[Federal Register Volume 64, Number 84 (Monday, May 3, 1999)]
[Notices]
[Pages 23691-23710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10985]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41325 ; File No. SR-CBOE-98-54]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. To Update and
Reorganize Its Rules Relating to Designated Primary Market-Makers
April 22, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 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\ On February 18, 1999, the Exchange submitted an amendment to
the proposed rule filing.\4\ The Commission is publishing this notice
to solicit
[[Page 23692]]
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\ As discussed below, CBOE filed a substantially similar
proposal in 1998, which it subsequently withdrew. See note 5 below.
\4\ The amendment deleted a proposed change to CBOE Rule 8.7.07
because the proposed change amended language proposed by another
pending CBOE rule filing that has not been approved by the
Commission. Letter from Arthur B. Reinstein, Assistant General
Counsel, CBOE is Kelly McCormick, Division of Market Regulation,
SEC, dated February 11, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to update and reorganize its rules relating to
designated primary market-makers (``DPMs''). The text of the proposed
rule change is as follows. Additions are italicized, deletions are
bracketed.
Chapter III--Membership
* * * * *
Rule 3.27.--Membership Options Trading Permits
* * * * *
(c) DPMs. The DPM trading system described in Section C of Chapter
VIII [Modified Trading System established in Rule 8.80] will be
employed in NYSE Options. Each specialist firm to which a Permit is
issued pursuant to subparagraph (a)(2) of this Rule shall be appointed
as the DPM in the same classes of NYSE Options as those for which it
was designated as a specialist on NYSE. Subject to the provisions of
the Rules, a Permit holder qualified to act as a DPM pursuant to the
Rules shall be appointed to act as the DPM for each class of equity
options designated by the Exchange pursuant to the last sentence of
paragraph (b) of this Rule. Each specialist firm appointed as a DPM in
a class of NYSE Options pursuant to the foregoing two sentences shall,
subject to the provisions of the Rules, continue to act as such DPM
during the term of the Permits and thereafter so long as it is a
regular member or member organization of the Exchange.
* * * * *
Chapter VI--Doing Business on the Exchange Floor
* * * * *
Rule 6.8.--RAES Operations in Equity Options
* * * * *
[(a)(iii) This rule shall apply to RAES in classes handled by DPM's
except that the MTS Appointments Committee may make available
additional series or raise the size of eligible orders in a DPM's
classes pursuant to Rule 8.80.]
* * * * *
Chapter VIII--Market-Makers, Trading Crowds and Designated Primary
Market-Makers
* * * * *
Section A: Market-Makers
* * * * *
Rule 8.3.--Appointment of Market-Makers
* * * * *
[Interpretations and Policies:]
[01 The Exchange has adopted the policy that no Market-Maker may
act as an independent Market-Maker in a class of options for which the
Market-Maker has been approved to act as a DPM.]
* * * * *
Rule 8.16.--RAES Eligibility in Option Classes Other Than DJX
* * * * *
(a)(ii) The Market-Maker may designate that his trades be assigned
to and clear into either his individual account or a joint account in
which he is a participant. Each individual member of the joint account
must be physically present in the trading crowd while that member is
signed onto RAES and each joint account member is subject to all of the
following provisions of this rule. [DPM participation shall also be
governed by the MTS Committee as provided in Rule 8.80.]
* * * * *
Section C: Designated Primary Market-Makers [Modified Trading System]
DPM Defined
Rule 8.80. A ``Designated Primary Market-Maker'' or ``DPM'' is a
member organization that is approved by the Exchange to function in
allocated securities as a Market-Maker (as defined in Rule 8.1), as a
Floor Broker (as defined in Rule 6.70), and as an Order Book Official
(as defined in Rule 7.1). Determinations concerning whether to grant or
withdraw the approval to act as a DPM are made by the Modified Trading
System Appointments Committee (``MTS Committee'') in accordance with
Rules 8.83 and 8.90. DPMs are allocated securities by the Allocation
Committee and the Special Product Assignment Committee in accordance
with Rule 8.95.
DPM Designees
Rule 8.81. (a) A DPM may act as a DPM solely through its DPM
Designees. A ``DPM Designee'' is an individual who is approved by the
MTS Committee to represent a DPM in its capacity as a DPM. The MTS
Committee may subclassify DPM Designees and require that certain DPM
Designees be subject to specified supervision and/or be limited in
their authority to represent a DPM.
(b) Notwithstanding any other rules to the contrary, an individual
must satisfy the following requirements in order to be a DPM Designee
of a DPM:
(i) The individual must be a member of the Exchange;
(ii) The individual must be a nominee of the DPM or of an affiliate
of the DPM or must own a membership that has been registered for the
DPM or for an affiliate of the DPM;
(iii) The individual must be registered as a Market-Maker pursuant
to Rule 8.2 and as a Floor Broker pursuant to Rule 6.71;
(iv) On such form or forms as the Exchange may prescribe, the DPM
must authorize the individual to enter into Exchange transactions on
behalf of the DPM in its capacity as a DPM, must authorize the
individual to represent the DPM in all matters relating to the
fulfillment of the DPM's responsibilities as a DPM, and must guaranty
all obligations arising out of the individual's representation of the
DPM in its capacity as a DPM in all matters relating to the Exchange;
and
(v) The individual must be approved by the MTS Committee to
represent the DPM in its capacity as a DPM.
Notwithstanding the provisions of subparagraph (b)(ii) of this
Rule, the MTS Committee shall have the discretion to permit an
individual who is not affiliated with a DPM to act as a DPM Designee
for the DPM on an emergency basis provided that the individual
satisfies the other requirements of subparagraph (b) of this Rule.
(c) The approval of an individual to act as a DPM Designee shall
expire in the event the individual does not have trading privileges on
the Exchange for a six month time period.
(d) Each DPM shall have at least two DPM Designees who are nominees
of the DPM or who own a membership that has been registered for the
DPM.
(e) A DPM Designee of a DPM may not trade as a Market-Maker or
Floor Broker in securities allocated to the DPM unless the DPM Designee
is acting on behalf of the DPM in its capacity as a DPM. When acting on
behalf of a DPM in its capacity as a DPM, a DPM Designee is exempt from
the provisions of Rule 8.8.
MTS Committee
Rule 8.82. (a) The MTS Committee shall consist of the Vice-Chairman
of the Exchange, the Chairman of the Market Performance Committee, and
nine members elected by the membership of the Exchange.
(b) The nine elected MTS Committee members shall include: four
members whose primary business is as a Market-Maker, two members whose
primary business is as a Market-Maker or as a DPM Designee, one member
whose primary business is as a Floor Broker and who is not associated
with a member organization that conducts a
[[Page 23693]]
public customer business, and two persons associated with member
organizations that conduct a public customer business. No more than two
of the nine elected MTS Committee members may be associated with a DPM.
The nine elected MTS Committee members shall have three-year terms,
three of which shall expire each year.
(c) The election procedures for the nine elected MTS Committee
members shall be the same as the election procedures for elected
Directors that are set forth in Article IV and Article V of the
Exchange Constitution. Accordingly, the following shall occur as part
of these procedures: During October of each year, the Nominating
Committee shall select nominees to fill expiring terms and vacancies on
the MTS Committee. Nominations may also be made by petition, signed by
not less than 100 members and filed with the Secretary of the Exchange
no later than 5:00 p.m. (Chicago time) on November 15, or the first
business day thereafter in the event November 15 occurs on a holiday or
a weekend. The election to fill the expiring terms and vacancies on the
MTS Committee shall be held as part of the annual election.
Approval To Act as a DPM
Rule 8.83. (a) A member organization desiring to be approved to act
as a DPM shall file an application with the Exchange on such form or
forms as the Exchange may prescribe.
(b) The MTS Committee shall determine the appropriate number of
approved DPMs. Each DPM approval shall be made by the MTS Committee
from among the DPM applications on file with the Exchange, based on the
MTS Committee's judgment as to which applicant is best able to perform
the functions of a DPM. Factors to be considered in making such a
selection may include, but are not limited to, any one or more of the
following:
(i) Adequacy of capital;
(ii) Operational capacity;
(iii) Trading experience of and observance of generally accepted
standards of conduct by the applicant, its associated persons, and the
DPM Designees who will represent the applicant in its capacity as a
DPM;
(iv) Number and experience of support personnel of the applicant
who will be performing functions related to the applicant's DPM
business;
(v) Regulatory history of and history of adherence to Exchange
Rules by the applicant, its associated persons, and the DPM Designees
who will represent the applicant in its capacity as a DPM;
(vi) Willingness and ability of the applicant to promote the
Exchange as a marketplace;
(vii) Performance evaluations conducted pursuant to Rule 8.60; and
(viii) In the event that one or more shareholders, directors,
officers, partners, managers, members, DPM Designees, or other
principals of an applicant is or has previously been a shareholder,
director, officer, partner, manager, member, DPM Designee, or other
principal in another DPM, adherence by such DPM to the requirements set
forth in this Section C of Chapter VIII respecting DPM responsibilities
and obligations during the time period in which such person(s) held
such position(s) with the DPM.
(c) Each applicant for approval as a DPM will be given an
opportunity to present any matter which it wishes the MTS Committee to
consider in conjunction with the approval decision. The MTS Committee
may require that a presentation be solely or partially in writing, and
may require the submission of additional information from the applicant
or individuals associated with the applicant. Formal rules of evidence
shall not apply to these proceedings.
(d) In selecting an applicant for approval as a DPM, the MTS
Committee may place one or more conditions on the approval, including,
but not limited to, conditions concerning the capital, operations, or
personnel of the applicant and the number or type of securities which
may be allocated to the applicant.
(e) Each DPM shall retain its approval to act as a DPM until the
MTS Committee relieves the DPM of its approval and obligations to act
as a DPM or the MTS Committee terminates the DPM's approval to act as a
DPM pursuant to Rule 8.90.
(f) If a member organization resigns as a DPM or if pursuant to
Rule 8.90 the MTS Committee terminates or otherwise limits its approval
to act as a DPM, the MTS Committee shall have the discretion to do one
or both of the following:
(i) Approve an interim DPM, pending the final approval of a new DPM
pursuant to paragraphs (a) through (d) of this Rule; and
(ii) Allocate on an interim basis to another DPM or to other DPMs
the securities that were allocated to the affected DPM, pending a final
allocation of such securities pursuant to Rule 8.95.
Neither an interim approval or allocation made pursuant to this
paragraph (f) should be viewed as a prejudgment with respect to the
final approval or allocation.
Conditions on the Allocation of Securities to DPMs
Rule 8.84. (a) The MTS Committee may establish (i) restrictions
applicable to all DPMs on the concentration of securities allocable to
a single DPM and to affiliated DPMs and (ii) minimum eligibility
standards applicable to all DPMs which must be satisfied in order for a
DPM to receive allocations of securities, including but not limited to
standards relating to adequacy of capital and number of personnel.
(b) The MTS Committee has the authority under other Exchange rules
to restrict the ability of particular DPMs to receive allocations of
securities, including but not limited to, Rules 8.88(b) and 8.60, Rule
8.83(d), and Rule 8.90.
DPM Obligations
Rule 8.85. (a) Dealer Transactions. Each DPM shall fulfill all of
the obligations of a Market-Maker under the Rules, and shall satisfy
each of the following requirements, in respect of each of the
securities allocated to the DPM:
(i) assure that disseminated market quotations are accurate;
(ii) assure that each displayed market quotation is honored for at
least the number of contracts prescribed pursuant to Rule 8.51;
(iii) in the case of option contracts, comply with the bid/ask
differential requirements of Rule 8.7(b)(iv);
(iv) assure that the number of DPM Designees and support personnel
continuously present at the trading station throughout every business
day is not less than the minimum required by the MTS Committee;
(v) trade in all securities allocated to the DPM only in the
capacity of a DPM and not in any other capacity;
(vi) segregate in a manner prescribed by the MTS Committee (A) all
transactions consummated by the DPM in securities allocated to the DPM
and (B) any other transactions consummated by or on behalf of the DPM
that are related to the DPM's DPM business;
(vii) with respect to any security traded pursuant to Chapter XXX
that is allocated to the DPM, fill any odd lot portion combined with a
round lot order in that security at a price determined in accordance
with Rule 30.22, Interpretation and Policy .05;
(viii) participate at all times in any Exchange sponsored automated
order handling system, including the Retail Automatic Execution System
(RAES); and
(ix) determine a formula for generating automatically updated
[[Page 23694]]
market quotations and disclose the following components of the formula
to the other members trading at the trading station at which the
formula is used: option pricing calculation model, volatility, interest
rate, dividend, and what is used to represent the price of the
underlying.
Notwithstanding the provisions of subparagraph (a)(ix) of this
Rule, the MTS Committee shall have the discretion to exempt DPMs using
proprietary automated quotation updating systems from having to
disclose proprietary information concerning the formulas used by those
systems. In addition, to the extent that there is any inconsistency
between the specific obligations of a DPM set forth in subparagraphs
(a)(i) through (a)(ix) of this Rule and the general obligations of a
Market-Maker under the Rules, subparagraphs (a)(i) through (a)(ix) of
this Rule shall govern.
(b) Agency Transactions. Each DPM shall fulfill all of the
obligations of a Floor Broker (to the extent that the DPM acts as a
Floor Broker) and of an Order Book Official under the Rules, and shall
satisfy each of the following requirements, in respect of each of the
securities allocated to the DPM:
(i) place in the public order book any order in the possession of
the DPM which is eligible for entry into the book unless (A) the DPM
executes the order upon its receipt or (B) the customer who placed the
order has requested that the order not be booked, and upon receipt of
the order, the DPM announces in public outcry the information
concerning the order that would be displayed if the order were a
displayed order in the public order book;
(ii) not remove from the public order book any order placed in the
book unless (A) the order is canceled, expires, or is executed or (B)
the DPM returns the order to the member that placed the order with the
DPM in response to a request from that member to return the order;
(iii) accord priority to any order which the DPM represents as
agent over the DPM's principal transactions, unless the customer who
placed the order has consented to not being accorded such priority;
(iv) not charge any brokerage commission with respect to the
execution of any order for which the DPM has acted as both agent and
principal, unless the customer who placed the order has consented to
paying a brokerage commission to the DPM with respect to the DPM's
execution of the order while acting as both agent and principal;
(v) act as a Floor Broker to the extent required by the MTS
Committee; and
(vi) not represent discretionary orders as a Floor Broker or
otherwise. Notwithstanding the provisions of subparagraph (b)(vi) of
this Rule, the MTS Committee shall have the discretion to authorize a
DPM, on a temporary basis, to accept and represent types of orders in
one or more of the securities allocated to the DPM which vest the DPM
with limited discretion, if the MTS Committee determines that unusual
circumstances are present and that the acceptance and representation of
such orders by the DPM is necessary in order to assure that there will
be adequate representation in such securities of those types of orders.
In addition, to the extent that there is any inconsistency between the
specific obligations of a DPM set forth in subparagraphs (b)(i) through
(b)(vi) of this Rule and the general obligations of a Floor Broker or
of an Order Book Official under the Rules, subparagraphs (b)(i) through
(b)(vi) of this Rule shall govern.
(c) Other Obligations. In addition to the obligations described in
paragraphs (a) and (b) of this Rule, a DPM shall fulfill each of the
following obligations:
(i) resolve disputes relating to transactions in the securities
allocated to the DPM, subject to Floor Official review, upon the
request of any party to the dispute;
(ii) promote the Exchange as a marketplace, including meeting and
educating market participants, maintaining communications with member
firms in order to be responsive to suggestions and complaints, and
performing other like activities;
(iii) act to increase the Exchange's order flow in the securities
which are allocated to the DPM and respond to competitive developments
by improving market quality and service and otherwise acting to
increase the Exchange's market share in those securities;
(iv) promptly inform the MTS Committee of any desired change in the
DPM Designees who represent the DPM in its capacity as a DPM and of any
material change in the financial or operational condition of the DPM;
(v) supervise all persons associated with the DPM to assure
compliance with the Rules;
(vi) segregate in a manner prescribed by the MTS Committee the
DPM's business and activities as a DPM from the DPM's other businesses
and activities; and
(vii) continue to act as a DPM and to fulfill all of the DPM's
obligations as a DPM until the MTS Committee relieves the DPM of its
approval and obligations to act as a DPM or the MTS Committee
terminates the DPM's approval to act as a DPM pursuant to Rule 8.90.
(d) Obligations of DPM Associated Persons. Each person associated
with a DPM shall be obligated to comply with the provisions of this
Rule when acting on behalf of the DPM.
* * * Interpretations and Policies:
.01 The Exchange may make personnel available to assist a DPM in
the DPM's performance of the obligations of an Order Book Official, for
which the Exchange may charge the DPM a reasonable fee.
DPM Financial Requirements
Rule 8.86. Each DPM shall maintain (i) net liquidating equity in
its DPM account of not less than $100,000, and in conformity with such
guidelines as the MTS Committee may establish from time to time, and
(ii) net capital sufficient to comply with the requirements of Exchange
Act Rule 15c3-1. Each DPM which is a Clearing Member shall also
maintain net capital sufficient to comply with the requirements of the
Clearing Corporation.
Participation Entitlement of DPMs
Rule 8.87. (a) Subject to the review of the Board of Directors, the
MTS Committee may establish from time to time a participation
entitlement formula that is applicable to all DPMs.
(b) To the extent established pursuant to paragraph (a) of this
Rule, each DPM shall have a right to participate for its own account
with the Market-Makers present in the trading crowd in transactions in
securities allocated to the DPM that occur at the DPM's previously
established principal bid or offer.
Review of DPM Operations and Performance
Rule 8.88. (a) The MTS Committee or a subcommittee of the MTS
Committee may conduct a review of a DPM's operations or performance at
any time and at a minimum shall conduct a review of each DPM's
operations and performance on an annual basis. A DPM and its associated
persons shall submit to the MTS Committee such information requested by
the Committee in connection with a review of the DPM's operations or
performance.
(b) The MTS Committee shall perform the market performance
evaluation and remedial action functions set forth in Rule 8.60 with
respect to DPMs and the Market-Makers and Floor Brokers that regularly
trade at DPM trading stations.
[[Page 23695]]
The MTS Committee may combine a review conducted pursuant to paragraph
(a) of this Rule with an evaluation conducted pursuant to Rule 8.60.
(c) Members of the MTS Committee may perform the functions of a
Floor Official at DPM trading stations.
Transfer of DPM Appointments
Rule 8.89. (a) A DPM proposing any sale, transfer, or assignment of
any ownership interest or any change in its capital structure, voting
authority, or distribution of profits or losses shall give not less
than thirty (30) days prior written notice thereof to the MTS
Committee. No such transaction that is deemed to involve the transfer
of a DPM appointment within the meaning of paragraph (b) of this Rule
may take place unless (i) the transferee is qualified to act as a DPM
in accordance with the Rules, and (ii) the transaction has received the
prior approval of the MTS Committee.
(b) For purposes of this Rule 8.89, the following transactions are
deemed to involve the transfer of a DPM appointment: (i) any sale,
transfer, or assignment of any significant share of the ownership of a
DPM; (ii) any change or transfer of control of a DPM; [sic](iii) any
merger, sale of assets, or other business combination or reorganization
of a DPM. A sale, transfer, or assignment of a five percent (5%) or
more interest in the equity or profits or losses of a DPM (or any
series of smaller changes that in the aggregate amount to a change of
five percent or more) shall be deemed to be a sale, transfer, or
assignment of a significant share of the ownership of the DPM;
provided, however, that any sale, transfer, or assignment of a less
than five percent interest may also be found by the MTS Committee to
represent a significant share of the ownership of a DPM depending on
the surrounding facts and circumstances, in which event the MTS
Committee shall notify the DPM within fifteen (15) days after receiving
notice thereof that the approval of the transaction by the MTS
Committee is required.
(c) An application for the approval of a transaction deemed to
involve the transfer of a DPM appointment shall be submitted in writing
to the MTS Committee at least thirty (30) days prior to the proposed
effective date of the transaction, unless the MTS Committee approves a
shorter period for its review. The application shall contain a full and
complete description of the proposed transaction, including (i) the
identity of the transferee, (ii) a description of the transferee's
ownership and capital structure, (iii) the identity of those persons
who will be the partners, shareholders, directors, officers, and other
managers or affiliates of the transferee, as well as those persons who
will be responsible for performing the duties of the DPM following the
transfer, (iv) the terms of the transaction including the consideration
proposed to be paid by the transferee, (v) the terms of any other
business relationships between the parties to the transaction, and (vi)
any other material information pertaining to the transaction that the
MTS Committee may request.
(d) Promptly after receipt of a completed application for the
approval of a proposed transfer of a DPM appointment, the MTS Committee
shall post notice of the proposed transfer on the Exchange Bulletin
Board and in the Exchange Bulletin. The MTS Committee shall not
ordinarily consider a proposed transfer sooner than ten (10) business
days following the day notice is posted on the Bulletin Board, unless
the MTS Committee finds it necessary to give earlier consideration to
the matter in the interest of the maintenance of fair and orderly
markets and the protection of investors. During this period, the MTS
Committee will accept written comments on the proposed transfer from
any member, and will accept written proposals from other members or
from Market-Maker crowds who wish to be considered for appointment in
some or all of the classes that are the subject of the proposed
transfer.
(e) No application shall be finally approved by the MTS Committee
until it is accompanied by complete and final documents pertaining to
the transfer (all corporate or partnership documents and amendments
thereto, voting trust, ``buy-sell'' or similar agreements, employment
agreements, pro forma financial statements), except as the MTS
Committee may agree to defer the delivery of specific documents for
good cause shown. In considering the approval of a proposed transfer of
a DPM appointment, the MTS Committee shall give due consideration to
all relevant facts and circumstances, including but not limited to each
of the following factors, if applicable: (i) the financial and
operational capacity of the transferee; (ii) continuity of control,
management, and persons responsible for the operation of the DPM; (iii)
avoiding undue concentration of DPM appointments on the Exchange; (iv)
available alternatives for reallocating the DPM's appointment taking
into account comments made and alternatives proposed by other members
during the posting period; and (v) the best interests of the Exchange.
If the proposed transferee is not approved to act as a DPM at the time
the application is considered by the MTS Committee, the approval of the
transfer may be made contingent on the transferee's being so approved
within a stated period of time.
(f) The approval or failure to approve a proposed transfer of a DPM
appointment is subject to direct review by the Board of Directors upon
receipt by the Secretary of the Exchange, within ten (10) days of the
time the decision of the MTS Committee is announced, of (i) a written
request for such review made by the applicant, specifying why the
applicant believes the decision of the Committee should be reversed or
modified (in the case of a failure to approve an application as
submitted) or (ii) a request for review made by at least five Directors
of the Exchange (in any case).
* * * Interpretations and Policies
.01 For purposes of paragraph (b) of this Rule, a transfer of an
interest in the profits (but not the ownership) of a DPM to an
associated person of the DPM solely as compensation for the associated
person's services in support of the business of the DPM shall not
ordinarily be deemed to be a sale, transfer, or assignment of a
significant share of the ownership of the DPM.
Termination, Conditioning, or Limiting Approval to Act as a DPM
Rule 8.90. (a) The MTS Committee may terminate, place conditions
upon, or otherwise limit a member organization's approval to act as a
DPM under any one or more of the following circumstances:
(i) if the member organization incurs a material financial,
operational, or personnel change;
(ii) if the member organization fails to comply with any of the
requirements under this Section C of ChapterVIII, including, but not
limited to, any conditions imposed under Rule 8.83(d), Rule
8.84(a)(ii), or this Rule; or
(iii) if for any reason the member organization should no longer be
eligible for approval to act as a DPM or to be allocated a particular
security or securities.
Before the MTS Committee takes action to terminate, condition, or
otherwise limit a member organization's approval to act as a DPM, the
member organization will be given notice of such possible action and an
opportunity to present any matter which it wishes the MTS Committee to
consider in determining whether to take such action. Such proceedings
shall be conducted in the same manner as MTS
[[Page 23696]]
Committee proceedings concerning DPM approvals which are governed by
Rule 8.83(c).
(b) Notwithstanding the provisions of paragraph (a) of this Rule,
the MTS Committee has the authority to immediately terminate,
condition, or otherwise limit a member organization's approval to act
as a DPM if it incurs a material financial, operational, or personnel
change warranting such action or if the member organization fails to
comply with any of the financial requirements of Rule 8.86.
(c) Limiting a member organization's approval to act as a DPM may
include, among other things, limiting or withdrawing the member
organization's DPM participation entitlement provided for under Rule
8.87, withdrawing the right of the member organization to act in the
capacity of a DPM in a particular security or securities which have
been allocated to the member organization, and/or requiring the
relocation of the member organization's DPM operation on the Exchange's
trading floor.
(d) If a member organization's approval to act as a DPM is
terminated, conditioned, or otherwise limited by the MTS Committee
pursuant to this Rule, the member organization may seek review of that
decision under Chapter XIX of the Rules.
Limitations on Dealings of DPMs and Affiliated Persons of DPMs
RULE 8.91. (a) No person or entity affiliated with a DPM shall
purchase or sell on the Exchange, for any account in which such person
or entity has a direct or indirect interest, any security which is
allocated to the DPM. Any such person or entity may, however, reduce or
liquidate an existing position in a security which is allocated to an
affiliated DPM provided that any order to consummate such a transaction
is (i) identified as being for an account in which such person or
entity has a direct or indirect interest, (ii) approved for execution
by a Floor Official, and (iii) executed by the DPM in a manner
reasonably calculated to contribute to the maintenance of price
continuity with reasonable depth. No order entered pursuant to this
paragraph (a) shall be given priority over, or parity with, any order
represented in the market at the same price. This paragraph (a) shall
not apply to a DPM Designee of a DPM acting on behalf of the DPM in its
capacity as a DPM.
(b) Neither a DPM for an equity option, nor any member affiliated
with the DPM, shall engage in any material business transaction with
the issuer of the security that underlies the equity option or with any
officer, director, or 10% shareholder of the issuer of the security.
Neither a DPM for a security traded pursuant to Chapter XXX, nor any
member affiliated with the DPM, shall engage in any material business
transaction with the issuer of the security or with any officer,
director, or 10% shareholder of the issuer of the security. For the
purposes of this paragraph (b), a material business transaction shall
be deemed to be a transaction which is material in value either to the
issuer or the DPM, would provide access to material non-public
information relating to the issuer, or would give rise to a control
relationship between the issuer and the DPM. Notwithstanding the
foregoing, the receipt of routine business services, goods, materials,
or insurance, on terms that would be generally available shall not be
deemed a material business transaction for the purposes of this
paragraph (b).
(c) Neither a DPM for an equity option, nor any member affiliated
with the DPM, shall accept any orders directly from the issuer of the
security that underlies the equity option or directly from any officer,
director, or 10% shareholder of the issuer of the security. Neither a
DPM for a security traded pursuant to Chapter XXX, nor any member
affiliated with the DPM, shall accept any orders directly from the
issuer of the security or directly from any officer, director, or 10%
shareholder of the issuer of the security.
(d) No member affiliated with a DPM may act as a Floor Broker in
any trading crowd in which the DPM acts as a DPM. This paragraph (d)
shall not apply to a DPM Designee of a DPM acting on behalf of the DPM
in its capacity as a DPM.
(e) Paragraphs (a), (b), and (c) of this Rule shall not apply to
any member affiliated with a DPM that has established and obtained
Exchange approval of procedures restricting the flow of material non-
public corporate and market information (i.e., a ``Chinese Wall'')
between such member on the one hand and the DPM and persons affiliated
with the DPM on the other hand. Any such procedures shall comply with
the following Guidelines:
Guidelines for Exemptive Relief Under Rule 8.91(e) for Members
Affiliated with DPMs
These Guidelines set forth the steps that a member affiliated with
a DPM must undertake, at a minimum, to seek to obtain an exemption
under Rule 8.91(e) from the requirements of paragraphs (a) through (c)
of Rule 8.91. These Guidelines may be supplemented or modified by the
Exchange in individual cases when the Exchange deems it appropriate to
do so.
(a) Generally, an affiliated member seeking a Rule 8.91(e)
exemption should establish its operational structure along the lines
discussed below.
(i) The affiliated member and the DPM must be organized as separate
and distinct organizations. At a minimum, the two organizations must
maintain separate and distinct books, records, and accounts and satisfy
separately all applicable financial and capital requirements. While the
Exchange will permit the affiliated member and the DPM to be under
common management, in no instance may persons on the affiliated
member's side of the ``Wall'' exercise influence over or control the
DPM's conduct with respect to particular securities or vice versa. Any
general managerial oversight must not conflict with or compromise in
any way the DPM's market-making responsibilities pursuant to the Rules.
(ii) The affiliated member and the DPM must establish procedures
designed to prevent the use of material non-public corporate or market
information in the possession of the affiliated member to influence the
DPM's conduct and to avoid the misuse of DPM market information to
influence the affiliated member's conduct. Specifically, the affiliated
member and the DPM must ensure that material non-public corporate
information relating to trading positions taken by the affiliated
member in a DPM security are not made available to the DPM or to any
shareholder, director, officer, partner, manager, member, principal,
DPM Designee, or employee associated therewith; that no trading is done
by the DPM while in possession of non-public corporate information
derived by the affiliated member from any transaction or relationship
with the issuer or any other person in possession of such information;
that advantage is not taken of knowledge of pending transactions or the
affiliated member's recommendations; and that all information
pertaining to positions taken or to be taken by the DPM and to the
DPM's ``book'' in a DPM security is kept confidential and is not made
available to the affiliated member except to the extent that such
information is made available to the affiliated member in accordance
with subparagraph (b)(iii) of these Guidelines.
(b) An affiliated member seeking a Rule 8.91(e) exemption shall
submit to the Exchange a written statement which shall set forth:
(i) The manner in which the affiliated member intends to satisfy
each of the
[[Page 23697]]
conditions stated in subparagraphs (a)(i) and (a)(ii) of these
Guidelines, and the compliance and audit procedures the affiliated
member proposes to implement to ensure that the functional separation
is maintained between the affiliated member and the DPM;
(ii) The designation and identification of the individuals
associated with the affiliated member responsible for maintenance and
surveillance of such procedures;
(iii) That the DPM shall make available to the affiliated member
only the sort of market information that the DPM would make available
in the normal course of its DPM activity to any other member; that the
DPM shall only make such information available to the affiliated member
in the same manner that it is made available to any other member; and
that the DPM shall only make such information available to the
affiliated member pursuant to a request by the affiliated member for
such information;
(iv) That where the affiliated member ``popularizes'' a security in
which the DPM acts as DPM the affiliated member shall disclose that an
associated DPM makes a market in the security, may have a position in
the security, and may be on the opposite side of public orders executed
on the Exchange in the security; and that the affiliated member shall
forward to the Exchange, immediately after its issuance, a copy of any
research report or written recommendation which ``popularizes'' a
security in which the DPM acts as DPM;
(v) That the affiliated member shall file with the Exchange such
information and reports as the Exchange may, from time to time, require
relating to its transactions in a security in which the DPM acts as
DPM;
(vi) That the affiliated member shall take appropriate remedial
action against any person violating these Guidelines and/or the
affiliated member's internal compliance and audit procedures adopted
pursuant to subparagraph (b)(i) of these Guidelines, and that the
affiliated member and the DPM each recognizes that the Exchange may
take appropriate remedial action, including (without limitation)
removal of securities from the DPM and/or revocation of the Rule
8.91(e) exemption, in the event of such a violation;
(vii) Whether the affiliated member intends to clear proprietary
trades of the DPM and, if so, the procedures established to ensure that
information with respect to such clearing activities will not be used
to compromise the affiliated member's ``Chinese Wall'' (the procedures
followed shall, at a minimum, be the same as those used by the
affiliated member to clear for unaffiliated third parties); and
(viii) That no individual associated with the affiliated member
shall trade on the Exchange as a Market-Maker in any security in which
the DPM acts as DPM. (Any written statements submitted pursuant to this
paragraph (b) shall be collectively referred to herein as the
``Exemption Request''.)
(c) In the event that, notwithstanding the procedures established
pursuant to these Guidelines, any DPM Designee of a DPM becomes aware
of the fact that the Designee has received from the affiliated member
any material non-public corporate or market information relating to any
of the DPM securities, the DPM Designee shall promptly communicate that
fact and disclose the information so received to the person associated
with the affiliated member responsible for compliance with securities
laws and regulations (the compliance officer) and shall seek a
determination from the compliance officer as to whether the DPM
Designee should, as a consequence of the Designee's receipt of such
information, give up the DPM Designee's appointment as a DPM Designee
in the security involved. If the compliance officer determines that the
DPM Designee should give up the Designee's appointment as a DPM
Designee, the DPM Designee shall, at a minimum, give the appointment up
to another DPM Designee who is not in possession of the information so
received. In any such event, the compliance officer shall determine
when it is appropriate for the DPM Designee to recover the Designee's
appointment as a DPM Designee and recommence acting as DPM Designee in
the security involved. Procedures shall be established by the
affiliated member to assure that in any instance when the compliance
officer determines that a DPM Designee should give up the Designee's
appointment as a DPM Designee, such transfer is effected in a manner
which will prevent the market sensitive information from being
disclosed to the remaining DPM Designees.
The compliance officer shall keep a written record of each request
received from a DPM Designee for a determination as referred to above.
Such record shall be adequate to record the pertinent facts and shall
include, at a minimum, the identification of the security, the date, a
description of the information received by the DPM Designee, the
determination made by the compliance officer, and the basis therefor.
If the appointment is given up, the record shall also set forth the
time at which the DPM Designee reacquired the appointment and the basis
upon which the compliance officer determined that such reacquisition
was appropriate. The Exchange shall be given prompt notice of any
instance when the compliance officer determines that a DPM Designee
should give up the DPM Designee's appointment and also of the
determination that the DPM Designee should be permitted to reacquire
the appointment. In accordance with such schedules as the Exchange
shall from time to time prescribe (at least monthly), the written
record of all requests received by the compliance officer from DPM
Designees for a determination as referred to above shall be furnished
to the Exchange for its review. Members are cautioned that any trading
by any person while in possession of material non-public information
received as a result of any breach of the internal controls required by
these Guidelines may violate Exchange Act Rule 10b-5, Exchange Act Rule
14e-3, just and equitable principles of trade, or one or more other
provisions of the Exchange Act, regulations thereunder, or Rules of the
Exchange. The Exchange intends to review carefully any such trading of
which it becomes aware to determine whether any such violation has
occurred.
(d) Subparagraph (b)(vii) of these Guidelines permits an affiliated
member to clear the DPM transactions of the DPM provided that the
affiliated member establishes procedures to ensure that information
with respect to such clearing activities will not be used to compromise
the affiliated member's ``Chinese Wall.'' Such procedures should
provide that any information pertaining to security positions and
trading activities of the DPM, and information derived from any
clearing and margin financing arrangements between the affiliated
member and the DPM, may be made available only to those (other than
employees actually performing clearing and margin financing functions)
associated with the affiliated member that are in senior management
positions and are involved in exercising general managerial oversight
over the DPM. Generally, such information may be made available only to
the affiliated member's chief executive officer, chief operations
officer, chief financial officer, and senior officer responsible for
managerial oversight of the DPM, and only for the purpose of exercising
permitted managerial oversight. Such information may not be made
available to anyone actually engaged in making day-to-day
[[Page 23698]]
trading decisions for the affiliated member, or in making
recommendations to the customers or potential customers of the
affiliated member. Any margin financing arrangements must be
sufficiently flexible so as not to limit the ability of the DPM to meet
market-making or other obligations under Exchange Rules.
(e) The Exemption Request shall detail the internal controls which
both the affiliated member and the DPM intend to adopt to satisfy each
of the conditions stated in paragraphs (b)(i) through (b)(viii) of
these Guidelines, and the compliance and the audit procedures they
propose to implement to ensure that the internal controls are
maintained. If the Exchange determines that the organizational
structure and the compliance and audit procedures proposed by the
affiliated member and the DPM are acceptable under these Guidelines,
the Exchange shall so inform the affiliated member and the DPM, in
writing, at which point a Rule 8.91(e) exemption shall be granted with
or without conditions. Absent such prior written Exchange approval, an
exemption shall not be available. The Exemption Request should identify
the individuals associated with the affiliated member that are in
senior management positions (and their titles/levels of responsibility)
to whom information concerning the DPM trading activities and security
positions, and information concerning clearing and margin financing
arrangements, is to be made available, the purpose for which the
information is to be made available, the frequency with which the
information is to be made available, and the format in which the
information is to be made available. If any shareholder, director,
officer, partner, manager, member, principal, or employee of the
affiliated member intends to serve in any such capacity with the DPM,
or vice versa, the written statement must include a statement of the
duties of the particular individual at both entities, and why it is
necessary for such individual to be a shareholder, director, officer,
partner, manager, member, principal, or employee of both entities. The
Exchange will grant approval for service at both entities only if the
dual affiliation is for overall management control purposes or for
administrative and support purposes. Dual affiliation will not be
permitted for an individual who intends to be active in the day-to-day
business operations of both entities. Nothing in the foregoing,
however, shall preclude an employee of one entity who performs strictly
administrative or support functions (such as facilities, accounting,
data processing, personnel, or similar types of functions) from
performing similar functions on behalf of the other entity, provided
that such individual is clearly identified, and the functions performed
on behalf of each entity are specified in the Exemption Request, and
all requirements in paragraph (a) of these Guidelines as to maintaining
the confidentiality of information are satisfied.
(f) In the event that the Exchange grants a Rule 8.91(e) exemption
to an affiliated member: (i) the affiliated member and DPM shall abide
by any representations and undertakings set forth in the Exemption
Request and shall comply with any conditions placed by the Exchange
upon the grant of such exemption; (ii) the affiliated member shall
promptly notify the Exchange in writing in the event that any of the
information set forth in the Exemption Request changes or becomes
inaccurate; and (iii) the Exchange may amend or revoke its grant of
exemptive relief pursuant to Rule 8.91(e) in the event that there is a
change in the policies, procedures, or organizational structure of the
affiliated member or DPM or in any of the information set forth in the
Exemption Request.
[Modified Trading System]
[RULE 8.80. (a) Deleted April 16, 1998. (See Rule 8.95.)]
[(b) The MTS Designated Primary Market-Makers (``DPM'') shall be
selected and removed as follows:]
[(1) The selection and removal of DPMs will be conducted by the MTS
Appointments Committee (``MTS Committee'' or ``Committee''). The
Committee will consist of the Vice-Chairman of the Exchange, the
Chairman of the Market Performance Committee, and nine other members,
to be nominated by the Nominating Committee and appointed by the Board,
whose business functions are as follows: Six market-makers, one floor
broker not associated with a member organization that conducts a public
customer business, and two persons associated with member organizations
that conduct a public customer business. The nine appointed committee
members shall have two year terms four or five of which will expire
each year.]
[(2) Any regular member or member organization is eligible for
appointment as a DPM. The MTS Committee will select that candidate who
appears best able to perform the functions of DPM in the designated
options class or classes. Factors to be considered for selection
include the following: adequacy of capital, experience with trading the
option class or a similar option class, willingness to promote the
Exchange as a marketplace, operational capacity, support personnel,
history of adherence to Exchange rules and to all criteria specified in
this Rule as DPM responsibilities, and trading crowd evaluations under
Rule 8.60.]
[(3) Applications for DPM appointment by member organizations shall
include the name of specified nominees. The MTS Committee shall specify
whether a DPM appointment is as an individual, or as a member
organization. The Committee may also specify any one or more conditions
on the appointment, in respect of any representations made in the
application process, including but not limited to capital, operations,
or personnel. The DPM is obligated promptly to inform the Committee of
any material change in financial or operational condition, or in
personnel. The appointment may not be transferred without approval of
the MTS Committee. The DPM shall serve until he is relieved of his
obligations by the Committee.]
[(4) The MTS Committee may, in its discretion, open an option class
or classes to a new DPM selection process under any of the following
circumstances:
(i) If upon review, the Committee determines that a DPM has not
performed satisfactorily any condition of his appointment under Subpart
(b)(3) or his functions as described in subpart (c) hereof. The
Committee may conduct reviews of appointments at any time, and shall do
so at least quarterly.
(ii) If a DPM incurs a material financial, operational, or
personnel change. Provided, however, that the Committee shall open an
option class or classes to a new DPM selection process upon request, if
a DPM member organization changes its specified nominee and the former
nominee so requests.
(iii) If for any reason the DPM should no longer be eligible for
appointment, should resign appointment, or fail to perform his duties.
The incumbent DPM may apply for the appointment in the new selection
process.]
[(5) The MTS Committee has discretion to relieve a DPM of his
appointment due to a material financial, operational, or personnel
change warranting immediate action.]
[(6) If a DPM has been relieved of his appointment or the
appointment otherwise becomes vacant, the MTS Committee has discretion
to appoint an interim DPM pending the conclusion of a new DPM selection
process. The appointment as interim DPM is not a
[[Page 23699]]
prejudgment of the new DPM selection process.]
[(7) Deleted April 16, 1998. (See Rule 8.95.)]
[(8) If the MTS Committee decides to terminate a DPM's appointment
under subpart (b)(7) of this Rule, the terminated DPM will receive a
proportionate share of the net book revenues, not to exceed one-half,
for any period specified by the Committee up to a maximum of five
years. This award will take into account the length of time of DPM
service, capital commitment and efforts expended during the DPM
appointment.]
[(9) The hearing process before the MTS Committee will be as
follows:
(i) Appointment Decisions: Each applicant for appointment as DPM
will be given an opportunity to present any matter which he wishes the
Committee to consider in conjunction with the appointment decision. The
Committee may require that presentation to be solely or partially in
writing, and may require the submission of additional information from
an applicant, member, or any person associated with a member. Formal
rules of evidence do not apply to these proceedings.
(ii) Decisions to Terminate Appointments: The DPM who is the
subject of Committee review in conjunction with the termination of a
DPM appointment will be so advised and given an opportunity to present
any matter which he wishes the Committee to consider in conjunction
with the termination decision. The procedure shall be as described in
paragraph 9(i) above.
(iii) Review: A DPM relieved of an appointment under subpart
(b)(5), (6) or (7) of this Rule, and, in the case of a member
organization DPM, the relieved nominee, may seek review of that
decision under Chapter XIX of the Rules. A DPM relieved of an
appointment under subpart (b)(4) of this Rule may also seek review of
that decision under Chapter XIX of the Rules, but only if he applies
for reappointment and is denied.]
[(10) The MTS Committee may perform all functions of the Market
Performance Committee under the Rules in respect of review and
evaluation of the conduct of DPMs in the classes of his DPM
appointment, including but not limited to Rules 6.71, 8.1, 8.2, 8.3,
8.7, and 8.60. The process for review of any action taken by the MTS
Committee under this subpart shall be the same as if the action had
been taken by the Market Performance Committee.]
[(c) The DPM is a member who functions in approved classes as a
market-maker, floor broker, and in the place of the Order Book Official
(``OBO'') exempt from Rule 8.8. In acting as a market-maker, the DPM
shall fulfill all obligations of a market-maker in his appointed option
class or classes. In acting as a floor broker, and in place of the OBO
in appointed options classes, the DPM shall fulfill his obligation of
due diligence (and all other obligations associated with these
functions). In addition, the DPM shall:]
[(1) assure that disseminated market quotations are accurate.]
[(2) assure that each disseminated market quotation in appointed
options classes shall be honored up to five contracts, or such other
minimum number as set from time to time by the MTS Committee.]
[(3) determine any formula for generating the automatically updated
market quotations, disclosing the elements of the formula to the
members of the trading crowd.]
[(4) in addition to fulfilling general market-maker obligations
under Rule 8.7, be present at the trading post throughout every
business day, and, with respect to his trading as market-maker, effect
trades which have a high degree of correlation with the overall pattern
of trading for each series in the options classes involved.]
[(5) participate at all times in any automated execution system
which may be open in appointed option classes.]
[(6) resolve trading disputes, subject to Floor Official review
upon the request of any party to the dispute.]
[(7) In executing transactions for his own account as market-maker,
the DPM shall (i) accord priority to orders he represents as floor
broker over his activity as market-maker; (ii) have a right to
participate pro rata with the trading crowd in trades that take place
at the DPM's principal bid or offer; and (iii) not initiate a
transaction for his own account that would result in putting into
effect any stop or stop limit order which may be in the book or which
he represents as floor broker except with the approval of a Floor
Official and when the DPM guarantees that the stop or stop limit order
will be executed at the same price as the electing transaction.]
[(8) In appointed options classes and in other securities traded
subject to the rules in Chapter XXX for which a DPM has been appointed,
the DPM shall perform all functions of the Order Book Official,
pursuant to Rules 7.3 through 7.10, and may, but is not obligated to,
accept non-discretionary orders which are not eligible to be placed on
the public order book, and to represent such orders as a Floor Broker.
The DPM may not represent discretionary orders as a Floor Broker or
otherwise. All orders in the DPM's possession which are eligible to be
booked shall be booked.]
[(9) The DPM is designated to disclose book information under Rule
7.8.]
[(d) The Exchange shall continue to be responsible for the
maintenance, handling, and billing of the book in option classes in
which a DPM has been appointed, and shall retain and compensate the DPM
for performing the OBO function. The Exchange will make personnel
available to assist the DPM, as the DPM shall require in the DPM's OBO
function, for which personnel the Exchange may charge the DPM a
reasonable fee.]
* * * [Interpretations and Policies:]
[.01 Willingness to promote the Exchange as a marketplace includes
assisting in meeting and educating market participants (and taking the
time for travel related thereto), maintaining communications with
member firms in order to be responsive to suggestions and complaints,
responding to suggestions and complaints, responding to competition in
offering competitive markets and competitively priced services, and
other like activities.]
[.02 Every registered DPM shall maintain a cash or liquid asset
position in the amount of $100,000 or in an amount sufficient to assume
a position of twenty trading units of each security in which the DPM
holds an appointment, whichever amount is greater. In the event that
two or more DPMs are associated with each other and deal for the same
DPM account, this requirement shall apply to such DPMs as one unit,
rather than to each DPM individually.]
[.03 In addition to his responsibilities as a Market-Maker, a
person appointed to serve as DPM in one or more securities traded
subject to the rules in Chapter XXX shall continuously maintain on the
floor of the Exchange a two-sided market in the securities for which he
has been appointed, consisting of a current bid and a current offer for
his account, at prices reasonably calculated, under existing
circumstances, to contribute to the maintenance of a supply of and
demand for such securities sufficient to afford liquidity to other
buyers and sellers of such securities whose orders are represented on
the Exchange floor.]
[Limitations on Dealings of Designated Primary Market-Makers]
[Rule 8.81. (a) No member (other than a Designated Primary Market
Maker (``DPM'') acting pursuant to Rule 8.80 above), limited partner,
officer, employee, approved person or party
[[Page 23700]]
approved, who is affiliated with a DPM or member organization, shall,
during the period of such affiliation, purchase or sell any option in
which such DPM is registered for any account in which such person or
party has a direct or indirect interest. Any such person or party may,
however, reduce or liquidate an existing position in an option in which
such DPM is registered provided that such orders are (i) identified as
being for an account in which such person or party has a direct or
indirect interest; (ii) approved for execution by a Floor official; and
(iii) executed by the DPM in a manner reasonably calculated to
contribute to the maintenance of price continuity with reasonable
depth. No order entered pursuant to this paragraph (a) shall be given
priority over, or parity with, any order represented in the market at
the same price.]
[(b) Notwithstanding the provisions of Rule 8.80, an approved
person or member organization which is affiliated with a DPM shall not
be subject to Rule 8.81(a), provided that it has established and
obtained Exchange approval of procedures restricting the flow of
material non-public corporate or market information between itself and
the DPM and any member, officer, or employee associated therewith.]
[(c) For such member organization which controls or is controlled
by or is under common control with, another organization, the exemption
provided in paragraph (b) of this Rule shall be available to it only
where the Exchange has determined that the relationship between the
DPM, each person associated therewith, and such other organization
satisfies all the conditions specified in the guidelines.]
[(d) The procedures referred to in paragraph (b) of this rule shall
comply with such guidelines as are promulgated by the Exchange.]
[Guidelines for Exemptive Relief Under Rule 8.81 for Members or Member
Organizations Affiliated with a Designated Primary Market-Maker]
[(a) The following restrictions apply to a member or member
organization which is affiliated with a designated primary market-maker
(``DPM''):
It may not purchase or sell for any account in which it has a
direct or indirect interest any security in which its affiliate is a
DPM.
It may not engage in any business transaction with the issuer of a
security or its insiders in which its affiliate is a DPM.
The member firm may not accept orders directly from the issuer, its
insiders or certain designated parties in securities in which its
affiliate is a DPM.]
[This Rule provides a means by which an affiliated firm doing
business with the public as defined in Rule 9.1 (hereafter ``member
organization'') may obtain an exemption from the restrictions discussed
above. This exemption is only available to a member firm which obtains
prior Exchange approval for procedures restricting the flow of
material, non-public information between it and its affiliated DPM,
i.e., a ``Chinese Wall.'' This Rule sets forth the steps a member firm
must undertake, at a minimum, to seek to qualify for exemptive relief.
Any firm that does not obtain Exchange approval for its procedures in
accordance with these Guidelines shall remain subject to the
restrictions set forth above.]
[(b) These Guidelines require that an affiliated member firm
establish procedures which are sufficient to restrict the flow of
information between itself and the DPM. Generally, an affiliated member
firm seeking an exemption from the Rules discussed in paragraph (a)
above should establish its operational structure along the lines
discussed below.
(i) The affiliated member firm and the DPM must be organized as
separate and distinct organizations. At a minimum, the two
organizations must maintain separate and distinct books, records and
accounts and satisfy separately all applicable financial and capital
requirements. While the Exchange will permit the affiliated member firm
and the DPM to be under common management, in no instance may persons
on the member firm's side of the ``Wall'' exercise influence over or
control the DPM's conduct with respect to particular securities or vice
versa. Any general managerial oversight must not conflict with or
compromise in any way the DPM's market making responsibilities pursuant
to the Rules of the Exchange.
(ii) The affiliated member firm and the DPM must establish
procedures designed to prevent the use of material non-public corporate
or market information in the possession of the affiliated member firm
to influence the DPM's conduct and avoid the misuse of DPM market
information to influence the affiliated member firm's conduct.
Specifically, the affiliated member firm and the DPM organization must
ensure that material non-public corporate information relating to
trading positions taken by the affiliated member firm in a DPM security
are not made available to the DPM; or to any member, partner, director
or employee thereof; by a DPM while in possession of non-public
corporate information derived by the affiliated member firm from any
transaction or relationship with the issuer or any other person in
possession of such information; that advantage is not taken of
knowledge of pending transactions or the member firm's recommendations;
and that all information pertaining to positions taken or to be taken
by the DPM and to the DPM's ``book'' in a DPM security is kept
confidential and is not made available to the affiliated member firm.]
[(c) An affiliated member firm seeking exemption shall submit to
the Exchange a written statement which shall set forth:
(i) The manner in which it intends to satisfy each of the
conditions stated in subparagraphs (b)(i) and (b)(ii) of these
Guidelines, and the compliance and audit procedures it proposes to
implement to ensure that the functional separation is maintained;
(ii) The designation and identification of the individual(s) within
the affiliated member firm responsible for maintenance and surveillance
of such procedures;
(iii) That the DPM may make available to a broker affiliated with
it only the sort of market information that it would make available in
the normal course of its DPM activity to any other broker and in the
same manner that it would make information available to any other
broker; and that the DPM may only make such information available to a
broker affiliated with the member firm pursuant to a request by such
broker for such information and may not, on its own initiative, provide
such broker with such information;
(iv) That where it ``popularizes'' a security in which it acts as
DPM it must disclose that an associated DPM makes a market in the
security, may have a position in the security, and may be on the
opposite side of public orders executed on the Floor of the Exchange in
the security, and the firm will notify the Exchange immediately after
the issuance of a research report or written recommendation;
(v) That it will file with the Exchange such information and
reports as the Exchange may, from time to time, require relating to its
transactions in a specialty security;
(vi) That it will take appropriate remedial action against any
person violating these Guidelines and/or its internal compliance and
audit procedures adopted pursuant to subsection (c)(i) of these
Guidelines, and that it and its associated DPM each recognizes that the
Exchange may take appropriate remedial action, including (without
limitation) reallocation of
[[Page 23701]]
securities in which it serves as DPM and/or revocation of the
exemption, in the event of such a violation;
(vii) Whether the firm intends to clear proprietary trades of the
DPM and, if so, the procedures established to ensure that information
with respect to such clearing activities will not be used to compromise
the firm's Chinese Wall (the procedures followed shall, at a minimum,
be the same as those used by the firm to clear for unaffiliated third
parties); and
(viii) That no individual associated with it may trade as a market-
maker in any security in which the associated DPM has an appointment.]
[(d) Paragraph (b) of these Guidelines requires the establishment
of procedures designed to prohibit the flow of certain market sensitive
information from a member firm to its affiliated DPM or to any member,
partner, director or employee thereof. In the event that,
notwithstanding these procedures, any DPM becomes aware of the fact
that he has received any such information relating to any of his DPM
securities from his organization's affiliated member firm, the DPM
shall promptly communicate that fact and disclose the information so
received to the person in the affiliated member firm responsible for
compliance with securities laws and regulations (the compliance
officer) and shall seek a determination from the compliance officer as
to whether he should, as a consequence of his receipt of such
information, give up the appointment in the option class involved. If
the compliance officer determines that the DPM should give up the DPM
appointment, the DPM shall, at a minimum, give it up to another member
who is registered as DPM in the security and who is not in possession
of the information so received. In any such event, the compliance
officer shall determine when it is appropriate for the DPM to recover
the DPM security and recommence acting as DPM in the DPM security
involved. Procedures shall be established by the affiliated member firm
to assure that in any instance when the compliance officer determines
that a DPM should give up the appointment, such transfer is effected in
a manner which will prevent the market sensitive information from being
disclosed to the temporary DPM.]
[The compliance officer shall keep a written record of each request
received from a DPM for a determination as referred to above. Such
record shall be adequate to record the pertinent facts and shall
include, at a minimum, the identification of the security, the date, a
description of the information received by the DPM, the determination
made by the compliance officer and the basis therefor. If the
appointment is given up, the record shall also set forth the time at
which the DPM reacquired the appointment and the basis upon which the
compliance officer determined that such reacquisition was appropriate.
The Exchange shall be given prompt notice of any instance when the
compliance officer determines that a DPM should give up the appointment
and also of the determination that such DPM should be permitted to
reacquire the appointment. In accordance with such schedules as the
Exchange shall from time to time prescribe (at least monthly), the
written record of all requests received by the compliance officer from
the affiliated DPM for a determination as referred to above shall be
furnished to the Exchange for its review. Members and member
organizations are cautioned that any trading by any person while in
possession of material, non-public information received as a result of
any breach of the internal controls required by the Guidelines may have
violated Rule 10b-5, Rule 14e-3, just and equitable principles of trade
or one or more other provisions of the Exchange Act, or regulations
thereunder or rules of the Exchange. The Exchange intends to review
carefully any such trading of which it becomes aware to determine
whether any such violation has occurred.]
[(e) Subparagraph (c)(vii) of these Guidelines permits a member
firm to clear the DPM transactions of its affiliated DPM provided it
establishes procedures to ensure that information with respect to such
clearing activities will not be used to compromise the firm's Chinese
Wall. Such procedures should provide that any information pertaining to
security positions and trading activities of the DPM, and information
derived from any clearing and margin financing arrangements between the
affiliated member firm and the DPM, may be made available only to those
(other than employees actually performing clearing and margin financing
functions) in senior management positions in the affiliated member firm
who are involved in exercising general managerial oversight over the
DPM. Generally, such information may be made available only to the
affiliated member firm's chief executive officer, chief operations
officer, chief financial officer, and senior officer responsible for
managerial oversight of the DPM, and only for the purpose of exercising
permitted managerial oversight. Such information may not be made
available to anyone actually engaged in making day-to-day trading
decisions for the affiliated member firm, or in making recommendations
to the customers or potential customers of the affiliated member firm.
Any margin financing arrangements must be sufficiently flexible so as
not to limit the ability of any DPM to meet market-making or other
obligations under Exchange Rules.]
[(f) The written statement required by Paragraph (c) of these
Guidelines shall detail the internal controls which both the affiliated
member firm and the DPM intend to adopt to satisfy each of the
conditions stated in subparagraphs (c)(i) through (c)(viii) of these
Guidelines, and the compliance and the audit procedures they propose to
implement to ensure that the internal controls are maintained. If the
Exchange determines that the organizational structure and the
compliance and audit procedures proposed by the member firm and its
affiliated DPM are acceptable under the Guidelines, the Exchange shall
so inform the member firm and its affiliated DPM, in writing, at which
point an exemption shall be granted. Absent such prior written
approval, an exemption shall not be available. The written statement
should identify the individuals in senior management positions (and
their titles/levels of responsibility) of the affiliated member firm to
whom information concerning the DPM trading activities and security
positions, and information concerning clearing and margin financing
arrangements, is to be made available, the purpose for which it is to
be made available, the frequency with which the information is to be
made available, and the format in which the information is to be made
available. If any partner, director, officer or employee of the
affiliated member firm intends to serve in any such capacity with the
DPM, or vice versa, the written statement must include a statement of
the duties of the particular individual at both entities, and why it is
necessary for such individual to be a partner, director, officer or
employee of both entities. The Exchange will grant approval for service
at both entities only if the dual affiliation is for overall management
control purposes or for administrative and support purposes. Dual
affiliation will not be permitted for an individual who intends to be
active in the day-to-day business operations of both entities. Nothing
in the foregoing, however, shall preclude an employee of one entity who
performs strictly administrative or support functions (such as
facilities, accounting, data processing, personnel and similar types of
services) from
[[Page 23702]]
performing similar functions on behalf of the other entity, provided
that such individual is clearly identified, and the functions performed
on behalf of each entity are specified, in the written statement
described above, and all requirements in Paragraph (b) above as to
maintaining the confidentiality of information are met.]
Section D: Allocation of Securities and Location of Trading Crowds and
DPMs
RULE 8.95--Allocation of Securities and Location of Trading Crowds
and DPMs.
* * * * *
* * * Interpretations and Policies.
.01 Subject to Rule 8.83(f)[8.80(b)(6)], it shall be the
responsibility of the Allocation Committee and the Special Product
Assignment Committee pursuant to paragraph (a) of this Rule to
reallocate a security in the event that the security is removed
pursuant to another Exchange Rule from the trading crowd or 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 such allocation.
* * * * *
Chapter XXIII--Interest Rate Option Contracts
* * * * *
RULE 23.7.--RAES.
The Retail Automated Execution System (RAES) for interest rate
options uses the provisions established for equity options except as
otherwise provided in this Rule.
(i) The appropriate Floor Procedure Committee [Modified Trading
System Committee] (``Committee'') shall determine what series will be
eligible for RAES and the size of eligible orders.
(ii) Eligible orders must be market or marketable limit orders for
one hundred or fewer contracts, as determined by the Committee, in
series placed on the system.
* * * * *
Chapter XXX--Stocks, Warrants and Other Securities
* * * * *
RULE 30.40.--Market-Makers.
* * * * *
(b) Classes of Contracts Other Than Those to Which Appointed. With
respect to securities in which he does not hold an appointment, a
Market-Maker should not engage in transactions for an account in which
he has an interest which are disproportionate in relation to, or in
derogation of, the performance of his obligations, as specified in
paragraph (a) of this Rule, with respect to those securities to which
he does hold appointments. Whenever a Market-Maker enters the trading
crowd for securities in which he does not hold an appointment in other
than a floor brokerage capacity, he shall fulfill the obligations
established by paragraph (a) of this Rule. On a day on which a
transaction in a non-appointed security is effected for the account of
a Market-Maker, such Market-Maker may be required to undertake the
obligations specified in paragraph (a) of this Rule upon request by a
Floor Broker, or by the Order Book Official or DPM in accordance with
Rules 7.5 and 8.85(b) [8.80(c)], as applicable. Furthermore, Market-
Makers should not:
(i) Congregate in a particular security; or
(ii) Individually or as a group, intentionally or unintentionally,
dominate the market in a particular security; or
(iii) Effect purchases or sales on the floor of the Exchange except
in a reasonable and orderly manner.
* * * * *
RULE 30.73--Application of Exchange Rules.
* * * * *
* * * Interpretations and Policies.
* * * * *
.02 Any acceptance of a commitment or obligation to trade received
on the floor through ITS or any other application of the System shall
comply with the rules applicable to the making of bids and offers and
transactions on the floor, except where the context otherwise requires.
In addition, the following rules shall be applicable in the case where
commitments or obligations to trade are issued (transmitted) from the
floor of the Exchange Rules 6.3, 6.6, 6.21, 6.22, 6.24, 8.1 through
8.6, 8.8, 8.85, 8.87, 8.91, [8.80, 8.81], 30.3, 30.4, 30.16, 30.18 and
30.40.
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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange's DPM program began as a pilot program in 1987 with 4
DPMs allocated a total of 11 equity option classes. The DPM program was
granted permanent approval by the Commission in 1994.\5\ In the more
than 11 years since its introduction, the DPM program has experienced
significant growth and success. Currently, the program includes 30 DPMs
which have been allocated over 725 equity option classes, as well as
numerous index option classes and structured products.
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\5\ Securities Exchange Act Release No. 34999 (November 22,
1994), 59 FR 61361 (November 30, 1994) (File No. SR-CBOE-94-36).
---------------------------------------------------------------------------
Over the course of the program's evolution, the Exchange has
developed various procedures for implementing the rule provisions that
govern the program. The current rules are set forth in CBOE Rules 8.80
and 8.81 and the Exchange has made relatively few changes to these
rules since they were promulgated in 1987. The purpose of the current
proposed rule change is to update the DPM rules to incorporate the
various procedures that the Exchange implemented pursuant to Rules 8.80
and 8.81 and to incorporate various proposed improvements and
enhancements that the Exchange believes will be beneficial to the
operation of the DPM program. In addition, the Exchange proposes to
reorganize the rules governing the DPM program by segregating them into
12 separate rules that each address 1 of the 12 primary aspects of the
DPM program. The Exchange believes that this restructuring will improve
the organization of the rules relating to DPMs making it easier for the
Exchange's members to reference and understand the provisions.
The proposed rule changes are the product of a comprehensive review
and evaluation by the Exchange of the current rules relating to DPMs.
This thorough and detailed review and evaluation was conducted by
Exchange staff, the Exchange's Modified Trading System Appointments
Committee (``MTS Committee''), the Exchange's Floor Directors
Committee, and the Exchange's Board of Directors, and involved numerous
meetings and discussions by and among these groups over several years.
The Exchange filed substantially similar proposed rule change with
the
[[Page 23703]]
Commission in 1998.\6\ After the submission of this proposed rule
change, the Exchange received a member petition concerning the portion
of the proposed rule change that related to the transfer of DPM
appointments. Although the petition only addressed the portion of the
proposed rule change that related to the transfer of DPM appointments,
the Board of Directors decided to withdraw the entire proposal from the
Commission because it believed the proposed rule change to be an
integrated reorganization of all of the rule provisions relating to the
operation of the DPM program. The Exchange then engaged in a period of
dialogue with the Exchange's members regarding DPM transferability
which included, among other things, Exchange membership meetings at
which member roundtable discussions were held regarding this issue.
Following this period of dialogue, the Board of Directors re-approved a
substantially similar proposed rule change to update and reorganize the
Exchange's rules relating to DPMs, subject to the approval of the
proposed rule change by a membership vote. The proposed rule change was
submitted to the Exchange's membership for a vote and approved on
December 14, 1998.
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 40041 (May 28, 1998), 63
FR 30525 (June 4, 1998) (File No. SR-CBOE-98-15).
---------------------------------------------------------------------------
The proposed rule change amends the Exchange's rule provisions
relating to DPMs and are proposed to be segregated into proposed Rules
8.80 through 8.91. Set forth below is a summary of each of the proposed
rules.
Rule 8.80--DPM Defined. Proposed Rule 8.80 defines a DPM as a
member organization that is approved by the Exchange to function in
allocated securities as a Market-Maker, Floor Broker, and Order Book
Official. The only change to this definition from the current DPM
definition is that proposed Rule 8.80 requires a DPM to be a member
organization. The purpose of this additional requirement is to ensure
that each DPM has a formal organizational structure in place to govern
the manner in which it will operate and to define the relationship
between the individuals associated with the DPM. Proposed Rule 8.80
also clarifies that DPMs are approved by the MTS Committee and are
allocated securities by the Exchange's Allocation Committees.\7\
---------------------------------------------------------------------------
\7\ The Exchange's process for allocating securities to DPMs and
Market-Maker trading crowds is set forth in CBOE Rule 8.95.
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Rule 8.81--DPM Designees. Proposed Rule 8.81 is divided into five
subparagraphs, (a) through (e), and sets forth the requirements
applicable to DPM Designees.
Proposed Rule 8.81(a) makes explicit that a DPM may act as a DPM
solely through its DPM Designees. A DPM Designee is defined as an
individual who is approved by the MTS Committee to represent a DPM in
its capacity as a DPM. Proposed Rule 8.81(a) also provides that the MTS
Committee may subclassify DPM Designees and require certain DPM
Designees to be subject to specified supervision and/or be limited in
their authority to represent the DPM. For example, the MTS Committee
may wish to require that less experienced DPM Designees only act in
this capacity when a more experienced DPM Designee is also present at
the trading station to provide supervision.
Proposed Rule 8.81(b) requires each DPM Designee to (i) be an
Exchange member, (ii) be a nominee of, or have a membership that has
been registered for, the DPM or an affiliate of the DPM, (iii) be
registered with the Exchange as a Market-Maker and a Floor Broker, (iv)
have in place an authorization and guarantee from the DPM, and (v) be
approved by the MTS Committee. Additionally, proposed Rule 8.81(b)
provides that the MTS Committee shall have the discretion to permit an
individual who is not affiliated with a DPM to act as a DPM Designee
for the DPM on an emergency basis as long as the individual satisfies
the other requirements of proposed Rule 8.81(b).
Proposed Rule 8.81(c) provides that a DPM Designee approval will
expire if the individual does not have trading privileges on the
Exchange for a 6 month period. This provision is intended to ensure
that any DPM Designee who has not had trading privileges for 6 months
(and therefore does not engage in trading activities during that
period) and who then desires to act again in the capacity of a DPM
Designee will be reviewed by the MTS Committee. This will allow the
Committee to evaluate whether the individual remains qualified to act
as a DPM Designee.
Proposed Rule 8.81(d) requires each DPM to have at least two DPM
Designees who are nominees of the DPM or who have a membership that has
been registered for the DPM.
Exchange rules require that each member organization have at least
one nominee or person who has registered his or her membership for the
organization. The purpose of proposed Rule 8.81(d) is to help ensure
that a DPM remains qualified to act as a member organization, and hence
a DPM, if a nominee or person who has registered his or her membership
for the organization departs from the organization.
Proposed Rule 8.81(e) incorporates two existing rule provisions.
First, proposed Rule 8.81(e) provides that a DPM Designee may not trade
as a Market-Maker or Floor Broker in securities allocated to the DPM
unless the DPM Designee is acting on behalf of the DPM in its capacity
as a DPM. This provision is currently embodied in CBOE Rule 8.3.01
(which is proposed to be deleted) and in current Rule 8.81 (which is
proposed to be restated in proposed Rule 8.91). Second, proposed Rule
8.81(e) provides that a DPM Designee is exempt from the provisions of
CBOE Rule 8.8 when acting on behalf of the DPM in its capacity as a
DPM. CBOE Rule 8.8 generally prohibits a member from acting as both a
Market-Maker and Floor Broker in a trading station on the same day, and
the exemption to CBOE Rule 8.8 for DPMs is currently set forth in
current Rule 8.80(c).
Rule 8.82--MTS Committee. Proposed Rule 8.82 governs the
composition of the MTS Committee. It retains the current 11 member
composition of the Committee which consists of the Vice-Chairman of the
Exchange, the Chairman of the Exchange's Market Performance Committee,
four members whose primary business is as a Market-Maker, two members
whose primary business is as a Market-Maker or as a DPM Designee, one
member whose primary business is as a Floor Broker who is not
associated with a member organization that conducts a public customer
business, and two persons associated with member organizations that
conduct a public customer business. Currently, the nine members of the
MTS Committee, other than the Vice-Chairman and the Chairman of the
Market Performance Committee, are nominated by the Nominating Committee
and appointed by the Board of Directors to serve two-year terms. Under
proposed Rule 8.82, these nine members of the Committee will be elected
by the Exchange's membership in the same manner that Exchange Directors
are elected by the membership. In addition, proposed Rule 8.82
increases the terms served by these nine members of the Committee to
three-year terms \8\ and provides that no
[[Page 23704]]
more than two of the nine elected MTS Committee members may be
associated with a DPM. Because of the important responsibilities of the
MTS Committee, the Exchange believes that the MTS Committee should be
composed of individuals who have been elected by the membership. The
Vice-Chairman is already elected by the membership and the Chairman of
the Market Performance Committee is typically one of the Exchange's
elected Directors. Moreover, the Exchange believes that increasing the
terms of the MTS Committee members by one year will provide the
Committee with more continuity and expertise in addressing issues that
comes before it.
---------------------------------------------------------------------------
\8\ Upon effectiveness of this proposed rule change, the MTS
Committee members at the time will remain as members of the
Committee until their then current terms expire. Because MTS
Committee members currently serve two-year terms (with 4 or 5 of
those terms expiring each year) and because proposed Rule 8.82
provides that the MTS Committee members will serve three-year terms
(with three of those terms expiring each year), the Exchange's
Nominating Committee will shorten the length of some of the terms of
the MTS Committee members elected in the first two years following
the effectiveness of the proposed rule change to ensure that three
positions will come up for election each year once the three-year
terms are fully phased in.
---------------------------------------------------------------------------
Rule 8.83--Approval to Act as a DPM. Proposed Rule 8.83 addresses
the DPM approval process. It is substantially similar to the current
provisions that govern the DPM approval process set forth in current
Rule 8.80. For example, proposed Rule 8.83 describes the criteria that
may be considered by the MTS Committee in deciding whether to approve
an applicant as a DPM (including such factors as adequacy of capital,
operational capacity, trading experience, regulatory history, and
market performance), and provides that each applicant will be given an
opportunity to present any matter that it wishes the MTS Committee to
consider in conjunction with the approval decision. In addition, as
with any decision of the MTS Committee (other than an approval or
disapproval a proposed transfer of a DPM appointment which is subject
to direct review by the Board of Directors as discussed below), any
applicant not approved by the MTS Committee to act as a DPM may appeal
that decision to the Exchange's Appeals Committee under Chapter XIX of
the Exchange's Rules. The appeal procedures provide the right to a
formal Appeals Committee hearing concerning any approval decision, and
the decision of the Appeals Committee may be appealed to the Board of
Directors pursuant to CBOE Rule 19.5.
Rule 8.84--Conditions on the Allocation of Securities to DPMs.
Proposed Rule 8.84 grants the MTS Committee new authority to establish
(i) restrictions applicable to all DPMs regarding the concentration of
securities allocable to a single DPM and to affiliated DPMs, and (ii)
minimum eligibility standards applicable to all DPMs which must be
satisfied in order for a DPM to receive allocations of securities,
including but not limited to, standards relating to adequacy of capital
and number of personnel. One of the reasons for granting the MTS
Committee the authority to limit the concentration of securities
allocable to a single DPM and to affiliated DPMs is to promote
competition on the Exchange's trading floor. Moreover, the Exchange
believes this authority should help ensure that no DPM or group of
affiliated DPMs is allocated such a large number of securities as to
make it difficult for the Exchange to quickly reallocate those
securities to other DPMs and/or Market-Maker trading crowds in the
event that a DPM or group of affiliated DPMs is no longer able to
perform in its DPM capacity. The reasons for granting the MTS Committee
the authority to establish minimum eligibility standards for DPMs to
receive allocations of securities is to help ensure that a DPM has the
financial and operational ability to handle additional allocations of
securities. Similarly, the MTS Committee may utilize this Rule to
establish specific minimum market performance standards that must be
satisfied by DPMs in order to receive allocations of securities so that
a DPM that is not performing adequately with respect to the securities
that have already been allocated to the DPM is not allocated additional
securities.
Rule 8.85--DPM Obligations. Proposed Rule 8.85 describes the
obligations of a DPM. The proposed rule change states the general
obligation of a DPM, with respect to each of its allocated securities,
is to fulfill all of the obligations under Exchange Rules of a Market-
Maker, a Floor Broker (to the extent that the DPM acts as a Floor
Broker), and an Order Book Official.
Most of the obligations and other provisions contained in proposed
Rule 8.85 are contained in current Rule 8.80. In some instances, these
provisions are proposed to be slightly modified to clarify their scope.
For example, proposed Rule 8.85(a)(vi) requires a DPM to segregate in a
manner prescribed by the MTS Committee (i) all transactions consummated
by the DPM in securities allocated to the DPM and (ii) any other
transactions consummated by or on behalf of the DPM that are related to
the DPM's DPM business. This will permit the Exchange to monitor each
DPM's trading positions in order to ensure that each DPM is in
compliance with DPM financial and other requirements.
In addition, the Exchange proposes to charge a $250 processing fee
for each DPM Designee that will be executing transactions on behalf of
a DPM in that DPM's segregated account(s). This is the same fee amount
that is charged for each participant in a joint account established
pursuant to CBOE Rule 8.9. Since DPMs currently utilize joint accounts
to segregate their transactions, the proposed $250 fee will essentially
replace the $250 joint account fee that DPMs are currently being
assessed in this regard.
Currently, Rule 8.80(c)(3) requires each DPM to determine a formula
for generating automatically updated market quotations and to disclose
the components of the formula to the other members trading at the DPM's
trading station. Proposed Rule 8.85(a)(ix) restates this requirement
and clarifies the requirement by specifying that the components of the
formula that are required to be disclosed include the option pricing
calculation model, volatility, interest rate, dividend, and what is
used to represent the price of the underlying. Proposed Rule 8.85(a)
also provides that the MTS Committee shall have the discretion to
exempt DPMs using proprietary automated quotation updating systems from
having to disclose proprietary information concerning the formulas used
by those systems. Most DPMs utilize the Exchange's Auto Quote System to
generate automatically updated market quotations and therefore would
not be eligible for an exemption of this kind. However, proposed Rule
8.85(a) will permit the MTS Committee to exempt those DPMs that utilize
proprietary automated quotation updating systems from disclosing
confidential information concerning those systems.
Proposed Rule 8.85(b)(i) restates the current requirement that a
DPM is obligated to place in the public order book any order in the
DPM's possession which is eligible for entry, subject to two limited
exceptions. First, proposed Rule 8.85(b)(i)(A) clarifies that a DPM is
not obligated to book a book-eligible order if the DPM immediately
executes the order upon its receipt. This permits a DPM to immediately
execute a marketable customer order without having to delay the
execution by first placing the order in the public order book. Second,
proposed Rule 8.85(b)(i)(B) provides that a DPM may refrain from
booking a book-eligible order if the customer who placed the order has
requested that the order not be booked, and upon receipt of the order,
the DPM announces in public outcry the information concerning the order
that would be displayed if the order were displayed in the public order
book. Proposed Rule 8.85(b)(i)(B) is intended
[[Page 23705]]
to accommodate the wishes of customers who desire an opportunity for
price improvement before the execution of a limit order at its limit
price, while at the same time requiring the information concerning the
order that would have been displayed in the public order book to be
disclosed to the other members of the trading crowd, so that the other
members of the trading crowd are not at an informational disadvantage.
Proposed Rule 8.85(b)(ii) elaborates upon the requirement set forth
in proposed Rule 8.85(b)(i) by requiring that a DPM not remove any
order from the public order book except in two circumstances. First,
proposed Rule 8.85(b)(ii) clarifies that a DPM may remove an order from
the book if the order is canceled, expires, or is executed. Second,
proposed Rule 8.85(b)(ii) clarifies that a DPM may return an order to
the member that placed the order upon the member's request. For
example, a Floor Broker may desire to leave an order with a DPM
temporarily while the Floor Broker attends to business elsewhere on the
trading floor, or until such time as the prevailing market moves closer
to the order's limit price. Proposed Rule 8.85(b)(ii) is intended to
clarify that a DPM may return an order to a Floor Broker in such
situations.
Proposed Rule 8.85(b)(iii) restates the current requirement that a
DPM is obligated to accord priority to any order which the DPM
represents as agent over the DPM's principal transactions, and sets
forth one narrow exception to this requirement--when the customer who
placed the order consents to not being accorded this priority. This
exception is intended to address situations such as the following.
Under both the current and proposed DPM rules, a DPM may, but is not
obligated to, accept non-discretionary orders which are not eligible to
be placed in the public order book, such as orders from a competing
specialist or other broker-dealer. Competing specialists have on
occasion inquired as to whether a DPM would be willing to represent an
order on behalf of the competing specialist if the competing specialist
were to agree to waive the priority requirement and/or allow the DPM to
participate (or match) with the competing specialist's order. Under the
current rules, regardless of the DPM's and customer's desire to have
such an arrangement, they are unable to do so because the current rules
do not allow a DPM to give priority to the orders it represents.
Proposed Rule 8.85(b)(iii) would permit a DPM to accommodate a customer
who desires to have a DPM represent an order and to waive this priority
requirement with respect to the order.
Proposed Rule 8.85(b)(iv) restates the current requirement that a
DPM may not charge any brokerage commission with respect to the
execution of any order for which the DPM has acted as both agent and
principal. There is, however, an exception to the requirement set forth
in proposed Rule 8.85(b)(iv) if the customer consents. The reasons for
this exception are the same as the reasons for the exception to the
priority requirement in proposed Rule 8.85(b)(iii). It should also be
noted that although proposed Rule 8.85(b)(iv) would not permit a DPM to
charge a brokerage commission with respect to the execution of an order
for which the DPM acts as both agent and principal (subject to the
limited exception described above), the DPM would be permitted under
proposed Rule 8.85(b)(iv) to bill back to the customer any Exchange
fees charged to the DPM with respect to the execution of the order.
As noted above, a DPM may, but is not obligated to, accept non-
discretionary orders which are not eligible to be placed in the public
order book. Proposed Rule 8.85(b)(v), however, also provides that a DPM
is required to act as a Floor Broker to the extent required by the MTS
Committee. The purpose of proposed Rule 8.85(b)(v) is to permit the MTS
Committee to require a DPM to act as a Floor Broker if there is a need
for the DPM to act in this capacity. For example, the MTS Committee may
require a DPM to act as a Floor Broker if regular Floor Brokers are not
available to represent orders in the securities allocated to the DPM.
Proposed Rule 8.85(b)(vi) restates the current requirement that a
DPM may not represent discretionary orders as a Floor Broker or
otherwise. Proposed Rule 8.85 also provides that the MTS Committee may
authorize a DPM, on a temporary basis, to accept and represent types of
orders in one or more of the securities allocated to the DPM which vest
the DPM with limited discretion, if the MTS Committee determines that
unusual circumstances are present and that the acceptance and
representation of such orders by the DPM is necessary in order to
assure that there will be adequate representation in such securities of
those types of orders. As with proposed Rule 8.85(b)(v), the purpose of
this provision is to grant the MTS Committee the ability to invoke this
provision if there is a need for a DPM to act in this capacity, such as
if regular Floor Brokers are not available to do so.
Proposed Rule 8.85(c)(vi) sets forth a new requirement that each
DPM is required to segregate, in a manner prescribed by the MTS
Committee, the DPM's business and activities as a DPM from the DPM's
other businesses and activities. This provision will permit the MTS
Committee to establish segregation requirements that will help to
reduce the risk that a DPM's financial integrity will be adversely
impacted by financial losses that may be incurred by the DPM in
connection with its other businesses and activities.
Rule 8.86--DPM Financial Requirements. Proposed Rule 8.86 restates
the current requirement that each DPM is required to maintain net
liquidating equity in its DPM account of not less than $100,000. It
also includes two requirements which, although currently applicable to
DPMs, are not referenced in the current DPM rules. Specifically,
proposed Rule 8.86 requires that each DPM maintain sufficient net
capital to comply with the requirements of Rule 15c3-1 under the Act
and that each DPM which is an Exchange Clearing Member also maintain
sufficient net capital to comply with the requirements of The Options
Clearing Corporation. Although there are other rules which already
subject DPMs to these requirements, the Exchange believes that it is
worthwhile to also include these requirements in proposed Rule 8.86 so
that the Rule is more informative and complete.
Moreover, proposed Rule 8.86 requires DPMs to maintain net
liquidating equity in their DPM accounts to conform with such
guidelines as the MTS Committee may establish from time to time. The
Exchange currently uses DPM financial guidelines in connection with the
process of allocating securities to DPMs. Proposed Rule 8.86 would
permit the Exchange to implement and enforce such guidelines and other
future equity guidelines. The MTS Committee has established the
financial guidelines it intends to use under proposed Rule 8.86, which
are set forth in a draft regulatory circular that is available for
inspection at the places specified in Section IV. The guidelines
require that a DPM applying for the allocation of securities must have
in its DPM account $350,000 plus $25,000 in equity for each security
that has been allocated to the DPM in excess of the initial eight
securities allocated to the DPM. Because these guidelines are more
stringent than the current requirement, which states that a DPM must
maintain an equity amount sufficient to assume a position of 20 trading
units of each security which has been allocated to the DPM, the current
requirement has been eliminated.
[[Page 23706]]
Rule 8.87--Participation Entitlement of DPMs. A DPM's right to
participate as principal in a transaction is generally governed by the
principles of time and price priority as set forth in CBOE Rule 6.45.
Under these principles, if a DPM announces a bid (offer) for the DPM's
own account ahead of other members in response to a request for a
market from a member not acting on behalf of the DPM, the DPM is
entitled to participate up to 100% in any resulting transaction. In
addition to the rights granted by Rule 6.45, current Rule
8.80(c)(7)(ii) grants each DPM a right to participate ``pro rata'' with
the Market-Makers present in the trading crowd, in any transaction in a
security that has been allocated to the DPM if the DPM's previously
established principal bid (offer) was equal to the highest bid (lowest
offer) in the trading crowd, even if the DPM's bid (offer) is not
entitled to priority under CBOE Rule 6.45. Because the term ``pro
rata'' is not precisely defined by current Rule 8.80(c)(7)(ii), the
scope of that term, and hence the participation right, has historically
been interpreted by the MTS Committee.
Since 1993, the MTS Committee has interpreted a DPM's participation
right in transactions that occur in an allocated security (when the
DPM's previously established principal bid (offer) was equal to the
highest bid (lowest offer) in the trading crowd) to consist of the
following: an initial 40% participation right, a 30% participation
right when average daily volume in the security over the previous
calendar quarter reaches 2501 contracts, and no guaranteed
participation right when average daily volume in the security over the
previous calendar quarter reaches 5,000 contracts. Additionally, the
MTS Committee has determined to maintain all multiply traded securities
at the 40% participation level until further notice.
Proposed Rule 8.87 formalizes the authority of the MTS Committee to
determine the appropriate participation right for DPMs by providing
that the MTS Committee, subject to review by the Board of Directors,
may establish from time to time a participation entitlement formula
that is applicable to all DPMs. Additionally, proposed Rule 8.87
further provides that, in accordance with the established formula, each
DPM shall have a right to participate for its own account with the
Market-Makers present in the trading crowd in transactions in the DPM's
allocated securities that occur at the DPM's previously established
principal bid or offer.
Rule 8.88--Review of DPM Operations and Performance. Proposed Rule
8.88(a) restates the current rule provision that the MTS Committee may
conduct a review of a DPM's operations or performance any time, and
clarifies that the reviews may be conducted by a subcommittee of the
MTS Committee. Proposed Rule 8.88(a) also clarifies that a DPM and its
associated persons are obligated to submit information requested by the
MTS Committee in connection with a review. The current rule provision
which contemplates that these reviews will be conducted at least
quarterly has been revised to provide that, at a minimum, a review of
each DPM's operations and performance shall be conducted on an annual
basis. The reason for this change is that the Exchange does not believe
it is necessary to conduct a formal and detailed operational and
performance review of each DPM more than once a year. In the interim,
the MTS Committee will review information regarding each DPM's
operations and performance on an ongoing basis and will conduct a
review of, and/or speak with, any DPM that has any operational or
performance issues that need to be addressed prior to that DPM's next
annual review. The Exchange believes that this approach is more
effective than quarterly reviews, since it will permit the MTS
Committee to timely address any operational or performance issues that
require immediate attention, while allowing more time to be spent on
each formal and detailed DPM review.
Proposed Rule 8.88(b) provides that the MTS Committee shall perform
the market performance evaluation and remedial action functions set
forth in CBOE Rule 8.60 with respect to DPMs and that the MTS Committee
may combine a review conducted pursuant to proposed Rule 8.88(a) with
an evaluation conducted pursuant to Rule 8.60. This is consistent with
current Rule 8.80(b)(10) which also provides that the MTS Committee may
review and evaluate the conduct of DPMs pursuant to Rule 8.60.
In addition, current Rule 8.80(b)(10) grants the MTS Committee
market performance authority with respect to other issues relating to
DPMs that the Exchange now believes should be handled by other Exchange
committees. The Exchange believes that this authority should be
transferred from the MTS Committee to these other committees because
these other committees already have responsibility concerning these
issues for non-DPMs and because consolidating responsibility for these
issues will result in greater efficiency. Thus, for example, the
authority to determine the series eligible for the Exchange's Retail
Automatic Execution System (RAES) and the eligible size of RAES orders
for securities allocated to DPMs, which is currently exercised by the
MTS Committee pursuant to CBOE Rule 6.8, has been consolidated in the
Exchange's Floor Procedure Committees since they have responsibility
for these issues for securities that are allocated to non-DPM trading
crowds. Similarly, the authority under the Rules with respect to DPM
RAES participation and eligibility, which is currently exercised by the
MTS Committee pursuant to CBOE Rule 8.16, has been consolidated in the
Exchange's Market Performance Committee since it has responsibility for
these issues for non-DPMs.
One market performance related authority that the Exchange has
determined the MTS Committee should retain is Floor Official authority.
Thus, proposed Rule 8.88(c) provides that members of the MTS Committee
may perform the functions of a Floor Official at DPM trading stations.
MTS Committee members currently possess this authority by virtue of
current Rule 8.80(b)(10), which provides that the MTS Committee may
perform all of the functions of the Market Performance Committee under
the Rules, and CBOE Rule 6.20.09, which provides that members of the
Market Performance Committee may perform the functions of a Floor
Official for the purpose of enforcing trading conduct policies. The
Exchange believes that MTS Committee members should retain Floor
Official authority with respect to DPM trading stations because MTS
Committee members have expertise with respect to the trading conduct
rules that are applicable to DPMs. In addition, acting as Floor
Officials at DPM trading stations allows MTS Committee members to stay
abreast of issues that may arise at these stations and provides the MTS
Committee with a valuable source of information which the Committee
utilizes in connection with its oversight of the performance and
operations of DPMs.
Proposed Rule 8.88 expands the market performance responsibilities
of the MTS Committee by providing that the MTS Committee shall perform
the market performance evaluation and remedial action functions set
forth in Rule 8.60 with respect to the Market-Makers and Floor Brokers
that regularly trade at DPM trading stations, in addition to performing
these functions with respect to DPMs. The primary reason for this
change is that the performance of a DPM trading crowd is influenced by
both the DPM and the Market-Makers and Floor Brokers that trade in the
crowd. Accordingly, the
[[Page 23707]]
Exchange believes that it will be more efficient if one committee
exercises the market performance and remedial action responsibilities
with respect to both the DPM and the Market-Makers and Floor Brokers
that trade in a DPM trading crowd, instead of the current bifurcated
structure in which the MTS Committee has market performance authority
with respect to the DPM and the Market Performance Committee has market
performance authority with respect to the Market-Makers and Floor
Brokers.
Rule 8.89--Transfer of DPM Appointments. Current Rule 8.80(b)(3)
provides that a DPM appointment may not be transferred without the
approval of the MTS Committee. Proposed Rule 8.89 expands upon this
provision by setting forth both a detailed procedure for the
consideration of any proposal to sell, transfer, or assign an interest
in a DPM, and the standards that apply to such consideration. This
procedure is set forth in proposed Rules 8.89(a) through 8.89(f).
Proposed Rule 8.89(a) provides that a DPM proposing any sale,
transfer, or assignment of any ownership interest or any change in its
capital structure, voting authority, or distribution of profits or
losses shall give at least 30 days prior written notice of the proposed
change to the MTS Committee. Proposed Rule 8.89(a) further provides
that if the transaction is deemed to involve the transfer of a DPM
appointment, the transaction is required to be approved by the MTS
Committee before it may be consummated.
Proposed Rule 8.89(b) defines the transfer of a DPM appointment to
include, among other things, any sale, transfer, or assignment of any
significant share of the ownership of a DPM. A significant share of the
ownership of a DPM is defined to include any sale, transfer, or
assignment of a 5% or more interest in the equity or profits or losses
of the DPM (or a series of smaller changes that in the aggregate amount
to a change of 5% or more). Additionally, proposed Rule 8.89(b)
provides that a sale, transfer, or assignment of less than 5% may also
be found by the MTS Committee to represent a significant share of the
ownership of a DPM depending on the surrounding facts and
circumstances.
Proposed Rule 8.89(c) provides that any DPM desiring to obtain
approval of a transaction deemed to involve the transfer of a DPM
appointment is required to submit a written application to the MTS
Committee at least 30 days prior to the proposed effective date of the
transaction. Proposed Rule 8.89(c) also requires that the application
contain a full and complete description of the proposed transaction,
including among other things, the transferee's ownership and capital
structure, the identity of those persons who will perform the duties of
the DPM following the transaction, the terms of the transaction, and
any other material information pertaining to the transaction that the
MTS Committee may request.
Proposed Rule 8.89(d) provides that promptly after the receipt of a
completed application for the approval of a proposed transfer of a DPM
appointment, the MTS Committee will post notice of the proposed
transfer on the Exchange Bulletin Board and in the Exchange Bulletin
and that the MTS Committee will not ordinarily consider the proposed
transfer until it has been posted on the Bulletin Board for at least 10
business days. Proposed Rule 8.89(d) also provides that during this
posting period the MTS Committee will accept written comments on the
proposed transfer from any member and will accept written proposals
from other members and from Market-Maker trading crowds who wish to be
considered for appointment in some or all of the classes that are the
subject of the proposed transfer.
Proposed Rule 8.89(e) sets forth the factors that may be considered
by the MTS Committee in determining whether to approve a proposed
transfer of a DPM appointment. These factors include (i) the financial
and operational capacity of the transferee, (ii) the continuity of
control, management, and persons responsible for the operation of the
DPM, (iii) avoiding undue concentration of DPM appointments on the
Exchange, (iv) available alternatives for reallocating the DPM's
appointment taking into account comments made and alternatives proposed
by other members during the posting period, and (v) the best interests
of the Exchange. In addition, proposed Rule 8.89(e) provides that no
application relating to a proposed transfer of a DPM appointment will
be approved by the MTS Committee until it is accompanied by complete
and final documents pertaining to the transfer, except as the MTS
Committee may agree to defer the delivery of specific documents for
good cause shown.
Proposed Rule 8.89(f) provides that the approval or disapproval of
a proposed DPM appointment transfer is subject to direct review by the
Board of Directors. The Secretary of the Exchange must receive within
10 days of the announcement of the MTS Committee's decision either: (i)
a written request for review made by the applicant (in the case of a
failure to approve an application as submitted) or (ii) a request for
review made by at least five Directors of the Exchange (in any case).
In the event of a request for review, the Board will appoint a panel of
Directors to review the matter. Following this review, the panel, with
the assistance of Board counsel, will prepare a proposed written
decision of the Board concerning the matter and will submit the
proposed decision to the full Board for discussion and consideration.
The Board will then decide whether to adopt or modify the proposed
decision and will issue its final decision to the applicant and to the
MTS Committee.
In conjunction with proposed Rule 8.89, the Board of Directors has
also issued a memo to the MTS Committee which conveys the Board's views
with respect to the various factors that may bear upon whether a
request to transfer an interest in a DPM appointment should be
approved. The memo is available for inspection at the places specified
in Section IV. The purpose of the memo is to provide guidance to the
MTS Committee concerning the types of considerations that the Board
believes should be taken into account in evaluating such requests. For
example, the memo states Board's view that a DPM's franchise in its
allocated securities is not a transferable property interest owned by
the DPM. Thus, the Board does not believe that the outright sale of all
or a part of a DPM's business should ordinarily be approved.
Nevertheless, the Board also states that it recognizes that there are
circumstances where it may be in the best interests of both the DPM and
the Exchange to permit the transfer of some or all of the DPM's
interest in its DPM appointment, even though this may result in the DPM
being paid for the value of the goodwill in its DPM business. For
example, the Board states that such circumstances might include
situations where a transfer is for the purpose of attracting new
capital to an existing successful DPM to enable it to expand its
market-making activities, or to enable the DPM to bring in a new
partner or other principal, or in response to an emergency need for
capital where there is reason to permit the existing DPM to remain
involved in the operation and therefore not to reallocate its
appointment, assuming in each case that the expansion or increase in
capital is found to be necessary or desirable in the best interests of
the Exchange.
The Exchange believes that proposed Rule 8.89 and the accompanying
memo from the Board of Directors will improve the current rule
provision regarding transfer of DPM appointments
[[Page 23708]]
both by setting forth a detailed procedure for considering such
requests, which will help to ensure that the MTS Committee has
sufficient information on which to base decisions regarding such
requests, including member input, and by setting forth the appropriate
criteria to be utilized in evaluating such requests.
Rule 8.90--Termination, Conditioning, or Limiting Approval to Act
as a DPM. Proposed Rule 8.90 governs the termination, conditioning, and
limiting of approval to act as a DPM. For the most part, it restates,
with certain clarifications, provisions that are contained in current
Rule 8.80. For example, proposed Rule 8.90(a) clarifies that the MTS
Committee may condition or limit a DPM's appointment (in addition to
being permitted to terminate the appointment) if the DPM (i) incurs a
material financial, operational, or personnel change, (ii) fails to
comply with the DPM rules or any conditions placed on its DPM
appointment, or (iii) is no longer eligible to act as DPM. In addition,
proposed Rule 8.90(c) clarifies that limiting a DPM's appointment may
include, among other things, limiting or withdrawing a DPM's
participation entitlement, withdrawing a DPM's right to act as DPM in
one or more of its allocated securities, and requiring a relocation of
the DPM on the trading floor.
As is the case under current Rule 8.80, proposed Rule 8.90(a)
generally provides that before the MTS Committee may take any action to
terminate, condition, or otherwise limit a member organization's
approval to act as a DPM, the member organization will be given notice
of a possible action and an opportunity to present any matter which it
wishes the MTS Committee to consider in determining whether to take
action. The only exception to this provision is that, as under current
Rule 8.80, the MTS Committee has the authority to immediately
terminate, condition, or otherwise limit a member organization's
approval to act as a DPM if the DPM incurs a material financial,
operational, or personnel change warranting action or if the DPM fails
to comply with any of the financial requirements applicable to DPMs.
As is also the case under the current DPM rules, if a member
organization's approval to act as a DPM is terminated, conditioned, or
otherwise limited by the MTS Committee pursuant to proposed Rule 8.90,
proposed Rule 8.90(d) provides that the member organization may appeal
that decision to the Appeals Committee under Chapter XIX. In addition,
as described above, these appeal procedures provide the right to a
formal Appeals Committee hearing concerning a MTS Committee's decision.
The decision of the Appeals Committee may be appealed to the Board of
Directors.
Rule 8.91--Limitations on Dealings of DPMs and Affiliated Persons
of DPMs Guidelines for Exemptive Relief Under Rule 8.91(e) for Members
Affiliated with DPMs. Proposed Rule 8.91 and the accompanying proposed
guidelines for exemptive relief under proposed Rule 8.91(e) restate the
rule provisions that are currently contained in current Rule 8.81 and
the current guidelines for exemptive relief that accompany that Rule.
Proposed Rule 8.91 and its accompanying guidelines are intended to more
clearly reflect those provisions and how they have historically been
interpreted by the Exchange. For example, the Exchange believes that
the organization of these provisions has been improved by including in
proposed Rule 8.91 all of the restrictions on DPM affiliates that are
set forth in the current provisions, instead of including only one of
these restrictions in the Rule and including other restrictions in the
accompanying guidelines, as is currently the case. In addition, the
restrictions on DPM dealings with an issuer are restated to include in
the case of options, which are nominally issued by The Options Clearing
Corporation, that these restrictions are intended to apply to dealings
with the issuer of the underlying security, whereas in the case of
securities other than options, they apply to dealings with the issuer
of the security itself. Moreover, other clarifying revisions of a
similar nature have been made to the current provisions without
changing the substance of those provisions as they have been
interpreted by the Exchange.
In addition, consistent with the Exchange's long-standing
interpretation of current Rule 8.80, proposed Rule 8.91(d) explicitly
prohibits any member affiliated with a DPM from acting as a Floor
Broker in any trading crowd in which the DPM acts as a DPM, unless the
member is a DPM Designee of the DPM acting on behalf of the DPM in its
capacity as a DPM. The Exchange has interpreted current Rule 8.80 to
provide for such a prohibition since permitting a Floor Broker
affiliated with a DPM to represent orders in the DPM's trading crowd
could potentially allow the DPM to direct orders to the Floor Broker
and thus circumvent certain of the DPM's obligations such as the
obligation to place eligible orders in the public order book , the
obligation to accord priority to any order which the DPM represents as
agent over the DPM's principal transactions, the obligation not to
charge any brokerage commission with respect to the execution of any
order for which the DPM acts as both agent and principal, and the
obligation not to represent discretionary orders.
Deletions from Current DPM Rules. Current Rule 8.80(b)(4)(ii)
provides that the MTS Committee shall open a DPM's allocated option
classes to a new DPM selection process if the DPM changes its specified
nominee and the former nominee so requests. The Exchange no longer
believes that this provision is appropriate because DPM organizations
are generally much larger than they used to be. Today, DPMs often have
many nominees, and nominees are added to and depart from DPM
organizations more frequently than in the early years of the DPM
program. For this reason, most DPM nominees no longer have the same
stake in their DPM organizations that many DPM nominees may have had in
the past. Thus, it is often no longer equitable to allow a DPM nominee
to request a new DPM selection process for that DPM's allocated
securities following the nominee's departure from the DPM organization.
Two provisions relating to maintenance of the public order book
have also been deleted. First, current Rule 8.80(b)(8), which provides
that under certain circumstances a terminated DPM will receive a
proportionate share of the net book revenues for a period specified by
the MTS Committee (up to a maximum of 5 years), has not been retained
in the proposed DPM rules. The original purpose of this provision was
to provide incentive to members to apply to be appointed as a DPM.
Because the interest in becoming a DPM has grown throughout the years,
the Exchange believes this incentive is no longer necessary to attract
DPM candidates.
Second, the Exchange is eliminating the provision of current Rule
8.80(d) which provides that the Exchange shall be responsible for the
maintenance, handling, and billing of the public order book and shall
retain and compensate the DPM for performing the Order Book Official
function. The reason for this deletion is that over time DPMs have
taken on the responsibility for the maintenance, handling, and billing
of the public order book, and the Exchange no longer retains this
responsibility nor compensates DPMs for performing these functions. The
current provision of Rule 8.80(d), however, which contemplates that the
Exchange may make personnel available to assist a DPM in the DPM's
performance as an Order Book Official, for which the Exchange may
charge the DPM a reasonable fee, has been retained
[[Page 23709]]
in proposed Rule 8.85.01 with one minor modification. Specifically,
proposed Rule 8.85.01 merely permits, and does not require, the
Exchange to provide this assistance when it is requested. This change
has been made because, although the Exchange is often able to provide
such assistance to DPMs, the Exchange may not always be able to do so.
Finally, current Rule 8.80(c)(7)(iii) is being deleted because the
Exchange believes the procedure called for under the Rule is cumbersome
and because the concern that the Rule addresses is adequately addressed
by another Exchange Rule. Current Rule 8.80(c)(7)(iii) provides that a
DPM may not initiate a transaction for its own account that would
result in putting into effect any stop or stop limit order which may be
in the public order book or which the DPM represents as Floor Broker,
except with the approval of a Floor Official and when the DPM
guarantees that the stop or stop limit order will be executed at the
same price as the electing transaction. The Exchange believes that this
procedure is cumbersome because it necessitates that a Floor Official
be summoned to the trading station each of the many times this
situation arises. Moreover, the required approval mechanism leads to
delay in the execution of customer orders. The Exchange believes that
the concern addressed by current Rule 8.80(c)(7)(iii) is adequately
addressed by CBOE Rule 6.73(a), which requires a Floor Broker handling
an order, including a DPM, to use due diligence to execute the order at
the best price or prices available to the Floor Broker, in accordance
with the Rules. Thus, if a DPM were to initiate a transaction for its
own account in order to disadvantage a customer by putting into effect
a stop or stop limit order, the Exchange would have the ability to
discipline the DPM for such activity under Rule 6.73 for failure to
exercise due diligence with respect to the representation of the order.
Conforming Rule Changes. The Exchange also proposes to make
conforming changes to other CBOE rules to make them consistent with the
proposed rule changes described above.
2. Basis
The Exchange believes the proposed rule change will improve the
operation of the DPM trading system which, in accordance with Section
11A(a)(1)(C)(i) of the Act,\9\ assures the economic and efficient
execution of securities transactions. Accordingly, the Exchange
beleives that the proposed rule change is consistent with Section 6(b)
of the Act,\10\ in general, and further the objectives of Section
6(b)(5) \11\ in particular, in that it is designed to remove
impediments to and perfect the mechanism of a free and open market.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78k-1(a)(1)(C)(i).
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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.
As set forth above, the Exchange filed a substantially similar
proposed rule change with the Commission in 1998 as part of CBOE Rule
File No. SR-CBOE-98-15 and received a member petition concerning the
proposed rule change prior to the Exchange's withdrawal of the filing
from the Commission. The petition objected to proposed Rule 8.89 and
requested a membership vote regarding whether proposed Rule 8.89 should
be approved or should be revised to absolutely prohibit any sale,
transfer, or assignment of a DPM appointment or a DPM's allocated
securities.
Current Rule 8.80(b)(3) provides the MTS Committee with the
discretion to determine whether to approve the transfer of a DPM
appointment by setting forth that a DPM appointment may not be
transferred without the approval of the MTS Committee. As is more fully
described in the section entitled Rule 8.89--Transfer of DPM
Appointments, the Exchange believes that proposed Rule 8.89 and the
accompanying memo from the Board of Directors improve the current rule
provision by setting forth a detailed procedure for considering
proposals to sell, transfer, or assign an interest in a DPM, which will
help to ensure that the MTS Committee has sufficient information on
which to base decisions regarding such proposals, including member
input, and by setting forth the appropriate criteria to be utilized in
evaluating such proposals. In addition, the Exchange does not believe
that it is in the best interest of the Exchange, customers, or the
market to prohibit the Exchange from approving any sale, transfer, or
assignment of a DPM appointment. To the contrary, the Exchange believes
that there are circumstances where it may be in the best interests of
the Exchange, customers, and the market to permit the transfer of some
or all of the DPM's interest in its DPM appointment. Therefore, the
Exchange believes that it is important for the Exchange to have the
flexibility to approve such transfers in appropriate circumstances. For
example, a transfer for the purpose of attracting new capital to an
existing successful DPM can benefit the Exchange, customers, and the
market by allowing the DPM to increase its personnel, to service its
customers better, and to make tighter and deeper markets. Accordingly,
the Exchange believes that proposed Rule 8.89 is in the best interest
of the Exchange, customers, and the market as well as in furtherance of
the objectives of the Act.
The Exchange also notes that since the time the member petition
concerning proposed Rule 8.89 was submitted to the Exchange, the
Exchange has engaged in a period of dialogue with the Exchange's
membership regarding the issue of DPM transferability and that the
proposed rule changes to update and reorganize the Exchange's rules
relating to DPMs, including proposed Rule 8.89, have been approved by
the Exchange's membership in a membership vote.
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-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule
[[Page 23710]]
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. 20549-0609.
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-98-54 and should be submitted by May 24, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-30(a)(12).
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Margaret H. McFarland,
Deputy Secretary
[FR Doc. 99-10985 Filed 4-30-99; 8:45 am]
BILLING CODE 8010-01-U
