[Federal Register Volume 69, Number 97 (Wednesday, May 19, 2004)]
[Notices]
[Pages 28959-28962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49687; File No. SR-CBOE-2004-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments Nos. 1 and 2 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to the Relocation of an Entire Trading 
Station's Securities to Another Trading Station

May 12, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 28, 2004, the Chicago Board Options 
Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. CBOE filed Amendment No. 1 on March 15, 
2004.\3\ CBOE filed Amendment No. 2 on May 6, 2004.\4\ 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\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Christopher Solgan, Attorney, Division of Market Regulation 
(``Division''), Commission, dated March 12, 2004 (``Amendment No. 
1''). In Amendment No. 1, CBOE amended the proposal to further 
explain why it is transferring to the Modified Trading System 
Appointments (``MTS'') Committee the authority to determine whether 
to relocate an entire trading station's securities to another 
trading station that is operated by the same Designated Primary 
Market Maker (``DPM''). CBOE also clarified the process the MTS 
Committee would follow in deciding whether to relocate securities. 
CBOE also noted in Amendment No. 1 that the MTS Committee would 
relocate securities in accordance with CBOE Rule 30.18, which allows 
for limited side-by-side trading and integrated market making, and 
that to the extent any person is aggrieved economically by any MTS 
Committee decision, such person may seek to have the decision 
reviewed under Chapter XIX of CBOE's Rules. Finally, CBOE also 
amended its proposed rule text in its entirety.
    \4\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Christopher Solgan, Attorney, Division, Commission, dated 
May 5, 2004 (``Amendment No. 2''). In Amendment No. 2, CBOE 
clarified when the MTS Committee may forgo giving notice to a DPM 
organization and trading crowds prior to relocation because 
expeditious action is necessary. CBOE also stated that it 
anticipates that the relocation of securities under this proposal 
pursuant to the consideration of the appropriate factors, will have 
a positive impact on the affected DPM's, market makers, and market 
participants.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rules 8.84 and 8.95 to grant to the MTS 
Committee, and not the Allocation Committee, the authority to approve 
the relocation of an entire trading station's securities to another 
trading station that is operated by the same DPM organization. The text 
of the proposed rule change follows. Additions are in italics.
* * * * *

Section C: Designated Primary Market-Makers (Rules 8.80-8.91)

* * * * *

Rule 8.84. Conditions on the Allocation of Securities to DPMs

    (a) The MTS Committee may establish (i) restrictions applicable to 
all DPMs on the concentration of securities allocable to a single DPM 
and to affiliated DPMs and (ii) minimum eligibility standards 
applicable to all DPMs which must be satisfied in order for a DPM to 
receive allocations of securities, including but not limited to 
standards relating to adequacy of capital and number of personnel.
    (b) The MTS Committee has the authority under other Exchange rules 
to

[[Page 28960]]

restrict the ability of particular DPMs to receive allocations of 
securities, including but not limited to, Rules 8.88(b) and 8.60, Rule 
8.83(d), and Rule 8.90.

Interpretations and Policies

    .01 (a) It shall be the responsibility of the MTS Committee, 
pursuant to this Rule, to determine whether or not to relocate all of 
the securities traded at a trading station operated by a DPM 
organization to another trading station operated by the same DPM. In 
making a determination pursuant to this Interpretation, the MTS 
Committee should evaluate whether the change is in the best interests 
of the Exchange, and the Committee may consider any information that it 
believes will be of assistance to it. Factors to be considered may 
include, but are not limited to, any one or more of the following: 
performance, operational capacity of the Exchange or the DPM, 
efficiency, number and experience of personnel of the DPM who will be 
performing functions related to the trading of the applicable 
securities, number of securities involved in the relocation, number of 
market-makers affected by the relocation of the securities, and trading 
volume of the securities.
    (b) Prior to making a determination pursuant to this 
Interpretation, except when expeditious action is required, the MTS 
Committee shall notify the DPM organization and trading crowds affected 
by the relocation of the securities of the action the MTS Committee is 
considering taking, and shall convene one or more informal meetings of 
the Committee with the DPM and the trading crowds to discuss the 
matter, or shall provide the DPM and the trading crowds with the 
opportunity to submit a written statement to the Committee.
* * * * *

Rule 8.95 Allocation of Securities and Location of Trading Crowds and 
DPMs

    (a) The Allocation Committee shall be responsible for determining 
for each equity option class traded on the Exchange: (i) whether the 
option class should be allocated to a trading crowd or to a DPM and 
(ii) which trading crowd or DPM should be allocated the option class. 
The Allocation Committee shall also be responsible for determining the 
location on the Exchange's trading floor of each trading crowd, each 
DPM, and each security traded on the Exchange. The Special Product 
Assignment Committee shall be responsible for determining for each 
security traded on the Exchange other than an equity option (i) whether 
the security should be allocated to a trading crowd or to a DPM and 
(ii) which trading crowd or DPM should be allocated the security.
    (b)-(g) no change.

Interpretations and Policies

    .04 Notwithstanding paragraph (a) of this Rule, the MTS Committee 
shall have the authority to relocate all of the securities traded at a 
trading station operated by a DPM organization to another trading 
station operated by the same DPM organization pursuant to 
Interpretation .01 of Rule 8.84.
* * * * *

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 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
    CBOE Rule 8.95(a) currently provides that the Exchange's Allocation 
Committee is responsible for determining the location on the Exchange's 
trading floor of each trading crowd, each DPM, and each security traded 
on the Exchange. Moreover, Paragraph (c) of Rule 8.95 provides that any 
decision made by the Allocation Committee (or the Special Product 
Assignment Committee) may be changed if the committee concludes that a 
change is in the best interest of the Exchange based on operational 
factors or efficiency. Paragraph (d) of Rule 8.95 describes the process 
the Allocation Committee follows prior to taking any action under Rule 
8.95(c), including giving notice to the DPM and trading crowd affected 
by the proposed committee action, and giving the DPM and the trading 
crowd an opportunity to appear before the committee or submit a written 
statement to the committee.
    Recently, some DPM organizations, which operate as a DPM at more 
than one trading station on the Exchange's trading floor, have 
requested to relocate all of the securities traded at a particular 
trading station operated by that DPM organization to another trading 
station operated by the same DPM (sometimes referred to as 
consolidations of DPM trading stations). Pursuant to CBOE Rule 8.95, 
CBOE's Allocation Committee has considered these requests.
    However, because these requests may impact the operational 
performance and market performance of the DPM organization, the 
Exchange believes that it would be appropriate for the MTS Committee to 
consider these types of requests.\5\ Indeed, the MTS Committee 
typically reviews DPM transfer of interest proposals that involve, 
among other things, changes to a DPM's management structure. Further, 
under current CBOE's rules, the MTS Committee is vested with the 
authority to, among other things, approve member organizations to act 
as DPMs (CBOE Rule 8.83); establish restrictions applicable to all DPMs 
on the concentration of securities allocable to a single DPM and 
minimum eligibility standards applicable to all DPMs which must be 
satisfied in order for a DPM to receive allocations (CBOE Rule 8.84); 
review DPMs' operations and performance, including an evaluation of the 
extent to which a DPM has satisfied its obligations under CBOE Rule 
8.85--DPM Obligations (CBOE Rule 8.88); and approve the transfer of DPM 
appointments (CBOE Rule 8.89).\6\ Accordingly, CBOE believes that it is 
appropriate for the MTS Committee to determine whether or not to 
relocate an entire trading station's securities to another trading 
station that is operated by the same DPM.\7\ As a result, the Exchange 
proposes to add a new interpretation to CBOE Rule 8.84 which states 
that it shall be the responsibility of the MTS Committee to determine 
whether or not to relocate all of the securities traded at a trading 
station operated by a DPM organization to another trading station 
operated by the same DPM.\8\
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    \5\ In Amendment No. 1, CBOE clarified that the MTS Committee 
may determine whether to relocate an entire trading station's 
securities to another trading station that is operated by the same 
DPM, pursuant to a request from a DPM organization or on the 
Committee's own initiative. See Amendment No. 1, supra note 3.
    \6\ See Amendment No. 1, supra note 3.
    \7\ Id.
    \8\ CBOE also proposes to add a new interpretation to CBOE Rule 
8.95 stating that notwithstanding paragraph (a) of CBOE Rule 8.95, 
the MTS Committee shall have the authority to relocate all of the 
securities traded at a trading station operated by a DPM 
organization to another trading station operated by the same DPM 
organization pursuant to Interpretation .01 of CBOE Rule 8.84.
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    Proposed Interpretation .01 to CBOE Rule 8.84 also states that in 
making a determination pursuant to the Interpretation, the MTS 
Committee

[[Page 28961]]

should evaluate whether the change is in the best interest of the 
Exchange and may consider any information that it believes will be of 
assistance to it.\9\ Factors to be considered may include, but are not 
limited to, any one or more of the following: performance, operational 
capacity of the Exchange or the DPM, efficiency, number and experience 
of personnel of the DPM who will be performing functions related to the 
trading of the applicable securities, number of securities involved in 
the relocation, number of market-makers affected by the relocation of 
the securities, and trading volume of the securities. CBOE believes 
that the various factors identified under proposed Interpretation .01 
to CBOE Rule 8.84 that the MTS Committee may consider when evaluating 
whether to relocate an entire trading station's securities are 
generally intended to relate to and be more descriptive of the factors 
that the Allocation Committee previously utilized when making such 
relocation decisions under CBOE Rule 8.95.\10\ CBOE further believes 
that if, after reviewing the appropriate factors and determining that a 
relocation of securities is in the best interests of the Exchange in 
accordance with Interpretation .01(a) to CBOE Rule 8.84, the MTS 
Committee determines to relocate an entire trading station's securities 
to another trading station that is operated by the same DPM 
organization, that such relocation would have a positive impact on the 
DPM trading those option classes, the market-makers choosing to trade 
those options classes, and other market participants.\11\
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    \9\ CBOE believes that this requirement is consistent with the 
requirement of current CBOE Rule 8.95(c). See Amendment No. 2, supra 
note 4. Paragraph (c) of CBOE Rule 8.95 provides that any decision 
made by the Allocation Committee may be changed if the Committee 
concludes that a change is in the best interest of the Exchange 
based on operational factors or efficiency.
    \10\ See Amendment No. 1, supra note 3.
    \11\ See Amendment No. 2, supra note 4. CBOE trading crowd 
members, including market makers, are able to move freely around 
CBOE's trading floor among the trading crowds to which they are 
appointed. Therefore, market makers would continue to be able to 
trade their assigned option classes if those options classes were 
moved to another trading station due to the consolidation of a DPM's 
options classes. Specifically, CBOE market makers are able to move 
freely around the trading floor, if the market makers execute at 
least 75% of their total contract volume in their appointed classes. 
See Interpretation .03A to CBOE Rule 8.7. Telephone conversation 
between Patrick Sexton, Assistant General Counsel, CBOE, to 
Christopher Solgan, Attorney, Division, Commission, on April 30, 
2004.
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    Similar to paragraph (d) of CBOE Rule 8.95, the proposed new 
Interpretation .01 to CBOE Rule 8.84 also includes a provision 
requiring the MTS Committee to notify the DPM organization and trading 
crowds affected by the relocation of the securities of the action the 
MTS Committee is considering taking, and shall convene one or more 
informal meetings of the Committee with the DPM and the trading crowds 
to discuss the matter, or shall provide the DPM and the trading crowds 
with the opportunity to submit a written statement to the 
Committee.\12\
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    \12\ In Amendment No. 1, CBOE clarified that proposed 
Interpretation .02 to CBOE Rule 8.84 allows the MTS Committee to 
forego giving notice to the DPM organization and trading crowds 
affected by the relocation of the securities when expeditious action 
is required. CBOE noted that this is consistent with existing CBOE 
Rule 8.95(d), which states that the Allocation Committee similarly 
may forego giving notice when expeditious action is required. See 
Amendment No. 1, supra note 3. CBOE clarified, however, that the MTS 
Committee would do this only in unusual circumstances, such as 
extreme market volatility or some other situation requiring urgent 
action. Any determination by the MTS Committee in this regard could 
be, but would not be required to be, temporary. See Amendment No. 2, 
supra note 4.
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    This proposed change maintains the authority of the Allocation 
Committee (under CBOE Rules 8.95(a) and (c)) to determine whether or 
not to relocate less than all of the securities at a particular trading 
station to another trading station that is operated by the same DPM 
organization.
    Finally, CBOE notes that (i) nothing in this proposal is intended 
to amend CBOE's rules which allow for limited side-by-side trading and 
integrated market making (CBOE Rule 30.18), and (ii) to the extent any 
person is aggrieved in an economic sense by any decision made by the 
MTS Committee, such person may seek to have the decision reviewed under 
Chapter XIX of the Exchange's Rules.\13\
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    \13\ See Amendment No. 1, supra note 3. The appeal process 
continues to be available in event the MTS Committee forgoes giving 
notice to the affected trading crowd because expeditious action is 
required. Telephone conversation between Patrick Sexton, Assistant 
General Counsel, CBOE, to Christopher Solgan, Attorney, Division, 
Commission, on April 27, 2004.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act \14\ in general and furthers the objectives of 
section 6(b)(5)\15\ in particular in that it will 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 a burden on competition that is not necessary or appropriate in 
furtherance of 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. Comments may be 
submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number CBOE-2004-05 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-05. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule

[[Page 28962]]

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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies 
of such filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2004-05 and should be submitted on or before June 
9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11310 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P