[Federal Register Volume 61, Number 57 (Friday, March 22, 1996)]
[Notices]
[Pages 11911-11912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6899]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36977; File No. SR-CBOE-95-65]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 Thereto by the Chicago Board Options Exchange, Inc. 
Relating to Joint Account Participant Trading in Equity Options

March 15, 1996.
    On October 20, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise its policy regarding 
joint account participation in equity options. Notice of the proposal 
was published for comment and appeared in the Federal Register on 
December 7, 1995.\3\ No comment letters were received on the proposal. 
On February 28, 1996 the Exchange filed Amendment No. 1 to the 
proposal.\4\ This order approves the CBOE's proposal as amended.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ See Securities Exchange Act Release No. 36534 (November 30, 
1995), 60 FR 62913 (December 7, 1995).
    \4\ In Amendment No. 1 the CBOE revises the proposed regulatory 
circular to make clear that it will be a member's responsibility to 
ensure that they do not trade in-person or enter orders through 
floor brokers such that a trade occurs in which the buyer and seller 
are representing the same joint account and are on opposite sides of 
the transaction. See Letter from Timothy Thompson, Senior Attorney, 
CBOE to James McHale, Attorney, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Division''), Commission, 
dated February 28, 1996 (``Amendment No. 1'').
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I. Description of the Proposal

    The purpose of this rule change is to revise that provision of the 
Exchange's policy governing joint account participant trading in equity 
options that currently prohibits the simultaneous representation in a 
trading crowd by more than one member of a joint account.\5\ Under the 
proposed regulatory circular, a joint account may be simultaneously 
represented in a trading crowd but only by participants trading in-
person. All other provisions of the current regulatory circular would 
remain unchanged, including a prohibition against orders being entered 
in the crowd via a floor broker when a joint account participant is 
trading in the crowd in-person. The change in policy is also reflected 
in a deletion of one sentence from, and the addition of another 
sentence to, paragraph (a)(ii) of Rule 8.16, RAES Eligibility in Equity 
Options.

    \5\ This policy is set forth in Regulatory Circular RG 93-50, 
which is a reissuance of RG 91-68, File No. SR-CBOE-91-48, noticed 
in Securities Exchange Act Release No. 30334 (February 4, 1992), 57 
FR 4900 (February 10, 1992).
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    There are two reasons why the Exchange has determined to propose 
this charge, which has been recommended by the Exchange's Equity Floor 
Procedure Committee. First, the change will make the policy governing 
joint account trading in equity options more consistent with the 
current policy governing index option trading, where multiple 
representation of orders for the same joint account is permitted by 
participants in the joint account trading in-person at the trading 
post, or by floor brokers representing the orders at the post.\6\ The 
policy proposed for equity options nonetheless will remain more 
restrictive than the policy for index options, in that it will only 
permit joint representation by participants trading in-person, and will 
not permit multiple representation of orders for the same joint account 
if one or more of the orders is represented by a floor broker. The 
policy for index options reflects that, as a practical matter, floor 
broker representation is often required in index option trading crowds, 
where special trading practices and procedures have been adopted to 
deal with the special needs of these very large crowds. Since a trader 
from another crowd may be unfamiliar with these practices, he may need 
to use the services of a floor broker who is regularly present at the 
index crowd and who understands its trading practices. Smaller equity 
option trading posts do not present the same practical need for the 
services of floor brokers, which is why the proposed policy permitting 
joint account representation at equity option posts is limited to in-
person representation of orders by market-makers.

    \6\ See Regulatory Circular RG 95-64, which is a reissuance of 
Regulatory Circular RG 91-57, approved in Securities Exchange Act 
Release No. 31174 (September 10, 1992), 57 FR 42789 (September 16 
1992).
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    A second reason why the Exchange has chosen to institute this 
policy is to ensure that member organizations that choose to employ a 
joint account for their Exchange trading, rather than using individual 
market-maker accounts, are not disadvantaged in participating in trades 
vis-a-vis those member organizations that do employ individual market-
maker accounts. Some member organizations choose to have their various 
market-makers trade in a joint account so that the member 
organization's positions can be more easily monitored and managed. 
Under the current equity policy regarding joint accounts, however, 
these member organizations would only be able to be represented by one 
joint account participant in a trading crowd at one time. On the other 
hand, the member organization using the individual market-maker 
accounts would be able to be represented by each market-maker's 
individual account. The proposed change would eliminate the 
disadvantage currently suffered by member organizations using joint 
account structures.
    In addition to revising the regulatory circular, one sentence will 
be deleted from, and another sentence added to, Rule 8.16(a)(ii). This 
rule currently prohibits more than one joint account participant from 
using the joint account for trading on RAES in a particular option 
class unless the Exchange's

[[Page 11912]]
Market Performance Committee (``MPC'') provides an exemption. However, 
because any joint account participant trading in-person would be 
entitled to participate in the same side of a trade with his fellow 
joint account participants in the same trading crowd as a result of the 
proposed regulatory circular,\7\ the Exchange believes it is 
appropriate to no longer require an exemption from the MPC to have more 
than one participant use the joint account for trading on RAES. In any 
event, to participate on RAES, a member must be present in the trading 
crowd.

    \7\ Pursuant to Interpretation .06 to CBOE Rule 8.9 
(``Securities Accounts and Orders of Market Makers''), joint account 
participant trading on opposite sides of a transaction is 
prohibited.
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II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5) \8\ in that it will 
help remove impediments to a free and open securities market and 
facilitate transactions in securities, while protecting investors and 
the public interest.

    \8\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that it is appropriate for 
the CBOE to modify certain joint account trading policies for equity 
options while keeping restrictions in place that are designed to ensure 
market integrity. First, the rule change will make the policy governing 
joint account trading in equity options more consistent with the 
current policy regarding index option trading. The Commission notes 
that the CBOE's policy regarding equity option trading will continue to 
be more restrictive than that governing index option trading in that 
only joint representation by participants trading in person will be 
permitted in equity option trading crowds. Multiple representation of 
orders for the same joint account in equity option trading crowds will 
not be permitted if one or more of the orders is represented by a floor 
broker.
    Second, the change in policy will eliminate the disparity in 
treatment between member organizations that choose to employ a joint 
account for their exchange trading, and those member organizations 
which use individual market-maker accounts. Member organizations which 
choose to have their various market-makers trade in a joint account so 
that the member organization's positions can be more easily monitored 
and managed, would no longer be disadvantaged by only having a single 
joint account represented in a trading crowd at one time. Thus, by 
eliminating a distinction that currently exists between member 
organizations that manage their positions differently, the rule change 
furthers the objectives of Section 6(b)(5) of the Act by providing 
rules that perfect the mechanisms of a free and open market.
    With respect to protecting investors and the public interest, the 
Commission notes that the CBOE's proposed regulatory circular contains 
provisions designed to ensure that joint account participants do not 
engage in abusive or illegal trading, thereby ensuring the maintenance 
of fair and orderly markets and market integrity. As mentioned above, 
the proposed circular provides that members are prohibited from 
entering orders in a particular crowd with floor brokers for their 
individual or joint account whenever they are trading in-person in that 
crowd; this applies even though the orders are for an account they are 
not then actively trading. Additionally, the regulatory circular states 
that ``[i]t is a member's responsibility to ensure that they do not 
trade in-person or enter orders with floor brokers such that any of the 
following results: (1) A trade occurs between a joint account 
participant's individual account and the joint account of which he or 
she is a participant, (b) a trade occurs between two joint accounts 
that have common participants, or (c) a trade occurs in which the buyer 
and seller are representing the same joint account and are on opposite 
sides of the transaction.'' \9\ Finally, the Commission notes that the 
CBOE has surveillance procedures designed to detect and deter abusive 
trading by joint account participants.\10\

    \9\ See Amendment No. 1, supra note 4.
    \10\ Based on conversations with its Equity Floor Procedure 
Committee, the Exchange believes that the change in policy is not 
likely to result in one joint account dominating, or ``packing,'' an 
equity option trading crowd through the use of multiple joint 
account participants. Telephone conversation between Patricia L. 
Cerny, Director, Market Regulation, CBOE and James McHale, Attorney, 
OMS, Division, Commission, on March 14, 1996.
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    Accordingly, the Commission believes that expanding the ability of 
joint account participants to trade in equity options classes in 
limited circumstances will not threaten the integrity of CBOE's market.
    The Commission finds food cause for approving Amendment No. 1 to 
the proposal prior to the thirtieth day after the date of publication 
of the notice of filing thereof in the Federal Register Specifically, 
Amendment No. 1 merely clarifies the regulatory circular to highlight 
that members must ensure that they do not trade in-person or enter 
orders with floor brokers such that a trade occurs in which the buyer 
and seller are representing the same joint account and are on opposite 
sides of the transaction. The Commission believes that emphasizing this 
requirement in the regulatory circular clarifies the responsibilities 
of joint account participants trading in equity options and strengthens 
the market integrity aspects of the proposal.
    Based on the above, the Commission finds good cause for approving 
Amendment No. 1 to the proposed rule change on an accelerated basis and 
believes that the proposal, as amended, is consistent with Sections 
6(b)(5) and 19(b)(2) of the Act.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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, 
N.W., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to the File No. SR-CBOE-95-65 and 
should be submitted by April 12, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-95-65), as amended, is 
approved.

    \11\ 15 U.S.C. 78s(b)(2).
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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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6899 Filed 3-21-96; 8:45 am]
BILLING CODE 8010-01-M