[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29274-29275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14022]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40015; File No. SR-CBOE-98-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., Relating to Adjustments in Market Maker 
Equity

May 20, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ notice is hereby given that on March 31, 1998, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the 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 proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ On May 7, 1998, the CBOE filed Amendment No. 1 to the 
proposal. See Letter from Timothy H. Thompson, Director, Regulatory 
Affairs, Legal Department, CBOE, to Yvonne Fraticelli, Division of 
Market Regulation, Commission, dated May 6, 1998 (``Amendment No. 
1'') In Amendment No. 1, the CBOE revised its proposal to: (1) 
indicate that CBOE Rule 12.3(f)(3)(C)(3), rather than Regulation X 
of the Board of Governors of the Federal Reserve System, prohibits a 
clearing firm from extending credit to a market maker when the 
market maker's account is in deficit; (2) replace a reference in 
proposed Interpretation and Policy .06 to CBOE Rule 12.3(b)(1)(D) 
with a reference to CBOE Rule 12.3(f)(1)(F) to define net 
liquidating equity; and (3) revise proposed Interpretation and 
Policy .06 to indicate that clearing firms will be allowed to extend 
credit for opening trades, rather than to permit opening trades.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 12.3, ``Margin Requirements'' 
by adopting Interpretation and Policy .06, which will allow clearing 
firms to adjust a market maker's equity under certain limited 
circumstances so that the clearing firm may extend credit for opening 
trades. Specifically, proposed Interpretation and Policy .06 will allow 
a clearing firm to adjust the equity in a market maker's account when 
the underlying stock price is disseminated after the options close at 
3.02 p.m.\3\ at a price that is inconsistent with the options closing 
price.
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    \3\ All time references are in Central Time.
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    Copies of the proposed rule change are 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 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, the Proposed Rule Change

1. Purpose
    CBOE Rule 12.3(f)(3) (C)(3) \4\ prohibits clearing firms from 
extending credit to a market maker for opening transactions when the 
market maker's account is in deficit. The CBOE proposes to add 
Interpretation and Policy .06 to CBOE Rule 12.3 to permit a clearing 
firm to adjust the equity in a market maker's account under certain 
limited circumstances in order to allow the clearing firm to extend 
credit for opening trades. Specifically, proposed Interpretation and 
Policy .06 will permit a clearing firm to adjust the equity in market 
maker's account when the underlying stock price is disseminated after 
the options close at 3:02 p.m. at a price that is inconsistent with the 
options closing price.
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    \4\ See Amendment No. 1, supra note 2.
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    In 1997, the CBOE and the other options exchanges changed the 
closing time for trading equity options and certain narrow-based index 
options from 3:10 p.m. to 3.02 p.m.\5\ Since then, the CBOE has 
discovered that the equity of market maker's account at a clearing firm 
can be severely affected when news of a stock underlying a CBOE option 
is disseminated near the close, resulting in heavy trading and a late 
trade tape. In these situations, the last sale of the underlying stock 
could be disseminated well after the overlying options stop trading at 
3:02 p.m.,\6\ and closing price of the underlying stock may be out of 
line with the closing quotes and the last sale of the options series. 
The CBOE notes that while this situation would almost assuredly realign 
itself at the opening of trading on the next day, the discrepancy in 
closing prices may cause a market maker's account to have deficit 
equity. This is true even though from a market risk standpoint the 
market maker may be hedged.
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    \5\ See e.g., Securities Exchange Act Release No. 38543 (May 14, 
1997), 62 FR 28082 (May 22, 1997) (order approving File No. SR-CBOE-
96-71).
    \6\ When the options markets closed at 3:10 p.m., this situation 
would rarely arise because the final stock prices were almost always 
disseminated by the time the options markets closed, thereby 
allowing options market makers to adjust their quotes accordingly.
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    Proposed Interpretation and Policy .06 would allow a clearing firm 
to appropriately adjust a market maker's account equity to eliminate a 
pricing disparity for a trader whose account is in deficit as a result 
of such a situation. The clearing firm will be required to provide 
documentation to the CBOE for such adjustments before the opening of 
trading the next day (or before the firm may extend credit for opening 
transactions). These adjustments will be made on a case-by-case basis. 
In situations where the deficit is eliminated by the adjustment and the 
adjustment is approved by the CBOE's Department of Financial and Sales 
Practice Compliance, the trader would be permitted to continue trading 
the next business day.
2. Statutory Basis
    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that, by allowing for an adjustment 
in a market maker's account equity in situations where the stock and 
the overlying options close at anomalous prices, the proposal is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.

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

    The 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

[[Page 29275]]

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 by 
order approve such proposed rule change, or 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, 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, 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. 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-98-11 and should 
be submitted by June 18, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14022 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M