[Federal Register Volume 66, Number 66 (Thursday, April 5, 2001)]
[Notices]
[Pages 18131-18133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8347]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44121; File No. SR-CBOE-00-48]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc., Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule 
Change Relating to RAES Eligibility Requirements for OEX and DJX 
Options

March 27, 2001.

I. Introduction

    On September 20, 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 proposal to amend CBOE Rule 24.17, which governs the 
eligibility of Market-Makers to participate on the Exchange's Retail 
Automatic Execution System (``RAES'') in options on the Standard & 
Poor's 100 Index (``OEX'') and on the Dow Jones Industrial Average 
(``DJX'').
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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 was published for comment in the Federal 
Register on December 14, 2000.\3\ On January 31, 2001, the Exchange 
filed Amendment No. 1 to the proposal.\4\ No comments were received on 
the proposal. This order approves the proposed rule change, grants 
accelerated approval to Amendment No. 1, and solicits comments from 
interested persons on Amendment No. 1.
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    \3\ Securities Exchange Act Release No. 43676 (December 5, 
2000), 65 FR 78231.
    \4\ See letter from Jamie Galvin, Attorney, Legal Division, 
CBOE, to Steven Johnston, Special Counsel, Division of Market 
Regulation, Commission, dated January 31, 2001. Amendment No. 1 
proposes an exception to a requirement that Market-Makers remain 
logged onto RAES (``Amendment No. 1'').
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    The text of the proposed rule change, as amended, is set forth 
below. Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *

Rule 24.17

    (b) Individuals.
    (iv) An individual member who is logged onto RAES must log off 
the system whenever he leaves the trading crowd, unless the 
departure is for a brief interval.
    (v) RAES participation in the Option Class is limited to Market-
Makers in that Option Class. To qualify, a Market-Maker must:
    (A) be approved under Exchange rules as a Market-Maker with a 
letter of guarantee, and,
    (B) maintain his principal business on the CBOE as a Market-
Maker.[,]
    [(C) execute at least seventy five percent of his Market Maker 
contracts for the preceding calendar month in that Option Class, and
    (D) execute at least seventy five percent of his Market Maker 
trades for the preceding calendar month in that Option Class in 
person.
    In making these calculations, RAES trades will not be 
considered.]
    (vi) A Market-Maker may be eligible to participate in RAES in 
OEX and DJX during the same calendar month as long as:
    (A) OEX and DJX are trading in the same physical trading 
structure on the floor of the Exchange, and
    (B) that Market-Maker satisfies the requirements of sub-
paragraphs (b)(v)(A) and (b)(v)(B). [, and]
    [(C) that Market Maker meets one of the following three 
criteria: (1) The Market Maker satisfies the requirements of 
(b)(v)(C) and (b)(v)(D) with respect to OEX; (2) the Market Maker 
satisfies the requirements of (b)(v)(C) and (b)(v)(D) with respect 
to DJX; or (3) the Market Maker satisfies the requirements of 
(b)(v)(C) with respect to contracts in OEX and DJX combined and 
(b)(v)(D) with respect to his Market Maker trades in either OEX or 
DJX.]
    A Market-Maker must be present in the particular trading crowd 
where the class is traded while he is participating in RAES for that 
class.
    (c) Joint Accounts.
    (iii) Members of the joint account that are not present in the 
trading crowd for the Option Class may not be logged onto RAES. Any 
member of the joint account that has been logged onto RAES must log 
off the system whenever he leaves the trading crowd for the Option 
Class for other than a brief interval. Once a member of a joint 
account has been logged onto RAES for that Option Class at any time 
during an expiration cycle, each member of that account must be 
logged onto RAES for that Option Class at any time that he enters 
the trading crowd for that Option Class from the date of the initial 
log on through the business day immediately preceding expiration.
    (e) Authority to Disapprove
    (i) No person or entity may participate directly or indirectly 
in RAES, or share in the profits, directly or indirectly, with more 
than one RAES group. [, which may not exceed the maximum number of 
RAES participants set by the appropriate Committee from time to 
time. In no event may the appropriate Committee set a maximum number 
higher than 50 RAES participants or 25% of the average number of 
RAES participants for the prior quarter, whichever is smaller. The 
appropriate Committee will give groups one month notice if a 
reduction in group size becomes necessary due to application of the 
this size limit. The appropriate Committee reserves the authority to 
establish lower limits on the size of groups eligible to use RAES. 
Such limits may be imposed by the Committee at any time.]
    (ii) The appropriate Committee [also] retains the right to 
disallow any group from participating in RAES where it appears to 
the Committee that such group:
    (A) has ``purchased'' RAES rights from members of the group;
    (B) does not afford each group participant a reasonable 
participation in profits and losses (as a guideline: no RAES 
participant may receive a flat fee, and a minimum participation 
level of any group member is \1/4\ of an equal distribution to all 
group members, with responsibility for losses equivalent to share of 
profits); \4\
    (C) is managed by a person who is not a member of the group; or
    (D) is managed by a person who has a financial interest in 
another group.
    (f) Authority to Require RAES Participation
    (i) Notwithstanding the limitations in paragraph (b)(v)[(C) and 
(D)] and paragraph (b)(vi), if there appears to be inadequate RAES 
participation in the Option Class, the chairperson of the 
appropriate Committee, or a designee thereof, in consultation with a 
senior Exchange executive officer, may require Market-Makers who are 
members of the trading crowd, as defined in Rule 8.50 to log on to 
RAES absent reasonable justification or excuse for non-
participation. If there continues to be inadequate RAES 
participation, the chairperson of the appropriate Committee or a 
designee, in consultation with a senior Exchange executive officer, 
may request participation of all Market-Makers whether or not they 
are members of the Option Class crowd.
* * * * *

II. Description of the Proposal

    Currently, Rule 24.17(b)(v) sets forth four eligibility 
requirements that must

[[Page 18132]]

be met by a Market-Maker before he or she can participate on RAES in 
either OEX or DJX options. The CBOE proposal would eliminate two of the 
current four Market-Maker eligibility requirements. One of these 
requirements is that the Market-Maker must execute at least seventy-
five percent of his or her Market-Maker contracts for the preceding 
calendar month in the option class in which the Market-Maker is 
participating on RAES. Another requirement is that the Market-Maker 
must execute in person at least seventy-five percent of his or her 
Market-Maker trades for the preceding calendar month in the option 
class in which the Market-Maker is participating on RAES. No comparable 
RAES eligibility requirements are imposed upon Market-Makers trading in 
non-index option classes. The Exchange proposes to eliminate the in-
person and volume quotas from the eligibility requirements of Rule 
24.17 so that the RAES eligibility requirements of OEX and DJX Market-
Makers are the same as those for Market-Makers trading in non-index 
options.\5\
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    \5\ The remaining two eligibility provisions for the Market-
Makers desiring to trade in OEX and DJX options would continue to 
require Market-Makers to be approved under Exchange rules and to 
maintain their principal places of business on the CBOE as Market-
Makers. CBOE Rule 24.17(b)(v)(B); CBOE Rule 24.17(b)(v)(C).
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    The Exchange represents that recently, Market-Maker participation 
on RAES in index options has been low compared to historical levels. 
The Exchange believes that this is a problem that has been aggravated 
by the fact that the in-person and volume requirements in essence 
require the Exchange to have new Market-Makers desiring to participate 
on RAES wait for at least 30 days before logging onto RAES. The 
proposed rule change would permit a new Market-Maker to log onto RAES 
if the Market-Maker: (1) Has signed the RAES Participation Agreement 
and completed the RAES instructional program; \6\ (2) has been approved 
under Exchange rule as a Market-Maker with a letter of guarantee; \7\ 
and (3) is maintaining his or her principal business on the CBOE as 
Market-Maker.\8\
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    \6\ CBOE Rule 24.17(b)(i).
    \7\ CBOE Rule 24.17(b)(v)(A).
    \8\ CBOE Rule 24.17(b)(v)(B).
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    Also, the Exchange proposes to eliminate certain requirements that 
Market-Makers currently must meet to participate in both OEX and DJX 
options during the same calendar month. Rule 24.17(b)(vi)(C) requires 
that, before participating in both OEX and DJX options during the same 
month, a Market-Maker must meet: (1) The in-person and volume 
requirements with respect to OEX; (2) the in-person and volume 
requirements with respect to DJX; or (3) the volume requirement with 
respect to OEX and DJX combined, as well as the in-person requirement 
with respect to OEX or DJX. The Exchange proposal would eliminate Rule 
24.17(b)(vi)(C). Under the proposed rule change, a Market-Maker would 
be eligible to participate in OEX and DJX during the same calendar 
month as long as: (1) OEX and DJX options continue to be traded at the 
same physical trading locations; \9\ and (2) the Market-Maker meets the 
criteria under 24.17(b)(v)(A) and 24.17(b)(v)(B).\10\
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    \9\ CBOE Rule 24.17(b)(vi)(A).
    \10\ CBOE Rule 24.17(b)(vi)(B).
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    The Exchange also proposes to eliminate the cap, set forth in Rule 
24.17(e)(i), on the number of Market-Makers that may participate in a 
RAES group. Rule 24.17(e)(i) provides that a RAES group may not exceed 
the lesser of (1) 50 RAES participants; (2) 25 percent of the average 
number of RAES participants for the prior quarter, or (3) a smaller 
maximum number set by ``the appropriate Committee'' \11\ According to 
the CBOE, a recent decline in RAES participation in index options has, 
by operation of Rule 24.17(e)(i), resulted in reductions, as compared 
to historical levels, in the size of RAES groups. The reductions have 
taken place because Rule 24.17(e)(i) currently ties maximum RAES group 
size to the level of RAES participation.\12\
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    \11\ CBOE Rule 24.17(a)(iii) defines ``the appropriate 
Committee'' as ``the Exchange Committee to which the Exchange 
delegates the market performance function for options on the S&P 100 
in the case of OEX and on the DJIA in the case of DJX.''
    \12\ Conversation between Jamie Galvin, Attorney, Legal 
Division, CBOE, and Steven Johnston, Special Counsel, Division of 
Market Regulation, Commission, February 28, 2001 (clarifying 
operation of current CBOE Rule 24.17(e)).
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    The Exchange further proposes to add to Rule 24.17 an exception to 
the requirement that a Market-Maker who has logged onto RAES in OEX or 
DJX must log RAES whenever he or she leaves the respective trading 
crowd. The exception would allow OEX and DJX Market-Makers to remain 
logged onto RAES if the Market-Maker's departure from the trading crowd 
were for a ``brief interval.'' The proposed exception mirrors one in 
current Rule 24.16,\13\ which governs eligibility requirements for the 
Standard & Poor's 500 Index (``SPX''), and in rule 8.16,\14\ the 
eligibility rule for equity options.\15\ The Exchange believes that OEX 
and DJX RAES Market-Makers should have the benefit of an exception that 
currently applies to SPX and equity options Market-Makers. ``The 
appropriate Committee'' would have authority to determine the length of 
time that constitutes a ``brief interval'' for the OEX and DJX trading 
crowds. Finally, Amendment No. 1 proposes to revise Rule 24.17(c)(iii) 
to require members of a joint account \16\ who have been logged onto 
RAES to log off the system whenever they leave the trading crowd for 
other than a brief interval. The proposed revision would make the 
language of proposed Rule 24.17(c)(iii) identical to the language of 
Rule 24.16(c)(iii).\17\
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    \13\ CBOE Rule 24.16(c)(iii).
    \14\ CBOE Rule 8.16(a)(iii).
    \15\ A ``brief interval'' in SPX options has been determined by 
``the appropriate Committee'' to mean no more than 10 to 15 minutes. 
In equity options, a brief interval has been determined by ``the 
appropriate Committee'' to mean 5 minutes or less.
    \16\ A member of a joint account is either: (1) A Market-Maker 
having an appointment under CBOE Rule 8.7(b); or (2) a clearing 
member which carries the joint account. CBOE Rule 8.9, 
Interpretation .01.
    \17\ Amendment No. 1.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act \18\ and the rules and regulations 
promulgated thereunder applicable to a national securities exchange. 
Specifically, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act,\19\ which requires that the rules of an 
Exchange be designed to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest.
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    \18\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78f(b)(5).
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    The CBOE proposal would amend Rule 24.17 to eliminate what the CBOE 
represents are several disincentives to Market-Maker participation in 
OEX and DJX trades. The Commission finds that removal of in-person 
volume quotas, elimination of the cap on the number of Market-Makers 
that may participate in OEX and DJX trades, and the inclusion of an 
exception to log-on requirements, are appropriate measures to reduce 
disincentives. In addition, the Commission recognizes the importance of 
encouraging Market-Maker participation to ensure adequate liquidity, 
particularly where participation levels are low.
    The Commission finds good cause for approving Amendment No. 1 to 
the

[[Page 18133]]

CBOE proposal prior to the thirtieth day after the date of publication 
of notice of filing thereof in the Federal Register. By extending to 
members of joint accounts the ``brief interval'' exception to the RAES 
log-on requirement, Amendment No. 1 provides for more consistent 
application of that exception. Therefore, the Commission finds good 
cause for accelerating approval of Amendment No. 1.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change, 
including whether it 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 Section. Copies of 
Amendment No. 1 to the proposed rule change will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. CBOE-00-48 and should be submitted 
by April 26, 2001.

V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposal (SR-CBOE-00-48) be and hereby is, approved, 
and Amendment No. 1 is approved on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-8347 Filed 4-4-01; 8:45 am]
BILLING CODE 8010-01-M