[Federal Register Volume 61, Number 204 (Monday, October 21, 1996)]
[Notices]
[Pages 54691-54693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26856]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37808; File No. SR-CBOE-96-35]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 1 to Proposed Rule Change by the 
Chicago Board Options Exchange, Inc., to Amend the Firm Facilitation 
Exemption

October 10, 1996.

I. Introduction

    On June 12, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its firm facilitation 
exemption.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change appeared in the Federal Register 
on July 11, 1996.\3\ No comments were received on the proposed rule 
change. The Exchange subsequently filed Amendment No. 1 to the proposed 
rule change on September 25, 1996.\4\ This order approves the CBOE's 
proposal, as amended.
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    \3\ See Securities Exchange Act Release No. 37393 (July 2, 
1996), 61 FR 36592 (July 11, 1996).
    \4\ In Amendment No. 1, the CBOE revised the proposed rule 
language of Interpretation .06 to Exchange Rule 4.11 so that ``a 
member firm who receives a customer order for execution only against 
the member firm's proprietary account'' may qualify for the 
facilitation exemption. See letter from Patricia L. Cerny, Director, 
Department of Market Regulation, to Holly Smith, Associate Director, 
Division of Market Regulation, Commission, dated September 25, 1996 
(``Amendment No. 1'').
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II. Background and Description

    Earlier in 1996, the CBOE obtained Commission approval to expand 
the firm facilitation exemption \5\ that was available for SPX index 
options and interest rate options to all non-multiply-listed Exchange 
option classes.\6\ Currently, only a member firm who

[[Page 54692]]

facilitates and executes an order for its own customer \7\ may qualify 
for a firm facilitation exemption.\8\
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    \5\ The CBOE notes that 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.
    \6\ See Securities Exchange Act Release No. 36964 (March 13, 
1996), 61 FR 11453 (March 20, 1996) (File No. SR-CBOE-95-68).
    \7\ The CBOE defines a customer order as one that is entered, 
cleared, and in which the resulting position is carried with the 
firm.
    \8\ See Interpretation .06 to Exchange Rule 4.11.
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    The CBOE is proposing to amend the firm facilitation exemption in 
two ways. First, a member firm who facilitates its own customer whose 
account it carries, whether the firm executes the order itself or gives 
the order to an independent broker for execution may qualify for the 
exemption. Second, the facilitation exemption will be expanded to 
include member firms who facilitate another member's customer order. 
Such customer order must be for execution only against the member 
firm's proprietary account. Further, unlike a member firm that 
facilitates its own customer, the resulting position will not be 
carried by the facilitating member firm.\9\
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    \9\ The Commission notes that any solicitation of a member by 
another member or customer to facilitate a customer order must 
comply with Exchange Rule 6.9 concerning solicited transactions.
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III. 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, with the requirements of Section 6(b)(5).\10\ Specifically, 
the Commission believes that by allowing member firms an exemption from 
position limits to facilitate large customer orders, whether they are 
firms who accept customer orders for execution only against the member 
firm's proprietary account, or they are firms who carry their own 
customers' accounts and positions, the depth and liquidity of the 
market will be enhanced in a manner consistent with the protection of 
investors and the public interest. Further, permitting a member firm 
who facilitates its own customer order to qualify for the exemption 
whether it executes the order itself or gives it to an independent 
broker for execution should provide firms with flexibility in handling 
such orders while still requiring compliance with the rule's 
requirements.\11\
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    \10\ 15 U.S.C. 78f(b)(5) (1988).
    \11\ See infra notes 9 and 17 and accompanying text.
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    The Commission believes that the CBOE's proposal to amend its firm 
facilitation exemption will accommodate the needs of investors as well 
as market participants without substantially increasing concerns 
regarding the potential for manipulation and other trading abuses. The 
Commission also believes that the proposed rule change will further 
enhance the potential depth and liquidity of the options market as well 
as the underlying markets by providing Exchange members greater 
flexibility in executing large customer orders. Moreover, the 
Commission is relying on the absence of discernible manipulation 
problems under the CBOE's current firm facilitation exemption as an 
indicator that the proposal is appropriate.
    In addition, the CBOE's existing safeguards that apply to the 
current facilitation exemption will continue to serve to minimize any 
potential disruption or manipulation concerns. First, the facilitation 
firm must receive approval from the Exchange's Exemption Committee 
prior to executing facilitating trades.\12\ Second, a facilitation firm 
must, within five business days after the execution of a facilitation 
exemption order, hedge all exempt options positions that have not 
previously been liquidated, and furnish to the Exchange's Department of 
Market Regulation documentation reflecting the resulting hedging 
positions.\13\ In meeting this requirement, the facilitation firm must 
liquidate and establish its customer's and its own options and stock 
positions or their equivalent in an orderly fashion, and not in a 
manner calculated to cause unreasonable price fluctuations or 
unwarranted price changes.\14\ In addition, a facilitation firm is not 
permitted to use the facilitation exemption for the purpose of engaging 
in index arbitrage.\15\ The Commission believes that these requirements 
will help to ensure that the facilitation exemption will not have an 
undue market impact on the options or on any underlying stock 
positions.
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    \12\ See Interpretation .06(a) to Exchange Rule 4.11.
    \13\ See Interpretation .06(d) to Exchange Rule 4.11.
    \14\ See Interpretation .06(e)(1) to Exchange Rule 4.11.
    \15\ Id.
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    Third, the facilitation firm is required to promptly provide to the 
Exchange any information or documents requested concerning the exempted 
options positions and the positions hedging them, as well as to 
promptly notify the Exchange of any material change in the exempted 
options position or the hedge.\16\
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    \16\ See Interpretations .06(b) and .06(e)(2) to Exchange Rule 
4.11.
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    Fourth, neither the member's nor the customer's order may be 
contingent on ``all or none'' or ``fill or kill'' instructions, and the 
orders may not be executed until Exchange Rule 6.74(b) (crossing order) 
procedures have been satisfied and crowd members have been given a 
reasonable time to participate in the trade.\17\
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    \17\ See Interpretations .06(c)(1) and .06(c)(2) to Exchange 
Rule 4.11.
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    Fifth, the facilitation firm may not increase the exempted option 
position once it is closed, unless approval from the CBOE is again 
received pursuant to a reapplication.18
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    \18\ See Interpretation .06(e)(3) to Exchange Rule 4.11.
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    Lastly, violation of any of these provisions, absent reasonable 
justification or excuse, will result in the withdrawal of the 
facilitation exemption and may form the basis for subsequent denial of 
an application for a facilitation exemption.19
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    \19\ See Interpretation .06(f) to Exchange Rule 4.11.
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    In summary, the Commission continues to believe that the safeguards 
built into the facilitation exemptive process will serve to minimize 
the potential for disruption and manipulation concerns, while at the 
same time benefitting market participants by allowing member firms 
greater flexibility to facilitate large customer orders. The Commission 
also notes that the facilitation exemption will be monitored in the 
same manner, whether the facilitation is done by the member firm for 
its own customer and executed by the firm itself or given to an 
independent broker for execution, or whether the facilitation is done 
by another member firm willing to facilitate the order of another 
member firm's customer. Further, as noted above, any firm solicitation 
to facilitate a customer order must comply with the CBOE's solicitation 
rules as well as with the CBOE's facilitation and crossing 
rules.20 Lastly, the Commission believes that the CBOE has 
adequate surveillance procedures to surveil for compliance with the 
rule's requirements. Based on these reasons, the Commission believes 
that it is appropriate for the CBOE to amend its firm facilitation 
exemption.
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    \20\ See supra notes 9 and 17.
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    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, because the revised rule langugage contained in Amendment 
No. 1 only serves to clarify the Exchange's original intent, no new 
regulatory concerns are raised. In addition, the CBOE's rule proposal 
was published for the entire twenty-one day comment period and 
generated no responses. Accordingly, the Commission believes that it is 
consistent with Sections 6(b)(5) and

[[Page 54693]]

19(b)(2) of the Act to approve Amendment No. 1 to the proposed rule 
change on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal. 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 at the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 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-96-35 and should be submitted by November 12, 1996.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the CBOE's 
proposal to amend its firm facilitation exemption is consistent with 
the requirements of the Act and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,21 that the proposed rule change (SR-CBOE-96-35), as amended, 
is approved.

    \21\ 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.22
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26856 Filed 10-18-96; 8:45 am]
BILLING CODE 8010-01-M