[Federal Register Volume 68, Number 189 (Tuesday, September 30, 2003)]
[Notices]
[Pages 56356-56357]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24756]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48524; File No. SR-CBOE-2003-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Modifying the Designated Primary Market-Maker Membership Ownership 
Requirement

September 23, 2003.
    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 August 11, 2003, 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 modify the Designated Primary Market-Maker 
(``DPM'') membership ownership requirement. The proposed rule text 
follows:

(Additions are italicized)

Chicago Board Options Exchange, Incorporated

Rules

* * * * *
    Rule 8.85(e) Requirement to Own Membership. Each DPM organization 
shall own at least one Exchange membership for each trading location in 
which the organization serves as a DPM. For purposes of this Rule, a 
trading location is defined as any separate identifiable unit of a DPM 
organization that applies for and is allocated option classes by the 
appropriate Allocation Committee. An Exchange membership shall include 
a transferable regular membership or a Chicago Board of Trade full 
membership that has effectively been exercised pursuant to Article 
Fifth(b) of the Certificate of Incorporation. The same Exchange 
membership(s) may not be used to satisfy this ownership requirement for 
different DPM organizations or different trading locations operated by 
the same DPM organization. Each DPM shall have until May 12, 2003 to 
satisfy this ownership requirement, but each DPM organization must 
continually own at least one membership until that date.
    * * * Interpretations and Policies:
    .04 A DPM organization shall be deemed to own an Exchange 
membership for purposes of paragraph (e) of this Rule if a natural 
person owner of the DPM organization owns an Exchange membership that 
would otherwise qualify under paragraph (e) and such individual meets 
the following criteria: (1) Owns at least a 45% equity interest in the 
DPM organization; (2) maintains at least a 45% profit participation in 
the DPM organization; (3) is actively involved in the management of the 
DPM operation; and (4) maintains a constant presence on the Exchange 
trading floor as a primary DPM designee of the DPM organization.

II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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
    On August 21, 2000, the Commission approved a CBOE rule filing 
adopting a DPM membership ownership requirement.\3\ This requirement, 
contained in CBOE Rule 8.85(e), provided, among other things, that each 
DPM must own at least one Exchange membership, and that the requirement 
would be deemed satisfied if a senior principal of the DPM owned the 
required membership (what constituted a ``senior principal'' was not 
defined).
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    \3\ See Securities Exchange Act Release No. 43186 (August 21, 
2000), 65 FR 51880 (August 25, 2000) (SR-CBOE-99-37).
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    On February 10, 2003, the Commission approved changes to CBOE Rule 
8.85(e) to make clear that the requirements of the Rule are applicable 
to each DPM trading location (as opposed to each DPM organization), and 
to eliminate the concept that a senior principal can own a membership 
in place of the DPM organization.\4\
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    \4\ See Securities Exchange Act Release No. 47333 (February, 10, 
2003), 68 FR 7634 (February 14, 2003) (SR-CBOE-2002-18).
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    CBOE now seeks to again allow a senior principal's ownership of a 
membership to satisfy the requirement on behalf of the DPM 
organization, but only if the senior principal meets certain criteria. 
More specifically, the senior principal must be a natural person owner 
of the DPM organization who: (i) Owns at least 45% equity interest in 
the DPM organization; (ii) maintains at least a 45% profit 
participation in the DPM organization; (iii) is actively involved in 
the management of the DPM operation; and (iv) maintains a constant 
presence on the Exchange floor as a DPM designee of the DPM 
organization.
    When CBOE first proposed the DPM membership ownership requirement, 
most DPMs were smaller, local operations and the owners of the DPMs 
were floor traders who were long-time market makers on the CBOE. Many 
of these individuals owned memberships (seats) and the Exchange 
believed that these seats should qualify for purposes of compliance 
with the intent of proposed CBOE Rule 8.85(e) \5\ because these 
individuals were the primary owners of the DPMs. However, once the Rule 
was actually in place, a consolidation of DPMs on the trading floor had 
already taken place (with larger, more national firms operating 
multiple DPM stations more prevalent on CBOE) and the Exchange observed 
that some firms were asserting that non-equity employees who were 
nominally involved in the operation of the DPM and who happened to own 
seats were ``senior principals'' of the DPM for purposes of the Rule. 
This prompted the Exchange to eliminate the senior principal component 
of the Rule. Unfortunately, by eliminating the senior principal 
provision, certain DPM

[[Page 56357]]

organizations that are largely owned and managed by individual seat 
owners, were no longer able to satisfy the provisions of the Rule 
despite the fact that their seat ownerships previously complied and 
were originally intended to count towards compliance with the Rule when 
it was originally proposed.
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    \5\ CBOE states that the intent of the Rule is to ensure that 
DPMs maintain a long-term commitment to the Exchange.
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    As proposed, the revised rule would allow an individual seat owner 
who has a significant ownership and profit interest in a DPM 
organization (i.e., at least 45%), and who is actively involved in the 
management of the DPM operation and maintains a constant presence on 
the trading floor as a DPM designee, to use his seat to comply with the 
requirements of the Rule. CBOE notes that, for purposes of the proposed 
rule, a ``constant presence'' would not mean every minute of every 
trading day, but rather that the individual is primarily working on the 
trading floor as a DPM designee.
2. Statutory Basis
    The Exchange believes the proposed rule change will contribute 
toward assuring that DPMs have a long-term commitment to the Exchange. 
Accordingly, the CBOE believes it is consistent with section 6(b) of 
the Act, \6\ in general, and further the objectives of section 6(b)(5) 
in particular,\7\ in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market, and to protect investors and the public 
interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not 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

    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 self-regulatory organization 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. 
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 such filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to the file number in the caption above 
and should be submitted by October 21, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24756 Filed 9-29-03; 8:45 am]
BILLING CODE 8010-01-P