[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Notices]
[Pages 29274-29275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14022]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40015; File No. SR-CBOE-98-11]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to the Proposed Rule Change by the Chicago
Board Options Exchange, Inc., Relating to Adjustments in Market Maker
Equity
May 20, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ notice is hereby given that on March 31, 1998, the
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the CBOE.\2\ The 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\ On May 7, 1998, the CBOE filed Amendment No. 1 to the
proposal. See Letter from Timothy H. Thompson, Director, Regulatory
Affairs, Legal Department, CBOE, to Yvonne Fraticelli, Division of
Market Regulation, Commission, dated May 6, 1998 (``Amendment No.
1'') In Amendment No. 1, the CBOE revised its proposal to: (1)
indicate that CBOE Rule 12.3(f)(3)(C)(3), rather than Regulation X
of the Board of Governors of the Federal Reserve System, prohibits a
clearing firm from extending credit to a market maker when the
market maker's account is in deficit; (2) replace a reference in
proposed Interpretation and Policy .06 to CBOE Rule 12.3(b)(1)(D)
with a reference to CBOE Rule 12.3(f)(1)(F) to define net
liquidating equity; and (3) revise proposed Interpretation and
Policy .06 to indicate that clearing firms will be allowed to extend
credit for opening trades, rather than to permit opening trades.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend CBOE Rule 12.3, ``Margin Requirements''
by adopting Interpretation and Policy .06, which will allow clearing
firms to adjust a market maker's equity under certain limited
circumstances so that the clearing firm may extend credit for opening
trades. Specifically, proposed Interpretation and Policy .06 will allow
a clearing firm to adjust the equity in a market maker's account when
the underlying stock price is disseminated after the options close at
3.02 p.m.\3\ at a price that is inconsistent with the options closing
price.
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\3\ All time references are in Central Time.
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Copies of the proposed rule change are 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 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 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
1. Purpose
CBOE Rule 12.3(f)(3) (C)(3) \4\ prohibits clearing firms from
extending credit to a market maker for opening transactions when the
market maker's account is in deficit. The CBOE proposes to add
Interpretation and Policy .06 to CBOE Rule 12.3 to permit a clearing
firm to adjust the equity in a market maker's account under certain
limited circumstances in order to allow the clearing firm to extend
credit for opening trades. Specifically, proposed Interpretation and
Policy .06 will permit a clearing firm to adjust the equity in market
maker's account when the underlying stock price is disseminated after
the options close at 3:02 p.m. at a price that is inconsistent with the
options closing price.
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\4\ See Amendment No. 1, supra note 2.
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In 1997, the CBOE and the other options exchanges changed the
closing time for trading equity options and certain narrow-based index
options from 3:10 p.m. to 3.02 p.m.\5\ Since then, the CBOE has
discovered that the equity of market maker's account at a clearing firm
can be severely affected when news of a stock underlying a CBOE option
is disseminated near the close, resulting in heavy trading and a late
trade tape. In these situations, the last sale of the underlying stock
could be disseminated well after the overlying options stop trading at
3:02 p.m.,\6\ and closing price of the underlying stock may be out of
line with the closing quotes and the last sale of the options series.
The CBOE notes that while this situation would almost assuredly realign
itself at the opening of trading on the next day, the discrepancy in
closing prices may cause a market maker's account to have deficit
equity. This is true even though from a market risk standpoint the
market maker may be hedged.
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\5\ See e.g., Securities Exchange Act Release No. 38543 (May 14,
1997), 62 FR 28082 (May 22, 1997) (order approving File No. SR-CBOE-
96-71).
\6\ When the options markets closed at 3:10 p.m., this situation
would rarely arise because the final stock prices were almost always
disseminated by the time the options markets closed, thereby
allowing options market makers to adjust their quotes accordingly.
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Proposed Interpretation and Policy .06 would allow a clearing firm
to appropriately adjust a market maker's account equity to eliminate a
pricing disparity for a trader whose account is in deficit as a result
of such a situation. The clearing firm will be required to provide
documentation to the CBOE for such adjustments before the opening of
trading the next day (or before the firm may extend credit for opening
transactions). These adjustments will be made on a case-by-case basis.
In situations where the deficit is eliminated by the adjustment and the
adjustment is approved by the CBOE's Department of Financial and Sales
Practice Compliance, the trader would be permitted to continue trading
the next business day.
2. Statutory Basis
The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that, by allowing for an adjustment
in a market maker's account equity in situations where the stock and
the overlying options close at anomalous prices, the proposal is
designed to promote just and equitable principles of trade and to
protect 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 of the date of publication of this notice in the
Federal
[[Page 29275]]
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 by
order approve such proposed rule change, or 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, 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 in the
Commission's Public Reference Room. 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-98-11 and should
be submitted by June 18, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14022 Filed 5-27-98; 8:45 am]
BILLING CODE 8010-01-M
