Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30525

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

2 17 CFR 240.19b–4.

Expenses incurred in connection with

the liquidation were borne by Tiger

Management L.L.C., an affiliate of

applicant’s investment adviser.

Filing Dates: The application was

filed on March 25, 1998, and amended

on May 11, 1998.

Applicant’s Address: 101 Park

Avenue, New York, New York 10178.

Merrill Lynch KECALP Growth

Investments Limited Partnership 1983

[File No. 811–3389] and Merrill Lynch

KECALP L.P. 1984 [File No. 811–3909]

Summary: Each applicant seeks an

order declaring that it has ceased to be

an investment company. On December

23, 1997, each applicant distributed its

assets to its securityholders at the net

asset value per share. Expenses of

approximately $30,000 are expected to

be incurred in connection with each

applicant’s liquidation and will be

borne by KECALP, Inc., the general

partner of applicants.

Filing Dates: Each application was

filed on February 23, 1998, and

amended on April 29, 1998.

Applicants’ Address: South Tower,

World Financial Center, 225 Liberty

Street, New York, New York 10080.

The Laidlaw Covenant Fund [811–7602]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. On December 20,

1996, applicant transferred all of its

assets and liabilities to Value Fund, a

series of The Vintage Funds, based on

the relative net asset values per share.

Laidlaw Holdings Asset Management,

Inc., applicant’s investment adviser,

incurred expenses in connection with

the merger of $25,000, with any

expenses exceeding that amount borne

by Vintage Advisers, Inc., The Vintage

Funds’ investment adviser.

Filing Dates: The application was

filed on November 18, 1997 and

amended on May 14, 1998.

Applicant’s Address: 100 Park

Avenue, New York, NY 10017.

Allmerica Funds [File No. 811–6308]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. On October 31,

1997, applicant made a liquidating

distribution to its sole shareholder at net

asset value. No expenses were incurred

in connection with the liquidation.

Applicant retained $9,201 to cover

outstanding liabilities relating to

advisory fees, printing fees, custody fees

and tax services.

Filing Dates: The application was

filed on November 12, 1997, and

amended on May 19, 1998.

Applicant’s Address: 440 Lincoln

Street, Worcester, Massachusetts 06153.

Putnam Adjustable Rate U.S.

Government Fund [File No. 81–4531]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. On November 8,

1996, applicant transferred its assets

and liabilities to the Putnam

Intermediate U.S. Government Income

Fund (‘‘Putnam Intermediate’’) based on

the relative net asset values per share.

Applicant paid approximately $78,604

in expenses related to the

reorganization. Putnam Intermediate

paid approximately $41,620 in

reorganization expenses.

Filing Dates: The application was

filed on March 17, 1998 and amended

on May 11, 1998.

Applicant’s Address: One Post Office

Square, Boston, MA 02109.

Consultants Trust [811–7542]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. Applicant

abandoned its intention to operate

before it received any assets. Applicant

never issued securities.

Filing Dates: The application was

filed on April 21, 1998 and applicant

has agreed to file an amendment during

the notice period.

Applicant’s Address: 2303 Yorktown

Avenue, Lynchburg, Virginia 24501.

Midcap Growth Portfolio [811–7638]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. Applicant has

never made a public offering of its

securities and does not propose to make

a public offering or engage in business

of any kind.

Filing Dates: The application was

filed on May 11, 1998 and applicant has

agreed to file an amendment during the

notice period.

Applicant’s Address: 777 Mariners

Island Blvd., P.O. Box 7777, San Mateo,

CA 94403–7777.

John Hancock Sovereign Investors

Fund, Inc. [File No. 811–115]

Summary: Applicant seeks an order

declaring that it has ceased to be an

investment company. On December 2,

1996, applicant, on behalf of John

Hancock Sovereign Investors Fund (the

‘‘Fund’’), a series of applicant,

transferred all of the Fund’s assets and

liabilities to John Hancock Sovereign

Investors Fund, a series of John Hancock

Investment Trust, based on the relative

net asset values per share. Applicant

bore approximately $266,103 in

reorganization expenses. John Hancock

Investment Trust bore approximately

$307,727 in reorganization expenses.

Filing Dates: The application was

filed on October 6, 1997 and amended

on May 22, 1998.

Applicant’s Address: 101 Huntington

Avenue, Boston, MA 02199–7603.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14826 Filed 6–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40041; File No. SR–CBOE–

98–15]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. to Update and Reorganize Its

Rules Relating to Designated Primary

Market-Makers

May 28, 1998.

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

Securities Exchange Act of 1934

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

hereby given that on April 22, 1998, the

Chicago Board Options Exchange, Inc.

(‘‘CBOE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘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

The CBOE proposes to update and

reorganize the Exchange’s rules relating

to designated primary market-makers

(‘‘DPMs’’). Below is the text of the

proposed rule change. Proposed new

language is in italics; proposed

deletions are in brackets.

Chapter III—Membership

* * * * *

Rule 3.27 Membership Options Trading

Permits

* * * * *

(c) DPMs. The DPM trading system

described in Section C of Chapter VIII

[Modified Trading System established

in Rule 8.80] will be employed in NYSE

Options. Each specialist firm to which
30526 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

a Permit is issued pursuant to

subparagraph (a)(2) of this Rule shall 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 the provisions of

the Rules, a Permit holder qualified to

act as a DPM pursuant to the Rules shall

be appointed to act as the DPM for each

class of equity options designated by the

Exchange pursuant to the last sentence

of paragraph (b) of this Rule. Each

specialist firm appointed as a DPM in a

class of NYSE Options pursuant to the

foregoing two sentences shall, subject to

the provisions of the Rules, continue to

act as such DPM during the term of the

Permits and thereafter so long as it is a

regular member or member organization

of the Exchange.

* * * * *

Chapter VI—Doing Business on the

Exchange Floor

* * * * *

Rule 6.8. RAES Operations in Equity

Options

* * * * *

[(a)(iii) This rule shall apply to RAES

in classes handled by DPM’s except that

the MTS Appointments Committee may

make available additional series or raise

the size of eligible orders in a DPM’s

classes pursuant to Rule 8.80.]

* * * * *

Chapter VIII—Market Traders, Trading

Crowds and Designated Primary MarketMakers

* * * * *

Section A: Market-Makers

* * * * *

Rule 8.3 Appointment of Market Makers

* * * * *

[Interpretations and Policies: .01

The Exchange has adopted the policy

that no Market-Maker may act as an

independent Market-Maker in a class of

options for which the Market-Maker has

been approved to act as a DPM.]

* * * * *

Rule 8.7. Obligations of Market-Makers

* * * * *

* * * Interpretations and Policies:

* * * * *

.07 Market-Makers are expected to

participate in and support Exchange

sponsored automated programs, or

approved equivalents, including but not

limited to the Retail Automatic

Execution System and Auto Quote. The

variables in the formula used in each

trading crowd to generate automatically

updated market quotations shall be as

agreed upon by the respective trading

crowds. For those classes in which a

DPM has been appointed, this

responsibility shall be primarily

assigned to the DPM pursuant to Rule

8.85(a)(viii). The DPM shall disclose to

the other members trading at the same

trading station the following

components of the formula used to

generate automatically updated market

quotations at that station: option pricing

calculation model, volatility, interest

rate, dividend, and what is used to

represent the value of the underlying;

provided however, that the MTS

Committee shall have the discretion to

exempt DPMs using proprietary

automated quotation updating systems

from having to disclose proprietary

information concerning the formulas

used by those systems.

* * * * *

Rule 8.16 RAES Eligibility in Option

Classes Other Than DJX

* * * * *

(a)(ii) The Market-Maker may

designate that his trades be assigned to

and clear into either this individual

account or a joint account in which he

is a participant. Each individual

member of the joint must be physically

present in the trading crowd while that

member is signed onto RAES and each

joint account member is subject to all of

the following provisions of this rule.

[DPM participation shall also be

governed by the MTS Committee as

provided in Rule 8.80.]

* * * * *

Section C: Designation Primary MarketMakers

DPM Defined

Rule 8.80. A ‘‘Designated Primary

Market-Maker’’ or ‘‘DPM’’ is a member

organization that is approved by the

Exchange to function in allocated

securities as a Market-Maker (as defined

in Rule 8.1), as Floor Broker (as defined

in Rule 6.70, and as an Order Book

Official (as defined in Rule 7.1).

Determinations concerning whether to

grant or withdraw the approval to act as

a DPM are made by the Modified

Trading System Appointment

Committee (‘‘MTS Committee’’) in

accordance with Rules 8.83 and 8.90.

DPMs are allocated securities by the

Allocation Committee and the Special

Product Assignment Committee in

accordance with Rule 8.95.

DPM Designees

Rule 8.81. (a) A DPM may act as a

DPM soley through its DPM Designees.

A ‘‘DPM Designee’’ is an individual who

is approved by the MTC Committee to

represent a DPM in its capacity as a

DPM. The MTS Committee may

subclassify DPM Designees and require

that certain DPM Designees be subject to

specified supervision and/or be limited

in their authority to represent a DPM.

(b) Notwithstanding any other rules to

the contrary, an individual must satisfy

the following requirements in order to

be a DPM Designee of a DPM:

(i) the individual must be a member

of the Exchange:

(ii) the individual must be a nominee

of the DPM or of an affiliate of the DPM

or must own a membership that has

been registered for the DPM or for an

affiliate of the DPM;

(iii) the individual must be registered

as a Market-Maker pursuant to Rule 8.2

and as a Floor Broker pursuant to Rule

6.71;

(iv) on such form or forms as the

Exchange may prescribe the DPM must

authorize the individual to enter into

Exchange transactions on behalf of the

DPM in its capacity as a DPM, must

authorize the individual to represent the

DPM in all matters relating to the

fulfillment of the DPM’s responsibilities

as a DPM, and must guaranty all

obligations arising out of the

individual’s representation of the DPM

in its capacity as a DPM in all matters

relating to the Exchange; and

(v) the individual must be approved

by the MTS Committee to represent the

DPM in its capacity as a DPM.

The approval of an individual to act

as a DPM Designee shall expire in the

event the individual does not have

trading privileges on the Exchange for a

six month time period.

(c) Each DPM shall have at least two

DPM Designees who are nominees of the

DPM or who own a membership that has

been registered for the DPM.

(d) A DPM Designee of a DPM may not

trade as a Market-Maker or Floor Broker

in securities allocated to the DPM unless

the DPM Designee is acting on behalf of

the DPM in its capacity as a DPM. When

acting on behalf of a DPM in its capacity

as a DPM, a DPM Designee is exempt

from the provisions of Rule 8.8.

MTS Committee

Rule 8.82. (a) The MTS Committee

shall consist of the Vice-Chairman of

the Exchange, the Chairman of the

Market Performance Committee, and

nine members elected by the

membership of the Exchange.

(b) The nine elected MTS Committee

members shall include: four members

whose primary business is as a MarketMaker, two members whose primary

business is as a Market-Maker or as a

DPM Designee, one member whose

primary business is as a Floor Broker

and who is not associated with a
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30527

member organization that conducts a

public customer business, and two

persons associated with member

organizations that conduct a public

customer business. No more than two of

the nine elected MTS Committee

members may be associated with a

DPM. The nine elected MTS Committee

members shall have three-year terms,

three of which shall expire each year.

(c) The election procedures for the

nine elected MTS Committee members

shall be the same as the election

procedures for elected Directors that are

set forth in Article IV and Article V of

the Exchange Constitution. Accordingly,

the following shall occur as part of these

procedures: During October of each

year, the Nominating Committee shall

select nominees to fill expiring terms

and vacancies on the MTS Committee.

Nominations may also be made by

petition, signed by not less than 100

members and filed with the Secretary of

the Exchange no later than 5:00 p.m.

(Chicago time) on November 15, or the

first business day thereafter in the event

November 15 occurs on a holiday or a

weekend. The election to fill the

expiring terms and vacancies on the

MTS Committee shall be held as part of

the annual election.

Approval to Act as a DPM

Rule 8.83. (a) A member organization

desiring to be approved to act as a DPM

shall file an application with the

Exchange on such form or forms as the

Exchange may prescribe.

(b) The MTS Committee shall

determine the appropriate number of

approved DPMs. Each DPM approval

shall be made by the MTS Committee

from among the DPM applications on

file with the Exchange, based on the

MTS Committee’s judgment as to which

applicant is best able to perform the

functions of a DPM. Factors to be

considered in making such a selection

may include, but are not limited to, any

one or more of the following:

(i) adequacy of capital;

(ii) operational capacity;

(iii) trading experience of and

observance of generally accepted

standards of conduct by the applicant,

its associated persons, and the DPM

Designees who will represent the

applicant in its capacity as a DPM;

(iv) number and experience of support

personnel of the applicant who will be

performing functions related to the

applicant’s DPM business;

(v) regulatory history of and history of

adherence to Exchange Rules by the

applicant, its associated persons, and

the DPM Designees who will represent

the applicant in its capacity as a DPM;

(vi) willingness and ability of the

applicant to promote the Exchange as a

marketplace;

(vii) performance evaluations

conducted pursuant to Rule 8.60; and

(viii) in the event that one or more

shareholders, directors, officers,

partners, managers, members, DPM

Designees, or other principals of an

applicant is or has previously been a

shareholder, director, officer, partner,

manager, member, DPM Designee, or

other principal in another DPM,

adherence by such DPM to the

requirements set forth in this Section C

of Chapter VIII respecting DPM

responsibilities and obligations during

the time period in which such person(s)

held such position(s) with the DPM.

(c) Each applicant for approval as a

DPM will be given an opportunity to

present any matter which it wishes the

MTS Committee to consider in

conjunction with the approval decision.

The MTS Committee may require that a

presentation be solely or partially in

writing, and may require the submission

of additional information from the

applicant or individuals associated with

the applicant. Formal rules of evidence

shall not apply to these proceedings.

(d) In selecting an applicant for

approval as a DPM, the MTS Committee

may place one or more conditions on

the approval, including, but not limited

to, conditions concerning the capital,

operations, or personnel of the

applicant and the number or type of

securities which may be allocated to the

applicant.

(e) Each DPM shall retain its approval

to act as a DPM until it resigns as a DPM

or its approval is terminated by the MTS

Committee pursuant to Rule 8.90.

(f) If a member organization resigns as

a DPM or if pursuant to Rule 8.90 the

MTS Committee terminates or otherwise

limits its approval to act as a DPM, the

MTS Committee shall have the

discretion to do one or both of the

following:

(i) approve an interim DPM, pending

the final approval of a new DPM

pursuant to paragraphs (a) through (d)

of this Rule; and

(ii) allocate on an interim basis to

another DPM or to other DPMs the

securities that were allocated to the

affected DPM, pending a final allocation

of such securities pursuant to Rule 8.95.

Nether an interim approval or

allocation made pursuant to this

paragraph (f) should be viewed as a

prejudgment with respect to the final

approval or allocation.

Conditions on the Allocation of

Securities to DPMs

Rule 8.84. (a) The MTS Committee

may establish (i) restrictions applicable

to all DPMs on the concentration of

securities allocable to a single DPM and

(ii) minimum eligibility standards

applicable to all DPMs which must be

satisfied in order for a DPM to receive

allocations of securities, including but

not limited to standards relating to

adequacy of capital and number of

personnel.

(b) The MTS Committee has the

authority under other Exchange rules to

restrict the ability of particular DPMs to

receive allocations of securities,

including but not limited to, Rules

8.88(b) and 8.60, Rule 8.83(d), and Rule

8.90.

DPM Obligations

Rule 8.85. (a) Dealer Transactions.

Each DPM shall fulfill all of the

obligations of a Market-Maker under the

Rules, and shall satisfy each of the

following requirements, in respect of

each of the securities allocated to the

DPM:

(i) assure that disseminated market

quotations are accurate;

(ii) assure that each displayed market

quotation is honored for at least the

number of contracts prescribed

pursuant to Rule 8.51;

(iii) in the case of option contracts,

comply with the bid/ask differential

requirements of Rule 8.7(b)(iv);

(iv) assure that the number of DPM

Designees and support personnel

continuously present at the trading

station throughout every business day is

not less than the minimum required by

the MTS Committee;

(v) trade in all securities allocated to

the DPM only in the capacity of a DPM

and not in any other capacity;

(vi) segregate in a manner prescribed

by the MTS Committee (A) all

transactions consummated by the DPM

in securities allocated to the DPM and

(B) any other transactions consummated

by or on behalf of the DPM that are

related to the DPM’s DPM business;

(vii) participate at all times in any

Exchange sponsored automated order

handling system, including the Retail

Automatic Execution System (RAES);

and

(viii) determine a formula for

generating automatically updated

market quotations and disclose the

following components of the formula to

the other members trading at the trading

station at which the formula is used;

option pricing calculation model,

volatility, interest rate, dividend, and

what is used to represent the price of the

underlying.
30528 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

Notwithstanding the provisions of

subparagraph (a)(viii) of this Rule, the

MTS Committee shall have the

discretion to exempt DPMs using

proprietary automated quotation

updating systems from having to

disclose proprietary information

concerning the formulas used by those

systems. In addition, to the extent that

there is any inconsistency between the

specific obligations of a DPM set forth

in subparagraphs (a)(i) through (a)(viii)

of this Rule and the general obligations

of a Market-Maker under the Rules,

subparagraphs (a)(i) through (a)(viii) of

this Rule shall govern.

(b) Agency Transactions. Each DPM

shall fulfill all of the obligations of a

Floor Broker (to the extent that the DPM

acts as a Floor Broker) and of an Order

Book Official under the Rules, and shall

satisfy each of the following

requirements, in respect of each of the

securities allocated to the DPM:

(i) place in the public order book any

order in the possession of the DPM

which is eligible for entry into the book

unless (A) the DPM executes the order

upon its receipt or (B) the customer who

placed the order has requested that the

order not be booked, and upon receipt

of the order, the DPM announces in

public outcry the information

concerning the order that would be

displayed if the order were a displayed

order in the public order book;

(ii) not remove from the public order

book any order placed in the book

unless (A) the order is canceled, expires,

or is executed or (B) the DPM returns the

order to the member that placed the

order with the DPM in response to a

request from that member to return the

order;

(iii) accord priority to any order which

the DPM represents as agent over the

DPM’s principal transactions, unless the

customer who placed the order has

consented to not being accorded such

priority;

(iv) not charge any brokerage

commission with respect to the

execution of any order for which the

DPM has acted as both agent and

principal, unless the customer who

placed the order has consented to

paying a brokerage commission to the

DPM with respect to the DPM’s

execution of the order while acting as

both agent and principal;

(v) act as a Floor Broker to the extent

required by the MTS Committee; and

(vi) not represent discretionary orders

as a Floor Broker or otherwise.

Notwithstanding the provisions of

subparagraph (b)(vi) of this Rule, the

MTS Committee shall have the

discretion to authorize a DPM, on a

temporary basis, to accept and represent

types of order in one or more of the

securities allocated to the DPM which

vest the DPM with limited discretion, if

the MTS Committee determines that

unusual circumstances are present and

that the acceptance and representation

of such orders by the DPM is necessary

in order to assure that there will be

adequate representation in such

securities of those types of orders. In

addition, to the extent that there is any

inconsistency between the specific

obligations of a DPM set forth in

subparagraphs (b)(i) through (b)(vi) of

this Rule and the general obligations of

a Floor Broker or of an Order Book

Official under the Rules, subparagraphs

(b)(i) through (b)(vi) of this Rule shall

govern.

(c) Other obligations. In addition to

the obligations described in paragraphs

(a) and (b) of this Rule, a DPM shall

fulfill each of the following obligations;

(i) resolve disputes relating to

transactions in the securities allocated

to the DPM, subject to Floor Official

review, upon the request of any party to

the dispute;

(ii) promote the Exchange as a

marketplace, including meeting and

educating market participants,

maintaining communications with

member firms in order to be responsive

to suggestions and complaints, and

performing other like activities;

(iii) act to increase the Exchange’s

order flow in the securities which are

allocated to the DPM and respond to

competitive developments by improving

market quality and service and

otherwise acting to increase the

Exchange’s market share in those

securities;

(iv) promptly inform the MTS

Committee of any desired change in the

DPM Designees who represent the DPM

in its capacity as a DPM and of any

material change in the financial or

operational condition of the DPM; and

(v) supervise all persons associated

with the DPM to assure compliance with

the Rules.

(d) Obligations of DPM Associated

Persons. Each person associated with a

DPM shall be obligated to comply with

the provisions of this Rule when acting

on behalf of the DPM.

* * * Interpretations and Policies: .01

The Exchange may make personnel

available to assist a DPM in the DPM’s

performance of the obligations of an

Order Book Official, for which the

Exchange may charge the DPM a

reasonable fee.

DPM Financial Requirements

Rule 8.86. Each DPM shall maintain

(i) net liquidating equity in its DPM

account of not less than $100,000, and

in conformity with such guidelines as

the MTS Committee may establish from

time to time, and (ii) net capital

sufficient to comply with the

requirements of Exchange Act Rule

15c3–1. Each DPM which is a Clearing

Member shall also maintain net capital

sufficient to comply with the

requirements of the Clearing

Corporation.

Participation Entitlement of DPMs

Rule 8.87. (a) Subject to the review of

the Board of Directors, the MTS

Committee may establish from time to

time a participation entitlement formula

that is applicable to all DPMs.

(b) To the extent established pursuant

to paragraph (a) of this Rule, each DPM

shall have a right to participate for its

own account with the Market-Makers

present in the trading crowd in

transactions in securities allocated to

the DPM that occur at the DPM’s

previously established principal bid or

offer.

Review of DPM Operations and

Performance

Rule 8.88. (a) The MTS Committee or

a subcommittee of the MTS Committee

may conduct a review of a DPM’s

operations or performance at any time

and at a minimum shall conduct a

review of each DPM’s operations and

performance on an annual basis. A DPM

and its associated persons shall submit

to the MTS Committee such information

requested by the Committee in

connection with a review of the DPM’s

operations or performance.

(b) The MTS Committee shall perform

the market performance evaluation and

remedial action functions set forth in

Rule 8.60 with respect to DMPs and the

Market-Makers that trade at DPM

trading stations. The MTS Committee

may combine a review conducted

pursuant to paragraph (a) of this Rule

with an evaluation conducted pursuant

to Rule 8.60.

(c) Members of the MTS Committee

may perform the functions of a Floor

Official at DPM trading stations.

Transfer of DPM Appointments

Rule 8.89. (a) A DPM proposing any

sale, transfer, or assignment of any

ownership interest or any change in its

capital structure, voting authority, or

distribution of profits or losses shall give

not less than thirty (30) days prior

written notice thereof to the MTS

Committee. No such transaction that is

deemed to involve the transfer of a DPM

appointment within the meaning of

paragraph (b) of this Rule may take

place unless (i) the transferee is

qualified to act as a DPM in accordance
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30529

with the Rules, and (ii) the transaction

has received the prior approval of the

MTS Committee.

(b) For purposes of this Rule 8.89, the

following transactions are deemed to

involve the transfer of a DPM

appointment: (i) any sale, transfer, or

assignment of any significant share of

the ownership of a DPM; (ii) any change

or transfer of control of a DPM; (iii) any

merger, sale of assets, or other business

combination or reorganization of a

DPM. A sale, transfer, or assignment of

a five percent (5%) or more interest in

the equity or profits or losses of a DPM

(or any series or smaller changes that in

the aggregate amount to a change of five

percent or more) shall be deemed to be

a sale, transfer, or assignment of a

significant share of the ownership of the

DPM; provided, however, that any sale,

transfer, or assignment of a less than

five percent interest may also be found

by the MTS Committee to represent a

significant share of the ownership of a

DPM depending on the surrounding

facts and circumstances, in which event

the MTS Committee shall notify the

DPM within fifteen (15) days after

receiving notice thereof that the

approval of the transaction by the MTS

Committee is required.

(c) An application for the approval of

a transaction deemed to involve the

transfer of a DMP appointment shall be

submitted in writing to the MTS

Committee at least thirty (30) days prior

to the proposed effective date of the

transaction, unless the MTS Committee

approves a shorter period for its review.

The application shall contain a full and

complete description of the proposed

transaction, including (i) the identity of

the transferee, (ii) a description of the

transferee’s ownership and capital

structure, (iii) the identity of those

persons who will be the partners,

shareholders, directors, officers, and

other managers or affiliates of the

transferee, as well as those persons who

will be responsible for performing the

duties of the DPM following the transfer,

(iv) the terms of the transaction

including the consideration proposed to

be paid by the transferee, (v) the terms

of any other business relationships

between the parties to the transaction,

and (vi) any other material information

pertaining to the transaction that the

MTS Committee may request.

(d) Promptly after receipt of a

completed application for the approval

of a proposed transfer of a DPM

appointment, the MTS Committee shall

post notice of the proposed transfer on

the Exchange Bulletin Board and in the

Exchange Bulletin. The MTS Committee

shall not ordinarily consider a proposed

transfer sooner than ten (10) days

following the day notice is posted on the

Bulletin Board, unless the MTS

Committee finds it necessary to give

earlier consideration to the matter in the

interest of the maintenance of fair and

orderly markets and the protection of

investors. During this period, the MTS

Committee will accept written

comments on the proposed transfer

from any member, and will accept

written proposals from other members

or from Market-Maker crowds who wish

to be considered for appointment in

some or all of the classes that are the

subject of the proposed transfer.

(e) No application shall be finally

approved by the MTS Committee until it

is accompanied by complete and final

documents pertaining to the transfer (all

corporate or partnership documents and

amendments thereto, voting trust, ‘‘buysell’’ or similar agreements, employment

agreements, pro forma financial

statements), except as the MTS

Committee may agree to defer the

delivery of specific documents for good

cause shown. In considering the

approval of a proposed transfer of a

DPM appointment, the MTS Committee

shall give due consideration to all

relevant facts and circumstances,

including but not limited to each of the

following factors, if applicable; (i) the

financial and operational capacity of

the transferee; (ii) continuity of control,

management, and persons responsible

for the operation of the DPM; (iii)

avoiding undue concentration of DPM

appointments on the Exchange; (iv)

available alternatives for reallocating

the DPM’s appointment taking into

account comments made and

alternatives proposed by other members

during the posting period; and (v) the

best interests of the Exchange. If the

proposed transferee is not approved to

act as a DPM at the time the application

is considered by the MTS Committee,

the approval of the transfer may be

made contingent on the transferee’s

being so approved within a stated

period of time.

(f) The approval or failure to approve

a proposed transfer of a DPM

appointment is subject to direct review

by the Board of Directors upon receipt

by the Secretary of the Exchange, within

ten (10) days of the time the decision of

the MTS Committee is announced, of (i)

a written request for such review made

by the applicant, specifying why the

applicant believes the decision of the

Committee should be reversed or

modified (in the case of a failure to

approve an application as submitted) or

(ii) a request for review made by at least

five Directors of the Exchange (in any

case).

* * * Interpretations and Policies: .01

For purposes of paragraph (b) of this

Rule, a transfer of an interest in the

profits (but not the ownership) of a DPM

to an associated person of the DPM

solely as compensation for the

associated person’s services in support

of the business of the DPM shall not

ordinarily be deemed to be a sale,

transfer, or assignment of a significant

share of the ownership of the DPM.

Termination, Conditioning, or Limiting

Approval to Act as a DPM

Rule 8.90. (a) The MTS Committee

may terminate, place conditions upon,

or otherwise limit a member

organization’s approval to act as a DPM

under any one or more of the following

circumstances:

(i) if the member organization incurs

a material financial, operational, or

personnel change;

(ii) if the member organization fails to

comply with any of the requirements

under this Section C of Chapter VIII,

including, but not limited to, any

conditions imposed under Rule 8.83(d),

Rule 8.84(a)(ii), or this Rule; or

(iii) if for any reason the member

organization should no longer be

eligible for approval to act as a DPM or

to be allocated a particular security or

securities.

Before the MTS Committee takes

action to terminate, condition, or

otherwise limit a member organization’s

approval to act as a DPM, the member

organization will be given notice of such

possible action and an opportunity to

present any matter which it wishes the

MTS Committee to consider in

determining whether to take such

action. Such proceedings shall be

conducted in the same manner as MTS

Committee proceedings concerning DPM

approvals which are governed by Rule

8.82(c).

(b) Notwithstanding the provisions of

paragraph (a) of this Rule, the MTS

Committee has the authority to

immediately terminate, condition, or

otherwise limit a member organization’s

approval to act as a DPM if it incurs a

material financial, operational, or

personnel change warranting such

action or if the member organization

fails to comply with any of the financial

requirements of Rule 8.86.

(c) Limiting a member organization’s

approval to act as a DPM may include,

among other things, limiting or

withdrawing the member organization’s

DPM participation entitlement provided

for under Rule 8.87, withdrawing the

right of the member organization to act

in the capacity of a DPM in a particular

security or securities which have been

allocated to the member organization,
30530 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

and/or requiring the relocation of the

member organization’s DPM operation

on the Exchange’s trading floor.

(d) If a member organization’s

approval to act as a DPM is terminated,

conditioned, or otherwise limited by the

MTS Committee pursuant to this Rule,

the member organization may seek

review of that decision under Chapter

XIX of the Rules.

Limitations on Dealings of DPMs and

Affiliated Persons of DPMs

Rule 8.91. (a) No person or entity

affiliated with a DPM shall purchase or

sell on the Exchange, for any account in

which such person or entity has a direct

or indirect interest, any security which

is allocated to the DPM. Any such

person or entity may, however, reduce

or liquidate an existing position in a

security which is allocated to an

affiliated DPM provided that any order

to consummate such a transaction is (i)

identified as being for an account in

which such person or entity has a direct

or indirect interest, (ii) approved for

execution by a Floor Official, and (iii)

executed by the DPM in a manner

reasonably calculated to contribute to

the maintenance of price continuity

with reasonable depth. No order entered

pursuant to this paragraph (a) shall be

given priority over, or parity with, any

order represented in the market at the

same price. This paragraph (a) shall not

apply to a DPM Designee of a DPM

acting on behalf of the DPM in its

capacity as a DPM.

(b) Neither a DPM for an equity

option, nor any member affiliated with

the DPM, shall engage in any material

business transaction with the issuer of

the security that underlies the equity

option or with any officer, director, or

10% shareholder of the issuer of the

security. Neither a DPM for a security

traded pursuant to Chapter XXX, nor

any member affiliated with the DPM,

shall engage in any material business

transaction with the issuer of the

security or with any officer, director, or

10% shareholder of the issuer of the

security. For the purposes of this

paragraph (b), a material business

transaction shall be deemed to be a

transaction which is material in value

either to the issuer or the DPM, would

provide access to material non-public

information relating to the issuer, or

would give rise to a control relationship

between the issuer and the DPM.

Notwithstanding the foregoing, the

receipt of routine business services,

goods, materials, or insurance, on terms

that would be generally available shall

not be deemed a material business

transaction for the purposes of this

paragraph (b).

(c) Neither a DPM for an equity

option, nor any member affiliated with

the DPM, shall accept any orders from

the issuer of the security that underlies

the equity option or directly from any

officer, director, or 10% shareholder of

the issuer of the security. Neither a DPM

for a security traded pursuant to

Chapter XXX, nor any member affiliated

with the DPM, shall accept any orders

directly from the issuer of the security

or directly from any officer, director, or

10% shareholder of the issuer of the

security.

(d) Paragraphs (a), (b), and (c) of this

Rule shall not apply to any member

affiliated with a DPM that has

established and obtained Exchange

approval of procedures restricting the

flow of material non-public corporate

and market information (i.e., a ‘‘Chinese

Wall’’) between such member on the one

hand and the DPM and persons

affiliated with the DPM on the other

hand. Any such procedures shall

comply with the following Guidelines:

Guidelines for Exemptive Relief Under

Rule 8.91(d) for Members Affiliated with

DPMs

These Guidelines set forth the steps

that a member affiliated with a DPM

must undertake, at a minimum, to seek

to obtain an exemption under Rule

8.91(d) from the requirements of

paragraphs (a) through (c) of Rule 8.91.

These Guidelines may be supplemented

or modified by the Exchange in

individual cases when the Exchange

deems it appropriate to do so.

(a) Generally, an affiliated member

seeking a Rule 8.91(d) exemption

should establish its operational

structure along the lines discussed

below.

(i) The affiliated member and the

DPM must be organized as separate and

distinct organizations. At a minimum,

the two organizations must maintain

separate and distinct books, records,

and accounts and satisfy separately all

applicable financial and capital

requirements. While the Exchange will

permit the affiliated member and the

DPM to be under common management,

in no instance may persons on the

affiliated member’s side of the ‘‘Wall’’

exercise influence over or control the

DPM’s conduct with respect to

particular securities or vice versa. Any

general managerial oversight must not

conflict with or compromise in any way

the DPM’s market-making

responsibilities pursuant to the Rules.

(ii) The affiliated member and the

DPM must establish procedures

designed to prevent the use of material

non-public corporate or market

information in the possession of the

affiliated member to influence the

DPM’s conduct and to avoid the misuse

of DPM market information to influence

the affiliated member’s conduct.

Specifically, the affiliated member and

the DPM must ensure that material nonpublic corporate information relating to

trading positions taken by the affiliated

member in a DPM security are not made

available to the DPM or to any

shareholder, director, officer, partner,

manager, member, principal, DPM

Designee, or employee associated

therewith; that no trading is done by the

DPM while in possession of non-public

corporate information derived by the

affiliated member from any transaction

or relationship with the issuer or any

other person in possession of such

information; that advantage is not taken

of knowledge of pending transactions or

the affiliated member’s

recommendations; and that all

information pertaining to positions

taken or to be taken by the DPM and to

the DPM’s ‘‘book’’ in a DPM security is

kept confidential and is not made

available to the affiliated member

except to the extent that such

information is made available to the

affiliated member in accordance with

subparagraph (b)(iii) of these

Guidelines.

(b) An affiliated member seeking a

Rule 8.91(d) exemption shall submit to

the Exchange a written statement which

shall set forth:

(i) The manner in which the affiliated

member intends to satisfy each of the

conditions stated in subparagraphs

(a)(i) and (a)(ii) of these Guidelines, and

the compliance and audit procedures

the affiliated member proposes to

implement to ensure that the functional

separation is maintained between the

affiliated member and the DPM;

(ii) The designation and identification

of the individuals associated with the

affiliated member responsible for

maintenance and surveillance of such

procedures;

(iii) That the DPM shall make

available to the affiliated member only

the sort of market information that the

DPM would make available in the

normal course of its DPM activity to any

other member; that the DPM shall only

make such information available to the

affiliated member in the same manner

that it is made available to any other

member; and that the DPM shall only

make such information available to the

affiliated member pursuant to a request

by the affiliated member for such

information;

(iv) That where the affiliated member

‘‘popularizes’’ a security in which the

DPM acts as DPM the affiliated member

shall disclose that an associated DPM
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30531

makes a market in the security, may

have a position in the security, and may

be on the opposite side of public orders

executed on the Exchange in the

security; and that the affiliated member

shall forward to the Exchange,

immediately after its issuance, a copy of

any research report or written

recommendation which ‘‘popularizes’’ a

security in which the DPM acts as DPM;

(v) That the affiliated member shall

file with the Exchange such information

and reports as the Exchange may, from

time to time, require relating to its

transactions in a security in which the

DPM acts as DPM;

(vi) That the affiliated member shall

take appropriate remedial action

against any person violating these

Guidelines and/or the affiliated

member’s internal compliance and

audit procedures adopted pursuant to

subparagraph (b)(i) of these Guidelines,

and that the affiliated member and the

DPM each recognizes that the Exchange

may take appropriate remedial action,

including (without limitation) removal

of securities from the DPM and/or

revocation of the Rule 8.91(d)

exemption, in the event of such a

violation;

(vii) Whether the affiliated member

intends to clear proprietary trades of the

DPM and, if so, the procedures

established to ensure that information

with respect to such clearing activities

will not be used to compromise the

affiliated member’s ‘‘Chinese Wall’’ (the

procedures followed shall, at a

minimum, be the same as those used by

the affiliated member to clear for

unaffiliated third parties); and

(viii) That no individual associated

with the affiliated member shall trade

on the Exchange as a Market-Maker in

any security in which the DPM acts as

DPM.

(Any written statements submitted

pursuant to this paragraph (b) shall be

collectively referred to herein as the

‘‘Exemption Request’’.

(c) In the event that, notwithstanding

the procedures established pursuant to

these Guidelines, any DPM Designee of

a DPM becomes aware of the fact that

the Designee has received from the

affiliated member any material nonpublic corporate or market information

relating to any of the DPM securities, the

DPM Designee shall promptly

communicate that fact and disclose the

information so received to the person

associated with the affiliated member

responsible for compliance with

securities laws and regulations (the

compliance officer) and shall seek a

determination from the compliance

officer as to whether the DPM Designee

should, as a consequence of the

Designee’s receipt of such information,

give up the DPM Designee’s

appointment as a DPM Designee in the

security involved. If the compliance

officer determines that the DPM

Designee should give up the Designee’s

appointment as a DPM Designee, the

DPM Designee shall, at a minimum, give

the appointment up to another DPM

Designee who is not in possession of the

information so received. In any such

event, the compliance officer shall

determine when it is appropriate for the

DPM Designee to recover the Designee’s

appointment as a DPM Designee and

recommence acting as DPM Designee in

the security involved. Procedures shall

be established by the affiliated member

to assure that in any instance when the

compliance officer determines that a

DPM Designee should give up the

Designee’s appointment as a DPM

Designee, such transfer is effected in a

manner which will prevent the market

sensitive information from being

disclosed to the remaining DPM

Designees.

The compliance officer shall keep a

written record of each request received

from a DPM Designee for a

determination as referred to above.

Such record shall be adequate to record

the pertinent facts and shall include, at

a minimum, the identification of the

security, the date, a description of the

information received by the DPM

Designee, the determination made by

the compliance officer, and the basis

therefor. If the appointment is given up,

the record shall also set forth the time

at which the DPM Designee reacquired

the appointment and the basis upon

which the compliance officer

determined that such reacquisition was

appropriate. The Exchange shall be

given prompt notice of any instance

when the compliance officer determines

that a DPM Designee should give up the

DPM Designee’s appointment and also

of the determination that the DPM

Designee should be permitted to

reacquire the appointment. In

accordance with such schedules as the

Exchange shall from time to time

prescribe (at least monthly), the written

record of all requests received by the

compliance officer from DPM Designees

for a determination as referred to above

shall be furnished to the Exchange for

its review. Members are cautioned that

any trading by any person while in

possession of material non-public

information received as a result of any

breach of the internal controls required

by these Guidelines may violate

Exchange Act Rule 10b–5, Exchange Act

Rule 14e–3, just and equitable

principles of trade, or one or more other

provisions of the Exchange Act,

regulations thereunder, or Rules of the

Exchange. The Exchange intends to

review carefully any such trading of

which it becomes aware to determine

whether any such violation has

occurred.

(d) Subparagraph (b)(vii) of these

Guidelines permits an affiliated member

to clear the DPM transactions of the

DPM provided that the affiliated

member establishes procedures to

ensure that information with respect to

such clearing activities will not be used

to compromise the affiliated member’s

‘‘Chinese Wall.’’ Such procedures

should provide that any information

pertaining to security positions and

trading activities of the DPM, and

information derived from any clearing

and margin financing arrangements

between the affiliated member and the

DPM, may be made available only to

those (other than employees actually

performing clearing and margin

financing functions) associated with the

affiliated member that are in senior

management positions and are involved

in exercising general managerial

oversight over the DPM. Generally, such

information may be made available only

to the affiliated member’s chief

executive officer, chief operations

officer, chief financial officer, and

senior officer responsible for managerial

oversight of the DPM, and only for the

purpose of exercising permitted

managerial oversight. Such information

may not be made available to anyone

actually engaged in making day-to-day

trading decisions for the affiliated

member, or in making recommendations

to the customers or potential customers

of the affiliated member. Any margin

financing arrangements must be

sufficiently flexible so as not to limit the

ability of the DPM to meet marketmaking or other obligations under

Exchange Rules.

(e) The Exemption Request shall

detail the internal controls which both

the affiliated member and the DPM

intend to adopt to satisfy each of the

conditions stated in paragraphs (b)(i)

through (b)(viii) of these Guidelines, and

the compliance and the audit

procedures they propose to implement

to ensure that the internal controls are

maintained. If the Exchange determines

that the organizational structure and the

compliance and audit procedures

proposed by the affiliated member and

the DPM are acceptable under these

Guidelines, the Exchange shall so

inform the affiliated member and the

DPM, in writing, at which point a Rule

8.91(d) exemption shall be granted with

or without conditions. Absent such prior

written Exchange approval, an
30532 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

exemption shall not be available. The

Exemption Request should identify the

individuals associated with the

affiliated member that are in senior

management positions (and their titles/

levels of responsibility) to whom

information concerning the DPM trading

activities and security positions, and

information concerning clearing and

margin financing arrangements, is to be

made available, the purpose for which

the information is to be made available,

the frequency with which the

information is to be made available, and

the format in which the information is

to be made available. If any

shareholder, director, officer, partner,

manager, member, principal, or

employee of the affiliated member

intends to serve in any such capacity

with the DPM, or vice versa, the written

statement must include a statement of

the duties of the particular individual at

both entities, and why it is necessary for

such individual to be a shareholder,

director, officer, partner, manager,

member, principal, or employee of both

entities. The Exchange will grant

approval for service at both entities only

if the dual affiliation is for overall

management control purposes or for

administrative and support purposes.

Dual affiliation will not be permitted for

an individual who intends to be active

in the day-to-day business operations of

both entities. Nothing in the foregoing,

however, shall preclude an employee of

one entity who performs strictly

administrative or support functions

(such as facilities, accounting, data

processing, personnel, or similar types

of functions) from performing similar

functions on behalf of the other entity,

provided that such individual is clearly

identified, and the functions performed

on behalf of each entity are specified in

the Exemption Request, and all

requirements in paragraph (a) of these

Guidelines as to maintaining the

confidentiality of information are

satisfied.

(f) In the event that the Exchange

grants a Rule 8.91(d) exemption to an

affiliated member: (i) the affiliated

member and DPM shall abide by any

representations and undertakings set

forth in the Exemption Request and

shall comply with any conditions placed

by the Exchange upon the grant of such

exemption; (ii) the affiliated member

shall promptly notify the Exchange in

writing in the event that any of the

information set forth in the Exemption

Request changes or becomes inaccurate;

and (iii) the Exchange may amend or

revoke its grant of exemptive relief

pursuant to Rule 8.91(d) in the event

that there is a change in the policies,

procedures, or organizational structure

of the affiliated member or DPM or in

any of the information set forth in the

Exemption Request.

[Modified Trading System

Rule 8.80. (a) Deleted [insert date of

effectiveness of SR–CBOE–98–03]. (See

Rule 8.95.)

(b) The MTS Designated Primary

Market-Makers (‘‘DPM’’) shall be

selected and removed as follows:

(1) the selection and removal of DPMs

will be conducted by the MTS

Appointments Committee (‘‘MTS

Committee’’ or ‘‘Committee’’). The

Committee will consist of the ViceChairman of the Exchange, the

Chairman of the Market Performance

Committee, and nine other members, to

be nominated by the Nominating

Committee and appointed by the Board,

whose business functions are as follows:

Six market-makers, one floor broker not

associated with a member organization

that conducts a public customer

business, and two persons associated

with member organizations that conduct

a public customer business. The nine

appointed committee members shall

have two year terms four or five of

which will expire each year.

(2) Any regular member or member

organization is eligible for appointment

as a DPM. The MTS Committee will

select that candidate who appears best

able to perform the functions of DPM in

the designated options class or classes.

Factors to be considered for selection

include the following: adequacy of

capital, experience with trading the

option class or a similar option class,

willingness to promote the Exchange as

a marketplace, operational capacity,

support personnel, history of adherence

to Exchange rules and to all criteria

specified in this Rule as DPM

responsibilities, and trading crowd

evaluations under Rule 8.60.

(3) Applications for DPM

appointment by member organizations

shall include the name of specified

nominees. The MTS Committee shall

specify whether a DPM appointment is

as an individual, or as a member

organization. The Committee may also

specify any one or more conditions on

the appointment, in respect of any

representations made in the application

process, including but not limited to

capital, operations, or personnel. The

DPM is obligated promptly to inform the

Committee of any material change in

financial or operational condition, or in

personnel. The appointment may not be

transferred without approval of the MTS

Committee. The DPM shall serve until

he is relieved of his obligations by the

Committee.

(4) The MTS Committee may, in its

discretion, open an option class or

classes to a new DPM selection process

under any of the following

circumstances:

(i) If upon review, the Committee

determines that a DPM has not

performed satisfactorily any condition

of his appointment under Subpart (b)(3)

or his functions as described in subpart

(c) hereof. The Committee may conduct

reviews of appointments at any time,

and shall do so at least quarterly.

(ii) If a DPM incurs a material

financial, operations, or personnel

change. Provided, however, that the

Committee shall open an option class or

classes to a new DPM selection process

upon request, if a DPM member

organization changes its specified

nominee and the former nominee so

requests.

(iii) If for any reason the DPM should

no longer be eligible for appointment,

should resign appointment, or fail to

perform his duties. The incumbent DPM

may apply for the appointment in the

new selection process.

(5) The MTS Committee has

discretion to relieve a DPM of his

appointment due to a material financial,

operations, or personnel change

warranting immediate action.

(6) If a DPM has been relieved of his

appointment or the appointment

otherwise becomes vacant, the MTS

Committee has discretion to appoint an

interim DPM pending the conclusion of

a new DPM selection process. The

appointment as interim DPM is not a

prejudgment of the new DPM selection

process.

(7) Deleted [insert date of

effectiveness of SR–CBOE–98–03]. (See

Rule 8.95.)

(8) If the MTS Committee decides to

terminate a DPM’s appointment under

subpart (b)(7) of this Rule, the

terminated DPM will receive a

proportionate share of the net book

revenues, not to exceed one-half, for any

period specified by the Committee up to

a maximum of five years. This award

will take into account the length of time

of DPM service, capital commitment

and efforts expended during the DPM

appointment.

(9) The hearing process before the

MTS Committee will be as follows:

(i) Appointment Decisions: Each

applicant for appointment as DPM will

be given an opportunity to present any

matter which he wishes the Committee

to consider in conjunction with the

appointment decision. The Committee

may require that presentation to be

solely or partially in writing, and may

require the submission of additional

information from an applicant, member,
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30533

or any person associated with a

member. Formal rules of evidence do

not apply to these proceedings.

(ii) Decisions to Terminate

Appointments: The DPM who is the

subject of Committee review in

conjunction with the termination of a

DPM appointment will be so advised

and given an opportunity to present any

matter which he wishes the Committee

to consider in conjunction with the

termination decision. The procedure

shall be as described in paragraph 9(i)

above.

(iii) Review: A DPM relieved of an

appointment under subpart (b)(5), (6) or

(7) of this Rule, and, in the case of a

member organization DPM, the relieved

nominee, may seek review of that

decision under Chapter XIX of the

Rules. A DPM relieved of an

appointment under subpart (b)(4) of this

Rule may also seek review of that

decision under Chapter XIX of the

Rules, but only if he applies for

reappointment and is denied.

(10) The MTS Committee may

perform all functions of the Market

Performance Committee under the Rules

in respect of review and evaluation of

the conduct of DPMs in the classes of

his DPM appointment, including but not

limited to Rules 6.71, 8.1, 8.2, 8.3, 8.7,

and 8.60. The process for review of any

action taken by the MTS Committee

under this subpart shall be the same as

if the action had been taken by the

Market Performance Committee.

(c) The DPM is a member who

functions in approved classes as a

market-maker, floor broker, and in the

place of the Order Book Official

(‘‘OBO’’) exempt from Rule 8.8. In

acting as a market-maker, the DPM shall

fulfill all obligations of a market-maker

in his appointed option class or classes.

In acting as a floor broker, and in place

of the OBO in appointed options

classes, the DPM shall fulfill his

obligation of due diligence (and all

other obligations associated with these

functions). In addition, the DPM shall:

(1) assure that disseminated market

quotations are accurate.

(2) assure that each disseminated

market quotation in appointed options

classes shall be honored up to five

contracts, or such other minimum

number as set from time to time by the

MTS Committee.

(3) determine any formula for

generating the automatically updated

market quotations, disclosing the

elements of the formula to the members

of the trading crowd.

(4) in addition to fulfilling general

market-maker obligations under Rule

8.7, be present at the trading post

throughout every business day, and,

with respect to his trading as marketmaker, effect trades which have a high

degree of correlation with the overall

pattern of trading for each series in the

options classes involved.

(5) participate at all times in any

automated execution system which may

be open in appointed option classes.

(6) resolve trading disputes, subject to

Floor Official review upon the request

of any party to the dispute.

(7) In executing transactions for his

own account as market-maker, the DPM

shall (i) accord priority to orders he

represents as floor broker over his

activity as market-maker; (ii) have a

right to participate pro rata with the

trading crowd in trades that take place

at the DPM’s principal bid or offer; and

(iii) not initiate a transaction for his own

account that would result in putting

into effect any stop or stop limit order

which may be in the book or which he

represents as floor broker except with

the approval of a Floor Official and

when the DPM guarantees that the stop

or stop limit order will be executed at

the same price as the electing

transaction.

(8) In appointed options classes and

in other securities traded subject to the

rules in Chapter XXX for which a DPM

has been appointed, the DPM shall

perform all functions of the Order Book

Official, pursuant to Rules 7.3 through

71.0, and may, but is not obligated to,

accept non-discretionary orders which

are not eligible to be placed on the

public order book, and to represent such

orders as a Floor Broker. The DPM may

not represent discretionary orders as a

Floor Broker or otherwise. All orders in

the DPM’s possession which are eligible

to be booked shall be booked.

(9) The DPM is designated to disclose

book information under Rule 7.8.

(d) The Exchange shall continue to be

responsible for the maintenance,

handling, and billing of the book in

option classes in which a DPM has been

appointed, and shall retain and

compensate the DPM for performing the

OBO function. The Exchange will make

personnel available to assist the DPM, as

the DPM shall require in the DPM’s

OBO function, for which personnel the

Exchange may charge the DPM a

reasonable fee.

* * * Interpretations and Policies: .01

Willingness to promote the Exchange as

a marketplace includes assisting in

meeting and educating market

participants (and taking the time for

travel related thereto), maintaining

communications with member firms in

order to be responsive to suggestions

and complaints, responding to

suggestions and complaints, responding

to competition in offering competitive

markets and competitively priced

services, and other like activities.

.02 Every registered DPM shall

maintain a cash or liquid asset position

in the amount of $100,000 or in an

amount sufficient to assume a position

of twenty trading units of each security

in which the DPM holds an

appointment, whichever amount is

greater. In the event that two or more

DPMs are associated with each other

and deal for the same DPM account, this

requirement shall apply to such DPMs

as one unit, rather than to each DPM

individually.

.03 In addition to his responsibilities

as a Market-Maker, a person appointed

to serve as DPM in one or more

securities traded subject to the rules in

Chapter XXX shall continuously

maintain on the floor of the Exchange a

two-sided market in the securities for

which he has been appointed,

consisting of a current bid and a current

offer for his account, at prices

reasonably calculated, under existing

circumstances, to contribute to the

maintenance of a supply of and demand

for such securities sufficient to afford

liquidity to other buyers and sellers of

such securities whose orders are

represented on the Exchange floor.

Limitations on Dealings of Designated

Primary Market-Makers

Rule 8.81. (a) No member (other than

a Designated Primary Market Maker

(‘‘DPM’’) acting pursuant to Rule 8.80

above), limited partner, officer,

employee, approved person or party

approved, who is affiliated with a DPM

or member organization, shall, during

the period of such affiliation, purchase

or sell any option in which such DPM

is registered for any account in which

such person or party has a direct or

indirect interest. Any such person or

party may, however, reduce or liquidate

an existing position in an option in

which such DPM is registered provided

that such orders are (i) identified as

being for an account in which such

person or party has a direct or indirect

interest; (ii) approved for execution by

a Floor official; and (iii) executed by the

DPM in a manner reasonably calculated

to contribute to the maintenance of

price continuity with reasonable depth.

No order entered pursuant to this

paragraph (a) shall be given priority

over, or parity with, any order

represented in the market at the same

price.

(b) Notwithstanding the provisions of

Rule 8.80, an approved person or

member organization which is affiliated

with a DPM shall not be subject to Rule

8.81(a), provided that it has established

and obtained Exchange approval of
30534 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

procedures restricting the flow of

material non-public corporate or market

information between itself and the DPM

and any member, officer, or employee

associated therewith.

(c) For such member organization

which controls or is controlled by or is

under common control with, another

organization, the exemption provided in

paragraph (b) of this Rule shall be

available to it only where the Exchange

has determined that the relationship

between the DPM, each person

associated therewith, and such other

organization satisfies all the conditions

specified in the guidelines.

(d) The procedures referred to in

paragraph (b) of this rule shall comply

with such guidelines as are promulgated

by the Exchange.

Guidelines for Exemptive Relief Under

Rule 8.81 for Members or Member

Organizations Affiliated with a

Designated Primary Market-Maker

(a) The following restrictions apply to

a member or member organization

which is affiliated with a designated

primary market-maker (‘‘DPM’’):

It may not purchase or sell for any

account in which it has a direct or

indirect interest any security in which

its affiliate is a DPM.

It may not engage in any business

transaction with the issuer of a security

or its insiders in which its affiliate is a

DPM.

The member firm may not accept

orders directly from the issuer, its

insiders or certain designated parties in

securities in which its affiliate is a DPM.

This Rule provides a means by which

an affiliated firm doing business with

the public as defined in Rule 9.1

(hereafter ‘‘member organization’’) may

obtain an exemption from the

restrictions discussed above. This

exemption is only available to a member

firm which obtains prior Exchange

approval for procedures restricting the

flow of material, non-public information

between it and its affiliated DPM, i.e., a

‘‘Chinese Wall.’’ This Rule sets forth the

steps a member firm must undertake, at

a minimum, to seek to qualify for

exemptive relief. Any firm that does not

obtain Exchange approval for its

procedures in accordance with these

Guidelines shall remain subject to the

restrictions set forth above.

(b) These Guidelines require that an

affiliated member firm establish

procedures which are sufficient to

restrict the flow of information between

itself and the DPM. Generally, an

affiliated member firm seeking an

exemption from the Rules discussed in

paragraph (a) above should establish its

operational structure along the lines

discussed below.

(i) The affiliated member firm and the

DPM must be organized as separate and

distinct organizations. At a minimum,

the two organizations must maintain

separate and distinct books, records and

accounts and satisfy separately all

applicable financial and capital

requirements. While the Exchange will

permit the affiliated member firm and

the DPM to be under common

management, in no instance may

persons on the member firm’s side of

the ‘‘Wall’’ exercise influence over or

control the DPM’s conduct with respect

to particular securities or vice versa.

Any general managerial oversight must

not conflict with or compromise in any

way the DPM’s market making

responsibilities pursuant to the Rules of

the Exchange.

(ii) The affiliated member firm and

the DPM must establish procedures

designed to prevent the use of material

non-public corporate or market

information in the possession of the

affiliated member firm to influence the

DPM’s conduct and avoid the misuse of

DPM market information to influence

the affiliated member firm’s conduct.

Specifically, the affiliated member firm

and the DPM organization must ensure

that material non-public corporate

information relating to trading positions

taken by the affiliated member firm in

a DPM security are not made available

to the DPM; or to any member, partner,

director or employee thereof; by a DPM

while in possession of non-public

corporate information derived by the

affiliated member firm from any

transaction or relationship with the

issuer or any other person in possession

of such information; that advantage is

not taken of knowledge of pending

transactions or the member firm’s

recommendations; and that all

information pertaining to positions

taken or to be taken by the DPM and to

the DPM’s ‘‘book’’ in a DPM security is

kept confidential and is not made

available to the affiliated member firm.

(c) An affiliated member firm seeking

exemption shall submit to the Exchange

a written statement which shall set

forth:

(i) The manner in which it intends to

satisfy each of the conditions stated in

subparagraphs (b)(i) and (b)(ii) of these

Guidelines, and the compliance and

audit procedures it proposes to

implement to ensure that the functional

separation is maintained;

(ii) The designation and identification

of the individual(s) within the affiliated

member firm responsible for

maintenance and surveillance of such

procedures;

(iii) That the DPM may make available

to a broker affiliated with it only the sort

of market information that it would

make available in the normal course of

its DPM activity to any other broker and

in the same manner that it would make

information available to any other

broker; and that the DPM may only

make such information available to a

broker affiliated with the member firm

pursuant to a request by such broker for

such information and may not, on its

own initiative, provide such broker with

such information;

(iv) That where it ‘‘popularizes’’ a

security in which it acts as DPM it must

disclose that an associated DPM makes

a market in the security, may have a

position in the security, and may be on

the opposite side of public orders

executed on the Floor of the Exchange

in the security, and the firm will notify

the Exchange immediately after the

issuance of a research report or written

recommendation;

(v) That it will file with the Exchange

such information and reports as the

Exchange may, from time to time,

require relating to its transactions in a

specialty security;

(vi) That it will take appropriate

remedial action against any person

violating these Guidelines and/or its

internal compliance and audit

procedures adopted pursuant to

subsection (c)(i) of these Guidelines,

and that it and its associated DPM each

recognizes that the Exchange may take

appropriate remedial action, including

(without limitation) reallocation of

securities in which it serves as DPM

and/or revocation of the exemption, in

the event of such a violation;

(vii) Whether the firm intends to clear

proprietary trades of the DPM and, if so,

the procedures established to ensure

that information with respect to such

clearing activities will not be used to

compromise the firm’s Chinese Wall

(the procedures followed shall, at a

minimum, be the same as those used by

the firm to clear for unaffiliated third

parties); and

(viii) That no individual associated

with it may trade as a market-maker in

any security in which the associated

DPM has an appointment.

(d) Paragraph (b) of these Guidelines

requires the establishment of procedures

designed to prohibit the flow of certain

market sensitive information from a

member firm to its affiliated DPM or to

any member, partner, director or

employee thereof. In the event that,

notwithstanding these procedures, any

DPM becomes aware of the fact that he

has received any such information

relating to any of his DPM securities

from his organization’s affiliated

member firm, the DPM shall promptly

communicate that fact and disclose the
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30535

information so received to the person in

the affiliated member firm responsible

for compliance with securities laws and

regulations (the compliance officer) and

shall seek a determination from the

compliance officer as to whether he

should, as a consequence of his receipt

of such information, give up the

appointment in the option class

involved. If the compliance officer

determines that the DPM should give up

the DPM appointment, the DPM shall, at

a minimum, give it up to another

member who is registered as DPM in the

security and who is not in possession of

the information so received. In any such

event, the compliance officer shall

determine when it is appropriate for the

DPM to recover the DPM security and

recommence acting as DPM in the DPM

security involved. Procedures shall

established by the affiliated member

firm to assure that in any instance when

the compliance officer determines that a

DPM should give up the appointment,

such transfer is effected in a manner

which will prevent the market sensitive

information from being disclosed to the

temporary DPM.

The compliance officer shall keep a

written record of each request received

from a DPM for a determination as

referred to above. Such record shall be

adequate to record the pertinent facts

and shall include, at a minimum, the

identification of the security, the date, a

description of the information received

by the DPM, the determination made by

the compliance officer and the basis

therefor. If the appointment is given up,

the record shall also set forth the time

at which the DPM reacquired the

appointment and the basis upon which

the compliance officer determined that

such reacquisition was appropriate. The

Exchange shall be given prompt notice

of any instance when the compliance

officer determines that a DPM should

give up the appointment and also of the

determination that such DPM should be

permitted to reacquire the appointment.

In accordance with such schedules as

the Exchange shall from time to time

prescribe (at least monthly), the written

record of all requests received by the

compliance officer from the affiliated

DPM for a determination as referred to

above shall be furnished to the

Exchange for its review. Members and

member organizations are cautioned

that any trading by any person while in

possession of material, non-public

information received as a result of any

breach of the internal controls required

by the Guidelines may have violated

Rule 10b–5, Rule 14e–3, just and

equitable principles of trade or one or

more other provisions of the Exchange

Act, or regulations thereunder or rules

of the Exchange. The Exchange intends

to review carefully any such trading of

which it becomes aware to determine

whether any such violation has

occurred.

(e) Subparagraph (c)(vii) of these

Guidelines permits a member firm to

clear the DPM transactions of its

affiliated DPM provided it establishes

procedures to ensure that information

with respect to such clearing activities

will not be used to compromise the

firm’s Chinese Wall. Such procedures

should provide that any information

pertaining to security positions and

trading activities of the DPM, and

information derived from any clearing

and margin financing arrangements

between the affiliated member firm and

the DPM, may be made available only to

those (other than employees actually

performing clearing and margin

financing functions) in senior

management positions in the affiliated

member firm who are involved in

exercising general managerial oversight

over the DPM. Generally, such

information may be made available only

to the affiliated member firm’s chief

executive officer, chief operations

officer, chief financial officer, and

senior officer responsible for managerial

oversight of the DPM, and only for the

purpose of exercising permitted

managerial oversight. Such information

may not be made available to anyone

actually engaged in making day-to-day

trading decisions for the affiliated

member firm, or in making

recommendations to the customers or

potential customers of the affiliated

member firm. Any margin financing

arrangements must be sufficiently

flexible so as not to limit the ability of

any DPM to meet market-making or

other obligations under Exchange Rules.

(f) The written statement require by

Paragraph (c) of these Guidelines shall

detail the internal controls which both

the affiliated member firm and the DPM

intend to adopt to satisfy each of the

conditions stated in subparagraphs (c)(i)

through (c)(viii) of these Guidelines, and

the compliance and the audit

procedures they propose to implement

to ensure that the internal controls are

maintained. If the Exchange determines

that the organizational structure and the

compliance and audit procedures

proposed by the member firm and its

affiliated DPM are acceptable under the

Guidelines, the Exchange shall so

inform the member firm and its

affiliated DPM, in writing, at which

point an exemption shall be granted.

Absent such prior written approval, an

exemption shall not be available. The

written statement should identify the

individuals in senior management

positions (and their titles/levels of

responsibility) of the affiliated member

firm to whom information concerning

the DPM trading activities and security

positions, and information concerning

clearing and margin financing

arrangements, is to be made available,

the purpose for which it is to be made

available, the frequency with which the

information is to be made available, and

the format in which the information is

to be made available. If any partner,

director, officer or employee of the

affiliated member firm intends to serve

in any such capacity with the DPM, or

vice versa, the written statement must

include a statement of the duties of the

particular individual at both entities,

and why it is necessary for such

individual to be a partner, director,

officer or employee of both entities. The

Exchange will grant approval for service

at both entities only if the dual

affiliation is for overall management

control purposes or for administrative

and support purposes. Dual affiliation

will not be permitted for an individual

who intends to be active in the day-today business operations of both entities.

Nothing in the foregoing, however, shall

preclude an employee of one entity who

performs strictly administrative or

support functions (such as facilities,

accounting, data processing, personnel

and similar types of services) from

performing similar functions on behalf

of the other entity, provided that such

individual is clearly identified, and the

function performed on behalf of each

entity are specified, in the written

statement described above, and all

requirements in Paragraph (b) above as

to maintaining the confidentiality of

information are met.]

Section D: Allocation of Securities and

Location of Trading Crowds and DPMs

Rule 8.95. Allocation of Securities and

Location of Trading Crowds and DPMs

* * * * *

* * * Interpretations and Policies: .01

Subject to Rule 8.83(f) [8.80(b)(6)], it

shall be the responsibility of the

Allocation Committee and the Special

Product Assignment Committee

pursuant to paragraph (a) of this Rule to

reallocate a security in the event that the

security is removed pursuant to another

Exchange Rule from the trading crowd

or DPM to which the security has been

allocated or in the event that for some

other reason the trading crowd or DPM

to which the security has been allocated

no longer retains such allocation.

* * * * *
30536 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

3See Securities Exchange Act Release No. 24934

(September 22, 1987) 52 FR 36122 (September 25,

1987) (order approving file No. SR–CBOE–87–18).

4See Securities Exchange Act Release No. 34999

(November 22, 1994) 59 FR 61361 (November 30,

1994) (order approving File No. SR–CBOE–94–36).

5The Exchange’s process for allocating securities

to DPMs and Market-Maker trading crowds is set

forth in Rule 8.95, recently approved by the

Commission. See Securities Exchange Act Release

No. 39879 (April 16, 1998) 63 FR 20227 (April 23,

1998).

Chapter XXX—Stocks, Warrants and Other

Securities

* * * * *

Rule 30.40. Market-Makers

* * * * *

(b) Classes of Contracts Other Than

Those to Which Appointed. With

respect to securities in which he does

not hold an appointment, a MarketMaker should not engage in transactions

for an account in which he has an

interest which are disproportionate in

relation to, or in derogation of, the

performance of his obligations, as

specified in paragraph (a) of this Rule,

with respect to those securities to which

he does hold appointments. Whenever a

Market-Maker enters the trading crowd

for securities in which he does not hold

an appointment in other than a floor

brokerage capacity, he shall fulfill the

obligations established by paragraph (a)

of this rule. On a day on which a

transaction in a non-appointed security

is effected for the account of a Marketmaker, such Market-Maker may be

required to undertake the obligations

specified in paragraph (a) of this Rule

upon request by a Floor Broker, or by

the Order Book Official or DPM in

accordance with Rules 7.5 and 8.85(b)

[8.80(c)], as applicable. Furthermore,

Market-Makers should not:

(i) Congregate in a particular security;

or

(ii) Individually or as a group,

intentionally, or unintentionally,

dominate the market in a particular

security; or

(iii) Effect purchases or sales on the

floor of the Exchange except in a

reasonable and orderly manner.

* * * * *

Rule 30.73—Application of Exchange

Rules

* * * * *

* * * Interpretations and Policies:

* * * * *

.02 Any acceptance of a

commitment or obligation to trade

received on the floor through ITS or any

other application of the System shall

comply with the rules applicable to the

making of bids and offers and

transactions on the floor, except where

the context otherwise requires. In

addition, the following rules shall be

applicable in the case where

commitments or obligations to trade are

issued (transmitted) from the floor of the

Exchange Rules 6.3, 6.6, 6.21, 6.22, 6.24,

8.1 through 8.6, 8.8, 8.85, 8.87, 8.91,

[8.80, 8.81,] 30.3, 30.4, 30.16, 30.18 and

30.40.

* * * * *

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

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

1. Purpose

The Exchange’s DPM program began

as a pilot program in 1987 with 4 DPMs

allocated a total of 11 equity option

classes.3 In the more than 10 years since

the introduction of the DPM program,

the program has experienced significant

growth and success and was granted

permanent approval by the Commission

in 1994.4 Currently, the program

includes 28 DPMs, and those DPMs

have been allocated over 675 equity

option classes, as well as numerous

index option classes and structured

products.

Over the course of the more than 10

year evolution of the DPM program, the

Exchange has developed various

procedures for implementing the rule

provisions that govern the program.

However, the Exchange has made

relatively few changes to these rule

provisions, which are set forth in CBOE

Rules 8.80 and 8.81, since the time these

provisions were first promulgated in

1987. The purpose of this proposed rule

change is to update the rule provisions

relating to DPMs so that they address

the various procedures that have been

implemented over time pursuant to

Rules 8.80 and 8.81 and so that they

incorporate various proposed

improvements and enhancements that

the Exchange believes will be beneficial

to the operation of the DPM program

based on the Exchange’s decade-long

experience in operating the program.

Additionally, the Exchange proposes to

reorganize the rule provisions that

govern the DPM program by segregating

them into 12 separate rules that each

address 1 of the 12 primary aspects of

the DPM program. The Exchange

believes that this restructuring will

improve the organization of the rule

provisions relating to DPMs and make it

easier for the Exchange’s membership to

reference and understand these

provisions.

The proposed rule changes are the

product of a comprehensive review and

evaluation by the Exchange of the

current rule provisions relating to

DPMs. This thorough and detailed

review and evaluation was conducted

by Exchange staff, the Exchange’s

Modified Trading System Appointments

Committee (‘‘MTS Committee’’), the

Exchange’s Floor Directors Committee,

and the Exchange’s Board of Directors,

and involved numerous meetings and

discussions by and among these groups

over several years.

Under this proposed change, the

Exchange’s rule provisions relating to

DPMs are proposed to be segregated into

proposed Rules 8.80 through 8.91. Set

forth below is a summary of each of

these proposed rules.

Rule 8.80—DPM Defined. Proposed

Rule 8.80 defines a DPM as a member

organization that is approved by the

Exchange to function in allocated

securities as a Market-Maker, Floor

Broker, and Order Book Official. The

only change to this definition from the

current DPM definition is that proposed

Rule 8.80 requires a DPM to be a

member organization. The purpose of

this additional requirement is to ensure

that each DPM has a formal

organizational structure in place to

govern the manner in which it will

operate and to define the relationship

between the individuals associated with

the DPM. Proposed Rule 8.80 also

clarifies that DPMs are approved by the

MTS Committee and are allocated

securities by the Exchange’s Allocation

Committees.5

Rule 8.81—DPM Designees. Proposed

Rule 8.81 is divided into four

subparagraphs, (a) through (d), and sets

forth the requirements applicable to

DPM Designees.

Proposed Rule 8.81(a) makes explicit

that a DPM may act as a DPM solely

through its DPM Designees and defines

a DPM Designee as an individual who

is approved by the MTS Committee to

represent a DPM in its capacity as a

DPM. Proposed Rule 8.81(a) also

provides that the MTS Committee may

subclassify DPM Designees and require

certain DPM Designees to be subject to
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30537

6Upon the effectiveness of this proposed rule

change, the MTS Committee members at that time

will remain as members of the Committee until

their then current terms expire. Because MTS

Committee members currently serve 2 year terms

(with 4 or 5 of those terms expiring each year) and

because Rule 8.82 provides that the MTS

Committee members will serve 3 year terms (with

3 of those terms expiring each year), the Exchange’s

Nominating Committee will shorten the length of

some of the terms of the MTS Committee positions

elected in the first 2 years following the

effectiveness of this rule change in order to ensure

that 3 positions on the MTS Committee will come

up for election each year once the 3 year terms are

fully phased in.

7Many of the obligations of a DPM, which are

currently set forth in Rule 8.80(c), are proposed to

be moved to proposed Rule 8.85, discussed below.

specified supervision and/or to be

limited in their authority to represent

the DPM. For example, the MTS

Committee may wish to require that less

experienced DPM Designees only act in

that capacity when a more experienced

DPM Designee is also present at the

trading station to provide supervision.

Proposed Rule 8.81(b) requires each

DPM Designee of a DPM to (i) be an

Exchange member, (ii) be a nominee of

or an affiliate of the DPM, or own a

membership that has been registered for

the DPM or for an affiliate of the DPM,

(iii) be registered with the Exchange as

a Market-Maker and a Floor Broker, (iv)

have in place an authorization from the

DPM to act on its behalf and a guarantee

from the DPM guarantying the

designee’s obligations arising out of its

representation of the DPM, and (v) be

approved by the MTS Committee.

Additionally, Rule 8.81(b) provides that

a DPM Designee approval will expire if

the individual does not have trading

privileges on the Exchange for a 6

month period. This provision is

intended to ensure that any DPM

Designee who has no trading privileges

for 6 months (and therefore does not

engage in trading activities during that

period) and who then desires to act

again in the capacity of a DPM Designee

will be reviewed by the MTS Committee

so that the Committee can evaluate

whether the individual remains

qualified to act as a DPM Designee.

Proposed Rule 8.81(c) requires each

DPM to have at least 2 DPM Designees

who are nominees of the DPM or who

have a membership that has been

registered for the DPM. Exchange rules

require each member organization to

have at least 1 nominee or person who

has registered his or her membership for

the organization, and the purpose of

Rule 8.81(c) is to help to ensure that a

DPM remains qualified to act as a

member organization, and hence a DPM,

if a nominee or person who has

registered his or her membership for the

organization departs from the

organization.

Proposed Rule 8.81(d) incorporates

two existing rule provisions. First,

proposed Rule 8.81(d) provides that a

DPM Designee of a DPM may not trade

as a Market-Maker or Floor Broker in

securities allocated to the DPM unless

the DPM Designee is acting on behalf of

the DPM in its capacity as a DPM.

Similar provisions are currently

embodied in CBOE Rule 8.3.01 (which

is proposed to be deleted) and in current

Rule 8.81 (which is proposed to be

substantially restated in proposed Rule

8.91). Second, proposed Rule 8.81(d)

provides that a DPM Designee is exempt

from the provisions of CBOE Rule 8.8

when acting on behalf of the DPM in its

capacity as a DPM. Rule 8.8 generally

prohibits a member from acting as both

a Market-Maker and Floor-Broker in a

trading station on the same day, and the

exemption to Rule 8.8 for DPMs is

currently set forth in current Rule

8.80(c).

Rule 8.82—MTS Committee. Proposed

Rule 8.82 governs the composition of

the MTS Committee and retains the

current 11 member composition of the

Committee, which consists of the ViceChairman of the Exchange, the

Chairman of the Exchange’s Market

Performance Committee, 4 members

whose primary business is as a MarketMaker, 2 members whose primary

business is as a Market-Maker or as a

DPM Designee, 1 member whose

primary business is as a Floor Broker

who is not associated with a member

organization that conduct a public

customer business, and 2 persons

associated with member organizations

that conduct a public customer

business. Currently, the 9 members of

the MTS Committee, other than the

Vice-Chairman and the Chairman of the

Market Performance Committee, are

nominated by the Nominating

Committee and appointed by the Board

of Directors to serve 2 year terms on the

Committee. Under Rule 8.82, these 9

members of the Committee will be

elected by the Exchange’s membership

in the same manner that elected

Exchange Directors are chosen by the

membership. In addition, Rule 8.82

increases the length of the terms to be

served by these 9 members of the

Committee to 3 years 6 and provides that

no more than 2 of the 9 elected MTS

Committee members may be associated

with a DPM. Because of the important

responsibilities of the MTS Committee,

the Exchange believes that that MTS

Committee should be composed of

individuals who have been elected by

the membership. The Vice-Chairman is

already elected by the membership and

the Chairman of the Market Performance

Committee is typically one of the

Exchange’s elected Directors. In

addition, the Exchange believes that

increasing the term lengths of the MTS

Committee members by one year will

provide the Committee with more

continuity and expertise in addressing

issues that come before the Committee.

Rule 8.83—Approval to Act as a DPM.

Proposed Rule 8.83 addresses the DPM

approval process. For the most part, it

consists of a restatement of the current

provisions that govern the DPM

approval process as set forth in current

Rule 8.80.7 For example, Rule 8.83

describes the criteria that may be

considered by the MTS Committee in

deciding whether to approve an

application as a DPM (including such

factors as adequacy of capital,

operational capacity, trading

experience, regulatory history, and

market performance), and provides that

each applicant will be given an

opportunity to present any matter which

it wishes the MTS Committee to

consider in conjunction with the

approval decision. Additionally, as with

any decision of the MTS Committee

(other than an approval or failure to

approve a proposed transfer of a DPM

appointment, which is subject to direct

review by the Board of Directors as

discussed below), any applicant not

approved by the MTS Committee to act

as a DPM may appeal that decision to

the Exchange’s Appeal Committee

under Chapter XIX of the Exchange’s

Rules. The appeal procedures provide

for the right to a formal Appeals

Committee hearing concerning any such

decision, and the decision of the

Appeals Committee may be appealed to

the Board of Directors pursuant to CBOE

Rule 19.5.

Rule 8.84—Conditions on the

Allocation of Securities to DPMs.

Proposed Rule 8.84 grants the MTS

Committee new authority to establish (i)

restrictions applicable to all DPMs on

the concentration of securities allocable

to a single DPM and (ii) minimum

eligibility standards applicable to all

DPMs which must be satisfied in order

for a DPM to receive allocations of

securities, including but not limited to

standards relating to adequacy of capital

and number of personnel. Among the

reasons for granting the MTS Committee

the authority to limit the concentration

of securities allocable to a single DPM

is to promote competition on the

Exchange’s trading floor and to help to

ensure that no DPM is allocated such a

large number of securities that it would

be difficult for the Exchange to quickly

reallocate those securities to other DPMs

and/or Market-Maker trading crowds in
30538 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

the event that for some reason the DPM

were no longer able to preform as a

DPM. Among the reasons for granting

the MTS Committee the authority to

establish minimum eligibility standards

for DPMs to receive allocations of

securities is to help to ensure that a

DPM has the financial and operational

capacity to handle additional

allocations of securities. Similarly, the

MTS Committee may utilize this Rule to

establish specific minimum market

performance standards that must be

satisfied by the DPMs in order to receive

allocations of securities so that a DPM

that is not performing adequately with

respect to the securities that have

already been allocated to the DPM is not

allocated additional securities.

Rule 8.85—DPM Obligations.

Proposed Rule 8.85 describes the

obligations of a DPM, including the

general obligation with respect to each

of its allocated securities to fulfill all of

the obligations under Exchange Rules of

a Market-Maker, of a Floor Broker (to

the extent that the DPM acts as a Floor

Broker), and of an Order Book Official.

Most of the obligations and other

provisions contained in proposed Rule

8.85 are contained in current Rule 8.80.

In some instances, these provisions are

proposed to be slightly modified to

clarify their scope. Among the new DPM

obligations and related provisions set

forth in Rule 8.85 are the following:

Proposed Rule 8.85(a)(vi) requires a

DPM to segregate in a manner

prescribed by the MTS Committee (i) all

transactions consummated by the DPM

in securities allocated to the DPM and

(ii) any other transaction consummated

by or on behalf of the DPM that are

related to the DPM’s DPM business.

This will permit the Exchange to

monitor each DPM’s trading positions in

order to ensure that the DPM is in

compliance with the financial and other

requirements that are applicable to

DPMs. In addition, the Exchange

proposes to charge a $250 processing fee

for each DPM Designee that will be

executing transactions on behalf of a

DPM in that DPM’s segregated

account(s). This is the same fee amount

that is charged for each participant in a

joint account established pursuant to

CBOE Rule 8.9. Since DPMs currently

utilize joint accounts to segregate their

transactions, the proposed $250 fee will

essentially replace the $250 joint

account fee that DPMs are currently

being assessed in this regard.

Current Rule 8.80(c)(3) requires each

DPM to determine a formula for

generating automatically updated

market quotations and to disclose the

components of the formula to the other

members trading at the DPM’s trading

station. Proposed Rule 8.85(a)(viii)

restates this requirement and clarifies

the requirement by specifying that the

components of the formula that are

required to be disclosed include the

option pricing calculation model,

volatility, interest rate, dividend, and

what is used to represent the price of

the underlying. Rule 8.85(a) also

provides that the MTS Committee shall

have the discretion to exempt DPMs

using proprietary automated quotation

updating systems having to disclose

proprietary information concerning the

formulas used by those systems. Most

DPMs utilize the Exchange’s Auto Quote

System to generate automatically

updated market quotations and

therefore would not be eligible for an

exemption of this kind.

Proposed Rule 8.85(b)(i) restates the

current requirement that a DPM is

obligated to place in the public order

book any order in the DPM’s possession

that is eligible for entry into the book,

subject to two limited exceptions. First,

Rule 8.85(b)(i)(A) clarifies that a DPM is

not obligated to book a book-eligible

order if the DPM immediately executes

the order upon its receipt. This permits

a DPM to immediately execute a

marketable customer order without

having to delay that execution by first

placing the order in the public order

book. Second, Rule 8.85(b)(i)(B)

provides that a DPM may refrain from

booking a book-eligible order if the

customer who placed the order has

requested that the order not be booked,

and upon receipt of the order, the DPM

announces in public outcry the

information concerning the order that

would be displayed if the order were a

displayed order in the public order

book. Rule 8.85(b)(i)(B) is intended to

accommodate the wishes of customers

who desire an opportunity for price

improvement before the execution of a

limit order at its limit price, while at the

same time requiring the information

concerning the order that would have

been displayed in the public order book

to be disclosed to the other members of

the trading crowd, so that the other

members of the trading crowd are not at

an informational disadvantage.

Proposed Rule 8.85(b)(ii) elaborates

upon the requirement set forth in Rule

8.85(b)(i) by requiring that a DPM not

remove any order from the public order

book except in two circumstances. First,

Rule 8.85(b)(ii)(A) clarifies that a DPM

may remove an order from the book if

the order is canceled, expires, or is

executed. Second, Rule 8.85(b)(ii)(B)

clarifies that a DPM may return an order

to the member that placed the order

with the DPM when so requested by that

member. For example, a Floor Broker

may desire to leave an order with a DPM

temporarily while the Floor Broker

attends to business elsewhere on the

trading floor, or until such time as the

prevailing market moves closer to the

order’s limit price.

Proposed Rule 8.85(b)(iii) restates the

current requirement that a DPM is

obligated to accord priority to any order

which the DPM represents as agent over

the DPM’s principal transactions, and

sets forth one narrow exception to this

requirement in circumstances where the

customer who placed the order has

consented to not being accorded such

priority. This exception is intended to

address situations such as the following.

Under both the current and proposed

DPM rules, a DPM may, but is not

obligated to, accept non-discretionary

orders that are not eligible to be placed

in the public order book, such as orders

from a competing specialist or other

broker-dealer. Competing specialists

have on occasion inquired as to whether

a DPM would be willing to represent an

order on behalf of the competing

specialist if the competing specialist

were to agree to waive the priority

requirement and/or allow the DPM to

participate (or match) with the

competing specialist’s order. However,

despite the fact that both the DPM and

the customer (in this case, the

competing specialist) may desire to have

such an arrangement, they are unable to

do so under the current rules, which

allow no exceptions to the requirement

that a DPM accord priority to the orders

it represents. Rule 8.85(b)(iii) would

permit a DPM to accommodate a

customer who desires to have a DPM

represent an order and to waive this

priority requirement with respect to the

order.

Proposed Rule 8.85(b)(iv) restates the

current requirement that a DPM may not

charge any brokerage commission with

respect to the execution of any order for

which the DPM has acted as both agent

and principal. Additionally, just as with

respect to the priority requirement set

forth in proposed Rule 8.85(b)(iii), there

is an exception to the requirement set

forth in Rule 8.85(b)(iv) if the customer

consents. The reasons for this exception

are the same as the reasons for the

exception to the priority requirement in

Rule 8.85(b)(iii). It should also be noted

that although Rule 8.85(b)(iv) would not

permit a DPM to charge a brokerage

commission with respect to the

execution of an order for which the

DPM acts as both agent and principal

(subject to the limited exception

described above), the DPM would be

permitted under Rule 8.85(b)(iv) to bill

back to the customer any Exchange fees
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30539

charged to the DPM with respect to the

execution of the order.

As noted above, a DPM may, but is

not obligated to, accept nondiscretionary orders that are not eligible

to be placed in the public order book.

However, proposed Rule 8.85(b)(v) also

provides that a DPM is required to act

as a Floor Broker to the extent required

by the MTS Committee. The purpose of

Rule 8.85(b)(v) is to permit the MTS

Committee to require a DPM to act as a

Floor Broker if there is a need for the

DPM to act in this capacity. For

example, the MTS Committee may

require a DPM to act as a Floor Broker

if regular Floor Brokers are not available

to represent orders in the securities

allocated to the DPM.

Proposed Rule 8.85(b)(vi) restates the

current requirement that a DPM may not

represent discretionary orders as a Floor

Broker or otherwise. Rule 8.85 also

provides that the MTS Committee may

authorize a DPM, on a temporary basis,

to accept and represent types of orders

in one or more of the securities

allocated to the DPM which vest the

DPM with limited discretion, if the MTS

Committee determines that unusual

circumstances are present and that the

acceptance and representation of such

orders by the DPM is necessary in order

to assure that there will be adequate

representation in such securities of

those types of orders. As with Rule

8.85(b)(v), the purpose of this provision

is to grant MTS Committee the ability to

invoke this provision if there is a need

for a DPM to act in this capacity, such

as if regular Floor Brokers are not

available to do so.

Rule 8.86—DPM Financial

Requirements. Proposed Rule 8.86

restates the current requirement that

each DPM is required to maintain net

liquidating equity in its DPM account of

not less than $100,000. It also includes

two requirements which, although they

are currently applicable to DPMs, are

not referenced in the current DPM rules.

Specifically, Rule 8.86 includes the

requirement that each DPM maintain

net capital sufficient to comply with the

requirements of Rule 15c3–1 under the

Act and that each DPM which is an

Exchange Clearing Member also

maintain net capital sufficient to

comply with the requirements of The

Options Clearing Corporation. Although

there are other rules which already

subject DPMs to these requirements, the

Exchange believes that it is worthwhile

to also include these requirements in

Rule 8.86 so that the Rule is more

informative and complete.

Additionally, proposed Rule 8.86

requires DPMs to maintain net

liquidating equity in their DPM

accounts in conformity with such

guidelines as the MTS Committee may

establish from time to time. The

Exchange currently uses DPM financial

guidelines in connection with the

process for allocating securities to

DPMs, and Rule 8.86 would permit the

Exchange to implement and enforce

such guidelines and future equity

guidelines as DPM financial

requirements under the Rules. The MTS

Committee has established financial

guidelines that it intends to utilize

under Rule 8.86. Under these

guidelines, in order for a DPM to apply

for the allocation of securities, the DPM

must have in its DPM account $350,000

plus $25,000 in equity for each security

that has been allocated to the DPM in

excess of the initial 8 securities

allocated to the DPM. Because these

guidelines are more stringent than the

current requirement that a DPM must

maintain an equity amount sufficient to

assume a position of 20 trading units of

each security which has been allocated

to the DPM, that requirement has been

eliminated.

Rule 8.87—Participation Entitlement

of DPMs. A DPM’s right to participate as

principal in a transaction is generally

governed by the principles of time and

price priority as set forth in CBOE Rule

6.45. Under these principles, if a DPM

announces a bid (offer) for the DPM’s

own account ahead of other members in

response to a request for a market from

a member not acting on behalf of the

DPM, the DPM is entitled to participate

up to 100% in any resulting transaction.

In addition to the rights granted by Rule

6.45, current Rule 8.80(c)(7)(ii) grants

each DPM a right to participate ‘‘pro

rata’’, with the Market-Makers present

in the trading crowd, in any transaction

in a security that has been allocated to

the DPM if the DPM’s previously

established principal bid (offer) was

equal to the highest bid (lower offer) in

the trading crowd, even if the DPM’s bid

(offer) is not entitled to priority under

CBOE Rule 6.45. Because the term ‘‘pro

rata’’ is not precisely defined by current

Rule 8.80(c)(7)(ii), the scope of that

term, and hence the participation right,

has historically been interpreted by the

MTS Committee.

Since 1993, the MTS Committee has

interpreted a DPM’s participation right

in transactions that occur in an

allocated security (when the DPM’s

previously established principal bid

(offer) was equal to the highest bid

(lowest offer) in the trading crowd) to

consist of the following: an initial 40%

participation right, a 30% participation

right when average daily volume in the

security over the previous calendar

quarter reaches 2501 contracts, and no

guaranteed participation right when

average daily volume in the security

over the previous calendar quarter

reaches 5,000 contracts. Additionally,

the MTS Committee has determined to

maintain all multiply traded securities

at the 40% participation level until

further notice.

Proposed Rule 8.87 formalizes the

authority of the MTS Committee to

determine the appropriate participation

right for DPMs by providing that the

MTS Committee, subject to review by

the Board of Directors, may establish

from time to time a participation

entitlement formula that is applicable to

all DPMs. Additionally, Rule 8.87

further provides that, in accordance

with the established formula, each DPM

shall have a right to participate for its

own account with the Market-Makers

present in the trading crowd in

transactions in the DPM’s allocated

securities that occur at the DPM’s

previously established principal bid or

offer.

Rule 8.88—Review of DPM Operations

and Performance. Proposed Rule 8.88(a)

restates that current rule provision that

the MTS Committee may conduct a

review of a DPM’s operations or

performance any time, and clarifies that

such reviews may be conducted by a

subcommittee of the MTS Committee.

Rule 8.88(a) also clarifies that a DPM

and its associated persons are obligated

to submit information requested by the

MTS Committee in connection with

such a review. The current rule

provision which contemplates that such

reviews will be conducted at least

quarterly has been revised to provide

that, at a minimum, a review of each

DPM’s operations and performance shall

be conducted on an annual basis. The

reason for this change is that the

Exchange does not believe it is

necessary to conduct a formal and

detailed operational and performance

review of each DPM more than once a

year. In the interim, the MTS Committee

will review information regarding each

DPM’s operations and performance on

an ongoing basis and will conduct a

review of, and/or speak with, any DPM

that has any operational or performance

issues that need to be addressed prior to

that DPM’s next annual review. The

Exchange believes that this approach is

more effective than quarterly reviews,

since it will permit the MTS Committee

to timely address any operational or

performance issues that require

immediate attention, while allowing

more time to be spent on each formal

and detailed DPM review.

Proposed Rule 8.88(b) provides that

the MTS Committee shall perform the

market performance evaluation and
30540 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

remedial action functions set forth in

CBOE Rule 8.60 with respect to DPMs

and that the MTS Committee may

combine a review conducted pursuant

to Rule 8.88(a) with an evaluation

conducted pursuant to Rule 8.60. This

is consistent with current Rule

8.80(b)(10) which also provides that the

MTS Committee may review and

evaluate the conduct of DPMs pursuant

to Rule 8.60.

On the other hand, current Rule

8.80(b)(10) also grants the MTS

Committee market performance

authority with respect to other issues

relating to DPMs that the Exchange now

believes should be handled by other

Exchange committees. The Exchange

believes that this authority should be

transferred from the MTS Committee to

these other committees because these

other committees already have

responsibility concerning these issues

for non-DPMs and because

consolidating responsibility for these

issues will result in greater efficiency.

Thus, for example, the authority to

determine the series eligible for the

Exchange’s Retail Automatic Execution

System (RAES) and the eligible size of

RAES orders for securities allocated to

DPMs, which is currently exercised by

the MTS Committee pursuant to CBOE

Rule 6.8, has been consolidated in the

Exchange’s Floor Procedure Committees

since they have responsibility for these

issues for securities that are allocated to

non-DPM trading crowds. Similarly, the

authority under the Rules with respect

to DPM RAES participation and

eligibility, which is currently exercised

by the MTS Committee pursuant to

CBOE Rule 8.16, has been consolidated

in the Exchange’s Market Performance

Committees since they have

responsibility for these issues for nonDPMs.

One market performance related

authority that the Exchange has

determined that MTS Committee should

retain is Floor Official authority. Thus,

proposed Rule 8.88(c) provides that

members of the MTS Committee may

perform the functions of a Floor Official

at DPM trading stations. MTS

Committee members currently possess

this authority by virtue of current Rule

8.80(b)(10), which provides that the

MTS Committee may perform all of the

functions of the Market Performance

Committee under the Rules, and CBOE

Rule 6.20.09, which provides that

members of the Market Performance

Committee may perform the functions of

a Floor Official for the purpose of

enforcing trading conduct policies. The

Exchange believes that MTS Committee

members should retain Floor Official

authority with respect to DPM trading

stations because MTS Committee

members have expertise with respect to

the trading conduct rules that are

applicable to DPMs. In addition, acting

as Floor Officials at DPM trading

stations allows MTS Committee

members to stay abreast of issues that

may arise at these stations and provides

the MTS Committee with a valuable

source of information which the

Committee utilizes in connection with

its oversight of the performance and

operations of DPMs.

Proposed Rule 8.88 expands the

market performance responsibilities of

the MTS Committee by providing that

the MTS Committee shall perform the

market performance evaluation and

remedial action functions set forth in

Rule 8.60 with respect to the MarketMakers that trade at DPM trading

stations, in addition to performing these

functions with respect to DPMs. The

primary reason for this change is that

the performance of a DPM trading

crowd is influenced by both the DPM

and the Market-Makers that trade in the

crowd. Accordingly, the Exchange

believes that it will be more efficient if

one committee exercises the market

performance and remedial action

responsibilities with respect to both the

DPM and the Market-Makers that trade

in a DPM trading crowd, instead of the

current bifurcated structure in which

the MTS Committee has market

performance authority with respect to

the DPM and the Market Performance

Committee has market performance

authority with respect to the MarketMakers.

Rule 8.89—Transfer of DPM

Appointments. Current Rule 8.80(b)(3)

provides that a DPM appointment may

not be transferred without the approval

of the MTS Committee. Proposed Rule

8.89 expands upon this provision by

setting forth both a detailed procedure

for the consideration of any proposal to

sell, transfer, or assign an interest in a

DPM, and the standards that apply to

such consideration. This procedure is

set forth in proposed Rules 8.89(a)

through 8.89(f) and consists of the

following:

Proposed Rule 8.89(a) provide that a

DPM proposing any sale, transfer, or

assignment or any ownership interest or

any change in its capital structure,

voting authority, or distribution of

profits or losses shall give at least 30

days prior written notice of the

proposed change to the MTS

Committee. Rule 8.89(a) further

provides that if the transaction is

deemed to involve the transfer of a DPM

appointment, the transaction is required

to be approved by the MTS Committee

before it may be consummated.

Proposed Rule 8.89(b) defines the

transfer of a DPM appointment to

include, among other things, any sale,

transfer, or assignment of any significant

share of the ownership of a DPM and

defines the foregoing to include any

sale, transfer, or assignment of a 5% or

more interest in the equity or profits or

losses of the DPM (or a series of smaller

changes that in the aggregate amount to

a change of 5% or more). Additionally,

Rule 8.89(b) provides that a sale,

transfer, or assignment of less than 5%

may also be found by the MTS

Committee to represent a significant

share of the ownership of a DPM

depending on the surrounding facts and

circumstances.

Proposed Rule 8.89(c) provides that

any DPM desiring to obtain approval of

a transaction that is deemed to involve

the transfer of a DPM appointment is

required to submit a written application

to the MTS Committee at least 30 days

prior to the proposed effective date of

the transaction. Rule 8.89(c) also

requires that the application contain a

full and complete description of the

proposed transaction, including among

other things, the transferee’s ownership

and capital structure, the identity of

those persons who will perform the

duties of the DPM following the

transaction, the terms of the transaction,

and any other material information

pertaining to the transaction that the

MTS Committee may request.

Proposed Rule 8.89(d) provides that

promptly after the receipt of a

completed application for the approval

of a proposed transfer of a DPM

appointment, the MTS Committee will

post notice of the proposed transfer on

the Exchange Bulletin Board and in the

Exchange Bulletin and that the MTS

Committee will not ordinarily consider

the proposed transfer until it has been

posted on the Bulletin Board for at least

10 days. Rule 8.89(d) also provides that

during this posting period the MTS

Committee will accept written

comments on the proposed transfer from

any member and will accept written

proposals from other members and from

Market-Maker trading crowds that wish

to be considered for appointment in

some or all of the options classes that

are impacted by the proposed transfer.

Proposed Rule 8.89(e) sets forth the

factors that may be considered by the

MTS Committee in determining whether

to approve a proposed transfer of a DPM

appointment. These factors include (i)

the financial and operational capacity of

the transferee, (ii) the continuity of

control, management, and persons

responsible for the operation of the

DPM, (iii) avoiding undue concentration

of DPM appointments on the Exchange,
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30541

(iv) available alternatives for

reallocating the DPM’s appointment

taking into account comments made and

alternatives proposed by other members

during the posting period, and (v) the

best interests of the Exchange. In

addition, Rule 8.89(e) provides that no

application relating to a proposed

transfer of a DPM appointment will be

approved by the MTS Committee until

it is accompanied by complete and final

documents pertaining to the transfer,

except as the MTS Committee may agree

to defer the delivery of specific

documents for good cause shown.

Proposed Rule 8.89(f) provides that

the approval or failure to approve a

proposed transfer of a DPM

appointment is subject to direct review

by the Board of Directors upon receipt

by the Secretary of the Exchange, within

10 days of the time the decision of the

MTS Committee is announced, of (i) a

written request for review made by the

applicant (in the case of a failure to

approve an application as submitted) or

(ii) a request for review made by at least

5 Directors of the Exchange (in any

case). In the event of a request for

review, the Board will appoint a panel

Directors to review the matter.

Following this review, the panel, with

the assistance of Board counsel, will

prepare a proposed written decision of

the Board concerning the matter and

will submit the proposed decision to the

full Board for discussion and

consideration. The Board will then

decade whether to adopt or modify the

proposed decision and will issue its

final decision to the applicant and to the

MTS Committee.

In conjunction with proposed Rule

8.89, the Board of Directors has also

issued a memo to the MTS Committee

which conveys the Board’s views with

respect to the various factors that may

bear upon whether a request to transfer

an interest in a DPM appointment

should be approved. The purpose of the

memo is to provide guidance to the

MTS Committee concerning the types of

considerations that the Board believes

should be taken into account in

evaluating such requests. Among the

guidance provided in the memo is the

Board’s view that a DPM’s franchise in

its allocated securities is not a

transferable property interest owned by

the DPM. Thus, the Board states in the

memo that it does not believe that the

outright sale of all or a part of a DPM’s

business should ordinarily be approved.

Nevertheless, the Board also states that

it recognizes that there are

circumstances where it may be in the

best interests of both the DPM and the

Exchange to permit the transfer of some

or all of the DPM’s interest in its DPM

appointment, even though this may

result in the DPM being paid for the

value of the goodwill in its DPM

business. For example, the Board states

that such circumstances might include

situations where a transfer is for the

purpose of attracting new capital to an

existing successful DPM to enable it to

expand its market-making activities, or

to enable the DPM to bring in a new

partner or other principal, or in

response to an emergency need for

capital where there is reason to permit

the existing DPM to remain involved in

the operation and therefore not to

reallocate its appointment, assuming in

each case that the expansion or increase

in capital is found to be necessary or

desirable in the best interests of the

Exchange.

The Exchange believes that proposed

Rule 8.89 and the accompanying memo

from the Board of Directors will

improve the current rule provision

regarding transfer of DPM appointments

both by setting forth a detailed

procedure for considering such requests,

which will help to ensure that the MTS

Committee has sufficient information on

which to base decisions regarding such

requests, including member input, and

by setting forth the appropriate criteria

to be utilized in evaluating such

requests.

Rule 8.90—Termination,

Conditioning, or Limiting Approval to

Act as a DPM. Proposed Rule 8.90

governs the termination, conditioning,

and limiting of approval to act as a

DPM. For the most part, it restates, with

certain clarifications, provisions that are

contained in current Rule 8.80. For

example, Rule 8.90(a) clarifies that the

MTS Committee may condition or limit

a DPM’s appointment (in addition to

being permitted to terminate the

appointment) if the DPM (i) incurs a

material financial, operational, or

personnel change, (ii) fails to comply

with the rules applicable to DPMs or

any conditions placed on its DPM

appointment, or (iii) is no longer eligible

to act as a DPM. In addition, Rule

8.90(c) clarifies that limiting a DPM’s

appointment may include, among other

things, limiting or withdrawing a DPM’s

participation entitlement, withdrawing

a DPM’s right to act as a DPM in one or

more of its allocated securities, and

requiring a relocation of the DPM on the

trading floor.

As is the case under current Rule

8.80, proposed Rule 8.90(a) generally

provides that before the MTS Committee

may take any action to terminate,

condition, or otherwise limit a member

organization’s approval to act as a DPM,

the member organization will be given

notice of such possible action and an

opportunity to present any matter which

it wishes the MTS Committee to

consider in determining whether to take

such action. The only exception to this

provision is that, as under current Rule

8.80, the MTS Committee has the

authority to immediately terminate,

condition, or otherwise limit a member

organization’s approval to act as a DPM

if the DPM incurs a material financial,

operational, or personnel change

warranting such action or if the DPM

fails to comply with any of the financial

requirements applicable to DPMs.

As is also the case under the current

DPM rules, if a member organization’s

approval to act as a DPM is terminated,

conditioned, or otherwise limited by the

MTS Committee pursuant to proposed

Rule 8.90, Rule 8.90(d) provides that the

member organization may appeal that

decision to the Appeals Committee

under Chapter XIX. Additionally, as is

described above, these appeal

procedures provide for the right to a

formal Appeals Committee hearing

concerning any such decision, and the

decision of the Appeals Committee may

be appealed to the Board of Directors.

Rule 8.91—Limitations on Dealings of

DPMs and Affiliated Persons of DPMs.

Guidelines for Relief Under Rule 8.91(d)

for Members Affiliated with DPMs.

Proposed Rule 8.91 and the

accompanying proposed guidelines for

exemptive relief under Rule 8.91(d)

restate the rule provisions that are

currently contained in current Rule 8.81

and the current guidelines for

exemptive relief that accompany that

Rule. Proposed Rule 8.91 and its

accompanying guidelines are intended

to more clearly reflect those provisions

and how they have historically been

interpreted by the Exchange. For

example, the organization of these

provisions have been improved by

including in proposed Rule 8.91 all

three of the restrictions on DPM

affiliates that are set forth in the current

provisions, instead of including only

one of these restrictions in the Rule and

including the other two restrictions in

the accompanying guidelines, as is

currently the case. Also, the restrictions

on DPM dealings with an issuer are

restated to take into account that in the

case of options, which are nominally

issued by The Options Clearing

Corporation, these restrictions are

intended to apply to dealings with the

issuer of the underlying security,

whereas in the case of securities other

than options, they apply to dealings

with the issuer of the security itself.

Additionally, other clarifying revisions

of a similar nature have been made to

the current provisions without changing
30542 Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices

8 15 U.S.C. 78kk-1(a)(1)(C)(i).

9 15 U.S.C. 78f.

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

the substance of these provisions as they

have been interpreted by the Exchange.

Deletions from Current DPM Rules.

Among the significant deletions from

the current DPM rules that are not

discussed above are the following:

Current Rule 8.80(b)(4)(ii) provides

that the MTS Committee shall open a

DPM’s allocated option classes to a new

DPM section process if the DPM

changes its specified nominee and the

former nominee so requests. The

Exchange no longer believes that this

provision is appropriate because DPM

organizations are generally much larger

than they used to be. Today, DPMs often

have many nominees, and nominees are

added to and depart from DPM

organizations more frequently than in

the early years of the DPM program. For

this reason, most DPM nominees no

longer have the same stake in their DPM

organizations that many DPM nominees

may have had in the past. Thus, it is

often no longer equitable to allow a

DPM nominee to request a new DPM

section process for that DPM’s allocated

securities following the nominee’s

departure from the DPM organization.

Two provisions relating to

maintenance of the public order book

have also been deleted. First, current

Rule 8.80(b)(8), which provides that

under certain circumstances a

terminated DPM will receive a

proportionate share of the net book

revenues for a period specified by the

MTS Committee (up to a maximum of

5 years), has not been retained in the

proposed DPM rules. The original

purpose of this provision was to provide

incentive to members to apply to be

appointed as a DPM. Because the

interest in becoming a DPM has grown

throughout the years, this incentive is

no longer necessary to attract DPM

candidates.

Second, the Exchange is eliminating

the provision of current Rule 8.80(d)

which provides that the Exchange shall

be responsible for the maintenance,

handling, and billing of the public order

book and shall retain and compensate

the DPM for performing the Order Book

Official function. The reason for this

deletion is that over time DPMs have

taken on the responsibility for the

maintenance, handling, and billing of

the public order book, and the Exchange

no longer retains this responsibility nor

compensates DPMs for performing these

functions. However, the current

provision of Rule 8.80(d) which

contemplates that the Exchange may

make personnel available to assist a

DPM in the DPM’s performance as an

Order Book Official, for which the

Exchange may charge the DPM a

reasonable fee, has been retained in

proposed Rule 8.85.01 with one minor

modification. Specifically, proposed

Rule 8.85.01 merely permits, and does

not require, the Exchange to provide

this assistance when it is requested.

This change has been made because,

although the Exchange is often able to

provide such assistance to DPMs, the

Exchange may not always be able to do

so.

Finally, current Rule 8.80(c)(7)(iii) is

being deleted because the procedure

called for under the Rule is cumbersome

and because the concern that the Rule

addresses is adequately addressed by

another Exchange Rule. Current Rule

8.80(c)(7)(ii) provides that a DPM may

not initiate a transaction for its own

account that would result in putting

into effect any stop or stop limit order

which may be in the public order book

or which the DPM represents as Floor

Broker, except with the approval of a

Floor Official and when the DPM

guarantees that the stop or stop limit

order will be executed at the same price

as the electing transaction. This

procedure is cumbersome because it

necessitates that a Floor Official be

summoned to the trading station each of

the many times this situation arises.

Also, the required approval mechanism

leads to delay in the execution of

customer orders. The Exchange believes

that the concern addressed by current

Rule 8.80(c)(7)(iii) is adequately

addressed by CBOE Rule 6.73(a), which

requires a Floor Broker handling an

order, including a DPM, to use due

diligence to execute the order at the best

price or prices available to the Floor

Broker, in accordance with the Rules.

Thus, if a DPM were to initiate a

transaction for its own account in order

to disadvantage a customer by putting

into effect a stop or stop limit order, the

Exchange would have the ability to

discipline the DPM for such activity

under Rule 6.73 for failure to exercise

due diligence with respect to the

representation of the order.

2. Statutory Basis

The Exchange believes that the

proposed rule change will improve the

operation of the DMP trading system

which, in accordance with Section

11A(a)(1)(C)(i) of the Act,8 assures the

economic and efficient execution of

securities transactions. Accordingly, the

Exchange believes that the proposed

rule change is consistent with Section

6(b) of the Act,9 in general, and further

the objectives of Section 6(b)(5)10 in

particular, in that it is designed to

remove impediments to and perfect the

mechanism of a free and open market.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE does not believe that the

proposed rule change will impose any

burden on competition.

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 35 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

90 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,

including whether the proposed rule

change is 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. 25049. Copies of the

submissions, 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, 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–98–

15 and should be submitted by June 25,

1998.
Federal Register / Vol. 63, No. 107 /Thursday, June 4, 1998 / Notices 30543

11 17 CFR 200.30–3(a)(1).

1 15 U.S.C. 79s(b)(1).

2The Commission has modified the text of the

summaries prepared by DTC and NSCC.

3For a more complete description of Direct

Clearing, refer to Securities Exchange Act Release

No. 32221 (April 26, 1993), 58 FR 26570 [File No.

SR–NSCC–93–03].

4Securities Exchange Act Release No. 31861

(February 16, 1993), 58 FR 9582 [File No SR–

NSCC–93–03].

5Securities Exchange Act Release No. 34629

(September 9, 1994), 59 FR 46680 [File No. SR–

NSCC–94–12].

6 DTC’s proposed procedures are attached as

Exhibit 2 to DTC’s filing which is available for

inspection and copying at the Commission’s public

reference room and through DTC.

7The current version of NSCC Rule 31 was

approved by the Commission in 1996. Securities

Exchange Act Release No. 37631 (September 3,

1996), 61 FR 47534 [File No. SR–NSCC–96–08].

8 15 U.S.C. 78q–1.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14778 Filed 6–3–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40045; File Nos. SR–DTC–

98–09, SR–NSCC–98–05]

Self-Regulatory Organizations; The

Depository Trust Company; National

Securities Clearing Corporation;

Notice of a Proposed Rule Change

Relating to Direct Clearing Services

and New York Window Services

May 29, 1998.

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

Securities Exchange Act of 1934

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

May 13, 1998, The Depository Trust

Company (‘‘DTC’’) and the National

Securities Clearing Corporation filed

with the Securities and Exchange

Commission (‘‘Commission’’) proposed

rule changes as described in Items I, II,

and III below, which Items have been

prepared primarily by DTC and NSCC.

The Commission is publishing this

notice to solicit comments from

interested persons on the proposed rule

changes.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Changes

Under the proposed rule changes,

NSCC will discontinue providing its

Direct Clearing Services (‘‘Direct

Clearing’’) and New York Window

Services (‘‘Window’’). DTC will begin to

offer its participants most of the services

currently offered by NSCC through

Direct Clearing and the Window and

will call the service the ‘‘New York

Window Services.’’

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In its filing with the Commission,

DTC and NSCC included statements

concerning the purpose of and basis for

the proposed rule changes and

discussed any comments they received

on the proposed rule changes. The text

of these statements may be examined at

the places specified in Item IV below.

DTC and NSCC have prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of such statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

Direct Clearing is a physical securities

processing service which NSCC has

provided since its inception to NSCC

participants that do not have offices in

New York City. The principal services

of Direct Clearing include (i) processing

of over-the-window receives and

deliveries, (ii) processing transfers of

physical securities certificates, and (iii)

processing deliveries to designated

agents in connection with

reorganizations and other corporate

actions. In the course of providing these

and other Direct Clearing services,

NSCC may have custody of participants’

physical securities certificates including

overnight custody for one or more

days.3

The Window was originally approved

by the Commission as a pilot project for

NSCC in 1993 4 and became a

permanent service in 1994.5 The

principal services of the Window are

similar to those of Direct Clearing, but

they initially were provided to NSCC

participants located in New York City.

NSCC organized the Window in order to

centralize redundant services provided

at many of its participants’ offices that

were based in New York City.

NSCC has proposed to discontinue

providing Direct Clearing and the

Window in order to focus its resources

on the core businesses of NSCC. The

proposed arrangements between NSCC

and DTC should assist in eliminating

redundant services and facilities and

thereby should result in greater

efficiencies while offering the current

users of Direct Clearing and the Window

the ability to receive similar services

from DTC.

Under the proposals, DTC will adopt

new procedures for the operation of its

New York Window Services.6 DTC’s

proposed procedures are substantially

the same as NSCC’s Rule 31 7 except

that DTC’s proposed procedures do not

include provisions similar to section 4

of NSCC Rule 31, which relates to

money settlement through the Window.

Currently, it is anticipated that NSCC

will discontinue providing Direct

Clearing and the Window and DTC will

begin offering its New York Window

Services on July 10, 1998.

DTC and NSCC believe that the

proposed rule changes are consistent

with the requirements of Section 17A of

the Act 8 and the rules and regulations

thereunder because the proposed

arrangements should provide for more

efficient clearing and depository

services and thereby should facilitate

the prompt and accurate clearance and

settlement of such transactions. In

addition, DTC believes that the

proposed rule changes will be

implemented consistently with its

obligation under Section 17A to

safeguard securities and funds in its

custody and control or for which it is

responsible.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The proposed arrangements would

impose no burden on competition.

Securities depositories registered under

Section 17A of the Act are utilities

created to serve members of the

securities industry for the purpose of

providing certain services that are

ancillary to the businesses in which

industry members compete with one

another.

After consummation of the proposed

arrangements between DTC and NSCC,

securities industry members will

continue to have access to high-quality,

low-cost depository services provided

under the mandate of the Act.

(C) Self-Regulatory Organizations’

Statement on Comments on the

Proposed Rule Changes Received from

Members, Participants or Others

Written comments from DTC

participants, NSCC participants, and

others have not been solicited or

received. NSCC and DTC have worked

closely, however, with a users’ group

composed of many of the users of Direct

Clearing and the Window in evaluating

and planning the proposed transaction.