[Federal Register Volume 67, Number 199 (Tuesday, October 15, 2002)]
[Notices]
[Pages 63717-63719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26059]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46607; File No. SR-CBOE-2002-51]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Board Options Exchange, Incorporated Relating to a Safe 
Harbor From the Unbundling Rule

October 7, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 6, 2002, the Chicago Board Options Exchange, 
Incorporated (``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. On September 27, 2002, CBOE submitted to the Commission 
Amendment No. 1 to the proposed rule change.\3\ The Commission

[[Page 63718]]

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\ 217 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the text of the proposed rule change 
to clarify that the safe-harbor from the unbundling rule applies to 
orders entered outside of any 15-second period. See letter from 
Steve Youhn, Legal Division, CBOE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated September 
26, 2002.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE seeks to adopt a safe-harbor provision from its unbundling 
rule, Rule 6.8(c)(vii). Below is the text of the proposed rule change. 
Proposed deletions are in brackets; proposed new language is 
italicized.
* * * * *

Rule 6.8 RAES Operations

    (a)-(b) No change.
    (c)(i)-(vi) No change.
    (c)(vii) For purposes of determining whether an order meets the 
maximum size requirement set forth in sub-paragraph (c)(v), a 
customer's order cannot be split up (i.e., unbundled) such that its 
parts are eligible for entry into RAES. Orders entered in compliance 
with CBOE Rule 6.8(e)(iii) (i.e., outside of any 15-second period) will 
not be considered to have been unbundled.
    (d) No change.
    (e)(i)-(ii) No change.
    (e)(iii) Neither enter nor permit the entry of multiple orders on 
the same side of the market in [a call class and/or a put class for the 
same] an option issue within any 15-second period for an account or 
accounts of the same beneficial owner.

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 CBOE 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 CBOE 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 Rule 6.8(c)(vii) states ``for purposes of determining whether 
an order meets the maximum [RAES] size requirement, a customer's order 
cannot be split up such that its parts are eligible for entry into 
RAES.'' This ``unbundling'' provision is designed to prevent customers 
from splitting up non-RAES eligible orders into smaller RAES-eligible 
orders. Additionally, CBOE Rule 6.8(e)(iii) requires order-entry firms 
to prevent the entry of multiple orders in a call class and/or put 
class for the same option issue within any 15-second period for an 
account or accounts of the same beneficial owner. This ``15-second'' 
rule essentially prevents users from sending through RAES multiple 
orders in the same class within any 15-second period.
    The purpose of this rule filing is to amend Rule 6.8(c)(vii) to 
create a ``safe harbor'' from the unbundling provision by referencing 
the 15-second rule.\4\ In this respect, customers will not be deemed to 
have unbundled an order provided they comply with the 15-second rule 
(i.e., they do not enter multiple orders within 15 seconds of each 
other).\5\ Orders entered in compliance with the 15-second rule will 
not be deemed to have been unbundled. The Exchange believes the 
proposed rule change will provide more certainty to order-entry firms 
and customers alike by creating an objective, bright-line test as to 
activity that does not constitute unbundling.\6\ Previously, a customer 
could enter orders more than 15 seconds apart in the same class; 
however, the order entry firm might not be able to determine if the 
orders had been unbundled. This rule change will eliminate the need to 
make this determination. The Exchange represents that this proposed 
rule change is virtually identical to existing Pacific Exchange Rule 
6.87(d)(2).
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    \4\ CBOE has represented that this proposed rule change 
supersedes the effectiveness of its Regulatory Circular 00-27 and 
that it will advise its members accordingly. Telephone conversation 
between Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission and Steve Youhn, Legal Division, CBOE, 
October 4, 2002.
    \5\ Under Rule 6.8(e)(iii), if two orders on the same side of 
the market are entered exactly 15 seconds apart, entry of the second 
order would violate the rule and the safe-harbor would not be 
available. However, if the two orders are entered more than 15 
seconds apart, entry of the second order would not violate the rule 
and the safe-harbor would be available. For example, if the first 
order is entered at 11:00:00 a.m. and the second order is entered at 
11:00:15 a.m., entry of the second order would violate the rule. 
However, if the first order is entered at 11:00:00 a.m. and the 
second order is entered at 11:00:16 a.m., entry of the second order 
would not violate the rule. Telephone conversation between Steve 
Youhn, Legal Division, CBOE and Gordon Fuller, Counsel to the 
Assistant Director, Division of Market Regulation, Commission 
(September 25, 2002). Amendment No. 1 clarifies this point.
    \6\ The Exchange notes that the 15-second rule speaks to member 
firms (i.e., ``Order Entry Firms shall * * * neither enter nor 
permit the entry of multiple orders * * * within any 15-second 
period * * *'') As such, disciplinary action for violations is 
against the Order Entry Firm that allows the orders to be 
transmitted and NOT against the customer that submitted the orders. 
In this regard, member firms have an obligation to have reasonable 
procedures in place to ensure that the rule is complied with.
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    The Exchange also proposes to restrict applicability of the 15-
second rule by clarifying that it will only apply to orders on the same 
side of the market in a particular class. Currently, the rule applies 
to orders on either side of the market, which would prevent a customer 
from submitting two orders on opposite sides of the market within 15 
seconds. The Exchange represents that this interpretation may hinder 
the ability of investors to engage in legitimate trading strategies 
through RAES (e.g., legging into a spread). The changes proposed to 
Rule 6.8(e)(iii) will now allow customers to send in orders on the 
opposite side of the market within 15 seconds without violating the 
rule.
2. Statutory Basis
    This proposal provides a safe harbor from the unbundling rule by 
creating an objective test, which the Exchange believes will aid 
customers and firms alike in determining what constitutes unbundling. 
The proposal also limits applicability of the 15-second rule by 
clarifying that it will apply only to orders submitted on the same side 
of the market within a particular class. Accordingly, the Exchange 
believes the proposed rule change is consistent with the Act and the 
rules and regulations under the Act applicable to a national securities 
exchange and, in particular, the requirements of Section 6(b) of the 
Act. Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \7\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts and, in general, to 
protect investors and the public interest.
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    \7\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition 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

    No written comments were solicited or received with respect to the 
proposed rule change.

[[Page 63719]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change, as amended: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission, the proposed rule 
change \8\ has become effective pursuant to Section 19(b)(3)(A) of the 
Act \9\ and Rule 19b-4(f)(6)\10\ thereunder.
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    \8\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\11\
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    \11\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C).
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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 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 at the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to the File No. SR-CBOE-2002-51 and should be 
submitted by November 5, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26059 Filed 10-11-02; 8:45 am]
BILLING CODE 8010-01-P