24236 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Exchange Act Release No. 42112 (Nov. 5,

1999), 64 FR 62238.

4See 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.

5RAES permits automatic execution of small

public customer orders.

6ORS 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.

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.

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 marketmaker 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.

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

Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices 24237

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).

8We note that the CBOE states in its filing the

85% of market-maker trade input is currently done

through handheld terminals.

9As noted above, these provisions previously

applied only to index options and options trading

ex-dividend or ex-distribution the following day.

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

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 exdistribution 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.

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.

24238 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

10 15 U.S.C. 78f(b)(5).

11 15 U.S.C. 78s(b)(2).

12 15 U.S.C. 78s(b)(2).

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3The Exchange’s Exercise Regulatory Circular

sets forth procedures and requirements regarding

the exercise of American-style, cash-settled index

options. In 1998, the CBOE filed with the

Commission the Exercise Regulatory Circular, See

Securities Exchange Act Release No. 40334 (August

18, 1998), 63 FR 45275 (August 25, 1998) (File No.

CBOE–98–34).

4See Letter from Arthur B. Reinstein, Counsel,

CBOE, to Hong-anh Tran, Attorney, Division of

Market Regulation (‘‘Division’’), SEC, dated May 10,

1999 (‘‘Amendment No. 1’’).

5Securities Exchange Act Release No. 41435 (May

21, 1999), 64 FR 29370 (June 1, 1999) (File No. SR–

CBOE–99–03).

6Currently, the Exchange trades only one type of

standardized American-style, cash-settled index

option contract, Standard & Poor’s 100 index

options (‘‘OEX index options’’). 7CBOE Rule 24.6, Days and Hours of Business. 8The Exchange is proposing to move the text of

CBOE Rule 11.1.05, which relates to the exercise of

American-style, cash-settled index options, to

proposed CBOE Rule 11.1.03(h) for ease of reference

for Exchange members. 9The Exchange is also proposing to reflect the

Commission’s 1999 approved rule changes to CBOE

Rule 11.1.05 and CBOE Rule 4.16(b) in an Exercise

Regulatory Circular. In 1999, the Commission

approved rule amendments to CBOE Rule 11.1.05

and CBOE Rule 4.16(b), which state that with the

exception of the last business day prior to

expiration, exercises of cash-settled index options

will be prohibited during any time when trading in

such options is delayed, halted, or suspended,

unless otherwise determined by the Exchange’s

President or his designee. The 1999 rule

amendments also stated that, notwithstanding this

prohibition, the exercise of a cash-settled index

option may be processed and given effect in

accordance with and subject to the rules of the OCC

while trading in an option is delayed, halted, or

suspended if it can be documented that the decision

to exercise the option was made during allowable

time frames prior to the delay, halt or suspension.

The Commission approved these rule amendments

in 1999, but the Exchange did not propose, at that

time, to reflect those rule amendments in an

Exercise Regulatory Circular. See Securities

Exchange Act Release No. 40951 (January 15, 1999),

64 FR 4482 (January 28, 1999) (File No. SR–CBOE–

98–33).

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.

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10260 Filed 4–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42693; File No. SR–CBOE–

99–03]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. Relating to Option Exercise

Procedures

April 17, 2000.

On January 20, 1999, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or the ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) a proposed

rule change pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder.2

In its filing, CBOE proposes to amend

Exchange Rules 4.16 and 11.1 relating to

option exercise procedures for noncashsettled equity options and Americanstyle, cash-settled index options, as well

as to reflect in an Exercise Regulatory

Circular the proposed changes to

American-style, cash-settled index

options, and a change approved in a

prior Commission Order relating to

those options.3 On May 10, 1999, the

Exchange submitted to the Commission

Amendment No. 1 to the proposed rule

change.4 The proposed rule change and

Amendment No. 1 were published for

comment in the Federal Register on

June 1, 1999.5 The Commission received

no comments on the proposal. This

Order approves the proposed rule

change as amended.

I. Description of the Proposal

A. Exercise Procedures for AmericanStyle, Cash-Settled Index Options After

Certain Trading Halts and During a

Trading Resumption That May Follow

Such Trading Halts

The CBOE proposes to modify its

rules governing the exercise of

American-style, cash-settled index

options during certain trading halts. In

addition, if trading resumes following a

trading halt (such as by closing

rotation), the Exchange proposes to

permit exercises to occur during the

resumption of trading and for five

minutes after the close of the

resumption of trading. In particular, the

Exchange proposes to modify CBOE

Rules 11.1 and 4.16 to permit the

exercise of American-style, cash-settled

index options during a trading halt that

occurs at or after 3:00 p.m. (Central

Time).6 A number of index options are

traded on the Exchange from 8:30 a.m.

To 3:15 p.m. (CT),7 whereas the markets

for the equity securities underlying

those index options generally close for

trading by 3:00 p.m. (CT). CBOE Rule

11.1 governs the exercise of option

contracts, including index option

contracts, and provides that Exchange

members will follow the procedures of

the Options Clearing Corporation

(‘‘OCC’’), as well as those of the

Exchange, when exercising option

contracts. CBOE Rule 4.16 governs other

restrictions on options transactions and

exercises. Under CBOE Rule 11.1.05 8

and CBOE Rule 4.16(b), exercises of

cash-settled index options are

prohibited whenever trading in such

options is delayed, halted or suspended,

unless otherwise determined by the

Exchange’s President or his designee.9

The Exchange has long noted that one

of the distinctive characteristics of a

cash-settled option is that its exercise is

functionally equivalent to trading out of

the long position, and, conversely, the

assignment of a short option eliminates