[Federal Register Volume 64, Number 220 (Tuesday, November 16, 1999)]
[Notices]
[Pages 62238-62239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29796]



[[Page 62238]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42112; File No. SR-CBOE-99-38]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Amending its Trade 
Processing Rules

November 5, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 13, 1999, the Chicago 
Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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

    The CBOE is proposing to update and reorganize its rules on trade 
processing. The text of the proposed rule change is available at the 
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
    The purpose of the proposed rule change is to update the Exchange's 
trade processing rules to incorporate changes that have been made to 
the Exchange's trade processing system over the last few years. One 
significant change that has occurred at the Exchange is the increasing 
use of market-maker handheld trading terminals. Market-maker handheld 
terminals are electronically linked to the Exchange's trade processing 
system and trade information is sent to the Exchange's trade processing 
system automatically when the trade is input onto the handheld 
terminal. Currently, more than 85% of market-maker trade input is done 
through market-maker handheld terminals. Market-makers that do not use 
handheld terminals must manually record their trade information on a 
trade card and submit a copy of the card to the member's clearing firm 
for inclusion into the Exchange's trade processing system.
    The Exchange is proposing to change Exchange Rule 6.50 to require 
Members to file with, or at the direction of, the Exchange trade 
information required by Rule 6.51(d) for each Exchange transaction for 
which the Member is responsible. The rule currently states that only 
Clearing Members are required to file the required trade information 
with the Exchange. With the use of handhelds, however, much of the 
required trade information is already provided automatically by the 
market-maker members.
    The Exchange is deleting the phrase ``business day (the exact hours 
to be fixed by the Exchange)'' which describes when Members are 
required to submit trade information because the Exchange no longer 
uses a scheduled batch process for processing trade information. 
Consequently, the Exchange no longer fixes the time by which trade 
information must be submitted. Currently, the Exchange processes trade 
information on a continuous real time basis as it receives input from 
handhelds and other electronic systems such as the Retail Automatic 
Execution System (``RAES'') \2\ and the Exchange's Order Routing System 
(``ORS'') \3\ throughout the trading day.
---------------------------------------------------------------------------

    \2\ RAES permits automatic execution of small public customer 
orders.
    \3\ ORS provides member firms with a method of efficiently 
delivering orders to CBOE's trading floor. Orders received by ORS 
are logged onto the ORS database and evaluated, based on volume and 
price, to determine their routing destination on the trading floor.
---------------------------------------------------------------------------

    The Exchange is proposing to change Interpretation .01 to Rule 6.51 
to require the buyer and seller in each transaction to immediately 
provide the transaction record to the member for whom the transaction 
was executed and/or the clearing member that will clear the 
transaction. Currently, the interpretation requires the buyer and 
seller to provide transaction record within the time frames established 
by the Exchange. Again, the widespread use of technology in trading 
allows for the information to be provided immediately. The provision of 
the information immediately will allow for more efficient trade 
checking on an intra-day basis.
    The Exchange is adding a new Interpretation .03 to Exchange Rule 
6.51 to explicitly set forth the requirements for submitting trade 
information. These requirements are currently set forth in Exchange 
Rule 2.30, which establishes fees for late trade submission. 
Interpretation .03 makes it clear that members are required to submit 
the information in accordance with the interpretation even if the 
information is submitted in a timely manner for purposes of Rule 2.30. 
The new interpretation sets forth the following procedures for 
reporting transactions pursuant to Rule 6.51(d): For trades executed 
via an electronic data storage medium, or electronic system, trade 
information shall be immediately submitted to the Exchange for trade 
matching and clearance. For trades not executed on an electronic data 
storage medium, or electronic system, trade information shall be 
immediately recorded on a card or ticket and submitted as soon as 
reasonably possible, but not later than the one hour maximum time 
periods stated in Rule 2.30.
    The Exchange is amending Rule 6.61 to provide that a member may 
receive either an Unmatched Trade Notification or an Unmatched Trade 
Report. An Unmatched Trade Notification is an electronic message sent 
to market-maker handheld users, whereas an Unmatched Trade Report is a 
written notice sent to all members and firms. Currently, under rule 
6.61 a member only receives Unmatched Trade Reports. The Exchange is 
also proposing amending Rule 6.61 to obligate Members to reconcile all 
unmatched trades and advisory trades and to report all reconciliations 
to the Exchange ``or the Clearing Member responsible for submission to 
the Exchange.'' The addition of the phrase makes it clear that all 
Members are responsible for reconciling unmatched trades and to report 
those reconciliations to the Exchange or the Clearing Member 
responsible for submission to the Exchange.
    The Exchange is proposing to make a number of revisions to 
Interpretation .01 to Rule 6.61. New paragraph (a) of Interpretation 
and Policy .01 of Rule 6.61 essentially is an updated version of what 
is now paragraph (a) of Interpretation .05 to Rule 6.61. The difference 
is that the provision in Interpretation .05 required that a 
representative be available to resolve

[[Page 62239]]

unmatched trades only for transactions in index options or in any class 
of options which will trade ex-dividend or ex-distribution the 
following day. By including the requirements in paragraph (a) in 
Interpretation .01 the Exchange is requiring that a representative be 
available to reconcile unmatched trades for all options transactions on 
all trade dates. Because of system enhancements, the Exchange and its 
members now have the tools to review trade activity on an intra-day 
basis. By requiring reports to be reconciled on an intra-day basis, the 
Exchange can minimize the potential loss to members who may have to 
take market action to correct an outtrade.
    Paragraph (b) of Interpretation .01 to Rule 6.61 also is being 
moved from Interpretation .05 and requires that members make reasonable 
efforts to detect and correct errors in carding or keying a trade. By 
virtue of being moved from Interpretation .05 to Interpretation .01, 
the requirement will become applicable to all transactions in options 
and not only those concerning index options or any class of options 
which will trade ex-dividend or ex-distribution the following day.
    Paragraph (c) of Interpretation .01 changes the time requirement 
for correcting unmatched trades that occurred on the previous trade 
date from the opening of trading to fifteen minutes prior to the 
opening of trading on the next business day. This change will allow the 
involved parties to correct the positions and be prepared for open 
trading sooner. By resolving the unmatched trade before the market in 
the underlying security opens, the parties will be in a better position 
to enter any necessary orders in the markets to adjust their positions 
where necessary.
    Paragraph (d) of Interpretation .05 is being moved to paragraph (d) 
of Interpretation .01 and states that Members who fail to comply with 
Rule 6.61 will be responsible for any liability resulting from an 
unmatched transaction that should have been matched. Moving this 
provision from Interpretation .05 to Interpretation .01 will make it 
applicable to all transactions in options and not only those concerning 
index options and any class of options which will trade ex-dividend or 
ex-distribution the following day. In addition, to further clarify to 
the Exchange membership the Exchange's authority to handle violations 
of Rule 6.61, the Exchange notes that it may establish a fine schedule 
with respect to the violative conduct and it may refer repeated 
violations to the Business Conduct Committee.\4\
---------------------------------------------------------------------------

    \4\ The Exchange would be required to submit the appropriate 
rule filing in compliance with section 19(b) of the Act.
---------------------------------------------------------------------------

    Finally, the Exchange is proposing to amend Interpretation .05 to 
Exchange Rule 6.61 by revising the language to make it consistent with 
current practice. The Exchange has deleted references to First Pass and 
Second Pass. First Pass and Second Pass refer to the former practice of 
submitting trade information for trade processing in batches at 
different times during the day. Now the Exchange processes the trade 
information continually through the trade day.
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
\5\ in general and furthers the objectives of section 6(b)(5) \6\ in 
particular in that it is designed to promote just and equitable 
principles of trade, remove impediments to a free and open market and a 
national market system, and protect investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange did not solicit or receive written comments on 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 person 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 CBOE. 
All submissions should refer to the File No. SR-CBOE-99-38 and should 
be submitted by December 7, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29796 Filed 11-15-99; 8:45 am]
BILLING CODE 8010-01-M