Document ID: SEC-2007-0028-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2007-01-08T05:00Z

[Federal Register: January 8, 2007 (Volume 72, Number 4)]
[Notices]               
[Page 812-813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ja07-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55025; File No. SR-CBOE-2006-96]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Regarding 
Allocation of Stocks to CBSX DPMs

December 29, 2006.

I. Introduction

    On November 20, 2006, the Chicago Board Options Exchange, 
Incorporated (``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'' or ``Exchange Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposal relating to the allocation of 
stocks for the CBOE Stock Exchange (``CBSX''). The proposal was 
published for comment in the Federal Register on November 27, 2006.\3\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54792 (November 20, 
2006), 71 FR 68659.
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II. Description of the Proposal

    The purpose of this filing is to adopt rules that would allow for 
the allocation of stocks to CBSX DPMs.
    The Exchange has represented that it intends to submit a proposal 
to modify Chapters 50-55 of its rules, which govern the trading of non-
option securities on the Exchange,\4\ in connection with the 
establishment of CBSX (the ``CBSX Trading Rules Proposal''). In 
addition, the Exchange has proposed rules to establish CBSX as a 
facility of the Exchange (the ``CBSX Facility Proposal'').\5\ If the 
Commission approves these proposals, CBSX would be a facility of the 
Exchange and would serve as the Exchange's vehicle for trading non-
option securities. In addition, the Exchange has filed for immediate 
effectiveness a proposal to appoint CBSX DPMs (the ``CBSX DPM 
Appointment Proposal'').\6\ Any appointments under the CBSX DPM 
Appointment Proposal and any allocations made to such DPMs under this 
proposal would be contingent on Commission approval of the CBSX Trading 
Rules Proposal--in particular, those rules governing DPM trading 
procedures and obligations on CBSX--and the CBSX Facility Proposal.
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    \4\ See Securities Exchange Act Release No. 54422 (September 11, 
2006), 71 FR 54537 (September 15, 2006) (approving SR-CBOE-2004-21). 
See also Securities Exchange Act Release No. 54526 (September 27, 
2006), 71 FR 58646 (October 4, 2006) (approving SR-CBOE-2006-70).
    \5\ See SR-CBOE-2006-110 (filed December 26, 2006).
    \6\ See Securities Exchange Act Release No. 54831 (November 29, 
2006), 71 FR 70814 (December 6, 2006) (notice of filing and 
immediate effectiveness of SR-CBOE-2006-100).
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    Initial CBSX DPM stock allocations would be handled pursuant to 
proposed CBOE Rule 53.54. For the initial launch, and potentially in 
instances where CBSX seeks to commence trading a number of new 
securities at one time, CBSX would conduct a ``draft'' for eligible 
CBSX DPMs to select available stocks. The draft order would be 
determined randomly. In connection with the initial launch, the draft 
would apply to the first 500 securities selected.\7\ The remaining 
securities slated for trading on CBSX would be allocated randomly by 
CBSX to the CBSX DPMs equally.
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    \7\ Telephone conversation between Angelo Evangelou, Assistant 
General Counsel, CBOE, and Nathan Saunders, Special Counsel, 
Division of Market Regulation, Commission, November 20, 2006.
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    CBSX would utilize proposed CBOE Rule 53.54 for future stock 
allocations as well. In those cases, a draft could be

[[Page 813]]

employed or CBSX could allocate the stocks based on any one or more of 
the following: Performance, volume, capacity, market performance 
commitments, operational factors, efficiency, competitiveness, 
expressed preferences of issuers, and the best interest of CBSX.
    The Exchange is seeking to launch trading on CBSX on February 5, 
2007. The Exchange has stated that allocating stocks to CBSX DPMs ahead 
of the launch date would allow it and the CBSX DPMs to be prepared to 
commence trading on CBSX immediately if and when the Commission 
approves the CBSX Trading Rules Proposal and the CBSX Facility 
Proposal.

III. Discussion

    After careful review, 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.\8\ 
In particular, the Commission believes that the proposal is consistent 
with the requirements of Section 6(b)(5) of the Act,\9\ in that it has 
been designed to promote just and equitable principles of trade, to 
protect investors and the public interest, and is not designed to 
permit unfair discrimination between CBSX DPMs.
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    \8\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the CBOE's proposal to employ a 
randomly-set draft rotation for allocating non-option securities is 
reasonably designed to promote just and equitable principles of trade 
and to avoid unfair discrimination. Moreover, the Commission believes 
that the additional proposed criteria for allocating non-option 
securities to CBSX DPMs when a draft is not appropriate are reasonable 
and consistent with the Act. These additional criteria are similar to 
the options allocation criteria set forth in CBOE Rule 8.95(a) and (b), 
which the Commission has previously approved.\10\
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    \10\ See Securities Exchange Act Release No. 39879 (April 16, 
1998), 63 FR 20227 (April 23, 1998) (order approving SR-CBOE-98-03). 
Several of the factors that CBSX may consider in the allocation 
process are adopted from CBOE Rule 8.95: performance, volume, 
capacity, market performance commitments, operational factors, 
efficiency, competitiveness, and expressed preferences of issuers. 
The Commission believes that these criteria should be used by CBOE 
solely for the purpose of allocating non-option securities to CBSX 
DPMs. The Commission emphasizes that CBOE should not use the 
proposed criteria--especially the ``market performance commitments'' 
and ``best interest of CBSX'' criteria--to directly or indirectly 
attempt to restrict a market participant that is appointed as a CBSX 
DPM from performing market-making or specialist activities on other 
markets.
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    The Commission notes that all allocations of securities to CBSX 
DPMs under this proposal are contingent on Commission approval of the 
CBSX Trading Rules Proposal and the CBSX Facility Proposal. Moreover, 
in approving CBOE's proposal to establish rules for allocating stocks 
on CBSX, the Commission is not prejudging CBOE's other pending 
proposals relating to CBSX. If the Commission were not to approve the 
CBSX Trading Rules Proposal and the CBSX Facility Proposal, any 
allocations made pursuant to this proposal would be meaningless. 
Approving the CBSX allocation rules does, however, afford CBOE an 
opportunity to prepare for the possibility that the Commission will 
approve the CBSX Trading Rules Proposal and the CBSX Facility Proposal, 
and would reduce the time between any such approvals and the 
commencement of trading on CBSX.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-CBOE-2006-96) is 
approved.
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    \11\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-15 Filed 1-5-07; 8:45 am]

BILLING CODE 8011-01-P