[Federal Register Volume 70, Number 166 (Monday, August 29, 2005)]
[Notices]
[Pages 51101-51102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4712]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52319; File No. SR-CBOE-2005-28]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval to Proposed Rule Change Relating 
to DPM Obligations for Maintaining Backup Autoquote Systems

August 23, 2005.
    On April 1, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) \1\ of the 
Securities Exchange Act of 1934 (``Act'') and Rule 19b-4 thereunder,\2\ 
a proposed rule change to amend Rules 8.85(a)(xi) and (xii) to remove 
the requirement that Designated Primary Market-Makers (``DPMs'') 
maintain a back-up quoting system for Hybrid and non-Hybrid option 
classes. The Exchange proposes a corresponding amendment to its Minor 
Rule Plan to remove references to Rules 8.85(a)(xi) and 8.85(a)(xii). 
The proposed rule change was published for comment in the Federal 
Register on July 22, 2005.\3\ The Commission received no comments on 
the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52044 (July 15, 
2005), 70 FR 42397 (``Notice'').
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    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6 of the Act,\4\ applicable to a 
national securities exchange.\5\ In particular, the

[[Page 51102]]

Commission believes that the proposal is consistent with Sections 
6(b)(5) and 6(b)(7) of the Act,\6\ which require, among other things, 
that an exchange have rules designed to promote just and equitable 
principles of trade, protect investors and the public interest, and 
enhance the effectiveness and fairness of the Exchange's disciplinary 
procedures. The Commission believes that CBOE's proposed rule changes 
should help to improve the efficiency of CBOE's market by eliminating 
unnecessary costs now borne by the Exchange's DPMs relating to the 
maintenance of back-up quotation systems.
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    \4\ See 15 U.S.C. 78f.
    \5\ In approving this proposed rule change, the Commission has 
considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5) and 78f(b)(7).
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    As set forth in the Notice, CBOE Rules 8.85(a)(xi) and (xii) both 
impose an obligation on DPMs to maintain independent backup autoquote 
systems that can be employed in the event that a DPM's proprietary 
autoquote system should fail or be otherwise unavailable. Rule 
8.85(a)(xi) governs non-CBOE Hybrid System (``non-Hybrid'') classes, 
while Rule 8.85(a)(xii) governs CBOE Hybrid System (``Hybrid'') 
classes.
    With regard to CBOE Rule 8.85(a)(xi), the Commission notes that the 
Exchange has converted all of its DPM option classes to the CBOE Hybrid 
System. Thus, because non-Hybrid option classes no longer exist, CBOE 
Rule 8.85(a)(xi) has no applicability. Its repeal will have no impact 
on market participants.
    As regards CBOE Rule 8.85(a)(xii), which requires DPMs to maintain 
an independent backup autoquote system that it may employ in the event 
its proprietary autoquote system fails, the Commission believes that 
the CBOE has made a reasonable determination that the backup obligation 
is no longer necessary. The Commission has no basis at this time to 
disagree with the CBOE's assessment that the recent adoption and 
implementation of the electronic DPM (``e-DPM'') program \7\ on the 
Exchange should provide a more appropriate and cost effective safeguard 
against a DPM's inability to generate quotes in such option classes. 
Pursuant to the Exchange's rules governing the program, CBOE may 
allocate an option class that is already allocated to a DPM to one or 
more e-DPMs.\8\ Such e-DPMs provide competing quotations accessible by 
CBOE market participants.
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    \7\ See Exchange Act Release Nos. 49577 (April 19, 2004), 69 FR 
22576 (April 26, 2004) (order approving the process for approving e-
DPMs on the Exchange); 50003 (July 12, 2004), 69 FR 25647 (July 19, 
2004) (order approving e-DPM trading rules).
    \8\ See CBOE Rules 8.92 and 8.93.
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    Thus, the Commission believes that, given the CBOE's current 
trading environment, the exchange has made a reasonable determination 
that the requirement to maintain a backup quotation system is 
unnecessary and unduly burdensome on DPMs. The proposed rule changes 
appear to be reasonably designed to help to put DPMs on a more equal 
competitive footing other market participants, including electronic 
DPMs, which do not have a backup quotation system maintenance 
requirement. Moreover, the Commission notes that deletion of the backup 
autoquote rules would not affect a DPM's separate obligation to provide 
continuous market quotations for each of its allocated classes and 
respective series.\9\
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    \9\ See CBOE Rule 8.85(a)(i).
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    Finally, the Commission approves CBOE's proposal to remove 
references to Rules 8.85(a)(xi) and 8.85(a)(xii) in its Minor Rule 
Violations Plan.\10\
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    \10\ See CBOE Rule 17.50(g)(10).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-2005-28) be, and hereby 
is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4712 Filed 8-26-05; 8:45 am]
BILLING CODE 8010-01-P