[Federal Register Volume 67, Number 63 (Tuesday, April 2, 2002)]
[Notices]
[Pages 15643-15644]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7868]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45633; File No. SR-CBOE-2002-09]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Allocation of Orders for Appointed Market-Makers in Index FLEX Options

March 22, 2002.
    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 February 19, 2002, 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 
Exchange. On March 18, 2002, the CBOE submitted Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Jaime Galvan, Attorney, CBOE, to Nancy J. 
Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated March 15, 2002 (``Amendment No. 
1''). The changes made by Amendment No. 1 have been incorporated 
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 24A.5 relating to allocation 
of orders for Appointed Market Makers in Index Flex Options (``AMMs'').
    Below is the text of the proposed rule change. Deleted language is 
in brackets. Proposed new language is italicized.
* * * * *

Chicago Board Options Exchange, Inc.

Rules

CHAPTER XXIVA

Flexible Exchange Options

* * * * *
FLEX Trading Procedures and Principles
* * * * *
Rule 24A.5
* * * * *
    (e) Priority of Bids and Offers. (no change)
    (i) Bids. (no change)
    (ii) Offers. (no change)
    (iii) Notwithstanding the foregoing sub-paragraphs (i) and (ii) of 
this paragraph (e), whenever the Submitting Member has indicated an 
intention to cross or act as principal on the trade and has matched or 
improved the BBO during the BBO Improvement Interval, the following 
priority principles will apply:
    (A) (no change)
    (B) In the case of Index FLEX Options, where the Submitting Member 
has matched the BBO or in the event the Submitting Member has improved 
the BBO and any other FLEX participating member matched the improved 
BBO, the Submitting Member will have priority to execute the contra 
side of the trade that is the subject of the Request for Quotes, but 
only to the extent of the largest of [25%] 20% of the trade, a 
proportional share of the trade, $1 million Underlying Equivalent 
Value, or the remaining Underlying Equivalent Value on a closing 
transaction valued at less than $1 million.
    (iv) Notwithstanding subparagraphs (i), (ii) and (iii), subject to 
the review of the Board of Directors, the appropriate Floor Procedure 
Committee may establish from time to time a participation entitlement 
formula that is applicable to all FLEX Appointed Market-Makers.
* * * * *
    The CBOE has also submitted as part of its proposed rule change the 
draft text of a proposed Regulatory Circular that would establish a 
participation entitlement formula pursuant to the above proposed CBOE 
Rule 24A.5(e)(iv) and would further describe its application, as 
discussed in Section II.A. below. The text of this proposed Regulatory 
Circular 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 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 
Item IV 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
    CBOE is submitting the proposed change to amend CBOE Rule 24A.5 
pursuant to subparagraph IV.B.j. of the Commission's Order of September 
11, 2000,\4\ which requires that respondent options exchanges adopt 
new, or amend existing, rules to make express any practice or procedure 
``whereby market makers trading any particular option class determine 
by agreement * * * the allocation of orders in that option class.'' The 
proposed rule change addresses the allocation of orders for FLEX Index 
Options.
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    \4\ Order Instituting Public Administrative Proceedings Pursuant 
to section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings and Imposing Remedial Sanctions. Securities Exchange Act 
Release No. 43268 (September 11, 2000).
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    The proposed rule change would add CBOE Rule 24A.5(e)(iv), which 
would permit the appropriate Floor Procedure Committee to establish a 
participation entitlement formula that is applicable to all AMMs in 
FLEX Index Options. In addition, the proposed rule change would amend 
the participation entitlement of the Submitting Member \5\ by deleting 
``25%'' in CBOE Rule

[[Page 15644]]

24A.5(e)(iii)(B) and replacing it with ``20%.'' \6\
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    \5\ A ``Submitting Member'' is defined in CBOE Rule 24A.1(q) as 
an Exchange member that initiates FLEX bidding and offering by 
submitting a FLEX Request for Quotes.
    \6\ CBOE Rule 24A.5(e)(iii)(B) currently permits a Submitting 
Member who has matched or improved the BBO to have priority to 
execute the contra side of the trade that is the subject of the 
Request for Quotes (``RFQ''), but only to the extent of the largest 
of 25% of the trade, a proportional share of the trade, $1 million 
Underlying Equivalent Value, or the remaining Underlying Equivalent 
Value on a closing transaction valued at less than $1 million.
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    CBOE is also submitting as part of the proposed rule change a draft 
Regulatory Circular in which the SPX Floor Procedure Committee \7\ 
would exercise its authority under the proposed CBOE Rule 24A.5(e)(iv) 
to set the participation entitlement formula for AMMs.\8\ Specifically, 
the Regulatory Circular would state that the Submitting Member is 
entitled to cross up to 20% of the contracts in an order that occurs as 
a result of the Submitting Member's Request for Quotes (``RFQ''). The 
Regulatory Circular would stipulate that to receive this participation 
entitlement, the Submitting Member must indicate an intention to cross 
or act as principal with respect to the FLEX trade. The Regulatory 
Circular would also state that the AMM(s) is (are) entitled to the 
contracts remaining in the order up to an aggregate of 40% of the 
order, but that a Submitting Member and the AMM(s) could not receive an 
entitlement that collectively equals more than 40% of the order. The 
remaining contracts in the order would then be allocated according to 
the relevant Exchange rules.\9\
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    \7\ The SPX Floor Procedure Committee would be the appropriate 
Floor Procedure Committee pursuant to proposed Rule CBOE Rule 
24A.5(e)(iv) to establish the participation entitlement formula. 
Telephone conversation between Madge Hamilton and Jaime Galvan, 
Attorneys, the CBOE; and Nancy Sanow, Assistant Director, Ira 
Brandriss, Special Counsel, and Frank N. Genco, Attorney-Advisor, 
Division, Commission, on March 4, 2002.
    \8\ The Exchange states that changes to this Regulatory 
Circular, including changes to a participation entitlement formula, 
will be submitted to the Commission pursuant to section 19(b) of the 
Act.
    \9\ The AMM(s) would not be entitled to a share in these 
remaining contracts unless all other participants have been 
satisfied. Telephone conversation between Jaime Galvan, Attorney, 
CBOE, and Ira Brandriss, Special Counsel, and Frank N. Genco, 
Attorney-Advisor, Division, Commission, March 19, 2002.
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2. Statutory Basis
    The CBOE believes that the proposed rule change is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market, to protect 
investors and the public interest, and is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers, pursuant 
to section 6(b)(5) of the Exchange Act.\10\ The CBOE believes that, 
through the AMMs' obligation to respond to all RFQs, liquidity is 
provided to the FLEX Index Options market. In return for the 
obligations that are imposed on AMMs in FLEX Index Options, the CBOE 
believes it is just and equitable that the AMMs receive a participation 
entitlement, which may be up to 40% of an order.
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    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change, as amended.

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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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 the CBOE. All 
submissions should refer to file number SR-CBOE-2002-09 and should be 
submitted by April 23, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7868 Filed 4-1-02; 8:45 am]
BILLING CODE 8010-01-P