[Federal Register Volume 62, Number 36 (Monday, February 24, 1997)]
[Notices]
[Pages 8287-8289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4387]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38286; File No. SR-CBOE-96-70]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc., Order Approving Proposed Rule Change Relating to the Reporting
Requirements for Securities Accounts and Orders of Market-Makers and
Joint Account Provisions
February 13, 1997.
I. Introduction
On November 20, 1996, the Chicago Board Options Exchange, Inc.,
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder \2\ a proposed rule change relating to the reporting
requirements for securities accounts and orders of market-makers and
joint account provisions. The proposed rule change was published for
comment in Securities Exchange Act Release No. 38085 (December 24,
1996), 62 FR 434 (January 3, 1997). The Commission received no comments
on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.18b-4.
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II. Description of the Proposal
CBOE proposes amending Rule 8.9, regarding Securities Accounts and
Orders of Market-Makers. Specifically, CBOE is amending Rule 8.9(a),
regarding the identification of accounts, to eliminate the routine
submission of information by market-makers respecting non-market-maker
trading accounts, or ``outside accounts.'' Currently, Exchange market-
makers are required to identify and report to the Exchange all accounts
in which the market-maker may engage in stock, option and securities
trading, directly or indirectly, or over which it has investment
discretion. The rule in its current form is broad enough to require
market-makers to report professional trading accounts held at clearing
firms, as well as outside personal accounts such as brokerage accounts.
The Exchange is amending the reporting requirements of Rule 8.9(a) to
eliminate the routine submission of information respecting non-market-
maker trading accounts, or ``outside accounts.'' The rule change will
require market-makers to report outside account information only when
requested by the Exchange.
CBOE also proposes amending Rule 8.9(b), regarding the reporting of
market-maker orders. Currently, each market-maker is required to report
to the Exchange every order entered into by that market-maker within
the specifications of the Rule. CBOE proposes amending Rule 8.9(b) to
require the clearing firm that maintains the market-maker's trading
account, rather than the market-maker personally, to report executed
order information to the Exchange. The Exchange believes it is
appropriate to limit the required order information to ``executed''
orders only, based upon its position that only marginal surveillance
benefits are derived from gathering unexecuted order information on a
routine basis.
Under the proposal, the market-maker will be held responsible for
the reporting requirements only if the clearing firm is not reporting
executed order information to the Exchange and/or if the Exchange has
requested that the market-maker provide the information. Furthermore,
the proposed rule change will clarify that this reporting requirement
applies to ``professional trading accounts'' (i.e., transactions
cleared into all accounts carried for market-makers who are the subject
of a clearing firm letter of guarantee issued to the Exchange pursuant
to CBOE Rule 8.5).
The clearing firm thus will be the primary source for the reporting
of market-maker executed order information to the Exchange. However,
all firms which represent and execute market-maker orders, including
order services firms as defined in Exchange Rule 6.77, will continue to
be
[[Page 8288]]
responsible for maintaining and retaining executed and unexecuted order
information as required by Rules 17a-3 and 17a-4 under the Act and by
Exchange Rule 15.1. The continuing recordkeeping obligations of such
firms pursuant to Exchange rules and other applicable securities laws
and regulations will be noted in an Exchange regulatory circular upon
approval of the proposed rule change.
In an effort to improve reporting and move toward electronic
reporting in the future, CBOE proposes to eliminate the existing
description of specific order information required to be reported as
set forth in Rule 8.9(b).\3\ Upon approval of this filing, the Exchange
will issue a regulatory circular to clearing firms which will list the
order reporting requirements that were previously embodied in Rule
8.9(b). CBOE will issue additional circulars as reporting requirements
are added.
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\3\ CBOE Rule 8.9(b) states that the report pertaining to orders
must include the terms of each order, identification of the
brokerage firms through which the orders were entered, the times of
entry or cancellation, the times report of execution were received
and, if all or part of the order was executed, the quantity and
execution price.
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Finally, CBOE proposes to amend Interpretation and Policy .06 to
Rule 8.9 to clarify that the existing prohibition against a joint
account participant effecting a transaction with another member acting
on behalf of the same joint account applies whether the transaction is
effected in person or via order. CBOE will also revise Interpretation
and Policy .06 to Rule 8.9 to prohibit transactions between two joint
accounts if the member who causes a transaction to be executed for one
of the joint accounts knows or has reason to know that the two joint
accounts have one or more common participants.
The addition to Interpretation .06 to Rule 8.9 codifies in the
rule's current provisions in regulatory circulars which seek to ensure
that joint account transactions result in a bona fide change in
beneficial ownership. Existing regulatory circulars RG96-28 (item 7(b))
and RG95-64 (item 8(b)) provide that a member has the responsibility to
ensure that in-person transactions or the entry of orders with floor
brokers do not result in trades occurring ``between two joint accounts
that have common participants.'' The rule change expressly imposes a
knowledge requirement as an element of the offense of effecting a
transaction between joint accounts with common participants. This
recognizes that members are not always able to know whether there are
common participants in two joint accounts because of the frequency with
which joint account composition may change.
III. Discussion
The Commission believes CBOE's proposed rule change is consistent
with Section 6(b)(5) of the Act.\4\ Section 6(b)(5) requires, among
other things, that the rules of an exchange be designed to promote just
and equitable principles of trade, perfect the mechanism of a free and
open national market system, and, in general, to further investor
protection and the public interest.
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\4\ 15 U.S.C. Sec. 78f(b)(5).
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The Commission believes that CBOE's proposal to allow market-makers
to provide outside account information upon request by the Exchange
rather than providing such information on a routine basis is a
reasonable revision to CBOE's market-maker account reporting
procedures. This conclusion is based on CBOE's representation that
outside account information provides little benefit to the Exchange's
surveillance programs unless special circumstances exist. The
Commission believes that the ability of the Exchange to request outside
account information upon request should help preserve the Exchange's
ability to conduct adequate surveillance.
The Commission believes that CBOE's proposal to make a market
maker's clearing firm the primary responsible source for reporting
market-maker executed order information to the Exchange is a reasonable
means of streamlining the order reporting process. The Commission also
recognizes the Exchange's position that clearing firms with back-office
systems capabilities can most accurately gather and report market-maker
order information to the Exchange. Accordingly, the proposed change
should result in more effective and efficient reporting of market-maker
accounts and executed order information to the Exchange, thus promoting
just and equitable principles of trade, perfecting the mechanism of a
free and open national market system, and furthering investor
protection and the public interest.
The Commission believes it is appropriate to limit the required
submitted order information to ``executed'' orders only, based on
CBOE's representation that only minimal surveillance benefits are
gained by gathering unexecuted order information on a routine basis.
Where the clearing firm is not reporting the information to the
Exchange and if the Exchange requests that the market-maker provide the
information, the market-maker will be responsible for reporting
executed order information. Moreover, while the clearing firm is the
primary source for the reporting of market-maker executed order
information, the firms representing and executing market-maker orders
will continue to be responsible for maintaining and retaining executed
and unexecuted order information pursuant to Rules 17a-3 \5\ and 17a-
4,\6\ of the Act and CBOE Rule 15.1. These provisions offer further
assurance that executed order information will be reported and records
of executed and unexecuted orders will be maintained.
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\5\ 17 CFR 240.17a-3.
\6\ 17 CFR 240.17a-4.
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The Commission believes that CBOE's proposal to eliminate the
existing description of specific order information required to be
reported pursuant to Rule 8.9(b), and its proposal to issue a
regulatory circular to clearing firms listing the order reporting
requirements, will provide the CBOE with greater flexibility in adding
reporting requirements as needed. The Commission notes that the
Exchange has agreed to issue a regulatory circular to its members
reflecting that all of the specific order information currently
contained in Rule 8.9(b) \7\ will continue to be required to be
reported pursuant to the rule. If the CBOE in the future seeks to
eliminate the required reporting of any of this specific information,
such a change would require the submission of a rule filing pursuant to
Section 19(b) \8\ of the Act.\9\
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\7\ See supra note 3.
\8\ 15 U.S.C. 78s(b).
\9\ Although the submitted filing indicated that circulars would
be issued to clearing members, the CBOE has clarified that all
members will receive a circular informing them of changes in the
reporting requirements. Although the circulars sent to clearing
firms may differ from those sent to other CBOE members, the
information contained therein will be the same. Phone conversation
between Jeff Schroer, Market Surveillance, CBOE, and Peggy Blake,
Division of Market Regulation, Commission (February 13, 1997).
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The Commission believes that CBOE's proposed clarifications to
Interpretation .06 will aid members in understanding their
responsibilities with regard to joint account transactions, thus
assuring that such transactions result in a bona fide change in
beneficial ownership. Finally, the Commission believes that CBOE's
proposed change to require knowledge as an element of the offense of
effecting a transaction between joint accounts with common participants
constitutes a reasonable clarification of CBOE's existing joint account
provisions, thereby serving to protect investors and the public
interest.
[[Page 8289]]
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the CBOE, and in particular Section 6(b)(5).
It is therefore ordered, Pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-CBOE-96-70) be and
hereby is approved.
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\10\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation, pursuant
to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 97-4387 Filed 2-21-97; 8:45 am]
BILLING CODE 8010-01-M
