaged in regulatory, clearing, settling, and facilitating 
transactions in securities and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system.

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

    The 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 thirty-five 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 ninety 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 CBOE 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 CBOE. All submissions 
should refer to File No. SR-CBOE-95-62 and should be submitted by 
January 8, 1996.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\10\

    \10\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30661 Filed 12-15-95; 8:45 am]
BILLING CODE 8010-01-M