[Federal Register Volume 62, Number 170 (Wednesday, September 3, 1997)]
[Notices]
[Pages 46527-46528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38972; File No. SR-CBOE-97-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to Duties of Market Makers

August 26, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 24, 1997 the Chicago 
Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'') or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the self-regulatory 
organization. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add an interpretation to Rule 8.7 and to 
Rule 7.5 to clarify CBOE's policy regarding the enforcement of those 
rules concerning the obligations of Market-Makers.
    The text of the proposed rule change is available at the Office of 
the Secretary, 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, the self-regulatory organization 
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. The self-regulatory organization 
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
    The purpose of the proposed rule change is to clarify the 
Exchange's policy regarding the enforcement of Rule 8.7 and Rule 7.5 
concerning the obligations of Market-Makers. Rule 8.7(b) presently 
provides that, for each class of option contracts for which a Market-
Maker holds an appointment under Rule 8.3, the Market-Maker has a 
continuous obligation to engage, to a reasonable degree under the 
existing circumstances, in dealings for his own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for a particular option contract, or a temporary distortion of 
the price relationships between option contracts of the same class. In 
short, Rule 8.7(b) sets forth a Market-Maker's obligation to make 
markets in a class of options in which he holds an appointment.
    Rule 7.5 presently provides a mechanism by which Exchange Order 
Book Officials may ``call upon'' Market-Makers to make bids (offers) in 
a particular class of options that contribute to meeting the standards 
set forth in Rule 8.7. In particular, at the request of a floor broker 
or on the Order Book Official's own initiative in the interests of a 
fair, orderly and competitive market, an Order Book Official may call 
upon those Market-Makers who hold an appointment to the particular 
options class or who that day have effected a transaction for their 
accounts in that class of options. The Order Book Official is required 
to make a record of Market-Makers ``who fail to respond'' to this 
request.\2\
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    \2\ In addition, the Commission notes that other CBOE rules 
exist to help ensure a sufficient number of Market-Makers will be 
available to make markets in a particular trading crowd. For 
example, Rule 8.3(a) permits the CBOE Market Performance Committee 
to make additional Market-Maker appointments whenever this committee 
deems such action to be in the interests of a fair and orderly 
market. Therefore, if there were an insufficient number of Market-
Makers to respond to a call to a particular trading crowd, the 
Market Performance Committee could appoint additional Market-Makers 
to the classes traded at the affected trading crowd, which would 
make those additional Market-Makers subject to the call to that 
trading crowd under Rule 7.5. Should the Exchange be unable to 
require a sufficient number of Market-Makers to appear at an 
affected trading crowd, the CBOE Allocation Committee could move the 
location on the Exchange's trading floor where the affected option 
classes are traded to a trading crowd that has an adequate number of 
Market-Makers present or that has a Designated Primary Market-Maker 
(``DPM''). DPMs, in contrast to Market-Makers, are required to be 
present at their trading posts throughout every business day. See 
also Letter from Arthur B. Reinstein, Senior Attorney, CBOE, to 
Michael Walinskas, Senior Special Counsel, Division of Market 
Regulation, SEC, dated August 20, 1997 (discussing the 
aforementioned safeguards).
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    The Exchange has always interpreted Rule 8.7(b) as applying to 
Market-Makers who are present on the Exchange floor and as applying 
with

[[Page 46528]]

respect to the trading crowd in which the Market-Maker is present at 
the time in question. Similarly, the Exchange has always interpreted 
Rule 7.5 as applying to Market-Makers who are present on the Exchange 
floor at the time of the Order Book Official call. The Exchange has not 
interpreted Rule 8.7 or Rule 7.5 as requiring Market-Makers to appear 
on the Exchange floor to make markets on any particular day or under 
any particular market conditions.\3\ However, when a Market-Maker is on 
the trading floor and is present in a particular trading crowd, the 
Exchange does enforce the obligations set forth in Rule 8.7 with 
respect to the Market-Maker's activities in that trading crowd. 
Similarly, whenever a Market-Maker is on the trading floor, the 
Exchange enforces the obligations set forth in Rule 7.5 as to that 
Market-Maker.
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    \3\ Although Rule 8.7 and Rule 7.5 do not require Market-Makers 
to appear at the Exchange to perform their market-making duties, the 
Commission notes that other CBOE rules encourage Market-Makers to 
undertake their market- making functions. For example, Rule 8.60 
provides that the CBOE Market Performance Committee may take 
remedial action against Market-Makers or trading crowds that fail to 
satisfy minimum minimum market performance standards. Accordingly, 
the failure of a Market-Maker or trading crowd to appear at the 
Exchange and to make markets in a volatile market situation is a 
factor the CBOE Market Performance Committee could consider in 
evaluating the performance of a Market-Maker or trading crowd and in 
determining whether to take remedial action against a Market-Maker 
or trading crowd pursuant to Rule 8.60. Letter from Arthur B. 
Reinstein, Senior Attorney, CBOE, to Michael Walinskas, Senior 
Special Counsel, Division of Market Regulation, SEC, dated August 
20, 1997.
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    The Exchange's present interpretation is consistent with Rule 
8.7(b) paragraphs (i) through (iii), which make clear that, at the 
station where a Market-Maker is present, a Market-Maker is expected to 
perform certain activities in the course of maintaining a fair and 
orderly market. Similarly, the Exchange's present interpretation is 
consistent with the text of Rule 7.5 which, by authorizing Order Book 
Officials to ``call upon'' Market-Makers and by requiring a record of 
those who ``fail to respond,'' implicitly recognizes that this 
procedure will apply to Market-Makers whose physical presence on the 
floor will enable them to hear and ``respond'' to such a ``call.'' The 
proposed Interpretation .09 to Rule 8.7 and proposed Interpretation .04 
to Rule 7.5 would clarify CBOE's existing interpretation and 
enforcement policy regarding Rule 8.7(b) and Rule 7.5.
    The Exchange believes such clarification is necessary because it 
knows of at least one instance where Rule 8.7 obligations were 
misinterpreted. In a class action lawsuit filed against the Exchange, 
Spicer et al. v. Chicago Board Options Exchange, Inc. et al.,\4\ 
counsel for the class took the position that Rule 8.7 imposed an 
obligation on all Market-Makers to appear on the Exchange's trading 
floor and to make markets under certain market conditions. The Exchange 
believes the proposed interpretation will help avoid such 
misinterpretation of either Rule 8.7(b) or Rule 7.5 in the future.
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    \4\ Spicer v. Chicago Board Options Exchange, Inc., No. 88C 
2139, 1990 WL 172712 (N.D. Ill. Oct. 30, 1990) aff'd, 977 F.2d 255 
(7th Cir. 1992).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act \5\ in that 
the Exchange's clarification of its interpretation and policy regarding 
Market-Maker obligations under Rule 8.7 and Rule 7.5 is designed to 
perfect the mechanism of a free and open market and to protect 
investors and the public interest.
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    \5\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change does not impose 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change constitutes an interpretation with 
respect to the enforcement of an existing rule of the self-regulatory 
organization. Therefore, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \6\ and subparagraph (e) of 
Rule 19b-4 thereunder.\7\ At any time within sixty days of the filing 
of such proposed rule change, the Commission may summarily abrogate 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \6\ 15 U.S.C. Sec. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. 20549. 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-97-34 and should be 
submitted by September 24, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23340 Filed 9-2-97; 8:45 am]
BILLING CODE 8010-01-M