[Federal Register Volume 62, Number 131 (Wednesday, July 9, 1997)]
[Notices]
[Pages 36854-36855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17940]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38805; File No. SR-CBOE-97-19]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 of the Chicago Board Options Exchange, Incorporated; 
Amending the Minor Rule Violation Plan With Respect to Position Limit 
Fines

July 1, 1997.
    On May 8, 1997, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ a proposed rule change to 
revise the position limit summary fine schedule applied to CBOE 
members.\2\ Notice of the proposed rule change, together with the 
substance of the proposal, was published in the Federal Register.\3\ No 
comment letters were received. The Exchange subsequently filed 
Amendment No. 2 to the proposal on June 12, 1997.\4\ This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ The proposed rule change was originally filed on March 28, 
1997. The CBOE submitted Amendment No. 1 to the proposed rule change 
to revise the review period applied to multiple position limit 
violations occurring in member accounts under CBOE Rule 
17.50(g)(1)(b) to a rolling 12 month review period, instead of a 
calendar year review period. The CBOE has requested that the rolling 
12 month review period not become effective until three months after 
SR-CBOE-97-19 is approved so that CBOE members who may be affected 
by the change will have a notice period prior to the revision. 
Letter from Margaret G. Abrams, Senior Attorney, CBOE, to Katherine 
England, Esq., Assistant Director, Division of Market Regulation--
Office of Market Supervision, dated May 8, 1997.
    \3\ Securities Exchange Act Release No. 38619 (May 13, 1997), 62 
FR 27283 (May 19, 1997).
    \4\ Amendment No. 2 will revise the review period for multiple 
position limit violations occurring in the accounts of non-member 
customers under CBOE Rule 17.50(g)(1)(a) to a rolling twelve month 
review period, instead of a calendar year review period. The CBOE 
also has requested that the rolling year review period in Amendment 
No. 2 not become effective until three months after SR-CBOE-97-19 is 
approved so that CBOE members who may be affected by the change will 
have a notice period prior to the revision. Letter from Margaret G. 
Abrams, Senior Attorney, CBOE, to Katherine England, Esq., Assistant 
Director, Division of Market Regulation--Office of Market 
Supervision, dated June 12, 1997.
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I. Background

    The proposed rule change will revise the position limit summary 
fine schedule in subsection (g)(1)(b) of Exchange Rule 17.50, the 
CBOE's minor rule violation plan, for violations in member accounts and 
other accounts that do not qualify as non-member customer accounts 
under subsection (g)(1)(a) of Exchange Rule 17.50. The proposed rule 
change also will revise Interpretation and Policy .01 to Rule 17.50 to 
conform the proposed amendment to the fine schedule. The revisions 
result from an Exchange review of existing position limit sanction 
levels at other exchanges to ensure comparative equality of sanction 
levels between option exchanges and to ensure that sanction levels 
appropriately fit the violative behavior.\5\
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    \5\ A subgroup was formed by the Exchange's Business Conduct 
Committee (``BCC'') to review position limit sanctions. The subgroup 
included the BCC chairman, vice chairman, another BCC member, a 
member firm representative, and five other Exchange committee 
chairmen. The subgroup met during September through November 1996. 
The subgroup's recommendations were approved by the full BCC in 
November 1996, and by the Exchange's Board of Directors in December 
1996.
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    In addition, the proposed rule change will redefine CBOE's fining 
method for member position limit summary fines in Rule 17.50(g)(1)(b) 
so that, for the first three violations within any rolling 12 month 
period, CBOE will treat a member with two consecutive trade dates of 
position limit overage in the same manner as a member with a single 
trade date overage. For the fourth and succeeding violations in any 
twelve month period, CBOE will treat a two consecutive trade date 
occurrence as two separate violations. The Exchange Staff will continue 
to issue non-disciplinary letters of caution for the first three member 
violations in lieu of a fine, so long as the overage does not exceed 5% 
of the applicable limit. The proposed rule change also will allow 
Exchange staff, in its discretion, for the third violation, to meet 
with the member during a non-disciplinary staff interview, in lieu of 
issuing a letter of caution.
    The Exchange will continue to impose a $1.00 per contract position 
limit summary fine for the first through third member position limit 
violations when the overage exceeds 5% of the applicable limit and the 
fourth through sixth member position limit violations. However, the 
proposed rule change will establish fine levels of $2.50 per contract 
for the seventh through ninth position limit violations and $5.00 per 
contract for the tenth and succeeding violations. By creating another 
fining tier between the $1.00 and $5.00 per contract levels, the 
Exchange will utilize a more graduated calculation of position limit 
summary fines.
    Finally, CBOE proposed to change to a rolling 12 month period of 
review, rather than a calendar year, for multiple position limit 
violations occurring in both member and non-member accounts in 
subsections (g)(1) (a) and (b) of Exchange Rule 17.50 to implement a 
1996 recommendation by the Commission's Office of Compliance 
Inspections and Examinations.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 of the Act in general, and in particular, with Section 
6(b)(7) because it provides a fair procedure for the disciplining of 
members and persons associated with members in that the revisions to 
the fining method for member violations will deter multiple violations 
and will improve the minor rule violation plan process, while resulting 
in position limit summary fines that are in proportion to other fines 
imposed by the CBOE for comparable rule violations. The Commission 
believes that the proposed role change provides a fair procedure for

[[Page 36855]]

the disciplining of members and persons associated with members in that 
it is appropriate to treat two consecutive trade dates of position 
limit overage in the same manner as a member with a single trade date 
overage for the first three violations. A member with a two consecutive 
trade date overage may unintentionally violate the position limit on 
the first trade date and, upon becoming aware of the overage, begin to 
take action to reduce the position. Market conditions and the size of 
the overage may then prevent the member from reducing the overage until 
the end of the second trade date. During the initial three violations, 
issuing letters of caution or conducting a staff interview should 
educate a member to avoid future violations. Thus, the Commission 
believes that treating two consecutive trade date occurrences as one 
violation is not warranted for the fourth and succeeding violations.
    The Commission also believes that using a more graduated scale for 
calculation of multiple position limit summary fines may effectively 
deter multiple violations. By creating a fining level of $2.50 per 
contract between the $1.00 per contract fining level and the $5.00 per 
contract fining level, the proposed rule change will deter multiple 
position limit violations though the use of increasingly higher fines.
    The Commission also finds that using a rolling 12 month period of 
review, rather than a calendar year, for multiple position limit 
violations occurring in member and non-member accounts will deter 
repeat violations. Using the rolling 12 month period to calculate 
position limit violations will prevent a firm from repeating multiple 
position limit violations at the end of a calendar year and continuing 
its position limit violations through the beginning of the succeeding 
calendar year without incurring a fine.
    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing of the proposed rule change in the 
Federal Register to allow the Exchange to review multiple position 
limit violations occurring in non-member accounts under CBOE Rule 
17.50(g)(1)(a) using the same rolling 12 month period used for 
violations occurring in member accounts under CBOE Rule 17.50(g)(1)(b), 
without further delay.
    The Commission also believes that Amendment No. 2 does not raise 
any significant new issues that require public notice prior to approval 
because Amendment No. 2 only changes the Exchange's review period of 
multiple position limit violations occurring in non-member accounts to 
the same rolling 12 month period used for violations occurring in 
member accounts and no comments were received on the substance of the 
original proposal. The Commission also believes that delaying for three 
months after the approval date of SR-CBOE-97-19 the change to the 
rolling 12 month review period for multiple position limit violations 
will ensure that any CBOE members have adequate notice prior to the 
change from a calendar year to a rolling 12 month period. Accordingly, 
the Commission believes it is consistent with Section 6 of the Act to 
approve Amendment No. 2 to the proposed rule change on an accelerated 
basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 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. Sec. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-97-19 and should be submitted by July 30, 1997.
    It is therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, SR-CBOE-97-19, be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-17940 Filed 7-8-97; 8:45 am]
BILLING CODE 8010-01-M