Document ID: SEC-2010-0427-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-03-22T04:00Z

[Federal Register: March 22, 2010 (Volume 75, Number 54)]
[Notices]               
[Page 13626-13629]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22mr10-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61715; File No. SR-CBOE-2010-028]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Market-Maker Joint Accounts

March 16, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 8, 2010, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Exchange filed the proposal as a ``non-controversial'' 
proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 
\3\ and Rule 19b-4(f)(6) thereunder.\4\ 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 is proposing to amend CBOE Rule 6.55, Multiple 
Representation Prohibited, and to eliminate related Regulatory 
Circulars pertaining to joint account activity. The Exchange is also 
proposing related amendments to CBOE Rule 8.9, Securities Accounts and 
Orders of Market-Makers. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.cboe.org/Legal), at 
the Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.

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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    CBOE Rule 6.55 pertains to multiple representation by an individual 
Market-Maker in open outcry. Currently, the rule provides in relevant 
part that, except in accordance with procedures established by the 
Exchange or with respect the Exchange's permission in individual cases, 
no Market-Maker shall enter or be present in a trading crowd while a 
Floor Broker present in the trading crowd is holding an order on behalf 
of the Market-Maker's individual account or an order initiated by the 
Market-Maker for an account in which the Market-Maker has an interest.
    In addition, Interpretation and Policy .02 to CBOE Rule 6.55 
advises members to consult CBOE's Regulatory Circulars for procedures 
governing the simultaneous presence in a trading crowd of participants 
in and orders for the same joint account. The relevant circulars, RG01-
60 and RG01-128, set forth Exchange procedures and requirements for 
trading in joint accounts that vary depending upon whether the 
particular trading occurs in equity options or in index options and 
options on exchange-traded funds (``ETFs'').\5\ While certain 
restrictions apply to joint account activity in equity options,\6\ 
there are generally no

[[Page 13627]]

restrictions on the joint account activity of an individual Market-
Maker vis-[agrave]-vis other joint account participants in certain 
index and ETF options except that the members ensure that they do not 
trade in-person or by orders such that (i) a trade occurs between a 
joint account participant's individual Market-Maker account and the 
joint account of which he is a participant, or (ii) a trade occurs in 
which the buyer and seller are representing the same joint account and 
are on opposite sides of a transaction.\7\ These limitations on trading 
between a Market-Maker's individual account or a joint account in which 
he is a participant and another member acting on behalf of the joint 
account are provided in RG01-60 and RG01-128, as well as in 
Interpretation and Policy .06 to CBOE Rule 8.9. Interpretation and 
Policy .03 to CBOE Rule 6.55 also sets forth in relevant part an 
exception procedure that applies to any options class and allows a 
Market-Maker to enter or be present in the trading crowd when a Floor 
Broker holds a solicited order on behalf of a Market-Maker's joint 
account.\8\ This procedure is in addition to, and not a limitation of, 
the joint account exception procedures identified in Interpretation and 
Policy .02.
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    \5\ The Regulatory Circular governing joint account trading in 
equity products, RG01-60, was last amended through Securities 
Exchange Act Release No. 44152 (April 5, 2001), 66 FR 19262 (April 
13, 2001) (SR-CBOE-00-13). The Regulatory Circular governing joint 
account trading in certain index options and options on ETFs was 
last amended through Securities Exchange Act Release No. 44433 (June 
15, 2001), 66 FR 33589 (June 22, 2001) (SR-CBOE-2001-30).
    \6\ For equity option classes, RG01-60 currently provides in 
part that: (i) A joint account may be simultaneously represented in 
a trading crowd only by participants trading in-person; orders for a 
joint account may not be entered in a crowd where a participant of 
the joint account is trading in-person for the joint account; 
however, if no participant is trading in-person for the joint 
account, orders may be entered via Floor Broker so long as the same 
option series in not represented by more than one Floor Broker; (ii) 
members may alternate trading in-person between their individual and 
joint accounts while in the crowd; members who alternate trading 
between accounts must ensure that while trading the joint account 
another participant does not enter orders through a Floor Broker for 
the joint account in the same crowd or that an order is not being 
continuously represented for the joint account in the same crowd; 
(iii) it is the responsibility of a joint account participant to 
ascertain whether joint account orders have been entered in a crowd 
prior to trading the joint account in-person; (iv) joint account 
participants may not act as a Floor Broker for the joint account of 
which they are a participant; (v) when a joint account participant 
is trading in a crowd for his individual account or actively as a 
Floor Broker for accounts unrelated to his joint account, another 
participant of the joint account may either trade in-person for the 
joint account or enter orders for the joint account with other Floor 
Brokers; (vi) members are prohibited from entering orders in a 
particular crowd with Floor Brokers for their individual or joint 
account whenever they are trading in-person in that crowd; this 
applies even though the orders are for an account they are not then 
actively trading. Other exceptions to these procedures and 
requirements may apply. For example, exceptions to item (vi) above 
are currently outlined in Interpretations and Policies .01, .03 and 
.04 of CBOE Rule 6.55.
    \7\ For certain index and ETF option classes, RG01-128 currently 
provides in part that: (i) Joint accounts may be simultaneously 
represented in a trading crowd by participants trading in-person for 
the joint account; (ii) joint account participants who are not 
trading in-person in a trading crowd, may enter orders for the joint 
account with Floor Brokers even if other participants are trading 
the same joint account in-person; (iii) when series are 
simultaneously opened during rotation, joint account participants 
trading the joint account in-person may enter orders for the joint 
account with Floor Brokers in series where they are unable to trade 
the joint account in-person; (iv) there is no restriction on the 
number of joint account participants that may participate on behalf 
of the joint account on the same trade in the option; (v) when joint 
account participants are trading in a trading crowd for their 
individual account or as a Floor Broker, another participant of the 
joint account may trade for the joint account in-person or enter 
orders for the joint account with Floor Brokers; (vi) except for the 
exemption described in (vii) below, members are prohibited from 
entering orders for their individual or joint accounts while they 
are trading in-person in a trading crowd even if the orders are for 
an account they are not then actively trading; (vii) managers of 
Exchange approved RAES joint accounts may enter orders with Floor 
Brokers for the RAES joint account if the manager is trading in-
person for his individual account in the trading crowd; if the 
manager is trading in-person for the joint account the manager may 
not enter an order for the joint account with a Floor Broker; (viii) 
joint account participants may not act as a Floor Broker for the 
joint account of which they are a participant; and (ix) members may 
alternate trading in-person for their individual account and their 
joint account while in a trading crowd. Other exceptions to these 
procedures and requirements may apply. For example, exceptions to 
item (vi) above are currently outlined in Interpretations and 
Policies .01, .03 and .04 of CBOE Rule 6.55.
    \8\ CBOE Rule 6.55.03 currently provides that, subject to the 
requirements of CBOE Rule 6.9, Solicited Transactions, or 6.74, 
Crossing Orders, as applicable, a Market-Maker may permissibly enter 
or be present in a trading crowd in which a Floor Broker is present 
who holds (a) a solicited order on behalf of the Market-Maker's 
individual or joint account or (b) a solicited order initiated by 
the Market-Maker for an account in which the Market-Maker has an 
interest, provided that the Market-Maker makes the Floor Broker 
aware of the Market-Maker's intention to enter or to be present in 
the trading crowd and the Market-Maker refrains from trading in-
person on the same trade as the original order. It is the 
responsibility of the Market-Maker utilizing these procedures to 
ascertain whether solicited orders for the Market-Maker's joint 
account have been entered in a trading crowd prior to the Market-
Maker trading the joint account in-person.
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Proposed Changes
    In order to simplify the rule and create uniform requirements in 
all options classes for joint account activity of an individual Market-
Maker vis-[agrave]-vis other joint account participants, the Exchange 
is proposing to apply the terms of the circular currently applicable to 
trading in certain index and ETF options (RG01-128) to trading in all 
options classes. To accomplish this change, the provisions of the index 
and ETF options circular (RG01-128) will be incorporated into the rule 
text, replacing existing Interpretation and Policy .02. CBOE does not 
propose to modify any of the existing joint account trading policies or 
procedures set forth in RG01-128, except as noted below. The equity 
option circular (RG01-60) will no longer be applicable and will be 
superseded by revised Interpretation and Policy .02.
    The joint account trading policies and procedures applicable to all 
options classes will be the same as is set forth in RG01-128,\9\ except 
as follows. First, references to CBOE's Retail Automatic Execution 
System (``RAES'') will not be incorporated into the rule text. CBOE no 
longer utilizes RAES and, therefore, the references in RG01-128 are 
outdated. Second, RG01-128 includes a description of a manual process 
for identifying joint account transactions on trade tickets that is 
outdated and no longer applicable, and thus will not be incorporated 
into the rule text.\10\ Proposed Rule 6.55.02(j) and amended Rule 
8.9.03 will set forth the updated process. In particular, proposed Rule 
6.55.02(j) will provide that, when completing a trade ticket for a 
joint account, it must contain such information as may be required by 
the Exchange under Rule 6.51(d). Rule 8.9.03, as proposed to be 
amended, would provide that, for purposes of evaluating Market-Maker 
performance in accordance with Rule 8.7.03, trading activity in the 
joint account shall be credited to the Market-Maker either individually 
or collectively with the Market-Makers of the same member 
organization.\11\ Third, with respect to the prohibitions on Market-
Makers trading with their joint account and on trades in which the 
buyer and seller represent the same joint account and are on opposite 
sides of the transaction, the rule text will provide that it is the 
responsibility of a joint account participant to ascertain whether 
joint account orders have been entered in a crowd prior to trading the 
joint account in-person.
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    \9\ See note 7, supra, and related discussion.
    \10\ Specifically, RG01-128 provides that the proper procedure 
for completing a trade ticket for joint account transactions is that 
both the member's and joint account acronym must be included. The 
circular also indicates that this information is required to ensure 
that the initiating joint account member receives credit for such 
transactions as they relate to reporting and market performance 
obligations set forth in Exchange Rules 6.51(d) and 8.7.03. Rule 
6.51(d) provides that each member shall file with the Exchange trade 
information showing for each transaction certain trade information 
specified in the Rule as well as such other information as may be 
required by the Exchange. Rule 8.7.03 provides for certain 
percentage requirements that apply to Market-Maker trading activity 
in appointed classes and in-person requirements for Market-Makers in 
Hybrid 3.0 classes.
    \11\ This change is intended to update Rule 8.9.03 to be 
consistent with the provisions of Rule 8.7.03. In accordance with 
Rule 6.51(d)(m), the Exchange may require that other information 
beyond that specified in Rule 6.51(d) shall be reported for Exchange 
transactions. In this regard, the Exchange intends to specify that 
transactions for Market-Maker joint accounts be identified with the 
joint account acronym. This trade information reporting requirement 
for joint account transactions, and any changes thereto, will be 
announced to the membership via circular.
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    Lastly, CBOE is proposing to delete Interpretation and Policy .03 
to Rule 6.55.\12\ The provisions in Interpretation and Policy .03 
pertaining to simultaneous joint account activity are no longer 
necessary given the above-described proposed changes to Interpretation 
and Policy .02. The

[[Page 13628]]

remaining provisions in Interpretation and Policy .03 pertaining to 
multiple representation by an individual Market-Maker (for solicited 
orders entered on behalf of the Market-Maker's individual account or 
solicited orders initiated by the Market-Maker himself for an account 
in which the Market-Maker has an interest) are no longer necessary 
since they are duplicative of Interpretation and Policy .04.\13\
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    \12\ See note 8, supra.
    \13\ CBOE Rule 6.55.04, which is proposed to be renumbered to 
CBOE Rule 6.55.01(b), applies to a Market-Maker's orders generally, 
including solicited orders. In [sic] provides that a Market-Maker 
may permissibly enter or be present in a trading crowd in which a 
Floor Broker is present who holds an order on behalf of the Market-
Maker's individual account or an order initiated by the Market-Maker 
for an account in which the Market-Maker has an interest, provided 
that (i) the Market-Maker makes the Floor Broker aware of the 
Market-Maker's intention to enter or to be present in the trading 
crowd and (ii) the Market-Maker refrains from trading in-person on 
the same trade as the order being represented by the Floor Broker. 
In addition to renumbering Rule 6.55.04 to 6.55.01(b), the Exchange 
is proposing to clarify that, with respect to the condition in (ii) 
above, the Market-Maker does not need to refrain from trading in-
person on the same order if other in-crowd market participants 
choose not to trade the remaining portion of the order. This 
allowance to trade when other in-crowd market participants choose 
not to trade is similar to language in other CBOE rules. See, e.g., 
subparagraph (d)(viii) of Rule 6.74, Crossing Orders, which provides 
that nothing prohibits a Floor Broker, On-Floor DPM or On-Floor LMM, 
as applicable, from trading more than his percentage entitlement if 
the other in-crowd market participants do not choose to trade the 
remaining portion of an order.
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    The proposed changes will make the policy governing joint account 
trading in equity options the same as the current policy governing 
index option trading (subject to the changes described above), where 
multiple representation of orders for the same joint account is 
permitted by participants in the joint account trading in-person at the 
trading post and/or by Floor Brokers representing orders at the post. 
(The current equity option policy is more restrictive in that it only 
permits joint representation by participants trading in-person and does 
not permit multiple representation of orders for the same joint account 
if one or more of the orders is represented by a Floor Broker.) In this 
regard, the Exchange believes the proposed changes to the equity option 
policy reflect changes that have occurred in the trading environment 
since that policy was enacted over 13 years ago, including the 
Exchange's migration from a floor-based market to a hybrid environment 
where Market-Makers can trade in-person on the floor or remotely in a 
larger number of option classes (which may present more need for the 
services of Floor Brokers), and the increasing prevalence of CBOE 
Market-Maker member organizations utilizing joint accounts (as compared 
to individual accounts). The proposed changes ensure that member 
organizations that choose to employ a joint account for their Exchange 
trading are not disadvantaged in participating in trades vis-[agrave]-
vis those member organizations that choose to employ individual Market-
Maker accounts.\14\ The Exchange also believes the proposed changes 
will reduce unnecessary complexity and confusion, and delineate an 
unambiguous standard for multiple representation across all option 
classes.\15\
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    \14\ Some member organizations choose to have their various 
Market-Makers trade in a joint account so that the member 
organization's positions can be more easily monitored and managed. 
Under the current equity options policy regarding joint accounts, 
however, a joint account may be simultaneously represented in a 
trading crowd only by participants trading in-person. Orders for a 
joint account may not be entered with a Floor Broker in a crowd 
where a participant of the joint account is trading in-person for 
the joint account (unless the in-crowd participant and Floor Broker 
refrain from participating on the same trade). However, if no 
participant is trading in-person for the joint account, orders may 
be entered via Floor Broker so long as the same option series is not 
represented by more than one Floor Broker. On the other hand, under 
the current equity options policy, a member organization using 
individual Market-Maker accounts is able to be simultaneously 
represented by each Market-Maker's individual account, whether the 
accounts are being traded in-person and/or by order. The proposed 
change would eliminate the disadvantage currently suffered by member 
organizations using joint account structures.
    \15\ For example, the Exchange notes that many trading crowds no 
longer exclusively trade equity options or index options. In that 
regard, the proposed rule change will reduce unnecessary complexity 
and confusion over which policy applies.
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 2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \16\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\17\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \18\ requirements that the rules of 
an exchange be designed to promote just and equitable principles of 
trade, to prevent fraudulent and manipulative acts, to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest. The Exchange believes the proposed changes will 
eliminate a distinction that currently exists between member 
organizations that manage their equity option positions differently 
and, overall, will reduce unnecessary complexity and confusion, and 
delineate an unambiguous standard for multiple representation across 
all option classes.
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    \16\ 15 U.S.C. 78s(b)(1).
    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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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 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

    The Exchange neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the date of 
filing of the proposed rule change or such shorter time as designated 
by the Commission, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6) 
thereunder.\20\ At any time within 60 days of the filing of such 
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.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
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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

[[Page 13629]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2010-028 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2010-028. 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 Commission's 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2010-028 and should be 
submitted on or before April 12, 2010.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-6183 Filed 3-19-10; 8:45 am]
BILLING CODE 8011-01-P