[Federal Register Volume 65, Number 56 (Wednesday, March 22, 2000)]
[Notices]
[Pages 15398-15399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7068]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42527; File No. SR-CBOE-00-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to Option Trading Permit Auction 
Procedures

March 14, 2000.
    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 March 2, 2000, 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 and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change interested persons and to grant accelerated 
approval to the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange is proposing to amend the procedure through which it 
auctions Option Trading Permits (``Permits'') from the Permit lease 
pool. 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 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 
Items II below. The Exchange 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
    Holders of Option Trading Permits have specified limited trading 
rights set forth in CBOE Rule 3.27. Section (a)(3) of Rule 3.27 
provides for the creation of a Permit lease pool to be administered by 
the Exchange. The procedures for the administration of this lease pool 
were previously filed with and approved by the Commission.\3\ 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.\4\
---------------------------------------------------------------------------

    \3\ The procedures for the administration of the Permit lease 
pool were filed with the Commission in SR-CBOE-97-14. This filing 
provided for the issuance of Permits in connection with the transfer 
of the options business of the New York Stock Exchange, Inc. 
(``NYSE'') 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). The CBOE later amended the 
procedures for administering the Permit lease pool in SR-CBOE-97-47, 
which amended the manner in which the CBOE assesses the fee that is 
charged when a person submits a bid to receive a Permit. See 
Securities Exchange Act Release No. 39179 (October 1, 1997), 62 FR 
52602 (October 8, 1997).
    \4\ Id.
---------------------------------------------------------------------------

    Last year, certain amendments to these procedures were filed with 
and approved by the Commission.\5\ The most important of these 
amendments established a procedure for Permit bidding that is known as 
a ``Dutch auction.'' Under the Dutch auction procedure, each successful 
bidder pays the price of the lowest successful bid. Following each 
Dutch auction, the Exchange continues to accept bids, with a minimum 
bid established at the price set in the most recent Dutch auction. 
Permit lease payments received by the Exchange are distributed to 
certain previous holders of NYSE option trading rights, as provided in 
Rule 3.27(a)(3). The Exchange adopted the Dutch auction to promote 
fairer and more equitable lease payments by having everyone in the 
auction pay the same price.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 41912 (September 24, 
1999), 64 FR 53757 (October 4, 1999).
---------------------------------------------------------------------------

    The first Dutch auction under these new procedures was held on 
September 29, 1999. The auction was publicized through various means, 
and the submitted bids ranged from $50 to $5,000 per month, with all 
but six of the bids being for at least $1,300 per month. However, due 
to an unexpectedly low number of bidders (only 28 bids were received 
for the 28 available Permits), the $50 per month bid was successful. 
Under the existing Dutch auction rules, this resulted in a $50 monthly 
lease rate for all 28 successful bidders. This undervalued the trading 
rights conferred by the Permits, based upon the fact that the median of 
the bids received last September 29 was $2,750, and the average of all 
the bids was $2,525.
    To address this situation, the Exchange proposes to amend the 
Permit Dutch auction process by establishing a minimum bid level in all 
Dutch auctions at $1,000. The Exchange believes that this level is 
below the fair value of the Permits, as reflected by the median and 
average of the bids just

[[Page 15399]]

noted, and that this minimum bid amount is needed to ensure that the 
price determined by the Dutch auction is fair and equitable.
2. Statutory Basis
    The Exchange believes that the revised Dutch auction procedure for 
the Permit lease pool will more effectively ensure that the amounts 
paid for Permits by each successful bidder are fair and equitable. As 
such, the Exchange believes that the proposed rule change is consistent 
with Section 6(b)(4) \6\ of the Act in that is it designed to provide 
for the equitable allocation of reasonable dues, fees, and other 
charges among its members and issuers and other persons using its 
facilities.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule will impose 
any inappropriate 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 either solicited or received.

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, DC 20549-0609. 
Copies of the submissions, 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 at the 
Commission's Public Reference Room. 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-00-05 and 
should be submitted by April 12, 2000.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of Section 6(b)(4),\7\ because the 
proposed rule change provides for the equitable allocation of 
reasonable dues, fees, and other charges.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    CBOE Rule 3.27 provides for a Permit lease pool to distribute 
Permits originating from the transfer of the options business of the 
NYSE to CBOE. Lease payments on the Permits are paid to persons 
identified by the NYSE. Under the existing Dutch auction rules, there 
is no limit on the monthly bid for a Permit. Consequently, a low bid 
can, and did, succeed as the lease amount for all Permits, even if the 
average of the bids is significantly higher (indicating a higher market 
value for the Permits). The proposed rule change establishes a minimum 
bid level of $1,000 for the Permits. The Commission finds that 
establishing this minimum bid is a reasonable and appropriate measure 
to attempt to prevent undervaluing the trading rights conferred by the 
Permits.
    CBOE has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice in the Federal Register. Specifically, 
the Exchange requests that the Commission accelerate the operative date 
of the proposed rule change so the Exchange can employ the revised 
Dutch auction procedures in the next scheduled auction, that of March 
15, 2000. The Exchange believes that accelerating approval of the 
proposed rule change will enable the Exchange to implement a procedure 
that more fairly and equitably allocates the cost of the lease pool 
Permits for the benefit of the lease payment recipient.\8\ The 
Commission believes that permitting the Exchange to use the revised 
procedures in the next Dutch auction would ensure that the Permits were 
not significantly undervalued at another auction. Accordingly, the 
Commission finds good cause, consistent with Sections 6(b)(5) and 
19(b)(2) of the Act,\9\ to approve the proposed rule change prior to 
the thirtieth day after the date of publication of the notice of filing 
thereof in the Federal Register.
---------------------------------------------------------------------------

    \8\ Telephone conversation between Chris Hill, Attorney, CBOE, 
and Heather Traeger, Attorney, Division of Market Regulations, SEC, 
on March 7, 2000.
    \9\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-00-05) is hereby 
approved on an accelerated basis.

    \10\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7068 Filed 3-21-00; 8:45 am]
BILLING CODE 8010-01-M