[Federal Register: April 2, 2007 (Volume 72, Number 62)]
[Notices]
[Page 15736-15737]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap07-118]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55531; File No. SR-CBOE-2006-94]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change and Amendment No.
1 Thereto Relating to Off-Floor DPMs
March 26, 2007.
I. Introduction
On November 13, 2006, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed with 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\ a proposed rule change to allow DPMs to operate off-
floor. The Exchange filed Amendment No. 1 to the proposed rule change
on January 18, 2007. The proposed rule change was published for comment
in the Federal Register on February 20, 2007.\3\ The Commission
received no comments on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 55275 (February 12,
2007), 72 FR 7782.
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II. Description of the Proposal
CBOE proposes to amend its rules to allow a DPM to operate remotely
away from CBOE's trading floor. DPMs are member organizations that
function in option classes allocated to them as Market-Makers, and also
are subject to the obligations under Rule 8.85 or as otherwise provided
in CBOE's Rules. Currently, all DPMs operate on CBOE's trading floor.
However, some member organizations have expressed an interest in acting
as DPM remotely away from CBOE's trading floor. As discussed below, the
proposed rule change is intended to provide DPMs with the flexibility
to operate on CBOE's trading floor (``On-Floor DPM'') or remotely away
from CBOE's trading floor (``Off-Floor DPM''). A DPM would only be
permitted to operate as an Off-Floor DPM in equity option classes
traded on the Hybrid Trading System.
CBOE proposes to amend Rule 8.83 to provide that in selecting an
applicant for approval as a DPM, the appropriate exchange committee may
place one or more conditions on the approval, including, but not
limited to, whether the DPM will operate on-floor or off-floor.
Additionally, CBOE proposes to amend Rule 8.83 to provide that an On-
Floor DPM can request that the appropriate Exchange committee authorize
it to operate as an Off-Floor DPM in one or more equity option classes
traded on the Hybrid Trading System. The appropriate Exchange committee
will consider the factors specified in Rule 8.83(b) in determining
whether to permit an On-Floor DPM to operate as an Off-Floor DPM. In
the event a DPM is approved to operate as an Off-Floor DPM, Rule 8.83
provides that the Off-Floor DPM can have a DPM Designee trade in open
outcry in the option classes allocated to the Off-Floor DPM, but the
Off-Floor DPM shall not receive a participation entitlement under Rule
8.87 with respect to orders represented in open outcry. CBOE also
proposes to amend Rule 6.45A(a)(C) and Rule 6.74 to make clear that the
DPM participation entitlement is only applicable to an On-Floor DPM.
As provided in new Interpretation .01 to Rule 8.83, if an Off-Floor
DPM wishes to operate as an On-Floor DPM, the Off-Floor DPM can request
that the appropriate Exchange Committee authorize it to do so. In
making a determination pursuant to this Interpretation, the appropriate
Exchange committee would evaluate whether the change is in the best
interests of the Exchange, and the committee may consider any
information that it believes will be of assistance to it. Factors to be
considered may include, but are not limited to, any one or more of the
following: Performance, operational capacity of the Exchange or the
DPM, efficiency, number and experience of personnel of the DPM who will
be performing functions related to the trading of the applicable
securities, number of securities involved, number of Market-Makers
affected, and trading volume of the securities.
In connection with this rule change, CBOE proposes to amend certain
DPM obligations contained in Rule 8.85. In particular, CBOE proposes to
amend the obligation contained in subparagraph (a)(iv), which currently
provides that the DPM must 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 appropriate Exchange committee. CBOE proposes to amend subparagraph
(a)(iv) to state that an Off-Floor DPM similarly shall assure that the
number of DPM Designees and support personnel continuously overseeing
the DPM's activities is not less than the minimum required by the
appropriate Exchange committee. Additionally, an Off-Floor DPM shall
provide members with telephone access to a DPM Designee at all times
during market hours for purposes of resolving problems involving
trading on the Exchange.
CBOE also proposes to amend subparagraph (a)(v) of Rule 8.85, which
states that a DPM shall trade in all securities allocated to the DPM
only in the capacity of a DPM and not in any other capacity. CBOE
proposes to allow, as part of an existing pilot program applicable to
e-DPMs,\4\ an Off-Floor DPM to have not more than one Market-Maker
affiliated with the Off-Floor DPM trade on CBOE's trading floor in any
specific option class allocated to the Off-Floor DPM, provided such
Market-Maker is trading on a separate membership.\5\ The affiliated
Market-Maker would also have to comply with the ``Guidelines for
Exemptive Relief Under Rule 8.91(e) for Members Affiliated with DPMs,''
set forth in Rule 8.91. (Absent the pilot program, an Off-Floor DPM may
not allow any Market-Makers affiliated with the Off-Floor DPM to trade
on CBOE's trading floor in any class allocated to the Off-Floor DPM.)
If the Off-Floor DPM has an affiliated Marker-Maker trade on CBOE's
trading floor in any specific option class allocated to the Off-Floor
DPM pursuant to the pilot program, Rule 8.85(a)(v) provides that the
Off-Floor DPM cannot also have a DPM Designee trading in open outcry in
the option classes allocated to the Off-Floor DPM.
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\4\ See CBOE Rule 8.93(vii).
\5\ CBOE proposes to make a corresponding change to the
``Guidelines for Exemptive Relief Under Rule 8.91(e) for Members
Affiliated with DPMs.'' See Guidelines, Paragraph (b)(viii).
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Finally, CBOE proposes to amend Interpretation .02 of Rule 3.8 to
allow an Off-Floor DPM to appoint one individual to be the nominee for
all memberships utilized by the organization in an Off-Floor DPM
capacity. Interpretation .02 of Rule 3.8 currently provides that a
member organization can appoint one individual to be the nominee for
all memberships utilized by the organization in an RMM capacity or an
e-DPM capacity. This is an exception to the general requirement of Rule
3.8(a)(ii) which provides that ``if a member organization is the owner
or lessee of more than one membership, the organization must designate
a different individual to be the nominee for each of the memberships.''
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to
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a national securities exchange \6\ and, in particular, the requirements
of Section 6 of the Act.\7\ Specifically, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\8\ in that the
proposal has been designed to promote just and equitable principles of
trade, and to protect investors and the public interest.
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\6\ The Commission has considered the amended proposed rule
change's impact on efficiency, competition and capital formation. 15
U.S.C. 78c(f).
\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(5).
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In addition, the Commission believes that a Market Maker must have
an affirmative obligation to hold itself out as willing to buy and sell
options for its own account on a regular or continuous basis to justify
receiving market maker margin. The Commission believes that CBOE's
rules impose such affirmative obligations on DPMs that choose to
operate remotely and notes that, under the proposal, a DPM acting from
a remote location would still be required to meet the obligations of a
DPM set forth in CBOE Rule 8.85.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-CBOE-2006-94), as modified by
Amendment No. 1, is approved.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-5980 Filed 3-30-07; 8:45 am]
BILLING CODE 8010-01-P