[Federal Register Volume 64, Number 220 (Tuesday, November 16, 1999)]
[Notices]
[Pages 62238-62239]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29796]
[[Page 62238]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42112; File No. SR-CBOE-99-38]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Amending its Trade
Processing Rules
November 5, 1999.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 13, 1999, the Chicago
Board Options Exchange, Inc. (``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. 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).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE is proposing to update and reorganize its rules on trade
processing. The text of the proposed rule change is available at the
CBOE and at the Commission.
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 purpose of the proposed rule change is to update the Exchange's
trade processing rules to incorporate changes that have been made to
the Exchange's trade processing system over the last few years. One
significant change that has occurred at the Exchange is the increasing
use of market-maker handheld trading terminals. Market-maker handheld
terminals are electronically linked to the Exchange's trade processing
system and trade information is sent to the Exchange's trade processing
system automatically when the trade is input onto the handheld
terminal. Currently, more than 85% of market-maker trade input is done
through market-maker handheld terminals. Market-makers that do not use
handheld terminals must manually record their trade information on a
trade card and submit a copy of the card to the member's clearing firm
for inclusion into the Exchange's trade processing system.
The Exchange is proposing to change Exchange Rule 6.50 to require
Members to file with, or at the direction of, the Exchange trade
information required by Rule 6.51(d) for each Exchange transaction for
which the Member is responsible. The rule currently states that only
Clearing Members are required to file the required trade information
with the Exchange. With the use of handhelds, however, much of the
required trade information is already provided automatically by the
market-maker members.
The Exchange is deleting the phrase ``business day (the exact hours
to be fixed by the Exchange)'' which describes when Members are
required to submit trade information because the Exchange no longer
uses a scheduled batch process for processing trade information.
Consequently, the Exchange no longer fixes the time by which trade
information must be submitted. Currently, the Exchange processes trade
information on a continuous real time basis as it receives input from
handhelds and other electronic systems such as the Retail Automatic
Execution System (``RAES'') \2\ and the Exchange's Order Routing System
(``ORS'') \3\ throughout the trading day.
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\2\ RAES permits automatic execution of small public customer
orders.
\3\ ORS provides member firms with a method of efficiently
delivering orders to CBOE's trading floor. Orders received by ORS
are logged onto the ORS database and evaluated, based on volume and
price, to determine their routing destination on the trading floor.
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The Exchange is proposing to change Interpretation .01 to Rule 6.51
to require the buyer and seller in each transaction to immediately
provide the transaction record to the member for whom the transaction
was executed and/or the clearing member that will clear the
transaction. Currently, the interpretation requires the buyer and
seller to provide transaction record within the time frames established
by the Exchange. Again, the widespread use of technology in trading
allows for the information to be provided immediately. The provision of
the information immediately will allow for more efficient trade
checking on an intra-day basis.
The Exchange is adding a new Interpretation .03 to Exchange Rule
6.51 to explicitly set forth the requirements for submitting trade
information. These requirements are currently set forth in Exchange
Rule 2.30, which establishes fees for late trade submission.
Interpretation .03 makes it clear that members are required to submit
the information in accordance with the interpretation even if the
information is submitted in a timely manner for purposes of Rule 2.30.
The new interpretation sets forth the following procedures for
reporting transactions pursuant to Rule 6.51(d): For trades executed
via an electronic data storage medium, or electronic system, trade
information shall be immediately submitted to the Exchange for trade
matching and clearance. For trades not executed on an electronic data
storage medium, or electronic system, trade information shall be
immediately recorded on a card or ticket and submitted as soon as
reasonably possible, but not later than the one hour maximum time
periods stated in Rule 2.30.
The Exchange is amending Rule 6.61 to provide that a member may
receive either an Unmatched Trade Notification or an Unmatched Trade
Report. An Unmatched Trade Notification is an electronic message sent
to market-maker handheld users, whereas an Unmatched Trade Report is a
written notice sent to all members and firms. Currently, under rule
6.61 a member only receives Unmatched Trade Reports. The Exchange is
also proposing amending Rule 6.61 to obligate Members to reconcile all
unmatched trades and advisory trades and to report all reconciliations
to the Exchange ``or the Clearing Member responsible for submission to
the Exchange.'' The addition of the phrase makes it clear that all
Members are responsible for reconciling unmatched trades and to report
those reconciliations to the Exchange or the Clearing Member
responsible for submission to the Exchange.
The Exchange is proposing to make a number of revisions to
Interpretation .01 to Rule 6.61. New paragraph (a) of Interpretation
and Policy .01 of Rule 6.61 essentially is an updated version of what
is now paragraph (a) of Interpretation .05 to Rule 6.61. The difference
is that the provision in Interpretation .05 required that a
representative be available to resolve
[[Page 62239]]
unmatched trades only for transactions in index options or in any class
of options which will trade ex-dividend or ex-distribution the
following day. By including the requirements in paragraph (a) in
Interpretation .01 the Exchange is requiring that a representative be
available to reconcile unmatched trades for all options transactions on
all trade dates. Because of system enhancements, the Exchange and its
members now have the tools to review trade activity on an intra-day
basis. By requiring reports to be reconciled on an intra-day basis, the
Exchange can minimize the potential loss to members who may have to
take market action to correct an outtrade.
Paragraph (b) of Interpretation .01 to Rule 6.61 also is being
moved from Interpretation .05 and requires that members make reasonable
efforts to detect and correct errors in carding or keying a trade. By
virtue of being moved from Interpretation .05 to Interpretation .01,
the requirement will become applicable to all transactions in options
and not only those concerning index options or any class of options
which will trade ex-dividend or ex-distribution the following day.
Paragraph (c) of Interpretation .01 changes the time requirement
for correcting unmatched trades that occurred on the previous trade
date from the opening of trading to fifteen minutes prior to the
opening of trading on the next business day. This change will allow the
involved parties to correct the positions and be prepared for open
trading sooner. By resolving the unmatched trade before the market in
the underlying security opens, the parties will be in a better position
to enter any necessary orders in the markets to adjust their positions
where necessary.
Paragraph (d) of Interpretation .05 is being moved to paragraph (d)
of Interpretation .01 and states that Members who fail to comply with
Rule 6.61 will be responsible for any liability resulting from an
unmatched transaction that should have been matched. Moving this
provision from Interpretation .05 to Interpretation .01 will make it
applicable to all transactions in options and not only those concerning
index options and any class of options which will trade ex-dividend or
ex-distribution the following day. In addition, to further clarify to
the Exchange membership the Exchange's authority to handle violations
of Rule 6.61, the Exchange notes that it may establish a fine schedule
with respect to the violative conduct and it may refer repeated
violations to the Business Conduct Committee.\4\
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\4\ The Exchange would be required to submit the appropriate
rule filing in compliance with section 19(b) of the Act.
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Finally, the Exchange is proposing to amend Interpretation .05 to
Exchange Rule 6.61 by revising the language to make it consistent with
current practice. The Exchange has deleted references to First Pass and
Second Pass. First Pass and Second Pass refer to the former practice of
submitting trade information for trade processing in batches at
different times during the day. Now the Exchange processes the trade
information continually through the trade day.
2. Statutory Basis
The proposed rule change is consistent with section 6(b) of the Act
\5\ in general and furthers the objectives of section 6(b)(5) \6\ in
particular in that it is designed to promote just and equitable
principles of trade, remove impediments to 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange did not solicit or receive 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 self-regulatory organization 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 person are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of CBOE.
All submissions should refer to the File No. SR-CBOE-99-38 and should
be submitted by December 7, 1999.
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. 99-29796 Filed 11-15-99; 8:45 am]
BILLING CODE 8010-01-M
