[Federal Register Volume 61, Number 96 (Thursday, May 16, 1996)]
[Notices]
[Pages 24843-24845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12236]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37187; File No. SR-CBOE-96-25]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change Relating to Members' Use of Blanket or Standing
Assurances as to Stock Availability To Satisfy Their Affirmative
Determination Requirements Under the Prompt Receipt and Delivery of
Securities Interpretation When Effecting Short Sales
May 9, 1996.
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 April
17, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the CBOE. This
Order approves the proposed rule change on an accelerated basis and
also solicits comments from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to make certain changes to its rules relating
to the requirement to make prior arrangements to borrow stock or to
obtain other assurances that delivery can be made on settlement date
before a member or person associated with a member may sell short. The
text of the proposed rule change is available at the Office of the
Secretary of the 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 CBOE included statements
concerning the purpose of the 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. CBOE has prepared summaries, set forth in Section (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
The purpose of this rule proposal is to amend an interpretation
regarding the need to make prior arrangements to borrow stock,
warrants, or other securities that trade subject to Chapter 30 of the
Exchange's rules, or to otherwise ensure availability of the subject
securities before engaging in short sales. Specifically, the Exchange
proposes to amend the interpretation to provide that under certain
circumstances members may rely on ``blanket'' or standing assurances
(e.g., daily fax sheets) as to stock availability to satisfy their
affirmative determination requirements under the Interpretation.
On November 27, 1995, the Commission published a notice of filing
an immediate effectiveness of a proposed rule change by the Exchange
which adopted Interpretation .04 to Rule 30.20 (``Interpretation''),
``Long''
[[Page 24844]]
and ``Short'' Sales.\1\ The Interpretation is similar to rules of other
securities exchanges and requires that member organizations who effect
short sales for their own account or for the accounts of customers make
an affirmative determination that delivery of the subject securities
can be made on settlement date. The purpose for this interpretation is
to ensure that borrowings and short sales do not outpace the supply of
deliverable stock, thus, leading to potential systemic problems.
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\1\ Securities Exchange Act Release No. 36513 (November 27,
1996).
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The Interpretation also describes the type of ``affirmative
determinations'' that must be obtained by the member or person
associated with the member to ensure that the securities will be
available. The member or person associated with the member is obligated
to keep a written record of each ``affirmative determination.'' If a
customer assures delivery, the written affirmative determination must
record the present location of the securities in question, whether they
are in good deliverable form and the customer's ability to deliver them
to the member within three business days. If the member or person
associated with a member locates the stock, the affirmative
determination must record the identity of the individual and firm
contacted who offered assurance that the shares would be delivered or
that were available for borrowing by settlement date and the number of
shares needed to cover the short sale.
The Interpretation also provides that the manner by which a member
or person associated with a member annotates compliance with this
``affirmative determination'' requirements (e.g., marking the order
tickets, recording inquiries in a log) is left for each individual firm
to decide. In addition, the Interpretation required that an affirmative
determination and annotation of that affirmative determination be made
for each and every transaction since a `'blanket'' or standing
assurance that securities are available for borrowing is not acceptable
to satisfy the affirmative determination requirement (``standing
assurance provision'').
On March 29, 1996, the Exchange filed a proposed rule with the
Commission to delay the effectiveness of the standing assurance
provision until May 10, 1996.\2\ CBOE delayed effectiveness of this
provision because its rule was based on a similar rule of the NASD,
which had also delayed effectiveness of its standing assurance
provision. The NASD re-examined the standing assurance provision and
subsequently replaced it with a provision that allows members to rely
on blanket assurances under some circumstances.\3\
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\2\ See Securities Exchange Act Release No. 37052 (March 29,
1996).
\3\ See Securities Exchange Act Release No. 36859 (February 20,
1996) (``NASD Approval Order'').
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The Exchange has decided, for the sake of regulatory compatibility,
to adopt the same provision. Specifically, under the proposal, a CBOE
member could rely on a ``blanket'' or standing assurance that
securities will be available for borrowing on settlement date to
satisfy its affirmative determination requirement under the
Interpretation provided that: (1) the information used to generate the
``blanket'' or standing assurance is not more than 24-hours old; and
(2) the member delivers the security on settlement date. The proposal
also provides that, should a member relying on a blanket or standing
assurance fail to deliver the security on settlement date, the Exchange
will deem such conduct inconsistent with the terms of the
Interpretation, absent mitigating circumstances adequately documented
by the member.
The Exchange believes the new proposal strikes the appropriate
balance between the need to prevent potentially abusive short selling
activity and the desire to avoid the imposition of unnecessarily
burdensome regulatory requirements. Under the new proposal, members
would have the flexibility to exercise their judgment as to whether it
would or would not be appropriate to rely on a fax sheet. On the other
hand, the proposal allows the Exchange to consider the firm to have
violated the rule if the firm uses a fax sheet but then fails to
deliver the stock. In order to permit the rule to be reasonably
employed by firms who with good intention are unable to deliver, the
rule does permit the Exchange to consider mitigating circumstances in
failure to deliver situations.
Because this rule proposal helps prevent a shortage of deliverable
stock and fails to deliver without imposing any unnecessarily
burdensome regulatory requirements, and conforms the CBOE rule to the
rules of the NASD and the New York Stock Exchange, the Exchange
believes the proposal is consistent with Section 6(b) of the act in
general and Section 6(b)(5) in particular by providing rules that
facilitate transactions in securities, remove impediments to a free and
open market and protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will not result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments.
III. Findings and Conclusions
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, the requirements of Section 6(b)(5).\4\ In particular, the
Commission believes the proposal is consistent with the Section 6(b)(5)
requirement that the rules of an exchange be designed to promote just
and equitable principles of trade and not to permit unfair
discrimination between customers, issuers, brokers, and dealers.
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\4\ 15 U.S.C. Sec. 78f(b)(5) (1982).
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As in the NASD Approval Order, the Commission has determined to
allow CBOE to permit firms to utilize standing assurances in satisfying
their affirmative determination requirements, thereby providing members
with the flexibility to determine whether it is appropriate to rely on
a standing assurance in a given situation. The proposal, however, also
puts members on notice that reliance on standing assurances may be
deemed conduct inconsistent with the Interpretation under certain
circumstances. The Commission believes that this flexible approach will
act not only to ease compliance burdens where appropriate, but also to
protect against conduct inconsistent with the purposes of the
Interpretation.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register because the CBOE's proposal
conforms the Interpretation to the NYSE's interpretation of its own
affirmative determination rule \5\ and is also identical to the
recently approved NASD proposal. The Commission believes that
consistent application of CBOE, NASD, and NYSE rules will
[[Page 24845]]
result in more efficient compliance with such rules. Accordingly, the
proposal does not raise any new or unique regulatory issues. For these
reasons, the Commission believes there is good cause, consistent with
Sections 6(b)(5) and 19(b)(2) of the Act, to approve the proposed rule
change on an accelerated basis.
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\5\ See NYSE Rule 440C; NYSE Information Memo 91-41 (October 18,
1991).
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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, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rules 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 Section, 450 Fifth Street
NW., Washington, D.C. 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 June 6, 1996.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\6\ that the proposed rule change (SR-CBOE-96-25) is approved.
\6\ 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.\7\
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\7\ 17 CFR Sec. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12236 Filed 5-15-96; 8:45 am]
BILLING CODE 8010-01-M
