[Federal Register Volume 67, Number 212 (Friday, November 1, 2002)]
[Notices]
[Pages 66689-66692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27805]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46719; File No. SR-CBOE-2002-41]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendment
No. 1 Thereto by the Chicago Board Options Exchange, Inc. Relating to
an Interpretation of Paragraph (b) of Article Fifth of Its Certificate
of Incorporation and an Amendment to Rule 3.16(b)
October 25, 2002.
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 July 29, 2002, the Chicago Board Options Exchange, Inc. (``CBOE'')
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 the CBOE. On September 20, 2002, the CBOE filed
an amendment to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons, and to approve the proposed rule change, as
amended, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Arthur B. Reinstein, Deputy General Counsel,
CBOE, to Elizabeth King, Associate Director, Division of Market
Regulation, Commission, dated September 19, 2002 (``Amendment No.
1''). Amendment No. 1 designates the proposed rule change as filed
pursuant to Section 19(b)(2) of the Act. 15 U.S.C. 78s(b)(2). The
CBOE also requests that the proposed rule change be given
accelerated effectiveness, pursuant to 19(b)(2) of the Act. 15
U.S.C. 78s(b)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change consists of an interpretation of paragraph
(b) of Article Fifth of the Certificate of Incorporation of the CBOE
(``Article Fifth (b)'') pertaining to the right of 1,402 full members
of the Board of Trade of the City of Chicago (``CBOT'') to become
members of CBOE without having to purchase a CBOE membership (the
``Exercise Right''). This provision has previously been interpreted by
the CBOE, including an interpretation reflected in an agreement between
the CBOE and CBOT dated September 1, 1992 (the ``1992 Agreement'').\4\
The interpretation provided, among other things, that in order to
become a member of the CBOE pursuant to the Exercise Right, a full
member of the CBOT must be in possession of all the trading rights and
privileges appurtenant to a CBOT full membership.
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\4\ The CBOE believes that the 1992 Agreement and an amendment
to Rule 3.16 referring to the 1992 Agreement were approved by the
Commission. See Securities Exchange Act Release No. 32430 (June 8,
1993), 58 FR 32969 (June 14, 1993).
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It has recently come to the attention of the CBOE that starting in
1999, the CBOT implemented expedited membership approval procedures
applicable only to those individuals who wished to become CBOE members
pursuant to the Exercise Right, but did not wish to trade as members on
the CBOT itself. Under the rules of the CBOT, individuals approved for
CBOT membership pursuant to these expedited procedures do not have any
rights to trade as members on the CBOT, and thus the CBOE believes that
these individuals do not satisfy the interpretation reflected in the
1992 Agreement as described above.
On April 17, 2002, the CBOE informed the CBOT that individuals
approved for CBOT membership pursuant to these expedited procedures are
not entitled to become exerciser members of the CBOE. In response, on
April 22, 2002, the CBOT began advising applicants for membership on
the CBOT for the purpose of becoming exerciser members of the CBOE that
such individuals must complete regular CBOT membership approval
procedures. All individuals exercising since that date have complied
with this requirement. The CBOE represents that during the several
years that CBOT's
[[Page 66690]]
expedited membership approval procedures were in place, many
individuals that were approved as CBOT members under expedited
procedures did in fact exercise to become members of the CBOE.
According to the CBOE, approximately 330 such individuals are currently
engaged in activities as exerciser members of the CBOE. If the CBOE
were now to revoke the good standing of these individuals, unless and
until they are re-approved as CBOT members under regular procedures,
this would be likely to impose significant hardships on these
individuals and cause disruption to the CBOE's market.
To avoid these results, the CBOE now proposes a further
interpretation of its prior interpretation of the Exercise Right as
reflected in the 1992 Agreement to provide that each individual who
would have been a member in good standing of the CBOE on April 17,
2002, pursuant to the Exercise Right, but for the fact that he or she
was approved as a CBOT full member or full member delegate under
expedited procedures and therefore does not possess the trading rights
of a full member of CBOT, will nevertheless be recognized as a member
of the CBOE in good standing, so long as that individual would possess
all trading rights and privileges appurtenant to a CBOT full membership
upon satisfaction of the CBOT's regular (not expedited) application
process. Satisfaction of CBOT full membership would also include
examination and approval requirements necessary for an individual to be
in actual possession of all trading rights and privileges appurtenant
to a CBOT full membership as defined in the 1992 Agreement.
Any CBOE member in good standing who subsequently ceases to be a
CBOE member in good standing for any reason and who thereafter
reapplies to become a CBOE member pursuant to the Exercise Right, and
any other individual who applies to become a member of CBOE pursuant to
the Exercise Right after April 17, 2002, will be required to satisfy
all applicable CBOT application, examination and approval requirements
necessary for such individual to be in actual possession of all trading
rights and privileges appurtenant to a CBOT full membership as defined
in the 1992 Agreement. Notwithstanding the foregoing, if a CBOE
exerciser member in good standing subsequently ceases to be a member of
the CBOE in good standing, and he or she reapplies to become a member
of the CBOE pursuant to the Exercise Right within six months of the
date he or she ceased to a CBOE exerciser member, the individual may be
reinstated as a member of the CBOE in good standing without having to
satisfy the requirements of the CBOT necessary for such individual to
be in actual possession of all trading rights and privileges
appurtenant to a CBOT full membership as defined in the 1992 Agreement.
The CBOE intends to provide a limited exception to the CBOE Rule
3.16(b). The proposed interpretation, together with a proposed
amendment to CBOE Rule 3.16 (b), constitutes the proposed rule change
that is the subject of this filing. Below is the text of the proposed
rule change. Additions are italicized.
* * * * *
Rule 3.16 Special Provisions Regarding Chicago Board of Trade Exerciser
Memberships
(a) Termination of Nontransferable Memberships. [No change]
(a) Board of Trade Exercisers. For the purpose of entitlement to
membership on the Exchange in accordance with Paragraph (a) of Article
Fifth of the Certificate of Incorporation of the Exchange (``Article
Fifth(b)'') the term ``member of the Board of Trade of the City of
Chicago'' (the ``CBOT''), as used in Article Fifth(b), is interpreted
to mean an individual who is either an ``Eligible CBOT Full Member'' or
an ``Eligible CBOT Full Member Delegate,'' as those terms are defined
in the Agreement entered into on September 1, 1992 (the ``1992
Agreement'') between the CBOT and the Exchange, as further interpreted
in accordance with that certain proposed rule change filed with the
Securities and Exchange Commission as File No. SR-CBOE-2002-41, and
shall not mean any other person. In order to permit Eligible CBOT Full
Members and Eligible CBOT Full Member Delegates to participate in an
offer, distribution or redemption of the kind referred to in the last
two sentences of Paragraph 3(a) of the 1992 Agreement, and solely for
such purpose, the Exchange agrees to waive all membership dues, fees
and other charges and all qualification requirements, other than those
that may be imposed by law, that may be applicable to the application
for membership on the Exchange of each Eligible CBOT Full Member and
Eligible CBOT Full Member Delegate who wishes to exercise the Exercise
Right during the period commencing on the date the Exchange gives
notice to the CBOT pursuant to Paragraph 3(b) of the 1992 Agreement and
ending on the date such individual participates in such offer,
distribution or redemption (as the case may be); provided, however,
that (i) no Exerciser Member (as defined in the 1992 Agreement) for
whom dues, fees and other charges and qualification requirements are
waived in accordance with the foregoing shall have any rights as a
member of the Exchange other than to participate in such offer,
distribution or redemption, and (ii) the membership on the Exchange of
each such Exerciser Member shall terminate immediately following the
time such individual participates in such offer, distribution or
redemption.
* * * * *
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 CBOE 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 III below. The CBOE 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
The purpose of the proposed rule change is to provide a further
interpretation of a prior interpretation of Article Fifth (b). Article
Fifth (b) governs the right of all 1,402 full members of the CBOT to
become members of the CBOE without having to purchase a separate CBOE
membership. Article Fifth (b) has previously been interpreted on
several occasions, including an interpretation made pursuant to an
agreement between the CBOT and CBOE dated September 1, 1992. According
to the CBOE, the 1992 Agreement states that only an individual who is
an ``Eligible CBOT Full Member'' or an ``Eligible CBOT Full Member
Delegate'' constitutes a CBOT member within the meaning of Article
Fifth (b) and thus would be eligible to have an Exercise Right--that
is, a right to be an exerciser member of the CBOE.
The 1992 Agreement defines the terms ``Eligible CBOT Full Member''
and ``Eligible CBOT Full Member Delegate'' to require in each case that
the individual must be in possession of ``all trading rights and
privileges appurtenant to such CBOT Full Membership.''\5\ The 1992
Agreement
[[Page 66691]]
defines the term ``all trading rights and privileges appurtenant to
such CBOT Full Membership'' to mean ``(1) the rights and privileges of
a CBOT Full Membership which entitle a holder or delegate to trade as
principal and broker for others in all contracts traded on the CBOT,
whether by open outcry, by electronic means, or otherwise, during any
segment of a trading day when trading is authorized; and (2) every
trading right or privilege granted, assigned or issued by CBOT after
the effective date of this Agreement to holders of CBOT Full
Memberships, as a class, but excluding any right or privilege which is
the subject of an option granted, assigned or issued by CBOT to a CBOT
Full Member and which is not exercised by such CBOT Full Member.''
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\5\ According to the CBOE, the reference to ``such'' CBOT Full
Membership describes the CBOT Full Membership owned or leased by the
individual.
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These provisions of the 1992 Agreement are reflected in the CBOT's
rules and were adopted by the CBOT as required by the 1992 Agreement
(referred to in that Agreement as the ``CBOT Rule Change''). The CBOT
Rule Change may not be amended without the consent of CBOE. The CBOT
Rule Change has not been amended, and is currently set forth in CBOT
Rules 210.00 and 221.00(g).
In 1999, without the knowledge or approval of the CBOE, the CBOT
implemented certain expedited membership approval procedures applicable
to those individuals who wished to become CBOT members for the sole
purpose of exercising the right to become members of the CBOE pursuant
to the Exercise Right, but who did not wish to be able to trade as
members on the CBOT itself. Under these expedited procedures, the CBOT
waived its normal application procedures and examination requirements
for these individuals, and has relied on special delegated authority to
approve their membership applications. Individuals approved for CBOT
membership pursuant to these expedited procedures do not have any
rights to trade as a member of the CBOT in any of the contracts traded
on that exchange. Accordingly, such individuals cannot qualify as
Eligible CBOT Full Members or Full Member Delegates for purposes of the
interpretation of the Exercise Right reflected in the 1992 Agreement,
and thus are not eligible to become exerciser members of the CBOE.
The CBOE did not become aware of the expedited membership approval
procedures until late 2001. On April 17, 2002, the CBOE informed the
CBOT that individuals approved for CBOT membership pursuant to these
expedited procedures would not be entitled to become exerciser members
of the CBOE because they did not satisfy the requirements of Article
Fifth(b) as it had previously been interpreted under the 1992
Agreement. In response, on April 22, 2002, the CBOT began advising
individuals who apply to become members of CBOT for the purpose of
exercising to be members of the CBOE that such individuals must
complete regular CBOT membership approval procedures in order to be
able to exercise. The CBOE believes that all individuals exercising
since that date have complied with this requirement.
During the several years that the CBOT's expedited membership
approval procedures were in place, many CBOT members, pursuant to the
expedited procedures, exercised to become members of the CBOE. Without
the CBOE having been aware of the adoption of these expedited
membership procedures by the CBOT or having focused on the fact that
these individuals did not meet the requirements of a valid exercise,
these individuals were then approved by the CBOE as exerciser members.
According to the CBOE, approximately 330 individuals who were approved
as CBOT members under expedited procedures are currently engaged in
conducting business as exerciser members of the CBOE. If the CBOE now
refused to recognize these individuals as members of the CBOE in good
standing, unless and until they are re-approved as CBOT members under
procedures that give them full trading rights on the CBOT, the result
would impose significant hardships on these individuals. Likewise, the
CBOE believes that the removal of these individuals from the CBOE
trading floor, even if only for a temporary period while they are re-
approved as members of the CBOT, would be disruptive to the CBOE
itself.
To avoid these harmful results, the CBOE has determined to
interpret its prior interpretation of Article Fifth (b) of its
Certificate of Incorporation so as to allow each individual who would
have been an exerciser member in good standing of the CBOE on April 17,
2002, but for the fact that he or she was approved as a CBOT member or
delegate under expedited procedures, to be recognized as a member of
CBOE in good standing so long as that individual would be able to have
all trading rights and privileges appurtenant to a CBOT membership,
including satisfying full CBOT membership or delegate application,
examination and approval requirements. Any such individual who
subsequently ceases to be an exerciser member in good standing for any
reason and who thereafter reapplies to become an exerciser member, and
any other individual who applies to become an exerciser member of the
CBOE after April 17, 2002, as a condition of becoming an exerciser
member of the CBOE, will be required to satisfy all applicable CBOT
application, examination and approval requirements necessary for such
individual to be in actual possession of ``all trading rights and
privileges appurtenant to such CBOT Full Membership'' as defined in the
1992 Agreement. Notwithstanding the foregoing, if an individual who was
an exerciser member of the CBOE in good standing pursuant to the first
sentence of this paragraph subsequently ceases to be an exerciser
member in good standing, and if the same individual reapplies to become
an exerciser member of the CBOE within six months of the date he or she
ceased to be an exerciser member in good standing, the individual may
be reinstated as an exerciser member in good standing without having to
satisfy the requirements of the CBOT necessary for such individual to
be in actual possession of all trading rights and privileges
appurtenant to a CBOT full membership as defined in the 1992 Agreement.
This interpretation will provide a limited exception to the
requirement of the interpretation reflected in the 1992 Agreement that
all exercisers must be in possession of ``all trading rights and
privileges appurtenant to such CBOT Full Membership.'' It has the
effect of ``grandfathering'' those individuals who were exerciser
members of the CBOE in good standing on April 16, 2002, to the extent
described above, notwithstanding that they were approved as members of
the CBOT under expedited procedures and thus do not possess the right
to trade as members on the CBOT. The CBOE represents that this
interpretation will have no effect on the application of the
requirements of the 1992 Agreement to individuals who were not
exerciser members on April 17, 2002, and who seek to become exerciser
members after that date.
2. Statutory Basis
The CBOE believes that the proposed rule change is consistent with
and furthers the objectives of section 6(b)(5) of the Act \6\ in
particular, in that it constitutes an interpretation of and an
amendment to the rules of the Exchange that are designed to promote
just and equitable principles of trade, to perfect the mechanisms of a
free and open
[[Page 66692]]
market, and to protect investors and the public interest.
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\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange 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, 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 CBOE. All
submissions should refer to File No. SR-CBOE-2002-41 and should be
submitted by November 22, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act,\7\ and the rules and regulations thereunder applicable to a
national securities exchange.\8\ Specifically, the Commission believes
that this proposal, which provides a further interpretation of the
Exercise Right, as provided in Article Fifth (b) and CBOE Rule 3.16(b),
should clarify that the approximately 330 exerciser members of the
CBOE, who became CBOT members pursuant to the CBOT's expedited
membership approval procedures, will continue to be recognized by the
CBOE as exerciser members in good standing of the CBOE, so long as
these exerciser members would posses all trading rights and privileges
appurtenant to a CBOT membership, including satisfying full CBOT
membership or delegate application, examination, and approval
requirements. Further, the Commission believes that the proposal also
clarifies that the CBOE will reinstate as an exerciser member in good
standing any CBOE exerciser member, who became a CBOT member by the
CBOT's expedited membership approval procedures and who subsequently
ceases to be an exerciser member in good standing for any reason but
thereafter reapplies to become an exerciser member of the CBOE,
pursuant to the Exercise Right within six months of the date he or she
ceased to be a CBOE exerciser member.
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\7\ 15 U.S.C. 78f(b)(5).
\8\ In approving this rule, the Commission notes that it has
also considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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The Commission notes that this proposed interpretation as described
above by the CBOE provides a limited exception to CBOE Rule 3.16(b),
which interprets Article Fifth (b) to include ``Eligible CBOT Full
Member[s]'' and ``Eligible CBOT Full Member Delegate[s],'' as defined
in the 1992 Agreement between the CBOE and CBOT. The Commission
believes that the proposed interpretation has no investor protection
implications because all CBOE members, including exerciser members,
must nevertheless comply with the requirements of the Act and CBOE
rules in order to utilize their trading privileges on the CBOE floor.
Also, although the CBOT granted expedited approval to these 330
individuals, the CBOE conducted a full review of these 330 members
before they were permitted to trade on the CBOE. In addition, the
Commission believes that refusing to recognize these certain
individuals as exerciser members of the CBOE in good standing unless
and until they were re-approved as CBOT members under its regular
membership procedures would impose significant hardship on these
individuals and cause disruption to the CBOE itself. In order to avoid
such harmful results, the Commission believes that the proposed
interpretation described herein and the proposed rule change are
appropriate, in that the CBOE is interpreting its requirements for
certain CBOT members (exerciser members) to become and remain members
of the CBOE. For these reasons, the Commission finds good cause for
approving the proposed rule change, as amended, prior to the thirtieth
day after the date of publication of notice in the Federal Register.
It is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\9\ that the proposed rule change (SR-CBOE-2002-41), as amended, is
approved on an accelerated basis.
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\9\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to the delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27805 Filed 10-31-02; 8:45 am]
BILLING CODE 8010-01-P