Document ID: SEC-2008-0661-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2008-05-07T04:00Z

[Federal Register: May 7, 2008 (Volume 73, Number 89)]
[Notices]               
[Page 25811-25813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my08-139]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57747; File No. SR-CBOE-2008-49]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Off-Floor LMMs

April 30, 2008.
    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 April 24, 2008, 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, II, and III below, which Items have been substantially 
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 proposes to amend CBOE rules relating to Lead Market-
Makers (``LMMs''). 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.

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 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
    Last year, CBOE amended its rules to provide Designated Primary 
Market-Makers (``DPMs'') with the flexibility to operate remotely away 
from CBOE's trading floor as a so-called ``Off-Floor DPM.'' \5\ CBOE is 
now proposing to provide LMMs with the same flexibility to operate 
remotely away from CBOE's trading floor. Specifically, CBOE proposes to 
amend Rule 8.15A, Lead Market-Makers in Hybrid Classes, to provide the 
following:
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    \5\ See Securities Exchange Act Release No. 55531 (March 26, 
2007), 72 FR 15736 (April 2, 2007) (SR-CBOE-2006-94). See also 
Securities Exchange Act Release No. 57568 (March 26, 2008), 73 FR 
18016 (April 2, 2008) (SR-CBOE-2008-32) (immediately effective rule 
change expanding the Off-Floor DPM program, which had originally 
been limited to equity option classes to include all option classes 
traded on the Hybrid Trading System and Hybrid 2.0 Platform 
(collectively ``Hybrid'')).
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     An LMM generally will operate on CBOE's trading floor 
(``On-Floor LMM''). However, an LMM can request that the Exchange 
authorize the LMM to function remotely away from CBOE's trading floor 
(``Off-Floor LMM'') on a class-by-class basis.
     An LMM can request that the Exchange authorize it to 
operate as an Off-Floor LMM in one or more Hybrid classes. The Exchange 
will consider the factors specified in Rule 8.15A(a)(i)(A),\6\ as well 
as the factors applicable to Off-Floor DPMs specified in paragraph (g) 
of Rule 8.83, Approval to Act as a DPM,\7\ in determining whether to 
permit an LMM to operate as an Off-Floor LMM. If an LMM is approved to 
operate as an Off-Floor LMM in one or more Hybrid classes, the Off-
Floor LMM can have an LMM designee trade in open outcry in the option 
classes allocated to the Off-Floor LMM, but the Off-Floor LMM shall not 
receive a participation entitlement under Rule 8.15B, Participation 
Entitlement of LMMs, with respect to orders represented in open 
outcry.\8\
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    \6\ CBOE Rule 8.15A(a)(i) provides that the factors to be 
considered in selecting LMMs include: Adequacy of capital; 
experience in trading index options or options on ETFs; presence in 
the trading crowd; adherence to CBOE Rules; and ability to meet the 
obligations specified in the Rule. An individual may be appointed as 
an LMM for one expiration month at a time. When individual members 
are associated with one or more other members, only one member may 
receive an LMM appointment.
    \7\ CBOE Rule 8.83(g) provides that the factors to be considered 
in determining whether to permit a DPM to operate as an Off-Floor 
DPM include, but are not limited to, any one or more of the 
following: (i) Adequacy of capital; (ii) operational capacity; (iii) 
trading experience of and observance of generally accepted standards 
of conduct by the applicant, its associated persons, and the DPM 
Designees who will represent the applicant in its capacity as a DPM; 
(iv) number and experience of support personnel of the applicant who 
will be performing functions related to the applicant's DPM 
business; (v) regulatory history of and history of adherence to CBOE 
Rules by the applicant, its associated persons, and the DPM 
Designees who will represent the applicant in its capacity as a DPM; 
(vi) willingness and ability of the applicant to promote the 
Exchange as a marketplace; (vii) performance evaluations conducted 
pursuant to CBOE Rule 8.60, Evaluation of Trading Crowd Performance; 
and (viii) in the event that one or more shareholders, directors, 
officers, partners, managers, members, DPM Designees, or other 
principals of an applicant is or has previously been a shareholder, 
director, officer, partner, manager, member, DPM Designee, or other 
principal in another DPM, adherence by such DPM to the requirements 
set forth in Section C of Chapter VIII of the CBOE Rules respecting 
DPM responsibilities and obligations during the time period in which 
such person(s) held such position(s) with the DPM.
    \8\ In addition to the changes to CBOE Rule 8.15A, CBOE is 
proposing related updates to paragraph (b) of CBOE Rule 8.15B, 
Participation Entitlement of LMMs, and subparagraphs (d)(v) and 
(vii) of CBOE Rule 6.74, Crossing Orders.
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     An LMM that is approved to operate as an Off-Floor LMM in 
one or more Hybrid classes can request that the Exchange authorize it 
to operate as an On-Floor LMM in those option classes. In making a 
determination pursuant to this paragraph, the Exchange should evaluate 
whether the change is in the best interests of the Exchange, and may

[[Page 25812]]

consider any information that it believes will be of assistance to it. 
Factors to be considered may include, but are not limited to, 
performance, operational capacity of the Exchange or LMM, efficiency, 
number and experience of personnel of the LMM 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.\9\
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    \9\ These proposed On-/Off-Floor LMM provisions are 
substantially similar to the corresponding provisions for On-/Off-
Floor DPMs in paragraphs (g) and .01 to CBOE Rule 8.83.
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     In addition, CBOE is proposing to include a requirement 
that, as part of a pilot program until March 14, 2009, an Off-Floor LMM 
not allow more than one Market-Maker affiliated with the Off-Floor LMM 
to trade on CBOE's trading floor in any specific option class allocated 
to the Off-Floor LMM and provided such Market-Maker is trading on a 
separate membership (absent the pilot program, an Off-Floor LMM may not 
allow any Market-Makers affiliated with the Off-Floor LMM to trade on 
CBOE's trading floor in any class allocated to the Off-Floor LMM) and 
provided the Off-Floor LMM does not have an LMM designee trading in 
open outcry in the option classes allocated to the Off-Floor LMM.\10\
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    \10\ This provision is substantially similar to an existing 
provision in CBOE's rules respecting Off-Floor DPM obligations. See 
paragraph (a)(v) of CBOE Rule 8.85, DPM Obligations. CBOE is 
proposing a related cross-reference update to paragraph (c)(vii)(1) 
of CBOE Rule 8.3.
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    Lastly, CBOE is proposing to update the LMM obligations listed in 
Rule 8.15A to include a requirement that, subject to paragraph (d) of 
Rule 54.7, General Prohibitions (under the CBOE Stock Exchange Rules), 
LMMs in Hybrid classes (whether On-Floor or Off-Floor) 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 LMM or 
act as specialist or Market-Maker in any security underlying options 
allocated to the LMM, and otherwise comply with the requirements of 
Rule 4.18, Prevention of the Misuse of Material, Non-Public 
Information.\11\
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    \11\ This language is substantially similar to existing language 
in CBOE's rules respecting e-DPM obligations. See paragraph (x) of 
CBOE Rule 8.93, e-DPM Obligations. In addition, the Exchange is 
proposing to modify CBOE Rule 8.15A to make clear that the rule 
applies to Hybrid Trading System and Hybrid 2.0 Platform option 
classes.
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    By permitting an LMM to function as an Off-Floor LMM, CBOE believes 
that the rule change provides more flexibility to a member organization 
that may wish to function remotely, and provides more flexibility to 
CBOE when allocating option classes to the best applicant. It also 
removes a potential operational dilemma for a Market-Maker that 
functions as a DPM in some classes and an LMM in others, but that would 
like to function remotely away from the trading floor as a DPM/LMM in 
all of its option classes. Accordingly, CBOE believes that the proposed 
rule change is designed to promote just and equitable principles of 
trade.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
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.\12\ Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) Act \13\ 
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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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 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

    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,\14\ the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) 
thereunder.\16\ 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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    \14\ CBOE fulfilled this requirement.
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2008-49. 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, 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

[[Page 25813]]

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-2008-49 and should be submitted on or before May 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-10023 Filed 5-6-08; 8:45 am]

BILLING CODE 8010-01-P