Document ID: SEC-2010-0093-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change To Amend Rule 8.91-Limitations on Dealings of DPMs and Affiliated Persons of DPMs
Posted Date: 2010-01-19T05:00Z

[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Notices]
[Pages 2908-2911]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-822]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61336; File No. SR-CBOE-2009-092]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change To Amend Rule 8.91--Limitations on Dealings 
of DPMs and Affiliated Persons of DPMs

January 12, 2010.
    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 December 23, 2009, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') 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 CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 Rule 8.91--Limitations on 
Dealings of DPMs and Affiliated Persons of DPMs. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/Legal), 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 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 III 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to amend Rule 8.91--Limitation on Dealings of DPMs 
and Affiliated Persons of DPMs and Rule 8.93--e-DPM Obligations. 
Specifically, CBOE proposes to delete all of existing Rule 8.91, 
including the Guidelines for Exemptive Relief Under Rule 8.91(e) for 
Members Affiliated with DPMs (``Guidelines for Exemptive Relief''), and 
replace those provisions with the specific requirement applicable to e-
DPMs set forth in Rule 8.93(x) relating to the adoption of information 
barriers and compliance with Rule 4.18. CBOE also proposes to adopt in 
both Rule 8.91 and Rule 8.93 a limited exception for integrated market 
making in broad-based, highly capitalized and liquid ETFs and trust 
issued receipts (``TIRs'').
    CBOE Rule 8.91 and the Guidelines for Exemptive Relief under Rule 
8.91 were adopted in 1999, although the provisions contained therein 
were initially promulgated in 1987.\3\ Since that time, there have been 
very few changes to Rule 8.91 and the Guidelines for Exemptive Relief. 
Recently, members have requested that CBOE evaluate Rule 8.91 and the 
Guidelines for Exemptive Relief to determine whether any changes would 
be appropriate given that the rule has been in effect in its current 
form for many years and the functions and responsibilities of DPMs have 
changed over time. For example, in 2005 CBOE amended its rules to 
eliminate the DPM's responsibility to act as agent in the options in 
which it

[[Page 2909]]

is assigned.\4\ As a result, DPMs essentially act as market-makers in 
their assigned classes, with higher quoting obligations than market-
makers and additional responsibilities for which they receive a 
participation entitlement. Also, the prior restriction on Market-Makers 
affiliated with a DPM holding an appointment and submitting electronic 
quotations in an affiliated DPM's class has been eliminated (provided 
CBOE uses an algorithm in the class that does not allocate trades, in 
whole or in part, in an equal percentage based on the number of market 
participants quoting at the best bid or offer).\5\ DPMs also can 
request to operate away from CBOE's trading floor as an Off-Floor DPM, 
similar to an e-DPM.\6\
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    \3\ See Securities Exchange Act Release No. 43004 (6/30/00), 65 
FR 43060 (7/12/00), approving SR-CBOE-98-54.
    \4\ See Securities Exchange Act Release No. 52798 (11/18/05), 70 
FR 71344 (11/28/05), approving SR-CBOE-2005-46.
    \5\ See Securities Exchange Act Release No. 59539 (3/9/09), 74 
FR 11143 (3/16/09), granting immediate effectiveness to SR-CBOE-
2009-015; Securities Exchange Act Release No. 57742 (4/30/08), 73 FR 
25067 (5/6/08), granting immediate effectiveness to SR-CBOE-2008-50.
    \6\ See Securities Exchange Act Release No. 57568 (3/26/08), 73 
FR 18016 (4/2/08), granting immediate effectiveness to SR-CBOE-2008-
032.
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    In 2004, CBOE established a new category of market-making 
participant called e-DPMs, who are member organizations appointed to 
operate on CBOE as competing DPMs/specialists in a broad number of 
option classes.\7\ e-DPMs have specific obligations set forth in Rule 
8.93, and are otherwise not subject to the provisions in Rule 8.91 and 
the Guidelines for Exemptive Relief. Rather, under Rule 8.93(x), e-DPMs 
are required to ``maintain information barriers that are reasonably 
designed to prevent the misuse of material, non-public information with 
any affiliates that may conduct a brokerage business in option classes 
allocated to the e-DPM or act as specialist or Market-Maker in any 
security underlying options allocated to the e-DPM, and otherwise 
comply with the requirements of Rule 4.18 regarding the misuse of 
material non-public information.''
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    \7\ See Securities Exchange Act Release No. 50003 (7/12/04), 69 
FR 43028 (7/19/04), approving SR-CBOE-2004-24.
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    Rule 4.18 requires all members (other than lessor members who are 
not registered as broker-dealers) to establish, maintain and enforce 
written policies and procedures reasonably designed to prevent the 
misuse of material, nonpublic information by such member or persons 
associated with such member. For purposes of Rule 4.18, conduct 
constituting the misuse of material non-public information includes, 
but is not limited to: (i) Trading in any securities issued by a 
corporation, partnership, TIR or ETF or similar entities, or in any 
related securities or related options or other derivative securities, 
while in possession of material, nonpublic information concerning that 
corporation, partnership, TIR or ETF or similar entities; (ii) trading 
in any underlying security or related options or other derivative 
securities, while in possession of material, nonpublic information 
concerning imminent transactions in the above; and (iii) disclosing to 
another person or entity any material, non-public information involving 
a corporation, partnership, TIR or ETF or similar entities or an 
imminent transaction in an underlying security or related securities 
for the purpose of facilitating the possible misuse of such material, 
non-public information. Rule 4.18 also requires members to establish, 
maintain and enforce specific policies and procedures for compliance 
with Rule 4.18.
    Given that the functions and obligations of DPMs and e-DPMs are 
substantially similar, CBOE believes that it would be appropriate for 
DPMs and e-DPMs to be subject to the same requirements relating to the 
maintenance of information barriers with any affiliates that may 
conduct a brokerage business \8\ in option classes allocated to the DPM 
or act as a specialist or market-maker in any security underlying 
options allocated to the DPM. CBOE also notes that DPMs do not have any 
advantages regarding relevant trading information provided by the 
Exchange vis-[agrave]-vis other members in their appointed classes. 
Accordingly, CBOE proposes to delete the existing provisions in Rule 
8.91 and the Guidelines for Exemptive Relief, and replace them with the 
provisions in Rule 8.93(x) relating to the maintenance of information 
barriers and compliance with Rule 4.18. Rule 8.91(a), as amended, 
provides that a DPM shall provide its information barriers to the 
Exchange and obtain prior written approval, which is consistent with 
the current provisions of Rule 8.91(e).\9\
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    \8\ The reference to ``brokerage business'' includes conducting 
an investment banking business or a public securities business.
    \9\ If a DPM's ``Chinese Wall'' procedures were previously 
approved by the Exchange pursuant to Rule 8.91(e), the procedures do 
not need to be re-approved by the Exchange as a result of this rule 
change unless the procedures are subsequently modified.
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    In addition to the above, CBOE proposes to adopt an exception to 
the requirement that a DPM or e-DPM in an option overlying a broad-
based and highly capitalized ETF or TIR is required to maintain 
information barriers with any affiliate that acts as a specialist or 
market-maker in the underlying broad-based ETF or TIR. CBOE notes that 
this exception currently exists for CBSX DPMs and CBOE DPMs (see Rule 
54.7), and believes it is consistent with what the SEC has previously 
approved.\10\
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    \10\ See Securities Exchange Act Release No. 55392 (3/2/07), 72 
FR 10572 (3/8/07), approving SR-CBOE-2006-112; Securities Exchange 
Act Release No. 54422 (9/11/06), 71 FR 54537 (9/15/06), approving 
SR-CBOE-2004-21; Securities Exchange Act Release No. 47200 (1/15/
03), 68 FR 3907 (1/27/03), approving SR-CBOE-2002-63.
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2. Statutory Basis
    The Exchange believes the rule proposal is consistent with the 
Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\11\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \12\ requirements that the 
rules of an exchange be 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. Deleting 
existing Rule 8.91 and replacing those provisions with the specific 
requirement applicable to e-DPMs set forth in Rule 8.93(x) should 
clarify the regulatory obligations of DPMs while retaining an 
appropriate regulatory requirement relating to the adoption of 
information barriers and compliance with CBOE Rule 4.18.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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:

[[Page 2910]]

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 Number SR-CBOE-2009-092 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2009-092. 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 inspection and 
copying 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 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2009-092 and should be 
submitted on or before February 9, 2010.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, 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.\13\ The Commission believes that the proposal is consistent 
with Section 6(b)(5) \14\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \13\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange is proposing to eliminate the requirement that DPMs 
maintain certain specifically-prescribed information barriers as 
described in CBOE Rule 8.91. In its place, the Exchange proposes to 
amend CBOE Rule 8.91. Amended CBOE Rule 8.91 will continue to require 
information barriers, but will permit a Designated Primary Market Maker 
to develop and apply its own policies and procedures to, among other 
things, prevent the misuse of material nonpublic information. CBOE Rule 
8.91 addresses concerns arising from the potential for the sharing of 
material non-public information between a DPM's market making 
activities and other business activities of the DPM or its affiliates. 
For instance, one such concern is that the DPM or affiliate engaging in 
other business activities might use non-public information that was 
acquired by the DPM through its role as a market maker, such as trading 
based on information on the DPM's book. Another concern is that the DPM 
might use material non-public information received from the entity 
engaging in other business activities, such as trading based on a 
change in the firm's buy or sell recommendation.\15\
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    \15\ See Securities Exchange Act Release No. 58328 (August 7, 
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (articulating 
concerns in the context of approving changes to NYSE Rule 98).
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    While amended CBOE Rule 8.91 will no longer prescribe the specific 
information barriers a DPM must establish, the rule will require that 
such information barriers be reasonably designed to prevent the misuse 
of material non-public information by the member or persons associated 
with the member. Amended CBOE Rule 8.91 also will explicitly reference 
current CBOE Rule 4.18, which among other things, provides that the 
misuse of material non-public information includes trading in a 
security or related option or other derivative security while in 
possession of material non-public information concerning imminent 
transactions in the security, related option, or other derivative 
securities.\16\ In addition, the proposed rule change requires that the 
member provide a copy of its information barrier policies and 
procedures to the Exchange for prior written approval. The Commission 
believes that, with adequate oversight by the Exchange of its members 
and prior review and approval of a DPM's information barrier, the 
amendment of CBOE Rule 8.91 should not materially increase the 
potential for the misuse of nonpublic information.
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    \16\ See CBOE Rule 4.18, Interpretations and Policies .01.
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    Pursuant to this proposal rule change, members may utilize the 
flexible, principles-based approach to modify their information 
barriers as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. A member 
should be proactive in assuring that its information barriers reflect 
the current state of its business and continue to be reasonably 
designed to achieve compliance with applicable federal securities law 
and regulations, and with applicable Exchange rules.
    The Commission believes that the regulatory approach in this 
proposed rule change is similar to the regulatory approach of NYSE 
Arca, Inc. In particular, the CBOE approach, like the NYSE Arca 
approach, does not require market makers to maintain certain 
specifically-prescribed information barriers.\17\ Unlike NYSE Arca's 
approach, however, CBOE's rules continue to require all DPMs to 
maintain information barriers.\18\ The basis for this difference is 
that NYSE Arca's market makers and Lead Market Makers do not have any 
advantages regarding relevant trading information provided by NYSE 
Arca, either at, or prior to, the point of execution vis-[agrave]-vis 
other market participants. CBOE, on the other hand, represented only 
that its DPMs do not have any advantages regarding relevant trading 
information provided by the Exchange vis-[agrave]-vis other members in 
their appointed classes.\19\
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    \17\ See Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR 46272 (September 8, 2009) (SR-NYSEArca-2009-78).
    \18\ Id.
    \19\ CBOE members have access to auctions that other market 
participants do not, including, for example, the Automated 
Improvement Mechanism (``AIM'') (CBOE Rule 6.74A), and the 
Solicitation Auction Mechanism (CBOE Rule 6.74B).
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    CBOE also proposes to exempt DPMs and e-DPMs in an option overlying 
a broad-based ETF or TIR from the requirement to maintain barriers 
between it and any affiliates that act as a specialist or market-maker 
in the

[[Page 2911]]

underlying broad-based ETF or TIR, provided that the capitalization and 
liquidity requirements for the component securities of the broad-based 
ETF or TIR set forth in CBOE Rule 54.7, Interpretation and Policy .03 
are satisfied. The Commission believes that this exemption to the 
information barrier requirements is consistent with the Act. The 
Commission notes that this exemption is currently available to CBSX 
DPMs.\20\ In addition, CBOE Rule 54.7, Interpretation and Policy .03 
contains capitalization and liquidity requirements for the component 
securities of the broad-based ETFs and TIRs, which, together with the 
proposed exemption, are consistent with what the Commission has 
previously approved.\21\ As the Commission noted previously, these 
capitalization and liquidity requirements for the component securities 
should reduce the likelihood that any market participant has an unfair 
informational advantage about the ETF, TIR, its related options, or its 
component securities, or that a market participant would be able to 
manipulate the prices of the ETFs, TIRs, or their related options.\22\
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    \20\ See CBOE Rule 54.7(d).
    \21\ See Securities Exchange Act Release No. 54422 (September 
11, 2006), 71 FR 54537 (September 15, 2006) (SR-CBOE-2004-21) 
(approving CBOE Rule 54.7); Securities Exchange Act Release No. 
46213 (July 16, 2002), 67 FR 48232 (July 23, 2002) (SR-Amex-2002-21) 
(permitting side-by-side trading and integrated market making in 
broad-based ETFs and TIRs without information or physical barriers 
or other restrictions).
    \22\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002) (SR-Amex-2002-21) (permitting 
side-by-side trading and integrated market making in broad-based 
ETFs and TIRs without information or physical barriers or other 
restrictions).
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    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\23\ for approving the proposed rule change prior to the 
30th day after the date of publication of notice in the Federal 
Register. Although this proposed rule change does not require that DPMs 
maintain certain specifically-prescribed information barriers, it does 
require that DPMs establish and maintain information barriers that are 
reasonably designed to achieve compliance with applicable securities 
law and regulations, and with applicable Exchange rules. In addition, 
the rule requires that such barriers be pre-approved by the Exchange. 
The revised rule thus does not represent a significant change from the 
current rule, and is at least as stringent as the approach currently 
employed by NYSE Arca and Nasdaq.\24\ The Commission believes that, 
with Exchange approval and oversight, elimination of prescriptive 
information barrier requirements should not reduce the effectiveness of 
the CBOE rules which would now permit a DPM to develop and apply its 
own policies and procedures to, among other things, prevent the misuse 
of material nonpublic information.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq IM-2110-2; IM-
2110-3; IM-2110-4, and Rule 3010); see also supra note 17.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-CBOE-2009-092) be, and it 
hereby is, approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-822 Filed 1-15-10; 8:45 am]
BILLING CODE 8011-01-P