[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4425]
[Federal Register: February 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33641; File No. SR-CBOE-93-48]
Self-Regulatory Organizations; Order Approving Proposal Rule
Change by the Chicago Board Options Exchange, Inc., Relating to Fines
for Position Limit Infractions
February 18, 1994.
On October 25, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange``) submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend paragraph (g)(1) of Exchange Rule
17.50, ``Imposition of Fines for Minor Rule Violations,'' to establish
a separate fine schedule for position limit violations which occur in
non-CBOE member customer accounts carried by CBOE member firms,
including the accounts of non-member broker-dealers.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 249.19b-4 (1993).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33291 (December 6, 1993), 58 FR 65207. No
comments were received on the proposed rule change.
Currently, paragraph (g)(1) of Exchange Rule 17.50 provides the
following fine schedule for persons who violate the position limits
established in CBOE Rule 4.11, ``Position Limits,'' and 24.4,
``Position Limits for Board-Based Index Options:'' (1) A letter of
caution plus $1 per contract over 5% of the applicable limit for one to
three position limit violations within one calendar year; (2) $1 per
contract over the limit for four to six position limit violations
within one calendar year; and (3) $5 per contract over the applicable
limit for seven or more position limit violations within one calendar
year. The CBOE proposes to amend paragraph (g)(1) to establish a
separate fine schedule for position limit violations which occur in
non-CBOE member customer accounts (i.e., accounts of customers who are
not CBOE members) carried by CBOE member firms, including the accounts
of non-member broker-dealers. The proposal will increase the number of
cumulative infractions that may occur in non-member customer accounts
before a fine is triggered. Specifically, under new subparagraph (a),
the following fines, which will be imposed on CBOE member firms, will
apply to position limit violations occurring in non-member customer
accounts: (1) A letter of caution for position limit violations up to
5% in excess of the applicable limit plus $1 per contract above that
level for one to six violations within one calendar year; (2) $1 per
contract over the applicable limit for seven to 12 position limit
violations within one calendar year; and (3) $5 per contract over the
applicable limit for 13 or more position limit violations within one
calendar year. In calculating the fine thresholds for each CBOE member,
all non-member customer account position limit violations occurring
within a single calendar year in all of the member's non-member
customer accounts will be added together.
In addition, the Exchange proposes to rephrase the current language
of subparagraph (b) to indicate more clearly that a letter of caution
is given for position limit violations of up to 5% of the applicable
limit for one to three position limit violations occurring within a
single calendar year, and that a fine of $1 per contract applies to
violations exceeding that limit.
The Exchange believes that the proposal accommodates key
monitoring-related differences between non-member customer accounts and
the accounts of members. The CBOE states that although CBOE members are
well positioned generally to prevent, or to detect and promptly
correct, position limit infractions in their own accounts or in
accounts they carry for CBOE market makers, the CBOE and its member are
positioned less effectively to monitor the aggregate trading
commitments of non-CBOE broker-dealers or customers and to ensure the
prompt correction of position limit violations by such persons. The
CBOE states that factors such as customers trading through multiple
firms, customers entering into Clearing Member Trade Assignment
(``CMTA'') agreements,\3\ firms having multiple registered
representatives, and investment advisors managing several accounts make
it more difficult as a practical matter for member firms to prevent, or
to detect and correct, a position limit violation by a customer,
including a broker-dealer ``customer,'' who is not a CBOE member. As a
result, the CBOE believes that the fine tiers suitable with respect to
CBOE members' own accounts can be inappropriately strict when applied
to firms carrying a number of non-member customer accounts.
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\3\The CMTA is a process offered by the Options Clearing
Corporation (``OCC'') which enables an OCC clearing member to have
trades executed on its behalf on an exchange without holding
exchange membership. In order to participate in this process, the
OCC clearing member who has authorized an exchange member to execute
trades on its behalf must file a CMTA agreement with the OCC.
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The Exchange believes that the proposal will permit the effective
enforcement of the Exchange's position limit rules while taking into
account compliance and monitoring realities. The CBOE states that
situations involving numerous violations and/or substantial overages
will continue to be referred to the CBOE's Business Conduct Committee
(``BCC'') for appropriate sanctions on a case by case basis.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of section 6(b)(5) in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. In addition, the Commission
believes that the proposal is consistent with the section 6(b)(6)
requirement that the rules of an exchange provide that its members, and
persons associated with its members, be appropriately disciplined for
violation of the rules of the exchange. Specifically, the Commission
believes that the proposal, in this limited context, should provide the
CBOE with a prompt and effective means to enforce compliance with
position limits while taking into account the difficulties of CBOE
members in detecting and correcting position limit infractions by non-
member customers.
The Commission believes that the CBOE's proposal strikes a
reasonable balance between the Exchange's need to enforce its position
limit rules and its desire to take into consideration the difficulties
of CBOE members in detecting position limit violations that occur in
non-member customer accounts. Further, the Commission believes that the
revised fine schedule will prove sufficient to deter position limit
violations. In this regard, by tallying the infractions in all of a
member's non-member customer accounts cumulatively for purposes of the
fine schedule, the proposal will require members to continually monitor
compliance for position limit violations in non-member customer
accounts. In addition, the Commission notes that the CBOE plans to
refer cases involving numerous violations and/or substantial overages
to the Exchange's BCC, thus providing the Exchange with the flexibility
to impose a stricter sanction for more egregious infractions.
The Commission finds that the CBOE's rephrasing of the current
language of new subparagraph (b) is consistent with the Act in that it
clarifies Exchange Rule 17.50(b), thereby facilitating the enforcement
of the rule.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\4\ that the proposed rule change (File No. SR-CBOE-93-48) is
approved.
\4\15 U.S.C. 72s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4425 Filed 2-25-94; 8:45 am]
BILLING CODE 8010-01-M
