[Federal Register Volume 64, Number 191 (Monday, October 4, 1999)]
[Notices]
[Pages 53757-53758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25701]
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-41912; File No. SR-CBOE-99-24
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.: Order Approving Proposed Rule Change Relating to Option Trading
Permit Auction Procedures
September 24, 1999.
I. Introduction
On June 9, 1999, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act
[[Page 53758]]
of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to alter the Exchange's option trading permit auction
procedures.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change, including Amendment No. 1,\3\ was
published in the Federal Register on August 24, 1999.\4\ The Commission
did not receive any comments on the proposed rule change. This order
approves the proposed rule change, as amended.
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\3\ Amendment No. 1 was filed on August 2, 1999. Amendment No. 1
expanded the discussion on the proposed rule change and clarified
the proposed test of the rule change. See letter from Christopher R.
Hill, Attorney, CBOE, to Heather Traeger, Attorney, Division of
Market Regulation, dated August 2, 1999.
\4\ Securities Exchange Act Release No. 41747, (August 16,
1999), 64 FR 46221.
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II. Description of the Proposal
CBOE Rule 3.27(a)(3) provides for the creation of a Permit lease
pool to be administered by the Exchange.\5\ Under these procedures, the
Exchange conducts an auction every six months during which members and
non-members who have qualified for membership may submit bids equal to
the monthly rent that the bidder is willing to pay for a month-to-month
Permit lease. Upon the close of the bidding period, Permits in the
lease pool are awarded to the highest bidders in a number equal to the
total number of Permits in the lease pool at that time. Under the
existing procedures, the monthly rent to be paid by a lessee is the
dollar value of the bid submitted by that lessee. Following each
auction, the Exchange continues to accept bids for Permit leases.
Should any Permit lessee desire to give up that lessee's Permit prior
to the next auction, the Permit is transferred to the highest bidder at
a monthly lease price equal to the new lessee's bid for the remainder
of the six month auction cycle.
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\5\ The procedures for the administration on the lease pool were
previously filed with and approved by the Commission. SR-CBOE-97-14
provided for the issuance of Permits in connection with the transfer
of the options business of the New York Stock Exchange, Inc. to CBOE
and defined the rights and obligations associated with Permits. See
Securities Exchange Act Release No. 38541 (April 23, 1997), 62 FR
23516 (April 30, 1997). In SR-CBOE-97-47, CBOE amended the manner in
which the CBOE accesses the fee that it charges when a person
submits a bid to receive a Permit. See Securities Exchange Act No.
39179 (October 1, 1997), 62 FR 52602 (October 8, 1997).
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The proposal would amend the method of the auction to establish a
procedure known as a Dutch auction. Under the Dutch auction, bidders
will submit bids equal to the monthly rent which they are willing to
pay for a six-month lease, and, upon the close of the bidding period,
Permits in the lease pool will continue to be awarded to the highest
bidders in a number equal to the total number of Permits in the lease
pool at that time. Under the Dutch auction procedure, however, each
successful bidder will pay only the price of the lowest successful bid.
Following each Dutch auction, the Exchange will continue to accept
bids, with a minimum bid established at the price set in the most
recent Dutch auction.
The proposal also contains several other amendments, most of which
set forth existing Exchange practices in greater detail, including:
The proposed rule change establishes a minimum qualifying
bid level for all bidding which occurs between Dutch auctions. The
minimum qualifying bid is set at the lease rate established in the most
recent Dutch auction. This change is designed to equalize Permit lease
rates and enhance administrative efficiency by encouraging lessees to
use the Dutch auction process, rather than attempt to obtain a lower
priced lease by bidding between the Dutch auctions.
The proposed rule change permits a lessee to terminate the
lessee's Permit during the lease period, by written notice to the
Membership Department, but provides that the termination notice shall
be irrevocable. The Membership Department will post notice of the
availability of the Permit for at least two business days on the
Exchange bulletin board. The Permit will be transferred to the highest
bidder whose bid is received by 3:30 p.m. on the first Wednesday after
notice of the Permit's availability has been posted for at lest two
business days.
The proposed rule change also allows Permits to be
transferred among nominees of an organization with appropriate notice
to the Exchange, as is the case with CBOE membership.
The proposed rule change provides that an individual can
lease only one Permit from the lease pool at a time Therefore, an
individual who is already a Permit lessee may not submit a Permit bid
during the six month lease period (except to bid in the next Dutch
auction) unless and until the lessee first terminates the lessee's
current lease.
Finally, the proposed rule change establishes a six month
Permit lease instead of the current month-to-month lease, for easier
and more efficient administration of the lease process.
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission believes the
proposal is consistent with the requirements of Section 6(b)(5) of the
Act \5\ because it is designed to promote just and equitable principles
of trade, perfect the mechanism of a free and open national market
system, and, in general, to further investor protection and the public
interest. Under the proposal, the current auction procedure for Permit
leases would be replaced by a procedure known as a Dutch auction. The
proposed Dutch auction differs from the current procedures because each
successful bidder will pay only the price of the lowest successful bid
for Permits, instead of the dollar value of the bid submitted by that
lessee. The Commission believes that it is reasonable for the Exchange
to determine how to distribute the Permits. The Commission also
believes that the Dutch auction procedure as described in the proposal
is a competitive process that is a fair and equitable method for
distributing the Permits. The Commission further believes that the
proposal clearly sets forth in sufficient detail the parameters of and
for the proposed Dutch auction process so that Exchange members can
fully understand the proposed process, including how to bid, when to
bid, restrictions on bidding and holding Permit leases, and how to
terminate or transfer a Permit lease.
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\6\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-CBOE-99-24), is amended, is
approved.
\7\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25701 Filed 10-1-99; 8:45 am]
BILLING CODE 8010-01-M