Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to the Evaluation of Trading Crowd Performance

[Federal Register Volume 63, Number 237 (Thursday, December 10, 1998)]
[Notices]
[Pages 68321-68323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32827]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40737; File No. SR-CBOE-98-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Evaluation of Trading Crowd Performance

December 2, 1998.
    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 October 23, 1998, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CBOE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE is proposing to modify CBOE Rule 8.60, Evaluation of 
Trading Crowd Performance, to provide limited remedial actions for 
members, individually or collectively as trading crowds, who have 
failed to meet minimum performance standards. The proposed rule also 
modifies procedures relating to the administration and enforcement of 
the Rule.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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

[[Page 68322]]

in Item IV 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

    The Exchange is proposing to modify CBOE Rule 8.60 to clarify and 
improve the market performance evaluation of members and trading crowds 
on the Exchange. The proposed rule change accomplishes this by giving 
the appropriate Market Performance Committee \3\ (``appropriate 
Committee'') greater procedural flexibility to address the issue of 
member performance, while at the same time providing a clearer 
description of the due process safeguards that apply to the exercise of 
the appropriate Committee's authority.
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    \3\ The appropriate Committee is the Market Performance 
Committee, the Index Market Performance Committee or the Modified 
Trading System Appointments Committee.
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1. Generally
    The purpose of CBOE Rule 8.60 is to provide the appropriate 
Committee with a means to work with trading crowds and individual 
members to improve market quality and competition among members. The 
crowd evaluation process has significantly assisted the appropriate 
Committee in working with trading crowds and members to improve 
performance. The proposed changes will allow the appropriate Committee 
to take certain remedial actions after an informal meeting with members 
or crowds who have been identified through the evaluations. Currently, 
under CBOE Rule 8.60, the appropriate Committee must hold a formal 
hearing to impose more serious sanctions such as (i) suspension, (ii) 
termination or (iii) restriction of a market-maker's registration, 
appointments to option classes or right to trade at a particular 
trading station, but does not explicitly have the right to take limited 
remedial actions.
2. The Proposed Changes
    One of the proposed amendments to CBOE Rule 8.60(a) is to identify 
the Exchange rather than the appropriate Committee as the entity that 
prepares, administers and distributes the results of the member 
evaluation. The results of the member evaluation are provided by the 
Exchange's Market Procedures and Planning staff to the appropriate 
Committee for their review. Paragraph (a) of CBOE Rule 8.60 is being 
amended to provide that the appropriate Committee, in connection with 
its evaluation of member performance, may take into consideration 
factors other than the four factors currently enumerated in the 
Rule.\4\ To assist the Exchange in gathering market performance data in 
a timely manner, the proposed rule change moves language from paragraph 
(c) to paragraph (a). This language requires that members, persons 
associated with a member, or member firms answer market performance 
survey questions by the date specified and to the best of their ability 
and knowledge. In addition, the term market-maker is being replaced 
with the terms member or trading crowd to provide the appropriate 
Committee with more discretion in enforcing market performance 
standards.
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    \4\ The four factors are (i) quality of markets; (ii) 
competition among market-makers; (iii) observance of ethical 
standards, and (iv) administrative factors.
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    The Exchange is rewording paragraph (b) of CBOE Rule 8.60 to enable 
the appropriate Committee to determine whether there has been a failure 
to meet minimum performance standards based on the totality of factors 
considered, including whether a member or trading crowd is ranked in 
the bottom 10% of trading crowds.
    The language in paragraph (c) of CBOE Rule 8.60 as to the 
distribution of a Questionnaire on a six month periodic basis is being 
deleted. The Evaluation will be done as needed. Paragraph (c) of CBOE 
Rule 8.60 also will incorporate the existing language from paragraph 
(d). This incorporated language gives the appropriate Committee 
discretion to have an informal meeting with one or more members to 
discuss their performance.
    Paragraph (d) of CBOE Rule 8.60 is being amended to clarify that 
the appropriate Committee is authorized to take certain remedial 
actions against a member or trading crowd if the appropriate Committee 
believes that certain performance standards are not being met. These 
remedial actions are of a less serious nature than those provided for 
in paragraph (a). Paragraph (d) of CBOE Rule 8.60 is intended to 
provide the appropriate Committee with greater flexibility to take 
limited actions to improve overall market performance in those cases 
where more severe actions are not warranted, and without incurring the 
expense and delay associated with a formal evidentiary-type hearing 
which is required in cases where more severe actions are taken. The 
following measures are proposed as limited remedial actions that the 
appropriate Committee may take:
    (1) require that the trading crowd submit a business plan to the 
Committee detailing those steps that the crowd intends to take to 
improve its performance;
    (2) require that one or more members execute 100% of their opening 
transactions in that crowd in person;
    (3) restrict crowd members' ability to participate on the Retail 
Automatic Execution System;
    (4) restrict the eligibility of the crowd to be allocated new 
option classes or other securities;
    (5) require that one or more members attend a meeting or series of 
meetings as the Committee shall require for the purpose of education or 
improving the performance of the members;
    (6) require that all bookable orders be booked if not executed 
immediately upon presentation in the crowd; or
    (7) take any other limited remedial action which is comparable to 
the foregoing.
    Paragraph (d) would provide members an opportunity to be heard by 
the appropriate Committee, prior to the appropriate Committee taking 
remedial action.
    Paragraph (e) of CBOE Rule 8.60 clarifies and expands on the due 
process requirements to be fulfilled if the appropriate Committee deems 
that the actions listed in paragraph (a) are to be imposed. It will 
also be made clear that all affected members will be provided a written 
decision.
    The Exchange is also amending Paragraph (f) to provide the 
appropriate Committee with the authority to impose the proposed limited 
remedial sanctions of paragraph (d) for members who fail to appear 
before the committee when asked to do so under paragraph (c), without 
reasonable justification. The amended language also states that the 
appropriate Committee may refer any member's failure to appear to the 
Business Conduct Committee.
    Finally, the Exchange is amending Paragraph (g) to provide that any 
actions taken by the appropriate Committee, whether under paragraph (a) 
or (d), may be appealed according to the procedures of Chapter XIX of 
Exchange Rules. This change would have a member's appeal go directly to 
the Appeals Committee rather than the Board of Directors. This change 
would make the appeal procedure consistent with the appeal rights of 
most other Exchange committee decisions. Members would retain the right 
to appeal the Appeals Committee decision to the Board.
    Interpretation and Policy .01 under CBOE Rule 8.60 would be amended 
to provide some flexibility as to how the appropriate Committee defines 
whether a market-maker is a member of a trading crowd. The proposed 
rule change also

[[Page 68323]]

makes certain editorial changes to clarify CBOE Rule 8.60 without 
affecting its substance.
    The Exchange believes the proposed rule change is consistent with 
and promotes the objectives of Section 6(b)(5) of the Act \5\ in that 
it is designed to enhance the ability of the appropriate Market 
Performance Committee to regulate standards of member performance on 
the Exchange, while providing due process standards to members who 
appear before the appropriate Committee, thereby promoting just and 
equitable principles of trade and protecting investors and the public 
interest.
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    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 such proposed rule change, or
    (b) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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. 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. Copies of such filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to File No. SR-CBOE-98-46 and should be 
submitted by December 31, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32827 Filed 12-9-98; 8:45 am]
BILLING CODE 8010-01-M