[Federal Register Volume 63, Number 17 (Tuesday, January 27, 1998)]
[Notices]
[Pages 3938-3940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1855]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39556; File No. SR-CBOE-97-65]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Placing of Orders Over the Outside Telephone Lines at the Equity 
Trading Posts

January 16, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on December 11, 
1997, the Chicago Board Options Exchange, Incorporated (``CBOE'') 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 CBOE. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

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

    The Chicago Board Options Exchange, Inc. (``CBOE or the 
``Exchange'') proposes to amend its policy \1\ governing the use of 
member-owned or Exchange-owned telephones located at the equity trading 
post on the floor of the Exchange.
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    \1\ The two regulatory circulars that govern the use of 
telephones at the equity trading posts were approved by the 
Commission on October 28, 1996 [(see SR-CBOE-96-15, Securities 
Exchange Act Release No. 37876 (October 28, 1996), 61 FR 56728 
(November 4, 1996)] and on March 2, 1994 [See SR-CBOE-93-24, 
Securities Exchange Act Release No. 33701 (March 2, 1994)].
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    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, Proposed Rule Change

    In its filing with the Commission, CBOE 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 CBOE 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, Proposed Rule Change

    The purpose of the proposed rule change is to amend the policy 
currently governing the use of telephones at equity option trading 
posts. The proposed amendment would permit floor brokers at these posts 
to receive orders, over telephones located at the equity option posts, 
when (i) those calls are patched through a booth on the floor as 
further described below and (ii) the order is from U.S. registered 
broker-dealers. The revised policy will be issued in a regulatory 
circular. In addition, the Exchange has filed as Exhibit B to the 
filing a proposed form of application and agreement to be used by 
members seeking approval to use the telephones at the equity option 
posts.
Orders Entered by Broker-Dealers
    The proposed change is the latest in a continual expansion of 
direct telephone access of orders to the equity option trading posts 
since a telephone policy was first filed with the Commission in 1993, 
see SR-CBOE-93-24. The regulatory circular that was the subject of that 
original filing prohibited any orders from being transmitted over the 
outside telephone lines at the equity option posts. (At that time and 
today, orders could and can be transmitted over the intra-floor lines 
from one point on the Exchange floor to another.) In 1996, the Exchange 
liberalized its telephone policy in the equity crowds to allow market-
makers to place orders over the outside telephone lines directly with 
floor brokers at the equity option posts.\2\ This change allowed 
market-makers who need to be off the floor to transmit their orders 
more efficiently.
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    \2\ See SR-CBOE-96-15, approved in Securities Exchange Act 
Release No. 37876 (October 28, 1996), 61 FR 56728 (November 4, 
1996).
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    The current proposed change would expand the ability to transmit 
orders entered by broker-dealers over

[[Page 3939]]

telephones located at the equity option posts \3\ where an order is 
transmitted over the telephones on a three way call involving the 
following persons at the following locations: (1) a representative of a 
member broker-dealer or its correspondent firm from a location from off 
of the Exchange trading floor, (2) a CBOE broker or an associated 
person of such broker including a Designated Primary Market-Maker 
(``DPM'') acting in his capacity as a floor broker, at a booth on the 
floor of the Exchange, and (3) CBOE floor broker (including a DPM) or 
other person authorized to receive an order at an equity trading post 
on the floor of the Exchange.
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    \3\ Equity option posts includes trading stations of both 
market-makers and Designated Primary Market-Makers where equity 
options are traded and any other trading stations over which the 
Equity Floor Procedure Committee has jurisdiction. Persons 
transacting business in broad-based index options traded at the same 
posts as equity options will not be subjected to the restrictions of 
this policy as long as the telephone lines are not used in 
contravention of this policy in conducting business related to 
equity options. The EFPC will determine whether a particular narrow-
based index option is subject to this policy.
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    In determining to limit the transmittal of orders in this proposal 
to orders from member broker-dealers and their correspondent firms, the 
Exchange has adopted the Equity Floor Procedure Committee's 
recommendation.\4\ It is the judgment of this Committee which oversees 
trading at the equity option posts that it would be best to continue to 
expand telephone access to the equity option posts on an incremental 
basis. Because of concerns with the potential for error (and thus 
liability) in accepting orders from a wide range of customers, the 
Equity Floor Procedure Committee determined to limit access to this 
class of broker-dealers only. The requirement that the call must 
involve a person at a booth on the floor of the Exchange will help to 
ensure that there is a further record of the order in the event that a 
dispute arises later in connection with the order. The Equity Floor 
Procedure Committee and the Exchange will monitor the policy and 
determine whether a future expansion in line with the OEX model is 
appropriate. As with the use of telephones at the OEX trading post, the 
Exchange intends to police compliance with the conditions applicable to 
the use of telephones at the equity trading posts by means of customary 
floor surveillance procedures, including reliance on surveillance by 
Floor Officials and Exchange employees. Floor brokers accepting orders 
in this manner would not be required to be qualified pursuant to 
Exchange Rule 9.1 as with brokers accepting orders of public customers 
over OEX post telephones because the qualification requirements do not 
apply to the acceptance of orders from registered broker-dealers. 
However, the Department of Compliance will be required to review and 
approve all applications to ensure that the applicant is not intending 
to transact business which the applicant is not authorized to transact.
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    \4\ It should be noted that the Exchange filed (see SR-CBOE-95-
49) and the Commission approved (Securities Exchange Act Release No. 
37487 (July 26, 1996)) a more liberal policy concerning the 
transmittal or orders over outside telephone lines at the trading 
post for Standard & Poor's 100 Stock Index options (``OEX''). That 
policy permits orders to be transmitted from any source provided the 
broker accepting the order is properly qualified under Exchange 
rules to accept the order and provided the broker has received 
approval from the Exchange to accept such orders over the telephone. 
The Exchange generally has deferred to the judgment of the various 
Floor Procedure Committees in determining to what extent they want 
to allow telephone access directly into the trading posts over which 
they have purview. The Equity Floor Procedure Committee recommended 
taking a more limited approach than the OEX Floor Procedure 
Committee but, after gaining experience with this expansion, they 
may decide to offer access to the same extent as the OEX Floor 
Procedure Committee.
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Application and Agreement
    In order to implement the change in the policy, the Exchange is 
also seeking approval of a proposed form of application and agreement 
that members will be required to submit to be approved to use the 
telephones at the equity option posts pursuant to the revised policy. 
This application and agreement is nearly identical to the application 
and agreement used for OEX post telephones which was approved by the 
Commission, except to the extent that the agreement sets forth terms of 
the equity telephone policy that are different from the terms of the 
OEX telephone policy. The Exchange has determined to file the 
application and agreement for approval because it contains some 
provisions that have not otherwise been approved specifically for use 
of telephones at the equity option posts. Among the provisions in the 
application and agreement are paragraph G and H which deal with 
liability issues. Paragraph G states that the Exchange shall not be 
liable to members of their customers for losses resulting from the 
installation, operation, relocation, use of, or inability to use 
telephones or telephone lines at an equity option post. Paragraph H 
requires the member to indemnify the Exchange against any liabilities 
arising out of equity post telephones or lines.
    The application and agreement will require an applicant to receive 
approval of the Department of Compliance as well as the Equity Floor 
Procedure Committee, as indicated on the form, before the 
Telecommunications Department may authorize a line or telephone to be 
installed. Before approving a telephone request, the Department of 
Compliance will review the application and contact the applicant if any 
questions are raised about the intended use of the telephone line.
    Upon approval of the proposed rule changes, the Exchange will issue 
a regulatory circular substantially the same as Exhibit A to the 
submitted filing. The Exchange will implement these changes within 
sixty days of the approval of the changes.
    The proposed rules are consistent with and further the objectives 
of Section 6(b)(5) of the Securities Exchange Act of 1934 in that they 
are designed to improve communications to and from the Exchange's 
trading floor in a manner that promotes just and equitable principles 
of trade, prevents fraudulent and manipulative acts and practices, and 
maintains fair and orderly markets.

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

    CBOE does not believe that the proposed rule change 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 
proposed rule change.

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 change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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.,

[[Page 3940]]

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 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 the 
file number in the caption above and should be submitted by February 
17, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1855 Filed 1-26-98; 8:45 am]
BILLING CODE 8010-01-M