24578 Federal Register / Vol. 63, No. 85 / Monday, May 4, 1998 / Notices

1The Exchange originally submitted this proposal

as SR–CBOE–96–67 on November 11, 1996, and

withdrew it at the request of the Commission on

February 18, 1997.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4See letter and attachment from Trent Cutler,

TSC Partners, L.P., to Jonathan Katz, Secretary,

Commission, dated January 7, 1998.

5Amendment No. 1 clarifies the definition of ‘‘goalong’’ orders in the regulatory circular that the

Exchange expects to issue to its members.

Amendment No. 1 deletes ‘‘generally’’ from the first

sentence of the circular entitled ‘‘Definition of Go

Along Orders.’’ In addition, Amendment No. 1

clarifies the definition by explaining there are two

elements that an instruction to a floor broker must

meet before those instructions make an order a ‘‘go

along’’ order. First, the floor broker must be

instructed to bid or offer when one or more

participant in the trading crowd are bidding or

offering. Second, the floor broker must be instructed

to bid or offer at the price established by the other

participants in the trading crowd. Furthermore, the

Exchange is proposing to add a sentence to make

clear that the prohibition against ‘‘go along’’ orders

is not intended to prohibit a floor broker from

properly exercising discretion in the representation

of an order. Amendment No. 2 further clarifies the

definition of ‘‘go along’’ order to state that the floor

broker must be instructed to bid (offer) on a contract

only when particular market-makers in the trading

crowd are bidding (offering) on that contract, that

the floor broker must be instructed to bid (offer) at

the prices established by such market-makers in the

trading crowd. Amendment No. 2 also amends the

last sentence the last sentence of the first paragraph

of the definition section to state that the prohibition

against ‘‘go along’’ orders prevents a floor broker

from accepting a specific instruction to trade ‘‘in a

manner that mimics the trading behavior of one or

more market makers.’’ See letters from Timothy H.

Thompson, Senior Attorney, CBOE, to Michael

Walinskas, Senior Special Counsel, Market

Regulation, Commission, dated January 16, 1998

(‘‘Amendment No. 1’’) and February 9, 1998

(‘‘Amendment No. 2’’).

SUPPLEMENTARY INFORMATION: Section

4011 of the Employee Retirement

Income Security Act of 1974 requires

plan administrators of certain

underfunded single-employer pension

plans to provide an annual notice to

plan participants and beneficiaries of

the plan’s funding status and the limits

on the PBGC’s guarantee.

The PBGC’s regulation implementing

this provision (29 CFR Part 4011)

prescribes which plans are subject to the

notice requirement, who is entitled to

receive the notice, and the time, form,

and manner of issuance of the notice.

The notice provides recipients with

meaningful, understandable, and timely

information that will help them become

better informed about their plans and

assist them in their financial planning.

The collection of information under

the regulation has been approved by

OMB under control number 1212–0050

through September 30, 1998. The PBGC

intends to request that OMB extend its

approval for another three years. An

agency may not conduct or sponsor, and

a person is not required to respond to,

a collection of information unless it

displays a currently valid OMB control

number.

The PBGC estimates that an average of

3,500 plans per year will respond to this

collection of information. The PBGC

further estimates that the average annual

burden of this collection of information

is 1.97 hours and $74 per plan, with an

average total annual burden of 6,904

hours and $258,900.

The PBGC is soliciting public

comments to—

• evaluate whether the collection of

information is necessary for the proper

performance of the functions of the

agency, including whether the

information will have practical utility;

• evaluate the accuracy of the

agency’s estimate of the burden of the

collection of information, including the

validity of the methodology and

assumptions used;

• enhance the quality, utility, and

clarity of the information to be

collected; and

• minimize the burden of the

collection of information on those who

are to respond, including through the

use of appropriate automated,

electronic, mechanical, or other

technological collection techniques or

other forms of information technology,

e.g., permitting electronic submission of

responses.

Issued in Washington, DC, this 27th day of

April, 1998.

David M. Strauss,

Executive Director, Pension Benefit Guaranty

Corporation.

[FR Doc. 98–11711 Filed 5–1–98; 8:45 am]

BILLING CODE 7708–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39923; File No. SR–CBOE–

97–50]

Self-Regulatory Organizations; Order

Granting Approval to Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment Nos. 1 and 2 to Proposed

Rule Change by the Chicago Board

Options Exchange, Inc., Relating to

‘‘Go Along’’ Orders

April 27, 1998.

Introduction

On September 25, 1997,1 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’’) 2 and Rule 19b–4

thereunder,3 a proposed rule change to

issue a regulatory circular which would

establish the representation of ‘‘go

along’’ orders on the floor of the

Exchange as a violation of just and

equitable principles of trade pursuant to

Exchange Rule 4.1.

The proposed rule change, together

with the substance of the proposal, was

published for comment in Securities

Exchange Act Release No. 39261

(October 20, 1997) 62 FR 55663 (October

27, 1998). One comment letter was

receive in response to the proposal.4

The Exchange subsequently filed

Amendment Nos. 1 and 2 to the

proposed rule change on January 20,

1998 and February 10, 1998,

respectively.5

II. Background and Description

The purpose of the proposed rule

change is to prohibit floor brokers from

representing or executing ‘‘go along’’

orders (as further described below) on

the floor of the Exchange. The Exchange

will consider the representation or

execution of such orders an act

inconsistent with just and equitable

principles of trade pursuant to Exchange

Rule 4.1. The Exchange proposes to set

forth the prohibition against the

representation of ‘‘go along’’ orders in a

regulatory circular describing the types

of conduct which would be considered

to be violative of just and equitable

principles of trade. The proposed

regulatory circular will state the

following:

Definition of ‘‘Go Along’’ Orders

A ‘‘go along’’ order, or a ‘‘not held

with the crowd’’ order, is an order that

instructs a floor broker to bid or offer (as

appropriate for the type of order) on a

contract only (i) when a particular

market-makers in the trading crowd are

bidding or offering on the contract and

(ii) at the price or prices established by

such market-makers in the trading

crowd. The prohibition of ‘‘go along’’

orders does not limit a floor broker’s use

of discretion in representing an order on

behalf of a customer. Instead, the

prohibition is intended to prohibit a

floor broker from accepting a specific

instruction to trade in a manner that

mimics the trading behavior of one or

more market-makers.

Generally, customers submitting ‘‘go

along’’ orders to floor brokers will

specify whether the order is to buy or

sell, the number of contracts, the series,

and the strike price. Typically, the floor

broker will be instructed to buy when
Federal Register / Vol. 63, No. 85 / Monday, May 4, 1998 / Notices 24579

6See supra note 3.

7 15 U.S.C. 78f(b)(5).

8 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

9See CBOE Rules 8.7; 8.15 (Lead Market-Makers

and Supplemental Market-Makers); and 8.16 (RAES

Eligibility in Option Classes Other Than DJX). See

also Securities Exchange Act Release Nos. 28021

(May 16, 1990), 55 FR 21131 (May 22, 1990)

(‘‘* * * the Commission notes that the position of

options market makers on the floor provides them

substantial time and place advantages over other

market participants.’’) and 21008 (June 1, 1984), 49

FR 23721 (June 7, 1984) (‘‘In return for assuming

these obligations to the marketplace, market makers

are permitted to trade on the floor of the exchange,

thus being provided significant ‘‘time and place’’ as

well as margin credit (‘‘exempt credit’’) advantages

over other market participants.’’).

10CBOE Rule 8.7(b) and phone conversation

between Timothy H. Thompson, Senior Attorney,

CBOE, and Michael Walinskas, Deputy Associate

Director, Market Regulation, Commission, on April

24, 1998.

11Cf. Amex intra-day trading restriction. See

Securities Exchange Act Release No. 34363 (July 13,

1994), 59 FR 36808 (July 19, 1994).

the majority of the market-makers

participating on a trade are buying or to

sell the majority of the market-makers

participating on a trade are selling.

Similarly, a floor broker may be

instructed to buy when a particular

market-maker (or combination of

market-makers) is buying (selling) on a

trade. ‘‘Go along’’ orders can be entered

from off the floor of the Exchange and

can be concealed at the complete

discretion of the customer. CBOE

represents that ‘‘go along’’ orders often

are placed by market-making firms as a

side business, by upstairs broker-dealers

who want to participate in ‘‘market

making,’’ and by specialists on other

exchanges, who are attempting to

receive the benefits of market-making

without assuming the affirmative

obligations to provide markets. These

orders are entered in both multiplytraded and singly listed option classes.

Rationale for the Prohibition

The CBOE believes that the

proliferation of ‘‘go along’’ orders

interferes with the risk-reward trade-off

of Exchange market-making. ‘‘Go along’’

order participants, according to CBOE,

generally are professional traders that

are attempting to accept the rewards of

market making without accepting any of

the risks. In addition, CBOE does not

believe these orders provide any

incremental liquidity or price discovery

because market participants entering

‘‘go along’’ orders are merely trading at

a price and size at which market-makers

are willing to trade. ‘‘Go along’’ order

participants, as customers, however, are

not obliged to fulfill the affirmative

market-making obligations of marketmakers and their activity is not

necessarily subject to Commission or

Exchange oversight.

III. Summary of Comments

The Commission received one

comment letter opposing the proposed

rule change from members of the Pacific

Exchange, Inc. (‘‘PCX’’).6 The

commenters argue that the proposed

rule change, by prohibiting orders ‘‘that

don’t match the trading crowd as long

as the broker has discretion’’ makes this

a rule restricting discretionary orders,

which is much broader than a rule

restricting ‘‘go along’’ orders. The

commenters state that the rule is

attempting to reduce competitive forces

on the trading floor, which would

reduce liquidity and pricing efficiency

for all market participants, which, in

turn damages the Exchange’s long-term

competitive position.

IV. 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(b)(5) 7 that the

rules of the Exchange be 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, in general, to protect

investors and the public interest.8

The Commission finds that it is

reasonable for CBOE to prohibit floor

brokers from accepting ‘‘go along’’

orders. CBOE has determined that the

use of ‘‘go along’’ orders is an abusive

trading practice whereby professional

traders, including market-makers,

attempt to mimic the trading pattern of

particular market-makers. More

specifically, CBOE believes that the

proliferation of ‘‘go along’’ order use

could seriously threaten its marketmaker system, by reducing marketmaker trading opportunities. ‘‘Go along’’

orders often obtain parity with the bid/

offer of the market-maker(s) they are

designed to trade along with, thereby

diluting market-maker participation in

these affected trades. In essence, traders

submitting ‘‘go along’’ orders are

attempting to achieve the same time and

place advantage held by market-makers

on the floor. However, market-makers,

in return for their time and place

advantage, are subject to affirmative and

negative market-making obligations.9

While it is certainly possible that

market-makers on CBOE’s floor can

mimic the trading behavior of other

market-makers, they are required to

make an active market while present in

a particular trading crowd.10 Customers

submitting ‘‘go along’’ orders, by

contrast, have no market-making

responsibilities, and therefore, should

not be afforded benefits derived from

the special time and place benefits that

are unique to market-makers.

Notwithstanding the appropriate basis

for prohibiting ‘‘go along’’ orders,

restrictions on abusive trading practices

must be carefully crafted so as not to

restrict trading beyond that necessary to

curb the identified abuse.11 In this

regard, the Commission emphasizes that

CBOE’s proposed restriction is narrowly

tailored to apply only in the specific

instance where a customer instructs a

floor broker to bid (or offer) on a

contract when particular market-makers

are bidding or offering, at the price or

prices established by such marketmakers. The prohibition against ‘‘go

along’’ orders does not limit any

category of market participant from

access to CBOE markets and does not

impair market participants from

effecting legitimate trading strategies,

including obtaining the best available

price. The proposed rule change also

does not prohibit a floor broker from

accepting an order that directs him or

her to buy (or sell) along with the trend

of the crowd. If given such instructions,

a floor broker may, in his or her own

expert judgment, trade in a manner that

mimics the behavior of one or more

market-makers.

The comment letter objected to

original language in the definition of

‘‘go along’’ order that stated ‘‘Such an

order is prohibited even if the bid or

offer does not match exactly the price

established by the other participants in

the trading crowd as long as the

customer has given the broker discretion

to determine what to bid or offer based

upon the prices established by the other

participants.’’ The Commission notes

that the Exchange has eliminated this

provision. The Commission also notes,

as discussed more fully above, that the

prohibition of ‘‘go along’’ orders does

not limit a floor broker’s discretion, but

instead prohibits a customer from giving

a floor broker specific instructions to

trade in a particular manner.

The Commission finds good cause to

approve Amendment Nos. 1 and 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment Nos.

1 and 2 both clarify the definition of ‘‘go

along’’ order to narrowly outline the

boundaries of the restriction and to

ensure that the prohibition against ‘‘go
24580 Federal Register / Vol. 63, No. 85 / Monday, May 4, 1998 / Notices

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 12 CFR 220 et seq. The Board of Governors of

the Federal Reserve System issued Regulation T

pursuant to the Act.

along’’ orders does not prohibit a floor

broker from properly exercising

discretion in the representation of an

order or prevent market participants

from effecting legitimate trading

strategies. In addition, the proposed rule

change was published for the full

comment period and Amendment Nos.

1 and 2 do not substantively change the

proposal. Accordingly, the Commission

believes that it is consistent with

Section 6(b)(5) of the Act to approve

Amendment Nos. 1 and 2 to the

proposal on an accelerated basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

1 and 2 to the rule proposal, including

whether Amendment Nos. 1 and 2 are

consistent with the Act. 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. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–CBOE–97–50 and should be

submitted by May 26, 1998.

V. Conclusion

It is therefore ordered, pursuant to

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

proposed rule change (SR–CBOE–97–

50), including Amendment Nos. 1 and

2, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Jonathan G. Katz,

Secretary.

[FR Doc. 98–11746 Filed 5–1–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39925; File No. SR–CBOE–

97–67]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Incorporated, Relating to Substantive

Revisions of the Exchange’s Rules

Governing Margin Regulation

April 27, 1998.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

December 29, 1997, the Chicago Board

Options Exchange, Incorporated

(‘‘Exchange’’ or ‘‘CBOE’’) 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 Exchange. 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

The Exchange proposes substantive

changes to its rules concerning margin

requirements. The revisions would: (i)

Expand the types of short positions that

would be considered ‘‘covered’’ in a

cash account, specifically, certain short

positions that are components of

limited-risk spread strategies (e.g.,

butterfly and box spreads); (ii) allow a

bank-issued escrow agreement to serve

as cover in lieu of cash for certain

spread positions held in a cash account;

(iii) recognize butterfly and box spreads

as strategies for purposes of margin

treatment and establish appropriate

margin requirements; (iv) recognize

various strategies involving stocks (or

other underlying instruments) paired

with long options, and provide for lower

maintenance margin requirements on

such hedged stock positions; (v) permit

the extension of credit on certain long

term options and certain long box

spreads; (vi) consolidate in one chapter,

the various margin requirements that

presently are dispersed throughout the

Exchange’s rules; (vii) revise other

Exchange rules impacted by the

proposal; and (viii) update and improve,

as necessary, current margin rules.

The text of the proposed rule change

is available at the Office of the

Secretary, the Exchange, 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

Exchange 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

Exchange 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 Exchange proposes to make

revisions to its rules governing margin

regulation that would: (i) Expand the

types of short positions that would be

considered ‘‘covered’’ in a cash account,

specifically, certain short positions that

are components of limited-risk spread

strategies (e.g., butterfly and box

spreads); (ii) allow a bank-issued escrow

agreement to serve as cover in lieu of

cash for certain spread positions held in

a cash account; (iii) recognize butterfly

and box spreads as strategies for

purposes of margin treatment and

establish appropriate margin

requirements; (iv) recognize various

strategies involving stocks (or other

underlying instruments) paired with

long options, and provide for lower

maintenance margin requirements on

such hedged stock positions; (v) permit

the extension of credit on certain long

term options and certain long box

spreads; (vi) consolidate in one chapter,

the various margin requirements that

presently are dispersed throughout the

Exchange’s rules; (vii) revise other

Exchange rules impacted by the

proposal; and (viii) update and improve,

as necessary, current margin rules.

Previously, the margin requirements

governing options were set forth in

Regulation T, ‘‘Credit by Brokers and

Dealers.’’ 2 However, recent

amendments to Regulation T that

became effective June 1, 1997, modified

or deleted certain margin requirements

regarding options transactions in favor

of rules to be adopted by the option selfregulatory organizations (‘‘OSROs’’),