[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