Document ID: SEC-2007-0473-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2007-04-02T04:00Z

[Federal Register: April 2, 2007 (Volume 72, Number 62)]
[Notices]               
[Page 15736-15737]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap07-118]                         

[[Page 15736]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55531; File No. SR-CBOE-2006-94]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Amendment No. 
1 Thereto Relating to Off-Floor DPMs

March 26, 2007.

I. Introduction

    On November 13, 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'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to allow DPMs to operate off-
floor. The Exchange filed Amendment No. 1 to the proposed rule change 
on January 18, 2007. The proposed rule change was published for comment 
in the Federal Register on February 20, 2007.\3\ The Commission 
received no comments on the proposal.
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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. 55275 (February 12, 
2007), 72 FR 7782.
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II. Description of the Proposal

    CBOE proposes to amend its rules to allow a DPM to operate remotely 
away from CBOE's trading floor. DPMs are member organizations that 
function in option classes allocated to them as Market-Makers, and also 
are subject to the obligations under Rule 8.85 or as otherwise provided 
in CBOE's Rules. Currently, all DPMs operate on CBOE's trading floor. 
However, some member organizations have expressed an interest in acting 
as DPM remotely away from CBOE's trading floor. As discussed below, the 
proposed rule change is intended to provide DPMs with the flexibility 
to operate on CBOE's trading floor (``On-Floor DPM'') or remotely away 
from CBOE's trading floor (``Off-Floor DPM''). A DPM would only be 
permitted to operate as an Off-Floor DPM in equity option classes 
traded on the Hybrid Trading System.
    CBOE proposes to amend Rule 8.83 to provide that in selecting an 
applicant for approval as a DPM, the appropriate exchange committee may 
place one or more conditions on the approval, including, but not 
limited to, whether the DPM will operate on-floor or off-floor. 
Additionally, CBOE proposes to amend Rule 8.83 to provide that an On-
Floor DPM can request that the appropriate Exchange committee authorize 
it to operate as an Off-Floor DPM in one or more equity option classes 
traded on the Hybrid Trading System. The appropriate Exchange committee 
will consider the factors specified in Rule 8.83(b) in determining 
whether to permit an On-Floor DPM to operate as an Off-Floor DPM. In 
the event a DPM is approved to operate as an Off-Floor DPM, Rule 8.83 
provides that the Off-Floor DPM can have a DPM Designee trade in open 
outcry in the option classes allocated to the Off-Floor DPM, but the 
Off-Floor DPM shall not receive a participation entitlement under Rule 
8.87 with respect to orders represented in open outcry. CBOE also 
proposes to amend Rule 6.45A(a)(C) and Rule 6.74 to make clear that the 
DPM participation entitlement is only applicable to an On-Floor DPM.
    As provided in new Interpretation .01 to Rule 8.83, if an Off-Floor 
DPM wishes to operate as an On-Floor DPM, the Off-Floor DPM can request 
that the appropriate Exchange Committee authorize it to do so. In 
making a determination pursuant to this Interpretation, the appropriate 
Exchange committee would evaluate whether the change is in the best 
interests of the Exchange, and the committee may consider any 
information that it believes will be of assistance to it. Factors to be 
considered may include, but are not limited to, any one or more of the 
following: Performance, operational capacity of the Exchange or the 
DPM, efficiency, number and experience of personnel of the DPM who will 
be performing functions related to the trading of the applicable 
securities, number of securities involved, number of Market-Makers 
affected, and trading volume of the securities.
    In connection with this rule change, CBOE proposes to amend certain 
DPM obligations contained in Rule 8.85. In particular, CBOE proposes to 
amend the obligation contained in subparagraph (a)(iv), which currently 
provides that the DPM must assure that the number of DPM Designees and 
support personnel continuously present at the trading station 
throughout every business day is not less than the minimum required by 
the appropriate Exchange committee. CBOE proposes to amend subparagraph 
(a)(iv) to state that an Off-Floor DPM similarly shall assure that the 
number of DPM Designees and support personnel continuously overseeing 
the DPM's activities is not less than the minimum required by the 
appropriate Exchange committee. Additionally, an Off-Floor DPM shall 
provide members with telephone access to a DPM Designee at all times 
during market hours for purposes of resolving problems involving 
trading on the Exchange.
    CBOE also proposes to amend subparagraph (a)(v) of Rule 8.85, which 
states that a DPM shall trade in all securities allocated to the DPM 
only in the capacity of a DPM and not in any other capacity. CBOE 
proposes to allow, as part of an existing pilot program applicable to 
e-DPMs,\4\ an Off-Floor DPM to have not more than one Market-Maker 
affiliated with the Off-Floor DPM trade on CBOE's trading floor in any 
specific option class allocated to the Off-Floor DPM, provided such 
Market-Maker is trading on a separate membership.\5\ The affiliated 
Market-Maker would also have to comply with the ``Guidelines for 
Exemptive Relief Under Rule 8.91(e) for Members Affiliated with DPMs,'' 
set forth in Rule 8.91. (Absent the pilot program, an Off-Floor DPM may 
not allow any Market-Makers affiliated with the Off-Floor DPM to trade 
on CBOE's trading floor in any class allocated to the Off-Floor DPM.) 
If the Off-Floor DPM has an affiliated Marker-Maker trade on CBOE's 
trading floor in any specific option class allocated to the Off-Floor 
DPM pursuant to the pilot program, Rule 8.85(a)(v) provides that the 
Off-Floor DPM cannot also have a DPM Designee trading in open outcry in 
the option classes allocated to the Off-Floor DPM.
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    \4\ See CBOE Rule 8.93(vii).
    \5\ CBOE proposes to make a corresponding change to the 
``Guidelines for Exemptive Relief Under Rule 8.91(e) for Members 
Affiliated with DPMs.'' See Guidelines, Paragraph (b)(viii).
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    Finally, CBOE proposes to amend Interpretation .02 of Rule 3.8 to 
allow an Off-Floor DPM to appoint one individual to be the nominee for 
all memberships utilized by the organization in an Off-Floor DPM 
capacity. Interpretation .02 of Rule 3.8 currently provides that a 
member organization can appoint one individual to be the nominee for 
all memberships utilized by the organization in an RMM capacity or an 
e-DPM capacity. This is an exception to the general requirement of Rule 
3.8(a)(ii) which provides that ``if a member organization is the owner 
or lessee of more than one membership, the organization must designate 
a different individual to be the nominee for each of the memberships.''

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to

[[Page 15737]]

a national securities exchange \6\ and, in particular, the requirements 
of Section 6 of the Act.\7\ Specifically, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\8\ in that the 
proposal has been designed to promote just and equitable principles of 
trade, and to protect investors and the public interest.
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    \6\ The Commission has considered the amended proposed rule 
change's impact on efficiency, competition and capital formation. 15 
U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission believes that a Market Maker must have 
an affirmative obligation to hold itself out as willing to buy and sell 
options for its own account on a regular or continuous basis to justify 
receiving market maker margin. The Commission believes that CBOE's 
rules impose such affirmative obligations on DPMs that choose to 
operate remotely and notes that, under the proposal, a DPM acting from 
a remote location would still be required to meet the obligations of a 
DPM set forth in CBOE Rule 8.85.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2006-94), as modified by 
Amendment No. 1, is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-5980 Filed 3-30-07; 8:45 am]

BILLING CODE 8010-01-P