[Federal Register Volume 62, Number 15 (Thursday, January 23, 1997)]
[Notices]
[Pages 3547-3548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1560]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38169; File No. SR-CBOE-96-72]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to RAES 
Order Size for Interest Rate Options

January 14, 1997.
    On November 26, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``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 Exchange Rule 23.7, 
``RAES,'' to increase the maximum size of interest rate option orders 
eligible for entry into the CBOE's Retail Automated Execution System 
(``RAES'') from 10 or fewer contracts to 100 or fewer contracts.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1996).
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    The proposed rule change was published for comment in the Federal 
Register on December 12, 1996.\3\ No comments were received on the 
proposal.\4\
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    \3\ See Securities Exchange Act Release No. 38022 (December 5, 
1996), 61 FR 65422.
    \4\ The CBOE supplemented its proposals with a letter explaining 
that the proposed rule change is designed to encourage customer 
demand in interest rate options and to allow the CBOE to compete 
effectively with markets for other interest rate derivatives, which 
fill orders to a depth of 100 contracts. See Letter from Debora E. 
Barnes, Senior Attorney, CBOE, to Yvonne Fraticelli, Attorney, 
Options and Derivatives Regulation, Division of Market Regulation 
(``Division''), Commission, dated December 13, 1996 (``December 13 
Letter'').
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    The CBOE proposed to amend CBOE Rule 23.7(ii) to increase the 
maximum size of orders in CBOE interest rate options which are eligible 
for execution through RAES from 10 or fewer contracts to 100 or fewer 
contracts. The proposed increase in the maximum size of RAES-eligible 
interest rate option orders will apply to all classes of interest rate 
options.\5\
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    \5\ Currently, the CBOE offers four interest rate options, 
including the following: IRX (3-month Treasury Bill); FVX (5-year 
Treasury Note); TNX (10-year Treasury Note); and TYX (30-year 
Treasury Bond).
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    The proposed rule change is designed to allow the Exchange to 
compete effectively with other markets that trade interest rate 
derivatives.\6\ According to the CBOE, much of the trading in interest 
rate derivatives currently occurs in markets where transaction sizes 
are larger than are eligible for automatic execution through RAES at 
the CBOE.
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    \6\ See December 13 Letter, supra note 4.
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    Specifically, the CBOE notes that because the TYX interest rate 
contract offered to the CBOE represents approximately one-tenth (1/
10th) of the value of the underlying government securities, the current 
eligible order limit of ten contracts is essentially equivalent in 
value to only one U.S. Treasury Bond option. The Exchange believes that 
the proposed increase in the maximum size of orders for CBOE interest 
rate options, such as the TYX, that are eligible for execution through 
RAES (essentially a ``10-lot'' in the Treasury Bonds themselves), will 
provide a more meaningful limit for institutional customers.
    The CBOE believes that the proposed rule change will not impose any 
significant burdens on the operation and capacity of RAES, but instead 
will increase the efficiency of the Exchange's operations by expanding 
the number of orders that are eligible for automatic execution and by 
reducing manual processing. Finally, the CBOE believes that the rule 
change will not have a negative impact on the capacity, security or 
integrity of RAES.
    By expanding the maximum size of orders in CBOE interest rate 
options which are eligible for execution through RAES from 10 or fewer 
contracts to 100 or fewer contracts, the Exchange believes that the 
proposed rule change will better serve the needs of the CBOE's public 
customers and the Exchange members who make a market for such 
customers. The CBOE believes that the proposed rule change is 
consistent with section 6(b) of the Act, in general, and furthers the 
objectives of section 6(b)(5), in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and to protect investors and the public interest.
    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 and Section 11A.\7\ 
Specifically, the Commission finds that the CBOE's proposal will 
facilitate transaction in securities and protect investors and the 
public interest.\8\ The Commission believes that providing for the 
automatic execution of larger customer orders in interest rate options 
will provide for more efficient handling and reporting of orders in 
interest rate options, thereby improving order processing and 
turnaround time.\9\ In addition, the Commission believes that public 
customers may benefit from the proposal because their interest rate 
option orders for up to 100 contracts may be executed automatically at 
the displayed market quote. Public customers also will have the benefit 
of receiving nearly instantaneous executions and confirmations for 
interest rate option orders of up to 100 contracts.
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    \7\ 15 U.S.C. 78f and 78k-1 (1988).
    \8\ In approving the rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ The CBOE expects that, initially, the increased RAES order 
size eligibility will be utilized only for TYX options. Telephone 
conversation between Debora E. Barnes, Senior Attorney, CBOE, and 
Yvonne Fraticelli, Attorney, Office of Market Supervision, Division, 
Commission, on January 13, 1997.
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    The CBOE has stated that the proposal will allow the Exchange to 
compete more effectively with other markets that trade interest rate 
derivatives. Accordingly, the Commission believes that the proposal may 
help the CBOE to attract order flow, thereby increasing the depth and 
liquidity of the CBOE's market for interest rate options, to the 
benefit of all market participants. In addition, the proposal may 
benefit investors by providing them with additional financial products 
with which to implement their trading strategies.
    The Commission notes that it has approved proposals by other 
options exchanges allowing comparable increases in the number of option 
contracts eligible for automatic execution.\10\
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    \10\ See e.g., Securities Exchange Act Release Nos. 36601 
(December 18, 1995), 60 FR 66817 (December 26, 1995) (order 
approving File No. SR-PHLX-95-39) (increasing the maximum automatic 
execution order size eligibility for public customer orders for all 
equity and index options to 50 contracts); 33476 (January 13, 1994), 
59 FR 3140 (January 20, 1994) (order approving File No. SR-Amex-93-
33) (increasing the size of Japan Index option orders eligible for 
automatic execution to 99 contracts); 30290 (January 27, 1992), 57 
FR 4072 (February 3, 1992) (order approving File No. SR-Amex-91-27) 
(providing for automatic execution of public customer orders of up 
to 100 MidCap 400 Index option contracts); 25950 (July 28, 1988), 53 
FR 29293 (August 3, 1988) (order approving File No. SR-Amex-87-20) 
(increasing the number of Institutional Index options eligible for 
automatic execution to 100 contracts).

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[[Page 3548]]

    In addition, the Commission has approved a CBOE proposal to 
increase to 100 the firm quote contract size minimum applicable to 
Designated Primary Market Makers in classes of interest rate options 
for which Public Automated Routing System (``PAR'') workstations are 
available.\11\ The Commission believes that the CBOE's current proposal 
is consistent with the Exchange's earlier proposal to increase the firm 
quote contract size for classes of interest rate options for which PAR 
workstations are available.
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    \11\ See Securities Exchange Act Release No. 34876 (October 21, 
1994), 59 FR 54226 (October 28, 1994) (order approving File No. SR-
CBOE-94-17).
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    Finally, based on representations from the CBOE, the Commission 
believes that increasing the size of the interest rate option orders 
eligible for execution through RAES will not expose the CBOE's options 
markets to risk of failure or operational breakdown. In particular, the 
CBOE represents that the proposal will not impose significant burdens 
on the operation and capacity of RAES, nor will it have a negative 
impact on the security or integrity of RAES.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-96-72) is approved.

    \12\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1560 Filed 1-22-97; 8:45 am]
BILLING CODE 8010-01-M