[Federal Register: October 10, 2003 (Volume 68, Number 197)]
[Notices]
[Page 58735-58737]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10oc03-158]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48583; File No. SR-OC-2003-07]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by OneChicago, LLC To Amend Its
Policy Regarding Block Trades, Pre-Execution Discussions and Cross
Trades
October 1, 2003.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given
that on September 12, 2003 OneChicago, LLC (``OneChicago'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule changes described in Items I, II, and III below, which Items have
been prepared by OneChicago. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons. On September 11, 2003, OneChicago filed a written
certification under Section 5c(c) of the Commodity Exchange Act
(``CEA'') \3\ with the Commodity Futures Trading Commission (``CFTC'').
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\1\ 15 U.S.C. 78s(b)(7).
\2\ 17 CFR 240.19b-7.
\3\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule
Change
OneChicago is proposing to amend its policy regarding block trades,
pre-execution discussions and cross trades. The text of the proposed
rule change
[[Page 58736]]
appears below. New text is in italics; deleted text is in [brackets].
* * * * *
OneChicago Policies:
Block Trades, Pre-Execution Discussions and Cross Trades
Block Trades [Policy]
Pursuant to OneChicago Rule 417[(a)(i)(B)], the Exchange permits
eligible contract participants, See Rule 417(a), to execute block
trades [to be executed] away from the public auction market in
privately negotiated transactions for a minimum of 500 contracts per
transaction.
Each firm executing a side of a block trade must have at least one
designated person pre-authorized to report block trades. Only
OneChicago member firms with a clearing relationship at The Options
Clearing Corporation or the Chicago Mercantile Exchange Clearing
Division will be allowed to report a block trade.
The seller is obligated to call OneChicago Operations Management
(``OOM'') without delay after the trade is negotiated to notify the
Exchange of the basic terms of the trade, including the contract,
price, quantity and contra-party information. If the transaction is a
spread or combination, such as when one party is rolling a position
into the next contract month,\1\ the seller of the month closest to
expiration is responsible for reporting the entire transaction. OOM
will provide the caller a Trade Identification (``Trade ID'') for the
block trade and report both sides of the trade to the OneChicago trade
engine. The trade engine will then relay the block trade terms to the
Chicago Board Options Exchange Financial Network (``CFN''), which
serves as the OneChicago price distribution mechanism, and [to
]OneChicago's matched trade database. After reporting the trade to OOM,
the buyer and seller must each complete and transmit the prescribed
Block Trade Reporting form via facsimile or e-mail to the OOM Help
Desk. Both sides must include the Trade ID given by the OOM Help Desk
to the seller at the time of his call. It is the responsibility of the
buying and selling firms to effect any subsequent allocations or
necessary updates to non-critical matching fields utilizing their
chosen post-trade processing system.
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\1\ For purposes of this policy, the total quantity of the legs
of a spread or a combination must meet the 500 minimum contracts
requirement.
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To protect market integrity during the negotiation and reporting
period, any party with knowledge of the pending block trade is
prohibited from entering offsetting orders in the specific or any
related OneChicago product for the benefit of the account or accounts
related to a party to the block trade until the block trade has been
reported to and disseminated by CFN. Additionally, no party with
knowledge of the pending block trade report is allowed to exercise
discretion by withholding (or placing) orders for any account that
would have (or would not have) been placed given knowledge of the
pending block trade until the block trade has been reported to and
disseminated by the CFN price distribution mechanism. Parties subject
to the jurisdiction of a member or an affiliate of the Intermarket
Surveillance Group (``ISG'') are further prohibited from submitting
related offsetting orders on OneChicago if they utilize block trade
reporting facilities of any other ISG participant exchange until such
trades have been disseminated to the marketplace via the standard
public reporting mechanism for that exchange. OneChicago considers
busting block trades to be a serious matter and may deny a bust request
based on the factors surrounding the request, including but not limited
to the market impact of the original report, the amount of variation
between the block trade price and the market price at the time of the
report and the length of time transpiring since the block trade was
reported to the public. Fees will be levied for busting a block trade.
Any attempt to circumvent this policy or misrepresent a transaction
as a block trade will be forwarded to the appropriate party for
investigation.
Pre-Execution Discussions
In accordance with OneChicago Rule 614, the Exchange permits
Members and Access Persons to engage in pre-execution discussions
pursuant to which one party may agree in advance to take the opposite
side of the other party's order for a transaction to be executed on the
Exchange, on the following conditions:
1. Customers of each such party must consent to allow pre-execution
discussions with other market participants;
2. Any Member or Access Person who is solicited to participate in a
OneChicago transaction through pre-execution discussions shall not (i)
disclose to any other party the details of such discussions or (ii)
enter an order or quote through the Exchange to take advantage of
information conveyed during such discussions unless such Member or
Access Person has agreed during the pre-execution discussions to
participate in the transaction in accordance with this policy and the
order or quote is entered to implement that agreement; and
3. Except for block trades conducted pursuant to Rule 417 and
exchange of future for physical transactions conducted pursuant to Rule
416, a period of four seconds shall elapse between entering the first
order or quote and entering the second order for the opposite side. The
order or quote initially entered may be filled or lifted by a third
party during the four-second waiting period rather than consummating
the transaction with the intended party as contemplated by the pre-
execution discussions.
Cross Trades
[Pursuant to ]In accordance with OneChicago Rules 409 and 610, a
Member [of the Exchange ]may cross orders, provided that the Member
[exposes] enters one side of the trade [(buy or sell) to OneChicago's
central order book for a minimum of ](which shall be the Customer's
side in the event that the Member or its affiliate is taking the other
side) into OneChicago's trading system at least four seconds before
entering the order for the opposite side.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
OneChicago has prepared statements concerning the purpose of, and
basis for, the proposed rule change, burdens on competition, and
comments received from members, participants, and others. The text of
these statements may be examined at the places specified in Item IV
below. These statements are set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
OneChicago is proposing to amend its current policy regarding block
trades and cross trades and to add a new provision that explicitly
permits pre-execution discussions. The substantive changes in the
proposed rule change are the following: To amend the reporting
requirements for block trades to require the seller of the front month
of a block spread or combination transaction to report the entire
transaction; to explicitly permit OneChicago members and access persons
to enter into pre-execution discussions with other market participants
when certain conditions are
[[Page 58737]]
met; and to clarify that OneChicago members entering into cross trades
in which the member or affiliate of the member is taking the opposite
side of a customer order must expose the customer side of the trade on
the OneChicago trading system for at least four seconds.
OneChicago's block trade policy currently requires the seller of
the block trade to call OneChicago Operations Management (``OOM'') to
report the block transaction. Under the proposed rule change, if a
block trade were a spread or a combination, the seller of the month
closest to expiration would be required to report the entire
transaction. For example, if the block were comprised of 250 Sep'03
Microsoft contracts and 250 Dec'03 Microsoft contracts, then the seller
of the Sep'03 Microsoft contracts would report the entire block
transaction to OOM, both the Sep'03 Microsoft contracts and the Dec'03
Microsoft contracts. In addition, the proposed rule change clarifies
that the total quantity of the legs of a spread or combination must
meet the 500 minimum contracts requirement.
Furthermore, the proposed rule change would add a new provision
regarding pre-execution discussions. This provision would explicitly
permit OneChicago members and access persons \4\ to engage in pre-
execution discussions pursuant to which one party may agree in advance
to take the opposite side of the other party's order if the following
conditions are met:
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\4\ Under OneChicago Rule 101, an access person means any
person, other than a clearing member or Exchange member or related
party of either, who has been given access to the OneChicago System
through a OneChicago workstation by a clearing member.
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1. Customers of each party must consent to allow pre-execution
discussions with other market participants;
2. Any OneChicago member or access person who is solicited to
participate in a OneChicago transaction through pre-execution
discussions shall not: (i) Disclose to any other party the details of
such discussions or (ii) enter an order or quote through the Exchange
to take advantage of information conveyed during such discussions,
unless such member or access person has agreed during the pre-execution
discussions to participate in the transaction in accordance with this
policy, and the order or quote is entered to implement that agreement;
and
3. Except for block trades conducted pursuant to OneChicago Rule
417 and exchange of future for physical transactions conducted pursuant
to OneChicago Rule 416, a period of four seconds must elapse between
entering the first order or quote and entering the second order for the
opposite side. The order or quote initially entered may be filled or
lifted by a third party during the four-second waiting period rather
than consummating the transaction with the intended party as
contemplated by the pre-execution discussion.
The proposed rule change would also amend the provision relating to
cross trades to clarify that if a member is taking the other side of
its customer's order, the customer side of the order must be entered
into the OneChicago trading system for at least four seconds before the
member may take the opposite side.
2. Statutory Basis
OneChicago believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \5\ in that it is reasonably designed
to prevent fraudulent and manipulative acts and practices and to
promote just and equitable principles of trade. The proposed rule
change is also designed to protect investors and the public interest by
requiring certain conditions to be met in order for a member or access
person to enter into pre-execution discussions with other market
participants. The proposed cross trade amendments are also designed to
protect investors and the public interest by requiring that the
customer side of a cross trade be entered into OneChicago's trading
system for at least four seconds before members may take the other side
of the customer's order.
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\5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
OneChicago does not believe that the proposed rule change will have
a negative impact on competition.
C. Self-Regulatory Organization's Statement of Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments on OneChicago's proposed rule change have not been
solicited, and none have been received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change has become effective on September 12,
2003. Within 60 days of the date of effectiveness of the proposed rule
change, the Commission, after consultation with the CFTC, may summarily
abrogate the proposed rule change and require that the proposed rule
change be refiled in accordance with the provisions of Section 19(b)(1)
of the Act.\6\
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\6\ 15 U.S.C. 78s(b)(1).
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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, as amended, conflicts with the Act. Persons making written
submissions should file nine copies of the submission with the
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609. Comments also may be submitted electronically to the following e-mail address: rule-comments@sec.gov.
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 these filings also will
be available for inspection and copying at the principal office of
OneChicago. All submissions should refer to File No. SR-OC-2003-07 and
should be submitted by October 31, 2003.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(75).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-25794 Filed 10-9-03; 8:45 am]
BILLING CODE 8010-01-P