[Federal Register Volume 63, Number 48 (Thursday, March 12, 1998)]
[Notices]
[Pages 12119-12122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6336]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39725; File No. SR-CBOE-98-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Allocation Procedures
March 5, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on January 22, 1998, 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.\3\ The
[[Page 12120]]
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).
\2\ 17 CFR 240.19b-4.
\3\ On January 23, 1998, the CBOE filed a technical amendment to
the filing, clarifying that the Exchange's Board of Directors had
approved the proposed rule change in February 1997 (Amendment No.
1).
On February 12, 1998, the CBOE filed Amendment No. 2 to the
proposal, to delete CBOE Rules 8.80(a) and 8.80(b)(7) and to insert
an inadvertently omitted part of the Federal Register notice. See
Letter from Arthur Reinstein, Assistant General Counsel, CBOE, to
Joshua Kans, Attorney, Division of Market Regulation (``Division''),
Commission, dated February 12, 1998.
On March 4, 1998, the CBOE filed Amendment No. 3 to the
proposal, clarifying the basis for deleting CBOE Rule 8.80(b)(7).
The amendment also noted that the CBOE is in the process of
comprehensively amending CBOE Rule 8.80. See Letter from Arthur
Reinstein, CBOE, to Joshua Kans, Division, Commission, dated March
4, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to adopt a rule to codify the Exchange's process
for allocating securities to market-maker trading crowds and designated
primary market-makers (``DPMs'').
The text of the proposed rule change is available at the Office of
Secretary, 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 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 for in sections A,
B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The Exchange's Board of Directors has delegated to the Exchange's
Allocation Committee and Special Product Assignment Committee the
authority to allocate the securities traded on the Exchange. Each
allocation is made to either a market-maker trading crowd or to a DPM.
The purpose of the proposed rule change is to codify the Exchange's
allocation process in new CBOE Rule 8.95, ``Allocation of Securities
and Location of Trading Crowds and DPMs'' \4\
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\4\ On the effective date of the proposed rule change, the
Exchange will delete existing CBOE Rules 8.80(a) and 8.80(b)(7). See
Amendment Nos. 2 and 3, supra note 3.
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CBOE Rule 8.95 is proposed to consist of seven subparagraphs, (a)
through (g), and to contain two interpretations.
Proposed CBOE Rule 8.95(a) provides that the Allocation Committee
shall be responsible for determining for each equity option class
traded on the Exchange (i) Whether the option class should be a trading
crowd or to a DPM and (ii) which trading crowd DPM should be allocated
the option class. Similarly, proposed CBOE Rule 8.95(a) provides that
the Special Product Assignment Committee shall be responsible for
determining for each security traded on the Exchange other than an
equity option (i) whether the security should be allocated to a trading
crowd or to a DPM and (ii) which trading crowd or DPM should be
allocated the security. Securities other than equity options that are
traded on the Exchange include index options and securities traded
pursuant to Chapter XXX of the Exchange's Rules, such as structured
products.
Proposed CBOE Rule 8.95(a) further provides that the Allocation
Committee shall be responsible for determining the location on the
Exchange's trading floor of each trading crowd, each DPM, and each
security traded on the Exchange. For example, this provision permits
the Allocation Committee to place a large trading crowd or DPM
operation in a trading floor location that is large enough to
accommodate the crowd or DPM. As another example, if a DPM operated as
a DPM at more than one trading station, this provision permits the
Allocation Committee to determine the station, and the location within
each station, at which the securities allocated to the DPM will trade.
Proposed CBOE Rule 8.95(b) describes the criteria that may be
considered by the Allocation Committee and Special Product Assignment
Committee in making allocation determinations and by the Allocation
Committee in making location determinations. The factors to be
considered may include, but are not limited to, any one or more of the
following: performance, volume, capacity, market performance
commitments, operational factors, efficiency, competitiveness,
environment in which the security will be traded, expressed preferences
of issuers, and recommendations of other Exchange committees.
The following are some examples of the many ways in which these
criteria may be applied. For example, in considering performance, the
appropriate Allocation Committee (i.e., the Allocation Committee or
Special Product Assignment Committee, as applicable) might look at the
market performance ranking of the applicable trading crowds or DPMs, as
established by market performance reviews that are conducted by the
Exchange's Market Performance Committees and Modified Trading System
(``MTS'') Appointments Committee.\5\ In considering volume, the
appropriate Allocation Committee might look at the anticipated trading
volume of the security and the trading volume attributable to the
applicable trading crowds or DPMs in determining which trading crowds
or DPMs would be best able to handle the additional volume. Similarly,
in considering capacity, operational factors, and efficiency, the
appropriate Allocation Committee might look to criteria such as the
number of market-makers or DPM personnel, the ability to process order
flow, and the amount of trading crowd or DPM capital in determining
which trading crowds or DPMs would be best able to handle additional
securities. In considering market performance commitments, the
appropriate Allocation Committee might look at the pledges a trading
crowd or DPM has made with respect to how narrow its bid-ask spreads
will be and the number of contracts for which it will honor its
disseminated market quotations beyond what is required by the
Exchange's Rules. In considering competitiveness, the appropriate
Allocation Committee might look at percentage of volume attributable to
a trading crowd or DPM in allocated securities that are traded on more
than one exchange. In considering the environment in which the security
will be traded, the appropriate Allocation Committee might seek a
proportionate distribution of securities between the market-maker
system and the DPM system and across individual trading crowds and
DPMs. Also, in considering expressed preferences of issuers, the
appropriate Allocation Committee might give consideration to the views
of the issuer of a security traded pursuant to Chapter XXX with respect
to the allocation of that security or to the licenser of an index on
which an index option is based with respect to the allocation of that
index option. Similarly, the appropriate Allocation Committee might
give consideration to the recommendations of other Exchange committees,
particularly those that
[[Page 12121]]
evaluate trading crowd and DPM market performance.
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\5\ The Exchange has three committees that perform market
performance functions, including the evaluation of market
performance. The Exchange's Market Performance Committee performs
market performance functions with respect to all trading crowds,
market-makers (other than DPMs), and floor brokers that trade in
securities other than DJX, NDX, OEX, and SPX index options; the
Index Market Performance Committee performs market performance
functions with respect to the trading crowds, market-makers (other
than DPMs), and floor brokers that trade DJX, NDX, OEX, and SPX
index options; and the MTS Appointments Committee performs market
performance functions with respect to all DPMs.
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Proposed CBOE Rule 8.95(c) provides that that appropriate
Allocation Committee may remove an allocation and reallocate the
applicable security during the first six months following its
allocation to a trading crowd or DPM if the trading crowd or DPM fails
to adhere to any market performance commitments made by the trading
crowd or DPM in connection with receiving the allocation. The
Allocation Committees typically request that trading crowds and DPMs
make market performance commitments as part of their applications to
receive allocations of particular securities. As described above, these
commitments may relate to pledges to keep bid-ask spreads within a
particular width or to make disseminated quotations firm for a
designated number of contracts beyond what is required by Exchange
Rules. Proposed CBOE Rule 8.95(c) permits the appropriate Allocation
Committee to remove an allocation if these commitments are not met and
gives trading crowds and DPMs incentive to abide by these commitments.
Following the initial six months period after an allocation is made,
all the responsibility for monitoring market performance with respect
to that security is vested in the appropriate Market Performance
Committee or MTS Appointments Committee which continually evaluate
trading crowd and DPM market performance, as applicable, and are
authorized pursuant to CBOE Rule 8.60, CBOE Rule 8.80, and other
Exchange rules to take remedial action for failure to satisfy minimum
market performance standards.
Proposed CBOE Rule 8.95(c) also provides that the appropriate
Allocation Committee may change an allocation determination, and that
the appropriate Allocation Committee may change a location
determination, if the appropriate Allocation Committee concludes that
doing so is in the best interest of the Exchange based on operational
factors or efficiency. For example, if due to market conditions the
trading volume in a security greatly increased over a very short time
frame and the trading crowd or DPM allocated the security could not
handle the order flow, it may become necessary for the appropriate
Allocation Committee to reallocate the security to a trading crowd or
DPM with the capacity to do so. Similarly, if the trading volume at a
trading crowd or DPM post greatly increased the number of crowd members
or DPM personnel grew along with the increase in volume, it may become
necessary for the appropriate Allocation Committee to relocate the
trading crowd or DPM to a larger trading post.\6\
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\6\ Once proposed CBOE Rule 8.95(c) has become effective, it
will be necessary to delete existing CBOE Rule 8.80(b)(7).
Existing CBOE Rule 8.80(b)(7)(i) states that the MTS
Appointments Committee may discontinue the use of a DPM in an option
class if the trading activity in that class exceeds a predetermined
volume. That provision is now superfluous because the CBOE
membership voted in December 1993 to advise the MTS Appointments
Committee not to exercise that authority. See Amendment 2, supra
note 3.
Existing CBOE Rule 8.80(b)(7)(ii) permits the MTS Appointments
Committee to discontinue use of a DPM in an option class if it
determines that trading would be better accommodated by using a
market-maker system without a DPM. Proposed CBOE Rule 8.95(c) will
give similar authority to the appropriate Allocation Committee. See
Amendment Nos. 2 and 3, supra note 3.
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Proposed CBOE Rule 8.95(d) provides that prior to taking any action
to remove an allocation or to change a location, the appropriate
Allocation Committee shall generally give the affected trading crowd or
DPM prior notice of the contemplated action and an opportunity to be
heard concerning the action. The only exception to this requirement
would be in those unusual situations when expeditious action is
required due to extreme market volatility or some other situation
requiring emergency action. Specifically, except when expeditious
action is required, proposed CBOE Rule 8.95(d) requires that prior to
taking any action to remove an allocation or to change a location, the
appropriate Allocation Committee shall notify the trading crowd or DPM
involved of the reasons the committee is considering taking the
contemplated action, and shall either convene one or more informal
meetings of the committee (or a committee panel) with the trading crowd
or DPM to discuss the matter, or provide the trading crowd or DPM with
the opportunity to submit a written statement to the committee
concerning the matter. Due to the informal nature of the meetings
provided for under proposed CBOE Rule 8.95(d) and to encourage
constructive communication between the committee and the affected
trading crowd or DPM at those meetings, ordinarily neither counsel for
the committee nor counsel for the trading crowd or DPM shall be invited
to attend these meetings and no verbatim record of the meetings shall
be kept.
As with any decision made by the Allocation Committee and the
Special Product Assignment Committee, any person adversely affected by
a decision made by the appropriate Allocation Committee to remove an
allocation or change a location may appeal the decision to the
Exchange's Appeals Committee under Chapter XIX of the Exchange's Rules.
The appeal procedures in Chapter XIX provide for the right to a formal
hearing concerning any such decision and for the right to be
accompanied, represented, and advised by counsel at all stages of the
proceeding. In addition, any decision of the Appeals Committee may be
appealed to the Exchange's Board of Directors pursuant to CBOE Rule
19.5.
Proposed CBOE Rule 8.95(e) provides that the allocation of a
security to a trading crowd or DPM and the location of a trading crowd
or DPM on the Exchange's trading floor does not convey ownership rights
in the allocation or location or in the order flow associated with the
allocation or location. Proposed CBOE Rule 8.95(e) is intended to make
clear that trading crowds and DPMs may not buy, sell, or otherwise
transfer an allocation or location to another party, and that instead,
it is the Exchange which has the sole authority to determine
allocations and locations on the Exchange's trading floor. It should be
noted, however, that notwithstanding proposed CBOE Rule 8.95(e),
Exchange rules will continue to permit the transfer of DPM appointments
pursuant to CBOE Rule 8.80(b)(3) subject to Exchange approval.
Proposed CBOE Rule 8.95(f) is intended to reflect the current
restrictions that are in place with respect to the allocation of
securities to DPMs. Proposed CBOE Rule 8.95(f) reiterates the provision
currently contained in CBOE Rule 8.80(a) that no option classes opened
for trading prior to May 1, 1987, shall be allocated to a DPM, except
to the extent authorized by a membership vote.\7\ In addition, proposed
CBOE Rule 8.95(f) contains a modification to the foregoing provision
that was approved pursuant to an Exchange membership vote taken in
November 1989. Under this modification, if a trading crowd indicates
that it no longer wishes to trade an option class opened for trading
prior to May 1, 1987, the option class may be reallocated to another
trading crowd or to a DPM giving priority to trading crowd applications
over DPM applications, provided that the trading crowd's commitment to
market quality is competitive and that operational considerations are
satisfied.
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\7\ In amendment No. 2, the Exchange proposed to delete CBOE
Rule 8.80(a) to eliminate the redundancy between it and proposed
CBOE Rule 8.95(f).
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Proposed CBOE Rule 8.95(g) provides that in allocating and
reallocating
[[Page 12122]]
securities to trading crowds and DPMs, the appropriate Allocation
Committee shall act in accordance with any limitation or restriction on
the allocation of securities that is established pursuant to another
Exchange rule. For example, the appropriate Market Performance
Committee or the MTS Appointments Committee may take remedial action
against a trading crowd or DPM pursuant to CBOE Rule 8.60 and CBOE Rule
8.80(b)(10) for failure to satisfy minimum market performance
standards, and such action may involve a restriction related to the
allocation of securities to that trading crowd or DPM. Similarly, the
MTS Appointments Committee may place restrictions on a DPM's ability to
receive or retain allocations of securities pursuant to various
provisions of CBOE Rule 8.80, including as a condition of appointment
as a DPM (CBOE Rule 8.80(b)(3)), due to failure to perform DPM
functions (CBOE Rule 8.80(b)(4)(i)), or due to a material financial,
operations, or personnel change (CBOE Rule 8.80(b)(4)(ii)). Proposed
CBOE Rule 8.95(g) is intended to make clear that the appropriate
Allocation Committee must act in accordance with any such restrictions
in making allocation and location determinations.
Proposed CBOE Rule 8.95, Interpretation .01 generally provides that
it shall be the responsibility of the appropriate Allocation Committee
to reallocate a security in the event that the security is removed
pursuant to another Exchange rule from the trading crowd of DPM to
which the security has been allocated or in the event that for some
other reason the trading crowd or DPM to which the security has been
allocated no longer retains the allocation. For example, as described
above, CBOE Rules 8.60 and 8.80 authorize the Market Performance
Committees and the MTS Appointments Committee to take remedial actions
against trading crowds and DPMs in specified circumstances, including
the removal of an allocation. Proposed CBOE Rule 8.95, Interpretation
.01 is intended to make clear that in the event the appropriate Market
Performance Committee or the MTS Appointments Committee removes an
allocation pursuant to CBOE Rule 8.60 or CBOE Rule 8.80, it is the
responsibility of the appropriate Allocation Committee (and not the
committee that took the action to remove the allocation) to reallocate
the security pursuant to proposed CBOE Rule 8.95. The only exception to
this provision is that the MTS Appointments Committee is authorized
pursuant to CBOE Rule 8.80(b)(6) to allocate to an interim DPM on a
temporary basis a security that is removed from another DPM, until such
time as the appropriate Allocation Committee has made a final
allocation of the security.
Finally, proposed CBOE Rule 8.95, Interpretation .02 provides that
it shall be the responsibility of the Allocation Committee to relocate
a trading crowd or DPM in the event that the trading crowd or DPM is
required to be relocated pursuant to another Exchange rule. As has been
discussed, CBOE Rule 8.60 and CBOE Rule 8.80(b)(10) permit the Market
Performance Committees and the MTS Appointments Committee to take
remedial actions against trading crowds and DPMs in specified
circumstances, including requiring that a trading crowd or DPM be
relocated. Like with proposed CBOE Rule 8.95, Interpretation .01
proposed CBOE Rule 8.95, Interpretation .02 is intended to make clear
that in the event the appropriate Market Performance Committee or the
MTS Appointments Committee requires the relocation of trading crowd or
DPM pursuant to CBOE Rule 8.60 or CBOE Rule 8.80(b)(10), it is the
responsibility of the Allocation Committee (and not the Committee that
took the action to require the relocation) to relocate the trading
crowd or DPM.
The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act,\8\ in general, and furthers the objectives of
Section 6(b)(5),\9\ in particular, in that it is designed to remove
impediments to and perfect the mechanism of a free and open market and
to protect investors and the public interest by providing for
allocation procedures and policies that will ensure that securities
traded by the Exchange are allocated in an equitable and fair manner
and that all trading crowds and DPMs have a fair opportunity for
allocations based on established criteria and procedures.
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\8\ 15 U.S.C. 78f(b).
\9\ 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. 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 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, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the CBOE. All submissions should
refer to File No. SR-CBOE-98-03 and should be submitted by April 2,
1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-6336 Filed 3-11-98; 8:45 am]
BILLING CODE 8010-01-M
