[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Notices]
[Pages 23309-23310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11165]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39891; File No. SR-CBOE-97-40]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Granting Approval to Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 2 to 
the Proposed Rule Change Relating to the ``Terms and Conditions of an 
Order'' for Purposes of the Exchange's Rules on Solicited Trades and 
Crossed Trades

April 21, 1998.

I. Introduction

    On August 25, 1997, 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 define the phrase ``Terms and 
Conditions of an Order'' for purposes of the Exchange's rules on 
solicited trades and crossed trades. On March 23, 1998, the Exchange 
filed Amendment No. 2 to the proposed rule change with the 
Commission.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Stephanie C. Mullins, Attorney, CBOE to 
David Sieradzki, Attorney, SEC dated March 23, 1998 (``Amendment No. 
2''). In Amendment No. 2, the Exchange adds option class and series 
to the definition of ``Terms and Conditions of an Order.'' In 
addition, the Exchange adds language to the rule that indicates that 
the class of the option would be deemed disclosed if it is apparent 
that the crowd is aware of which option class is being traded.
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    The proposed rule change, and Amendment No. 1 thereto were 
published for comment in the Federal Register on November 17, 1997.\4\ 
No comments were received on the proposal. This order approves the 
proposal as amended.
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    \4\ Securities Exchange Act Release No. 39308 (Nov. 6, 1997), 62 
FR 61419 (Nov. 17, 1997).
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II. Description of the Proposal

    The purpose of the proposed rule change is to define and clarify 
the meaning of the phrase ``terms and conditions'' of an order as used 
in Exchange Rules 6.9 and 6.74. Pursuant to Rule 6.9, Solicited 
Transactions, a member or member organization representing an order 
respecting an option traded on the Exchange (an ``original order''), 
including a spread, combination, or straddle order as defined in Rule 
6.53 and a stock-option order as defined in Rule 1.1(ii), may solicit a 
member or member organization or a non-member customer or broker-dealer 
(the ``solicited person'') to transact in-person or by order (a 
``solicited order'') with the original order.
    Pursuant to Rule 6.74(b), a floor broker may effect a cross of a 
customer order and a facilitation order subject to satisfaction of 
certain conditions, including disclosure on an order ticket for the 
public customer order which is subject to facilitation, all of the 
terms of such order, including any contingency involving, and all 
related transactions in, either options or underlying or related 
securities. A facilitation order is defined in Rule 6.53(m) as an order 
which is only to be executed in whole or in part in a cross transaction 
with an order for a public customer of the member organization and 
which is clearly designated as a facilitation order.
    The rules relating to both facilitation ``solicited'' and 
``crossing'' transactions are designed to ensure that all market 
participants have an equal opportunity to participate in trades, 
fostering the objective of open outcry in a competitive market. The 
proposed rule amendment defines what is meant by the phrase ``terms and 
conditions'' as used in these two rules: the class; the series; the 
volume; the price; and contingencies; and any components related to the 
order. Components are related stock, options, futures or any other 
instruments or interests. A contingency order is a limit or market 
order to buy or sell that is contingent upon a condition being 
satisfied while the order is at the post. Contingent orders include: 
market-if-touched orders; market-on-close-orders; stop (stop-loss) 
orders; and stop-limit orders.
    The Exchange believes that the proposed Interpretations will enable 
those who solicit and those who wish to effect ``facilitation'' crosses 
to understand and abide by their disclosure obligations. In addition, 
the proposed change will aid in achieving uniformity with regard to 
trading crowd expectations, as well as to the type and amount of 
information disclosed on crossed and solicited orders.

III. Discussion

    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, with the requirements of Section 6(b).\5\ Specifically, the 
Commission believes

[[Page 23310]]

the proposal is consistent with the Section 6(b)(5) \6\ requirements 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public interest.\7\
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Exchange represents that the proposal will enable those who 
solicit and those who wish to effect ``facilitation'' crosses to 
understand and abide by their disclosure obligations. In addition, the 
Exchange represents that the proposed change will aid in achieving 
uniformity with regard to trading crowd expectations, as well as to the 
type and amount of information disclosed on crossed and solicited 
orders. The Commission supports the Exchange's efforts to review and 
clarify its rules relating to disclosure obligations of market 
participants. This is particularly true where, as here, the rule being 
clarified addresses priority accorded to orders on the floor of the 
Exchange. The Commission believes that the proposed rule change will 
help specify what information must be disclosed on crossed and 
solicited orders.
    In November, 1994, when the Exchange adopted Rule 6.9, Solicited 
Transactions, the Exchange recognized the importance of fully 
disclosing the orders that comprise a solicited transaction to the 
trading crowd. The Exchange stated that if orders comprising a 
solicited transaction were not suitably exposed to the trading crowd 
``the execution of such orders would be inconsistent with the open 
auction market principles governing the execution of orders on the 
CBOE's floor.'' \8\ By clarifying disclosure requirements with respect 
to solicited transactions, the current proposal should improve the 
ability of the Exchange to ensure that customer orders receive full 
consideration by the trading crowd.
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    \8\ Securities Exchange Act Release No. 34959 (November 9, 
1994), 59 FR 59446 (November 17, 1994).
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    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 filing thereof in the Federal Register. 
Amendment No. 2 adds option class and series to the definition of 
``Terms and Conditions.'' The Exchange has represented that this merely 
codifies the practice on the options trading floor to disclose an 
option's class and series in effecting a ``facilitation'' cross or 
solicited transaction.\9\ Further, the Commission notes that the 
original proposal was published for the full 21-day comment period and 
no comments were received by the Commission. Accordingly, the 
Commission believes it is appropriate to approve Amendment No. 2 to the 
Exchange's proposal on an accelerated basis.
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    \9\ Telephone conversation between Stephanie C. Mullins, 
Attorney, CBOE and David Sieradzki, Attorney, SEC on February 18, 
1998.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2 including whether the proposed 
rule change is consistent with the Act. 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 
provision of 5 U.S.C. 552, will be available for inspection and copying 
at the Commission's Public Reference Room. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the above-mentioned self-regulatory organization. All submissions 
should refer to File No. SR-CBOE-97-40 and should be submitted by May 
19, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-97-40) is approved as 
amended.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-11165 Filed 4-27-98; 8:45 am]
BILLING CODE 8010-01-M