[Federal Register Volume 64, Number 189 (Thursday, September 30, 1999)]
[Notices]
[Pages 52813-52814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41904; File No. SR-CBOE-99-32]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. To Change the
Participation Entitlement of Designated Primary Market-Makers
September 22, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on June 23, 1999, 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. 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to change the participation entitlement of
designated primary market-makers (``DPMs'').
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 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 section 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
A DPM's right to participate as principal in a transaction is
generally governed by the principles of time and price priority as set
forth in CBOE Rule 6.45. Under these principles, if a DPM is first to
respond with the best bid (offer) in response to a request for a market
from a member not acting on behalf of the DPM, the DPM is entitled to
participate up to 100% in any resulting transaction. In addition to the
rights granted by CBOE Rule 6.45, current CBOE Rule 8.80(c)(7)(ii)
grants each DPM a right to participate ``pro rata,'' with the market-
makers present in the trading crowd. This pro-rata right applies to any
transaction in a security that has been allocated to the DPM if the
DPM's previously established principal bid (offer) was equal to the
highest bid (lowest offer) in the trading crowd, even if the DPM's bid
(offer) is not entitled to priority under CBOE Rule 6.45.\3\ Because
the term ``pro rata'' is not precisely defined by current CBOE Rule
8.80(c)(7)(ii), the scope of that term, and hence the DPM participation
right, has historically been interpreted by the Exchange's Modified
Trading System Appointments Committee (``MTS Committee''), which is the
Exchange committee responsible for appointing DPMs and overseeing the
Exchange's DPM program.
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\3\ The right of a DPM to participate pro-rata, however, does
not include trades executed on the Exchange's Retail Automatic
Execution System. Telephone call between Arthur Reinstein, Assistant
General Counsel, CBOE, and Kelly Riley, Attorney, Division of Market
Regulation, SEC, on July 29, 1999.
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Since 1993, the MTS Committee has interpreted a DPM's participation
right in transactions that occur in an allocated security (when the
DPM's previously established principal bid (offer) was equal to the
highest bid (lowest offer) in the trading crowd) to consist of the
following: an initial 40% participation right, a 30% participation
right when average daily volume in the security over the previous
calendar quarter reaches 2501 contracts, and no guaranteed
participation right when average daily volume in the security over the
previous calendar quarter reaches 5,000 contracts. Additionally, the
MTS Committee determined to maintain all multiply traded securities at
the 40% participation level until further notice. This DPM
participation entitlement has been communicated to the Exchange's
membership in numerous Exchange circulars that have been issued to the
Exchange's membership since 1993.
The MTS Committee has now decided to propose that the level of
participation that a DPM may assert in transactions that occur at the
DPM's previously established principal bid or offer be changed to 30%.
Except as described below, this 30% participation right would apply to
all classes that are allocated to DPMs regardless of the volume in a
particular class and regardless of whether or not the class is multiply
listed.
The MTS Committee believes that this proposed single-level DPM
participation entitlement will be easier for members to apply than the
current DPM participation entitlement formula. Under the current
formula, as described above, the participation right varies from class
to class based on volume level, which may change the participation
right for a class each calendar quarter and based on a class's multiple
list status.
Additionally, the MTS Committee believes that the proposed
participation entitlement will be more equitable. The primary purpose
of the DPM participation right is to provide Exchange members with an
incentive to become and remain DPMs. Moreover, DPMs are required to
assume additional affirmative obligations which are not imposed on
other members. These additional obligations include, among other
things, the obligation to be present at the trading post throughout
every business day, the obligation to participate at all times in
automated execution and order handling systems
[[Page 52814]]
such as the Exchange's Retail Automatic Execution System (RAES), and
the obligation to act as the Exchange's Retail Automatic Execution
System (RAES), and the obligation to act as an order book official and
to maintain the public order book. Since these obligations exist
regardless of the volume level in a DPM allocated class, the 30% DPM
participation right is proposed to be applicable regardless of whether
the volume level in the class exceeds a certain volume threshold as is
required in the current formula. The MTS Committee also believes that a
DPM participation right of 30% is sufficient to provide the requisite
incentive for members to become and remain DPMs (as opposed to the 40%
DPM participation right that is applicable in most classes that are
allocated to DPMs under the current participation entitlement formula).
Although a DPM's participation right will generally be 30% as
provided above, the MTS Committee would retain its current authority to
condition a DPM's appointment in accordance with the Rules by
establishing a lower participation right in a class or classes
allocated to the DPM. For example, current CBOE Rule 8.80(b)(3) permits
the MTS Committee to specify conditions with respect to a DPM
appointment at the time the appointment is made, and current CBOE Rule
8.80 generally authorizes the MTS Committee to take remedial action
against a DPM (including conditioning the DPM's appointment) if the DPM
fails to satisfactorily perform its functions or incurs a material
financial, operational, or personnel change.
The Exchange proposes to publish a circular notifying the
Exchange's membership of the proposed DPM participation right upon its
effectiveness and to publish to the membership and keep current a list
setting forth the DPM participation right in any classes for which a
DPM's participation entitlement is lower than 30%.
The Exchange recently submitted a rule filing to the Commission
which proposes to update and reorganize the Exchange's rules relating
to DPMs.\4\ One part of the proposed rule change, which is currently
pending before the Commission, is proposed CBOE Rule 8.87 which
proposes to codify the authority of the MTS Committee to determine the
appropriate participation right for DPMs. Specifically, proposed CBOE
Rule 8.87 provides that, subject to the review of the Board of
Directors, the MTS Committee may establish from time to time a
participation entitlement formula that is applicable to all DPMs. In
addition, proposed CBOE Rule 8.87 provides that, in accordance with
this established formula, each DPM shall have a right to participate
for its own account with the market-makers present in the trading crowd
in transactions in the DPM's allocated securities that occur at the
DPM's previously established principal bid or offer. The DPM
participation right proposed by this rule change is consistent with the
DPM participation entitlement provided for under proposed CBOE Rule
8.87 and would continue to be applicable following the approval of
CBOE's pending rule filing to update and reorganize the DPM rules. The
MTS Committee would also continue to have the authority to condition a
DPM's appointment by establishing a lower participation right in a
class or classes allocated to a DPM in accordance with the proposed DPM
rules, including proposed CBOE Rules 8.83(d) and 8.90 (which contain
similar provisions to those contained in current CBOE Rule 8.80(b)(3)
and current CBOE Rule 8.80 which are discussed above).
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\4\ Securities Exchange Act Release No. 41325 (April 22, 1999),
64 FR 23691 (May 3, 1999) (File No. SR-CBOE-98-54).
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The MTS Committee intends to continue to periodically review the
DPM participation entitlement to ensure that it remains at an
appropriate level given the market environment that prevails at the
time, and, accordingly, that the Exchange may propose to the DPM
participation entitlement in the future.
2. Basis
The Exchange believes that the proposed rule change will improve
the operation of the DPM trading system by making the DPM participation
entitlement more equitable and easier for members to apply while
retaining the incentive for members to become and remain DPMs.
Accordingly, the Exchange believes that the proposed rule change is
consistent with Section 6(b) of the Act, in general, and Section
6(b)(5) \5\ in particular, in that it is designed to remove impediments
to and perfect the mechanism of a free and open market.
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\5\ 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. 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, 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 20549-0609.
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 submission should refer to File No. SR-CBOE-99-32 and should
be submitted by October 21, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25385 Filed 9-29-99; 8:45 am]
BILLING CODE 8010-10-M