33562 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices

4The proposed rule change amends the language

of Rule 24A.5(e) to state that a submitting member

will ‘‘have priority’’ to execute the specified share

of a trade, instead of that he will ‘‘be permitted’’

to execute that share, in order to clarify that a

member may cross more than the designated share

as to which he has priority if no one else is willing

to trade at the same or a better price.

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

6See Securities Exchange Act Release No. 36841

(February 14, 1996) (File No. SR–CBOE–95–43)

(‘‘FLEX Equity Option Approval Order’’).

7 Id.

8 15 U.S.C. 78k(a).

9 17 CFR 240.11a1–1(T).

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

11 17 CFR 200.30–3(a)(12).

Improvement Interval, has priority to

execute the contra side of the trade up

to the greater of (i) one-half of the trade,

(ii) $1 million Underlying Equivalent

Value, or (iii) the remaining Underlying

Equivalent Value on a closing

transaction valued at less than $1

million. If the member improves the

BBO and any other FLEX-participating

member matches the improved BBO, the

submitting member has priority to

execute the contra side of the trade up

to the greater of (i) two-thirds of the

trade, (ii) $1 million Underlying

Equivalent Value, or (iii) the remaining

Underlying Equivalent Value on a

closing transaction valued at less than

$1 million. By contrast, under current

Exchange rules no priority right of

participation in a principal or agency

cross is given to a member who submits

a Request for Quotes in respect of a

FLEX Equity Option, even if the

submitting member matches or

improves the BBO.

The proposed rule change would

provide that a member who submits a

Request for Quotes in respect of a FLEX

Equity Option and indicates an

intention to cross or act as principal on

the trade, and who matches or improves

the BBO during the BBO Improvement

Interval, has a priority right to execute

the contra side of the trade for at least

twenty-five percent (25%) of the trade.4

The Exchange believes that the

proposed rule change will encourage

members to bring FLEX Equity Option

orders to CBOE and to commit their

capital to the FLEX Equity Options

market on CBOE, and thereby contribute

to the liquidity of that market, by

guaranteeing them a minimum right of

participation in the other side of any

trade they bring to the market if they are

prepared to match or improve the BBO.

The Exchange believes that by

providing investors with the flexibility

to request quotes for options that expire

as early as the day following the day

they are issued, and by encouraging

members to submit requests for quotes

in FLEX Equity Options and to commit

capital to CBOE’s FLEX Equity Option

market, the proposed rule change

furthers the objectives of Section 6(b)(5)

of the Act to remove impediments to

and perfect the mechanism of a free and

open market in securities, and to protect

investors and the public interest.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, the

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

Act.5 The Commission believes that the

Exchange’s proposal to provide that new

series of FLEX Equity Options may be

opened so long as they do not expire on

the same day, reasonably addresses the

Exchange’s desire to meet the demands

of sophisticated portfolio managers and

other institutional investors who are

increasingly using the OTC market in

order to satisfy their hedging needs. In

this regard, the change will provide

FLEX Equity Option users with more

flexibility in establishing expiration

dates to better meet their hedging needs.

Market participants wanting to open a

new series of FLEX Equity Options with

a short duration will still have to meet

the 250 contract minimum requirement.

This should help to ensure that such

FLEX Equity Options are opened for

legitimate trading needs.

The Commission further notes that

expiration of FLEX Equity Options may

not correspond to the normal expiration

of Non-FLEX Equity Options. More

specifically, the expiration date of a

FLEX Equity Option may not occur on

a day that is on, or within, two business

days of the expiration date of a NonFLEX Equity Option.6 Moreover, as

stated in the FLEX Equity Option

Approval Order, the Commission

expects the Exchange to take prompt

action (including timely communication

with the self-regulatory organizations

responsible for oversight of trading in

the underlying securities) should any

unusual market effects develop.7

Additionally, the Commission

believes that the Exchange’s proposal to

provide a minimum right of

participation of at least 25% of the trade

to Exchange members who initiate

Requests for Quotes in respect of FLEX

Equity Options and indicate an

intention to cross or act as principal on

the trade, is consistent with the Act. In

addition, under CBOE rules, such

transactions must, in all cases, be in

compliance with the priority, parity,

and precedence requirements of Section

11(a) of the Act,8 and Rule 11a1–1(T) 9

promulgated thereunder. These

provisions set forth, among other things,

the conditions in which members must

yield priority to public customers’ bids

and offers at the same price.

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–

CBOE–96–20) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16368 Filed 6–26–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37338; File No. SR–CBOE–

96–28]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by Chicago Board

Options Exchange, Incorporated

Relating to the Selection of Underlying

Securities on Which FLEX Equity

Options May Be Traded on the

Exchange

June 19, 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 22, 1996, the

Chicago Board Options Exchange,

Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I and II 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 Exchange proposes to amend

CBOE Rule 24A.4(c)(1) governing the

selection of underlying securities on

which FLEX Equity Options may be

traded on the Exchange to eliminate the

requirement that the underlying

securities must be the subject of NonFLEX Equity Option trading on the

Exchange.

The text of the proposed rule change

is available at the Office of the

Secretary, CBOE and at the Commission.
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices 33563

1See Securities Exchange Act Release Nos. 37053

(March 29, 1996), 61 FR 15537 (April 8, 1996) (File

No. SR-Amex-95–57) and 37048 (March 29, 1996),

61 FR 15549 (File No. SR-Phlx-96–08). See also

Letter from Michael Pierson, Senior Attorney,

Market Regulation, Pacific Stock Exchange (‘‘PSE’’),

to John Ayanian, Attorney, Office of Market

Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Market Regulation’’), Commission

dated April 26, 1996 (proposing the same

amendment to File No. SR–PSE–96–11).

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

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

The CBOE proposes to trade FLEX

Equity Options on qualified underlying

securities that have been approved by

the Exchange for options trading

whether or not Non-FLEX Equity

Options on those same underlying

securities are traded on the Exchange.

Under CBOE Rule 24A. 4(c)(1), only

those qualified and approved

underlying securities that are the subject

of Non-FLEX Equity Option trading on

the Exchange may serve as underlying

securities of FLEX Equity Options

traded on the Exchange. In this respect,

Rule 24A.4(c)(1) differs from the rules

proposed by the American Stock

Exchange (‘‘Amex’’) and the

Philadelphia Stock Exchange (‘‘Phlx’’)

in respect of FLEX Equity Option

trading on those exchanges.1 Proposed

Amex Rule 903G(c) and proposed Phlx

Rule 1069A(a)(1)(B) are substantively

identical in that any options-eligible

security, regardless of whether the

security is the subject of Non-FLEX

Equity Options traded on the exchange,

may underlie a FLEX Equity Option.

CBOE Rule 24A.4(c)(1), on the other

hand, requires that an underlying

security must be ‘‘the subject of NonFLEX equity Options traded on the

Exchange’’ to be eligible for FLEX

Equity Options trading.

CBOE initially believed it was

appropriate to limit FLEX Equity

Options to those underlying securities

on which it provides a Non-FLEX

Equity Options market. Such a

limitation would likely facilitate

market-making in FLEX Equity Options,

and it would avoid investor confusion

that could arise if an exchange were to

maintain a market in one kind of option

but not the other on the same

underlying stock. CBOE incorporated

this limitation in its rules in the

expectation that other exchanges that

saw fit to copy its FLEX Equity Options

program in all other respects would

include this provision in their rules as

well. The CBOE believes that in order to

remain competitive with the exchanges

that propose to list Equity Option on

eligible underlying securities regardless

of whether that exchange lists NonFLEX Equity Options overlying that

security, the CBOE must submit a

similar proposed rule change.

By permitting CBOE to compete

equally with other exchanges in listing

FLEX Equity Options on qualified

underlying securities, and in light of the

Congressional finding embodied in

Section 11A(a)(1)(C)(ii) of the Act that it

is in the public interest and appropriate

for the protection of investors and the

maintenance of fair and orderly markets

to assure fair competition among

exchange markets, the Exchange

believes that the proposed rule change

is consistent with and furthers the

objectives of Section 6(b)(5) of that Act

to remove impediments to and perfect

the mechanism of a free and open

market and a national market system

and to protect investors and the public

interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

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. Commission’s Findings and Order

Granting Accelerated Approval of the

Proposed Rule Change

The Exchange has requested that the

proposed rule change be given

accelerated effectiveness pursuant to

section 19(b)(2) of the Act. 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) and 11A thereunder. The

Commission believes that the proposed

rule change is reasonable in that it

promotes fair competition among

exchanges, consistent with Section 11A

of the Act, and will perfect the

mechanism of a free and open market

and serve to protect investors and the

public interest in accordance with

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

As noted above, as originally

approved, the CBOE determined to

restrict the trading of FLEX Equity

Options to those options which were

traded on the Exchange as Non-FLEX

Equity Options. The CBOE rationale for

this restriction was reasonable and the

Commission therefore approved the

restriction as consistent with the Act.

The Commission believes, however, that

the restriction is not mandated by the

Act and that it is reasonable for the

CBOE to conform its rules to those

proposed by other competing markets

seeking to establish FLEX Equity

Options must still meet the eligibility

requirements and criteria set forth in

CBOE Rule 5.3. The change should also

promote fair competition among

exchange markets trading FLEX Equity

Options by allowing CBOE to trade and

compete for FLEX Equity Options order

flow on more options eligible securities.

The Commission finds good cause for

approving this proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register. Specifically, the

Commission believes that the CBOE

proposal to conform its rules concerning

the selection of underlying securities for

FLEX Equity Option trading to the

proposed rules of other exchanges on

the same subject raises no new

regulatory issues. Additionally, the

Amex and Phlx proposals were subject

to a full notice and comment period,

and no comments were received.

Accordingly, the Commission believes,

consistent with Section 6(b)(5) of the

Act, that good cause exists, to approve

the proposed rule change on an

accelerated basis.

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, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than
33564 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Notices

2 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1) (1988).

2Securities Exchange Act Release No. 36945

(March 7, 1996), 61 FR 10614.

3 GSCC amended the filing to request that the

proposed rule change become effective upon

approval by the Commission and not with the

implementation of the second stage of netting

services for repurchase and reverse repurchase

transactions involving government securities as the

underlying instrument (‘‘repos’’) as originally

requested. Letter from Jeffrey F. Ingber, General

Counsel and Secretary, GSCC, to Jerry W. Carpenter,

Assistant Director, Division of Market Regulation,

Commission (May 16, 1996).

4 15 U.S.C. § 78o (1988).

5 15 U.S.C. § 78o–5 (1988).

6 17 CFR 15c3–1(a) (1975).

7 GSCC maintains a list of grandfathered entities

which are non-netting system members that

historically have done business with GSCC’s

interdealer broker netting members. Business done

by the interdealer broker netting members with

grandfathered entities is treated by GSCC as

business done with an actual netting member.

8Unlike a category one IDB, a category two IDB

is permitted to have up to ten percent of its

business with non-netting members other than

grandfathered, nonmember firms. This

determination is based on the category two IDB’s

dollar volume of next-day and forward settling

activity in eligible securities over the prior twenty

business days.

9 15 U.S.C. 78q–1(b)(4)(B) (1988).

10 15 U.S.C. § 78q–1(b)(3)(F) (1988).

11 17 CFR 200.30–3(a)(12) (1995).

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, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to File No. SR–CBOE–96–28 and

should be submitted by July 18, 1996.

It is therefore ordered pursuant to

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

proposed rule change is approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.2

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16369 Filed 6–26–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37343; File No. SR–GSCC–

96–02]

Self-Regulatory Organizations;

Government Securities Clearing

Corporation; Order Approving

Proposed Rule Change Modifying the

Minimum Financial Criteria for

Category One Interdealer Broker

Netting Membership

June 20, 1996.

On February 13, 1996, the

Government Securities Clearing

Corporation (‘‘GSCC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–GSCC–96–02) pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’).1 Notice

of the proposal was published in the

Federal Register on March 14, 1996.2

GSCC amended the filing on May 16,

1996.3 No comment letters were

received regarding the proposed rule

change. For the reasons discussed

below, the Commission is approving the

proposed rule change.

I. Description

GSCC is modifying its rules to reflect

a new minimum financial criteria for

category one interdealer broker (‘‘IDB’’)

membership in GSCC’s netting system.

Such financial criteria will be based on

levels of (1) excess net capital if the

member is a broker-dealer registered

with the Commission pursuant to

Section 15 of the Act 4 or (2) excess

liquid capital if the member is a

government securities broker registered

pursuant to Section 15C of the Act.5

Excess net capital is defined in GSCC’s

rules as the difference between the net

capital of a broker or dealer and the

minimum net capital such broker or

dealer must have to comply with the

requirements of Rule 15c3–1(a) under

the Act.6 Excess liquid capital is defined

in GSCC’s rules as the difference

between the liquid capital of a

government securities broker or dealer

and the minimum liquid capital that

such broker or dealer must have to

comply with the requirements of 17 CFR

402.2 (a), (b), and (c).

Currently, GSCC has two categories of

netting system membership for IDBs.

Category one IDBs act exclusively as

brokers and trade only with netting

members and with certain

‘‘grandfathered’’ nonmember firms.7

Currently, the minimum financial

requirement for category one IDBs is

$4.2 million in excess net or liquid

capital, as applicable. Category two IDBs

have a minimum financial requirement

of $25 million in net worth and $10

million in excess net or liquid capital,

as applicable.8

GSCC’s proposed rule change will

modify the minimum financial

requirement for category one IDBs to

require $10 million in excess net or

liquid capital, as applicable. Category

one IDBs will continue not to have a

minimum net worth requirement.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the Act, and specifically with Sections

17A(b)(4)(B) 9 and 17A(b)(3)(F).10

Section 17A(b)(4)(B) provides that a

registered clearing agency may deny

participation to or condition the

participation of any person if such

person does not meet such standards of

financial responsibility as are prescribed

by the rules of the clearing agency.

Section 17A(b)(3)(F) requires the rules

of a clearing agency be designed to

assure the safeguarding of securities and

funds which are in the custody or

control of the clearing agency or for

which it is responsible. GSCC believes

that given the large dollar volume of

activity that the IDBs have submitted

and continue to submit to GSCC for

netting and settlement and their

principal nature vis-a-vis GSCC, it is

appropriate to require as a condition to

participation that all IDBs have and

maintain a minimum level of excess net

or liquid capital of at least $10 million.

The Commission believes that

modifying the minimum financial

criteria for category one IDBs should

strengthen GSCC’s overall risk

management process and enhance its

membership standards. The

Commission believes that the increased

capital requirement for category one

IDBs should provide for greater

financial responsibility, operational

capacity, experience, and competence.

The Commission also believes that by

enhancing its risk management process

the increase will facilitate GSCC in

fulfilling its statutory obligations under

Section 17A of the Act with respect to

the safekeeping of securities or funds in

its custody or control or for which it is

responsible.

IV. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with Section 17A

of the Act.

It is therefore ordered, pursuant to

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

proposed rule change (File No. SR–

GSCC–96–02) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–16450 Filed 6–26–96; 8:45 am]

BILLING CODE 8010–01–M