regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.,
[Federal Register: October 4, 1999 (Volume 64, Number 191)]
[Notices]
[Page 53757-53758]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04oc99-89]
SECURITIES AND EXCHANGE COMMISSION
Release No. 34-41912; File No. SR-CBOE-99-24
Self-Regulatory Organizations; Chicago Board Options Exchange, Inc.: Order Approving Proposed Rule Change Relating to Option Trading Permit Auction Procedures
September 24, 1999.
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Introduction
On June 9, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filedwith the Securities and Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act
[[Page 53758]]
of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to alter the Exchange's option trading permit auction procedures.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
The proposed rule change, including Amendment No. 1,\3\ was published in the Federal Register on August 24, 1999.\4\ The Commission did not receive any comments on the proposed rule change. This order approves the proposed rule change, as amended.
\3\ Amendment No. 1 was filedon August 2, 1999. Amendment No. 1 expanded the discussion on the proposed rule change and clarified the proposed test of the rule change. See letter from Christopher R. Hill, Attorney, CBOE, to Heather Traeger, Attorney, Division of Market Regulation, dated August 2, 1999.
\4\ Securities Exchange Act Release No. 41747, (August 16, 1999), 64 FR 46221.
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Description of the Proposal
CBOE Rule 3.27(a)(3) provides for the creation of a Permit lease pool to be administered by the Exchange.\5\ Under these procedures, the Exchange conducts an 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.
\5\ The procedures for the administration on the lease pool were previously filedwith and approved by the Commission. 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. See Securities Exchange Act Release No. 38541 (April 23, 1997), 62 FR 23516 (April 30, 1997). In SR-CBOE-97-47, CBOE 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 No. 39179 (October 1, 1997), 62 FR 52602 (October 8, 1997).
The proposal would 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 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 proposal also contains several other amendments, most of which set forth existing Exchange practices in greater detail, including:
‹bullet› 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.
‹bullet› The proposed rule change permits a lessee to terminate the lessee's Permit during the lease period, by written notice to the Membership Department, but provides that the termination notice shall be irrevocable. 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 lest two business days.
‹bullet› 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 membership.
‹bullet› 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.
‹bullet› 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.
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Discussion
After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission believes the proposal is consistent with the requirements of Section 6(b)(5) of the Act \5\ because it is designed to promote just and equitable principles of trade, perfect the mechanism of a free and open national market system, and, in general, to further investor protection and the public interest. Under the proposal, the current auction procedure for Permit leases would be replaced by a procedure known as a Dutch auction. The proposed Dutch auction differs from the current procedures because each successful bidder will pay only the price of the lowest successful bid for Permits, instead of the dollar value of the bid submitted by that lessee. The Commission believes that it is reasonable for the Exchange to determine how to distribute the Permits. The Commission also believes that the Dutch auction procedure as described in the proposal is a competitive process that is a fair and equitable method for distributing the Permits. The Commission further believes that the proposal clearly sets forth in sufficient detail the parameters of and for the proposed Dutch auction process so that Exchange members can fully understand the proposed process, including how to bid, when to bid, restrictions on bidding and holding Permit leases, and how to terminate or transfer a Permit lease.
\6\ 15 U.S.C. 78f(b)(5).
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Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,\7\ that the proposed rule change (SR-CBOE-99-24), is amended, is approved.
\7\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\
\8\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 99-25701Filed10-1-99; 8:45 am]
BILLING CODE 8010-01-M
