[Federal Register: December 7, 2005 (Volume 70, Number 234)]
[Notices]
[Page 72867-72870]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07de05-133]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52860; File No. SR-CBOE-2005-100]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Obligations of Designated Primary Market Makers
During the Implementation of the PAR Official Program
November 30, 2005.
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 November 22, 2005, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
CBOE has designated this proposal as non-controversial under section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\
which renders the proposed rule change effective upon filing with the
Commission. 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).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to issue a regulatory circular that will
subject certain Designated Primary Market Makers (``DPMs'') to
obligations that were removed upon the approval of the Exchange's PAR
Official proposal.\5\ The text of the proposed regulatory circular is
attached hereto as Exhibit A.
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\5\ See infra note 6 and accompanying text.
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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 Exchange 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 Exchange 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
On November 18, 2005, the Commission approved CBOE's proposal to
remove a DPM's obligation to execute orders as an agent, including as a
floor broker, in its allocated securities on the Exchange in any
trading station and to allow the Exchange to appoint an Exchange
employee or independent contractor (``PAR Official'') to assume many of
the functions and obligations that DPMs previously held (``PAR Official
proposal'').\6\ A specific provision of rules approved in connection
with the PAR Official proposal gives the Exchange up to ninety days to
implement the PAR Official proposal.\7\ Because this ninety-day
implementation provision could mean that some DPMs will continue to be
required to represent orders as agents in their allocated securities,
those DPMs must still be subject to the same obligations that governed
DPM operations prior to the approval of the PAR Official proposal. As
such, the Exchange has incorporated those obligations into a regulatory
circular that will govern the operations of those DPMs that were not
immediately included in the PAR Official conversion as of November 18,
2005. These rules and obligations, as provided in the regulatory
circular attached hereto as Exhibit A, were adopted directly from the
now-former DPM rules.
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\6\ See Securities Exchange Act Release No. 52798 (November 18,
2005), 70 FR 71344 (November 28, 2005).
\7\ See Interpretation and Policy .01 to CBOE Rule 7.12.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) \8\ of the Act in general, and furthers the
objectives of section 6(b)(5) \9\ in particular, in that it is designed
to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts, and, in general, to protect investors
and the public interest.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
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
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
The foregoing proposed rule change has become effective pursuant to
section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder
\11\ because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; or (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate. In addition, the Exchange provided the
Commission with written notice of its intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the date of the filing of
the proposed rule change as required by Rule 19b-4(f)(6).\12\
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
\12\ Id.
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Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\13\ the proposal
does not become operative until 30 days after the date of its filing,
or such shorter time as the Commission may designate if consistent with
the protection of investors and the public interest. The Exchange has
requested that the Commission waive the 30-day operative delay so that
the proposed rule change becomes effective immediately. The Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. The Commission notes
that granting this waiver will ensure that DPMs not immediately subject
to the new rules approved recently in connection with the PAR Official
proposal will continue to be subject to appropriate regulation.
Therefore, the Commission has determined to waive the 30-day delay
[[Page 72868]]
and to allow the proposed rule change to become operative
immediately.\14\
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\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ For purposes only of waiving the operative delay of this
proposal, the Commission notes that it has considered the proposed
rule's impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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At any time within 60 days of the filing of the 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.\15\
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\15\ 15 U.S.C. 78s(b)(3)(C).
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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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-CBOE-2005-100 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
All submissions should refer to File Number SR-CBOE-2005-100. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the CBOE. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-CBOE-2005-100 and should be submitted on or before
December 28, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
Exhibit A--Chicago Board Options Exchange, Incorporated Regulatory
Circular RG05-xx
Date: November 18, 2005.
To: Members and Member Firms.
From: Legal Division; Regulatory Division; Trading Operations
Division
Re: DPM Obligations Until the Implementation of the PAR Official
Program
On November 18, 2005, the Securities and Exchange Commission
(``SEC'') approved a CBOE rule change, SR-CBOE-2005-46 (``rule change''
or ``PAR Official rule change''), that, among other things, (1)
prohibits a DPM from executing orders as an agent or Floor Broker in
its allocated option classes and (2) eliminates the authority of a DPM
to act in any other way as a Floor Broker in those classes.\17\ Rule
8.8 and Rule 8.85(b) now prevent a DPM from representing or executing
orders for other persons in the DPM's assigned option classes. Once the
rule change goes into effect in a particular options class, the DPM
assigned to that option class will lose the ability to take custody of
or handle orders for other persons in that option class, including
through operation of the PAR terminal. The rule change authorizes the
Exchange to assign to an Exchange employee or subcontractor known as a
PAR Official, the responsibility, among other things, to operate the
PAR workstation for designated option classes, to maintain the book in
those classes, to represent orders to be sent via Intermarket Option
Linkage in those classes, and to effect executions of agency orders
placed with the PAR Official in those classes.
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\17\ Please refer to the rule change and the SEC order approving
the rule change, which both can be found on the Exchange's Web site
at http://www.cboe.org/Legal/filings.aspx.
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The rule change allows the Exchange to put PAR Officials in place
in DPM trading crowds during a 90-day period after the SEC approves the
rule change. This provision is intended to insure a smooth roll-out of
the PAR Official program. Therefore, until a PAR Official is put in
place in a particular DPM trading crowd during this 90-day transition
period, the DPM in that trading crowd will continue to be responsible
to operate the PAR workstation and will continue to be subject to the
same agency obligations as set forth under former Rule 8.85(b) and to
other obligations applicable to DPMs under current and former Exchange
rules. These rules and regulations are provided below:
* * * * *
DPM Obligations
(a) General Obligations. Each DPM shall fulfill all of the
obligations of a Floor Broker or Order Book Official (to the extent
that the DPM acts as a Floor Broker) under the Rules, and shall satisfy
each of the requirements contained in this paragraph, in respect of
each of the securities allocated to the DPM. To the extent that there
is any inconsistency between the specific obligations of a DPM set
forth in subparagraphs (b) through (i) of this Rule and the general
obligations of a Floor Broker or of an Order Book Official under the
Rules, subparagraphs (b) through (i) of this Rule shall govern.
(b) Display Obligation. Each DPM shall display immediately the full
price and size of any customer limit order that improves the price or
increases the size of the best disseminated CBOE quote. ``Immediately''
means, under normal market conditions, as soon as practicable but no
later than 30-seconds after receipt (``30-second standard'') by the
DPM. The term ``customer limit order'' means an order to buy or sell a
listed option at a specified price that is not for the account of
either a broker or dealer; provided, however, that the term customer
limit order shall include an order transmitted by a broker or dealer on
behalf of a customer. The following are exempt from the Display
Obligation as set forth under this provision:
(A) An order executed upon receipt;
(B) An order where the customer who placed it requests that it not
be displayed, 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 subject to being displayed;
(C) An order for which immediately upon receipt a related order for
the principal account of a DPM reflecting the terms of the customer
order is routed to another options exchange that is a participant in
the Intermarket Options Linkage Plan;
(D) The following orders as defined in Rule 6.53: contingency
orders; One-cancels-the-other orders; all or none
[[Page 72869]]
orders; fill or kill orders; immediate or cancel orders; complex orders
(e.g., spreads, straddles, combinations); and stock-option orders;
(E) Orders received before or during a trading rotation (as defined
in Rule 6.2, 6.2A, and 6.2B), including Opening Rotation Orders as
defined in Rule 6.53(l), are exempt from the 30-second standard,
however, they must be displayed immediately upon conclusion of the
applicable rotation; and
(F) Large Sized Orders: Orders for more than 100 contracts, unless
the customer placing such order requests that the order be displayed.
(c) A DPM shall 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;
(d) A DPM shall accord priority to any customer 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;
(e) A DPM shall not charge any brokerage commission with respect
to:
(1) The execution of any portion of an 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; or
(2) Any portion of an order for which the DPM was not the executing
floor broker, including any portion of the order that is automatically
executed through an Exchange system; or
(3) Any portion of an order that is automatically cancelled, or;
(4) Any portion of an order that is not executed and not cancelled.
(f) A DPM shall act as a Floor Broker to the extent required by the
MTS Committee.
(g) A DPM shall not represent discretionary orders as a Floor
Broker or otherwise.
(h) Autobook Pilot. A DPM shall maintain and keep active on the
DPM's PAR workstation at all times the automated limit order display
facility (``Autobook'') provided by the Exchange. The appropriate
Exchange Floor Procedure Committee will determine the Autobook timer in
all classes under that Committee's jurisdiction. A DPM may deactivate
Autobook as to a class or classes provided that Floor Official approval
is obtained. The DPM must obtain such approval no later than three
minutes after deactivation.
(i) 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.
* * * * *
RAES Operations
DPMs will still be responsible for non-automated handling of orders
routed to the PAR workstation pursuant to Rule 6.8(d)(vi) and
Interpretation and Policy .02(b) of Rule 6.8.
* * * * *
Priority of Bids and Offers and Priority of Allocation of Trades
DPMs shall be required to comply with those provisions of Rule
6.45, 6.45A, and 6.45B, that are now assigned to PAR Officials.
* * * * *
Timing of Firm Quote Obligations in a DPM Trading Crowd With Respect to
Firm Disseminated Market Quotes
In Non-Hybrid classes, for purposes of determining when the firm
quote obligations under Rule 8.51 attach in respect of orders received
at a PAR workstation in a DPM trading crowd and how the exemptions to
that obligation provided in paragraph (e) of that Rule apply, the
responsible broker or dealer shall be deemed to receive an order, and
an order shall be deemed to be presented to the responsible broker or
dealer, at the time the order is received on the DPM's PAR workstation.
In Hybrid classes, for purposes of determining when the firm quote
obligations under Rule 8.51 attach with respect to orders received at a
PAR workstation in a DPM trading crowd and how the exemptions to that
obligation provided in paragraph (e) of that rule apply, the
responsible broker or dealer shall be deemed to receive an order, and
an order shall be deemed presented to the responsible broker or dealer:
(i) At the time the order is announced to the trading crowd with
respect to each responsible broker or dealer that is not the DPM for
the class; and
(ii) At the time the order is received on PAR with respect to the
DPM as the responsible broker or dealer.
As such, firm quote obligations for an order received on a PAR
workstation may attach at two separate times for different responsible
broker or dealers: at the time of receipt with respect to the DPM as a
responsible broker or dealer and at the time of announcement with
respect to non-DPM members of the trading crowd as responsible brokers
or dealers.
* * * * *
Linkage Rules
Only with respect to any DPM continuing to represent and execute
orders as agent pursuant to this Regulatory Circular, Rule 6.80
(``Definitions'') paragraph (12)(i) shall read as follows:
``Principal Acting as Agent (`P/A') Order,'' which is an order for
the principal account of a Market-Maker (or equivalent entity on
another Participant Exchange that is authorized to represent Customer
orders) reflecting the terms of a related unexecuted Customer order for
which the Market-Maker is acting as agent.
* * * * *
DPM Designees
The DPM must continue to maintain the requisite number of approved
DPM Designees, as defined under Rule 8.81. Additionally, these DPM
Designees must continue to be registered as a Floor Broker pursuant to
Rule 6.71. A DPM Designee also shall continue to be restricted from
trading as a Floor Broker in securities allocated to the DPM unless
acting on behalf of the DPM in its capacity as a DPM.
Finally, when acting on behalf of a DPM in its capacity as a DPM,
the DPM Designee is exempt from the provisions of Rule 8.8
(``Restriction on Acting as Market-Maker and Floor Broker''). (See
former Rule 8.81(e)).
* * * * *
Rule 17.50. Imposition of Fines for Minor Rule Violations
DPMs shall be subject to a fine for failure to promptly book and
display limit orders that would improve the disseminated quote or for
failure to use due diligence in the execution of orders for which the
DPM maintains an agency obligation.
* * * * *
Summary
After the rule change has been approved and until the end of the
90-day trading period, neither a DPM assigned to a trading crowd nor
the Exchange shall be subject to the provisions of the rule change with
respect to the operation of that trading crowd until a PAR Official has
been assigned to that trading crowd.
Questions pertaining to this Regulatory Circular should be directed
to Jim Flynn at (312) 786-7070; Doug
[[Page 72870]]
Beck at (312) 786-7959; or John Johnston at (312) 786-7303.
[FR Doc. E5-6986 Filed 12-6-05; 8:45 am]
BILLING CODE 8010-01-P