Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change To Amend Rule 8.91-Limitations on Dealings of DPMs and Affiliated Persons of DPMs, 2908-2911 [2010-822]

Download as PDF 2908 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices the Commission’s Public Reference Section, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing will also be available for inspection and copying at the principal office of the Exchange. 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–Phlx–2009–104 and should be submitted on or before February 9, 2010. 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: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Florence E. Harmon, Deputy Secretary. Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Phlx–2009–104 on the subject line. jlentini on DSKJ8SOYB1PROD with NOTICES III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act25 and paragraph (f)(2) of Rule 19b–426 thereunder. At any time within 60 days of the filing of the 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. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2009–104. 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 (https://www.sec.gov/ rules/sro.shtml). Copies of the submission,27 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 25 15 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 27 The text of the proposed rule change is available on the Commission’s Web site at www.sec.gov. [FR Doc. 2010–824 Filed 1–15–10; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–61336; File No. SR–CBOE– 2009–092] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change To Amend Rule 8.91—Limitations on Dealings of DPMs and Affiliated Persons of DPMs January 12, 2010. 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 December 23, 2009, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by CBOE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and is approving the proposed rule change on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing to amend Rule 8.91—Limitations on Dealings of DPMs and Affiliated Persons of DPMs. The text of the proposed rule change is available on the Exchange’s Web site (https://www.cboe.org/Legal), 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 those statements may be examined at the places specified in Item III 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 Statutory Basis for, the Proposed Rule Change 1. Purpose CBOE proposes to amend Rule 8.91— Limitation on Dealings of DPMs and Affiliated Persons of DPMs and Rule 8.93—e-DPM Obligations. Specifically, CBOE proposes to delete all of existing Rule 8.91, including the Guidelines for Exemptive Relief Under Rule 8.91(e) for Members Affiliated with DPMs (‘‘Guidelines for Exemptive Relief’’), and replace those provisions with the specific requirement applicable to eDPMs set forth in Rule 8.93(x) relating to the adoption of information barriers and compliance with Rule 4.18. CBOE also proposes to adopt in both Rule 8.91 and Rule 8.93 a limited exception for integrated market making in broadbased, highly capitalized and liquid ETFs and trust issued receipts (‘‘TIRs’’). CBOE Rule 8.91 and the Guidelines for Exemptive Relief under Rule 8.91 were adopted in 1999, although the provisions contained therein were initially promulgated in 1987.3 Since that time, there have been very few changes to Rule 8.91 and the Guidelines for Exemptive Relief. Recently, members have requested that CBOE evaluate Rule 8.91 and the Guidelines for Exemptive Relief to determine whether any changes would be appropriate given that the rule has been in effect in its current form for many years and the functions and responsibilities of DPMs have changed over time. For example, in 2005 CBOE amended its rules to eliminate the DPM’s responsibility to act as agent in the options in which it 26 17 VerDate Nov<24>2008 16:28 Jan 15, 2010 Jkt 220001 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 3 See Securities Exchange Act Release No. 43004 (6/30/00), 65 FR 43060 (7/12/00), approving SR– CBOE–98–54. E:\FR\FM\19JAN1.SGM 19JAN1 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES is assigned.4 As a result, DPMs essentially act as market-makers in their assigned classes, with higher quoting obligations than market-makers and additional responsibilities for which they receive a participation entitlement. Also, the prior restriction on MarketMakers affiliated with a DPM holding an appointment and submitting electronic quotations in an affiliated DPM’s class has been eliminated (provided CBOE uses an algorithm in the class that does not allocate trades, in whole or in part, in an equal percentage based on the number of market participants quoting at the best bid or offer).5 DPMs also can request to operate away from CBOE’s trading floor as an Off-Floor DPM, similar to an e-DPM.6 In 2004, CBOE established a new category of market-making participant called e-DPMs, who are member organizations appointed to operate on CBOE as competing DPMs/specialists in a broad number of option classes.7 eDPMs have specific obligations set forth in Rule 8.93, and are otherwise not subject to the provisions in Rule 8.91 and the Guidelines for Exemptive Relief. Rather, under Rule 8.93(x), e-DPMs are required to ‘‘maintain information barriers that are reasonably designed to prevent the misuse of material, nonpublic information with any affiliates that may conduct a brokerage business in option classes allocated to the e-DPM or act as specialist or Market-Maker in any security underlying options allocated to the e-DPM, and otherwise comply with the requirements of Rule 4.18 regarding the misuse of material non-public information.’’ Rule 4.18 requires all members (other than lessor members who are not registered as broker-dealers) to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by such member or persons associated with such member. For purposes of Rule 4.18, conduct constituting the misuse of material non-public information includes, but is not limited to: (i) Trading in any securities issued by a 4 See Securities Exchange Act Release No. 52798 (11/18/05), 70 FR 71344 (11/28/05), approving SR– CBOE–2005–46. 5 See Securities Exchange Act Release No. 59539 (3/9/09), 74 FR 11143 (3/16/09), granting immediate effectiveness to SR–CBOE–2009–015; Securities Exchange Act Release No. 57742 (4/30/08), 73 FR 25067 (5/6/08), granting immediate effectiveness to SR–CBOE–2008–50. 6 See Securities Exchange Act Release No. 57568 (3/26/08), 73 FR 18016 (4/2/08), granting immediate effectiveness to SR–CBOE–2008–032. 7 See Securities Exchange Act Release No. 50003 (7/12/04), 69 FR 43028 (7/19/04), approving SR– CBOE–2004–24. VerDate Nov<24>2008 16:28 Jan 15, 2010 Jkt 220001 corporation, partnership, TIR or ETF or similar entities, or in any related securities or related options or other derivative securities, while in possession of material, nonpublic information concerning that corporation, partnership, TIR or ETF or similar entities; (ii) trading in any underlying security or related options or other derivative securities, while in possession of material, nonpublic information concerning imminent transactions in the above; and (iii) disclosing to another person or entity any material, non-public information involving a corporation, partnership, TIR or ETF or similar entities or an imminent transaction in an underlying security or related securities for the purpose of facilitating the possible misuse of such material, non-public information. Rule 4.18 also requires members to establish, maintain and enforce specific policies and procedures for compliance with Rule 4.18. Given that the functions and obligations of DPMs and e-DPMs are substantially similar, CBOE believes that it would be appropriate for DPMs and e-DPMs to be subject to the same requirements relating to the maintenance of information barriers with any affiliates that may conduct a brokerage business 8 in option classes allocated to the DPM or act as a specialist or market-maker in any security underlying options allocated to the DPM. CBOE also notes that DPMs do not have any advantages regarding relevant trading information provided ` by the Exchange vis-a-vis other members in their appointed classes. Accordingly, CBOE proposes to delete the existing provisions in Rule 8.91 and the Guidelines for Exemptive Relief, and replace them with the provisions in Rule 8.93(x) relating to the maintenance of information barriers and compliance with Rule 4.18. Rule 8.91(a), as amended, provides that a DPM shall provide its information barriers to the Exchange and obtain prior written approval, which is consistent with the current provisions of Rule 8.91(e).9 In addition to the above, CBOE proposes to adopt an exception to the requirement that a DPM or e-DPM in an option overlying a broad-based and highly capitalized ETF or TIR is required to maintain information 8 The reference to ‘‘brokerage business’’ includes conducting an investment banking business or a public securities business. 9 If a DPM’s ‘‘Chinese Wall’’ procedures were previously approved by the Exchange pursuant to Rule 8.91(e), the procedures do not need to be reapproved by the Exchange as a result of this rule change unless the procedures are subsequently modified. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 2909 barriers with any affiliate that acts as a specialist or market-maker in the underlying broad-based ETF or TIR. CBOE notes that this exception currently exists for CBSX DPMs and CBOE DPMs (see Rule 54.7), and believes it is consistent with what the SEC has previously approved.10 2. Statutory Basis The Exchange believes the rule proposal is consistent with the Securities Exchange Act of 1934 (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.11 Specifically, the Exchange believes that the proposed rule change is consistent with the Section 6(b)(5) Act 12 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. Deleting existing Rule 8.91 and replacing those provisions with the specific requirement applicable to e-DPMs set forth in Rule 8.93(x) should clarify the regulatory obligations of DPMs while retaining an appropriate regulatory requirement relating to the adoption of information barriers and compliance with CBOE Rule 4.18. 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 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 No written comments were solicited or received with respect to the proposed rule change. III. 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: 10 See Securities Exchange Act Release No. 55392 (3/2/07), 72 FR 10572 (3/8/07), approving SR– CBOE–2006–112; Securities Exchange Act Release No. 54422 (9/11/06), 71 FR 54537 (9/15/06), approving SR–CBOE–2004–21; Securities Exchange Act Release No. 47200 (1/15/03), 68 FR 3907 (1/27/ 03), approving SR–CBOE–2002–63. 11 15 U.S.C. 78f(b). 12 15 U.S.C. 78f(b)(5). E:\FR\FM\19JAN1.SGM 19JAN1 2910 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2009–092 on the subject line. Commission believes that the proposal is consistent with Section 6(b)(5) 14 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove Paper Comments impediments to and perfect the • Send paper comments in triplicate mechanism of a free and open market to Elizabeth M. Murphy, Secretary, and a national market system, and, in Securities and Exchange Commission, general, to protect investors and the Station Place, 100 F Street, NE., public interest. Washington, DC 20549–1090. The Exchange is proposing to eliminate the requirement that DPMs All submissions should refer to File maintain certain specifically-prescribed Number SR–CBOE–2009–092. This file information barriers as described in number should be included on the subject line if e-mail is used. To help the CBOE Rule 8.91. In its place, the Exchange proposes to amend CBOE Commission process and review your Rule 8.91. Amended CBOE Rule 8.91 comments more efficiently, please use only one method. The Commission will will continue to require information post all comments on the Commission’s barriers, but will permit a Designated Primary Market Maker to develop and Internet Web site (https://www.sec.gov/ apply its own policies and procedures rules/sro.shtml). Copies of the to, among other things, prevent the submission, all subsequent misuse of material nonpublic amendments, all written statements information. CBOE Rule 8.91 addresses with respect to the proposed rule concerns arising from the potential for change that are filed with the the sharing of material non-public Commission, and all written information between a DPM’s market communications relating to the making activities and other business proposed rule change between the Commission and any person, other than activities of the DPM or its affiliates. For instance, one such concern is that the those that may be withheld from the DPM or affiliate engaging in other public in accordance with the business activities might use non-public provisions of 5 U.S.C. 552, will be information that was acquired by the available for inspection and copying in DPM through its role as a market maker, the Commission’s Public Reference such as trading based on information on Room, 100 F Street, NE., Washington, the DPM’s book. Another concern is that DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. the DPM might use material non-public information received from the entity Copies of such filing also will be engaging in other business activities, available for inspection and copying at such as trading based on a change in the the principal office of CBOE. All firm’s buy or sell recommendation.15 comments received will be posted While amended CBOE Rule 8.91 will without change; the Commission does no longer prescribe the specific not edit personal identifying information barriers a DPM must information from submissions. You establish, the rule will require that such should submit only information that you wish to make publicly available. All information barriers be reasonably designed to prevent the misuse of submissions should refer to File material non-public information by the Number SR–CBOE–2009–092 and member or persons associated with the should be submitted on or before member. Amended CBOE Rule 8.91 also February 9, 2010. will explicitly reference current CBOE IV. Commission’s Findings and Order Rule 4.18, which among other things, Granting Accelerated Approval of the provides that the misuse of material Proposed Rule Change non-public information includes trading After careful consideration, the in a security or related option or other Commission finds that the proposed derivative security while in possession rule change is consistent with the of material non-public information requirements of the Act and the rules concerning imminent transactions in the and regulations thereunder applicable to security, related option, or other a national securities exchange.13 The 14 15 13 In approving this rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Nov<24>2008 16:28 Jan 15, 2010 Jkt 220001 U.S.C. 78f(b)(5). Securities Exchange Act Release No. 58328 (August 7, 2008), 73 FR 48260 (August 18, 2008) (SR–NYSE–2008–45) (articulating concerns in the context of approving changes to NYSE Rule 98). 15 See PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 derivative securities.16 In addition, the proposed rule change requires that the member provide a copy of its information barrier policies and procedures to the Exchange for prior written approval. The Commission believes that, with adequate oversight by the Exchange of its members and prior review and approval of a DPM’s information barrier, the amendment of CBOE Rule 8.91 should not materially increase the potential for the misuse of nonpublic information. Pursuant to this proposal rule change, members may utilize the flexible, principles-based approach to modify their information barriers as appropriate to reflect changes to their business model, business activities, or to the securities market itself. A member should be proactive in assuring that its information barriers reflect the current state of its business and continue to be reasonably designed to achieve compliance with applicable federal securities law and regulations, and with applicable Exchange rules. The Commission believes that the regulatory approach in this proposed rule change is similar to the regulatory approach of NYSE Arca, Inc. In particular, the CBOE approach, like the NYSE Arca approach, does not require market makers to maintain certain specifically-prescribed information barriers.17 Unlike NYSE Arca’s approach, however, CBOE’s rules continue to require all DPMs to maintain information barriers.18 The basis for this difference is that NYSE Arca’s market makers and Lead Market Makers do not have any advantages regarding relevant trading information provided by NYSE Arca, either at, or ` prior to, the point of execution vis-a-vis other market participants. CBOE, on the other hand, represented only that its DPMs do not have any advantages regarding relevant trading information ` provided by the Exchange vis-a-vis other members in their appointed classes.19 CBOE also proposes to exempt DPMs and e-DPMs in an option overlying a broad-based ETF or TIR from the requirement to maintain barriers between it and any affiliates that act as a specialist or market-maker in the 16 See CBOE Rule 4.18, Interpretations and Policies .01. 17 See Securities Exchange Act Release No. 60604 (September 1, 2009), 74 FR 46272 (September 8, 2009) (SR–NYSEArca–2009–78). 18 Id. 19 CBOE members have access to auctions that other market participants do not, including, for example, the Automated Improvement Mechanism (‘‘AIM’’) (CBOE Rule 6.74A), and the Solicitation Auction Mechanism (CBOE Rule 6.74B). E:\FR\FM\19JAN1.SGM 19JAN1 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices underlying broad-based ETF or TIR, provided that the capitalization and liquidity requirements for the component securities of the broad-based ETF or TIR set forth in CBOE Rule 54.7, Interpretation and Policy .03 are satisfied. The Commission believes that this exemption to the information barrier requirements is consistent with the Act. The Commission notes that this exemption is currently available to CBSX DPMs.20 In addition, CBOE Rule 54.7, Interpretation and Policy .03 contains capitalization and liquidity requirements for the component securities of the broad-based ETFs and TIRs, which, together with the proposed exemption, are consistent with what the Commission has previously approved.21 As the Commission noted previously, these capitalization and liquidity requirements for the component securities should reduce the likelihood that any market participant has an unfair informational advantage about the ETF, TIR, its related options, or its component securities, or that a market participant would be able to manipulate the prices of the ETFs, TIRs, or their related options.22 The Commission also finds good cause, pursuant to Section 19(b)(2) of the Act,23 for approving the proposed rule change prior to the 30th day after the date of publication of notice in the Federal Register. Although this proposed rule change does not require that DPMs maintain certain specificallyprescribed information barriers, it does require that DPMs establish and maintain information barriers that are reasonably designed to achieve compliance with applicable securities law and regulations, and with applicable Exchange rules. In addition, the rule requires that such barriers be pre-approved by the Exchange. The revised rule thus does not represent a significant change from the current rule, and is at least as stringent as the approach currently employed by NYSE Arca and Nasdaq.24 The Commission 20 See CBOE Rule 54.7(d). Securities Exchange Act Release No. 54422 (September 11, 2006), 71 FR 54537 (September 15, 2006) (SR–CBOE–2004–21) (approving CBOE Rule 54.7); Securities Exchange Act Release No. 46213 (July 16, 2002), 67 FR 48232 (July 23, 2002) (SR– Amex–2002–21) (permitting side-by-side trading and integrated market making in broad-based ETFs and TIRs without information or physical barriers or other restrictions). 22 See Securities Exchange Act Release No. 46213 (July 16, 2002), 67 FR 48232 (July 23, 2002) (SR– Amex–2002–21) (permitting side-by-side trading and integrated market making in broad-based ETFs and TIRs without information or physical barriers or other restrictions). 23 15 U.S.C. 78s(b)(2). 24 See Securities Exchange Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550 (January 23, 2006) jlentini on DSKJ8SOYB1PROD with NOTICES 21 See VerDate Nov<24>2008 16:28 Jan 15, 2010 Jkt 220001 believes that, with Exchange approval and oversight, elimination of prescriptive information barrier requirements should not reduce the effectiveness of the CBOE rules which would now permit a DPM to develop and apply its own policies and procedures to, among other things, prevent the misuse of material nonpublic information. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,25 that the proposed rule change (SR–CBOE–2009– 092) be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.26 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–822 Filed 1–15–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61331; File No. SR–CBOE– 2010–002] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Permit Concurrent Listing of $3.50 and $4 Strikes for Classes in the $0.50 Strike and $1 Strike Programs January 12, 2010. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 7, 2010, the Chicago Board Options Exchange, Incorporated (‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been 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 (adopting Nasdaq IM–2110–2; IM–2110–3; IM– 2110–4, and Rule 3010); see also supra note 17. 25 15 U.S.C. 78s(b)(2). 26 17 CFR 200.30–3(a)(12). 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). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 2911 solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change CBOE proposes to amend Interpretation and Policy .01 to Rule 5.5, Series of Options Open for Trading, to permit the concurrent listing of $3.50 and $4 strikes for classes that participate in both the $0.50 Strike and $1 Strike Programs. The text of the rule proposal is available on the Exchange’s Web site (https://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 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 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 Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange recently implemented a rule change that permits strike price intervals of $0.50 for options on stocks trading at or below $3.00 (‘‘$0.50 Strike Program’’).5 As part of the filing to establish the $0.50 Strike Program, the Exchange contemplated that a class may be selected to participate in both the $0.50 Strike Program and the $1 Strike Program. Under the $1 Strike Program, new series with $1 intervals are not permitted to be listed within $0.50 of an existing $2.50 strike price in the same series, except that strike prices of $2 and $3 are permitted to be listed within $0.50 of a $2.50 strike price for classes also selected to participate in the $0.50 Strike Program.6 Under CBOE’s existing rule, for classes selected to participate in both the $0.50 Strike Program and the $1 Strike Program, the Exchange may either: (a) List a $3.50 strike but not list 5 See Exchange Act Release No. 60695 (September 18, 2009), 74 FR 49055 (September 24, 2009) (SR– CBOE–2009–069). See also Interpretation and Policy .01(b) to Rule 5.5. 6 See Interpretation and Policy .01(a)(2) to Rule 5.5. E:\FR\FM\19JAN1.SGM 19JAN1

Agencies

[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Notices]
[Pages 2908-2911]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-822]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61336; File No. SR-CBOE-2009-092]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change To Amend Rule 8.91--Limitations on Dealings 
of DPMs and Affiliated Persons of DPMs

January 12, 2010.
    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 December 23, 2009, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposed rule change on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange is proposing to amend Rule 8.91--Limitations on 
Dealings of DPMs and Affiliated Persons of DPMs. The text of the 
proposed rule change is available on the Exchange's Web site (https://www.cboe.org/Legal), 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 those statements may be examined at 
the places specified in Item III 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE proposes to amend Rule 8.91--Limitation on Dealings of DPMs 
and Affiliated Persons of DPMs and Rule 8.93--e-DPM Obligations. 
Specifically, CBOE proposes to delete all of existing Rule 8.91, 
including the Guidelines for Exemptive Relief Under Rule 8.91(e) for 
Members Affiliated with DPMs (``Guidelines for Exemptive Relief''), and 
replace those provisions with the specific requirement applicable to e-
DPMs set forth in Rule 8.93(x) relating to the adoption of information 
barriers and compliance with Rule 4.18. CBOE also proposes to adopt in 
both Rule 8.91 and Rule 8.93 a limited exception for integrated market 
making in broad-based, highly capitalized and liquid ETFs and trust 
issued receipts (``TIRs'').
    CBOE Rule 8.91 and the Guidelines for Exemptive Relief under Rule 
8.91 were adopted in 1999, although the provisions contained therein 
were initially promulgated in 1987.\3\ Since that time, there have been 
very few changes to Rule 8.91 and the Guidelines for Exemptive Relief. 
Recently, members have requested that CBOE evaluate Rule 8.91 and the 
Guidelines for Exemptive Relief to determine whether any changes would 
be appropriate given that the rule has been in effect in its current 
form for many years and the functions and responsibilities of DPMs have 
changed over time. For example, in 2005 CBOE amended its rules to 
eliminate the DPM's responsibility to act as agent in the options in 
which it

[[Page 2909]]

is assigned.\4\ As a result, DPMs essentially act as market-makers in 
their assigned classes, with higher quoting obligations than market-
makers and additional responsibilities for which they receive a 
participation entitlement. Also, the prior restriction on Market-Makers 
affiliated with a DPM holding an appointment and submitting electronic 
quotations in an affiliated DPM's class has been eliminated (provided 
CBOE uses an algorithm in the class that does not allocate trades, in 
whole or in part, in an equal percentage based on the number of market 
participants quoting at the best bid or offer).\5\ DPMs also can 
request to operate away from CBOE's trading floor as an Off-Floor DPM, 
similar to an e-DPM.\6\
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    \3\ See Securities Exchange Act Release No. 43004 (6/30/00), 65 
FR 43060 (7/12/00), approving SR-CBOE-98-54.
    \4\ See Securities Exchange Act Release No. 52798 (11/18/05), 70 
FR 71344 (11/28/05), approving SR-CBOE-2005-46.
    \5\ See Securities Exchange Act Release No. 59539 (3/9/09), 74 
FR 11143 (3/16/09), granting immediate effectiveness to SR-CBOE-
2009-015; Securities Exchange Act Release No. 57742 (4/30/08), 73 FR 
25067 (5/6/08), granting immediate effectiveness to SR-CBOE-2008-50.
    \6\ See Securities Exchange Act Release No. 57568 (3/26/08), 73 
FR 18016 (4/2/08), granting immediate effectiveness to SR-CBOE-2008-
032.
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    In 2004, CBOE established a new category of market-making 
participant called e-DPMs, who are member organizations appointed to 
operate on CBOE as competing DPMs/specialists in a broad number of 
option classes.\7\ e-DPMs have specific obligations set forth in Rule 
8.93, and are otherwise not subject to the provisions in Rule 8.91 and 
the Guidelines for Exemptive Relief. Rather, under Rule 8.93(x), e-DPMs 
are required to ``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 e-DPM or act as specialist or Market-Maker in any 
security underlying options allocated to the e-DPM, and otherwise 
comply with the requirements of Rule 4.18 regarding the misuse of 
material non-public information.''
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 50003 (7/12/04), 69 
FR 43028 (7/19/04), approving SR-CBOE-2004-24.
---------------------------------------------------------------------------

    Rule 4.18 requires all members (other than lessor members who are 
not registered as broker-dealers) to establish, maintain and enforce 
written policies and procedures reasonably designed to prevent the 
misuse of material, nonpublic information by such member or persons 
associated with such member. For purposes of Rule 4.18, conduct 
constituting the misuse of material non-public information includes, 
but is not limited to: (i) Trading in any securities issued by a 
corporation, partnership, TIR or ETF or similar entities, or in any 
related securities or related options or other derivative securities, 
while in possession of material, nonpublic information concerning that 
corporation, partnership, TIR or ETF or similar entities; (ii) trading 
in any underlying security or related options or other derivative 
securities, while in possession of material, nonpublic information 
concerning imminent transactions in the above; and (iii) disclosing to 
another person or entity any material, non-public information involving 
a corporation, partnership, TIR or ETF or similar entities or an 
imminent transaction in an underlying security or related securities 
for the purpose of facilitating the possible misuse of such material, 
non-public information. Rule 4.18 also requires members to establish, 
maintain and enforce specific policies and procedures for compliance 
with Rule 4.18.
    Given that the functions and obligations of DPMs and e-DPMs are 
substantially similar, CBOE believes that it would be appropriate for 
DPMs and e-DPMs to be subject to the same requirements relating to the 
maintenance of information barriers with any affiliates that may 
conduct a brokerage business \8\ in option classes allocated to the DPM 
or act as a specialist or market-maker in any security underlying 
options allocated to the DPM. CBOE also notes that DPMs do not have any 
advantages regarding relevant trading information provided by the 
Exchange vis-[agrave]-vis other members in their appointed classes. 
Accordingly, CBOE proposes to delete the existing provisions in Rule 
8.91 and the Guidelines for Exemptive Relief, and replace them with the 
provisions in Rule 8.93(x) relating to the maintenance of information 
barriers and compliance with Rule 4.18. Rule 8.91(a), as amended, 
provides that a DPM shall provide its information barriers to the 
Exchange and obtain prior written approval, which is consistent with 
the current provisions of Rule 8.91(e).\9\
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    \8\ The reference to ``brokerage business'' includes conducting 
an investment banking business or a public securities business.
    \9\ If a DPM's ``Chinese Wall'' procedures were previously 
approved by the Exchange pursuant to Rule 8.91(e), the procedures do 
not need to be re-approved by the Exchange as a result of this rule 
change unless the procedures are subsequently modified.
---------------------------------------------------------------------------

    In addition to the above, CBOE proposes to adopt an exception to 
the requirement that a DPM or e-DPM in an option overlying a broad-
based and highly capitalized ETF or TIR is required to maintain 
information barriers with any affiliate that acts as a specialist or 
market-maker in the underlying broad-based ETF or TIR. CBOE notes that 
this exception currently exists for CBSX DPMs and CBOE DPMs (see Rule 
54.7), and believes it is consistent with what the SEC has previously 
approved.\10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 55392 (3/2/07), 72 
FR 10572 (3/8/07), approving SR-CBOE-2006-112; Securities Exchange 
Act Release No. 54422 (9/11/06), 71 FR 54537 (9/15/06), approving 
SR-CBOE-2004-21; Securities Exchange Act Release No. 47200 (1/15/
03), 68 FR 3907 (1/27/03), approving SR-CBOE-2002-63.
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2. Statutory Basis
    The Exchange believes the rule proposal is consistent with the 
Securities Exchange Act of 1934 (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.\11\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \12\ 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. Deleting 
existing Rule 8.91 and replacing those provisions with the specific 
requirement applicable to e-DPMs set forth in Rule 8.93(x) should 
clarify the regulatory obligations of DPMs while retaining an 
appropriate regulatory requirement relating to the adoption of 
information barriers and compliance with CBOE Rule 4.18.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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:

[[Page 2910]]

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2009-092 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2009-092. 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 (https://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, 100 F Street, NE., 
Washington, DC 20549, 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 office of 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 publicly available. All 
submissions should refer to File Number SR-CBOE-2009-092 and should be 
submitted on or before February 9, 2010.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, 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.\13\ The Commission believes that the proposal is consistent 
with Section 6(b)(5) \14\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \13\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange is proposing to eliminate the requirement that DPMs 
maintain certain specifically-prescribed information barriers as 
described in CBOE Rule 8.91. In its place, the Exchange proposes to 
amend CBOE Rule 8.91. Amended CBOE Rule 8.91 will continue to require 
information barriers, but will permit a Designated Primary Market Maker 
to develop and apply its own policies and procedures to, among other 
things, prevent the misuse of material nonpublic information. CBOE Rule 
8.91 addresses concerns arising from the potential for the sharing of 
material non-public information between a DPM's market making 
activities and other business activities of the DPM or its affiliates. 
For instance, one such concern is that the DPM or affiliate engaging in 
other business activities might use non-public information that was 
acquired by the DPM through its role as a market maker, such as trading 
based on information on the DPM's book. Another concern is that the DPM 
might use material non-public information received from the entity 
engaging in other business activities, such as trading based on a 
change in the firm's buy or sell recommendation.\15\
---------------------------------------------------------------------------

    \15\ See Securities Exchange Act Release No. 58328 (August 7, 
2008), 73 FR 48260 (August 18, 2008) (SR-NYSE-2008-45) (articulating 
concerns in the context of approving changes to NYSE Rule 98).
---------------------------------------------------------------------------

    While amended CBOE Rule 8.91 will no longer prescribe the specific 
information barriers a DPM must establish, the rule will require that 
such information barriers be reasonably designed to prevent the misuse 
of material non-public information by the member or persons associated 
with the member. Amended CBOE Rule 8.91 also will explicitly reference 
current CBOE Rule 4.18, which among other things, provides that the 
misuse of material non-public information includes trading in a 
security or related option or other derivative security while in 
possession of material non-public information concerning imminent 
transactions in the security, related option, or other derivative 
securities.\16\ In addition, the proposed rule change requires that the 
member provide a copy of its information barrier policies and 
procedures to the Exchange for prior written approval. The Commission 
believes that, with adequate oversight by the Exchange of its members 
and prior review and approval of a DPM's information barrier, the 
amendment of CBOE Rule 8.91 should not materially increase the 
potential for the misuse of nonpublic information.
---------------------------------------------------------------------------

    \16\ See CBOE Rule 4.18, Interpretations and Policies .01.
---------------------------------------------------------------------------

    Pursuant to this proposal rule change, members may utilize the 
flexible, principles-based approach to modify their information 
barriers as appropriate to reflect changes to their business model, 
business activities, or to the securities market itself. A member 
should be proactive in assuring that its information barriers reflect 
the current state of its business and continue to be reasonably 
designed to achieve compliance with applicable federal securities law 
and regulations, and with applicable Exchange rules.
    The Commission believes that the regulatory approach in this 
proposed rule change is similar to the regulatory approach of NYSE 
Arca, Inc. In particular, the CBOE approach, like the NYSE Arca 
approach, does not require market makers to maintain certain 
specifically-prescribed information barriers.\17\ Unlike NYSE Arca's 
approach, however, CBOE's rules continue to require all DPMs to 
maintain information barriers.\18\ The basis for this difference is 
that NYSE Arca's market makers and Lead Market Makers do not have any 
advantages regarding relevant trading information provided by NYSE 
Arca, either at, or prior to, the point of execution vis-[agrave]-vis 
other market participants. CBOE, on the other hand, represented only 
that its DPMs do not have any advantages regarding relevant trading 
information provided by the Exchange vis-[agrave]-vis other members in 
their appointed classes.\19\
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    \17\ See Securities Exchange Act Release No. 60604 (September 1, 
2009), 74 FR 46272 (September 8, 2009) (SR-NYSEArca-2009-78).
    \18\ Id.
    \19\ CBOE members have access to auctions that other market 
participants do not, including, for example, the Automated 
Improvement Mechanism (``AIM'') (CBOE Rule 6.74A), and the 
Solicitation Auction Mechanism (CBOE Rule 6.74B).
---------------------------------------------------------------------------

    CBOE also proposes to exempt DPMs and e-DPMs in an option overlying 
a broad-based ETF or TIR from the requirement to maintain barriers 
between it and any affiliates that act as a specialist or market-maker 
in the

[[Page 2911]]

underlying broad-based ETF or TIR, provided that the capitalization and 
liquidity requirements for the component securities of the broad-based 
ETF or TIR set forth in CBOE Rule 54.7, Interpretation and Policy .03 
are satisfied. The Commission believes that this exemption to the 
information barrier requirements is consistent with the Act. The 
Commission notes that this exemption is currently available to CBSX 
DPMs.\20\ In addition, CBOE Rule 54.7, Interpretation and Policy .03 
contains capitalization and liquidity requirements for the component 
securities of the broad-based ETFs and TIRs, which, together with the 
proposed exemption, are consistent with what the Commission has 
previously approved.\21\ As the Commission noted previously, these 
capitalization and liquidity requirements for the component securities 
should reduce the likelihood that any market participant has an unfair 
informational advantage about the ETF, TIR, its related options, or its 
component securities, or that a market participant would be able to 
manipulate the prices of the ETFs, TIRs, or their related options.\22\
---------------------------------------------------------------------------

    \20\ See CBOE Rule 54.7(d).
    \21\ See Securities Exchange Act Release No. 54422 (September 
11, 2006), 71 FR 54537 (September 15, 2006) (SR-CBOE-2004-21) 
(approving CBOE Rule 54.7); Securities Exchange Act Release No. 
46213 (July 16, 2002), 67 FR 48232 (July 23, 2002) (SR-Amex-2002-21) 
(permitting side-by-side trading and integrated market making in 
broad-based ETFs and TIRs without information or physical barriers 
or other restrictions).
    \22\ See Securities Exchange Act Release No. 46213 (July 16, 
2002), 67 FR 48232 (July 23, 2002) (SR-Amex-2002-21) (permitting 
side-by-side trading and integrated market making in broad-based 
ETFs and TIRs without information or physical barriers or other 
restrictions).
---------------------------------------------------------------------------

    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\23\ for approving the proposed rule change prior to the 
30th day after the date of publication of notice in the Federal 
Register. Although this proposed rule change does not require that DPMs 
maintain certain specifically-prescribed information barriers, it does 
require that DPMs establish and maintain information barriers that are 
reasonably designed to achieve compliance with applicable securities 
law and regulations, and with applicable Exchange rules. In addition, 
the rule requires that such barriers be pre-approved by the Exchange. 
The revised rule thus does not represent a significant change from the 
current rule, and is at least as stringent as the approach currently 
employed by NYSE Arca and Nasdaq.\24\ The Commission believes that, 
with Exchange approval and oversight, elimination of prescriptive 
information barrier requirements should not reduce the effectiveness of 
the CBOE rules which would now permit a DPM to develop and apply its 
own policies and procedures to, among other things, prevent the misuse 
of material nonpublic information.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(2).
    \24\ See Securities Exchange Act Release No. 53128 (Jan. 13, 
2006), 71 FR 3550 (January 23, 2006) (adopting Nasdaq IM-2110-2; IM-
2110-3; IM-2110-4, and Rule 3010); see also supra note 17.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-CBOE-2009-092) be, and it 
hereby is, approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-822 Filed 1-15-10; 8:45 am]
BILLING CODE 8011-01-P
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