[Federal Register Volume 69, Number 203 (Thursday, October 21, 2004)]
[Notices]
[Pages 61881-61882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2785]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50548; File No. SR-CBOE-2004-25]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Relating to Designated Primary Market-Makers 
Obligations

October 15, 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 April 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 CBOE. 
On September 30, 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change
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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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    The CBOE proposes to amend its rules to clarify that CBOE 
Designated Primary Market-Makers (``DPMs'') are required to make 
competitive markets on the Exchange and to otherwise promote the 
Exchange in a manner that is likely to enhance the ability of the 
Exchange to compete successfully for order flow in the classes they 
trade.\4\
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    \4\ Telephone conversation between James M. Flynn, Attorney, 
CBOE, and Sapna C. Patel, Special Counsel, and Angela Muehr, 
Attorney, Division of Market Regulation, Commission, on October 14, 
2004.
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    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deletions are in [brackets].
* * * * *

Chapter VIII

    Market-Makers, Trading Crowds and Modified Trading Systems (Rules 
8.1-8.95)
Rule 8.85--DPM Obligations
    Rule 8.85 (a)-(b) No Change.
    (c) Other Obligations. In addition to the obligations described in 
paragraphs (a) and (b) of this Rule, a DPM shall fulfill each of the 
following obligations:
    (i) Resolve disputes relating to transactions in the securities 
allocated to the DPM, subject to Floor Official review, upon the 
request of any party to the dispute;
    (ii) Make competitive markets on the Exchange and otherwise promote 
the Exchange in a manner that is likely to enhance the ability of the 
Exchange to compete successfully for order flow in the classes it 
trades [provide high quality markets and services and promote the 
Exchange as a marketplace to customers and other market participants];
    (iii) Promptly inform the MTS Committee of any desired change in 
the DPM Designees who represent the DPM in its capacity as a DPM and of 
any material change in the financial or operational condition of the 
DPM;
    (iv) Supervise all persons associated with the DPM to assure 
compliance with the Rules;
    (v) Segregate in a manner prescribed by the MTS Committee the DPM's 
business and activities as a DPM from the DPM's other businesses and 
activities; and
    (vi) Continue to act as a DPM and to fulfill all of the DPM's 
obligations as a DPM or the MTS Committee terminates the DPM's approval 
to act as a DPM pursuant to Rule 8.90.
    (d)-(e) No Change.
* * * * *

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
    The Exchange proposes to amend its rules governing DPMs in order to 
create an obligation that would require a DPM 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 classes it trades. This is identical 
to an obligation that is currently imposed

[[Page 61882]]

on CBOE electronic DPMs (``e-DPMs'') under CBOE Rule 8.93(vi).\5\
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    \5\ See Securities Exchange Act Release No. 50003 (July 12, 
2004), 69 FR 43208 (July 19, 2004) (order approving e-DPMs on the 
Exchange).
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    This proposed rule language would replace an existing DPM 
obligation under CBOE Rule 8.85(c)(ii), that is more of a generalized 
statement of the e-DPM obligation. CBOE Rule 8.85(c)(ii) currently 
requires a DPM to commit to ``provid[ing] high quality markets and 
services and promot[ing] the Exchange as a marketplace to customers and 
other market participants * * *.'' The Exchange believes that the 
proposed new language would provide a more specific statement of what 
is currently expected of a DPM.
    Additionally, the CBOE represents that this proposed new language 
is consistent with the standards of measurement used by the Exchange in 
determining whether a DPM is meeting its overall market performance 
standards. CBOE Rule 8.88 (Review of DPM Operations and Performance) 
requires the Exchange's Modified Trading System Appointments Committee 
(``MTS Committee'') to conduct an annual review of a DPM's operations 
and performance. Under CBOE Rule 8.88, the review shall include an 
evaluation of how a DPM has acted to make the Exchange competitive with 
other markets trading the same securities as those allocated to the 
DPM, taking into account the Exchange's market share in those allocated 
securities. In addition to making the DPM and e-DPM obligations more 
uniform, this proposal amends CBOE Rule 8.85(c) (Other Obligations) to 
expressly state that a DPM has the obligation to act to meet the levels 
of market performance that are currently expected of a DPM and that the 
MTS Committee currently considers when reviewing a DPM's market 
performance.
2. Statutory Basis
    By clarifying a DPM's obligations and making them more consistent 
with the obligations required of e-DPMs, the Exchange believes that 
this proposed rule change, as amended, is consistent with section 6(b) 
of the Act,\6\ in general, and further the objectives of section 
6(b)(5) of the Act,\7\ in particular, in that it should 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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    \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

    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-2004-25 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-2004-25. 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-2004-25 and should be submitted on or before November 12, 2004.

    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. E4-2785 Filed 10-20-04; 8:45 am]
BILLING CODE 8010-01-P