[Federal Register Volume 66, Number 12 (Thursday, January 18, 2001)]
[Notices]
[Pages 4877-4879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-1485]


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SECURITIES AND EXCHANGE COMMISSION

[Releae No. 34-43829; File No. SR-CBOE-00-10]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the Chicago Board Options Exchange, Inc., and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
No. 1, to Permit the Chairman of the Appropriate Floor Procedure 
Committee to Decrease the Size of Orders Eligible for Entry Into the 
Retail Automatic Execution System During Unusual Market Conditions

January 10, 2001.

I. Introduction

    On March 28, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change that would grant the Chairman of 
an appropriate Floor Procedure Committee (``FPC''), or his designee, 
the authority to decrease the size of orders eligible for entry into 
the Exchange's Retail Automatic Execution System (``RAES'') during 
unusual market conditions. On January 3, 2001, the Exchange filed 
Amendment No. 1 to the proposed rule change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Angelo Evangelou, Counsel, CBOE, to Jennifer 
Colihan, Attorney, Division of Market Regulation (``Division''), 
Commission, dated January 2, 2001. (``Amendment No. 1''). In 
Amendment No. 1, the Exchange clarified that the Chairman may 
designate his authority solely to: (1) another member of the FPC, or 
(2) or (2) two CBOE floor officials.
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    The proposed rule change was published for comment in the Federal 
Register on June 8, 2004.\4\ The Commission received no comments on the 
proposal. This order approves the proposal.
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    \4\ See Securities Exchange Act Release No. 42862 (May 30, 
2000), 65 FR 36481.
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II. Description of Proposal

    Currently, the appropriate FPC of the CBOE has the authority to 
determine the size of orders eligible for entry into RAES up to a 
maximum of seventy-five contracts.\5\ In this proposal, the Exchange is 
seeking to amend Interpretation .05 to Rule 6.8, RAES Operations, to 
allow the Chairman of the appropriate FPC, or the Chairman's 
designee,\6\ to exercise the authority of the FPC to decrease the size 
of orders eligible for entry into RAES for option classes during 
unusual market conditions.\7\
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    \5\ See Exchange Rules 6.8(a)(i) and 6.8(e). The Commission 
recently approved a proposed rule change by the Exchange to increase 
the maximum size of RAES-eligible orders to seventy-five contracts. 
See Securities Exchange Act Release No. 43517 (November 3, 2000), 65 
FR 69082 (November 15, 2000).
    \6\ See Amendment No. 1, supra note 3.
    \7\ The Exchange has represented that the minimum level to which 
the Chairman, or his designee, may decrease the size of orders 
eligible for entry into RAES pursuant to the proposed rule is ten 
contracts. Telephone conversation between Angelo Evangelou, Counsel, 
CBOE, and Jennifer Colihan, Attorney, Division, Commission, on 
September 8, 2000.
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    In its filing, the Exchange represented that it is sometimes 
necessary to temporarily reduce the eligible order size levels for RAES 
in situations where unusual market conditions exist. However, under the 
current Exchange rules,a decision to decrease the eligible

[[Page 4878]]

order size must be made by the appropriate FPC. The Exchange 
represented that it is not practicable to provide notice to all the 
members of the appropriate FPC and convene a meeting during the day to 
make the decision to decrease eligible order size in the event of an 
unusual market situation.
    Consequently, the Exchange seeks to delegate the authority provided 
in CBOE Rule 6.8(a)(i) to the Chairman of the appropriate FPC, or to 
the Chairman's designee, to decrease the eligible order size for RAES 
in unusual market conditions,\8\ provided that the Chairman or his 
designee believes that the action is warranted and provided that the 
decision is made for no more than one trading day (as is currently the 
case for the Chairman increasing the order size eligibility for 
RAES).\9\ To the extent that the conditions continue to exist on the 
following trading day, the Chairman or his designee must review the 
situation and make an independent decision to decrease the RAES 
eligible order size for that subsequent day. Further, any decisions 
made by the Chairman or his designee to decrease the RAES eligible 
order size for a particular option class for consecutive days will be 
reviewed by the FPC at its next regularly scheduled meeting. After 
reviewing these decisions, the FPC can provide guidance to the Chairman 
or his designee about the use of this authority if the FPC considers it 
appropriate.
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    \8\ According to the Exchange, unusual market conditions may 
include drastic movement in the security underlying an option, or 
news pending about the issuer of the underlying security. Telephone 
conversation between Angelo Evangelou, Counsel, CBOE, and Jennifer 
Colihan, Attorney, Division, Commission, on September 8, 2000.
    \9\ Under CBOE Rule 6.8, Interpretation .05, the Chairman of the 
appropriate FPC currently is authorized to increase the order size 
eligibility for RAES if he believes that the action is in the 
interest of alleviating a potential backlog of unexecuted orders in 
situations where a particular class of option is experiencing a 
large influx of orders, and provided the decision is made for no 
more than one trading day. That rule, however, does not permit the 
Chairman to decrease the order size eligibility maximum.
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III. Discussion

    After careful review, 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, the requirements of section 6(b) of the Act \10\ 
and the rules and regulations thereunder.\11\ Section 6(b)(5) of the 
Act \12\ states that the rules of an exchange must be designed to 
facilitate securities transactions and to remove impediments to and 
perfect the mechanism of a free and open market. The Commission 
believes that granting the Chairman of the appropriate FPC, or the 
Chairman's designee, the discretion to exercise the authority of the 
Committee to decrease the size of orders for entry into RAES is 
consistent with these statutory provisions.\13\
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    \10\ 15 U.S.C. 78f(b).
    \11\ In approving this rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with section 3(f) of the Act. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ The Commission notes that approval of this rule change is 
not dispositive of whether all aspects of the revised Interpretation 
comply with the terms and conditions of section IV.h.(i)(bb) of the 
Order Instituting Public Administrative Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Finding and Imposing Remedial Sanctions (the ``Order''). The parties 
to the Order, including the Exchange, are required to ``specify the 
circumstances, if any, under which automated execution systems can 
be disengaged or operated in any manner other than the normal manner 
set forth in the exchange's rules and require the documentation of 
the reasons for each decision to disengage an automated execution 
system or operate it in any manner other than the normal manner.'' 
The Order further provides that parties to the Order must submit to 
the Commission staff draft proposed rule changes that comply with 
the requirements set forth above no later than six months from the 
date of the Order. See Securities Exchange Act Release No. 43268 
(September 11, 2000).
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    The Commission further believes that the requirement that the FPC 
review any decision made by the Chairman or his designee to decrease 
the size of orders eligible for entry into RAES for consecutive days 
will help ensure that the Chairman, or his designee, only uses the 
discretion in limited circumstances that require that such action be 
taken to ensure the market's integrity and adequate function. Finally, 
the Commission notes that because this proposed rule involves changing 
the parameters of the eligible RAES order size, any action taken 
pursuant to the proposed rule must be documented in accordance with 
CBOE Rule 6.8, Interpretation .08.\14\
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    \14\ The Commission notes that Interpretation .08 to CBOE rule 
6.8 requires the CBOE to document instances in which the Chairman or 
his designee decrease RAES order size eligibility levels pursuant to 
this proposal. See Securities Exchange Act Release No. 43196 (August 
22, 2000), 65 FR 52800 (August 30, 2000) (noticing immediate 
effectiveness of SR-CBOE-00-38, which implemented Interpretation 
.08).
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IV. Amendment No. 1

    In Amendment No. 1, the Exchange clarified that the Chairman may 
designate his authority to decrease the size of orders for entry into 
RAES during unusual market conditions only to: (1) Another member of 
the FPC, or (2) two CBOE floor officials.\15\ The Commission believes 
that this limitation will help to ensure that only those persons with 
sufficient knowledge and judgment will be vested with the authority to 
make decisions that will affect the manner in which RAES is operated, 
and consequently the manner in which customer orders are executed. The 
Commission believes that is would be inappropriate for the Chairman of 
an FPC to delegate his authority to make decisions regarding how RAES 
is operated to an unlimited number of persons, with varying degrees of 
knowledge and aptitude for making such decisions.
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    \15\ See Amendment No. 1, supra note 3.
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    The Commission, therefore, finds that Amendment No. 1 is consistent 
with section 6(b)(5) of the Act,\16\ which requires that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to foster cooperation and coordination with persons engaged in 
relating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities. The Commission also finds 
good cause to approve Amendment No. 1 to the proposed rule change prior 
to the thirtieth day after the date of publication of notice of filing 
of the amendment in the Federal Register. The Commission notes that 
Amendment No. 1 merely clarifies precisely who is eligible to be the 
``Chairman's designee'' for purposes of the proposed interpretation. 
Accordingly, the Commission believes that there is good cause, 
consistent with section 6(b)(5) and 19(b) of the Act \17\ to approve 
Amendment No. 1 on an accelerated basis.
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ 15 U.S.C. 78f(b)(5) and 78s(b).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 at the Commission's 
Public Reference Room. Copies of such filing will also be

[[Page 4879]]

available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-00-10 and 
should be submitted by February 8, 2001.

VI. Conclusion

    For all of the aforementioned reasons, 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.
    It Is Therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-00-10), as amended, is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-1485 Filed 1-17-01; 8:45 am]
BILLING CODE 8010-02-M