Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices 37191

6LEAPS are Long Term Equity Anticipation

Securities or options with durations of up to 36

months. See Amex Rule 903c.

7FLEX options are customized options with

individually specified terms such as strike price,

expiration date, and exercise style. See Amex Rule

900G.

8 15 U.S.C. 78f. In approving this rule, the

Commission has considered the proposed rule’s

impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

9 15 U.S.C. 78f(b)(4).

10See Securities Exchange Act Release No. 42675,

(April 13, 2000), 65 FR 21223 (April 20, 2000)

(approving SR–Amex–00–15).

11 15 U.S.C. 78f(b)(5) and 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.

3Exchange Act Release No. 38928 (August 12,

1997), 62 FR 44296.

4Letters from James I. Gelbort to the

Commissioners, SEC, dated September 7, 1997

(‘‘Gelbort Letter’’); Scott Kilrea, President, Letco,

Lee E. Tenzer Trading Company, to Jonathan G.

Katz, Secretary, SEC, dated February 20, 1998

(‘‘Letco Letter No. 1’’); and Scott Kilrea, President

Letco, Lee E. Tenzer Trading Company, et al, to

Heather Seidal, Division of Market Regulation

(‘‘Division’’), SEC, dated August 7, 1998 (‘‘Letco

Letter No. 2’’).

5Letter from Timothy H. Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Heather Seidel, Division, SEC, dated July 22, 1998

(‘‘Amendment No. 1’’). In Amendment No. 1, the

Exchange amended the proposal by establishing a

floor percentage that may be set by the Market

Performance Committee (‘‘MPC’’) that limits a

market maker’s total transactions and contract

volume executed on RAES. The CBOE also

proposed that the market maker percentages should

be established and calculated on a quarterly basis.

Amendment No. 1 contained guidelines to be used

by the MPC when determining whether to exempt

market maker activity on one or more trading days

during the applicable calendar quarter and

guidelines for the exercise of discretion by the MPC

pursuant to Interpretation .01 of the proposed rule

change, which permits the MPC to apply the

eligibility requirements to fewer than all classes

traded at a particular trading station. Finally, the

CBOE responded to issues raised in Letco Letter No.

1 (see supra note 4).

6Letter from Timothy Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Richard Strasser, Division, SEC, dated September

23, 1999 (‘‘Amendment No. 2’’). In Amendment No.

2, the CBOE amended the proposal to limit its

application to those options classes identified by

the Exchange as having market makers that trade an

inordinate percentage of their transactions on

RAES. The Exchange also reiterated its belief that

the proposed rule language afforded protections

against potential discrimination by the MPC when

it determines which trading days to exempt from

the percentage calculations because the MPC will

not know the identity of market makers from the

data it reviews. Finally, the Exchange responded to

issues raised in Letco Letter No. 2 (see supra note

4).

7Letter from Stephanie C. Mullins, Attorney,

CBOE, to Kelly Riley, Division, SEC, dated

December 7, 1999 (‘‘Amendment No. 3’’). In

Amendment No. 3, the CBOE amended the

proposed rule change to provide an exemption from

the proposed RAES percentage requirements for

designated primary market makers (‘‘DPMs’’) and

their designees, when acting in the capacity as a

DPM in an option class.

8Letter from Timothy Thompson, Director,

Regulatory Affairs, Legal Department, CBOE, to

Kelly Riley, Division, SEC, dated March 21, 2000

(‘‘Amendment No. 4’’). In Amendment No. 4, the

CBOE corrected rule language submitted in

Amendment No. 3, which failed to reflect the

revisions proposed in Amendment No. 2.

from $0.07 to $0.19 per contract side for

member firm proprietary orders and

from $0.08 to $0.17 per contract side for

specialist and market maker orders. To

further offset the elimination of options

transaction, clearance and brokerage

fees for customer equity option orders,

the Exchange proposes to increase the

equity options transaction fee for nonmember broker-dealer orders from $0.07

to $0.19 per contract side. This revised

fee will also apply to both LEAPS 6 and

FLEX 7 options. Equity options

clearance and floor brokerage fees for

non-member broker-dealers will remain

unchanged at $0.04 and $0.03 per

contract side, respectively.

III. 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 and in particular, with the

requirements of Section 6 of the Act.8

Specifically, the Commission finds that

the proposal is consistent with Section

6(b)(4) of the Act, which requires a

registered national securities exchange

to promulgate rules that provide for the

equitable allocation of reasonable dues,

fees, and other charges among its

members and other persons using its

facilities.9 The Commission believes

that the proposed increase in the equity

options transaction fee for non-member

broker-dealer orders is not unreasonable

and should not discriminate unfairly

among market participants. In addition,

the Commission notes that member firm

proprietary orders are charged the same

options transaction fee as is proposed

for non-member proprietary orders.

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register. Approval of the

proposal will enable the Exchange to

offset the recent elimination of options

transaction, clearance, and floor

brokerage fees for customer equity

options orders in an expeditious

manner. The Commission notes that the

Exchange recently raised the equity

options transaction fee for member firm

proprietary orders to help offset the

elimination of options transaction,

clearance, and floor brokerage fees for

customer equity options orders, and no

comments were received on that

proposal.10 Therefore, the Commission

believes it is consistent with Section

6(b)(5) and Section 19(b)(2) of the Act to

grant accelerated approval to the

proposed rule change.11

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,12 that the

proposed rule change (SR–Amex–00–

18) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14820 Filed 6–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42870; File No. SR–CBOE–

97–37]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Approving Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendment Nos. 1, 2, 3, 4 and 5 to the

Proposed Rule Change Relating to

Eligibility Requirements for

Participation on the RAES System

May 31, 2000.

I. Introduction

On August 6, 1997, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend its Retail Automatic Execution

System (‘‘RAES’’) eligibility

requirements for market makers. The

proposed rule change was published in

the Federal Register on August 20,

1997.3 The Commission received three

comment letters on the proposed rule

change.4

On July 23, 1998, the CBOE submitted

Amendment No. 1 to the proposed rule

change. 5 On September 28, 1999, the

CBOE submitted Amendment No. 2 to

the proposed rule change.6 On

December 8, 1999, the CBOE submitted

Amendment No. 3 to the proposed rule

change.7 On March 22, 2000, the CBOE

submitted Amendment No. 4 to the

proposed rule change.8 Finally, on May

19, 2000, the CBOE submitted

37192 Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices

9Letter from Timothy Thompson, Director,

Regulatory Affairs, Legal Department, CBOE to

Kelly Riley, Division, SEC, dated May 18, 2000

(‘‘Amendment No. 5’’). In Amendment No. 5, the

CBOE amended the proposed language of

Interpretation .01 of Rule 8.16. Specifically,

Interpretation .01 is proposed to contain factors to

be considered by the MPC when it determines

whether to impose the percentage requirements on

a particular options class. Further, the Exchange

deleted factors proposed in Amendment No. 1,

which were to be used by the MPC to determine

whether to exempt an options class from the

percentage requirements. However, because the

proposal, as amended in Amendment No. 2, is no

longer proposed to be implemented floor wide but

only applied to specific options classes that have

been identified by the MPC as having market

makers that are not actively fulfilling their market

making obligations, the deleted factors were no

longer necessary.

10RAES is the Exchange’s automatic execution

system for small (generally less than 50 contracts)

public customer market or marketable limit orders.

When RAES receives an order, the system

automatically will attach to the order its execution

price, determined by the prevailing market quote at

the time of the order’s entry into the system. A buy

order will pay the offer; a sell order will sell at the

bid. An eligible market maker who is signed onto

RAES at the time the order is received will be

designated to trade with the public customer at the

assigned price.

11See Amendment No. 3.

12See Amendment No. 2.

13See Amendment No. 5.

14The Exchange also noted that the MPC might

determine to require an ineligible market maker to

participate in RAES if there is inadequate

participation in a particular options class. See

CBOE Rule 8.16(c).

15See supra note 4.

16See Gelbort Letter.

17See Letco Letter No. 1.

18See Letco Letter No. 2.

19Letter from Charles J. Henry, President and

Chief Operating Officer, CBOE to Jonathan G. Katz,

Secretary, SEC, dated October 31, 1997 (‘‘Response

Letter’’). The Response Letter addressed the issues

raised in the Gelbort Letter.

20CBOE Rule 8.7 sets forth the obligations of

market makers. Pursuant to CBOE Rule 8.7, market

makers are required, among other things, to execute

transactions that constitute a course of dealings that

are reasonably calculated to contribute to the

maintenance of a fair and orderly market.

Specifically, market makers are required, among

other things, to compete with other market makers

to improve markets, to make markets, to update

market quotations in response to changed market

conditions and to price options contracts fairly.

Amendment No. 5 to the proposed rule

change.9

This order approves the proposed rule

change, as amended. The Commission is

also soliciting comment on Amendment

Nos. 1, 2, 3, 4 and 5 to the proposed rule

change from interested persons.

II. Description of the Proposal

The CBOE proposes to establish two

additional eligibility requirements that

market makers must satisfy to be eligible

to participate in the RAES system.10 The

Exchange also proposes to clarify that

CBOE Rule 8.16 applies to RAES

eligibility in all CBOE options except

options on the Standard & Poor’s 100

Stock index (‘‘OEX’’), options on the

Standard & Poor’s 500 Stock Index

(‘‘SPX’’) and options on the Dow Jones

Industrial Average (‘‘DJX’’), which have

separate RAES rules.

The Exchange proposes to implement

a limit on the percentage of a market

maker’s overall trades, both in terms of

total transactions and contract volume,

that a market maker may transact on

RAES during a quarterly period. The

proposed eligibility requirements,

however, will not apply to DPMs.11 The

eligibility requirements have two

distinct parts, both of which must be

satisfied. First, a market maker’s RAES

transactions may not exceed a

maximum percentage of his or her total

transactions for a calendar quarter.

Second, a market maker’s contract

volume resulting from his or her RAES

transactions must not exceed a

maximum percentage of his or her

overall contract volume during a

calendar quarter.

These percentages will be determined

by the MPC. The MPC’s authority to

determine the applicable percentages,

however, will be limited so that neither

of the percentages may be set at less

than fifteen percent. In other words, the

MPC may not establish a maximum

RAES transaction or contact volume

percentage under fifteen percent.

Further, the MPC will only implement

these eligibility requirements on those

options classes that have been identified

as having market makers that are not

actively fulfilling their market making

obligations.12 If the MPC determines to

implement the eligibility requirements

on an options class, a regulatory circular

will be issued setting forth the

applicable percentages and the effective

date for the application of the

percentages before the beginning of the

quarterly period.

The MPC will have the authority to

implement the eligibility requirements

on those options classes that it identifies

as having market makers that are not

actively fulfilling their market making

obligations on the floor of the Exchange.

The factors to be considered by the MPC

when determining whether to apply the

percentage requirements include

complaints from floor brokers or other

market makers; the results of routine

market performance surveys; data

concerning the percentage of RAES

trades performed by a particular market

maker or market maker trading crowd;

or any other factor that the MPC deems

relevant.13

At the end of each quarter, the market

maker transaction and volume

percentages will be calculated. The MPC

will have the authority to exempt from

the percentage tabulations certain

trading days. When determining which

days to exempt, however, the MPC will

not be privy to individual market maker

identities. It will consider whether a

particular day experienced an unusually

high percentage of RAES trades

compared to normal trading days and

any other relevant factors. Generally, the

MPC will exempt market maker activity

for any option class on days where the

percentage of RAES trades out of total

trades exceeds the requirement set for

the class by the MPC.

If a market maker is found to be in

violation of the eligibility requirements,

he or she may be determined ineligible

to participate on RAES. In addition, a

market maker may be subject to

disciplinary or other remedial action by

the MPC under paragraph (d) of Rule

8.16. Market makers, pursuant to

Chapters XIX and XVII, as applicable,

may appeal such actions taken by the

MPC.14

III. Summary of Comments

The Commission received three

comment letters from two commenters

on the proposed rule change.15 One

commenter stated that he believed that

the proposed rule change was

unnecessary.16 The other commenter,

while generally supporting the

underlying motivation of the proposed

rule change, questioned its application

on DPMs 17 and requested that approval

of the proposal be postponed until the

ramifications on DPMs could be

resolved.18 The Exchange submitted to

the Commission a letter in response to

the issues raised by one commenter.19 In

addition, the Exchange addressed the

issues raised in the comment letters in

Amendment Nos. 1, 2, and 3. The

following discussion summarizes the

issues raised by the commenters and the

Exchange’s response.

1. Gelbort Letter

In his comment letter, Mr. Gelbort

questioned the appropriateness of the

proposed rule change and suggested that

current Exchange rules should be able to

sufficiently address the concerns

described by the Exchange relating to

market makers who fail to adequately

fulfill their market making obligations.

Specifically, Mr. Gelbort suggested that

by filing the proposal the Exchange

implied that it had been unable to

enforce the provisions of CBOE Rule

8.7.20 Mr. Gelbort stated that he believed

that other current Exchange rules, if

employed effectively, could adequately

address the problems identified by the

Exchange. For example, according to

Mr. Gelbort, CBOE Rule 8.2(a) provides

Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices 37193

21As discussed above, DPMs have been

specifically exempted from operation of the rule.

See Amendment No. 3.

22See CBOE Rule 8.16(b).

23See supra note 19.

24 Interpretation .03A of CBOE Rule 8.7 requires

a market maker to transact 75 percent of his or her

total contract volume in options classes to which

he or she has been appointed. Interpretation .03B

of CBOE Rule 8.7 requires a market maker to

execute at least 25 percent of his or her total

transactions in person, and not through the use of

orders, provided, however, that for any calendar

quarter in which a market maker receives market

maker treatment of off-floor orders, the market

maker must execute in person, and not through the

use of orders, 80 percent of his or her total

transactions.

25 Id.

the Exchange with the authority to deny

market maker registration for

insufficient ability. In addition,

according to Mr. Gelbort, CBOE Rule

8.2(b) permits the MPC to suspend or

terminate market maker registrations for

incompetence. Further, Mr. Gelbort

stated, CBOE Rule 8.3 permits the MPC

to suspend or terminate market maker

appointments when the interests of a

fair and orderly market are served.

Finally, Mr. Gelbort described the

authority granted to the MPC in CBOE

8.60 to hold informal meetings or

hearings that may result in remedial

actions against market makers and the

disciplinary proceedings that the

Exchange may institute under Chapter

XVII of its rules.

Mr. Gelbort also suggested that the

proposed rule change might create

inequities associated with its

administration. Specifically, Mr. Gelbort

raised concerns about the broad

authority sought by the Exchange and

questioned the apparent lack of

numerical limits. Mr. Gelbort pointed

out that the broad authority could result

in the proposed rule being applied to

exclude certain market makers in an

arbitrary manner. He also questioned

whether the proposed rule could be

applied differently to market makers

and DPMs.21 In addition, Mr. Gelbort

suggested that because the Exchange has

the authority to compel market maker

participation on RAES whenever a

market maker is present in the crowd

during an expiration cycle after the

market maker has signed on to RAES

once,22 that market makers would not be

able to self-regulate his or her own

RAES trading percentage. Further, Mr.

Gelbort stated that the proposed rule

would not encourage compliance with

the marekt making obligations of CBOE

Rule 8.7 in all classes allocated to a

crowd.

Mr. Gelbort also questioned the effect

of changing the phrase from ‘‘in that

trading crowd’’ to ‘‘at the trading

station’’ in proposed Rule 8.16(a)(iv).

Mr. Gelbort expressed concern that his

change in language could allow a future

MPC to interpret the phrase as

prohibiting market makers standing in

one part of the crowd from trading or

participating on RAES in all classes

allocated to the crowd. According to Mr.

Gelbort, some DPMs arrange their

stations to make it difficult for all

market makers to trade in all of the

classes allocated to the station and he

questioned the significance of the

language change.

Finally, Mr. Gelbort stated that he

believed that the proposed rule change

is anticompetitive because he believes it

condones disregard for the affirmative

market making obligations and because

it arbitrarily restricts the number of

market makers who may choose to

interact with RAES-eligible orders.

Further, he believed that the Exchange

should clarify the problems sought to be

addressed by the proposal and to

determine whether current Exchange

rules adequately address these

problems. If, however, the Exchange

finds that the proposal is the best gauge

for market maker performance, Mr.

Gelbort believes that persistent noncompliance should be met with

sanctions stronger than exclusion from

RAES.

The Exchange responded to Mr.

Gelbort’s comments in its Response

Letter.23 The following summarizes the

Response Letter.

The Exchange expressed its strong

disagreement with Mr. Gelbort’s

suggestion that is proposal was an

indication of its inability to enforce

CBOE Rule 8.7. According to the

Exchange, the proposal should not be

read to suggest that it lacks the ability

to enforce compliance with CBOE Rule

8.7, but should be considered as an

additional incentive for market makers

to meet their market making obligations.

The Exchange explained that it utilizes

a number of current rules to ensure

compliance by its market makers. For

example, the Exchange stated that it

conducts semi-annual crowd

evaluations pursuant to CBOE Rule 8.60

during which the MPC speaks to each

member of a trading crowd to explain

the obligations of market makers. These

reviews have led to some trading

crowds being restricted in new product

allocations and have led to referrals to

the Department of Market Regulation for

appropriate action when it appears that

individual market makers are

performing below standard.

The Exchange also stated that it

evaluates the performance of individual

market makers. The Exchange reviews,

on a quarterly basis, whether a market

maker is complying with the trading

volume requirements of Interpretation

.03 of CBOE Rule 8.7.24 The Exchange

stated that the MPC takes progressive

remedial actions against market makers

for violations of these provisions. In

conjunction with the MPC’s review, the

Department of Market Regulation

reviews the 80 percent in-person

requirement.25 According to the

Exchange, these reviews seek to ensure

that market makers trade in the

appointed options. If a market maker is

not performing, remedial actions may be

taken.

Moreover, according to the Exchange,

applications of potential market makers

are reviewed. The Exchange’s

Membership Committee reviews all

market maker applications, pursuant to

CBOE Rule 8.2(a) and Chapter III of the

Exchange’s rules. All market maker

applicants must successfully complete

an examination that measures

competence and qualifications. Further,

all applicants must attend educational

training.

In response to Mr. Gelbort’s assertion

that the proposal may be inequitably

administered because of the broad

authority of the MPC to set applicable

percentages, the Exchange stated that

this flexibility was necessary because

the MPC does not yet have experience

with setting such limitations. Further,

the Exchange believes that the flexibility

will enable the MPC to apply

appropriate to each class and to exempt

trading days as necessary. The Exchange

stated that the administration of the rule

would not be arbitrary because the same

percentages for a particular class will

apply to all market makers. Moreover,

members economically aggrieved by any

MPC decision will be able to appeal

such decision pursuant to Chapter XIX

of the Exchange’s rules.

The Exchange disagreed with Mr.

Gelbort’s assertion that market makers

will be unable to effectively regulate

their percentage of RAES trades. While

it is true that a market maker is

obligated to log on to RAES in specified

circumstances, which prevents the

market maker from regulating the

number of his or her RAES trades, the

Exchange believes that a market maker

can regulate the number of non-RAES

trades by making competitive markets

and aggressively competing for order

flow. Thus, the Exchange believes that

market makers can regulate the

percentage of his or her RAES trades by

monitoring his or her non-RAES trades.

Moreover, the Exchange states that the

MPC’s authority to exempt certain

37194 Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices

26See Letco Letter Nos. 1 and 2, supra note 4.

27See Amendment No. 3.

28 In approving this proposal, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

29 15 U.S.C. 78f(b)(5).

trading days should prevent market

makers from failing to satisfy the tests

due to unusual market conditions.

In response to Mr. Gelbort’s assertion

that the proposal would not encourage

compliance with the obligation imposed

on market makers to make markets in all

series of options classes at the trading

station, the Exchange states the proposal

was not intended for such a purpose.

According to the Exchange, the

proposed rule change was not meant to

encourage compliance with this market

maker obligation and that other

Exchange rule serve this purpose.

Regarding the proposed change in

language from ‘‘in the trading crowd’’ to

‘‘at the trading station,’’ the Exchange

states the terms ‘‘station’’ and ‘‘trading

crowd’’ are synonymous, pursuant to

Interpretation .01 to CBOE Rule 8.8.

Thus, a future MPC could not change

this Interpretation without first

submitting a proposed rule change to

the Commission for approval.

The Exchange believes that the

proposal should provide market makers

with an incentive to compete when they

are signed onto RAES because failure to

actively fulfill their market obligations

under CBOE Rule 8.7 could lead to

sanctions. The Exchange believes that

the proposal complements the other

objectives tests to ensure that a market

maker fulfills his Rule 8.7 obligations.

Further, the Exchange does not believe

that the proposal will limit the number

of market makers who will be able to

actively engage in making markets in

their appointed classes. Rather, the

Exchange believes that the proposal

encourages compliance with CBOE Rule

8.7 and promotes active competition

among market makers.

Finally, the Exchange agrees with Mr.

Gelbort’s observation that persistent

non-compliance with the proposal

should be met with a stronger sanction

than expulsion from RAES. According

to the Exchange, suspension from RAES

is only one of the alternative sanctions

that may be imposed pursuant to

proposed paragraph (d) of CBOE Rule

8.16. Specifically, if a member

repeatedly violates the proposed rule,

the MPC may refer the violations to the

Department of Market Regulation for an

investigation of the market maker’s

compliance with CBOE Rule 8.7

generally.

2. Letco Letters

Letco submitted two letters to the

Commission in response to the

proposed rule change.26 In both letters,

Letco expressed concern about some of

the administrative applications of the

proposal. Specifically, the commenter

questioned the application of the

proposal with respect to DPMs. As

discussed above, subsequent to these

comment letters, the Exchange amended

the proposal to exempt DPMs from the

proposal rule.27 Thus, the commenter’s

concerns regarding DPMs are moot.

IV. Discussion

After careful review, 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.28 In particular, the

Commission finds that the proposal is

consistent with the requirements of

Section 6(b)(5) 29 of the Act, which

requires, among other things, that the

rules of an exchange be designed to

promote just and equitable principals of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and in general, to protect

investors and the public interest.

Currently, CBOE Rule 8.16 does not

contain any eligibility requirements for

participating on RAES that is related to

a market maker’s trading activity. The

Exchange stated that it had learned that

some market makers on the floor have

relied on their RAES participation to

derive a large percentage of their profits

and have not been affirmatively

fulfilling their market making

obligations as set forth in CBOE Rule

8.7. The Exchange explained that RAES

was never intended to be a substitute to

the normal operation of a traditional

market making business. However, it

became apparent to the Exchange that

participation on RAES had led some

market makers to cease to perform their

obligations under CBOE 8.7.

To address these problems, the

Exchange developed the proposed

eligibility requirements. With these

requirements, the Exchange seeks to

ensure that market makers affirmatively

make markets in their allocated classes.

The proposal seeks to prevent market

makers from relying on order flow from

RAES without actively seeking order

flow on the floor of the Exchange.

Pursuant to CBOE Rule 8.7, market

makers have specified obligations that

must be fulfilled. Generally, market

makers are required to enter into

transactions that constitute a course of

dealings ‘‘reasonably calculated to

contribute to the maintenance of a fair

and orderly market.’’ Further, market

makers are obligated to continuously

engage in dealing for their own accounts

when a lack of price continuity exists or

when there is a temporary disparity

between supply and demand for a

particular contract, or when a temporary

distortion of the price relationships

exists between options contracts of the

same class. In addition, market makers

are specifically required to: (i) complete

with other market makers to improve

markets; (ii) make markets, which will

be honored to a reasonable number of

contracts in all series of options classes

at the trading post; (iii) update market

quotations in response to changed

market conditions; and (iv) price

options contracts fairly, within certain

perimeters.

As described above, market makers

have many important obligations that

create a viable marketplace for options

contracts, and perform functions that

contribute to fair and orderly markets,

as well as to liquidity. If market makers

are not actively performing these

obligations, the integrity of the

marketplace is compromised. Customers

expect that when they send an order to

the CBOE floor that it will be treated in

a manner consistent with the

requirements of the CBOE rules, and

when market makers fail to fulfill their

obligations, customers can be negatively

impacted.

If market makers are failing to fulfill

their obligations as the Exchange

described, the market for those

securities can be adversely affected

because there is not competition from

all of the market makers in the trading

crowd. This lack of total involvement by

the crowd could lead to inferior pricing

of customer orders, and could affect

liquidity. Moreover, customer orders

may be executed in a less timely

manner.

Thus, the Commission is satisfied that

the proposal addresses these concerns

in a manner that is consistent with the

Act. Under the proposal, in a particular

calendar quarter market makers will be

limited in the proportion of RAES

transactions that may make up their

total transactions and total contract

volume. As proposed, the MPC may

determine for a particular options class

to limit each market maker’s

transactions and contract volume

attributed to trades on RAES to a

maximum percentage of each market

maker’s total transactions and contract

volume. The MPC will determine two

percentages, one will establish a

maximum percentage of a market

maker’s total transactions for the quarter

that may be derived from RAES

transactions; the other will establish the

Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices 37195

30According to the Exchange, approximately 34%

of its order executions take place in RAES. 31See CBOE Rules 8.80 and 8.81.

maximum contract volume that may be

derived from a market maker’s RAES

transactions. Neither of these

percentages may be less than 15 percent.

The Commission believes that these

percentages should encourage market

makers to actively fulfill their market

making obligations. A market maker

allocated options that are subject to

these percentages requirements is more

likely to participate in the floor market

because its passive participation by

signing onto RAES will be limited based

on the market maker’s non-RAES

transactions. In this way, the proposed

rule should act as an incentive to market

makers to fulfill their obligations

because those who fail to keep their

RAES percentage within the maximum

percentages will be subject to sanctions,

including suspension of RAES

participation.

The Commission is satisfied with the

15 percent floor that has been

established in the rule. This provision

limits the discretion of the MPC by

preventing the MPC from establishing

percentages that may be too low, and

recognizes the importance of technology

in Exchange operations. Today, a large

amount of orders are routed to RAES for

automatic execution.30 Thus, an unduly

restrictive percentage may have

unintended consequences that

compromise order flow and trading

operations. This floor percentage is

intended to strike a balance between

establishing reasonable percentages to

encourage market-makers to fulfill their

obligations on the floor while also

recognizing the amount of order flow

that is routed to the RAES system for

execution. The Commission expects that

the Exchange will monitor the

percentages established by the MPC to

ensure that this balance is preserved.

The proposal will only be

implemented in those options classes

that the Exchange has identified as

having market makers that are not

actively fulfilling their market making

obligations. The Commission believes

that this limitation is appropriate and

consistent with the Act. There would

not be any reason to impose such

limitations on market makers who are

already actively making markets in their

allocated options classes. This proposal

provides the MPC with a remedial

measure that can be imposed when a

problem is identified.

The MPC will have the authority to

determine the options classes in which

market makers will be subject to the

percentage limitations. In determining

whether to impose the percentage

requirements on a particular options

classes, the MPC will consider factors

such as complaints from floor brokers or

other market makers that certain market

makers performance surveys, data

concerning the percentage of RAES

trades performed by particular market

makers, and other relevant factors. The

Commission believes that these factors

provide the MPC with the appropriate

amount of discretion. Because the MPC

will consider only relevant data, the

limitations on the proportion of RAES

trades to a market maker’s total trades

should only be applied to those options

classes that are experiencing market

maker problems. The Commission

believes that this discretion should

provide the MPC with flexibility to

implement the eligibility requirements

where needed, while also preventing the

implementation of these requirements

in classes that do not have such a need.

The MPC, at the end of each quarter,

will have the authority to exclude from

the percentage calculations trading days

that may have experienced an unusually

high percentage of RAES transactions

when compared to normal trading days.

In making this decision, the MPC,

however, will not be able to identify

individual market makers. Thus, the

MPC will not be able to make these

decisions based on any market maker’s

identity or volume. This anonymity

should help to ensure that the process

of excluding days is fair.

As described above, the Commission

received three comment letters from two

commenters regarding the proposal. The

Commission believes that the Exchange

adequately addressed the commenters

concerns. Specifically, the Commission

believes that the proposal does not

reflect upon the Exchange’s ability to

enforce its market making obligations.

Rather, the Commission believes that

the proposal should enhance the

existing regulatory structure of the

Exchange. In addition, the Commission

is satisfied with the Exchange’s

assertion that its rules already

specifically define the terms ‘‘in that

trading crowd’’ and ‘‘at the trading

station’’ as synonymous, and the

Commission further agrees that such

definitions could only be amended by a

rule change approved by the

Commission.

The Commission disagrees with Mr.

Gelbort’s assertion that the proposal is

anticompetitive because it condones

disregard for affirmative market making

obligations and because it arbitrarily

restricts the number of market makers

that may interact with RAES–eligible

orders. On the contrary, the Commission

believes that the proposal should

encourage market makers to vigorously

make markets in their appointed classes.

Moreover, the Commission does not

believe that the proposal arbitrarily

restricts the number of RAES-eligible

market makers that may interact with

RAES transactions because all market

makers will be able to continue to

interact with RAES orders so long as

their businesses do not place an overreliance on RAES transactions to the

detriment of the business on the floor.

Market makers that fulfill their market

making obligations on the floor, as well

as in RAES, should not be prevented

from participating in either trading

forum.

Finally, as discussed above both

commenters expressed concerns about

how the proposal would apply to DPMs.

The Exchange has addressed these

concerns by exempting DPMs from

operation of the rule. DPMs have

additional responsibilities along with

making markets, such as maintaining

the book, participating at all times in

automated execution and order

handling systems, and responding to

competitive developments in areas of

market quality and customer service.31

Thus, a DPM is unable to rely primarily

on RAES trades to operate profitably.

Therefore, imposing the eligibility

requirements on DPMs would be

unwarranted.

The Commission finds good cause to

accelerate approval of Amendment Nos.

1, 2, 3, 4 and 5 to the proposed rule

change prior to the thirtieth day after

the date of publication of notice thereof

in the Federal Register.

In Amendment No. 1, the Exchange

proposed to prohibit the MPC from

requiring that market makers’

transaction or contract volume from

RAES executions be less than 15 percent

of their total transaction or contract

volume. By placing a floor on the

percentage of a market maker’s total

transaction and contract volume that it

must execute otherwise than on RAES,

the Commission believes that the

changes proposed in Amendment No. 1

preclude the MPC from establishing

eligibility requirements that could

actually harm the operations of the floor

and the business of the market makers.

The Exchange also proposed to apply

these market makers eligibility

requirements on a quarterly basis.

Finally, the Exchange proposed two sets

of guidelines for the MPC. The first set

of guidelines will be used by the MPC

to determine which days to exclude

from the eligibility calculations. The

Commission believes that these

proposed guidelines strengthen the

proposal by preventing the MPC from

37196 Federal Register / Vol. 65, No. 114 / Tuesday, June 13, 2000 / Notices

32See Amendment No.5

33 15 U.S.C. 78f(b)(5).

34 15 U.S.C. 78s(b).

35 15 U.S.C. 78f(b)(5).

36 15 U.S.C. 78S(b).

37 15 U.S.C 78f(b)(5).

38 15 U.S.C. 78s.

39 15 U.S.C. 78f(b)(5).

40 15 U.S.C. 78s(b).

41 15 U.S.C. 78s(b)(2)

42 17 CFR 200.30–3(a)(12).

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

considering inappropriate information

that could lead to uneven or potentially

discriminatory application of the

eligibility requirements. The second set

of guidelines set forth the factors to be

considered by the MPC, pursuant to

Interpretation .01, in determining

whether to apply the eligibility

requirements to fewer than all the

option classes traded at a trading

station. The second set of guidelines

was eliminated by the CBOE in a

subsequent amendment.32

The Commission believes that the

proposals in Amendment No. 1 enhance

the proposed rule change. For these

reasons the Commission believes that

good cause exists, consistent with

Section 6(b)(5) 33 and Section 19(b) 34 of

the Act, to accelerate approval of

Amendment No. 1 to the proposed rule

change.

In Amendment No. 2, the Exchange

proposed to limit the application of the

proposed rule to options classes

identified as having market makers that

trade an inordinate percentage of their

trades on RAES. The Commission

believes that allowing the Exchange to

limit application of the proposal to only

certain options classes will reduce the

potential for undue burdens to be

placed on those options classes that are

trading without problems and that have

market makers that are actively fulfilling

their market making obligations. In

addition, the Exchange further

explained why it believes that its

proposal sufficiently protects against the

MPC discriminating against or in favor

of any parties when exercising its

discretion to exclude certain days from

the percentage calculations. The

Commission is satisfied that the

proposal prevents the MPC from

applying the eligibility requirements in

a discriminatory fashion. In particular,

the Commission believes that, because

the data upon which the MPC will base

its decision to exclude certain days from

the calculation of the eligibility

requirement will not identify individual

market makers, the MPC will not be able

to make such decisions based upon the

businesses of the individual market

makers on those days. For these reasons,

the Commission believes that

Amendment No. 2 is consistent with the

Act and that good cause exists to

accelerate its approval.

The Commission believes that good

cause exists, pursuant to Section

6(b)(5) 35 and Section 19(b) 36 of the Act,

to accelerate approval of Amendment

No. 3 to the proposed rule change. In

Amendment No. 3, the Exchange

proposed to exempt DPMs from the

eligibility requirements. The

Commission believes that in light of the

additional responsibilities that DPMs

must fulfill and due to the fact that

these additional responsibilities are

required by specific CBOE rules, that it

is reasonable to exempt DPMs from the

eligibility requirements.

The Commission believes that good

cause exists, pursuant to Section

6(b)(5) 37 and Section 19(b) 38 of the Act,

to accelerate approval of Amendment

No. 4 to the proposed rule change.

Amendment No. 4 was technical in

nature and only sought to correct the

proposed rule language submitted in

Amendment No. 3 to make it consistent

with the proposed rule language

submitted in Amendment No. 2.

Finally, in Amendment No. 5, the

Exchange deleted proposed factors that

were no longer applicable after the

submission of Amendment No. 2.

Specifically, in Amendment No. 2, the

Exchange proposed to only apply the

percentage requirements to those

options classes that had a demonstrated

need for the limitations. The factors the

Exchange proposes to delete in

Amendment No. 5 were to be used by

the MPC to determine if options classes

should be exempt from the percentage

requirements. Because the proposal now

only applies the percentage

requirements to those options classes

with a demonstrated need, these factors

are no longer appropriate. In addition,

the Exchange proposed to add factors to

be used by the MPC to determine which

options classes should be subject to the

percentage requirements. The

Commission believes that the factors, as

described above, provide the Exchange

with appropriate discretion to

determine which options should be

subject to the limitations. Therefore, the

Commission believes that good cause

exists, pursuant to Section 6(b)(5) 39 and

Section 19(b) 40 of the Act, to accelerate

approval of Amendment No. 5.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

1, 2, 3, 4, and 5, including whether

Amendment Nos. 1, 2, 3, 4 and 5 are

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 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–97–37 and should be

submitted by July 5, 2000.

VI. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,41 that the

amended proposed rule change (SR–

CBOE–97–37) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.42

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14850 Filed 6–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42900; File No. SR–OCC–

00–03]

Self-Regulatory Organizations; The

Options Clearing Corporation; Notice

of Filing of Proposed Rule Change To

Amend OCC’s By-Laws Relating to

Clearing Member Representatives

June 5, 2000.

Pursuant to Section 19(b)(1) 1 of the

Securities Exchange Act of 1934

(‘‘Act’’), notice is hereby given that on

April 6, 2000, The Options Clearing

Corporation (‘‘OCC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which have been prepared

primarily by OCC. The Commission is

publishing this notice to solicit

comments from interested persons on

the proposed rule change.