[Federal Register Volume 69, Number 53 (Thursday, March 18, 2004)]
[Notices]
[Pages 12878-12879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6107]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49411; File No. SR-CBOE-2004-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Establishing a Process for Approving Remote 
Electronic Designated Primary Market-Makers

March 12, 2004.
    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 March 11, 2004, 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. On March 11, 
2004, the CBOE filed Amendment No. 1 to the proposed rule change.\3\ 
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\ Amendment No. 1 replaces and supercedes the CBOE's original 
19b-4 filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt new rules establishing a process for 
approving remote electronic Designated Primary Market-Makers (``e-
DPMs'').
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized.
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
    Rule 8.92 Electronic DPM Program
    (a) [Reserved]
    (b) Approval to Act as an e-DPM. Determinations regarding granting 
or withdrawing approval to act as an e-DPM shall be made by the Board 
of Directors or a committee designated by the Board of Directors. A 
member organization desiring to be approved to act as an e-DPM shall 
file an application with the Exchange on such form or forms as the 
Exchange may prescribe. The Exchange shall determine the appropriate 
number of approved e-DPMs per option class. Factors to be considered in 
approving an e-DPM may include any one or more of the following:
    (i) adequacy of resources including capital, technology, and 
personnel;
    (ii) history of stability, superior electronic capacity, and 
superior operational capacity;
    (iii) market-making and/or specialist experience in a broad array 
of securities;
    (iv) ability to interact with order flow in all types of markets;
    (v) existence of order flow commitments;
    (vi) willingness to accept allocations as an e-DPM in options 
underlying at least 400 securities; and
    (vii) willingness and ability to make competitive markets on the 
Exchange and otherwise to promote the Exchange in a manner that is 
likely to enhance the ability of the Exchange to compete successfully 
for order flow in the options it trades.
    In selecting an applicant for approval as an e-DPM, the Exchange 
may place one or more conditions on the approval concerning the 
operations of the applicant and the number of option classes which may 
be allocated to the applicant. Each e-DPM shall retain its approval to 
act as an e-DPM until the Exchange relieves the e-DPM of its approval 
and obligations to act as an e-DPM or the Exchange terminates the e-
DPM's approval to act as an e-DPM pursuant to Exchange Rules. An e-DPM 
may not transfer its approval to act as an e-DPM unless approved by the 
Exchange.
    (c)-(e) [reserved]
* * * * *

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
    During 2004, CBOE will propose significant enhancements to its 
Hybrid Trading System. Among those will be the addition of a proposed 
new category of CBOE market making participants-- e-DPMs. e-DPMS, if 
approved by the Commission, will be member organizations appointed to 
operate on CBOE as competing DPMs in a broad number of option classes. 
Rules governing e-DPMs' trading procedures and obligations are being 
submitted to the Commission as part of a separate rule filing. The 
purpose of this filing is to establish rules and criteria to allow CBOE 
to appoint e-DPMs. Any such appointments would be contingent on 
Commission approval of CBOE rules governing e-DPM trading procedures 
and obligations.
    The CBOE expects to approve/appoint a limited number of e-DPMs. The 
Exchange's Board of Directors has established a special appointments 
committee to select the firms that would be designated as e-DPMs, and 
to make initial e-DPM option class allocations. The committee consists 
of the Lessor Director, two Public Directors, the Vice Chairman, and 
the President. Candidates seeking appointment as an e-DPM will be 
evaluated on the basis of how well they meet the following criteria:
     Significant market-making and/or specialist 
experience in a broad array of securities;
     Superior resources, including capital, 
technology and personnel;
     Demonstrated history of stability, superior 
electronic capacity, and superior operational capacity;
     Proven ability to interact with order flow in 
all types of markets;
     Existence of order flow commitments;

[[Page 12879]]

     Willingness to accept allocations as an e-DPM in 
options overlying 400 or more securities; and
     Willingness and ability to make competitive 
markets on CBOE and otherwise to promote CBOE in a manner that is 
likely to enhance the ability of CBOE to compete successfully for order 
flow in the options it trades.
    The purpose of the final factor listed above is to permit the 
Exchange to take into consideration in the selection process which of 
the applicants will best be able to enhance the competitiveness of the 
Exchange. ``Willingness to promote CBOE'' includes assisting in meeting 
and educating market participants, maintaining communications with 
member firms in order to be responsive to suggestions and complaints, 
responding to suggestions and complaints, and other like activities. 
Further, this factor will not be applied by the Exchange to restrict, 
directly or indirectly, e-DPMs' activities as a market maker or 
specialist elsewhere, or to restrict how e-DPMs handle orders held by 
them in a fiduciary capacity to which they owe a duty of best 
execution.
    The factor relating to the existence of order flow commitments 
would be used to evaluate existing order flow commitments between the 
applicant and order flow providers. A future change to, or termination 
of, any such commitments considered by the Exchange during the review 
process could not be used by the Exchange at any point in the future to 
terminate or take remedial action against an e-DPM. Further, the 
Exchange could not take remedial action solely because orders are not 
subsequently routed to the Exchange but elsewhere pursuant to any such 
commitments. Whether actual commitments result in orders being routed 
to the Exchange is a separate matter from the criteria for which an e-
DPM's performance would be evaluated.
    The proposed rules also provide that (i) as part of the approval of 
an e-DPM, the Exchange may place conditions on the approval based on 
the operations of the applicant and the number of option classes which 
may be allocated to the applicant; (ii) each e-DPM shall retain its 
approval unless such approval is removed by the Exchange pursuant to 
appropriate rules; and (iii) an e-DPM may not transfer its approval to 
act as an e-DPM unless allowed by the Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \4\ in general and furthers the 
objectives of sections 6(b)(5) \5\ of the Act in particular in that it 
serves to remove impediments to and perfect the mechanism of a free and 
open market because it will help the Exchange manage its proposed 
initial launch of e-DPM trading.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE believes that the 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 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, 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-CBOE-2004-17. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review your comments more efficiently, comments should be 
sent in hardcopy or by e-mail but not by both methods. 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 the CBOE. All 
submissions should refer to File No. SR-CBOE-2004-17 and should be 
submitted by April 8, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6107 Filed 3-17-04; 8:45 am]
BILLING CODE 8010-01-P