[Federal Register Volume 67, Number 96 (Friday, May 17, 2002)]
[Notices]
[Pages 35165-35166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12335]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45909; File No. SR-CBOE-2002-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Removal of the Restriction on Floor Brokers From Trading in the Same 
Crowds as Affiliated Designated Primary Market-Makers

May 10, 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 April 18, 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 CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to delete existing CBOE Rule 8.91(d) that 
prohibits a member affiliated with a Designated Primary Market-Maker 
(``DPM'') from acting as a floor broker in any trading crowd in which 
that DPM is the appointed DPM. 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 
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
    In 1998, CBOE filed a proposed rule change to update and reorganize 
its rules relating to the Exchange's DPM program.\3\ As part of that 
filing, CBOE adopted CBOE Rule 8.91, which limits the dealings between 
DPMs and its affiliates.\4\ CBOE Rules 8.91(a) through (c) describe the 
specific activities that are prohibited between a DPM and its 
affiliates and CBOE Rule 8.91(e) allows for exemptions to these 
restrictions if the related members can establish appropriate 
procedures to restrict the flow of material non-public and market 
information between the DPM and its affiliates.
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    \3\See Securities Exchange Act Release No. 43004 (June 30, 
2000), 65 FR 43060 (July 12, 2000) (SR-CBOE-98-54).
    \4\In addition, CBOE revised and restated CBOE Rule 8.81 as 
8.91. See supra note 3.
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    The Commission approved CBOE Rule 8.91(d) in connection with the 
Exchange's DPM program.\5\ CBOE Rule 8.91(d) provides, in pertinent 
part, that no member affiliated with a DPM may act as a floor broker in 
any trading crowd in which the DPM acts as a DPM. Although many other 
exchanges have rules similar to CBOE Rule 8.91 (a) through (c) and 
8.91(e),\6\ no other exchange's rules specifically prohibit a floor 
broker from trading in the same crowd of its affiliated specialist or 
lead market maker. The CBOE has concluded that the continued imposition 
of such a limitation on CBOE members can, and has, created a barrier to 
competition.
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    \5\See supra note 3.
    \6\See e.g., American Stock Exchange Rule 193; New York Stock 
Exchange Rule 98; and Pacific Exchange Rule 6.83.
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    CBOE Rule 8.91(d) was added to the revised DPM rules for a very 
narrow

[[Page 35166]]

purpose.\7\ Specifically, CBOE included this restriction to prevent 
DPMs from creating a wholly-owned floor brokerage subsidiary solely to 
circumvent its obligations and restrictions as a DPM. In proposing CBOE 
Rule 8.91(d), the Exchange raised concerns that, by directing orders to 
an affiliated floor broker, a DPM could circumvent its obligations to: 
(1) Place in the public order book orders eligible for entry into the 
book; (2) accord priority to any order which the DPM represents as 
agent over the DPM's principal transactions; (3) not charge any 
brokerage commission with respect to the execution of any order for 
which the DPM acts as both agent and principal; and (4) not represent 
discretionary orders.\8\ CBOE represents, however, that these concerns 
were more relevant to the structure of the DPM organizations in 1998 
than today.
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    \7\See supra note 3.
    \8\See Securities Exchange Act Release No. 41325 (April 22, 
1999), 64 FR 23691 (May 3, 1999).
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    In 1998, most DPMs were closely held entities and only about half 
of CBOE's equity option crowds were part of the DPM program. Since CBOE 
filed the proposal to implement CBOE Rule 8.91(d), there have been 
significant developments in the trading environment on CBOE, as well as 
in the entire industry. Somewhat recently, CBOE expanded the DPM 
program to virtually all trading crowds on the CBOE floor.\9\ Also, the 
options industry has seen a growing number of consolidations, a trend 
which has affected a large number of CBOE firms and their respective 
DPM operations. Consequently, a large number of firms that now run CBOE 
DPM operations are diversified and integrated corporate entities.
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    \9\CBOE represents that the CBOE index option pits do not 
utilize DPMs.
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    CBOE represents that with this growing trend toward consolidation, 
member firms and potential members are precluded from pursuing new 
trading operations simply because a subsidiary or an affiliated company 
holds a DPM allocation(s) or is conducting a floor brokerage operation 
on CBOE. Even more serious is that current CBOE floor brokers would be 
required to discontinue existing operations simply because the floor 
broker's firm is included in a legitimate merger or acquisition 
transaction that creates an affiliation with the DPM operation, despite 
the fact that the DPM is a wholly separate entity with little or no 
direct managerial control over the floor brokers' operations. The CBOE 
represents that this was not the desired effect of CBOE Rule 8.91(d).
    Additionally, in the absence of CBOE Rule 8.91(d), the CBOE 
believes that any attempt by a DPM organization to circumvent its 
obligations, in the manner proscribed by the Exchange in proposing Rule 
8.91(d) would be covered by existing rules of the 
Exchange.10 CBOE asserts that CBOE Rule 8.91(d) was not 
enacted to prevent floor brokers from trading with affiliated DPMs in 
the DPM's crowd, but to prevent member firms from creating a mechanism 
to blatantly flout its affirmative legal obligations. Due in large part 
to the recent changes both in the make-up of the CBOE's trading floor 
and in its membership, CBOE believes that CBOE Rule 8.91(d) has 
produced overly restrictive and unintended prohibitions. CBOE 
represents that, in the current environment, CBOE Rule 8.91(d) puts the 
CBOE at an undue competitive disadvantage with all other option 
exchanges. As such, in light of the industry trend toward consolidation 
and, most importantly, in consideration of the fact that no other 
exchange imposes such a restriction on its members, the CBOE believes 
that CBOE Rule 8.91(d) creates an unnecessary barrier upon its members, 
and potential members, and therefore, should be deleted.
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    \10\For example, CBOE Rule 6.43, Manner of Bidding and Offering, 
provides, in part, that ``[a]ll bids and offers shall be general 
ones and shall not be specified for acceptance by particular 
members.'' CBOE Rule 6.43 would prohibit a DPM from directing its 
trades. Also, CBOE Rule 7.4, Obligations for Orders, subparagraph d, 
Execution, requires a DPM to ``use due diligence to execute the 
orders placed in his custody at the best prices available to him 
under the Rules of the Exchange.'' CBOE Rule 4.1, Just and Equitable 
Principles of Trade, provides a general protection from any such 
illicit intentions, stating that: ``No member shall engage in acts 
or practices inconsistent with just and equitable principles of 
trade. Persons associated with members shall have the same duties 
and obligations as members under the Rules of this Chapter [IV].''
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\12\ in particular, in that it 
is designed to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and protect 
investors and the public interest.
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    \11\15 U.S.C. 78f(b).
    \12\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 will 
impose any 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 solicited or received with respect to 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; or
    (B) Institute proceedings to determine whether the proposed rule 
change 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 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 Room. Copies of the filing will also be 
available for inspection and copying at the principal offices of the 
Exchange. All submissions should refer to File No. SR-CBOE-2002-16 and 
should be submitted by June 7, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12335 Filed 5-16-02; 8:45 am]
BILLING CODE 8010-01-P