[Federal Register Volume 61, Number 22 (Thursday, February 1, 1996)]
[Notices]
[Pages 3741-3743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2057]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36778; File No. SR-CBOE-95-62]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Regarding Book-
Entry Settlement of Securities Transactions and Depository Eligibility
Requirements
January 26, 1996.
On October 19, 1995, the Chicago Board Options Exchange,
Incorporated (``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change (File No. SR-CBOE-
95-62) pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'').\1\ On October 26, 1995, CBOE filed an amendment to the
proposed rule change.\2\ Notice of the proposed rule change was
published in the Federal Register on December 18, 1995.\3\ No comment
letters were received. For the reasons discussed below, the Commission
is approving the proposed rule change.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Michael L. Meyer, Schiff, Hardin & Waite, to
Mark Steffensen, Division of Market Regulation (``Division''),
Commission (October 16, 1995).
\3\ Securities Exchange Act Release No. 36568 (December 8,
1995), 60 FR 65074.
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I. Description of the Proposal
Under the rule change, CBOE has added Rules 30.136 and 30.137 to
Chapter XXX of its rules in an effort to encourage book-entry
settlement of securities transaction.\4\ The new rules are in response
to recommendations of the Group of Thirty, U.S. Working Committee
(``U.S. Working Committee''), Clearance and Settlement Project
(``Project''), regarding book-entry settlement of securities
transactions.\5\ In connection with the Project, the U.S. Working
Committee recommended that settlements of transactions in corporate and
municipal securities among financial intermediaries (brokers, dealers,
and banks) and between financial intermediaries and their institutional
clients be effected only by book-entry movements within a
depository.\6\ Thereafter, six national securities exchanges and the
National Association of Securities Dealers, Inc. (``NASD'') adopted
uniform book-entry settlement rules in conformity with the Committee's
recommendations.\7\ Both of the CBOE's new rules are substantially the
same as rules previously adopted by six other national securities
exchanges and the NASD, which rules are designed to ensure that the
vast majority of securities transactions effected in the U.S. will be
settled by book-entry.\8\
\4\ The rules in Chapter XXX govern the listing and trading of
debt and equity securities, warrants, UIT interests, and such other
securities as may be determined by CBOE's Board of Directors.
Chapter XXX does not apply to the trading of option contracts.
\5\ The Group of Thirty is an independent, nonpartisan,
nonprofit organization established in 1978. In its March 1989
report, the Group of Thirty made nine recommendations, including the
recommendation that final settlement of securities transactions
should occur by T+3, for harmonizing clearance and settlement
practices worldwide. The U.S. Working committee, comprised of
representatives from brokerage firms, banks, other financial
intermediaries, and major industry organizations was formed to study
the existing U.S. clearance and settlement system and to recommend
reforms consistent with the Group of Thirty recommendations.
\6\ U.S. Working Committee, Implementing the Group of Thirty
Recommendations in the United States (November 1990).
\7\ Securities Exchange Act Release No. 32455 (June 11, 1993),
58 FR 33679 (order approving proposed rule changes of the American
Stock Exchange (``Amex''), Boston Stock Exchange (``BSE''), Midwest
Stock Exchange [now the Chicago Stock Exchange (``CHX'')], New York
Stock Exchange (``NYSE''), Pacific Stock Exchange (``PSE''),
Philadelphia Stock Exchange (``PHLX''), and NASD requiring book-
entry settlement of securities transactions).
\8\ Because CBOE did not then provide a market in depository
eligible securities, it did not adopt the uniform rule at that time.
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Subject to certain exceptions set forth in the text of the rule and
described below, CBOE Rule 30.136 requires the use of the facilities of
a registered securities depository for the book-entry settlement of all
transactions in depository eligible securities (1) between a CBOE
member and a financial intermediary or a member of a national
securities exchange or a registered securities association and (2)
between a CBOE member and its customers if settlement is to be effected
on a delivery-versus-payment (``DVP'') or receipt-versus-payment
(``RVP'') basis. As is the case under comparable rules adopted by other
self-regulatory organizations, Rule 30.136 does not apply to or affect
the manner in which member firms settle (1) transactions with
traditional retail customers (who typically do not have DVP/RVP
privileges), (2) transactions in securities that are not depository
eligible,\9\ or (3)
[[Page 3742]]
transactions in which settlement occurs outside the U.S. Rule 30.136
also does not apply to transactions where the securities to be
delivered in settlement of a transaction are not on deposit at a
securities depository and (1) the transaction is for same-day
settlement and the deliverer cannot by reasonable efforts deposit the
securities prior to the depository's cut-off time for same-day
crediting of deposited securities or (2) the deliverer cannot by
reasonable efforts deposit the securities prior to a cut-off time
established for that issue by the depository. The latter exception is
intended to address corporate reorganizations and other extraordinary
activities.
\9\ Under Rule 30.136(d), depository eligible securities is
defined to mean securities that (i) are part of an issue (as
identified by a single CUSIP number) of securities that is eligible
for deposit at a securities depository and (ii) with respect to a
particular transaction are eligible for book-entry transfer at the
depository at the time of settlement of the transaction.
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CBOE Rule 30.137 also reflects a response to a directive from the
Group of Thirty to address the need to raise clearing and settlement
standards.\10\ Rule 30.137 requires that before any issue of a domestic
issuer's securities is listed for trading on CBOE the issuer must
represent to CBOE that the CUSIP number identifying the issue has been
included in the file of eligible issues maintained by a registered
securities depository. This requirement does not apply to a security if
the terms of the security cannot be reasonably modified to meet the
criteria for depository eligibility at all securities depositories. In
addition, the rule does not apply to American Depositary Receipts for
securities of a foreign issuer.
\10\ The rule is substantially identical to a uniform depository
eligible rule that was developed through the coordinated efforts of
six national securities exchanges and the NASD and has been
incorporated in the rules of those self-regulatory organizations.
Securities Exchange Act Release No. 35798 (June 1, 1995), 60 FR
30909 (order approving proposed rule change of Amex, BSE, CHX, NYSE,
PSE, PHLX, and NASD regarding uniform depository eligibility rules).
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Rule 30.137 also sets forth additional requirements that must be
met before a security will be deemed to be depository eligible within
the meaning of the rule. These requirements are premised upon whether a
new issue is distributed by an underwriting syndicate before or after
the date a securities depository system is available for monitoring
repurchases of the distributed shares by syndicate members (i.e., a
``flipping tracking system'').
Currently, a flipping tracking system is being developed that: (1)
Can be activated upon the request of the managing underwriter for a
period of time that the managing underwriter specifies (2) in certain
circumstances, will require the delivering participant to provide to
the depository information sufficient to identify the seller of such
shares as a precondition to the processing of book-entry delivery
instructions for distributed shares, and (3) will report to the
managing underwriter the identity of any other syndicate member or
selling group member whose customer(s) sold distributed shares (but
will not report to the managing underwriter the identity of such
customer[s]) and in certain circumstances will report to such syndicate
member or selling group member the identity of such customer(s). Prior
to the availability of a flipping tracking system, the managing
underwriter may delay the date a security is deemed depository eligible
for up to three months after trading has commenced in the security.
After the availability of a flipping tracking system, a new issue must
be depository eligible before commencement of trading on CBOE.
II. Discussion
The Commission believes that the rule change is consistent with
Section 6(b)(5).\11\ Section 6(b)(5), among other things, requires that
the rules of a national securities exchange be designed to remove
impediments to and perfect a national market system. Both the book-
entry settlement and depository eligibility requirements should reduce
the problems associated with settling securities transactions by means
of physical delivery of certificates and thereby should promote the
perfection of a national market system and should promote efficiencies
within that system.
\11\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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Furthermore, the Commission believes the rule change should promote
the purposes of Section 17A of the Act.\12\ In Section 17A, Congress
called for the establishment of a national system for the prompt and
accurate clearance and settlement of securities transactions. In
Section 17A(e),\13\ Congress directed the Commission to use its
authority to end the physical movement of securities certificates in
connection with the settlement among brokers and dealers of
transactions in securities.
\12\ 15 U.S.C. Sec. 78q-1 (1988).
\13\ 15 U.S.C. Sec. 78q-1(e) (1988).
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Book-entry settlement of interdealer securities transactions has
been a goal since Congress enacted the Securities Acts Amendments of
1975.\14\ Since 1975, substantial progress has been made in reducing
the flow of physical certificates for settlement of interdealer and
institutional securities transactions.\15\ In 1993, the Commission
approved the uniform book-entry settlement rules applicable to certain
transactions in depository eligible securities \16\ as a means to
facilitate the conversion from a five-day settlement cycle to a three-
day settlement cycle, which occurred on June 7, 1995.\17\ The present
rule change is designed to facilitate efficient and timely settlement
of trades through the various market facilities and to further aid the
transition to a three-day settlement cycle by requiring book-entry
settlement of depository eligible issues and by increasing the number
of such depository eligible securities.\18\ CBOE's addition of book-
entry and depository eligibility requirements should reduce costs,
risks, and delays associated with the physical delivery of securities
certificates and should eliminate many of the labor intensive functions
associated with physical delivery of nondepository eligibility
securities.
\14\ Pub. L. No. 94-29, 89 Stat. 97 (1975) (codified at 15
U.S.C. Secs. 77-80h (1988)).
\15\ E.q., Securities Exchange Act Release Nos. 22021 (September
23, 1983), 48 FR 45167 (order granting full registration to nine
clearing agencies); 19698 (April 15, 1983), 48 FR 17604 (order
implementing The Depository Trust Company's (``DTC'') Fast Automated
Securities Transfer program); 30283 (January 23, 1992), 57 FR 3658
(order implementing DTC's Deposit/Withdrawal at Custodian program);
30505 (March 20 1992), 57 FR 10683 (order eliminating DTC's
Certificate on Demand service for most corporate issues); 31645
(December 23, 1992), 57 FR 62407 (order approving rule change
requiring that most interdealer transactions in municipal securities
be settled by book-entry through a depository); and 32455 (June 11,
1993), 58 FR 33679 (order approving uniform book-entry settlement
rules).
\16\ Supra note 7 and accompanying text.
\17\ Securities Exchange ACt Release Nos. 33023 (October 6,
1993), 58 FR 52891 (adoption of Rule 15c6-1) and 34952 (November 9,
1994), 59 FR 59137 (change of effective date of Rule 15c6-1 from
June 1, 1995, to June 7, 1995).
\18\ Although the rule change should serve to further reduce the
number of transactions in depository eligible securities for which
settlement is effected by the delivery of physical certificates, it
will not eliminate the ability of investors to obtain physical
certificates after settlement of the transaction. As the Commission
previously has noted, subject to an issuer's determination whether
to make physical certificates available to shareholders, the
Commission believes investors should be able to obtain negotiable
certificates on request. Securities Exchange Act Release No. 35038
(December 1, 1994), 59 FR 63652 [File No. S7-34-94] at note 17.
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III. Conclusion
On the basis of the foregoing, the Commission finds that the
proposals are consistent with Sections 6 and 17A of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (File No. SR-
[[Page 3743]]
CBOE-95-62) be and hereby is approved.
\19\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\20\
\20\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2057 Filed 1-31-96; 8:45 am]
BILLING CODE 8010-01-M
