[Federal Register Volume 67, Number 63 (Tuesday, April 2, 2002)]
[Notices]
[Pages 15644-15646]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7872]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45640; File No. SR-CBOE-2002-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Allocation of Orders for Lead Market-Makers and Supplemental Market-
Makers Logged On to the Exchange's Rapid Opening System

March 25, 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\ On March 22, 2002, the CBOE submitted Amendment No. 2 to the 
proposed rule change.\4\ 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. The changes made 
by Amendment No. 1 have been incorporated into this notice.
    \4\ See letter from Madge M. Hamilton, Attorney, CBOE, to Nancy 
J. Sanow, Assistant Director, Division, Commission, dated March 22, 
2002. The changes made by Amendment No. 2 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 Interpretation and Policies .01 of CBOE

[[Page 15645]]

Rule 6.2A (``Interpretation .01'') relating to allocation of orders for 
Lead Market-Makers (``LMMs'') and Supplemental Market-Makers (``SMMs'') 
logged on to the Exchange's Rapid Opening System (``ROS'').
    Below is the text of the proposed rule change. Deleted language is 
in brackets. Proposed new language is italicized.
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Rapid Opening System
Rule 6.2A (a) Operation
* * * * *
    * * * Interpretation and Policies:
    .01  ROS may be used by LMMs and SMMs, appointed pursuant to Rule 
8.15, to conduct rotations in [S&P 100] options classes [(``OEX'')]. 
Notwithstanding paragraph (b) of this Rule, ROS contracts to trade will 
be assigned to the LMMs and SMMs logged onto the ROS system. In 
addition, subject to the review of the Board of Directors, the 
appropriate Committee may establish from time to time a participation 
entitlement formula that is applicable to the LMM who determines the 
formula for generating automatically updated market quotations during 
the trading day and provides the primary quote feed for an option class 
during an expiration cycle. The participation entitlement formula only 
applies to ROS contracts to trade and is subject to the following 
conditions: (i) the LMM will receive this participation right only 
during expiration cycles (and only with respect to time periods during 
those expiration cycles) when the LMM is providing the primary quote 
feed, and (ii) the LMM logs onto ROS the designated number of times as 
established by the appropriate Committee.
* * * * *
    The CBOE has also submitted as part of its proposed rule change the 
draft text of a proposed Regulatory Circular that would establish, and 
further describe the application of, a participation entitlement 
formula for qualifying LMMs pursuant to the above proposed amendment to 
Interpretation .01 of Rule 6.2A. 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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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 Interpretation .01 
pursuant to subparagraph IV.B.j. of the Commission's Order of September 
11, 2000,\5\ 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 would clarify that ROS trades will be assigned to 
LMMs and SMMs logged onto ROS.\6\ It would also permit the appropriate 
Floor Procedure Committee to establish an entitlement formula--i.e., a 
participation right--that is applicable to the LMM who determines the 
formula for generating automatically updated market quotations during 
the trading day and provides the primary quote feed for an option class 
during the current expiration month.\7\
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    \5\ 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).
    \6\ ROS is the Exchange's automated system for opening classes 
of options at the beginning of the trading day or for re-opening 
classes of options during the trading day. See CBOE Rule 6.2A.
    \7\ 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 
Exchange Act.
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    The proposed rule change provides that this LMM's participation 
right would apply only to ROS contracts to trade, and would be subject 
to the following conditions: (1) The LMM would only receive this 
participation right during the time it is actually providing the 
primary quote feed for an option class; and (2) the LMM must log onto 
ROS the minimum number of times established by the appropriate Floor 
Procedure Committee.
    The CBOE states that the proposed rule change clarifies that ROS 
may be used by LMMs and SMMs appointed pursuant to CBOE Rule 8.15 to 
conduct rotations in options classes,\8\ and would permit LMMs and SMMs 
to use ROS in any options class. Interpretation .01 currently limits 
the use of ROS to LMMs and SMMs in S&P 100 (``OEX'') Options. Thus, the 
proposed change would permit a wider use of ROS by LMMs and SMMs.
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    \8\ See Securities Exchange Act Release No. 45574 (March 15, 
2002) concerning a related amendment to CBOE Rule 8.15 that was 
recently approved by the Commission.
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    The proposed rule change to Interpretation .01 is also intended to 
clarify that despite CBOE Rule 6.2A(b)--which assigns ROS contracts to 
trade to participating market-makers--in crowds to which LMMs and SMMs 
are appointed, ROS contracts to trade will be assigned only to the LMMs 
and SMMs logged onto ROS.\9\ The CBOE cites the notice in which the 
rule change to adopt Interpretation .01 was published,\10\ which stated 
that openings in OEX options have been conducted for many years by the 
use of LMMs.\11\ That notice also stated:
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    \9\ Telephone conversation between Madge Hamilton and Jaime 
Galvan, Attorneys, CBOE, and Ira Brandriss, Special Counsel, 
Division, Commission, on March 21, 2002.
    \10\ Securities Exchange Act Release No. 43666 (December 4, 
2000); 65 FR 77943 (December 13, 2000) (notice of filing and 
immediate effectiveness of proposed rule change that permitted the 
implementation of ROS in S&P 100 index options).
    \11\ Id. at 77944.

    CBOE * * * represent[ed] that the ROS system was not meant to 
supplant the LMM system which has added accountability to the 
openings in OEX. The CBOE believes that, at the option of the 
appropriate CBOE Floor Procedure Committee, ROS would be used as a 
tool by the LMM to facilitate openings. * * * To the extent that 
market-makers want to participate in the opening of a series in 
which they do not hold LMM or SMM appointments, they will continue 
to be able to transmit written non-cancelable proprietary and 
market-makers orders to the LMM in the appropriate zone ten minutes 
prior to the opening of trading, pursuant to the terms of 
Interpretation .02 to CBOE Rule 24.13.\12\
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    \12\ Id.

    The CBOE states that it has introduced a vendor quote program in 
OEX to replace the Autoquote system. The vendor system accepts a quote 
stream from a firm's proprietary quote system and then sends this quote 
information to the Trading Support System to be disseminated as market

[[Page 15646]]

quotes.\13\ The CBOE believes that the LMM that provides the primary 
quote feed for an option class during the current expiration cycle 
provides a valuable service that ensures that the quotes are being 
updated in timely fashion to reflect the current state of the market. 
The LMM currently receives no participation entitlement for providing 
the primary quote feed for an option class, other than the entitlement 
it receives along with all other SMMs entitled to participate during 
the opening. The proposed rule change would permit the appropriate 
Floor Procedure Committee to establish a participation entitlement 
formula for the LMM providing the primary quote feed.
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    \13\ A minimum of three market-makers or market-maker groups are 
approved by CBOE's Index Market Performance Committee to act as LMMs 
and SMMs and provide a proprietary quote feed to CBOE's vendor quote 
system. One feed serves as the primary quote feed, and the other 
feeds serve as backup. In addition, Autoquote provided by RISC 
Systems serves as a backup.
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    The CBOE is also submitting as part of the proposed rule change a 
draft Regulatory Circular for use by any appropriate Floor Procedure 
Committee to adopt the participation entitlement formula established in 
the circular. This Regulatory Circular establishes participation 
entitlements that range from 34 percent to 40 percent for the LMM 
providing the primary quote feed. These participation entitlements 
would be implemented by permitting the LMM providing the primary quote 
feed to log onto ROS an additional number of times as indicated in the 
table below:

------------------------------------------------------------------------
                                              The LMM
                                           providing the   Participation
                                           primary quote   right of the
  If the total Number of appointed LMMs    feed must log   LMM providing
               and SMMs is                 onto ROS the     the primary
                                             following      quote feed
                                             Number of       (percent)
                                               times
------------------------------------------------------------------------
3.......................................               1              34
4.......................................               2              40
5.......................................               2              34
6.......................................               3              38
7.......................................               4              40
8.......................................               4              36
9.......................................               5              38
10......................................               6              40
11......................................               6              38
12......................................               7              39
13......................................               8              40
14......................................               8              38
15......................................               9              39
16......................................              10              40
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    The draft Regulatory Circular adds that in the event the total 
number of LMMs and SMMs appointed pursuant to CBOE Rule 8.15 is one, 
all ROS contracts to trade will be assigned to the appointed LMM or 
SMM. In the event the total number of LMMs and SMMs appointed pursuant 
to Rule 8.15 is two, the circular states that the LMMs and/or SMMs will 
each be assigned an equal portion of ROS contracts.
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 Act.\14\ The CBOE believes that the proposed 
rule change protects investors and the public interest by providing 
incentives to the LMMs to provide the primary quote feed. The CBOE 
states that the LMM that provides the primary quote feed uses its own 
proprietary system to provide the quotes, and, in addition, must make 
sure that quotes are updated in a timely fashion to reflect the current 
quotes in the underlying Index Options.
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    \14\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change proposes to give the LMM a limited 
participation entitlement during the opening of an Index Option. The 
CBOE believes that given the service that the LMM is performing, it is 
within just and equitable principles of trade to grant the limited 
participation entitlement that is proposed. For the reasons stated, the 
CBOE believes that the proposed rule change is consistent with the Act 
and the regulations thereunder.

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

    The Exchange does not believe that the proposed rule change 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.

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 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-2002-10 and should be submitted by April 23, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7872 Filed 4-1-02; 8:45 am]
BILLING CODE 8010-01-P