[Federal Register Volume 65, Number 80 (Tuesday, April 25, 2000)]
[Notices]
[Pages 24236-24238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10260]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42696; File No. SR-CBOE-99-38]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 to the Proposed 
Rule Change Amending Trade Processing Rules

April 18, 2000.
    On July 13, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19(b)-4 
thereunder,\2\ a proposed rule change to amend the Exchange's trade 
processing rules. The proposed rule change was published for comment in 
the Federal Register on November 16, 1999.\3\ The CBOE submitted 
Amendment No. 1 \4\ to the proposed rule change on December 28, 1999. 
The Commission received no comments on the proposal. This order 
approves the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 42112 (Nov. 5, 1999), 64 FR 
62238.
    \4\ See Letter from Timothy Thompson, Director, Regulatory 
Affairs, CBOE, to David Sieradzki, Special Counsel, Division of 
Market Regulation, Commission, dated December 23, 1999 (``Amendment 
No. 1''). Amendment No. 1 clarifies that the reporting obligations 
of Exchange Rule 6.51(a) are for public dissemination purposes while 
the reporting obligations of Exchange Rule 6.51(d) are for clearance 
purposes. Second, Amendment No. 1 revises Interpretation and Policy 
.01 to Exchange Rule 6.51 to clarify that members that do not use 
handhelds must report trades as promptly as possible regardless of 
the requirements of Exchange Rule 2.30 that permit trades to be 
reported over a longer time frame before fees are imposed 
automatically. Third, Amendment No. 1 changes the word ``may'' back 
to ``shall'' in Interpretation and Policy .01(c) to Exchange Rule 
6.61 regarding the submission of unmatched trades to The Options 
Clearing Corporation. Fourth, Amendment No. 1 deletes the provision 
of Interpretation and Policy .01(d) to Exchange Rule 6.61 that 
states that the Exchange may establish a schedule of fines or refer 
violations to the Exchange's Business Conduct Committee. Finally, 
Amendment No. 1 changes the first reference to ``Clearing Member'' 
in Exchange Rule 6.60 to ``Member'' because all members are required 
under the proposed rule change to report trade information for 
clearing purposes.
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I. Description of the Proposal

    The CBOE states that the purpose of the proposed rule change is to 
update the Exchange's trade processing rules to incorporate changes 
that have been made to the Exchange's trade processing system over the 
last few years. According to the Exchange, one significant change that 
has occurred at the Exchange is the increasing use of market-maker 
handheld trading terminals. Market-maker handheld terminals are 
electronically linked to the Exchange's trade processing system and 
trade information is sent to the Exchange's trade processing system 
automatically when a trade is input onto the handheld terminal. 
Currently, more than 85% of market-maker trade input is done through 
market-maker handheld terminals. Market-makers that do not use handheld 
terminals must manually record their trade information on a trade card 
and submit a copy of the card to the member's clearing firm for 
inclusion into the Exchange's trade processing system.
    The Exchange is proposing to change Exchange Rule 6.50 to require 
members to file with the Exchange trade information required by Rule 
6.51(d) for each Exchange transaction for which the member is 
responsible. The Rule currently states that only Clearing Members are 
required to file the required trade information with the Exchange. The 
Exchange believes that with the use of handhelds much of the required 
trade information is already provided automatically by the market-maker 
members.
    The Exchange is deleting the phrase ``business day (the exact hours 
to be fixed by the Exchange'') under Exchange Rule 6.51(d), which 
describes when members are required to submit trade information because 
the Exchange no longer uses a scheduled batch process for processing 
trade information. Consequently, the Exchange no longer fixes the time 
by which trade information must be submitted. Currently, the Exchange 
processes trade information on a continuous real time basis as it 
receives input from handhelds and other electronic systems such as the 
Retail Automatic Execution System (``RAES'') \5\ and the Exchange's 
Order Routing System (``ORS'') \6\ throughout the trading day.
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    \5\ RAES permits automatic execution of small public customer 
orders.
    \6\ ORS provides member firms with a method of efficiently 
delivering orders to CBOE's trading floor. Orders received by ORS 
are logged onto the ORS database and evaluated, based on volume and 
price, to determine their routing destination on the trading floor.
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    The Exchange is proposing to change Interpretation .01 to Rule 6.51 
to require the buyer and seller in each transaction to immediately 
provide the transaction record to the member for whom the transaction 
was executed and/or the clearing member that will clear the 
transaction. Buyers and sellers who do not use handheld terminals would 
be required to provide the transaction record as promptly as possible 
to the member for whom the transaction was executed and/or the clearing 
member that will report the trade. Currently, Interpretation .01 
requires the buyer and seller to provide the transaction record within 
the time frames established by the Exchange. The Exchange believes that 
the widespread use of technology in trading allows for the information 
to be provided immediately. The provision of the information 
immediately will allow for more efficient trade checking on an intra-
day basis.
    The Exchange is adding a new Interpretation .03 to Exchange rule 
6.51 to explicitly set forth the requirements for submitting trade 
information. These requirements are currently set forth in Exchange 
rule 2.30, which establishes fees for late trade submission. Members 
are required to submit the information immediately or as promptly as 
possible in accordance with interpretation .03 even if a longer time 
period is allowed before fees for delayed submission of trade 
information are assessed pursuant Rule 2.30. The new interpretation 
sets forth the following procedures for reporting transactions pursuant 
to Rule 6.51(d): For trades executed via an electronic data storage 
medium, or electronic system, trade information shall be immediately 
submitted to the Exchange for trade matching and clearance. For trades 
not executed on an electronic data storage medium, or electronic 
system, trade information shall be immediately recorded on a card or 
ticket and submitted as soon as reasonably possible, but not later than 
the one hour maximum time period stated in rule 2.30.
    The Exchange is amending rule 6.61 to provide that a member may 
receive either an Unmatched Trade Notification or an Unmatched Trade 
Report. An Unmatched Trade Notification is an electronic message sent 
to market-maker handheld users, whereas an Unmatched Trade Report is a 
written notice sent to all members and firms. Currently, under rule 
6.61 a member only receives Unmatched Trade Reports. The Exchange is 
also proposing to amend Rule 6.61 to obligate members to reconcile all 
unmatched trades and advisory trades and to report all reconciliations 
to the Exchange ``or the Clearing Member responsible for submission to 
the Exchange.''
    The Exchange is also proposing to amend Interpretation .01 to Rule 
6.61 to require members and their representatives to make all 
reasonable efforts to resolve unmatched trades on trade day. Currently, 
Interpretation .01

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states that members and their representatives must resolve unmatched 
trades from the previous day's trading no later than the opening of 
trading on the following business day. According to the Exchange, 
because of system enhancements, the Exchange and its members now have 
the tools to review trade activity on an intra-day basis. The Exchange 
believes that requiring reports to be reconciled on an intra-day basis 
can minimize potential losses to members who may have to take market 
action to correct an outtrade.
    For trades that remain unmatched after trade day, the Exchange is 
proposing to amend paragraph (c) of Interpretation .01 to Rule 6.61 to 
change the time requirement for correcting these trades from the 
opening of trading on the next business day to fifteen minutes prior to 
the opening of trading on the next business day. This change will allow 
the involved parties to correct their positions and be prepared for 
trading sooner. The Exchange believes that by resolving the unmatched 
trade before the market in the underlying security opens, the parties 
will be in a better position to enter any necessary orders in the 
markets to adjust their positions where necessary.
    In addition, the Exchange is adding new paragraph (a) of 
Interpretation .01 to Rule 6.61, which essentially is an updated 
version of what is now paragraph (a) of Interpretation .05 to rule 
6.61. Currently, Interpretation .05 requires that a representative be 
available to resolve unmatched trades only for transactions in index 
options or in any class of options which will trade ex-dividend or ex-
distribution the following day. New paragraph (a) of Interpretation .01 
to Rule 6.61 will expand this requirement by stating that a 
representative must be available to reconcile unmatched trades for all 
options transactions on all trade dates.
    The Exchange is also proposing to amend Rule 6.61, Interpretation 
.05(b) and (d) to expand the options classes which must comply with the 
requirement that members make reasonable efforts to detect and correct 
errors in carding or keying a trade and the provision that states that 
members who fail to comply with Rule 6.61 will be responsible for any 
liability resulting from an unmatched transaction that should have been 
matched. Currently, Interpretation .05(b) and (d) only apply to index 
options and any class of options which will trade ex-dividend or ex-
distribution the following day. These provisions, as amended, will 
apply to all transactions in options.
    Finally, the Exchange is proposing to amend Interpretation .05 to 
Exchange Rule 6.61 by revising the language to make it consistent with 
current practice. The Exchange has deleted references to First Pass and 
Second Pass. First Pass and Second Pass refer to the former practice of 
submitting trade information for trade processing in batches at 
different times during the day. The Exchange currently processes the 
trade information continually through the trade day.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds that the proposed rule change meets the 
requirements of Section 6(b)(5) of the Act \7\ which states that, among 
other things, the rules of an exchange must be designed to facilitate 
securities transactions and to remove impediments to and perfect the 
mechanism of a free and open market. Specifically, the Commission 
believes that given the increasing use of handheld terminals, requiring 
all members to report trade information, rather than just clearing 
members as currently required, will facilitate securities transactions 
by making the clearance and settlement process more efficient. As noted 
by the Exchange, the increasing use of handheld trading terminals has 
allowed certain trade information to be sent automatically at the time 
of the trade to the Exchange's trade processing system. Accordingly, 
the Commission believes changing CBOE rules to impose trade reporting 
obligations on all members, not just clearing members, reflects the 
reality of automation on the CBOE floor and imposes the trade reporting 
burden on those members actually reporting such information currently 
through handheld terminals.\8\
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    \7\ 15 U.S.C. 78f(b)(5). In approving this rule change, the 
Commission has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ We note that the CBOE states in its filing the 85% of 
market-maker trade input is currently done through handheld 
terminals.
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    Under the new rules, buyers and sellers in each transaction using 
handheld terminals will be required to immediately provide the 
transaction information to the member for whom it was executed or 
clearing member clearing the transaction. The Commission recognizes, 
however, that not all members are using handheld terminals. 
Accordingly, under the CBOE's new rules, buyers and sellers who do not 
use handheld terminals would be required to provide the transaction 
information as promptly as possible. The Commission believes that the 
proposed rule change adequately accommodates members who choose not to 
use handheld terminals by requiring them to report trade information as 
promptly as possible rather than immediately.
    In addition, the Commission believes that, by requiring members to 
take all reasonable efforts to resolve unmatched trades on the day of 
the trade, rather than by the opening of trading on the following 
business day, the proposed rule change will minimize the potential loss 
to members who may have to take action to correct an outtrade. 
Similarly, the Commission believes that requiring all trades that 
remain unmatched after the trade day to be resolved at least fifteen 
minutes prior to the open of trading will enable involved parties to be 
better prepared for the open of trading and in a better position to 
enter any necessary orders in the markets to adjust their positions 
where necessary. The Commission further believes that requiring members 
to have a representative available to resolve unmatched trades for all 
options, rather than only index options and options that will trade ex-
dividend or ex-distribution the following day, will help to ensure that 
all unmatched trades are resolved as quickly as possible. Moreover, the 
Commission believes that requiring members who fail to observe the 
procedures of Exchange rule 6.61 to be responsible for unmatched trades 
in all options that should have matched and requiring members to make 
reasonable efforts to detect and correct errors attributable to carding 
or keying a trade in all options \9\ will also help to ensure that 
unmatched trades are resolved more quickly. Finally, the Commission 
believes that the proposed rule change, as a whole, recognizes and 
accommodates technological advances on the floor of the Exchange, and 
updates the CBOE rules to reflect these changes.
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    \9\ As noted above, these provisions previously applied only to 
index options and options trading ex-dividend or ex-distribution the 
following day.
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    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the 30th day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission notes that Amendment No. 1 merely makes certification 
clarifications to the proposed rule change and does not present any new 
regulatory issues.

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Accordingly, the Commission finds that good cause exists, consistent 
with section 6(b)(5) \10\ and 19(b)(2) \11\ of the Act to accelerate 
approval of Amendment No. 1 to the proposed rule change.
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78s(b)(2).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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 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, in Washington, DC. 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-99-38 and should 
be submitted by May 16, 2000.

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CBOE-99-38), as amended, is 
approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-10260 Filed 4-24-00; 8:45 am]
BILLING CODE 8010-01-M