[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17953]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34396; File No. SR-CBOE-94-16]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Expanding the Services Provided by Members Registered as ``Stock
Services''
July 18, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 1,
1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Currently CBOE Rule 6.77, ``Stock Execution Services,'' states that
a stock service is a member registered with the Exchange for the
purpose of providing stock execution services to market makers on the
CBOE's floor. The CBOE proposes to amend CBOE Rule 6.77 to replace
``stock service'' with ``order service firm'' and to allow order
service firms to take market maker orders for the purchase or sale of
commodity futures contracts and options thereon and forward the orders
to the appropriate futures exchange. In addition, the CBOE proposes to
adopt CBOE Rule 6.78, ``Letters of Guarantee Required of Order Service
Firms,'' which requires an order service firm to have on file with the
Exchange and in effect an Order Service Firm Letter of Guarantee issued
for the service firm by a member of the Options Clearing Corporation
(``OCC''). Under proposed CBOE rule 6.78(b), the letter of guarantee
must provide that the issuing clearing member accepts financial
responsibility for all orders handled by the order service firm on the
CBOE floor and for all financial obligations of the order service firm
to the Exchange.
The text of the proposal is available at the Office of the
Secretary, CBOE, and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections (A), (B), and (C) below,
of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The CBOE states that the purpose of the proposal is to permit
members that are registered as ``stock services'' under CBOE Rule 6.77
to expand the scope of their activity on the floor of the CBOE to
encompass order handling services in connection with commodity
interests. Currently CBOE Rule 6.77 provides that a member organization
that is registered with the CBOE as a ``stock service'' may provide
stock execution services to market makers on the floor of the
Exchange.\1\ The proposal would revise CBOE Rule 6.77 to permit
designated member organizations also to take orders for the purchase or
sale of commodity interests from market makers on the floor of the
Exchange and forward such orders to the appropriate futures exchange.
The execution of all orders to purchase or sell commodity interests
would occur on a futures exchange that has been designated as a
contract market by the Commodity Futures Trading Commission (``CFTC'').
To reflect more accurately the expanded scope of activities permitted
under CBOE Rule 6.77, the term ``stock service'' would be deleted from
CBOE Rules 3.1, ``Public Securities Business,'' 6.20, ``Admission to
and Conduct on the Trading Floor,'' and 6.77 and replaced with the term
``order service firm.''
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\1\The services provided by these firms generally consist of
taking orders for the purchase or sale of stocks and forwarding
these orders to broker-dealers for execution.
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The CBOE believes that the proposed rule change will facilitate
market making capacity in stock index options. Market makers in stock
index options are subject to the risk that market price will change
before they can liquidate their positions, and hedge this risk by
executing transactions in related commodity interests.\2\ The proposed
rule change would facilitate the ability of market makers in stock
index options to execute hedging transactions by providing them with a
more efficient means of effecting such transactions.
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\2\See Division of Market Regulation, Market Analysis of October
13 and 16, 1989 (December 1990) at 73-74.
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Order service firms that accept orders to buy or sell commodity
interests may be required to comply with certain provisions of the
Commodity Exchange Act of 1974, as amended (``CEA''). For example,
Section 4(a)(1) of the CEA generally provides that transactions in
commodity futures contracts may be executed only on a board of trade
which has been designated as a ``contract market'' in the underlying
commodity by the CFTC. In addition, Sections 4d and 4k of the CEA
generally provide that any person that is engaged in soliciting or
accepting orders for the purchase or sale of commodity interests must
be registered as an introducing broker or as an associated person. The
proposed rule change adds section (d) to CBOE Rule 6.77 to state
expressly that to the extent an order service firm accepts and forwards
orders for the purchase or sale of commodity interests, such firms must
comply with the CEA and the rules and regulations promulgated
thereunder. Additionally, the proposal requires such firms to keep the
CBOE's Department of Financial Compliance (``Department'') apprised of
its registration status under the CEA on an ongoing basis, including
any financial reporting or capital requirements.
In addition to revising CBOE Rule 6.77, the proposed rule change
adds CBOE Rule 6.78 to the Exchange's rules. Under proposed Rule 6.78,
any member organization that intends to act as an order service firm
must file with the Exchange a letter of guarantee issued by a member of
the OCC. Pursuant to this letter of guarantee, the clearing member must
accept financial responsibility for all orders handled by the order
service firm on behalf of Exchange market makers and all financial
obligations of the order service firm to the Exchange. In order to
limit the potential risk to any single clearing member, no clearing
member shall be permitted to guarantee more than three order service
firms without the prior written approval of the Department. In
considering a request to guarantee more than three such firms, the
Department shall consider the clearing member's level of excess net
capital, additional financial resources, and such other facts as the
Department deems appropriate.
The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it would facilitate the ability
of options market makers for which there are related commodity
interests to reduce their exposure to market risk by providing them
with a more efficient means of effecting hedging transactions in such
commodity interests.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days after the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(a) by order approve such proposed rule change, or
(b) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by August 15, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\3\
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\3\17 CFR 200.30-3(a) (12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17953 Filed 7-22-94; 8:45am]
BILLING CODE 8010-01-M
