Self-Regulatory Organizations; Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Short Sale of National Market Securities Trading Through the Nasdaq System

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34049; File No. SR-CBOE-94-10]

Self-Regulatory Organizations; Filing of Proposed Rule Change by

the Chicago Board Options Exchange, Inc. Relating to Short Sale of

National Market Securities Trading Through the Nasdaq System

May 12, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on March 31, 1994, the

Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') 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 prepared by the self-regulatory organization.\2\ 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\The CBOE amended its filing on May 9, 1994 (``Amendment No.

1'') to replace the term ``Nasdaq National Market System

securities'' with the term ``Nasdaq National Market securities.'' In

addition, Amendment No. 1 confirms that surveillance procedures have

been or will be implemented by the CBOE in order to permit the CBOE

to be a ``qualified options exchange'' that satisfies the

requirements of the proposed NASD short-sale rule currently pending

Commission approval (File No. SR-NASD-92-12). See letter from

Michael L. Meyer, Schiff Hardin & Waite, to Francois Mazur, Staff

Attorney, Division of Market Regulation, Commission, dated May 9,

1994.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The CBOE proposes to adopt rule 15.10 requiring members to

designate sales of National Market securities as long sales, short

sales, or bid test exempt sales in connection with the bid test

applicable to short sales of such securities proposed by the NASD for

inclusion in its Rules of Fair Practice.

The text of the proposal is available 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 these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

has prepared summaries, set forth in Sections (A), (B) and (C) below,

of the most significant aspects of such statement.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

The purpose of the proposed rule change is to coordinate the CBOE's

rules with the proposed addition to the NASD Rules of Fair Practice of

a bid test applicable to short sales of National Market (``NM'')

securities traded through the Nasdaq System.\3\ The proposed new rule

requires members who initiate, accept or transmit for execution, or

execute sales of NM securities for the account of another CBOE member

to designate such sales as long sales, short sales or bid test exempt

sales. This will enable NASD members who receive orders to sell NM

securities from or for the account of CBOE members to know whether such

sales are short sales subject to or exempt from the bid test.

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\3\See File No. SR-NASD-92-12.

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Sales may be designated as bid test exempt if they come within one

or more of the exemptions from the bid test proposed to be included in

the NASD Rules of Fair Practice. One of these exemptions, which is

reflected in the proposed CBOE rule, applies to short sales effected by

qualified options market makers to hedge offsetting options positions.

This exemption recognizes the need for options market makers to hedge

their options positions by buying or selling (including selling short)

shares of underlying stocks or component stocks of underlying stock

indexes. This exemption is also proposed to be included in both CBOE's

Rules and the NASD Rules of Fair Practice as an eighteen month pilot,

subject to modification or termination at the end of the pilot period.

Additionally, this exemption will apply only to NM securities

specifically designated by an options market maker as qualifying for

the exemption. In so designating NM securities, each market maker is

limited to stocks underlying options or included in an index underlying

options at no more than three (3) trading stations on the Exchange.

In the event that the Exchange determines that a qualified options

market maker has failed to comply with the terms of the exemption, the

Exchange may withdraw, suspend or modify the designation of a qualified

options market maker based upon the Exchange's determination that such

action is warranted in light of the substantial, willful, or continuing

nature of the violation. The Exchange further recognizes its commitment

to notify the NASD of such a determination in order that the NASD may

take steps to ensure that Nasdaq NM sales are executed in compliance

with the CBOE action and all applicable NASD rules. Moreover, the CBOE

has stated that it has designed surveillance procedures to ensure

compliance with the proposed rule change. These procedures must be

implemented in order to permit the Exchange to be deemed a ``qualified

options exchange'' as contemplated by the proposed NASD short-sale rule

currently on file as SR-NASD-92-12, as amended.\4\

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\4\See Amendment No. 1, supra note 2.

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The CBOE believes the proposed rule change is consistent with and

furthers the objectives of Section 6(b)(5) of the Act to promote just

and equitable principals of trade and to protect investors and promote

the public interest by coordinating the CBOE's rules with the NASD's

proposed bid test applicable to short sales of NM securities that is

intended to prevent fraud and manipulation in the Nasdaq market without

restricting options market makers who may need to sell stocks short in

order to hedge options positions resulting from their market making

activities.

(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.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments on the proposed rule change were neither solicited

nor received.

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

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(a) By order approve such proposed rule change, or

(b) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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 Section, 450 Fifth Street, NW.,

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to File No.

SR-CBOE-94-10 and should be submitted by June 8, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\5\

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\5\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-12039 Filed 5-17-94; 8:45 am]

BILLING CODE 8010-01-M