Federal Register / Vol. 62, No. 51 / Monday, March 17, 1997 / Notices 12669

12See supra note 10.

13See DBOE Rule 6.51 Reporting Duties.

14See supra note 11.

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

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1) (1988).

2The text of the proposed rule change is available

at the Office of the Secretary, CBOE and in the

Public Reference Room of the Commission.

3On March 3, the NYSE filed with the

Commission a proposed rule change, SR–NYSE–97–

05, regarding the transfer of the NYSE options

business to the CBOE.

4A copy of the Agreement is attached as Exhibit

B to this filing and is available for review at the

Office of the Secretary of CBOE, and in the Public

Reference Room of the Commission.

5 ‘‘NYSE Options’’ are defined as those classes of

options that were trade on NYSE immediately prior

to the Effective Date and not then also traded on

CBOE, and those classes of options on at least 14

additional underlying stocks which CBOE has

agreed to designate as NYSE Options during each

of the seven years following the Effective Date.

brokerage. The Commission does not

believe the elimination of Rule 14.6 will

adversely effect the quality of execution

by floor brokers of customer orders.

Specifically, the Commission notes that

the CBOE has other rules that require

floor brokers to use due diligence in

executing Order.12 In addition, the floor

broker executing the trade is required to

place his or her acronym on the trade

ticket,13 ensuring that the executing

floor broker can be identified and held

accountable for the handling of the

trade. The elimination of Rule 14.6

should aid in the orderly flow of the

market in that it enables floor brokers to

assist each other in handling order flow

on a more regular basis without penalty.

The Commission also notes that at least

several other exchanges currently do not

have rules forbidding the arrangements

covered by Rule 14.6, with no observed

abuses in this area.14

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,15 that the

proposed rule change (SR–CBOE–96–

63) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–6561 Filed 3–14–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38375; File No. SR–CBOE–

97–14]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Incorporated; Notice of Filing of

Proposed Rule Change Relating to the

Transfer of the Options Business of

the New York Stock Exchange to the

Chicago Board Options Exchange

March 7, 1997.

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

Securities Exchange Act of 1934,1 notice

is hereby given that on March 3, 1997,

the Chicago Board Options Exchange,

Incorporated (‘‘CBOE’’ and ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the CBOE. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

CBOE proposes to amend its

Constitution and Rules in order to

authorize the issuance of options

trading permits (‘‘Permits’’) in

connection with the proposed transfer

of the options business of the New York

Stock Exchange, Inc. (‘‘NYSE’’) to

CBOE. CBOE also proposes to define the

rights and obligations associated with

Permits, and to provide for the trading

of options on the NYSE Composite

Index.2

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

CBOE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CBOE has

prepared summaries, set forth in

sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

change is to authorize the issuance of 75

‘‘Options Trading Permits’’ (‘‘Permits’’)

in connection with the proposed

transfer of the NYSE’s options business

to CBOE, and to define the rights and

obligations associated with such

Permits.3 In addition, the proposed rule

change amends CBOE rules as necessary

to provide for the trading on CBOE of

options on the NYSE Composite Index.

The 75 Permits are proposed to be

issued pursuant to the terms of an

agreement between CBOE and NYSE.

The agreement represents the

culmination of a process initiated by

NYSE in the summer of 1996 when it

announced that it intended to

discontinue its options business. At that

time, NYSE invited interested parties

wishing to continue NYSE’s options

business to bid for its acquisition by

offering trading rights and other benefits

to NYSE members, including payment

for the ‘‘going business’’ value of the

business to be acquired. Based on its bid

in response to NYSE’s invitation, NYSE

determined to enter into exclusive

negotiations with CBOE. A definitive

agreement between CBOE and NYSE

(‘‘Agreement’’) was executed as of

February 5, 1997.4

The Agreement contemplates that

trading in NYSE Options will

commence on the CBOE trading floor on

April 28, 1997 (‘‘Effective Date’’),

subject to the fulfillment of specified

conditions and the approval of this

proposed rule change and the parallel

filing by NYSE.5 The Agreement

provides that CBOE will pay $5,000,000

as the purchase price for the business to

be transferred, of which $1,200,000 will

be retained by NYSE to cover its costs

associated with the termination of its

options activities and as payment for a

ten-year license granted to CBOE to

enable it to trade options on the NYSE

Composite Index, and $3,800,000 net of

a tax reserve will be distributed pro rata

to all NYSE members. Details of the

cash distribution to NYSE members are

described in Item 3 of the parallel

proposed rule change filed by NYSE.

The Agreement also provides that

CBOE will issue up to a total of 75

Permits to those NYSE specialist and

non-specialist firms and sole proprietors

who operated pursuant to options

trading rights on NYSE on December 5,

1996, and who agree to transfer their

options activities to CBOE. In the case

of an NYSE specialist, the specialist

firm may select any qualified person to

act as its nominee on CBOE. In the case

of a non-specialist, the individual acting

pursuant to an options trading badge on

NYSE on December 5, 1996, must

personally relocate to Chicago in order

to receive a Permit. If less than 75

Permits are issued to NYSE specialists

and non-specialists, the Agreement

provides that the difference between 75

Permits and the number of Permits so

issued will be deposited in a lease pool

to be leased to qualified persons who

wish to trade NYSE Options on CBOE.

The proceeds from the lease of these

Permits will be paid to certain

designated persons who help options

trading rights on NYSE, as described

below.

The issuance of 75 Permits is

proposed to be authorized pursuant to a

new Section 2(e) to the Exchange’s
12670 Federal Register / Vol. 62, No. 51 / Monday, March 17, 1997 / Notices

6Supra note 6.

Constitution. That section provides that

all Permits expire on the seventh

anniversary of the date when trading

begins on the floor of CBOE in NYSE

Options. It also specifies that Permit

holders shall have none of the rights of

members except as specified in the

Rules of the Exchange.

The rights and obligations of holders

of Permits are set forth in proposed new

Exchange Rule 3.27, which incorporates

by reference many of the other rules of

the Exchange pertaining to the rights

and obligations of Exchange members

generally. Subparagraph (a)(1) of Rule

3.27 reflects the terms of the Agreement

by providing that NYSE non-specialist

firms and sole proprietors who were

engaged in business on the options floor

of NYSE immediately prior to the

Effective Date are entitled to the same

number of Permits as the number of

options floor badges they held on NYSE

on December 5, 1996, but that each

individual who held an NYSE options

floor badge and acted as a non-specialist

must personally relocate to Chicago in

order to be entitled to a Permit in

respect of that badge. Subparagraph

(a)(2) provides that each specialist firm

engaged in business on the options floor

of NYSE is likewise entitled to the same

number of Permits as the number of

options floor badges they held on NYSE,

and that, subject to the rules of CBOE,

each such firm may designate any

qualified person to be the firm’s

nominee on CBOE.

Subparagraph (a)(3) of Rule 3.27

describes the terms of the lease pool

pursuant to which any of the 75 Permits

not issued to NYSE members active on

the NYSE options floor, or any so issued

but subsequently surrendered, will be

leased by CBOE through an auction or

other competitive process. The lease

proceeds would ordinarily be paid to

those person identified by NYSE as

having used or leased NYSE options

trading rights on December 5, 1996, or

holders of options trading rights that,

while not so used or leased, were

formally separated from their NYSE

memberships on that date, or transferees

of such persons.

Subparagraph (a)(4) of Rule 3.27

provides that if a Permit issued to a

NYSE options badge holder is not used

during the first year following the

Effective Date, the Permit shall be

surrendered and shall be added to the

lease pool described above, unless the

inactivity of the Permit has been

consented to by CBOE.

Subparagraph (a)(5) of Rule 3.27

provides that Permits issued to NYSE

options badge holders pursuant to

subparagraphs (a) (1) and (2) are not

transferable for one year following the

Effective Date, except as consented to by

the Exchange in the event of death,

hardship or certain successions in

ownership. Following this one year

period, Permits are freely transferable in

accordance with Exchange rules

governing the transfer of memberships

generally.

Paragraph (b) of Rule 3.27 describes

the trading rights to which the holder of

a Permit is entitled. In general, these

include the right to be admitted to the

separate CBOE trading facility devoted

exclusively to the trading of NYSE

Options, as defined in the Rule,6 and to

engage in the activities of a MarketMaker, Designated Primary MarketMaker (‘‘DPM’’) and/or Floor Broker in

respect of those options, subject to the

applicable rules of the Exchange. In

addition, the holder of a Permit is

entitled to trade by order as principal

those classes of options traded on

CBOE’s regular trading floor that were

dually traded on both CBOE and NYSE

immediately prior to the Effective Date.

Permit holders are also entitled to trade

by order as principal all other classes of

options traded on CBOE’s regular

trading floor, provided that such trades

during any calendar quarter (as

measured by contract volume) do not

exceed twenty percent of the sum of the

Permit holder’s total in person principal

trades in NYSE Options and the Permit

holder’s principal trades by order in

options that were dually traded on both

CBOE and NYSE immediately prior to

the Effective Date. Finally, a Permit

holder is entitled to be admitted to the

regular options trading floor in order to

respond to the call of a Board Broker or

Order Book Official for additional

market-makers pursuant to Exchange

Rule 7.5.

Paragraph (c) of Rule 3.27 provides

that each NYSE specialist firm to which

a Permit is issued will be appointed as

the DPM in the same classes of NYSE

Options as those for which it was

designated as a specialist on NYSE,

subject to qualifying to act as such

pursuant to CBOE rules. Paragraph (c)

also provides that the DPMs for the

additional classes of NYSE Options

designated each year shall be chosen

from among Permit holders. Subject to

the rules of the Exchange, specialist

firms appointed as DPMs in NYSE

Options shall be entitled to continue to

act as such during the term of the

Permits, and thereafter it they become

regular members of the Exchange.

Paragraph (d) of Rule 3.27, together

with Section 2(e) of the Exchange

Constitution, provides that Permit

holders shall have the same rights and

obligations of members, except that they

shall have no right to petition or vote or

to be counted as part of a quorum at

meetings of members, they shall have no

interest in the assets or property of the

Exchange, they shall not share in any

distribution by the Exchange, they shall

not participate in the Exchange’s

member death benefit program, and they

shall not have the right to transact

business with the public in any

securities dealt in on the Exchange other

than NYSE Options. Holders of Permits

may serve on any committee of the

Exchange to which they are appointed,

and are deemed to be appointed marketmakers in all classes of NYSE Options

pursuant to Exchange Rule 8.3.

Paragraph (d) also provides that

membership application fees shall be

waived in connection with the approval

of Permit holders or their nominees in

connection with the original issuance of

a Permit but not the subsequent transfer

or lease of a Permit, and shall also be

waived in connection with the approval

of the initial holder or its nominee as a

regular member of the Exchange or as

the nominee of a regular member.

Membership or nominee applications

made by Permit holders or their

nominees who are not subject to a

statutory disqualification and are not

the subjects of a self-regulatory

organization investigation that may

involve their fitness for membership

shall be deemed effective for a

temporary period of six months, so as

not to interrupt their Exchange activities

while their applications are being

processed.

It is also proposed to amend certain

of the rules in Chapters XXIV and

XXIVA of the Rules of the Exchange,

which govern the trading of index

options and FLEX options, respectively,

in order to provide for the listing and

trading of options on the NYSE

Composite Index. (Hereafter, such index

is referred to as the ‘‘Index’’ and such

options as ‘‘NYA Options’’.) The Index

is a capitalization-weighted index

comprising all of the over 2,500

common stocks listed on NYSE. The

Index is expressed in relation to the

base period market value which has

been adjusted for capitalization changes

over time. The base value of the Index

was set at 50 on December 31, 1965.

NYSE will continue to act as the

reporting authority for the Index, and

CBOE will trade NYA Options pursuant

to a license granted by NYSE.

As traded on NYSE and as proposed

to be traded on CBOE, NYA Options are

European-style, A.M.-settled index

options, strike prices for which are

introduced at $2.50 or $5.00 intervals

for strike prices below $200 or at or
Federal Register / Vol. 62, No. 51 / Monday, March 17, 1997 / Notices 12671

7 17 CFR 200.30–3(a)(12).

above $200, respectively. The Index

Multiplier for NYA Options is $100.

CBOE proposes to apply to NYA

Options the same 45,000 contract

position and exercise limits (no more

than 25,000 contracts expiring in the

nearest expiration month) and the same

hedge exemption that currently apply to

such options under NYSE rules. In

addition to regular index options, CBOE

proposes to provide for trading in

Quarterly Index Expiration options

(‘‘QIX’’ options), long-term and reducedvale long-term options (‘‘LEAPs’’ and

‘‘reduced-value LEAPs’’) and A.M.-

settled FLEX Options on the Index

pursuant to the same rules and

procedures that currently govern trading

on CBOE in these types of options.

In addition, the proposed rule change

includes a few corrections to the table

of position limits set forth in Rule 24.4

in order to add references to classes of

index options that were inadvertently

omitted from the table when it was last

revised, and a few clarifications to the

language of Rule 24A.4(b) concerning

the specification of the exercise

settlement values for FLEX Index

Options. No substantive changes will

result from these corrections and

clarifications.

CBOE believes that it has adequate

facilities and resources to provide for

the trading, surveillance and data

dissemination called for by the transfer

of the NYSE options business to its

market. In this connection, CBOE

intends to construct a new trading

facility dedicated solely to NYSE

Options, which will be configured and

equipped in the same manner as its

existing trading floor. The surveillance

and regulatory responsibilities resulting

from the transfer of the NYSE options

business to CBOE are not expected to

add significantly to CBOE’s existing

regulatory workload, and CBOE believes

it has adequate resources to assume

these added responsibilities. CBOE

intends to add one additional output

line to the OPRA processor for purposes

of transmitting market information

pertaining to NYSE Options. This will

not increase the total input to OPRA

because two lines from NYSE to the

OPRA processor will be terminated at

the time of the transfer to CBOE.

CBOE believes that the purposed rule

change is consistent with and in

furtherance of the provisions of Section

6(b)(5) of the Securities Exchange Act of

1934 because, by permitting those NYSE

members who have been engaged in

options activities on NYSE to continue

to conduct an options business in

CBOE’s regulated exchange

marketplace, the proposed rule change

is designed to promote just and

equitable principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and to

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

CBOE does not believe that the

proposed rule change will impose any

burden on competition. Instead, by

providing a framework within which all

of the members of NYSE who have been

active in NYSE’s options business may

continue to conduct that business on

CBOE, the proposed rule change is

intended to strengthen the ability of

those members to compete with other

markets that may also wish to trade the

options formerly traded on NYSE. In

this regard, CBOE understands that

early in 1996, NYSE determined to

continue its options business regardless

of whether it would be able to transfer

that business to CBOE or to any other

market. NYSE’s effort to transfer its

options business to another market was

made largely in order to provide a home

for those of its options members who

wished to continue in the options

business, as evidenced by NYSE’s

emphasis on trading rights for its

members in its request for bids for the

acquisition of its options business.

The terms governing the transfer of

NYSE’s options business to CBOE

impose no restrictions on the ability of

NYSE to resume options trading at any

time, except that if NYSE were to

resume trading options within one year

following the Effective Date, it would

have to pay CBOE $500,000 to offset a

small portion of CBOE’s costs associated

with the transfer. Nor are any

restrictions imposed on NYSE members

that would limit their ability to trade

options on NYSE if that exchange were

to resume its options trading program.

CBOE notes that any other securities

market is also free at any time to trade

any or all of the options formerly traded

on NYSE, other than NYA Options,

which will be exclusively licensed to

CBOE.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within thirty-five days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

ninety days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 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. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, DC 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–

14 and should be submitted by April 7,

1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–6562 Filed 3–14–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38376; File No. SR–NYSE–

97–05]

Self-Regulatory Organizations; New

York Stock Exchange, Inc., Notice of

Filing of Proposed Rule Change

Relating to the Agreement Transferring

the New York Stock Exchange Options

Business to the Chicago Board

Options Exchange

March 7, 1997.

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

Securities Exchange Act of 1934