[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