[Federal Register Volume 66, Number 81 (Thursday, April 26, 2001)]
[Notices]
[Pages 21031-21032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-10392]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44197; File No. SR-CBOE-00-49]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc., Order Approving Proposed Rule Change Relating to RAES Eligibility 
Requirements for SPX Options

April 18, 2001.

I. Introduction

    On September 20, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'' filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend CBOE Rule 24.16, which governs the 
eligibility of Market-Makers to participate on the Exchange's Retail 
Automatic Execution System (``RAES'') in options on the Standard & 
Poor's 500 Index (``SPX'').
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on December 14, 2000.\3\ No comments were received on the 
proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \3\ Securities Exchange Act Release No. 43677 (December 5, 
2000), 65 FR 78230.
---------------------------------------------------------------------------

    The text of the proposed rule change is set forth below. Proposed 
new language is in italics; proposed deletions are in brackets.
* * * * *

Rule 24.16

(a) Individual Members. Any individual Exchange member who has 
registered as a Market-Maker, who has signed the RAES Participation 
Agreement applicable to individuals, and who has completed the RAES 
instructional program is eligible to log onto RAES in SPX, so long 
as the requirements set forth in paragraph (iv) below are met:
* * * * *
    (iv) RAES participation in SPX is limited to SPX Market-Makers. 
To qualify, a Market-Maker must: (A) be approved under Exchange 
rules as a Market-Maker with a letter of guarantee, and (b) maintain 
his principal business on the CBOE as a Market-Maker.[, (C) execute 
at least fifty percent of his Market-Maker contracts for the 
preceding calendar month in SPX and (D) execute at least seventy-
five percent of his Market-Maker trades for the preceding calendar 
month in SPX in person. In making these calculations, RAES trades 
will not be considered.]
* * * * *
(d) Member Organizations with Multiple Nominees
    (i) A member organization with multiple Market-Maker/nominees on 
the floor may arrange to have the RAES trades of all its nominees 
assigned to a single Market-Maker account, provided that the firm's 
participating nominees have first executed the RAES Participation 
Agreement applicable to firms and the manager of the multiple 
nominee account has satisfactorily completed the RAES instructional 
program. Thereafter, each of the participating nominees will be able 
to trade through RAES only in the manner described below, and not as 
a member of a joint account or as an individual. Each eligible 
nominee must meet the SPX Market-Maker [obligations] requirements 
set forth in paragraph [(c)(i)(A)-(D)](a)(iv) above. Members of a 
multiple nominee RAES account may only participate in that one 
account and may not participate directly or indirectly in any other 
RAES account, nor may a member organization participate directly or 
indirectly in SPX on RAES in more than one account.
* * * * *
(e) Authority to Disapprove
    (i) No person or entity may participate directly or indirectly 
in RAES, or share in the profits, directly or indirectly, with more 
than RAES group.[. which may not exceed the maximum number of RAES 
participants set by the appropriate MPC from time to time. In no 
event may the appropriate MPC set a maximum number higher than 33\1/
3\% of the average number of RAES participants for the prior 
quarter. The appropriate MPC will give groups one month's notice if 
a reduction in group size becomes necessary due to application of 
this size limit. The appropriate MPC reserves the authority to 
establish lower limits on the size of groups eligible to use RAES. 
Size limits may be imposed by the appropriate MPC at any time.]

[[Page 21032]]

    (ii) The appropriate MPC [also] may disallow any group from 
participating in RAES where it appears to the Committee that such 
group:
    (A) has ``purchased'' RAES rights from members of the group;
    (B) does not afford each group participant a reasonable 
participation in profits and losses (As a guideline: no RAES 
participant may receive a flat fee, and a minimum participation 
level of any group member would be \1/4\ of a number that would 
represent an equal distribution to all group members, with 
responsibility for losses equivalent to share of profits);
    (C) is managed by a person who is not a member of the group; or
    (D) is managed by a person who has a financial interest in 
another group.
* * * * *

II. Description of the Proposal

    Currently, Rule 24.16(a)(iv) sets forth four eligibility 
requirements that must be met by a Market-Maker before he or she can 
participate on RAES in SPX options. The CBOE proposal would eliminate 
two of the current four Market-Maker eligibility requirements. One of 
these requirements is that the Market-Maker must execute at least fifty 
percent of his or her Market-Maker contracts for the preceding calendar 
month in SPX. Another requirement is that the Market-Maker must execute 
in person at least seventy-five percent of his or her Market-Maker 
trades for the preceding calendar month in SPX. No comparable RAES 
eligibility requirements are imposed upon Market-Makers trading in non-
index option classes. The Exchange proposes to eliminate the in-person 
and volume quotas from the eligibility requirements of Rule 24.16 so 
that the RAES eligibility requirements of SPX Market-Makers are the 
same as those for Market-Makers trading in non-index options.\4\
---------------------------------------------------------------------------

    \4\ The remaining two eligibility provisions for Market-Makers 
desiring to trade in SPX options would continue to require Market-
Makers to be approved under Exchange rules and to maintain their 
principal places of business on the CBOE as Market-Makers. CBOE Rule 
24.16(a)(iv)(A); CBOE Rule 24.16(a)(iv)(B).
---------------------------------------------------------------------------

    The Exchange represents that recently, Market-Maker participation 
on RAES in index options has been low compared to historical levels. 
The Exchange believes that this is a problem that has been aggravated 
by the fact that the in-person and volume requirements in essence 
require the Exchange to have new Market-Makers desiring to participate 
on RAES wait for at least 30 days before logging onto RAES. The 
proposed rule change would permit a new Market-Maker to log onto RAES 
if the Market-Maker: (1) has signed the RAES Participation Agreement 
and completed the RAES instructional program; \5\ (2) has been approved 
under Exchange rules as a Market-Maker with a letter of guarantee; \6\ 
and (3) is maintaining his or her principal business on the CBOE as a 
Market-Maker.\7\
---------------------------------------------------------------------------

    \5\ CBOE Rule 24.16(a).
    \6\ CBOE Rule 24.16(a)(iv)(A).
    \7\ CBOE Rule 24.16(a)(iv)(B).
---------------------------------------------------------------------------

    The Exchange also proposes to eliminate the cap, set forth in Rule 
24.16(e)(i), on the number of Market-Makers that may participate in a 
RAES group.\8\ Rule 24.16(e)(i) provides that a RAES group may not 
exceed the lesser of: (1) 33\1/3\ percent; or (2) a smaller maximum 
number set by the appropriate Market Performance Committee. According 
to the CBOE, a recent decline in RAES participation in index options 
has, by operation of such Exchange rules as Rule 24.16(e)(i), resulted 
in reductions, as compared to historical levels, in the size of RAES 
groups. The reductions have taken place because, among other reasons, 
CBOE Rule 24.16(e)(i) currently ties maximum RAES group size to the 
level of RAES participation.\9\
---------------------------------------------------------------------------

    \8\ A RAES group is a group of market-makers who participate on 
RAES via either an Exchange-approved joint account or a member 
organization account with multiple market-maker nominees. E-mail 
from Jamie Galvin, Attorney, Legal Division, CBOE to Steven 
Johnston, Special Counsel, Division of Market Regulation 
(``Division''), Commission, dated April 10, 2001.
    \9\ Conversation between Jamie Galvin, Attorney, Legal Division, 
CBOE, and Steven Johnston, Special Counsel, Division, Commission, 
February 28, 2001 (clarifying operation of current CBOE Rule 
24.16(e))
---------------------------------------------------------------------------

III. Discussion

    The CBOE proposal would amend Rule 24.16 to eliminate what the CBOE 
represents are several disincentives to Market-Maker participation in 
SPX trades. The Commission finds that removal of in-person volume 
quotas and elimination of the cap on the number of Market-Maker that 
may participate in SPX trades are appropriate measures to reduce 
disincentives. In addition, the Commission recognizes the importance of 
encouraging Market-Maker participation to ensure adequate liquidity, 
particularly where participation levels are low.
    For these reasons the Commission finds that the proposed rule 
change is consistent with the Act \10\ and the rules and regulations 
promulgated thereunder applicable to a national securities exchange. 
Specifically, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act,\11\ which requires that the rules of an 
Exchange be designed to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \10\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposal (SR-CBOE-00-49) be and hereby is approved.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-10392 Filed 4-25-01; 8:45 am]
BILLING CODE 8010-01-M