[Federal Register Volume 61, Number 96 (Thursday, May 16, 1996)]
[Notices]
[Pages 24843-24845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12236]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37187; File No. SR-CBOE-96-25]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change Relating to Members' Use of Blanket or Standing 
Assurances as to Stock Availability To Satisfy Their Affirmative 
Determination Requirements Under the Prompt Receipt and Delivery of 
Securities Interpretation When Effecting Short Sales

May 9, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 
17, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the CBOE. This 
Order approves the proposed rule change on an accelerated basis and 
also solicits comments from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to make certain changes to its rules relating 
to the requirement to make prior arrangements to borrow stock or to 
obtain other assurances that delivery can be made on settlement date 
before a member or person associated with a member may sell short. The 
text of the proposed rule change is available at the Office of the 
Secretary of the CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of the 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. CBOE has prepared summaries, set forth in Section (A), 
(B), and (C) below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of this rule proposal is to amend an interpretation 
regarding the need to make prior arrangements to borrow stock, 
warrants, or other securities that trade subject to Chapter 30 of the 
Exchange's rules, or to otherwise ensure availability of the subject 
securities before engaging in short sales. Specifically, the Exchange 
proposes to amend the interpretation to provide that under certain 
circumstances members may rely on ``blanket'' or standing assurances 
(e.g., daily fax sheets) as to stock availability to satisfy their 
affirmative determination requirements under the Interpretation.
    On November 27, 1995, the Commission published a notice of filing 
an immediate effectiveness of a proposed rule change by the Exchange 
which adopted Interpretation .04 to Rule 30.20 (``Interpretation''), 
``Long''

[[Page 24844]]

and ``Short'' Sales.\1\ The Interpretation is similar to rules of other 
securities exchanges and requires that member organizations who effect 
short sales for their own account or for the accounts of customers make 
an affirmative determination that delivery of the subject securities 
can be made on settlement date. The purpose for this interpretation is 
to ensure that borrowings and short sales do not outpace the supply of 
deliverable stock, thus, leading to potential systemic problems.
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    \1\ Securities Exchange Act Release No. 36513 (November 27, 
1996).
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    The Interpretation also describes the type of ``affirmative 
determinations'' that must be obtained by the member or person 
associated with the member to ensure that the securities will be 
available. The member or person associated with the member is obligated 
to keep a written record of each ``affirmative determination.'' If a 
customer assures delivery, the written affirmative determination must 
record the present location of the securities in question, whether they 
are in good deliverable form and the customer's ability to deliver them 
to the member within three business days. If the member or person 
associated with a member locates the stock, the affirmative 
determination must record the identity of the individual and firm 
contacted who offered assurance that the shares would be delivered or 
that were available for borrowing by settlement date and the number of 
shares needed to cover the short sale.
    The Interpretation also provides that the manner by which a member 
or person associated with a member annotates compliance with this 
``affirmative determination'' requirements (e.g., marking the order 
tickets, recording inquiries in a log) is left for each individual firm 
to decide. In addition, the Interpretation required that an affirmative 
determination and annotation of that affirmative determination be made 
for each and every transaction since a `'blanket'' or standing 
assurance that securities are available for borrowing is not acceptable 
to satisfy the affirmative determination requirement (``standing 
assurance provision'').
    On March 29, 1996, the Exchange filed a proposed rule with the 
Commission to delay the effectiveness of the standing assurance 
provision until May 10, 1996.\2\ CBOE delayed effectiveness of this 
provision because its rule was based on a similar rule of the NASD, 
which had also delayed effectiveness of its standing assurance 
provision. The NASD re-examined the standing assurance provision and 
subsequently replaced it with a provision that allows members to rely 
on blanket assurances under some circumstances.\3\
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    \2\ See Securities Exchange Act Release No. 37052 (March 29, 
1996).
    \3\ See Securities Exchange Act Release No. 36859 (February 20, 
1996) (``NASD Approval Order'').
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    The Exchange has decided, for the sake of regulatory compatibility, 
to adopt the same provision. Specifically, under the proposal, a CBOE 
member could rely on a ``blanket'' or standing assurance that 
securities will be available for borrowing on settlement date to 
satisfy its affirmative determination requirement under the 
Interpretation provided that: (1) the information used to generate the 
``blanket'' or standing assurance is not more than 24-hours old; and 
(2) the member delivers the security on settlement date. The proposal 
also provides that, should a member relying on a blanket or standing 
assurance fail to deliver the security on settlement date, the Exchange 
will deem such conduct inconsistent with the terms of the 
Interpretation, absent mitigating circumstances adequately documented 
by the member.
    The Exchange believes the new proposal strikes the appropriate 
balance between the need to prevent potentially abusive short selling 
activity and the desire to avoid the imposition of unnecessarily 
burdensome regulatory requirements. Under the new proposal, members 
would have the flexibility to exercise their judgment as to whether it 
would or would not be appropriate to rely on a fax sheet. On the other 
hand, the proposal allows the Exchange to consider the firm to have 
violated the rule if the firm uses a fax sheet but then fails to 
deliver the stock. In order to permit the rule to be reasonably 
employed by firms who with good intention are unable to deliver, the 
rule does permit the Exchange to consider mitigating circumstances in 
failure to deliver situations.
    Because this rule proposal helps prevent a shortage of deliverable 
stock and fails to deliver without imposing any unnecessarily 
burdensome regulatory requirements, and conforms the CBOE rule to the 
rules of the NASD and the New York Stock Exchange, the Exchange 
believes the proposal is consistent with Section 6(b) of the act in 
general and Section 6(b)(5) in particular by providing rules that 
facilitate transactions in securities, remove impediments to a free and 
open market and protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments.

III. Findings and Conclusions

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5).\4\ In particular, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirement that the rules of an exchange be designed to promote just 
and equitable principles of trade and not to permit unfair 
discrimination between customers, issuers, brokers, and dealers.
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    \4\ 15 U.S.C. Sec. 78f(b)(5) (1982).
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    As in the NASD Approval Order, the Commission has determined to 
allow CBOE to permit firms to utilize standing assurances in satisfying 
their affirmative determination requirements, thereby providing members 
with the flexibility to determine whether it is appropriate to rely on 
a standing assurance in a given situation. The proposal, however, also 
puts members on notice that reliance on standing assurances may be 
deemed conduct inconsistent with the Interpretation under certain 
circumstances. The Commission believes that this flexible approach will 
act not only to ease compliance burdens where appropriate, but also to 
protect against conduct inconsistent with the purposes of the 
Interpretation.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register because the CBOE's proposal 
conforms the Interpretation to the NYSE's interpretation of its own 
affirmative determination rule \5\ and is also identical to the 
recently approved NASD proposal. The Commission believes that 
consistent application of CBOE, NASD, and NYSE rules will

[[Page 24845]]

result in more efficient compliance with such rules. Accordingly, the 
proposal does not raise any new or unique regulatory issues. For these 
reasons, the Commission believes there is good cause, consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act, to approve the proposed rule 
change on an accelerated basis.
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    \5\ See NYSE Rule 440C; NYSE Information Memo 91-41 (October 18, 
1991).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rules 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 Section, 450 Fifth Street 
NW., Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by June 6, 1996.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (SR-CBOE-96-25) is approved.

    \6\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR Sec. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12236 Filed 5-15-96; 8:45 am]
BILLING CODE 8010-01-M