Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on May 24, 2000, the Chicago Board Options Exchange, Incorporated (“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 CBOE has designated this proposal as one concerned solely with the administration of the CBOE under Section 19(b)(3)(A)(iii) of the Act, which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposed to amend its rules to mandate that member firms test computer systems in order to ensure preparedness for the industry's conversion to decimal pricing.
The text of the proposed rule change is available upon request from the CBOE or the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filling with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received regarding the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
As the securities industry prepares for the conversion to decimal pricing, it will be necessary for various constituents of the securities industry to test their computer systems in order to avoid widespread problems. The CBOE, in cooperation with the Commission and other self-regulatory organizations, has been working toward a successful transition to decimal pricing. The purpose of the proposed rule change is to require CBOE member firms to participate in tests of computer systems designed to prepare for the industry's conversion to decimal pricing.
The proposed rule change would create new CBOE Rule 15.12 to require CBOE members to participate in the testing of computer systems in a manner and frequency to be prescribed by the Exchange. It is the CBOE's understanding that other self-regulatory organizations, including the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc., and the American Stock Exchange LLC, are also proposing rule changes to require testing by their members in connection with the industry's conversion to decimal pricing.
The Securities Industry Association has undertaken to coordinate industry-wide computer testing to ensure that the securities industry is adequately prepared to convert to decimal pricing. Industry constituents to participate in the testing will include, among others, national securities exchanges, registered clearing corporations, data processors, and broker-dealers. Several industry-wide tests have been planned, the first of which took place in April 2000.
The CBOE will employ its new Rule 15.12 to require that its members participate in these tests. CBOE Rule 15.12 further provides that any firm having an electronic interface with the Exchange would be required to conduct point-to-point testing with the Exchange. Point-to-point testing refers to tests conducted between two entities, in this case a member having an electronic interface and the Exchange.
A member that has its electronic interface with the Exchange through a service provider may be exempted from this requirement if such service provider conducts successful tests with the Exchange on behalf of the firms its services, if the member conducts successful point-to-point testing with the service provider by a time to be designated by the Exchange, and if the Exchange agrees that no further testing is necessary.
Under the proposal, the Exchange would require member firms to participate in industry-wide testing to the extent such firms can be accommodated by the testing schedule. The Exchange would exercise its authority under CBOE Rule 15.12 to the extent it deems that the participation of particular members in the testing is important, and to the extent those members would otherwise not voluntarily choose to participate.
The proposed rule change would also allow the CBOE to require members to file reports with the CBOE concerning the required tests in the manner and frequency determined by the Exchange. A member subject to CBOE Rule 15.12 who failed to participate in the manadatory tests or who failed to file any required reports, would be subject to disciplinary action pursuant to Chapter XVII of the Exchange's rules.
The Exchange believes that it currently has the authority, without the approval of CBOE Rule 15.12, to require testing and reporting with respect to the implementation of decimal pricing under the broad authority granted it to enforce the provisions of the Act and to ensure the safety of its marketplace. More specifically, CBOE Rule 4.2 prohibits members from engaging in conduct that violates the Act or rules and regulations thereunder; CBOE Rule 4.3 provides the Exchange authority to approve the maintenance of any wire connections between its members and other members or non-members; and CBOE Rule 4.10 gives the President or the Chairman of the Exchange the right to impose such conditions and restrictions on a member as either may consider reasonably necessary for the protection of the Exchange and the customers of such member. Notwithstanding this existing authority, however, the Exchange believes that its membership would be better served by having its specific intentions with respect to mandatory decimal pricing testing defined in a stand-alone rule.
The proposed CBOE Rule 15.12 would expire automatically upon the completion of decimal pricing implementation.
2. Statutory Basis
The CBOE believes proposed CBOE Rule 15.12, whose purpose is to ensure the participation of Exchange members in important testing prior to the securities industry's conversion to decimal pricing, is consistent with Section 6(b) of the Act in general and further the objectives of Section 6(b)(5) in particular in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest.
15 U.S.C. 78f(b)(5).
C. 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 not necessary or appropriate in furtherance of the purposes of the Act.
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 to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Because the foregoing rule change is concerned solely with the administration of the Exchange, it has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act and subparagraph (f)((3) of Rule 19b-4 thereunder. At any time within 60 days of the filing of such 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.
17 CFR 240.19b-4(f)(3).
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 20549-0609. 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 in the Commission's Public Reference Room, 450 Fifth Street, NW, Washington, DC. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-CBOE-00-20 and should be submittted by July 12, 2000.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-15614 Filed 6-20-00; 8:45 am]
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