[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21058]
[[Page Unknown]]
[Federal Register: August 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34565; File No. SR-CBOE-94-02]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to Equity
and SPX RAES Participation Requirements
August 19, 1994.
On January 22, 1994, the Chicago Board Options Exchange, Inc.
(``CBOE or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend its rules to impose fees on market
makers who fail to observe certain participation duties on the Retail
Automated Execution System (``RAES'') for equity and Standard & Poor's
500 Index (``SPX'') classes of options. Among other things, the CBOE
proposes to amend CBOE Rules 8.16, ``RAES Eligibility in Equity
Options'' and 24.16, ``RAES Eligibility in SPX/NDX,'' to impose the
following fees for failures to satisfy the rules' log-off
requirements:\3\ (1) a fee of $100.00 for each of one to three failures
within one twelve-month period; (2) a fee of $250.00 for each of four
to six failures within one twelve-month period; and (3) a fee of
$500.00 for each of seven or more failures within one twelve-month
period. In addition, the proposal provides that members who fail to
meet the log-on requirements of CBOE Rules 8.16(b) or 24.16(b)
ordinarily will be suspended from participation on RAES at the
applicable trading station for a period extending to 21 consecutive
business days.\4\
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\1\15 U.S.C. Sec. 78s(b)(1) (1982).
\2\17 CFR Sec. 240.19b-4 (1993).
\3\CBOE Rules 8.16(a)(iii) and 24.16(a)(iii) require a market
maker participating in RAES for equity or SPX options to continue on
the system only as long as he is present in the trading crowd and to
log off RAES when he leaves the trading crowd, unless the departure
is for a brief interval.
\4\CBOE Rule 8.16(b) states that in option classes designated by
the Market Performance Committee (``MPC''), any market maker who has
logged on RAES at any time during an expiration month must log on
the RAES system in that option class whenever he is present in that
trading crowd until the next expiration. CBOE Rule 24.16(b) states
that unless exempted by the MPC, any market maker who has logged on
RAES at any time during an expiration month must log on the RAES
system in SPX/NDX whenever he is present in that trading crowd until
the next expiration.
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Notice of the proposed rule change was published for comment in the
Federal Register in Securities Exchange Act Release Nos. 34270 (June
28, 1994), 59 FR 34457 (July 5, 1994) and 34329 (July 7, 1994), 59 FR
35954 (July 14, 1994). No comments were received on the proposal.
The CBOE states that the purpose of the proposed rule change is to
impose fees on members who fail to observe the RAES log-off
requirements set forth in CBOE Rules 8.16(a) and 24.16(a). The proposed
fees for equity and SPX RAES are identical in amounts and graduated
structure to the fees approved recently for failures to comply with the
log-on and log-off requirements for Standard & Poor's 100 Index
(``OEX'') options.\5\ For OEX options, and as proposed for SPX and
equity options, the fee amounts increase in relation to the number of
times each calendar year that a member does not log off as required.
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\5\See Securities Exchange Act Release No. 34376 (July 14,
1994), 59 FR 37109 (order approving File No. SR-CBOE-94-12) (``OEX
RAES Approval Order'').
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As is the case for fees applicable to OEX RAES participants under
existing CBOE Rule 24. 17, ``RAES Eligibility in OEX,'' the proposed
fees do not constitute disciplinary action, although the CBOE's review
procedures in Chapter XIX, ``Hearings and Review,'' of the CBOE's rules
will be available for review of fees assessed under the proposal. The
CBOE states that the Commission has noted the appropriateness of such
fees and appeal rights in a related context.\6\
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\6\Specifically, in approving a CBOE proposal that included
procedures for contesting the fees assessed for delayed submission
of trade data, the Commission stated that ``Although such formalized
procedures are unusual for challenging fee assessments, they
actually make the imposition of the fee fairer by allowing members
to challenge erroneous fee charges. Moreover, these procedures are
reasonably designed to afford a member assessed a fee the
opportunity to challenge the veracity of the assessments.'' See
Securities Exchange Act Release No. 30001 (November 26, 1991), 56 FR
63529 (order approving File No. SR-CBOE-90-06). See also OEX RAES
Approval Order, Supra note 5.
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In addition to establishing a fee schedule for failures to comply
with log-on and log-off requirements, the CBOE proposes to issue a
Regulatory Circular that will reaffirm the nature of CBOE market
makers' RAES log-on and log-off responsibilities in equity and SPX
options classes and describe the consequences that attach to any market
maker's failure to observe these responsibilities. The Regulatory
Circular addresses four points. First, CBOE Rules 8.16(a)(iii) and
24.16(a)(iii) require any market maker who has logged onto RAES at a
trading station on any given trading day to log off RAES whenever the
market maker leaves the trading crowd for more than ``a brief
interval.'' The Regulatory Circular interprets ``a brief interval'' to
mean ``five consecutive minutes.'' Under this interpretation any market
maker who signs onto RAES at a particular trading station during a
trading session must log off the system prior to leaving that station
for more than five consecutive minutes. The CBOE believes that this
interpretation should eliminate ambiguity about the amount of time a
market maker may be away from the trading crowd without signing off
RAES.
Second, the Regulatory Circular notes that graduated fees will be
assessed under CBOE Rules 8.16(a) and 24.16(a) for failures to observe
the RAES log-off requirement.
Third, the Regulatory Circular reflects the MPC's designation
pursuant to CBOE Rules 8.16(b) and 24.16(b) that the expiration month
log-on requirements reflected in those rules will be enforced in all
classes of equity and SPX options for which RAES is available.
Accordingly, any market maker who has logged onto RAES in accordance
with CBOE Rules 8.16(a) or 24.16(a) during an expiration month for a
given class of options must log on whenever present at the applicable
trading station, until the next expiration.
Fourth, the Regulatory Circular reflects a determination by the
MPC, pursuant to its authority under CBOE Rules 8.16(d) and 24.16(d),
that any market maker who fails to meet the log-on requirements under
CBOE Rules 8.16(b) or 24.16(b) ordinarily will be suspended from
participation on RAES at the applicable trading station for a period
extending to 21 consecutive business days.\7\
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\7\In contrast to this suspension provision, the OEX RAES
Approval Order provides that members who fail to observe the RAES
log-on requirements for OEX options are subject to a fee. The CBOE
has determined that suspensions, not fees, are the appropriate
mechanisms to promote compliance with RAES log-on requirements for
equity and SPX options. The CBOE states that it may introduce fees
for failures to observe the log-on requirements for equity and SPX
options at a later date if experience so dictates.
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The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it is designed to enable the
CBOE to enforce compliance with the Act, to promote just and equitable
principles of trade, and to protect investors and the public interest
by assuring that equity and SPX options market makers are aware of and
meet their responsibilities pertaining to RAES.
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 and, in
particular, the requirements of Section 6(b)(5) in that it is designed
to facilitate transactions in securities and to protect investors and
the public interest.\8\ The Commission believes that the graduated fee
schedule for failures to comply with the RAES log-off requirements and
the imposition of suspensions for failures to meet the RAES log-on
requirements established in CBOE Rules 8.16(b) and 24.16(b) are
designed to maintain the integrity of the RAES system for equity and
SPX options. The fees and suspensions, together with the provision
specifying that a market maker must log off RAES when leaving the
trading crowd for more than ``a brief interval'' of five minutes, are
designed to ensure that there is adequate market maker participation at
all times in SPX and equity RAES and that market makers are properly
logged on to the system. The presence of an adequate number of market
makers protects investors and contributes to the maintenance of fair
and orderly markets by helping the Exchange to maintain the continued
availability of RAES for SPX and equity options, thereby contributing
to the effective and efficient execution of public investor orders at
the best available prices.
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\8\15 U.S.C. Sec. 78f(b)(5) (1982).
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In addition, the Commission believes that the proposed Regulatory
Circular should facilitate compliance with SPX and equity RAES
requirements by explaining market makers' RAES log-on and log-off
requirements and the fees and suspensions provided for failures to
satisfy those requirements. The Commission also believes that the
graduated fee schedule should encourage compliance with the log-off
requirements and may increase the Exchange's ability to deter repeat
offenders. Likewise, the Commission believes that the provision
establishing suspensions for failures to comply with the RAES log-on
requirements should deter participating market makers from abandoning
their commitment to RAES for other than good cause.\9\
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\9\The Commission notes that under CBOE Rules 8.16 and 34.16 the
CBOE retains the discretion to bring full disciplinary proceedings.
The Commission expects the CBOE to bring full disciplinary
proceedings where appropriate, for example, in cases of egregious or
repeated violations of the SPX and equity RAES requirements.
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Finally, the Commission believes, as it has concluded in the
past,\10\ that the right to appeal the fees and suspensions imposed
under the proposal pursuant to Chapter XIX of the CBOE's rules\11\
should help to safeguard the procedural rights to SPX and equity RAES
participants. In addition, the Commission believes that the CBOE's
Regulatory Circular should help to safeguard the procedural rights of
SPX and equity RAES participants by providing them with additional
notification and clarification of their RAES log-on and log-off
responsibilities.
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\10\See OEX RAES Approval Order, supra note 5.
\11\See Letter from Michael Meyer, Schiff Hardin & Waite, to
Yvonne Fracticelli, Attorney, Options Branch, Division of Market
Regulation, Commission, dated August 19, 1994.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CBOE-94-02), is hereby
approved.
\12\15 U.S.C. Sec. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-21058 Filed 8-25-94; 8:45 am]
BILLING CODE 8010-01-M