[Federal Register Volume 67, Number 100 (Thursday, May 23, 2002)]
[Notices]
[Pages 36276-36277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12981]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45934; File No. SR-CBOE-2002-09]


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

May 15, 2002.

I. Introduction

    On February 15, 2002, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to 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 relating to the allocation of 
orders for Appointed Market-Makers (``AMMs'') in Index FLEX Options. On 
March 18, 2002, the CBOE submitted Amendment No. 1 to the proposed rule 
change. The proposed rule change and Amendment No. 1 were published for 
comment in the Federal Register on April 2, 2002.\3\ The Commission 
received no comments on the proposed rule change. This order approves 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 45633 (March 22, 
2002), 67 FR 15643 (April 2, 2002) (``Notice''). Although the Notice 
stated that the date of filing of Amendment No. 1 was March 18, 
2002, the amendment was deemed filed on March 15, 2002.
---------------------------------------------------------------------------

II. Description of Proposal

    The CBOE is proposing to amend CBOE Rule 24A.5, concerning the 
allocation of orders in FLEX Index Options. The proposed rule change 
was submitted by the CBOE 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.''
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    CBOE Rule 24A.9 provides for the appointment of Appointed Market-
Makers (``AMMs'') in FLEX Index Options and assigns these AMMs certain 
specified obligations in the trading of such options. The proposed rule 
change would amend CBOE Rule 24A.5, which relates to trading procedures 
for FLEX Options, to permit the appropriate Floor Procedure Committee--
in this case, the SPX Floor Procedure Committee--to establish a 
participation entitlement formula for such AMMs.
    The proposed rule change would also amend the participation 
entitlement of a ``Submitting Member,'' i.e., the Exchange member that 
initiates FLEX bidding and offering by submitting a FLEX Request for 
Quotes (``RFQ''). Currently, a Submitting Member who has indicated an 
intention to cross or act as principal on a FLEX Index Options trade, 
and has matched or improved the best bid or offer given in response to 
its RFQ, is granted priority to execute the contra side of the trade--
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. The proposed rule change 
would reduce the percentage participation entitlement, where it 
applies, from 25% to 20%.
    As part of the proposed rule change, the CBOE submitted a draft 
Regulatory Circular with which the SPX Floor Procedure Committee would 
exercise its authority to set the participation entitlement formula for 
AMMs.\5\ 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 RFQ when all 
conditions of such percentage are met. The Regulatory Circular would 
state further 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 
the 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.\6\
    The CBOE believes that it is just and equitable for AMMs in FLEX 
Index Options to receive a participation entitlement in return for the 
obligations that are imposed upon them. The CBOE believes that such an 
entitlement is

[[Page 36277]]

important to encourage members of the Exchange to become AMMs, because 
FLEX Index Options are customized and do not have the same liquidity as 
standardized options, and AMMs are subject to greater risk when quoting 
such options.
---------------------------------------------------------------------------

    \5\ The Exchange has stated that changes to this Regulatory 
Circular, including changes to the participation entitlement 
formula, will be submitted to the Commission pursuant to Section 
19(b) of the Act. See Notice.
    \6\ The CBOE has stated that AMM(s) would not be entitled to a 
share in these remaining contracts unless all other participants 
have been satisfied. See Notice.
---------------------------------------------------------------------------

III. Discussion

    After careful consideration, the Commission has determined to 
approve the proposed rule change.\7\ For the reasons discussed below, 
the Commission finds that the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with Section 6(b)(5) 
of the Act.\8\
---------------------------------------------------------------------------

    \7\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the rules 
of an exchange, among other things, be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest; and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    The Commission believes that it is reasonable for the Exchange to 
offer AMMs a participation guarantee to encourage Exchange members to 
become AMMs and provide liquidity in FLEX Index Options. The Commission 
notes that the proposed entitlement of the AMM together with any 
guaranteed participation granted to the Submitting Member could not 
exceed 40 percent of an order. The Commission has found with respect to 
participation guarantees in other contexts that a maximum combined 
guarantee of 40 percent is not inconsistent with statutory standards of 
competition and free and open markets.\9\
---------------------------------------------------------------------------

    \9\ See, e.g., Securities Exchange Act Release Nos. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000) at 11398; and 43100 
(July 31, 2000), 65 FR 48778 (August 9, 2000) at notes 96-99 and 
accompanying text.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-2002-09) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12981 Filed 5-22-02; 8:45 am]
BILLING CODE 8010-01-P