[Federal Register Volume 61, Number 109 (Wednesday, June 5, 1996)]
[Notices]
[Pages 28629-28632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14015]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37250; International Series Release No. 986; File No.
SR-CBOE-96-23]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by Chicago Board Options Exchange, Incorporated and Notice of
Filing and Order Granting Accelerated Approval to Amendment No. 1 to
Proposed Rule Change Relating to Permits to Trade Options on the Indice
de Precios y Cotizaciones
May 29, 1996.
I. Introduction
On April 15, 1996, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') submitted a proposed rule change to the
Securities and Exchange Commission (``Commission'') pursuant to section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder.\2\ On April 23, 1996, CBOE filed Amendment No. 1 to
the proposed rule change (``Amendment No. 1'') \3\ deleting certain
proposed definitions, making certain non-substantive stylistic and
clarifying changes to the proposed rule change and notifying the
Commission that the CBOE membership approved the issuance of the IPC
Permits (as defined herein).\4\ The proposed rule change would adopt
new Exchange Rule 3.26 authorizing the issuance of 33 permits (``IPC
Permits'')--one to each firm that was a member of the Bolsa Mexicana de
Valores (``Bolsa'') as of January 1, 1996 (``Bolsa members'' or ``IPC
Permit Holders'')--and setting forth the rights
[[Page 28630]]
and obligations appurtenant to the IPC Permits.\5\
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1993).
\3\ See Letter from Timothy Thompson, Senior Counsel, CBOE to
Michael Walinskas, Branch Chief, Division of Market Regulation, SEC
(April 23, 1996) (available in Commission's Public Reference Room)
and attached Certificate.
\4\ Section 2.1 of the CBOE's Constitution requires an
affirmative vote of the majority of the members present in person or
represented by proxy at a special membership meeting to approve the
issuance of the IPC Permits. In Amendment No. 1, CBOE reported that
78% of the total votes were cast in favor of issuing the IPC
Permits.
\5\ The Commission separately approved the listing and trading
of IPC Options by the Exchange. See Securities Exchange Act Release
No. 37189 (May 9, 1996), International Series Release No. 977, 61 FR
24982 (May 17, 1996) (approving SR-CBOE-96-09).
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The proposed rule change was noticed for comment in Securities
Exchange Act Release No. 37117 (April 16, 1996), 61 FR 17743 (April 22,
1996). No comments were received on the proposed rule change.
II. Description of the Proposal
A. Introduction
CBOE has entered into a license agreement with Bolsa (``License
Agreement'') pursuant to which Bolsa has licensed CBOE to trade index
options on the Indice de Precios y Cotizaciones (``IPC Options'').\6\
In consideration of the grant of this license, CBOE has agreed, among
other things, to issue the IPC Permits to the Bolsa members. As
discussed below, IPC Permits give Bolsa members limited rights with
respect to the trading of IPC Options on the CBOE.
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\6\ See id.
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B. Rights of Permit Holders and Permit Exercisers
The IPC Permits, which will be non-leasable and non-transferable,
may be used in one of two alternative ways. First, an IPC Permit Holder
who wants direct access to the CBOE trading floor in respect of IPC
Options could apply, either on its own or on behalf of a subsidiary, to
become an IPC Permit Exerciser. If the IPC Permit Holder is qualified
for membership on CBOE and its application is approved in accordance
with CBOE rules,\7\ it will become an IPC Permit Exerciser and will
have specified rights and privileges of CBOE membership under CBOE
rules with respect to IPC Options--including the right to have a
nominee appointed as a market maker or floor broker with respect to
such options. The IPC Permit Exerciser will have all of the obligations
of CBOE members, including the obligation to comply with CBOE rules and
federal securities laws, and will be subject to CBOE's enforcement
jurisdiction. For example, nominees of an IPC Permit Exerciser would be
required to complete CBOE member firm orientation and would be required
to comply with the requirements set forth in Chapter IX of CBOE rules
in order to conduct a public customer business. IPC Permit Exercisers
would also be subject to CBOE's limitation of liability rules--Rule
6.7, Rule 7.11, and Rule 24.12--to the same extent as regular members.
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\7\ Such applications will be subject to the same approval
procedures as applicable under the CBOE's rules to applications for
membership.
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IPC Permit Exercisers would not have certain rights of membership
and would be subject to certain limitations that do not apply to
regular Exchange members. IPC Permit Exercisers would not be deemed to
be members of CBOE for purposes of the General Corporation Law of
Delaware, CBOE's Certificate of Incorporation, or CBOE's Constitution.
Thus, IPC Permit Exercisers will have no property interest in CBOE, no
voting rights, and will not be eligible as members for election to
CBOE's Board of Directors (although they will be eligible for
membership on the committees established pursuant to CBOE Rule 2.1).
IPC Permit Exerciser would also not be permitted to enter into
transactions or to enter orders for any CBOE product other IPC Options
while on the floor of CBOE.\8\
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\8\ The Exchange will issue IPC Permit Exercisers with badges of
a distinctive color so that the limited authority of these traders
will be evident on the floor to other market participants and Floor
Officials. The Exchange expects, therefore, that these market
participants and Floor Officials will be able to ensure that IPC
Permit Exercisers do not engage in activity prohibited by Exchange
rules. In addition, the Exchange intends to issue distinctive
acronyms to IPC Permit Exercisers to facilitate surveillance of
illegal activity through a review of trade reports. Telephone
conversation between Timothy Thompson, Senior Counsel, CBOE and
Ethan Corey, Special Counsel, Division of Market Regulation, SEC
(May 28, 1996).
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An IPC Permit Holder which does not directly or indirectly become
an IPC Permit Exercisers would not have the rights or obligations of
CBOE membership. Accordingly, such IPC Permit Holders, in contrast to
IPC Permit Exercisers, as described above, have no right of access to
the CBOE floor to enter into transactions or enter orders for IPC
Options. However, CBOE has agreed, as part of the consideration given
by it in order to obtain the license of IPC from Bolsa, that if an IPC
Permit Holder traded IPC Options for its own account through a CBOE
member (including an IPC Permit Exerciser), that IPC Permit Holder
would be charged transaction fees for those trades at the same rates as
the transaction fees for CBOE member firm proprietary trades.
III. Commission Findings and Conclusions
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and rules and regulations thereunder
applicable to a national securities exchange, and, in particular, the
requirements of Sections 6(b)(2), 6(b)(4) and 6(b)(5) thereunder.\9\
Specifically, the Commission believes that liquidity may be enhanced in
IPC Options by the grant of the IPC Permits to Bolsa members. At the
same time, the CBOE's proposal only gives limited access for Bolsa
members to trade IPC Options on its trading floor on the same terms and
regulatory conditions for membership as applies to any other applicant
for membership.\10\ Accordingly, the proposal is consistent with the
requirements in Section 6(b)(5) of the Act that rules of an exchange be
designed to promote just and equitable principles of trade, facilitate
transactions in securities, remove impediments to a free and open
market and in general, to protect investors and the public interest as
well as the requirements of Section 6(b)(2) of the Act.\11\ For the
reasons discussed in more detail below, the Commission also believes
that the portion of the filing permitting IPC Permit Holders (those who
do not exercise the permit) to be charged CBOE member firm proprietary
transaction fees for their proprietary trades in IPC Options is
consistent with Section 6(b)(4) of the Act which requires the equitable
allocation of reasonable dues and fees among members and person using
its facilities.
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\9\ 15 U.S.C. Secs. 78f(b) (2), (4), (5).
\10\ These requirements include, among other things, that a
member be a U.S. registered broker-dealer.
\11\ Section 6(b)(2) of the Act requires the rules of a national
securities exchange to permit any registered broker or dealer to
become a member of that exchange (subject to limitations on the
aggregate number of registered brokers or dealers who may become
members of that exchange) unless it is subject to a statutory
disqualification, does not meet standards of financial
responsibility or operational capacity or has engaged and is
reasonably likely to continue to engage in acts or practices
inconsistent with just and equitable principles of trade.
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First, the Commission believes that the proposed rules concerning
IPC Permit Exercisers that allow direct access to the CBOE trading
floor for the limited purpose of trading, or entering transactions in,
IPC Options, ensure that only those IPC Permit Exercisers that meet the
Exchange's requirements for membership on the Exchange and the
requirements of the Act, and that actually have been approved by the
CBOE for membership, will have access to CBOE IPC Options on the
trading floor.
The rules further ensure that IPC Permit Exercisers and their
associated persons are obligated to comply with all CBOE rules and the
federal securities laws just as any other CBOE member and its
associated persons. This includes, among other things, the obligation
to comply with CBOE rules concerning conducting a public customer
business, taking required
[[Page 28631]]
examinations, maintaining and filing all required records under CBOE
rules and being subject to the Exchange's disciplinary and arbitration
jurisdiction. Thus IPC Permit Exercisers and their transactions will be
subject to complete oversight and surveillance by the CBOE as well as
subject fully to CBOE's enforcement jurisdiction.
Despite these obligations, IPC Permit Exercisers are not entitled
to full membership rights and will not be permitted to effect
transactions on the floor of the CBOE in any product other than IPC
Options. To ensure compliance with this limitation, the CBOE has
developed special distinctive color badges. The Exchange intends to
issue distinctive acronyms to IPC Permit Exercisers to facilitate
surveillance of illegal activity through a review of trade reports.\12\
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\12\ Telephone conversation between Timothy Thompson, Senior
Counsel, CBOE and Ethan Corey, Special Counsel, Division of Market
Regulation, SEC (May 28, 1996).
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Based on the above, the Commission believes that the rules
governing IPC Permit Exercisers have been carefully drafted to allow
limited access that should aid liquidity in IPC index options while
ensuring compliance with CBOE rules and the federal securities laws
consistent with Sections 6(b)(2) and 6(b)(5) of the Act.
The Commission also has carefully reviewed for consistency with the
Act the other portion of the CBOE proposal that would set fees on
proprietary transactions in IPC Options effected by IPC Permit Holders
through CBOE members at the same rate as transaction fees for CBOE
member firm proprietary trades. In order to approve the preferential
fees for IPC Permit Holders, the Commission must determine, among other
things, that the proposed fee is not designed to permit unfair
discrimination between customers, issuers, brokers or dealers and that
it provides for the equitable allocation of fees and charges among
members, issuers and other persons using its facilities.\13\
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\13\ 15 U.S.C. 78f(b) (4)-(5).
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The Commission notes that the Act ``prohibits `unfair
discrimination,' not `discrimination' simpliciter . . .''\14\ The
Commission believes, for the reasons stated below, that the
preferential rates to be offered to IPC Permit Holders executing
proprietary transactions in IPC Options through CBOE members do not
constitute unfair discrimination in violation of the Act or an
inequitable allocation of fees among persons using CBOE facilities.
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\14\ Timpinaro v. S.E.C., 2F.3d 453, 456 (D.C. Cir. 1993).
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The Commission has not previously approved another proposed rule
change presenting precisely the same issues as those presented by this
proposal. However, the Commission did approve a New York Stock Exchange
(``NYSE'') proposal to permit members of other securities or
commodities exchanges to apply to the NYSE for one-year free options
trading rights.\15\ Unlike CBOE's proposed rule change, the NYSE did
not propose to charge transaction fees at member rates to persons who
did not apply for options trading rights.
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\15\ Securities Exchange Act Release No. 20202 (Sept. 20, 1983),
48 FR 43752 (Sept. 26, 1983).
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The Commission viewed the NYSE proposal as a form of operational
subsidization that is difficult, if not impossible, to avoid when
developing a market for a new financial product.\16\
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\16\ Id. at 43753.
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The Commission believes that CBOE's efforts similarly are properly
viewed as a form of operational subsidization. In addition, the
Commission notes that Bolsa specifically required the preferential fees
established by this proposed rule change as consideration for granting
CBOE a license to list and trade options on the IPC Index.
The proposed rule change also is similar to the NYSE proposal in
that both were designed chiefly to ease access to facilities to
encourage the development of an active and liquid trading market.\17\
The Commission found that the NYSE proposal, by easing access,
furthered the purposes of Sec. 6(b)(2) of the Exchange Act, and, by
helping to create a viable trading market for its new options product,
furthered the purposes of Sec. 6(b)(5) of the Exchange Act.\18\
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\17\ See id.
\18\ Id.
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The Commission notes that the instant proposed rule change differs
from the NYSE proposal in that it provides preferential treatment to
parties who do not choose to access the CBOE trading floor. However,
the Commission believes that this distinction is not sufficient to
negate the benefits to be obtained from a more liquid trading market
for IPC Options.
Moreover, the IPC Permits have been issued under very limited and
special circumstances. First, Bolsa required the preferential fees
established by this proposed rule change as consideration for
permitting CBOE to list and trade IPC Options. Second, the preferential
rates are limited to Bolsa members and solely to trading in an index
option based on stocks traded on the Bolsa. Third, the preferential
rate is designed to enhance liquidity to ensure sufficient trading
volume in IPC Options. Fourth, the reduced fees do not give any Bolsa
member an unfair advantage in seeking to obtain the business of
customers, as the reduced fees are limited to Bolsa members'
proprietary transactions in IPC Options. Fifth, the IPC Permits are not
transferable and cannot be sold or leased to give preferential access
to other persons. Based on these factors, the Commission believes that
it is not unreasonable for the CBOE to grant IPC Permit Holders a
reduced proprietary transaction rate and that such a provision does not
permit unfair discrimination or an inequitable allocation of fees in
violation of the Act.
In summary, and based on the above, the Commission finds that the
proposed rule change is consistent with Section 6(b) of the Act in
general and furthers the objectives of Section 6(b)(5) of the Act by
helping to create a viable trading market for its new options product
by granting preferential access and reduced fees for IPC Option trading
to a group of persons (i.e., the Bolsa members) who are likely to
provide increased liquidity for the market in IPC Options.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. As
noted above, Amendment No. 1 deletes certain proposed definitions,
makes certain non-substantive stylistic and clarifying changes to the
proposed rule change and notifies the Commission that CBOE has received
the requisite member approval for the proposal. None of these
amendments affect the substance of the proposed rule change.
Accordingly, the Commission believes the amendment raises no new or
unique regulatory issues. Therefore, the Commission believes it is
consistent with sections 6(b)(5) and 19(b)(2) of the Act to approve
Amendment No. 1 to the CBOE's proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the Exchange's proposal.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
[[Page 28632]]
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying at the Commission's Public
Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Copies
of such filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to File No.
SR-CBOE-96-23 and should be submitted by June 26, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that SR-NASD-96-23, as amended is, approved.
For the Commission, by the Division of Market Regulation
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-14015 Filed 6-4-96; 8:45 am]
BILLING CODE 8010-01-M
