[Federal Register Volume 59, Number 68 (Friday, April 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8442]
[[Page Unknown]]
[Federal Register: April 8, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33853; File No. SR-CBOE-93-19, Amendment No. 1]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
1 to Proposed Rule Change by the Chicago Board Options Exchange, Inc.,
Relating to a Proposal To Extend Market Maker Margin and Capital
Treatment to Certain Market Maker Orders Entered Off the Trading Floor
April 1, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March
16, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') Amendment No. 1 to the proposed rule change
as described in Items I, II, and III below, which Items have been
prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
On April 20, 1993, the CBOE submitted to the Commission a proposal
to extend market maker capital and margin treatment to orders entered
by CBOE market makers from off the Exchange floor, provided that at
least 75% of their total transactions on the Exchange are executed in
person and not through the use of orders.\1\ In Amendment No. 1 the
CBOE proposes to modify its proposal to require that 80%, rather than
75%, of a market maker's total transactions on the Exchange be executed
in person on the CBOE's floor. In addition, Amendment No. 1 states that
the off-floor orders for which a market maker receives market maker
treatment shall be subject to the obligations of CBOE 8.7(a),
``Obligations of Market Makers,'' and in general shall be effected for
the purpose of hedging, reducing the risk of, rebalancing or
liquidating open positions of the market maker.
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\1\See Securities Exchange Act Release No. 32500 (June 23,
1993), 58 FR 35060.
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The text of the proposal is available at the Office of the
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 the Commission, the self-regulatory organization
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 self-regulatory organization
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
Currently, under CBOE Rule 8.1, ``Market Maker Defined,'' only
transactions initiated on the floor of the CBOE count as market maker
transactions. Thus, only market maker transactions initiated on the
CBOE's floor qualify for favorable capital treatment and for favorable
margin treatment under CBOE Rule 12.3(b)(2), even if such orders are
entered to adjust or hedge the risk of positions of the market maker
that result from his on-floor market making activity.\2\
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\2\Questions of margin and capital treatment do not arise in
connection with closing transactions initiated from off the floor,
since they only reduce or eliminate existing positions.
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The CBOE states that the purpose of its proposal is to accommodate
the need of CBOE market makers occasionally to adjust or hedge options
positions in their market maker accounts at times when they are not
physically present on the trading floor, without diluting the
requirement that the trading activity of market makers must fulfill
their market making obligations and must contribute to the maintenance
of a fair and orderly market on the Exchange. Under current CBOE Rule
8.7, ``Obligations of Market Makers,'' and Interpretations adopted
thereunder, all CBOE market makers are obligated to effect no less than
75% of their total contract volume in their appointed classes of
options, and to effect not less than 25% of their total transactions in
person on the trading floor and not by entry of orders.
The Exchange believes that limiting market maker treatment to on-
floor orders is contrary to the practical reality that market makers
cannot reasonably be expected to be physically present on the trading
floor every minute of every day that the market is open. Yet, as a
practical matter, that is essentially what the current rules require.
Since a market maker cannot effectively adjust his positions or engage
in hedging or other risk limiting opening transactions from off the
Exchange floor without incurring a significant economic penalty, CBOE
market makers must either be physically present on the Exchange floor
at all times while the market is open, or face significant risks of
adverse market movements during those times when they must necessarily
be absent from the trading floor.
Further, CBOE Rule 8.1 currently disallows market maker treatment
for all off-floor orders without regard to the individual market
maker's overall level of commitment toward meeting his market making
responsibilities, as evidenced by his record of engaging in in-person
transactions. Thus CBOE Rule 8.1 not only disallows market maker
treatment in circumstances where the market maker is more than
adequately meeting his obligations, but by imposing costs on certain
hedging or risk-adjusting transactions of market makers, the rule may
actually prevent CBOE market makers from effectively discharging their
market making obligations and may expose them to unacceptable levels of
risk.
The proposed rule change would remedy this situation by imposing a
more stringent in-person requirement on those market makers who choose
to receive market maker treatment for transactions executed as a result
of off-floor orders. In place of the existing 25% in-person requirement
of Exchange Rule 8.7, Interpretation .03, the amended proposal would
require market makers who choose to receive market maker treatment for
off-floor orders to satisfy the more stringent requirement that 80% of
their total transactions must be executed in person and not through the
use of orders. In addition, the market makers would be required to
satisfy all of the other existing obligations imposed on market makers,
including the requirement that 75% of their total contract volume in
each calendar quarter be in appointed classes. Amendment No. 1 also
clarifies that the off-floor transactions of a market maker should
constitute a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market and that no market maker
should enter into off-floor transactions or enter off-floor orders that
are inconsistent with such a course of dealings as prescribed in CBOE
Rule 8.7(a) for all market maker transactions.\3\ Further, Amendment
No. 1 states that such off-floor market maker transactions in general
should be effected for the purpose of hedging, reducing the risk of,
rebalancing or liquidating open market maker positions.
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\3\CBOE Rule 8.7(a) states that the transactions of a market
maker should constitute a course of dealings reasonably calculated
to contribute to the maintenance of a fair and orderly market, and
no market maker should enter into transactions or make bids or
offers that are inconsistent with such a course of dealings.
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The CBOE believes that the amended proposal represents a more
appropriate and realistic treatment of market maker transactions
initiated from off the trading floor than what is provided for under
existing Exchange Rule 8.1. The CBOE believes that extending favorable
margin and capital treatment for off-floor transactions only to those
market makers who submit to an 80% in-person requirement should have
the effect of increasing the extent to which market maker transactions
contribute to liquidity and to the maintenance of fair and orderly
markets on the CBOE by providing for a greater degree of in-person
trading by market makers and by enabling market makers to better manage
the risk of their market making activities. Thus, the CBOE believes
that the proposed amendment is consistent with and in furtherance of
the objectives of section 6(b)(5) and section 11(a) of the Act in that
it will promote the maintenance of fair and orderly markets on the CBOE
and will contribute to the protection of investors and the public
interest.
(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 after the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by April 29, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8442 Filed 4-7-94; 8:45 am]
BILLING CODE 8010-01-M
