[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Notices]
[Pages 67002-67003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31310]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36609; File No. SR-CBOE-95-68]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to an 
Expansion of the Firm Facilitation Exemption to All Non-Multiple-Listed 
Exchange Option Classes

December 20, 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 November 16, 1995, the Chicago Board Options Exchange, Inc. 
(``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 CBOE. 
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).
    \2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE, pursuant to Rule 19b-4 of the Act, proposes to expand the 
firm facilitation exemption for position and exercise limits that is 
currently available for the Standard & Poor's (``S&P'') 500 Index 
(``SPX'') options and for interest rate options to all non-multiple-
listed Exchange option classes. The text of the proposed rule change is 
available at the Office of the Secretary, the CBOE, and 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 CBOE included statements 
concerning the purpose of the 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. The CBOE has prepared summaries, set forth in Sections 
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 CBOE has previously established firm facilitation \3\ 
exemptions for certain option classes, such as for SPX index options 
(Rule 24.4.03),\4\ and for interest rate options (Rule 23.3(c)).\5\ 
Exchange member firms have expressed to the CBOE's Department of Market 
Regulation their belief that the current firm facilitation exemptions, 
which allow member firms to meet the investing needs of their 
customers, should be expanded floor-wide. The CBOE has also noted 
situations in which a member firm was willing to accommodate a large 
customer order \6\ that could not be filled by the trading crowd, but 
was prevented from facilitating the order because of a position limit 
constraint. In light of the above, the CBOE proposes that the firm 
facilitation exemption be made available in all option classes that are 
exclusively listed on the CBOE.\7\

    \3\ According to the CBOE, a facilitation trade is a transaction 
that involves crossing an order of a member firm's public customer 
with an order from the member firm's proprietary account.
    \4\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (approval order for File No. SR-
CBOE-92-09).
    \5\ See Securities Exchange Act Release No. 33106 (October 26, 
1993), 58 FR 58358 (November 1, 1993) (approval order for File No. 
SR-CBOE-93-21).
    \6\ The CBOE notes that the SPX facilitation exemption defines a 
customer order as one that is entered, cleared, and in which the 
resulting position is carried with the firm.
    \7\ The CBOE's general exercise limit provisions (Rule 4.12) 
also will be amended to increase exercise limits to the levels 
permitted by the firm facilitation exemption. Several other non-
substantive, editorial changes to the position and exercise limit 
rules, interpretations, and policies will be made as well.
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    The CBOE proposes to expand the firm facilitation exemption by 
incorporating it as new Interpretation and Policy .06 to Rule 4.11, the 
general position limit rule which also sets specific limits for equity 
option classes.\8\ By including the firm facilitation exemption within 
Rule 4.11, the exemption would be available to equity, broad-based 
(sector) index, narrow-based (industry) index, Flexible Exchange 
(``FLEX''), interest rate, and government securities option classes to 
the extent and at the levels specified therein.\9\

    \8\ Through the rule proposal, the exemption provisions 
contained in Rule 24.4.03 (for SPX index options) and in Rule 
23.3(c) (for interest rate options) would be eliminated.
    \9\ The CBOE notes that the structuring of the rule proposal in 
this manner is important because the special position limits for 
broad-based index options (Rule 24.4), for narrow-based index 
options (Rule 24.4A), for FLEX Options (Rule 24A.7), for interest 
rate options (Rule 23.3), and for government securities options 
(Rule 21.3) each mandate compliance with Rule 4.11.

[[Page 67003]]

    As is the case with the SPX and interest rate firm facilitation 
exemptions, Exchange Rule 6.74(b) procedures for crossing a customer 
order with a firm facilitation order must be followed. In this regard, 
before a customer order can be crossed with a firm facilitation order, 
the trading crowd must be given reasonable opportunity to participate. 
Moreover, only after it has been determined that the trading crowd will 
not fill the order, may the firm's customer order be crossed with the 
firm's facilitation order.
    In addition, except for the existing SPX and interest rate firm 
facilitation exemptions which are set at higher levels, the expanded 
firm facilitation exemption will be twice the standard limit.\10\

    \10\ The CBOE notes that this filing does not propose to change 
the existing SPX and interest rate firm facilitation exemptions.
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    The CBOE notes that the firm facilitation exemption will be in 
addition to and separate from the standard limit, as well as other 
exemptions available under Exchange position limit rules. For example, 
if a firm desires to facilitate a customer order in the XYZ option 
class, which is assumed to be a class of options traded exclusively on 
the Exchange with a 25,000 contract standard position limit, the firm 
may qualify for a firm facilitation exemption of up to twice the 
standard limit (50,000 contracts), as well as an equity hedge exemption 
of up to twice the standard limit (50,000 contracts), in addition to 
the 25,000 contract standard limit. If both exemptions are allowed, the 
facilitation firm may hold or control a combined position of up to 
125,000 XYZ contracts on the same side of the market.\11\

    \11\ 50,000 facilitation+50,000 hedge+25,000 standard=125,000 
contracts
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    The CBOE notes, however, that the firm facilitation exemption will 
not extend to all option classes listed on the Exchange. Rather, until 
coordinated intermarket procedures are developed, the exemption will be 
extended only to non-multiply-listed option classes.\12\

    \12\ The CBOE notes, however, that the Intermarket Surveillance 
Group (``ISG'') is currently working on developing such procedures.
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    The CBOE also proposes a new provision with respect to the 
requirement that the ``facilitation firm'' hedge the exempted position 
within five business days. The new provision would allow the 
facilitation firm to be granted an exemption from this requirement when 
opposite side of the market contracts are used to hedge the original 
facilitated customer order. In this regard, the Department of Market 
Regulation's staff would be responsible for granting the exemption for 
the hedge, and the facilitation firm would be required to submit 
documentation to the regulatory staff as to how the position was 
hedged.
    Lastly, to aid in understanding the scope of the firm facilitation 
exemption, Interpretation .06 will include both a table and an example 
showing how the exemption will be applied.
    The Exchange believes that expanding the firm facilitation 
exemption will contribute to the depth and liquidity of the market by 
allowing those member firms who are willing to commit firm capital the 
ability to facilitate large customer orders in a wide range of option 
classes. In approving the firm facilitation exemptions for SPX and 
interest rate options, the Commission expressed its opinion that 
providing member organizations with exemptions for the purpose of 
facilitating large customer orders would better serve the needs of the 
investing public by distributing the risks of large customer 
transactions to several market participants. At that time, the 
Commission also noted that safeguards were built into the exemption to 
minimize any potential disruption or manipulation concerns. The CBOE 
believes that these same benefits and assurances are also applicable 
with respect to the new firm facilitation exemption.
    Because the expanded firm facilitation exemption will enhance the 
depth and liquidity of the market for both members and investors, the 
Exchange believes that the rule proposal is consistent with and 
furthers the objectives of Section 6(b)(5) of the Act in that it would 
remove impediments to and perfect the mechanism of a free and open 
market in a manner consistent with the protection of investors and the 
public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any inappropriate 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 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 CBOE consents, the Commission will:
    A. By order approve the 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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW, 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-95-68 and should be 
submitted by January 17, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31310 Filed 12-26-95; 8:45 am]
BILLING CODE 8010-01-M