Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to Equity and SPX RAES Participation Requirements

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