Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices 35629

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

2 17 CFR 240.19b–4.

3See letter from Stephanie C. Mullins, Attorney,

CBOE, to Mike Walinskas, Deputy Associate

Director, Division of Market Regulation

(‘‘Division’’), Commission, dated May 26, 1998

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

CBOE amends the filing by clarifying that: (1) an

option stop order is triggered by a trade, as well as

by a bid or offer; (2) while the options markets do

have access to information from other exchanges,

they do not have an electronic linkage that provides

for the transmission of orders similar to the

Intermakert Trading System; and (3) while the

CBOE does not explicitly prohibit trade-throughs,

Rule 6.73(a) requires a floor broker ‘‘to use due

diligence to execute the order at the best price or

prices available to him in accordance with the

rules.’’ and in some circumstances, a floor broker

may determine that he should try to execute his

order on another market.

by a majority of the disinterested

trustees or directors), take whatever

steps are necessary to remedy or

eliminate the material irreconcilable

conflict. Such steps could include: (a)

withdrawing the assets allocable to

some or all of the Qualified Plans from

the Fund or any portfolio thereof and

reinvesting such assets in a different

investment medium, which may include

another portfolio of a Fund; and (b)

establishing a new registered

management investment company or

managed separate account.

4. If a material irreconcilable conflict

arises because of a Qualified Plan’s

decision to disregard its participants’

voting instructions, if applicable, and

that decision represents a minority

position or would preclude a majority

vote, the Qualified Plan may be

required, at the election of the Fund, to

withdraw its investment in such Fund,

and no charge or penalty will be

imposed as a result of such withdrawal.

To the extent permitted by applicable

law, the responsibility of taking

remedial action in the event of a Board

determination of a material

irreconcilable conflict and bearing the

cost of such remedial action, will be a

contractual obligation of all Participants

under their agreements governing

participation in the Fund, and these

responsibilities will be carried out with

a view only to the interests of

participants in such Qualified Plans. For

purposes of this condition, a majority of

the disinterested members of the

applicable Board will determine

whether or not any proposed action

adequately remedies any material

irreconcilable conflict, but in no event

will the relevant Fund, or FMR be

required to establish a new funding

medium for any Variable Contract.

Further, no Qualified Plan shall be

required by this condition to establish a

new funding medium for any Qualified

Plan if: (a) a majority of its participants

materially and adversely affected by the

irreconcilable material conflict vote to

decline such offer, or (b) pursuant to

governing Qualified Plan documents

and applicable law, the Qualified Plan

mades such decision without a vote of

its participants.

5. Any Board’s determination of the

existence of a material irreconcilable

conflict and its implications will be

make known promptly and in writing to

all Qualified Plans.

6. Each Qualified Plan will vote as

required by applicable law and

governing Qualified Plan documents.

7. All reports of potential or existing

conflicts received by a Board and all

Board actions with regard to

determining the existence of a conflict

of interest, notifying Qualified Plans of

a conflict, and determining whether any

proposed action adequately remedies a

conflict, will be properly recorded in

the minutes of the appropriate Board or

other appropriate records, and such

minutes or other records shall be made

available to the Commission upon

request.

8. Each Fund will disclose in its

prospectus that: (a) shares of the Fund

may be offered to insurance company

separate accounts on a mixed and

shared basis and to Qualified Plans; (b)

material irreconcilable conflicts may

arise between the interests of various

contractowners participating in the

Fund and the interests of Qualified

Plans investing in the Fund; and (c) the

Board of such Fund will monitor events

in order to identify the existence of any

material conflict and determine what

action, if any, should be taken in

response to such material irreconcilable

conflict.

9. No less than annually, the

Participants shall submit to each Board

such reports, materials or data as the

Board may reasonably request so that

the Board may carry out fully the

obligations imposed upon it by the

conditions contained in the application.

Such reports, materials and data shall be

submitted more frequently if deemed

appropriate by the Board. The

obligations of the Participants to

provide these reports, materials and

data shall be a contractual obligation of

all Participants under the agreements

governing their participation in the

Funds.

10. None of the Funds will accept a

purchase order from a Qualified Plan if

such purchase would make the

Qualified Plan shareholder an owner of

10% or more of the assets of a portfolio

(or class thereof) of such Fund unless

such Qualified Plan executes a fund

participation agreement with the

relevant Fund that includes the

conditions set forth herein to the extent

applicable. A Qualified Plan will

execute a shareholder participation

agreement containing an

acknowledgment of this condition at the

time of its initial purchase of shares of

such Fund.

Conclusion

For the reasons summarized above,

Applicants asserts that the requested

exemptions are appropriate in the

public interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the 1940 Act.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17386 Filed 6–29–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40111); File No. SR–CBOE–

97–41]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

No. 1 to the Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to the Definition of Stop

Orders

June 23, 1998.

I. Introduction

On August 25, 1997, the Chicago

Board Options Exchange, Inc. (‘‘CBOE

or Exchange’’), filed with the Securities

and Exchange Commission (‘‘SEC or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend its Rule 6.53 (‘‘Rule’’), governing

the definition of option stop orders, to

clarify that option stop orders on the

CBOE are triggered when the option

contract reaches a specified price ‘‘on

the CBOE floor.’’ The proposed rule

change was published for comment in

Securities Exchange Act Release No.

39100 (September 19, 1997), 62 FR

50644 (September 26, 1997). No

comments were received on the

proposal.

On May 26, 1998, the Exchange

submitted Amendment No. 1 to the

proposed rule change.3 This order

approves the proposal and approves
35630 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices

4See Amendment No. 1, supra note 3.

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

6 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

7The Commission notes that the American Stock

Exchange (‘‘Amex’’) and the Pacific Exchange, Inc.

(‘‘PCX’’), interpret their rules to mean that a stop

order left with a member will be executed based on

transactions or quotes that occur only on the floor

of their own exchange. Telephone conversation

between Stuart Diamond, Director of Rulings,

Amex, and Chester A. McPherson, Staff Attorney,

Division, Commission, February 3, 1998; telephone

conversation between Michael D. Pierson, Senior

Attorney, Regulatory Policy, PCX, and James T.

McHale, Special Counsel, Division, Commission, on

June 18, 1998.

8The Commission notes that various available

proprietary systems provide quotes and transactions

reports on a real time basis. 9See supra note 7.

Amendment No. 1 on an accelerated

basis.

II. Description of the Proposal

The CBOE proposes to amend its Rule

6.53 (‘‘Rule’’) governing the definition of

stop orders to clarify that an option stop

order on the CBOE is triggered when the

option contract reaches a specified price

‘‘on the CBOE floor.’’

Currently, paragraph (c)(iii) of

Exchange Rule 6.53 defines a stop order

as a contingency order to buy or sell

when the market for a particular option

contract reaches a specified price. The

Rule does not specify, but has always

been interpreted by the CBOE to mean,

that the contingency to buy or sell is

satisfied when the option contract

trades or is bid at or above the stop price

(in the case of a buy order) or trades or

is offered at or below the stop price (in

the case of a sell order) ‘‘on the floor of

the CBOE.’’ 4 The proposed amendment

will make it clear, therefore, that a stop

order is not activated when the bid or

offer (as appropriate) reaches the stop

limit on another options exchange or

when an options transaction occurs at

the stop limit on another options

exchange. The CBOE believes that the

proposed rule change will clarify the

required treatment of option stop orders

under the CBOE’s rules.

III. Discussion

After careful review of the Exchange’s

proposal, and for the reasons discussed

below, the Commission believes that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to national securities

exchanges, and, in particular, with the

requirements of Section 6(b) of the Act.5

Specifically, the Commission believes

the proposal is consistent with the

Section 6(b)(5) requirements that the

rules of an exchange be designed to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, to prevent fraudulent and

manipulative acts, and, in general, to

protect investors and the public

interest.6

The Commission believes that the

proposal is reasonable in that it will not

adversely affect the depth and liquidity

necessary to maintain fair and orderly

markets because the proposal represents

a codification of the existing practice of

the CBOE requiring that stop orders left

with CBOE members must be effected

and executed based on transactions or

quotes that occur only on the floor of

the CBOE.7 It also serves to clarify the

responsibility of CBOE members

regarding the handling of stop orders by

removing a potential ambiguity

contained in the existing Rule.

The Commission notes that the CBOE

has retracted a statement made in its

original filing that claimed CBOE

options traders have no way of knowing

whether a contract has reached a

specified ‘‘stop’’ in another options

market place.8 CBOE now states that it

recognizes that options markets do have

access to trade and quote information

occurring on other options exchanges;

however, CBOE maintains that the

absence of an electronic linkage

providing for the transmission of orders

to other options exchanges in order to

access current quotes makes it

impracticable for CBOE members to rely

on such data.

The Commission disagrees that the

existence of an electronic order routing

linkage between options markets should

be a requirement to ‘‘triggering’’ option

stop orders based on quotes or

transactions occurring in another

options market. In determining the

proper triggering event(s) that apply to

option stop orders, the most important

factor to consider is whether the

triggering quotes or trades are bona fide

and available on a timely and reliable

basis. However, it is not necessary to

have an electronic order routing linkage,

such as the Intermarket Trading System

(‘‘ITS’’), to ensure that quotes and trades

occurring on other options exchanges

meet this test.

Notwithstanding its disagreement

with CBOE over the relevance of the

existence of an intermarket electronic

order routing system to the present

proposal, the Commission believes there

are valid reasons for approving the

CBOE’s proposal at this time. The rule

proposal codifies an interpretation of

CBOE Rule 6.53 that has been observed

by market participants for many years.

Indeed, this interpretation is consistent

with the practices of the Annex and

PCX.9 Ideally, the extension of national

market system principles to the options

exchanges would include the existence

of electronic linkages ensuring the

availability to all market participants of

real-time quote and trade information

and the ability of exchange markets to

access each other’s markets at the touch

of a button. Another reason to approve

the present filing is that while real-time

quote and trade information originating

from other options markets is currently

available to all market participants,

including CBOE floor members, this

information is not always reliable. For

instance, during the last several years,

the dissemination of options trade

information has been subject, during

certain peak market volatility events, to

‘‘queuing,’’ whereby quote and trade

data become bottlenecked and cannot be

delivered on a real-time basis. Until

options quote and trade information

becomes more reliable, it is reasonable

for the options exchanges to limit

instances where members must

automatically trigger and execute

customer orders based on quote and

trade information emanating from the

other options exchanges.

Given that CBOE’s policy regarding

options stop orders ignores quotes and

transactions occurring on other options

markets, it is important to emphasizes

that broker-dealers representing

customer options orders, including

CBOE floor brokers, must continue to

fulfill their best execution obligations,

this includes monitoring the prices

available on all exchanges that trade the

particular option and may require the

broker-dealer to attempt execution on

the exchange with the best available

price. Moreover, the CBOE, along with

the other exchanges, should continue to

efforts to increase the reliability of the

dissemination of timely quote and trade

information. At some point in future,

when such reliability increases, it may

be appropriate to activate stop orders or

other contingency orders based on bids,

offers, or executions occurring on other

options markets.

The Commission finds good cause for

approving Amendment No. 1 prior to

the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. The Amendment

clarifies the description of the proposed

rule change and explains several

statements in the filing. For these

reasons, the Commission finds good

cause for approving Amendment No. 1

on an accelerated basis.
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 / Notices 35631

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

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

2The Commission has modified the text of the

summaries prepared by DTC and PTC.

3 DTC and PTC have informed the Commission

that the changes to DTC’s rules and procedures to

provide for the Division and to accommodate the

application of PTC’s current rules and procedures

to Division business will be the subject of a future

rule filing with the Commission.

4 15 U.S.C. 78q–1.

5 15 U.S.C. 78q–1.

6 15 U.S.C. 78q–1 and 78s.

IV. Solicitation of Comments

Interested person are invited to

submit written data, views and

arguments concerning Amendment No.

1, including whether it 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, DC 20549.

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

the those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room, 450 Fifth Street, N.W.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to File No. SR–CBOE–97–

41, and should be submitted by July 21,

1998.

V. Conclusion

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–CBOE–97–

41) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–17294 Filed 6–29–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40121; File Nos. SR–DTC–

98–12, SR–PTC–98–02]

Self-Regulatory Organizations; The

Depository Trust Company;

Participants Trust Company; Notice of

a Proposed Rule Change Relating to a

Proposed Merger Between The

Depository Trust Company and

Participants Trust Company

June 24, 1998.

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

Securities Exchange Act of 1934

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

May 29, 1998, The Depository Trust

Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) and on June 2, 1998,

Participants Trust Company (‘‘DTC’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) and on

June 2, 1998, Participants Trust

Company (‘‘PTC’’) filed with the

Commission proposed rule changes as

described in Items I, II, and III below,

which items have been prepared

primarily by DTC and PTC. The

Commission is publishing this notice to

solicit comments from interested

persons on the proposed rule changes.

I. Self-Regulatory Organizations’

Statement of the Terms of Substance of

the Proposed Rule Changes

The proposed rule changes relate to

the arrangements for a proposed merger

between DTC and PTC.

II. Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In its filing with the Commission,

DTC and PTC 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 PTC have prepared summaries,

set forth in sections (A), (B), and (C)

below, of the most significant aspects of

such statements.2

(A) Self-Regulatory Organizations’

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Changes

In March 1998, PTC announced that

it had decided to seek an affiliation with

DTC. The arrangements for the proposed

merger provide the following. PTC will

merge with and into DTC, and DTC will

make certain payments to PTC’s

shareholders. For at least two years from

the effective date of the merger, DTC

will provide the services currently

offered by PTC in a separate division of

DTC (‘‘Division’’). The current rules and

procedures of PTC with respect to

depository services, the processing of

transactions in PTC-eligible securities,

and the PTC participants fund will be

incorporated into the rules and

procedures of DTC and will be applied

to the business of the Division.3 In

addition, DTC will offer PTC

participants that are not DTC

participants an opportunity to become

participants of the Division.

Under the proposed rule changes,

PTC’s users, most of which are also DTC

participants, will continue to have

access to the depository services offered

by PTC. DTC and PTC believe that the

proposed merger should assist in

eliminating redundant facilities and

thereby should reduce the costs of

processing transactions in mortgagebacked securities that are currently PTCeligible.

DTC and PTC believe that the

proposed rule changes are consistent

with the requirements of Section 17A of

the Act 4 and the rules and regulations

thereunder because the arrangements for

the proposed merger should assure that

continued availability to PTC users of

efficient and cost-effective depository

services and thereby should facilitate

the prompt and accurate clearance and

settlement of transactions in PTCeligible securities. In addition, the

proposed arrangements should provide

PTC participants with access to DTC’s

facilities and should be implemented

consistent with DTC’s obligations to

safeguard securities and funds in its

custody and control or for which it is

responsible.

(B) Self-Regulatory Organizations’

Statement on Burden on Competition

DTC and PTC believe that the

proposed arrangements will impose no

burden on competition. Securities

depositories registered under Section

17A of the Act 5 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. Operating a

securities depository requires a

substantial and continuing investment

in infrastructure including securities

vaults, telecommunications links with

users, data centers, and disaster

recovery facilities in order to meet the

increasing needs of participants and to

respond to regulatory requirements.

DTC and PTC believe that the current

regulatory scheme and the particular

structure and nature of the depository

industry provide ample means to insure

that the merger of PTC with and into

DTC will achieve regulatory objectives.

Sections 17A and 19 of the Act 6 and the

rules thereunder provide the

Commission appropriate and effective

regulatory authority over DTC. DTC is