[Federal Register: December 27, 2002 (Volume 67, Number 249)]
[Notices]
[Page 79198-79199]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27de02-160]
[[Page 79198]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47033; File No. SR-CBOE-2002-49]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to RAES
Access Rules for Broad-Based Index Options and Options on Exchange-
Traded Funds on Broad-Based Indexes
December 19, 2002.
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 1, 2002, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by CBOE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend CBOE Rule 24.17 to broaden its applicability
to options on broad-based indexes, including SPX, and options on
exchange-traded funds (``ETFs'') on broad-based indexes, and make other
related changes to Exchange rules. The text of the proposed rule change
is available at the 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, CBOE 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. CBOE 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
Currently, the eligibility of CBOE market-makers to participate in
trades through the Retail Automatic Execution System (``RAES'') in
option classes on broad-based indexes, including OEX and SPX, as well
as option classes on ETFs \3\ on broad-based indexes (collectively,
``index-related options'') is governed under three different Exchange
rules. CBOE Rule 8.16 governs RAES eligibility for all options classes
other than DJX, OEX, and SPX. CBOE Rule 24.17 addresses RAES
eligibility for market-makers in OEX and DJX. Finally, RAES eligibility
in the SPX is governed by CBOE Rule 24.16, which is separate yet
functionally identical to CBOE Rule 24.17.\4\
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\3\ For purposes of this rule, trust issued receipts or holding
company depositary receipts (as defined in Interpretation .04 to
CBOE Rule 1.1), as well as index portfolio receipts (as defined in
Interpretation .02 to CBOE Rule 1.1) and index portfolio shares (as
defined in Interpretation .03 to CBOE Rule 1.1), are all included
within the meaning of the term ``exchange-traded fund.''
\4\ While a few subsections of CBOE Rule 24.16 are phrased
somewhat differently than their counterparts in CBOE Rule 24.17,
they are interpreted and applied by the CBOE as being equivalent.
Compare CBOE Rules 24.16(a)(ii), (c)(i), and (d)(i) with CBOE Rules
24.17(b)(ii), (c)(i), and (d)(i) (enabling market-makers to
``designate'' that their RAES trades be placed into an individual,
joint, or nominee account in which the market-maker participates);
also compare CBOE Rule 24.16(a)(iii) with CBOE Rule 24.17(b)(ii)-
(iv) (establishing requirements for personally logging onto RAES and
remaining in the trading crowd while logged in.)
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This proposed rule change would clarify and simplify the treatment
of index-related options under CBOE rules by broadening CBOE Rule 24.17
to apply to market-makers in index-related options. The Exchange
believes that this change would render CBOE Rule 24.16 duplicative and
unnecessary. Therefore, the Exchange proposes to delete the current
text of CBOE Rule 24.16, while reserving the rule number for possible
future use.
In addition, CBOE seeks to amend the title of CBOE Rule 8.16 and
certain text in subsection (a) of that rule to clarify that RAES
eligibility under CBOE Rule 8.16 would apply only to option classes
other than broad-based indexes and options on ETFs on broad-based
indexes.
CBOE believes the consolidation of Exchange RAES eligibility rules
for index-related options under one rule, 24.17, would provide
consistent RAES eligibility treatment for market-makers in the various
index-related options. In addition, the Exchange believes that CBOE
Rule 24.17 is better suited to govern trading in index-related options
than CBOE Rule 8.16, because index-related options more frequently tend
to be traded in larger crowds, where more than one market-maker from a
particular trading organization can often be present. CBOE believes
that the current language of CBOE Rule 24.17 better anticipates and
provides for this circumstance than does CBOE Rule 8.16, by setting
forth more detailed criteria for when and how market-makers can
participate in RAES as joint account members and/or as nominees of
member organizations.\5\
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\5\ Compare CBOE Rule 24.17(c)-(d) with CBOE Rule 8.16(a)(ii).
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CBOE proposes to add to CBOE Rule 24.17 one set of provisions
already present in the current CBOE Rule 8.16 in order to increase and
make more consistent the enforcement of market-maker obligations in
index-related options. These provisions currently exist as CBOE Rule
8.16(a)(iii) and the related Interpretations and Policies .01-.02. CBOE
proposes to add the provisions to CBOE Rule 24.17(b)(vii) and
Interpretations and Policies .03-.04, thereunder. These provisions
would authorize the appropriate Market Performance Committee to
establish and enforce maximum percentages of transaction and contract
volume that market-makers can execute through RAES transactions. The
Committee would establish such limitations to ensure that market-makers
standing in an index-related option crowd live up to their obligations
to improve, update, and honor competitive markets in their appointed
option classes in person, as set forth in CBOE Rule 8.7(b)(i)-(iii),\6\
and do not simply stand there for the purpose of accepting and scalping
out of favorable RAES trades, as they sometimes can do under the
current CBOE Rules 24.16 and 24.17. The Exchange believes that this
change would thereby further improve the competition and liquidity in
CBOE index-related options markets. The Exchange notes that the
provisions it is proposing to add to CBOE Rule 24.17 are substantially
the same provisions that the Commission has previously approved for
CBOE Rule 8.16.\7\
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\6\ CBOE Rule 8.7(b) provides that market-makers are expected to
perform the following activities in the course of maintaining a fair
and orderly market in their appointed option classes:
(i) To compete with other market-makers to improve markets in
all series of options classes at the station where a market-maker is
present.
(ii) To make markets which, absent changed market conditions,
will be honored to a reasonable number of contracts in all series of
options classes at the station where a market-maker is present.
(iii) To update market quotations in response to changed market
conditions in all series of options classes at the station where a
market-maker is present.
\7\ See Exchange Act Release No. 42870 (May 31, 2000), 65 FR
37191 (June 13, 2000) (SR-CBOE-97-37).
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[[Page 79199]]
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations under the Act applicable to a
national securities exchange and, in particular, the requirements of
section 6(b) of the Act.\8\ Specifically, the Exchange believes the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act \9\ that the rules of an exchange be 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. CBOE believes that the proposed rule change promotes
just and equitable principles of trade and protects investors and the
public interest because the RAES eligibility rules would be applied
consistently for similar products involving broad-based indexes and
options on ETFs on broad-based indexes. In addition, CBOE believes the
amended CBOE Rule 24.17 would facilitate greater enforcement of market-
maker obligations to improve, update, and honor competitive markets in
index-related option classes.
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\8\ 15 U.S.C. 78(f)(b).
\9\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change would result in
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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of 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 reasons for so finding, or (ii) as to
which the CBOE 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 filings will also be
available for inspection and copying at the principal office of CBOE.
All submissions should refer to File No. SR-CBOE-2002-49 and should be
submitted by January 17, 2003.
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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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-32737 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-P