[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45860-45861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17396]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50055; File No. SR-CBOE-2004-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated To Require 
Members To Use and Maintain a Back-Up Autoquote System in Hybrid 
Classes

July 21, 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 February 23, 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 
Exchange. 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

    CBOE proposes to require members to use and maintain a back-up 
quoting system in Hybrid classes and to incorporate violations of this 
requirement in the Exchange's Minor Rule Violation Plan (``Plan''). The 
text of the proposed rule change is available at the principal office 
of the Exchange and at the Commission's Public Reference Room.

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
    The Exchange seeks to adopt new CBOE Rule 8.85(a)(xii) which 
require a Designated Primary Market-Maker (``DPM''), utilizing a 
proprietary autoquote system in a class trading on CBOE's Hybrid 
platform, to have available for immediate use an alternative autoquote 
system that is independent of the DPM's primary autoquote system. This 
requirement would apply at all times during market hours. The Exchange 
believes that the back-up system would need to be independent in order 
to ensure that any event that may cause a failure to the primary 
autoquote system does not corrupt the back-up system. The Exchange also 
proposes to modify subparagraph (g)(10) of CBOE Rule 17.50--Imposition 
of Fines for Minor Rule Violations--to incorporate in its Plan 
violations of proposed CBOE Rule 8.85(a)(xii). The Exchange believes 
that this proposed rule change is substantially similar to a 
requirement currently in place for non-Hybrid classes \3\ (except, in 
that case, CBOE requires use of CBOE's autoquote system as a back-up; 
that system is not available in the Hybrid environment, so CBOE 
proposes to require a second proprietary back-up instead).
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    \3\ See Securities Exchange Act Release No. 46808 (November 12, 
2002), 67 FR 69776 (November 19, 2002) (SR-CBOE-2002-30).
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    The Exchange believes that the failure of a proprietary autoquote 
system could result in CBOE's inability to open for an entire group of 
listed option classes for a brief or sometimes lengthy time period. 
Thus, CBOE has strongly encouraged, and now seeks to require, that 
members have a back-up system ready in Hybrid classes should the 
primary autoquote system fail. CBOE believes that failure to comply 
with the proposed requirement should be subject to sanction under the 
Exchange's Plan on a trading-station-by-trading-station basis.
    The Exchange believes that determining a violation would be 
objective in nature and very suitable for inclusion in the Plan. 
However, because a DPM could be in violation for one minute or four 
hours, the Exchange believes that violations can vary greatly in terms 
of the impact on CBOE's marketplace. Therefore, the Exchange believes 
it is appropriate to allow for summary fines under the Plan that could 
range from $100 to $2,500 for first-time violations and from $100 to 
$5,000 (the minimum and maximum allowable under the Plan) for a limited 
number of subsequent violations. For egregious violations, including 
those that severely impact the trading of option classes on the 
Exchange for an extended period of time, the Modified

[[Page 45861]]

Trading System Appointments Committee (the committee charged with DPM 
supervision) would have the discretion to refer the matter to the CBOE 
Business Conduct Committee instead of handling such violations under 
the Plan. Further, in no event would more than three violations by the 
same DPM in any 12 month period be handled under the Plan. CBOE floor 
officials would be responsible for issuing summary fines under the 
proposed rule. Lastly, because different trading stations operated by 
the same DPM organization can operate and maintain autoquote systems 
differently, the Exchange believes it is appropriate for the summary 
fines to be handled on a trading-station-by-trading-station basis.
2. Statutory Basis
    The Exchange believes that, because the proposed rule change would 
refine and enhance the Exchange's Plan to make it more efficient and 
effective, the proposed rule change is consistent with Section 6(b) of 
the Act,\4\ in general, and furthers the objectives of Sections 6(b)(5) 
\5\ and 6(b)(7) \6\ in particular, in that it is designed to promote 
just and equitable principles of trade, to protect investors and the 
public interest, and enhances the effectiveness and fairness of the 
Exchange's disciplinary procedures.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 78f(b)(7).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
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

    The Exchange has neither solicited nor received written comments on 
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 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-2004-12 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-2004-12. 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 
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-2004-12 and should be submitted on or before August 20, 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-17396 Filed 7-29-04; 8:45 am]
BILLING CODE 8010-01-P