[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67956-67958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32606]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40729; File No. SR-CBOE-98-47]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 by the Chicago Board Options Exchange, Inc. Relating to Trade Match
Delayed Submission Fees
November 30, 1998.
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 October 23, 1998, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change.\3\ CBOE submitted to the
Commission Amendment No. 1 to its proposal on November 10, 1998.\4\ The
proposed rule change, as amended, is described in Items I and II below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice and order to solicit comments on the proposed
rule change from interested persons and to approve the proposal on the
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ An earlier version of the proposed rule change was submitted
on March 4, 1998, as CBOE-98-09. The Exchange subsequently submitted
Amendment No. 1 to CBOE-98-09 on April 20, 1998. The proposed rule
change was noticed in the Federal Register on April 30, 1998. See
Exchange Act Release No. 29910 (April 24, 1994), 63 FR 23817. The
Commission received no comments on the proposed rule change.
Subsequently, the Exchange withdrew its proposed rule change. See
Letter from Stephanie C. Mullins, Attorney, CBOE, to Ken Rosen,
Attorney, Division of Market Regulation (``Division'') Commission,
dated May 26, 1998 (``Withdrawal Letter''). The current proposed
rule change differs slightly from the original proposed rule change.
Generally, in this proposal the Exchange delayed the implementation
date of the proposed rule change by six months, made technical
changes to its proposed rule language, defined the terms nominee-
employee and out-trades, and provided a more detailed explanation of
how a financial loss may arise from late trade submissions and an
explanation for deleting Rule 2.30(d)(2).
\4\ In Amendment No. 1, the Exchange, generally, made technical
changes to its proposed rule language, defined the terms nominee-
employee and out-trades, and provided a more detailed explanation of
how a financial loss may arise from late trade submissions and an
explanation for deleting Rule 2.30(d)(2) See letter from Stephanie
C. Mullins, Attorney, CBOE, to Richard C. Strasser, Assistant
Director, Division, Commission, dated November 6, 1998 (``Amendment
No. 1'').
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[[Page 67957]]
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend Exchange Rule 2.30, Trade Match Delayed
Submission Fee, to reduce the amount of time permitted for trade
submission before the imposition of fees and to include under the rule,
all types of trades executed on 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 Exchange 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 III 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 expand the scope of
CBOE Rule 2.30 to include all types of executed trades and to reduce
the amount of time under Rule 2.30 in which Exchange members and
clearing firms are assessed fees for late trade submission. Currently,
market-makers and clearing firms are assessed fees for delayed trade
match submissions if eighty percent of market-maker in-person trades
are not submitted in less than two hours. The Exchange proposes to
amend this rule to include all types of trades not just market-maker
inperson trades) and to require, starting on January 1, 1999, that the
submission time for fee assessment be gradually reduced from two hours
to one hour. The eighty percent formula will remain the same, as will
the provisions for extenuating circumstances.\5\
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\5\ Telephone conversation between Stephanie C. Mullins,
Attorney, CBOE, and Terri L. Evans, Attorney, Division, Commission,
on November 6, 1998. See also Amendment No. 1, supra note 4.
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Non-market-maker trades were not originally included under Rule
2.30 because virtually all non-market-maker activity at that time met
the two hour time requirement. Within the revised time frames,
ultimately one hour, the Exchange anticipates that a small but
significant portion of non-market-maker trades will not be submitted on
time. For this reason, all executed trades will be included, so that
all parties in the trading process will be held to the same standards.
Under the proposal, the submission time reduction from two hours to
one hour will be done gradually over a period of months, so that
members and clearing firms will grow accustomed to the tighter time
requirement and will be encouraged towards immediate submission of
trades. The first time reduction will go into effect on January 1,
1999, and will require timely trade submission to be within ninety
minutes of execution. The next reduction would go into effect on April
1, 1999, and will require timely trade submission to be within seventy-
five minutes of execution. Finally, from July 1, 1999, forward, the
Exchange will require that timely trade submission be within one hour
of execution.
Presently, the average submission time for all market-maker trades
is thirty-one minutes after execution, and eighty percent of all
market-maker trades are submitted within one hour of execution. For
non-market-makers, the average submission time is twenty-two minutes,
and eighty-seven percent of trades are submitted within one hour of
execution. Thus, it should not be a hardship for all members and
clearing firms to abide by the proposed rule.
The purpose of this amendment is to increase the speed at which
trades are received and matched by the trade match system. With the
advent of a more automated trading environment, the current two hour
requirement is not stringent enough and may cause the CBOE to be slower
than other exchanges in matching trades. More timely trade submission
should lead to quicker awareness of out-trades,\6\ and consequently
could limit financial loss, thereby allowing the Exchange to better
compete with the other options exchanges for customer orders.
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\6\ An out-trade is a transaction that has been executed between
two parties where one or more of the terms of the trade do not
match. For instance, the parties may have had a misunderstanding on
the price, the quantity or the series. See Amendment No. 1, supra
note 4.
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By making the time requirements for trade submission more
stringent, this proposed rule should help members detect out-trades
sooner. Once the mistake is discovered, one or both of the parties to
the transaction may have to get out of a position or take on a new
position to rectify the mistake. The more time that elapses before
detection of an out-trade, the more likely it is that the market has
shifted away from the market that existed when the trade was executed
and the more likely that taking on a new position or getting out of an
existing position will incur financial loss.\7\ Thus, the potential
benefits to members and clearing firms of comparing trades immediately
after execution are significant.
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\7\ See Amendment No. 1, supra note 4.
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Exchange Rule 2.30(c), which formerly was reserved, is proposed to
address the situation where a nominee-employee \8\ of a clearing member
executes and submits trades for that clearing member. Under the
proposed rule, if the nominee-employee is assessed a fee for late trade
submissions, the clearing member will not be assessed a separate fee.
The clearing member will, however, be responsible for the fee assessed
against its employee.
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\8\ Under the Rule, a nominee-employee member is a member who is
a clearing member employee. See Amendment No. 1, supra note 4.
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Additionally, because of improvements to the Exchange's trade match
system and the advances of clearing firms, several sections of Rule
2.30 have become obsolete and are proposed to be eliminated. The
proposed rule change would delete Exchange Rule 2.30(d)(2). Since this
Rule was last amended, computer processing time has decreased. Thus,
the computer processing run performed at the end of the trading day
(``First Pass'') \9\ may be finished prior to the new submission
deadline, rendering the Rule obsolete. Second, trades that are
transacted late in the trading day no longer will be late merely by
being submitted after the First Pass. Under the original two hour
submission requirement and the First Pass schedule, trades submitted
after the First Pass would be deemed late because the First Pass always
was completed more than two hours after the end of the trading day.
Under the proposal, this situation will not always be the case.
Additionally, the proposed rule is a more objective criteria and will
be unaffected by any future changes in the First Past schedule. Thus,
the Exchange proposes to delete Rule 2.30(d)(2).\10\
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\9\ Telephone conversation between Stephanie C. Mullins,
Attorney, CBOE, and Terri L. Evans, Attorney, Division, Commission,
dated November 10, 1998.
\10\ See Amendment No. 1, supra note 4.
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In addition, when rule 2.30 was initially implemented, a deficient
clearing firm exception was included, 2.30(f)(1). This exception waived
fifty percent of a market-maker's delayed submission fee if the
clearing firm through which the market-maker submitted trades was
severely deficient in submitting all of its trades on a particular day.
This exception initially was applied infrequently and in the last
[[Page 67958]]
two years has not been applied to a market-maker client of a clearing
firm. Due to hand-held trade input terminals and general improvements
in trade submission systems, it is nearly impossible for a clearing
firm to fall below the deficient clearing firm level of fifty-five
percent. Therefore, Exchange Rule 2.30(f)(1) has become obsolete and
the Exchange proposes to delete it.
2. Statutory Basis
The Exchange proposes to reduce the amount of time in which trades
are submitted, resulting in an improved trade comparison process,
thereby serving to promote just and equitable principles of trade and
to protect investors and the public interest in furtherance of the
objectives of Section 6(b)(5) of the Act.\11\
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\11\ 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
No written comments were solicited or received with respect to the
proposed rule change.
III. 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 in Washington, D.C. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-CBOE-98-47 and should be submitted by December 30, 1998.
IV. Commission's Findings and Order Granting Accelerated Approval
of the Proposed Rule Change
The Commission believes that the proposal is consistent with the
requirements of Section 6(b) of the Act.\12\ Specifically, the
Commission believes the proposal is consistent with Section 6(b)(5) of
the Act,\13\ which requires an exchange to have rules designed to
promote just and equitable principles of trade; to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, and processing information, and, in general, to protect
investors and the public interest.\14\ In particular, the Commission
believes that the proposed rule change should encourage members to make
timely submissions of trade information by reducing the maximum
permitted time to submit trade information from two hours to one hour.
As a result, the clearing of options transactions should become more
efficient, with a reduction in the number of unmatched trades and
quicker resolution of out-trades. The Exchange should also be able to
monitor its members more effectively for any problems that might
disrupt the clearance and settlement process. The Commission also
believes that applying CBOE Rule 2.30 to all members and not just
market-makers trading in-person should provide for greater integrity of
the trade matching and clearing process. The Commission also believes
that it is consistent with the Act to delete obsolete provisions of
CBOE Rule 2.30.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
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The Commission also finds the proposed rule change regarding the
assessment of a single fee if a delay is caused by a nominee-employee
member of a clearing member is consistent with Section 6(b)(4) of the
Act,\15\ which states that the Exchange may provide for the equitable
allocation of reasonable dues, fees, and other charges among its
members. Under CBOE Rule 2.30, the timely submission of each individual
member and clearing member is measured separately and a fee imposed
only if the individual member or clearing member fails to submit at
least eighty percent of its trades in a timely manner. Where a nominee-
employee of a clearing member is acting on behalf of the clearing
member and where the clearing member is ultimately responsible for the
nominee-employee, the Commission believes that the proposed rule change
equitably allocates the cost of incorporating late trade information by
only imposing a single fee on clearing members.
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\15\ 15 U.S.C. 78f(b)(4).
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The Exchange has requested that the Commission approve the proposal
prior to the thirtieth day after the date of publication of notice of
the proposal in the Federal Register. Because the Commission believes
the proposal should expedite the clearing process, the Commission finds
good cause for approving the proposed rule change (SR-CBOE-98-47) prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register.\16\
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\16\ An earlier version of the proposed rule change was
submitted on March 4, 1998, as CBOE-98-09. The proposed rule change,
as amended, was noticed in the Federal Register on April 30, 1998.
See Release No. 39910, supra note 3. The Commission received no
comments on the proposed rule change Subsequently, the Exchange
withdrew its proposed rule change. See Withdrawal Letter, supra note
3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change be, and hereby is, approved on
an accelerated basis.
\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32606 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M
