Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to Changes to Option Trading Permit Auction Procedures

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41747; File No. SR-CBOE-99-24]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Board Options Exchange, Inc., Relating to Changes

to Option Trading Permit Auction Procedures

August 16, 1999.

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 June 9, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the

Exchange. Amendment No. 1 was filed on August 2, 1999.\3\ 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\ Amendment No. 1 expands the discussion on the proposed rule

change and clarifies the proposed text of the rule change. See

letter from Christopher R. Hill, Attorney, CBOE, to Heather Traeger,

Attorney, Division of Market Regulation, SEC, dated August 2, 1999.

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

Substance of the Proposed Rule Change

CBOE proposes to amend the procedure through which it auctions

Options Trading permits (``Permits'') from the Permit lease pool. The

text of the proposed rule change is available at 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 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 these 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 aspects of such

statements.

A. Self-Regulatory Organization's Statement of the purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Purpose

CBOE Rule 3.27(a)(3) provides for the creation of a Permit lease

pool to be administered by the Exchange. The procedures for the

administration of this lease pool were previously filed with and

approved by the Commission.\4\ Under these procedures, the Exchange

conducts and auction every six months during which members and non-

members who have qualified for membership may submit bids equal to the

monthly rent that the bidder is willing to pay for a month-to-month

Permit lease. Upon the close of the bidding period, Permits in the

lease pool are awarded to the highest bidders in a number equal to the

total number of Permits in the lease pool at that time. Under the

existing procedures, the monthly rent to be paid by a lessee is the

dollar value of the bid submitted by that lessee. Following each

auction, the Exchange continues to accept bids for Permit leases.

Should any Permit lessee desire to give up that lessee's Permit prior

to the next auction, the Permit is transferred to the highest bidder at

a monthly lease price equal to the new lessee's bid for the remainder

of the six month auction cycle.

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\4\ The procedures for the administration of the Permit lease

pool were filed with the Commission in SR-CBOE-97-14. SR-CBOE-97-14

provided for the issuance of Permits in connection with the transfer

of the options business of the New York Stock Exchange, Inc. to CBOE

and defined the rights and obligations associated with Permits. SR-

CBOE-97-14 was approved by the Commission in Securities Exchange Act

Release No. 38541 (April 23, 1997), 62 FR 23516 (April 30, 1997).

The CBOE later amended the procedures for administering the

Permit lease pool in SR-CBOE-97-47, which amended the manner in

which the CBOE accesses the fee that it charges when a person

submits a bid to receive a Permit. See Securities Exchange Act

Release No. 39179 (October 1, 1997), 62 FR 52602 (October 8, 1997).

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The Exchange proposes to amend the method of the auction to

establish a procedure known as a Dutch auction. Under the Dutch

auction, bidders will submit bids equal to the monthly rent which they

are willing to pay for a six-month lease, and, upon the close of the

bidding period, Permits in the lease pool will continue to be awarded

to the highest bidders in a number equal to the total number of Permits

in the lease pool at that time. under the Dutch auction procedure,

however, each successful

[[Page 46222]]

bidder will pay only the price of the lowest successful bid. Following

each Dutch auction, the Exchange will continue to accept bids, with a

minimum bid established at the price set in the most recent Dutch

auction.

The revised Permit Lease Pool Procedures also contain several other

amendments, most of which merely set forth existing exchange practices

in greater detail for the benefit of members and the public. The

following amendments represent changes to existing practices:

The proposed rule change establishes a minimum qualifying

bid level for all bidding which occurs between Dutch auctions. The

minimum qualifying bid is set at the lease rate established in the most

recent Dutch auction. This change is designed to equalize Permit lease

rates and enhance administrative efficiency by encouraging lessees to

use the Dutch auction process, rather than attempt to obtain a lower

priced lease by bidding between the Dutch auctions.

The proposed rule change permits a lessee to terminate the

lessee's Permit during the ease period, by written notice to the

Membership Department, but provides that the termination notice shall

be irrevocable.\5\ The Membership Department will post notice of the

availability of the Permit for at least two business days on the

Exchange bulletin board. The Permit will be transferred to the highest

bidder whose bid is received by 3:30 p.m. on the first Wednesday after

notice of the permit's availability has been posted for at least two

business days.

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\5\ The Exchange represents that this proposed rule change

codifies the Exchange's current procedure. See Amendment No. 1.

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The proposed rule change also allows Permits to be

transferred among nominees of an organization with appropriate notice

to the Exchange, as is the case with CBOE memberships.

The proposed rule change provides that an individual can

lease only one Permit from the lease pool at a time. Therefore, an

individual who is already a Permit lessee may not submit a Permit bid

during the six month lease period (except to bid in the next Dutch

auction) unless and until the lessee first terminates the lessee's

current lease.\6\

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\6\Id.

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Finally, the proposed rule change establishes a six month

Permit lease instead of the current month-to-month lease, for easier

and more efficient administration of the lease process.

2. Statutory Basis

The Exchange believes that the proposed Dutch auction procedure for

the Permit lease pool described herein will more effectively equalize

the amounts paid for Permits by each successful bidder. As such, the

proposed rule changes are consistent with Section 6(b) of the Act,\7\

in general, and further the objectives of Section 6(b)(4) \8\ in

particular, in that they are designed to provide for the equitable

allocation of reasonable dues, fees, and other charges.

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\7\ 15 U.S.C. 78f(b).

\8\ 15 U.S.C. 78f(b)(4).

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B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange 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

No written comments were solicited or received with respect to the

proposed rule change.

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 the 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, including whether the proposed rule

change, as amended, is consistent with the Act. Persons making written

submissions should file six copies thereof with the Secretary,

Securities and Exchange Commission, 450 Fifth Street, NW, Washington,

DC 20549-0609. 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 at the Commission's Public Reference Room. Copies of such

filing will also be available for inspection and copying at the

principal office of the Exchange. All submissions should refer to File

No. SR-CBOE-99-24 and should be submitted by September 14, 1999.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\9\

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\9\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-21867 Filed 8-23-99; 8:45 am]

BILLING CODE 8010-01-M