[Federal Register Volume 61, Number 131 (Monday, July 8, 1996)]
[Notices]
[Pages 35821-35822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17251]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37388; File No. SR-CBOE-96-31]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to Operation and Enforcement of the 
Firm Quote Rule in the OEX Trading Crowd

June 28, 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 May 15, 
1996, the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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 issue two regulatory circulars pertaining to 
the administration and enforcement of the firm quote rule in the 
trading crowd where options on the Standard and Poor's 100 Index (``OEX 
options'') are traded. The text of the regulatory circulars and the 
proposed rule change are available at the Office of the Secretary, 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 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 purpose of the proposed rule change is, first, to consolidate 
and clarify in a single regulatory circular (referred to as 
``Regulatory Circular 96-xx'') the Exchange's policies concerning the 
administration and enforcement of the firm quote rule (CBOE Rule 8.51) 
in the OEX trading crowd, and, second, to set forth in a separate 
regulatory circular (referred to as ``Regulatory Circular 96-yy'') the 
specific fines that may be imposed under the Exchange's summary fine 
procedure for violations of the requirements of the firm quote program 
in the OEX crowd, as contemplated in CBOE Rule 17.50(g)(6).
    Proposed Regulatory Circular 96-xx consolidates without substantial 
change various requirements applicable to market makers and floor 
brokers in the OEX trading crowd under CBOE Rule 8.51 (the firm quote 
rule). These requirements have previously been set forth in a number of 
different regulatory circulars, two of which (RG 90-09 and RG 96-25) 
are currently effective. The proposed regulatory circular would take 
the place of both of these circulars in order to provide in one place a 
clear and comprehensive statement of how firm quote requirements apply 
in the OEX crowd.
    In addition to restating what is set forth in existing circulars, 
the proposed circular would amend those circulars to clarify certain 
aspects of the obligations of market makers and floor brokers under the 
firm quote rule, and how those obligations are enforced. Specifically, 
with respect to market makers, proposed Regulatory Circular 96-xx sets 
forth a mechanism for the enforcement of Rule 8.51 in the OEX trading 
crowd by providing that if the OEX trading crowd fails to honor a 
posted quotation in accordance with the firm quote rule, two Floor 
Officials may designate one or more market makers in the crowd to take 
the contra side of the order that is entitled to execution. The 
proposed circular makes it clear that any failure to comply with the 
Floor Officials' designation is a violation of Rule 8.51, which may 
subject the violator to summary fine under Rule 17.50 as well as to 
formal disciplinary proceedings.\1\ The circular points out that the 
fine permitted to be imposed by Floor Officials for such violations can 
be as high as $5,000, which is the maximum fine authorized under the 
summary fine rule. It is the Exchange's expectation that the in 
terrorem effect of a substantial fine will cause market makers to 
comply with Floor Officials' designations, and the fines themselves 
will rarely if ever have to be imposed.
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    \1\ Violations of Rule 8.51 are deemed to be violations of Rule 
6.20(b) pursuant to paragraph (vii) of Interpretation and Policy .04 
under Rule 6.20. Rule 6.20(b) requires that fines imposed thereunder 
must be agreed upon by at least two Floor Officials.
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    Proposed Regulatory Circular 96-xx also clarifies the meaning of 
the due diligence obligation imposed on floor brokers under Rule 
6.73(a), as that obligation applies in the OEX trading crowd in light 
of the operation of the firm quote rule. The circular describes two 
alternative ways in which public customer orders eligible for execution 
under the firm quote rule may be represented: The floor broker may 
either ask for a market and then immediately fill the order for up to 
the ten contract limit entitled to execution under the firm quote rule 
at the better of the posted market or the market given in response to 
his request, or the floor broker may bid or offer on behalf of his 
customer at a price between the posted bid and offer in an attempt to 
obtain an execution at a better price than the posted market. Under the 
second alternative, the floor broker must then immediately fill the 
public customer order for up to ten contracts at his announced bid or 
offer if the crowd is willing to trade at that price, or if not, he 
must immediately fill the order at the originally posted market.
    In all other respects, proposed Regulatory Circular 96-xx is 
substantially the same as the existing circulars that it will replace.
    Proposed Regulatory Circular 96-yy is being issued pursuant to 
CBOE's summary fine rule (Rule 17.50), which authorizes the summary 
imposition of fines for certain specified ``minor rule violations'' in 
lieu of formal disciplinary proceedings. Paragraph (g)(6) of Rule 17.50 
covers the imposition of summary

[[Page 35822]]

fines for violation of trading conduct and decorum policies established 
under CBOE Rule 6.20, and states that the specific dollar amount that 
may be imposed as fines thereunder will be distributed to the 
membership periodically. The Exchange has previously issued Regulatory 
Circular 95-37, which sets forth fines for most of the trading conduct 
and decorum policies established under Rule 6.20, but does not include 
fines for violation of the firm quote requirements of Rule 8.51, which 
are deemed to be violations of Rule 6.20(b).\2\ Proposed Regulatory 
Circular 96-yy cures this omission for violations of the firm quote 
rule in the OEX crowd by setting forth the specific dollar amounts that 
may be imposed as summary fines for such violations. As noted above, 
the fines that may be imposed for refusal to take the other side of an 
OEX trade entitled to execution under the firm quote rule when directed 
to do so by Floor Officials range from $1,000 to $5,000, which places 
them at the high end of the scale under Rule 17.50. This is intended to 
remove any economic incentive for a market maker to refuse to obey the 
directions of Floor Officials to comply with firm quote requirements.
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    \2\ See supra note 1.
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    The Exchange believes that by clarifying the obligations of market 
makers and floor brokers in the OEX crowd under the firm quote rule and 
by specifying the fines that may be imposed for failure to honor these 
obligations, the proposed regulatory circulars will serve to promote 
just and equitable principles of trade and to protect investors and the 
public interest, in furtherance of the objectives of section 6(b)(5) of 
the Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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

    Because the foregoing rule change constitutes a stated policy with 
respect to the meaning, administration, or enforcement of an existing 
rule, it has become effective pursuant to Section 19(b)(3)(A) of the 
Act and Rule 19b-4 thereunder. At any time within 60 days of the filing 
of the proposed rule change, the Commission may summarily abrogate such 
rule if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 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 the CBOE. All 
submissions should refer to the File No. SR-CBOE-96-31 and should be 
submitted by July 29, 1996.

    For Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\3\
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    \3\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17251 Filed 7-5-96; 8:45 am]
BILLING CODE 8010-01-M