[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46527-46528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23340]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38972; File No. SR-CBOE-97-34]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Incorporated Relating to Duties of Market Makers
August 26, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 24, 1997 the Chicago
Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'') or
``Commission'') the proposed rule change as described in Items I and II
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.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add an interpretation to Rule 8.7 and to
Rule 7.5 to clarify CBOE's policy regarding the enforcement of those
rules concerning the obligations of Market-Makers.
The text of the proposed rule change 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
1. Purpose
The purpose of the proposed rule change is to clarify the
Exchange's policy regarding the enforcement of Rule 8.7 and Rule 7.5
concerning the obligations of Market-Makers. Rule 8.7(b) presently
provides that, for each class of option contracts for which a Market-
Maker holds an appointment under Rule 8.3, the Market-Maker has a
continuous obligation to engage, to a reasonable degree under the
existing circumstances, in dealings for his own account when there
exists, or it is reasonably anticipated that there will exist, a lack
of price continuity, a temporary disparity between the supply of and
demand for a particular option contract, or a temporary distortion of
the price relationships between option contracts of the same class. In
short, Rule 8.7(b) sets forth a Market-Maker's obligation to make
markets in a class of options in which he holds an appointment.
Rule 7.5 presently provides a mechanism by which Exchange Order
Book Officials may ``call upon'' Market-Makers to make bids (offers) in
a particular class of options that contribute to meeting the standards
set forth in Rule 8.7. In particular, at the request of a floor broker
or on the Order Book Official's own initiative in the interests of a
fair, orderly and competitive market, an Order Book Official may call
upon those Market-Makers who hold an appointment to the particular
options class or who that day have effected a transaction for their
accounts in that class of options. The Order Book Official is required
to make a record of Market-Makers ``who fail to respond'' to this
request.\2\
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\2\ In addition, the Commission notes that other CBOE rules
exist to help ensure a sufficient number of Market-Makers will be
available to make markets in a particular trading crowd. For
example, Rule 8.3(a) permits the CBOE Market Performance Committee
to make additional Market-Maker appointments whenever this committee
deems such action to be in the interests of a fair and orderly
market. Therefore, if there were an insufficient number of Market-
Makers to respond to a call to a particular trading crowd, the
Market Performance Committee could appoint additional Market-Makers
to the classes traded at the affected trading crowd, which would
make those additional Market-Makers subject to the call to that
trading crowd under Rule 7.5. Should the Exchange be unable to
require a sufficient number of Market-Makers to appear at an
affected trading crowd, the CBOE Allocation Committee could move the
location on the Exchange's trading floor where the affected option
classes are traded to a trading crowd that has an adequate number of
Market-Makers present or that has a Designated Primary Market-Maker
(``DPM''). DPMs, in contrast to Market-Makers, are required to be
present at their trading posts throughout every business day. See
also Letter from Arthur B. Reinstein, Senior Attorney, CBOE, to
Michael Walinskas, Senior Special Counsel, Division of Market
Regulation, SEC, dated August 20, 1997 (discussing the
aforementioned safeguards).
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The Exchange has always interpreted Rule 8.7(b) as applying to
Market-Makers who are present on the Exchange floor and as applying
with
[[Page 46528]]
respect to the trading crowd in which the Market-Maker is present at
the time in question. Similarly, the Exchange has always interpreted
Rule 7.5 as applying to Market-Makers who are present on the Exchange
floor at the time of the Order Book Official call. The Exchange has not
interpreted Rule 8.7 or Rule 7.5 as requiring Market-Makers to appear
on the Exchange floor to make markets on any particular day or under
any particular market conditions.\3\ However, when a Market-Maker is on
the trading floor and is present in a particular trading crowd, the
Exchange does enforce the obligations set forth in Rule 8.7 with
respect to the Market-Maker's activities in that trading crowd.
Similarly, whenever a Market-Maker is on the trading floor, the
Exchange enforces the obligations set forth in Rule 7.5 as to that
Market-Maker.
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\3\ Although Rule 8.7 and Rule 7.5 do not require Market-Makers
to appear at the Exchange to perform their market-making duties, the
Commission notes that other CBOE rules encourage Market-Makers to
undertake their market- making functions. For example, Rule 8.60
provides that the CBOE Market Performance Committee may take
remedial action against Market-Makers or trading crowds that fail to
satisfy minimum minimum market performance standards. Accordingly,
the failure of a Market-Maker or trading crowd to appear at the
Exchange and to make markets in a volatile market situation is a
factor the CBOE Market Performance Committee could consider in
evaluating the performance of a Market-Maker or trading crowd and in
determining whether to take remedial action against a Market-Maker
or trading crowd pursuant to Rule 8.60. Letter from Arthur B.
Reinstein, Senior Attorney, CBOE, to Michael Walinskas, Senior
Special Counsel, Division of Market Regulation, SEC, dated August
20, 1997.
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The Exchange's present interpretation is consistent with Rule
8.7(b) paragraphs (i) through (iii), which make clear that, at the
station where a Market-Maker is present, a Market-Maker is expected to
perform certain activities in the course of maintaining a fair and
orderly market. Similarly, the Exchange's present interpretation is
consistent with the text of Rule 7.5 which, by authorizing Order Book
Officials to ``call upon'' Market-Makers and by requiring a record of
those who ``fail to respond,'' implicitly recognizes that this
procedure will apply to Market-Makers whose physical presence on the
floor will enable them to hear and ``respond'' to such a ``call.'' The
proposed Interpretation .09 to Rule 8.7 and proposed Interpretation .04
to Rule 7.5 would clarify CBOE's existing interpretation and
enforcement policy regarding Rule 8.7(b) and Rule 7.5.
The Exchange believes such clarification is necessary because it
knows of at least one instance where Rule 8.7 obligations were
misinterpreted. In a class action lawsuit filed against the Exchange,
Spicer et al. v. Chicago Board Options Exchange, Inc. et al.,\4\
counsel for the class took the position that Rule 8.7 imposed an
obligation on all Market-Makers to appear on the Exchange's trading
floor and to make markets under certain market conditions. The Exchange
believes the proposed interpretation will help avoid such
misinterpretation of either Rule 8.7(b) or Rule 7.5 in the future.
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\4\ Spicer v. Chicago Board Options Exchange, Inc., No. 88C
2139, 1990 WL 172712 (N.D. Ill. Oct. 30, 1990) aff'd, 977 F.2d 255
(7th Cir. 1992).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
and furthers the objectives of Section 6(b)(5) of the Act \5\ in that
the Exchange's clarification of its interpretation and policy regarding
Market-Maker obligations under Rule 8.7 and Rule 7.5 is designed to
perfect the mechanism of a free and open market and to protect
investors and the public interest.
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\5\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change does not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change constitutes an interpretation with
respect to the enforcement of an existing rule of the self-regulatory
organization. Therefore, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \6\ and subparagraph (e) of
Rule 19b-4 thereunder.\7\ At any time within sixty days of the filing
of such proposed rule change, the Commission may summarily abrogate
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\6\ 15 U.S.C. Sec. 78s(b)(3)(A).
\7\ 17 CFR 240.19b-4.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 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-97-34 and should be
submitted by September 24, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23340 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M
