[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46528-46530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23341]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38974; File No. SR-CBOE-97-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Operation and Enforcement of Rules 
Relating to the Transmission of Orders to Exchange Electronic Order 
Systems Including RAES

August 26, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 22, 1997, the Chicago 
Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit

[[Page 46529]]

comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to issue a regulatory circular pertaining to 
the administration and enforcement of Exchange rules regarding the 
routing of ineligible orders to Exchange electronic order handling 
systems including RAES and the electronic public customer order book.
    The text of the proposed rule change 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 filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to consolidate and 
clarify in a single regulatory circular (referred to as ``Regulatory 
Circular 97-aa'') the Exchange's policies concerning the administration 
and enforcement of the rules governing the entry of orders to Exchange 
electronic order handling systems including the Exchange's Retail 
Automatic Execution System (``RAES'') \2\ and the electronic public 
customer order book.\3\ In addition, the rule filing sets forth steps 
that member firms may take to avoid liability for the actions of their 
correspondent firms in entering ineligible orders to RAES and the 
electronic book.
---------------------------------------------------------------------------

    \2\ RAES is the Exchange's automatic execution system for small 
public customer market or marketable limit orders.
    \3\ The electronic public customer order book (``EBOOK'') is an 
automated system whereby booked orders are automatically sorted and 
filed in price and time sequence. As orders are traded from EBOOK, 
Last Sale prices are automatically generated and overhead screens on 
the CBOE floor are simultaneously updated. Upon trade endorsement by 
Exchange book staff, execution reports are instantaneously 
generated.
---------------------------------------------------------------------------

Prohibition on RAES Unbundling

    The first section of the circular merely restates and clarifies the 
terms of current CBOE rules and circulars concerning the order 
eligibility requirements that orders must meet in order to be executed 
on RAES. The Exchange believed it was important to combine these 
criteria into one circular to provide guidance to Exchange members 
regarding these matters.
    First, the circular reiterates that to be eligible for RAES, orders 
must be market or marketable limit orders of public customers.\4\ In 
addition, RAES will accept market or marketable limit orders with 
certain contingencies, pursuant to the terms of a regulatory circular 
approved by the Commission.\5\ The circular also restates Exchange 
rules that specify that eligible public customer orders are orders for 
an account in which a member or a non-member broker-dealer does not 
have an interest.\6\
---------------------------------------------------------------------------

    \4\ See Rule 6.8(a)(1) and Rule 24.15(a)(1).
    \5\ See Regulatory Circular RG97-67 (June 11, 1997) which 
permits market and marketable limit orders tagged with AON (All or 
None), IOC (Immediate or Cancel), FOK (Fill or Kill), or MIN 
(Minimum quantity) to be executed on RAES. For MIN orders, the total 
order quantity must be within the RAES volume. This circular was 
approved in Securities Exchange Act Release No. 38702 (May 30, 
1997), 62 FR 31184 (June 6, 1997).
    \6\ Rule 6.8(a)(i) specifies that RAES is for the purpose of 
routing ``small public customer market or marketable limit orders. * 
* * as defined in Rule 7.4(a) regarding placing of orders on the 
public customer book.'' Rule 7.4(a) states that no order shall be 
placed on the public customer book in which a member, any non-member 
joint venture participant, or any non-member-broker/dealer has an 
interest.
---------------------------------------------------------------------------

    The circular continues by stating that generally the volume 
limitation for eligible RAES orders is ten contracts or fewer. The 
circular also states the volume parameters for a number of option 
classes where the eligible RAES order size is greater than ten 
contracts. The circular points out that a complete list of the 
applicable volume parameters is available from Exchange Support 
Systems.
    Finally, the first section of the circular restates the Exchange's 
policy, which is also set forth in Exchange rules, that orders for more 
than the applicable contract limit are never eligible for execution on 
the RAES system and may not be split in an attempt to make the parts of 
the order eligible.\7\
---------------------------------------------------------------------------

    \7\ See Exchange Rule 6.8(a) and Exchange Rule 24.15(a).
---------------------------------------------------------------------------

Regulatory Requirements Governing the Entry of Orders Over Exchange 
Systems

    The second section of the regulatory circular sets forth the 
Exchange's long-standing interpretations regarding the liability of 
member firms for the use of RAES and other Exchange electronic order-
handling systems by those firms' correspondent firms.\8\ In addition, 
this section of the circular sets forth recommended steps that a member 
firm may take to avoid potential disciplinary action for conduct of its 
correspondent firms in the use of RAES and other Exchange electronic 
order-handling systems.
---------------------------------------------------------------------------

    \8\ For purposes of the circular, a correspondent firm is any 
firm or customer that has been given access to the Exchange's 
systems by the member firm or by another correspondent of the member 
firm.
---------------------------------------------------------------------------

    First, the second section of the circular states that members and 
member firms who accept, execute, clear, and/or transmit agency orders 
for correspondent firms or who provide facilities for correspondent 
firms to transmit orders for execution via the Exchange's systems, 
including the Exchange's RAES systems or the electronic public customer 
book, should provide written notice to all correspondent firms that 
explains the proper use of those systems, including the eligibility of 
orders for entry and the prohibition of unbundling RAES orders.
    The circular further states that when the member firms provide 
facilities for correspondent firms to transmit orders for execution via 
Exchange systems, including the Exchange's RAES system or the 
electronic public customer order book, the member firms should ensure 
that correspondents have adequate written procedures to monitor and 
supervise the entry of orders to minimize misuses of Exchange systems 
and the potential for errors. The circular states that member firms may 
accomplish this by (a) obtaining and maintaining as part of their books 
and records, a copy of their correspondents' written control procedures 
pertaining to electronic order entry or (b) establishing the procedures 
by which a correspondent must abide and having the correspondent sign 
an agreement stating that it will abide by such procedures.
    The circular further states the Exchange's long-standing practice 
of seeking disciplinary action against member firms for the violative 
activity of the correspondent firms in connection with the improper use 
of RAES and the Exchange's electronic order-handling systems where the 
member firm has not taken reasonable steps to ensure compliance by the 
correspondent firm.
    For purposes of the circular, a correspondent firm is any firm or 
customer that has been given access to the Exchange's systems by the 
member

[[Page 46530]]

firm or by another correspondent of the member firm. Member firms 
should instruct their correspondents not to give access to the 
Exchange's systems to other customers without the prior knowledge and 
consent of the member firm through whose facilities such access would 
be provided.
    The Exchange has carried out an increasing number of investigations 
of violative activity involving correspondent use of the Exchange's 
electronic order-handling systems. In addition, the Exchange has issued 
disciplinary decisions against member firms due to correspondents' 
improper use of Exchange electronic order-handling systems. The 
Exchange believes that the record-keeping suggested by the proposed 
regulatory circular will serve as an educational tool to help eliminate 
violations of the rules governing the use of such systems.
2. Statutory Basis
    The Exchange represents that proposed rule change is consistent 
with the objectives of Section 6(b)(5) \9\ in that it will serve to 
promote just and equitable principles of trade and protect investors 
and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    The foregoing rule change constitutes a stated policy, practice or 
interpretation with respect to the meaning, administration, or 
enforcement of the Exchange's rules and, therefore, has become 
effective pursuant to Section 19(b)(3)(A)(i) of the Act \10\ and 
subparagraph (e) of Rule 19b-4 thereunder.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(i).
    \11\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 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 at 
the Commission's Public Reference Room. Copies of such filing also will 
be available for inspection and copying at the principal office of the 
Chicago Board Options Exchange. All submissions should refer to File 
No. SR-CBOE-97-32 and should be submitted by September 24, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23341 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M