[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3741-3743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2057]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36778; File No. SR-CBOE-95-62]


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

January 26, 1996.
    On October 19, 1995, the Chicago Board Options Exchange, 
Incorporated (``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change (File No. SR-CBOE-
95-62) pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934 (``Act'').\1\ On October 26, 1995, CBOE filed an amendment to the 
proposed rule change.\2\ Notice of the proposed rule change was 
published in the Federal Register on December 18, 1995.\3\ No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Michael L. Meyer, Schiff, Hardin & Waite, to 
Mark Steffensen, Division of Market Regulation (``Division''), 
Commission (October 16, 1995).
    \3\ Securities Exchange Act Release No. 36568 (December 8, 
1995), 60 FR 65074.
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I. Description of the Proposal

    Under the rule change, CBOE has added Rules 30.136 and 30.137 to 
Chapter XXX of its rules in an effort to encourage book-entry 
settlement of securities transaction.\4\ The new rules are 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, the U.S. Working 
Committee recommended that settlements of transactions in corporate and 
municipal securities 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.\6\ Thereafter, six national securities exchanges and the 
National Association of Securities Dealers, Inc. (``NASD'') adopted 
uniform book-entry settlement rules in conformity with the Committee's 
recommendations.\7\ Both of the CBOE's new rules are substantially the 
same as rules previously adopted by six other national securities 
exchanges and the NASD, which rules are designed to ensure that the 
vast majority of securities transactions effected in the U.S. will be 
settled by book-entry.\8\

    \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, including the 
recommendation that final settlement of securities transactions 
should occur by T+3, 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.
    \6\ U.S. Working Committee, Implementing the Group of Thirty 
Recommendations in the United States (November 1990).
    \7\ Securities Exchange Act Release No. 32455 (June 11, 1993), 
58 FR 33679 (order approving proposed rule changes 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 requiring book-
entry settlement of securities transactions).
    \8\ Because CBOE did not then provide a market in depository 
eligible securities, it did not adopt the uniform rule at that time.
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    Subject to certain exceptions set forth in the text of the rule and 
described below, CBOE Rule 30.136 requires the use of the facilities of 
a registered securities depository for the book-entry settlement of all 
transactions in depository eligible securities (1) between a CBOE 
member and a financial intermediary or a member of a national 
securities exchange or a registered securities association and (2) 
between a CBOE member and its customers 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 does not apply to or affect 
the manner in which member firms settle (1) transactions with 
traditional retail customers (who typically do not have DVP/RVP 
privileges), (2) transactions in securities that are not depository 
eligible,\9\ or (3) 

[[Page 3742]]
transactions in which settlement occurs outside the U.S. Rule 30.136 
also does 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 the 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 time 
established for that issue by the depository. The latter exception is 
intended to address corporate reorganizations and other extraordinary 
activities.

    \9\ Under Rule 30.136(d), depository eligible securities is 
defined to mean 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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    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.\10\ Rule 30.137 requires that before any issue of a domestic 
issuer's securities is listed for trading on CBOE the issuer must 
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 does not apply to a security if 
the terms of the security cannot be reasonably modified to meet the 
criteria for depository eligibility at all securities depositories. In 
addition, the rule does not apply to American Depositary Receipts for 
securities of a foreign issuer.

    \10\ The rule is substantially identical to a uniform depository 
eligible rule that was developed through the coordinated efforts of 
six national securities exchanges and the NASD and has been 
incorporated in the rules of those self-regulatory organizations. 
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 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. These requirements are premised 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: (1) 
Can be activated upon the request of the managing underwriter for a 
period of time that the managing underwriter specifies (2) 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 (3) will report to the 
managing underwriter the identity 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.

II. Discussion

    The Commission believes that the rule change is consistent with 
Section 6(b)(5).\11\ Section 6(b)(5), among other things, requires that 
the rules of a national securities exchange be designed to remove 
impediments to and perfect a national market system. Both the book-
entry settlement and depository eligibility requirements should reduce 
the problems associated with settling securities transactions by means 
of physical delivery of certificates and thereby should promote the 
perfection of a national market system and should promote efficiencies 
within that system.

    \11\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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    Furthermore, the Commission believes the rule change should promote 
the purposes of Section 17A of the Act.\12\ In Section 17A, Congress 
called for the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions. In 
Section 17A(e),\13\ Congress directed the Commission to use its 
authority to end the physical movement of securities certificates in 
connection with the settlement among brokers and dealers of 
transactions in securities.

    \12\ 15 U.S.C. Sec. 78q-1 (1988).
    \13\ 15 U.S.C. Sec. 78q-1(e) (1988).
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    Book-entry settlement of interdealer securities transactions has 
been a goal since Congress enacted the Securities Acts Amendments of 
1975.\14\ Since 1975, substantial progress has been made in reducing 
the flow of physical certificates for settlement of interdealer and 
institutional securities transactions.\15\ In 1993, the Commission 
approved the uniform book-entry settlement rules applicable to certain 
transactions in depository eligible securities \16\ as a means to 
facilitate the conversion from a five-day settlement cycle to a three-
day settlement cycle, which occurred on June 7, 1995.\17\ The present 
rule change is designed to facilitate efficient and timely settlement 
of trades through the various market facilities and to further aid the 
transition to a three-day settlement cycle by requiring book-entry 
settlement of depository eligible issues and by increasing the number 
of such depository eligible securities.\18\ CBOE's addition of book-
entry and depository eligibility requirements should reduce costs, 
risks, and delays associated with the physical delivery of securities 
certificates and should eliminate many of the labor intensive functions 
associated with physical delivery of nondepository eligibility 
securities.

    \14\ Pub. L. No. 94-29, 89 Stat. 97 (1975) (codified at 15 
U.S.C. Secs. 77-80h (1988)).
    \15\ E.q., Securities Exchange Act Release Nos. 22021 (September 
23, 1983), 48 FR 45167 (order granting full registration to nine 
clearing agencies); 19698 (April 15, 1983), 48 FR 17604 (order 
implementing The Depository Trust Company's (``DTC'') Fast Automated 
Securities Transfer program); 30283 (January 23, 1992), 57 FR 3658 
(order implementing DTC's Deposit/Withdrawal at Custodian program); 
30505 (March 20 1992), 57 FR 10683 (order eliminating DTC's 
Certificate on Demand service for most corporate issues); 31645 
(December 23, 1992), 57 FR 62407 (order approving rule change 
requiring that most interdealer transactions in municipal securities 
be settled by book-entry through a depository); and 32455 (June 11, 
1993), 58 FR 33679 (order approving uniform book-entry settlement 
rules).
    \16\ Supra note 7 and accompanying text.
    \17\ Securities Exchange ACt Release Nos. 33023 (October 6, 
1993), 58 FR 52891 (adoption of Rule 15c6-1) and 34952 (November 9, 
1994), 59 FR 59137 (change of effective date of Rule 15c6-1 from 
June 1, 1995, to June 7, 1995).
    \18\ Although the rule change should serve to further reduce the 
number of transactions in depository eligible securities for which 
settlement is effected by the delivery of physical certificates, it 
will not eliminate the ability of investors to obtain physical 
certificates after settlement of the transaction. As the Commission 
previously has noted, subject to an issuer's determination whether 
to make physical certificates available to shareholders, the 
Commission believes investors should be able to obtain negotiable 
certificates on request. Securities Exchange Act Release No. 35038 
(December 1, 1994), 59 FR 63652 [File No. S7-34-94] at note 17.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposals are consistent with Sections 6 and 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (File No. SR-

[[Page 3743]]
CBOE-95-62) be and hereby is approved.

    \19\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\

    \20\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2057 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M