[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43034-43036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16326]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50007; File No. SR-CBOE-2004-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated To Amend the Exchange's Membership Rules To 
Accommodate e-DPMs

July 13, 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 July 12, 2004, 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 July 12, 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\ See letter from David Doherty, Attorney, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division of Market 
Regulation, Commission, dated July 12, 2004 (``Amendment No. 1''). 
In Amendment No. 1, the CBOE proposes to amend its original 19b-4 
filing to remove the following sentence from section 3 and Item 
II(A) of Exhibit I: ``The individual designated may also be a 
nominee of one of the organization's other memberships.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its Chapter III membership rules to 
accommodate the proposed creation of a new category of CBOE market-
making participant--electronic Designated Primary Market-Makers (``e-
DPMs'').
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deletions are in brackets.
* * * * *

Chicago Board Options Exchange, Incorporated

* * * * *

Rules

* * * * *

Rule 3.2 Qualifications and Membership Statuses of Individual Members

    (a)-(b) No change.
    (c) Every individual member who is a lessee, a Chicago Board of 
Trade exerciser, or an owner (who is not a lessor) must have an 
authorized trading [floor] function. An individual member is deemed to 
have an authorized trading [floor] function if the member is approved 
by the Membership Committee to act as a Market-Maker, [and/or] Floor 
Broker, or nominee or person registered for an e-DPM organization.

* * * Interpretations and Policies

    .01 No change.
* * * * *

Rule 3.8 Nominees and Members Who Register Their Memberships for Member 
Organizations

    (a) Each member organization that is the owner of a membership for 
which the member organization will not be acting as a lessor and each 
member organization that is a lessee of a membership shall be subject 
to the following provisions:
    (i) No change.
    (ii) If the member organization is the owner or lessee of more than 
one such membership, the organization must designate a different 
individual to be the nominee for each of the memberships (except that 
this subparagraph shall not apply to memberships designated for use in 
an e-DPM capacity pursuant to Rule 8.92 by a member organization 
approved as an e-DPM);
    (iii) Each nominee of a member organization designated pursuant to 
subparagraph (a)(i) of this Rule is required to have an authorized 
trading [floor] function, except that a nominee of a member 
organization that is approved solely to transact business with the 
public pursuant to Rule 9.1 is not required to comply with this 
requirement;
    (iv)-(v) No change.
    (b) Each member organization that is the owner of a membership for 
which the member organization will be acting as a lessor shall be 
subject to the following provisions:
    (i)-(ii) No change.
    (iii) The nominee of the member organization for the membership(s) 
with respect to which the organization will be acting as a lessor may 
not have an authorized trading [floor] function with respect to such 
membership(s);
    (iv) The nominee of the member organization for the membership(s) 
with respect to which the organization will be acting as a lessor must 
satisfy all of the qualification requirements for membership, except 
for those requirements that are not applicable to lessors or that are 
applicable solely to members who will have an authorized trading 
[floor] function; and
    (v) No change.
    (c) Each individual member who owns a membership and each Chicago 
Board of Trade exerciser may apply to register his or her membership 
for a member organization. Upon approval of such an application, an 
individual who has registered his or her membership for a member 
organization shall represent the organization in all matters relating 
to the Exchange in the same manner that a nominee represents a member 
organization. Each individual who registers his or her membership for a 
member organization must have an authorized trading [floor] function.
    (d) No change.
    (e) The following requirements shall apply to every nominee of a 
member organization and to every individual who has registered his or 
her membership for a member organization:
    (i) No change.
    (ii) The person may have authorized trading [floor] functions only 
on behalf of one member organization; and
    (iii) The person may perform trading [floor] functions only on 
behalf of the member organization for which the person is approved by 
the Exchange to perform such functions and may not perform trading 
[floor] functions on the person's own behalf or on behalf of another 
member organization.
    (f) Notwithstanding the provisions of subparagraph (e)(iii) of this 
Rule, a nominee or person who has registered his or her membership for 
a member organization may act as an independent Market-Maker and/or an 
independent Floor Broker if the following 4 requirements are satisfied:
    (A) The person obtains the prior written approval to do so, in a 
manner and form prescribed by the Exchange, from the member 
organization for which the person is approved by the Exchange to 
perform trading [floor] functions;
    (B) The member organization for which the person is approved by the 
Exchange to perform trading [floor] functions agrees, in a manner and 
form prescribed by the Exchange, to guarantee all obligations arising 
out of that person's activities as an

[[Page 43035]]

independent Market-Maker and/or an independent Floor Broker;
    (C)-(D) No change.
    A person who is approved to act as an independent Market-Maker and/
or an independent Floor Broker pursuant to this paragraph (f) shall be 
personally responsible for all obligations arising out of those 
activities, and the member organization for which the person is 
approved by the Exchange to perform trading [floor] functions shall 
guarantee these obligations.
    (g) A member organization may designate one or more inactive 
nominees. An ``inactive nominee'' of a member organization is an 
individual who is eligible to become an effective nominee of that 
organization with respect to any membership for which the organization 
is either an owner (and not a lessor) or is a lessee. The following 
requirements shall apply to inactive nominees:
    (i) To become an inactive nominee of a member organization, an 
individual must be approved for membership and become an effective 
nominee of the member organization, with authorized trading [floor] 
functions, within 90 days of the approval for membership;
    (ii)-(iv) No change.

* * * Interpretations and Policies

    .01 No change.
* * * * *

Rule 3.9 Application Procedures and Approval or Disapproval

    (a)-(f) No change.
    (g) Any person applying pursuant to paragraph (a) of this Rule to 
have an authorized trading [Floor] function is required to have 
completed [attended] the Exchange's [New] Member Orientation Program 
and to have passed an [the] Exchange['s] Trading [Floor] Member 
Qualification Exam. Additionally, any person who has completed 
[attended] the [New] Member Orientation Program and taken and passed 
the applicable Trading [Floor] Member Qualification Exam and who then 
does not possess an authorized trading [Floor] function for more than 1 
year is required to complete [re-attend] the [New] Member Orientation 
Program and to re-pass the applicable Trading [Floor] Member 
Qualification Exam in order to once again become eligible to have an 
authorized trading [Floor] function. A person must score 75% or better 
on the applicable Trading [Floor] Member Qualification Exam in order to 
pass the Exam. Any person who fails the applicable Trading [Floor] 
Member Qualification Exam must wait 30 days to re-take the Exam after 
failing the Exam for the first time, must wait 60 days to re-take the 
Exam after failing the Exam for the second time, and must wait 120 days 
to re-take the Exam after failing the Exam for a third or subsequent 
time. The Exchange may not waive any of the requirements set forth in 
this paragraph (g).
    (h)-(l) No change.

* * * Interpretations and Policies

    .01-.02 No change.
* * * * *

Rule 3.28 [Reserved]

Letter of Guarantee

    [Reserved] Each member with trading functions on the Exchange shall 
provide a letter of guarantee for the member's trading activities on 
the Exchange from a Clearing Member in a form and manner prescribed by 
the Exchange.
* * * * *

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
    On May 7, 2004, the Commission published for comment SR-CBOE-2004-
24,\4\ which rule filing proposes to add a new category of CBOE market-
making participant--e-DPMs--to enhance the liquidity base of the CBOE's 
Hybrid Trading System. e-DPMs are member organizations appointed to 
operate on the CBOE as competing Designated Primary Market-Makers in a 
broad number of option classes. e-DPMs act as specialists on the CBOE 
by entering bids and offers electronically from locations other than 
the trading crowds where the applicable option classes are traded, and 
are not required to have traders physically present in the trading 
crowd. To accommodate the new e-DPM category, the CBOE is proposing 
amendments to CBOE Membership Rules 3.2, 3.8, 3.9, and 3.28.
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    \4\ See Securities Exchange Act Release No. 49643 (April 30, 
2004), 69 FR 25647.
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    CBOE Rule 3.8(a)(ii) currently states that member organizations 
that own more than one membership must designate separate individuals 
for each of those memberships. In the context of electronic access and 
market-making, this requirement serves no useful purpose and, to the 
contrary, may negatively affect an e-DPM member organization's 
operating structure by imposing upon it unnecessary expenses. To this 
end, the CBOE proposes to restrict application of this rule such that 
it will not apply to e-DPM member organizations. This will allow a 
member organization to designate one individual to be the nominee of 
the memberships that are designated for use in an e-DPM capacity.
    CBOE Rules 3.2, 3.8, and 3.9 contain several references to ``floor 
functions.'' e-DPMs, when introduced, will have a trading function but 
not a floor function. For this reason, the CBOE proposes to eliminate 
the word ``floor'' and instead refer to ``trading function.'' 
Additionally, the CBOE proposes to amend CBOE Rule 3.2 to make clear 
that a member is deemed to have an authorized ``trading function'' if 
the member is approved by the Membership Committee to act as a nominee 
or person registered for an e-DPM organization. This would ensure under 
CBOE Rule 3.9(g) that the e-DPM nominee completes the CBOE's Member 
Orientation Program (as proposed to be renamed herein) and passes the 
CBOE's Trading Member Qualification Exam (as proposed to be renamed 
herein).
    CBOE Market-Makers and Designated Primary Market-Makers are 
required pursuant to CBOE Rule 8.5 to furnish the CBOE with a letter of 
guarantee from a clearing member. New proposed CBOE Rule 3.28 seeks to 
impose the same obligation upon e-DPMs.
2. Statutory Basis
    The creation of a new Designated Primary Market-Maker category will 
expand the CBOE's liquidity base and market-making possibilities on the 
Exchange while ensuring that the nominee of the e-DPM organization has 
passed the proper Exchange administered exams and completed the 
requisite orientation program. Accordingly, the proposed rule change, 
as amended, is consistent with section 6(b) of the Act \5\ in general 
and furthers the objectives of section 6(b)(5) of the Act \6\ in 
particular in that it should

[[Page 43036]]

promote just and equitable principles of trade, serve to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(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.

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 SR-CBOE-2004-43 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-2004-43. 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 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 
CBOE. 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-2004-43 and should be submitted on or before August 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-16326 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P