[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