Document ID: SEC-2005-0329-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2005-12-07T05:00Z

[Federal Register: December 7, 2005 (Volume 70, Number 234)]
[Notices]               
[Page 72867-72870]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07de05-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52860; File No. SR-CBOE-2005-100]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Obligations of Designated Primary Market Makers 
During the Implementation of the PAR Official Program

November 30, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 22, 2005, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 Exchange. 
CBOE has designated this proposal as non-controversial under section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to issue a regulatory circular that will 
subject certain Designated Primary Market Makers (``DPMs'') to 
obligations that were removed upon the approval of the Exchange's PAR 
Official proposal.\5\ The text of the proposed regulatory circular is 
attached hereto as Exhibit A.
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    \5\ See infra note 6 and accompanying text.
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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 Exchange 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 Exchange 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

1. Purpose
    On November 18, 2005, the Commission approved CBOE's proposal to 
remove a DPM's obligation to execute orders as an agent, including as a 
floor broker, in its allocated securities on the Exchange in any 
trading station and to allow the Exchange to appoint an Exchange 
employee or independent contractor (``PAR Official'') to assume many of 
the functions and obligations that DPMs previously held (``PAR Official 
proposal'').\6\ A specific provision of rules approved in connection 
with the PAR Official proposal gives the Exchange up to ninety days to 
implement the PAR Official proposal.\7\ Because this ninety-day 
implementation provision could mean that some DPMs will continue to be 
required to represent orders as agents in their allocated securities, 
those DPMs must still be subject to the same obligations that governed 
DPM operations prior to the approval of the PAR Official proposal. As 
such, the Exchange has incorporated those obligations into a regulatory 
circular that will govern the operations of those DPMs that were not 
immediately included in the PAR Official conversion as of November 18, 
2005. These rules and obligations, as provided in the regulatory 
circular attached hereto as Exhibit A, were adopted directly from the 
now-former DPM rules.
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    \6\ See Securities Exchange Act Release No. 52798 (November 18, 
2005), 70 FR 71344 (November 28, 2005).
    \7\ See Interpretation and Policy .01 to CBOE Rule 7.12.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \8\ of the Act in general, and furthers the 
objectives of section 6(b)(5) \9\ in particular, in that it is designed 
to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, and, in general, to protect investors 
and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

    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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder 
\11\ because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; or (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate. In addition, the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, at least five business days prior to the date of the filing of 
the proposed rule change as required by Rule 19b-4(f)(6).\12\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ Id.
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\13\ the proposal 
does not become operative until 30 days after the date of its filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest. The Exchange has 
requested that the Commission waive the 30-day operative delay so that 
the proposed rule change becomes effective immediately. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. The Commission notes 
that granting this waiver will ensure that DPMs not immediately subject 
to the new rules approved recently in connection with the PAR Official 
proposal will continue to be subject to appropriate regulation. 
Therefore, the Commission has determined to waive the 30-day delay

[[Page 72868]]

and to allow the proposed rule change to become operative 
immediately.\14\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the operative delay of this 
proposal, the Commission notes that it has considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change 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.\15\
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    \15\ 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-CBOE-2005-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-100. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commissions Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the CBOE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2005-100 and should be submitted on or before 
December 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.

Exhibit A--Chicago Board Options Exchange, Incorporated Regulatory 
Circular RG05-xx

    Date: November 18, 2005.
    To: Members and Member Firms.
    From: Legal Division; Regulatory Division; Trading Operations 
Division
    Re: DPM Obligations Until the Implementation of the PAR Official 
Program
    On November 18, 2005, the Securities and Exchange Commission 
(``SEC'') approved a CBOE rule change, SR-CBOE-2005-46 (``rule change'' 
or ``PAR Official rule change''), that, among other things, (1) 
prohibits a DPM from executing orders as an agent or Floor Broker in 
its allocated option classes and (2) eliminates the authority of a DPM 
to act in any other way as a Floor Broker in those classes.\17\ Rule 
8.8 and Rule 8.85(b) now prevent a DPM from representing or executing 
orders for other persons in the DPM's assigned option classes. Once the 
rule change goes into effect in a particular options class, the DPM 
assigned to that option class will lose the ability to take custody of 
or handle orders for other persons in that option class, including 
through operation of the PAR terminal. The rule change authorizes the 
Exchange to assign to an Exchange employee or subcontractor known as a 
PAR Official, the responsibility, among other things, to operate the 
PAR workstation for designated option classes, to maintain the book in 
those classes, to represent orders to be sent via Intermarket Option 
Linkage in those classes, and to effect executions of agency orders 
placed with the PAR Official in those classes.
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    \17\ Please refer to the rule change and the SEC order approving 
the rule change, which both can be found on the Exchange's Web site 
at http://www.cboe.org/Legal/filings.aspx.

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    The rule change allows the Exchange to put PAR Officials in place 
in DPM trading crowds during a 90-day period after the SEC approves the 
rule change. This provision is intended to insure a smooth roll-out of 
the PAR Official program. Therefore, until a PAR Official is put in 
place in a particular DPM trading crowd during this 90-day transition 
period, the DPM in that trading crowd will continue to be responsible 
to operate the PAR workstation and will continue to be subject to the 
same agency obligations as set forth under former Rule 8.85(b) and to 
other obligations applicable to DPMs under current and former Exchange 
rules. These rules and regulations are provided below:
* * * * *

DPM Obligations

    (a) General Obligations. Each DPM shall fulfill all of the 
obligations of a Floor Broker or Order Book Official (to the extent 
that the DPM acts as a Floor Broker) under the Rules, and shall satisfy 
each of the requirements contained in this paragraph, in respect of 
each of the securities allocated to the DPM. To the extent that there 
is any inconsistency between the specific obligations of a DPM set 
forth in subparagraphs (b) through (i) of this Rule and the general 
obligations of a Floor Broker or of an Order Book Official under the 
Rules, subparagraphs (b) through (i) of this Rule shall govern.
    (b) Display Obligation. Each DPM shall display immediately the full 
price and size of any customer limit order that improves the price or 
increases the size of the best disseminated CBOE quote. ``Immediately'' 
means, under normal market conditions, as soon as practicable but no 
later than 30-seconds after receipt (``30-second standard'') by the 
DPM. The term ``customer limit order'' means an order to buy or sell a 
listed option at a specified price that is not for the account of 
either a broker or dealer; provided, however, that the term customer 
limit order shall include an order transmitted by a broker or dealer on 
behalf of a customer. The following are exempt from the Display 
Obligation as set forth under this provision:
    (A) An order executed upon receipt;
    (B) An order where the customer who placed it requests that it not 
be displayed, and upon receipt of the order, the DPM announces in 
public outcry the information concerning the order that would be 
displayed if the order were subject to being displayed;
    (C) An order for which immediately upon receipt a related order for 
the principal account of a DPM reflecting the terms of the customer 
order is routed to another options exchange that is a participant in 
the Intermarket Options Linkage Plan;
    (D) The following orders as defined in Rule 6.53: contingency 
orders; One-cancels-the-other orders; all or none

[[Page 72869]]

orders; fill or kill orders; immediate or cancel orders; complex orders 
(e.g., spreads, straddles, combinations); and stock-option orders;
    (E) Orders received before or during a trading rotation (as defined 
in Rule 6.2, 6.2A, and 6.2B), including Opening Rotation Orders as 
defined in Rule 6.53(l), are exempt from the 30-second standard, 
however, they must be displayed immediately upon conclusion of the 
applicable rotation; and
    (F) Large Sized Orders: Orders for more than 100 contracts, unless 
the customer placing such order requests that the order be displayed.
    (c) A DPM shall not remove from the public order book any order 
placed in the book unless (A) the order is canceled, expires, or is 
executed or (B) the DPM returns the order to the member that placed the 
order with the DPM in response to a request from that member to return 
the order;
    (d) A DPM shall accord priority to any customer order which the DPM 
represents as agent over the DPM's principal transactions, unless the 
customer who placed the order has consented to not being accorded such 
priority;
    (e) A DPM shall not charge any brokerage commission with respect 
to:
    (1) The execution of any portion of an order for which the DPM has 
acted as both agent and principal, unless the customer who placed the 
order has consented to paying a brokerage commission to the DPM with 
respect to the DPM's execution of the order while acting as both agent 
and principal; or
    (2) Any portion of an order for which the DPM was not the executing 
floor broker, including any portion of the order that is automatically 
executed through an Exchange system; or
    (3) Any portion of an order that is automatically cancelled, or;
    (4) Any portion of an order that is not executed and not cancelled.
    (f) A DPM shall act as a Floor Broker to the extent required by the 
MTS Committee.
    (g) A DPM shall not represent discretionary orders as a Floor 
Broker or otherwise.
    (h) Autobook Pilot. A DPM shall maintain and keep active on the 
DPM's PAR workstation at all times the automated limit order display 
facility (``Autobook'') provided by the Exchange. The appropriate 
Exchange Floor Procedure Committee will determine the Autobook timer in 
all classes under that Committee's jurisdiction. A DPM may deactivate 
Autobook as to a class or classes provided that Floor Official approval 
is obtained. The DPM must obtain such approval no later than three 
minutes after deactivation.
    (i) The Exchange may make personnel available to assist a DPM in 
the DPM's performance of the obligations of an Order Book Official, for 
which the Exchange may charge the DPM a reasonable fee.
* * * * *

RAES Operations

    DPMs will still be responsible for non-automated handling of orders 
routed to the PAR workstation pursuant to Rule 6.8(d)(vi) and 
Interpretation and Policy .02(b) of Rule 6.8.
* * * * *

Priority of Bids and Offers and Priority of Allocation of Trades

    DPMs shall be required to comply with those provisions of Rule 
6.45, 6.45A, and 6.45B, that are now assigned to PAR Officials.
* * * * *

Timing of Firm Quote Obligations in a DPM Trading Crowd With Respect to 
Firm Disseminated Market Quotes

    In Non-Hybrid classes, for purposes of determining when the firm 
quote obligations under Rule 8.51 attach in respect of orders received 
at a PAR workstation in a DPM trading crowd and how the exemptions to 
that obligation provided in paragraph (e) of that Rule apply, the 
responsible broker or dealer shall be deemed to receive an order, and 
an order shall be deemed to be presented to the responsible broker or 
dealer, at the time the order is received on the DPM's PAR workstation.
    In Hybrid classes, for purposes of determining when the firm quote 
obligations under Rule 8.51 attach with respect to orders received at a 
PAR workstation in a DPM trading crowd and how the exemptions to that 
obligation provided in paragraph (e) of that rule apply, the 
responsible broker or dealer shall be deemed to receive an order, and 
an order shall be deemed presented to the responsible broker or dealer:
    (i) At the time the order is announced to the trading crowd with 
respect to each responsible broker or dealer that is not the DPM for 
the class; and
    (ii) At the time the order is received on PAR with respect to the 
DPM as the responsible broker or dealer.
    As such, firm quote obligations for an order received on a PAR 
workstation may attach at two separate times for different responsible 
broker or dealers: at the time of receipt with respect to the DPM as a 
responsible broker or dealer and at the time of announcement with 
respect to non-DPM members of the trading crowd as responsible brokers 
or dealers.
* * * * *

Linkage Rules

    Only with respect to any DPM continuing to represent and execute 
orders as agent pursuant to this Regulatory Circular, Rule 6.80 
(``Definitions'') paragraph (12)(i) shall read as follows:
    ``Principal Acting as Agent (`P/A') Order,'' which is an order for 
the principal account of a Market-Maker (or equivalent entity on 
another Participant Exchange that is authorized to represent Customer 
orders) reflecting the terms of a related unexecuted Customer order for 
which the Market-Maker is acting as agent.
* * * * *

DPM Designees

    The DPM must continue to maintain the requisite number of approved 
DPM Designees, as defined under Rule 8.81. Additionally, these DPM 
Designees must continue to be registered as a Floor Broker pursuant to 
Rule 6.71. A DPM Designee also shall continue to be restricted from 
trading as a Floor Broker in securities allocated to the DPM unless 
acting on behalf of the DPM in its capacity as a DPM.
    Finally, when acting on behalf of a DPM in its capacity as a DPM, 
the DPM Designee is exempt from the provisions of Rule 8.8 
(``Restriction on Acting as Market-Maker and Floor Broker''). (See 
former Rule 8.81(e)).
* * * * *

Rule 17.50. Imposition of Fines for Minor Rule Violations

    DPMs shall be subject to a fine for failure to promptly book and 
display limit orders that would improve the disseminated quote or for 
failure to use due diligence in the execution of orders for which the 
DPM maintains an agency obligation.
* * * * *

Summary

    After the rule change has been approved and until the end of the 
90-day trading period, neither a DPM assigned to a trading crowd nor 
the Exchange shall be subject to the provisions of the rule change with 
respect to the operation of that trading crowd until a PAR Official has 
been assigned to that trading crowd.
    Questions pertaining to this Regulatory Circular should be directed 
to Jim Flynn at (312) 786-7070; Doug

[[Page 72870]]

Beck at (312) 786-7959; or John Johnston at (312) 786-7303.

 [FR Doc. E5-6986 Filed 12-6-05; 8:45 am]

BILLING CODE 8010-01-P