[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67956-67958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32606]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40729; File No. SR-CBOE-98-47]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 by the Chicago Board Options Exchange, Inc. Relating to Trade Match 
Delayed Submission Fees

November 30, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 23, 1998, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change.\3\ CBOE submitted to the 
Commission Amendment No. 1 to its proposal on November 10, 1998.\4\ The 
proposed rule change, as amended, is described in Items I and II below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change from interested persons and to approve the proposal on the 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ An earlier version of the proposed rule change was submitted 
on March 4, 1998, as CBOE-98-09. The Exchange subsequently submitted 
Amendment No. 1 to CBOE-98-09 on April 20, 1998. The proposed rule 
change was noticed in the Federal Register on April 30, 1998. See 
Exchange Act Release No. 29910 (April 24, 1994), 63 FR 23817. The 
Commission received no comments on the proposed rule change. 
Subsequently, the Exchange withdrew its proposed rule change. See 
Letter from Stephanie C. Mullins, Attorney, CBOE, to Ken Rosen, 
Attorney, Division of Market Regulation (``Division'') Commission, 
dated May 26, 1998 (``Withdrawal Letter''). The current proposed 
rule change differs slightly from the original proposed rule change. 
Generally, in this proposal the Exchange delayed the implementation 
date of the proposed rule change by six months, made technical 
changes to its proposed rule language, defined the terms nominee-
employee and out-trades, and provided a more detailed explanation of 
how a financial loss may arise from late trade submissions and an 
explanation for deleting Rule 2.30(d)(2).
    \4\ In Amendment No. 1, the Exchange, generally, made technical 
changes to its proposed rule language, defined the terms nominee-
employee and out-trades, and provided a more detailed explanation of 
how a financial loss may arise from late trade submissions and an 
explanation for deleting Rule 2.30(d)(2) See letter from Stephanie 
C. Mullins, Attorney, CBOE, to Richard C. Strasser, Assistant 
Director, Division, Commission, dated November 6, 1998 (``Amendment 
No. 1'').

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[[Page 67957]]

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

    The CBOE proposes to amend Exchange Rule 2.30, Trade Match Delayed 
Submission Fee, to reduce the amount of time permitted for trade 
submission before the imposition of fees and to include under the rule, 
all types of trades executed on the Exchange.

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 Exchange 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 III 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
    The Purpose of the proposed rule change is to expand the scope of 
CBOE Rule 2.30 to include all types of executed trades and to reduce 
the amount of time under Rule 2.30 in which Exchange members and 
clearing firms are assessed fees for late trade submission. Currently, 
market-makers and clearing firms are assessed fees for delayed trade 
match submissions if eighty percent of market-maker in-person trades 
are not submitted in less than two hours. The Exchange proposes to 
amend this rule to include all types of trades not just market-maker 
inperson trades) and to require, starting on January 1, 1999, that the 
submission time for fee assessment be gradually reduced from two hours 
to one hour. The eighty percent formula will remain the same, as will 
the provisions for extenuating circumstances.\5\
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    \5\ Telephone conversation between Stephanie C. Mullins, 
Attorney, CBOE, and Terri L. Evans, Attorney, Division, Commission, 
on November 6, 1998. See also Amendment No. 1, supra note 4.
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    Non-market-maker trades were not originally included under Rule 
2.30 because virtually all non-market-maker activity at that time met 
the two hour time requirement. Within the revised time frames, 
ultimately one hour, the Exchange anticipates that a small but 
significant portion of non-market-maker trades will not be submitted on 
time. For this reason, all executed trades will be included, so that 
all parties in the trading process will be held to the same standards.
    Under the proposal, the submission time reduction from two hours to 
one hour will be done gradually over a period of months, so that 
members and clearing firms will grow accustomed to the tighter time 
requirement and will be encouraged towards immediate submission of 
trades. The first time reduction will go into effect on January 1, 
1999, and will require timely trade submission to be within ninety 
minutes of execution. The next reduction would go into effect on April 
1, 1999, and will require timely trade submission to be within seventy-
five minutes of execution. Finally, from July 1, 1999, forward, the 
Exchange will require that timely trade submission be within one hour 
of execution.
    Presently, the average submission time for all market-maker trades 
is thirty-one minutes after execution, and eighty percent of all 
market-maker trades are submitted within one hour of execution. For 
non-market-makers, the average submission time is twenty-two minutes, 
and eighty-seven percent of trades are submitted within one hour of 
execution. Thus, it should not be a hardship for all members and 
clearing firms to abide by the proposed rule.
    The purpose of this amendment is to increase the speed at which 
trades are received and matched by the trade match system. With the 
advent of a more automated trading environment, the current two hour 
requirement is not stringent enough and may cause the CBOE to be slower 
than other exchanges in matching trades. More timely trade submission 
should lead to quicker awareness of out-trades,\6\ and consequently 
could limit financial loss, thereby allowing the Exchange to better 
compete with the other options exchanges for customer orders.
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    \6\ An out-trade is a transaction that has been executed between 
two parties where one or more of the terms of the trade do not 
match. For instance, the parties may have had a misunderstanding on 
the price, the quantity or the series. See Amendment No. 1, supra 
note 4.
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    By making the time requirements for trade submission more 
stringent, this proposed rule should help members detect out-trades 
sooner. Once the mistake is discovered, one or both of the parties to 
the transaction may have to get out of a position or take on a new 
position to rectify the mistake. The more time that elapses before 
detection of an out-trade, the more likely it is that the market has 
shifted away from the market that existed when the trade was executed 
and the more likely that taking on a new position or getting out of an 
existing position will incur financial loss.\7\ Thus, the potential 
benefits to members and clearing firms of comparing trades immediately 
after execution are significant.
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    \7\ See Amendment No. 1, supra note 4.
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    Exchange Rule 2.30(c), which formerly was reserved, is proposed to 
address the situation where a nominee-employee \8\ of a clearing member 
executes and submits trades for that clearing member. Under the 
proposed rule, if the nominee-employee is assessed a fee for late trade 
submissions, the clearing member will not be assessed a separate fee. 
The clearing member will, however, be responsible for the fee assessed 
against its employee.
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    \8\ Under the Rule, a nominee-employee member is a member who is 
a clearing member employee. See Amendment No. 1, supra note 4.
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    Additionally, because of improvements to the Exchange's trade match 
system and the advances of clearing firms, several sections of Rule 
2.30 have become obsolete and are proposed to be eliminated. The 
proposed rule change would delete Exchange Rule 2.30(d)(2). Since this 
Rule was last amended, computer processing time has decreased. Thus, 
the computer processing run performed at the end of the trading day 
(``First Pass'') \9\ may be finished prior to the new submission 
deadline, rendering the Rule obsolete. Second, trades that are 
transacted late in the trading day no longer will be late merely by 
being submitted after the First Pass. Under the original two hour 
submission requirement and the First Pass schedule, trades submitted 
after the First Pass would be deemed late because the First Pass always 
was completed more than two hours after the end of the trading day. 
Under the proposal, this situation will not always be the case. 
Additionally, the proposed rule is a more objective criteria and will 
be unaffected by any future changes in the First Past schedule. Thus, 
the Exchange proposes to delete Rule 2.30(d)(2).\10\
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    \9\ Telephone conversation between Stephanie C. Mullins, 
Attorney, CBOE, and Terri L. Evans, Attorney, Division, Commission, 
dated November 10, 1998.
    \10\ See Amendment No. 1, supra note 4.
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    In addition, when rule 2.30 was initially implemented, a deficient 
clearing firm exception was included, 2.30(f)(1). This exception waived 
fifty percent of a market-maker's delayed submission fee if the 
clearing firm through which the market-maker submitted trades was 
severely deficient in submitting all of its trades on a particular day. 
This exception initially was applied infrequently and in the last

[[Page 67958]]

two years has not been applied to a market-maker client of a clearing 
firm. Due to hand-held trade input terminals and general improvements 
in trade submission systems, it is nearly impossible for a clearing 
firm to fall below the deficient clearing firm level of fifty-five 
percent. Therefore, Exchange Rule 2.30(f)(1) has become obsolete and 
the Exchange proposes to delete it.
2. Statutory Basis
    The Exchange proposes to reduce the amount of time in which trades 
are submitted, resulting in an improved trade comparison process, 
thereby serving to promote just and equitable principles of trade and 
to protect investors and the public interest in furtherance of the 
objectives of Section 6(b)(5) of the Act.\11\
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    \11\ 15 U.S.C. 78f(b)(5).
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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. 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, 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Room in Washington, D.C. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CBOE-98-47 and should be submitted by December 30, 1998.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act.\12\ Specifically, the 
Commission believes the proposal is consistent with Section 6(b)(5) of 
the Act,\13\ which requires an exchange to have rules designed to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, and processing information, and, in general, to protect 
investors and the public interest.\14\ In particular, the Commission 
believes that the proposed rule change should encourage members to make 
timely submissions of trade information by reducing the maximum 
permitted time to submit trade information from two hours to one hour. 
As a result, the clearing of options transactions should become more 
efficient, with a reduction in the number of unmatched trades and 
quicker resolution of out-trades. The Exchange should also be able to 
monitor its members more effectively for any problems that might 
disrupt the clearance and settlement process. The Commission also 
believes that applying CBOE Rule 2.30 to all members and not just 
market-makers trading in-person should provide for greater integrity of 
the trade matching and clearing process. The Commission also believes 
that it is consistent with the Act to delete obsolete provisions of 
CBOE Rule 2.30.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 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 Commission also finds the proposed rule change regarding the 
assessment of a single fee if a delay is caused by a nominee-employee 
member of a clearing member is consistent with Section 6(b)(4) of the 
Act,\15\ which states that the Exchange may provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members. Under CBOE Rule 2.30, the timely submission of each individual 
member and clearing member is measured separately and a fee imposed 
only if the individual member or clearing member fails to submit at 
least eighty percent of its trades in a timely manner. Where a nominee-
employee of a clearing member is acting on behalf of the clearing 
member and where the clearing member is ultimately responsible for the 
nominee-employee, the Commission believes that the proposed rule change 
equitably allocates the cost of incorporating late trade information by 
only imposing a single fee on clearing members.
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    \15\ 15 U.S.C. 78f(b)(4).
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    The Exchange has requested that the Commission approve the proposal 
prior to the thirtieth day after the date of publication of notice of 
the proposal in the Federal Register. Because the Commission believes 
the proposal should expedite the clearing process, the Commission finds 
good cause for approving the proposed rule change (SR-CBOE-98-47) prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register.\16\
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    \16\ An earlier version of the proposed rule change was 
submitted on March 4, 1998, as CBOE-98-09. The proposed rule change, 
as amended, was noticed in the Federal Register on April 30, 1998. 
See Release No. 39910, supra note 3. The Commission received no 
comments on the proposed rule change Subsequently, the Exchange 
withdrew its proposed rule change. See Withdrawal Letter, supra note 
3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change be, and hereby is, approved on 
an accelerated basis.

    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32606 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M