[Federal Register Volume 61, Number 5 (Monday, January 8, 1996)]
[Notices]
[Pages 566-568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-179]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36647; File No. SR-CBOE-95-36]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving and Notice of Filing and Order Granting 
Accelerated Approval of Amendments No. 1 and 2 to a Proposed Rule 
Change Relating to the Transfer of Positions on the Floor of the 
Exchange in Cases of Dissolution and other Situations

December 28, 1995.

I. Introduction

    On July 13, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to adopt new CBOE Rule 6.49A, which would: 
(i) Identify certain transfers of options positions not subject to the 
requirements contained in CBOE Rule 6.49 that generally requires 
transactions of option contracts listed on the Exchange for a premium 
in excess of $1.00 to be effected on the floor of the Exchange or on 
another exchange; (ii) provide for the Exchange President to grant 
exemptions from the general Rule 6.49 on-floor requirement; and (iii) 
establish an optional procedure for transferring positions on the floor 
of the Exchange in cases of dissolution and other situations. The 
proposed rule change was published for comment and appeared in the 
Federal Register on September 25, 1995.\3\ On December 20, 1995, the 
CBOE filed Amendment No. 1 to its proposal,\4\ and on December 21, 
1995, the CBOE filed Amendment No. 2 to its proposal.\5\ No comments 
were received regarding the CBOE's proposal. This order approves the 
proposal.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 36241 (September 15, 
1995), 60 FR 49430.
    \4\ In Amendment No. 1, the CBOE modifies proposed CBOE Rule 
6.49A(a) to make clear the general proposition that all transactions 
in CBOE options must be brought to the floor, unless permitted to be 
done elsewhere by CBOE Rule 6.49, and the paragraph establishes an 
optional procedure for transferring certain of these positions. In 
addition, Proposed Interpretation .02 is moved into the text of the 
rule. Amendment No. 1 also modifies proposed CBOE Rule 6.49A(d), 
which would authorize the President of the CBOE to grant exemptions 
from the rule's requirement to bring positions to the floor, by 
making the guidelines under which the President is to evaluate the 
exemption request more straightforward and objective; and by making 
it clear that the exemption is from the requirement to bring the 
position to the floor and not an exemption from the procedure, since 
the use of the procedure set forth in proposed 6.49A(c) is an 
optional procedure. Letter from Timothy Thompson, CBOE, to Michael 
Walinskas, Branch Chief, Division of Market Regulation 
(``Division''), Commission, dated December 20, 1995.
    \5\ In Amendment No. 2, the CBOE seeks to clarify the 
relationship between Rule 6.49 and proposed Rule 6.49A. Rule 6.49(a) 
describes the types of transactions in CBOE options which are 
required to be transacted on the floor of the Exchange or on another 
exchange that trades such options. Amendment No. 2 eliminates 
similar language from proposed Rule 6.49A. Thus, the list of 
transactions described in proposed Rule 6.49A(a)(1) are exceptions 
to the general requirement set forth in Rule 6.49(a). Letter from 
Timothy Thompson, CBOE, to Michael Walinskas, Branch Chief, 
Division, Commission, dated December 21, 1995 (``Amendment No. 2'').
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II. Description of the Proposal

    The Exchange has a long-standing policy of prohibiting off-floor 
transfers of option positions between accounts, individuals, or 
entities where a change in beneficial ownership would result. The 
Exchange, however, previously has made exceptions to this general 
policy under certain limited circumstances, allowing otherwise 
prohibited transactions to be completed off the floor of the Exchange.
    The CBOE's proposal seeks to formalize the Exchange's policies in 
this area by adopting Rule 6.49A, which provides for the off-floor 
transfer of positions based on certain specified exemptions, or as 
approved by the Exchange's President when in the President's judgement 
the market value of the Transferor's business will be comprised by 
having to comply with this requirement or when market conditions make 
transfer on the floor impractical. 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.
    Because the Exchange recognizes that there may be other 
circumstances where an off-floor transfer may be justified, such as 
emergency transfers of a firm's positions in bulk during a market 
crisis, it also is proposing to allow the Exchange's President to grant 
an exemption from CBOE Rule 6.49(a) on his own motion or upon 
application of the Transferor. Such exemptions may be granted when in 
the President's judgement the market value of the Transferor's business 
will be compromised by having to comply with this requirement or market 
conditions make transfer on the floor impractical.
    In addition, proposed CBOE Rule 6.49A establishes a special 
procedure to permit options 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 Exchange member or member 
organization (``Transferor''). The purpose of this portion of the 
proposal is to establish a special on-floor procedure that ensures that 
the transferring member gets the best possible price for that member's 
positions and that other members of the Exchange have an adequate 
opportunity to make bids and offers on positions that are being 
transferred.
    The special on-floor procedure established by the proposed rule 
also may 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, open 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 member will not be 
permitted.
    Pursuant to the proposal, the special on-floor procedure provides 
that a Transferor may offer a set of options or other financial 
instruments as a package (``Transfer Package''), to be bid upon at a 
net debit or credit for the entire Transfer Package. A single Transfer 
Package may include no more than one class of option listed on the 
Exchange, but also may include stock or other securities. A Transferor 
may offer 

[[Page 567]]
multiple Transfer Packages on the floor at the same time or on the same 
day. Moreover, 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.\6\
    \6\ 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 Conservation'').
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    Any Transfer Package consisting of positions both in an option 
class and in other financial instruments must be offered at the 
Exchange's Flexible Exchange Options (``FLEX'') post, and will be 
subject to many of the procedures established for trading FLEX options.
    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 Specifer 
Transfer Packages should be individually priced and reported and will 
be subject to the Exchange's ordinary procedures for trading options.
    Any firm submitting a Transfer Package will be required to 
designater 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). In addition, notice must be given to the Order Book 
Official of each post (or the Designated Primary Market Maker, as 
appropriate) where a component of the Transfer Package trades.
    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'').\7\ 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.\8\ 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 chooses 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 its 
proposal to be a transfer procedure and not a price discovery 
mechanism, the Transferor will require the permission of the President 
of the Exchange to offer the positions on the Exchange floor for any 
day subsequent to the second day.
    \7\ 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 require 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.
    \8\ For example, if a Transferor offers four Transfer Packages, 
and following the Request Response Time, the Transferor receives 
bids for three of the Transfer Packages and one aggregate bid for 
all four Transfer Packages, then, if 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 6.
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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 positions whose transfer must 
be transacted on another exchange pursuant to applicable law or 
regulation (``Off Floor Portions''), then any accepted quote for the 
Transfer Package shall give rise to a contract for the option portion 
of the Transfer Package, the price of which is contingent on the price 
at which those other portions of the Transfer Package are transacted. 
The price at which the options position shall be transacted is the 
price that is required to have the entire Transfer Package trade at the 
agreed upon net debit or credit, taking into consideration the prices 
at which the Off Floor Portions have been transacted. All transactions 
that are required to be completed must be completed in time to allow 
the option portion to be transacted by the end of the trading day.
    In the event that a transaction in a non-CBOE listed component of 
the Transfer Package cannot be completed in a timely manner due to a 
trading halt, an operational problem outside the control of the 
parties, or the closing of the applicable market before the transaction 
can be completed, the trade for the option portion of the trade may be 
canceled at the election of any member that is a party to that trade.
    To the extent possible, equal bids for Transfer Packages will be 
split equally among the parties submitting the equal bids, or will be 
split in such a manner as may be agreed upon by the submitting parties.

III. Discussion

    The Commission finds the proposed rule change consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange. Specifically, the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act because the proposal is designed to promote just and 
equitable principles of trade, foster cooperation with persons engaged 
in facilitating and clearing transactions in securities, and protect 
investors and the public interest.
    The Commission believes that the CBOE's proposal clearly delineates 
the exceptions to CBOE Rule 6.49(a)'s general requirement that all CBOE 
members' transactions in CBOE options be effected on the floor of an 
exchange.\9\ In the Commission's opinion, it is appropriate for the 
CBOE to provide for transfers to occur off the floor of the Exchange in 
certain situations. Thus, the proposal envisions allowing off-floor 
transfers in several narrowly-defined situations where the transfer 
results in some degree of continuity in the ownership or management of 
the position or transfer is necessitated by certain legal or similar 
reasons, or where the President of the Exchange judges that the market 
value of the Transferor's business will be compromised, or judges that 
market conditions make the transfer process impractical.\10\ The 
Commission believes that it is reasonable and consistent with the Act 
to provide for off-floor transfers to be effected under these 
circumstances.

    \9\ See Amendment No. 2, supra note 5.
    \10\ See Amendment No. 1, supra note 4.
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    The Commission believes that the special on-floor procedures are 
designed to extend the benefits of an auction marketplace to the 
transactions outlined in Rule 6.49A(b)(1). More specifically, the 
special on-floor procedures proposed by the CBOE should expose the 
affected positions to the auction market, albeit in a somewhat 
different manner than governed by regular trading procedures.
    The Commission finds food cause for approving Amendments No. 1 and 
2 to the proposed rule change prior to the thirtieth day after the date 
of publication of notice thereof in the 

[[Page 568]]
Federal Register. The Commission believes that Amendments No. 1 and 2 
benefit the Exchange's proposal by clarifying the relationship between 
the proposed rule and existing Exchange Rule 6.49. The Amendments also 
revise the language concerning the exemptions from the general 
requirement of Rule 6.49(a) that transactions in CBOE options be 
effected on the floor of the CBOE or other exchange. The Commission 
believes that the amendments clarify the existing terms of the CBOE's 
proposal, rather than make any substantive changes. Based on the 
foregoing, the Commission believes it is consistent with Section 
6(b)(5) of the Act to approve Amendments No. 1 and 2 to the Exchange's 
proposal on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 1 and 2 to the proposed rule 
change. 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 the Exchange. All submissions should refer to File 
No. SR-CBOE-95-36 and should be submitted by January 29, 1996.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal, as amended, is consistent with the Act, and, in particular, 
Section 6 of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-CBOE-95-36), as 
amended, is approved.

    \11\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-179 Filed 1-5-96; 8:45 am]
BILLING CODE 8010-01-M