[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Pages 27816-27818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13278]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38633; File No. SR-CBOE-94-53]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
2 and 3 to Proposed Rule Change by the Chicago Board Options Exchange, 
Incorporated Relating to a Determination of the Exchange's Office of 
the Chairman Under Exchange Rule 4.10(b)(3)

May 14, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 8, 1997, and May 13, 
1997, respectively, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') Amendment Nos. 2 and 3 to its 
previously filed proposed rule change as described in Items I, II, and 
III below, which Items have been prepared by the CBOE.\2\ The 
Commission is publishing this notice to solicit comments on the policy 
of the Exchange's Office of the Chairman from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The proposed rule change was noticed for comment in 
Securities Exchange Act Release No. 35282 (February 2, 1995), 60 FR 
6577. Amendment No. 1 to the proposed rule change was noticed for 
comment in Securities Exchange Act Release No. 36458 (November 6, 
1995), 60 FR 57255.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE is proposing to amend SR-CBOE-94-53 and the text of the 
Regulatory Circular which was attached as Exhibit A to the amendments. 
The Regulatory Circular is directed to options market-maker clearing 
firms and describes certain financial requirements the Exchange's 
Office of the Chairman has determined to apply to these Exchange 
members pursuant to Exchange Rule 4.10(b)(3). The text of the 
Regulatory Circular is available at the Office of the Secretary, CBOE 
and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filings with the Commission, CBOE included statements 
concerning the purpose of and basis for the policy of the Exchange's 
Office of the Chairman. The text of these statements may be examined at 
the places specified in Item IV below. The CBOE has

[[Page 27817]]

prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements as they pertain to the 
proposed amendments.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of these amendments to SR-CBOE-94-53 is to amend the 
Regulatory Circular to conform it to the recent amendments to 
Commission Rule 15c3-1.\3\ The Regulatory Circular will require all 
Exchange members that clear options market-maker transactions on a 
proprietary of market-maker customer basis to calculate options market-
maker haircuts in accordance with the recent SEC amendments. These 
amendments do not become effective for all broker-dealers until 
September 1, 1997. Acting pursuant to its authority under CBOE Rule 
4.10(b)(3),\4\ however, the Office of the Chairman has determined to 
impose those requirements upon Exchange members that clear the 
transactions of options market-makers before the September date. The 
Office of the Chairman has determined that the current method of 
calculating options market-maker haircuts under current Commission Rule 
15c3-1(c)(2)(x) is less effective in that many hedged positions receive 
haircuts which are excessive while the haircuts for uncovered positions 
do not adequately reflect their potential risk.
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    \3\ See Securities Exchange Act Release No. 38248 (February 6, 
1997), 62 FR 6474 (``Net Capital Release'').
    \4\ CBOE Rule 4.10(b)(3) provides that the Office of the 
Chairman may impose additional financial and/or operational 
requirements on a member that clears market-maker trades when the 
Office of the Chairman determines that the member's continuance in 
business without such requirements has the potential to threaten the 
financial or operational integrity of Exchange market-maker 
transactions. Paragraph (b)(7) of Rule 4.10 provides that the 
Exchange shall file notice with the Commission in accordance with 
the provisions of Section 19(d)(1) of the Act of all final decisions 
to impose extraordinary requirements pursuant to Subsection (b)(3) 
of Rule 4.10. In addition, the CBOE has elected to file the 
Regulatory Circular as a proposed rule change under Section 19(b)(1) 
of said Act and Rule 19b-4 thereunder.
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    To date, all but one Exchange member which clears the transactions 
of independent options market-makers are calculating haircuts pursuant 
to the methodology described in this filing. We understand that the 
remaining member is operationally prepared to calculate haircuts under 
these parameters.
    There are a few changes that were made to the text of the 
Regulatory Circular itself. First, the circular will become effective 
thirty days from the date the SEC approves SR-CBOE-94-53. The Exchange 
believes that thirty days should be adequate time for Exchange members 
to make any final preparations for calculating haircuts under the new 
parameters, which are somewhat different from the parameters set forth 
under the Commission's no-action letter,\5\ and which have been the 
basis for the firms' calculations. The previous version of the 
Regulatory Circular did not specify a time under which the new haircut 
treatment would become effective.
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    \5\ See letter from Brandon Becker, Director, Division of Market 
Regulation, SEC, to Mary L. Bender, First Vice President, CBOE, and 
Timothy Hinkes, Vice President, the Options Clearing Corporation 
(``OCC''), dated March 15, 1994 (``1994 No-Action Letter'').
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    Second, the Regulatory Circular is being revised to give firms the 
option of calculating haircuts under the terms of the 1994 No-Action 
Letter until such time as the Commission's amendments adopted in the 
Net Capital Release \6\ become effective. The current version of the 
Regulatory Circular would have required firms to calculate risk-based 
haircuts under the Rule 15c3-1 amendment version approved by the 
Commission. This change is being made to accommodate those firms that 
may have difficulty instituting the changes approved in the Net Capital 
Release from an operational standpoint before September 1, 1997, but 
which are already able to calculate haircuts under the 1994 No-Action 
Letter. Because the two versions of risk-based haircuts are similar, 
the Exchange does not believe there is a problem in allowing firms to 
calculate haircuts under either method.
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    \6\ Supra note 3.
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    Third, consistent with the recently approved rule changes to SEC 
Rule 15c3-1, the Regulatory Circular will allow the use of a third 
party vendor's system if that system is approved by an examining 
authority designated pursuant to Section 17(d) of the Act, i.e., a 
Designated Examining Authority (``DEA''). The previous version of the 
Regulatory Circular and of Rule 15c3-1 would have required the third 
party system to be approved by the Commission.
    Fourth, the Regulatory Circular will add a new product group 
category for high-cap broad-based indexes. The product group category 
will be referred to as U.S. market group ``B'' and will include the S&P 
Barra Growth Index and the S&P Barra Value Index. The product group 
that was referred to as ``U.S. market group'' will now be ``U.S. market 
group A.''
    Fifth, the Regulatory Circular will also add a new product group 
category for non-high-cap broad-based indexes. The new category will be 
the Mexican market product group and will include the Mexican Index of 
Prices and Quotations (``IPC'').
    Sixth, the Exchange is proposing to add a sentence to the 
Regulatory Circular that would authorize broker-dealers to include in 
the product group categories any index options which are not specified 
in the circular to the extent the Commission has authorized such 
inclusion by means of a no-action letter, rule interpretation, or rule 
amendment.
    Finally, the Regulatory Circular is proposed to be amended by 
eliminating the generic references to the offsets permitted between 
types of instruments in determining the profits and losses for each 
portfolio type. Instead, the Regulatory Circular will now make 
reference to a chart that will be attached to the circular. This chart 
will depict the various portfolio offsets and will specify the 
particular indexes included in each product group. The CBOE believes 
that the chart should make it easier to determine the appropriate 
offsets.
    The Exchange believes the filing, as amended, is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act in that it 
will promote maintenance of fair and orderly markets and will 
contribute to the protection of investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the filing as amended will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
filing as amended.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule filing, or
    (b) Institute proceedings to determine whether the proposed rule 
filing should be disapproved.

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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 filing of the Exchange's policy imposing 
additional financial requirements upon Exchange members which clear the 
trades of options market-makers that are filed with the Commission, and 
all written communications relating to this matter 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 CBOE. All submissions should refer to File 
No. SR-CBOE-94-53 and should be submitted by June 11, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13278 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M