
[Federal Register Volume 78, Number 32 (Friday, February 15, 2013)]
[Notices]
[Pages 11249-11252]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03428]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68879; File No. SR-CBOE-2012-124]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change To Amend Various 
CBOE Rules Governing Letters of Guarantee and Authorization

February 8, 2013.
    On December 14, 2012, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend various CBOE Rules 
governing letters of guarantee and authorization. The proposed rule 
change was published for comment in the Federal Register on December 
27, 2012.\3\ The Commission did not receive any comment letters on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68487 (December 20, 
2012), 77 FR 76320
    (``Notice'').
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I. Description of the Proposal

    As further described below, each Trading Permit Holder (``TPH'') 
that has trading functions on CBOE currently is required to submit to 
CBOE a letter of guarantee or authorization for its trading activities 
on CBOE from a Clearing Trading Permit Holder (``Clearing TPH''). 
Typically, by a letter of guarantee, the Clearing TPH guarantees any 
trades made its TPH customer and, by a letter of authorization, a 
Clearing TPH accepts financial responsibility for all transactions on 
CBOE made by a guaranteed Floor Broker.
    The purpose of the proposal is to amend various CBOE rules 
governing letters of guarantee and authorization to:
     Give CBOE the ability to prevent access to its marketplace 
if a TPH does not have an effective letter of guarantee or 
authorization on file with the Exchange;
     Provide that any written revocation of a letter of 
guarantee or authorization will be given effect as quickly as CBOE can 
process it;
     Give CBOE the ability to take any action necessary to give 
effect to actions

[[Page 11250]]

by the Clearing Corporation,\4\ such as restricting the activities of a 
Clearing TPH or suspending a Clearing TPH;
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    \4\ Currently, The Options Clearing Corporation (``OCC'') is the 
only Clearing Corporation of CBOE. See Notice, supra note 3, at 
76320, n.5.
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     Automatically terminate the trading permit(s) and TPH 
status of a TPH if the TPH does not have a required letter of guarantee 
or authorization in place for ninety consecutive days;
     Delete obsolete and outdated rule text; and
     Make technical, non-substantive rule text changes.
    Generally, these substantive changes are designed to ensure that 
TPHs who engage in trading activities always have a valid letter of 
guarantee or authorization from a Clearing TPH.
    Changes to Rule 3.28 (Letters of Guarantee). The Exchange proposes 
to amend CBOE Rule 3.28 so that it will govern both letters of 
guarantee and authorization.\5\ The Exchange proposes to add new 
paragraphs (b) through (g) to expressly provide CBOE with remedial 
powers in the event the OCC restricts or suspends a Clearing TPH. The 
Exchange also proposes to add new paragraph (h) to Rule 3.28 to govern 
the termination of TPH status when a TPH is without a required letter 
of guarantee or authorization for a period of ninety consecutive days.
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    \5\ Currently, the rule governs only letters of guarantee. Rule 
6.72 will continue to govern Letters of Authorization for Floor 
Brokers and Rule 8.5 will continue to govern Letters of Guarantee 
for Market-Makers.
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    Under new paragraph (b) of the rule, a TPH may not engage in any 
trading activities on the Exchange if an effective letter of guarantee 
or authorization required to engage in those activities is not on file 
with the Exchange. If a Trading Permit Holder does not have an 
effective letter of guarantee or authorization on file with the 
Exchange, the Exchange will be permitted to prevent access and 
connectivity to the Exchange by that Trading Permit Holder. If a TPH 
has a letter of guarantee or authorization that is revoked or 
invalidated (as discussed below), that TPH's orders and quotes will be 
rejected after the revocation or invalidation after the revocation or 
invalidation becomes effective unless and until the TPH has another 
effective letter of guarantee or authorization in place and on file 
with the Exchange. This means that a TPH without an effective letter of 
guarantee or authorization will not be able to continue to trade on the 
Exchange.
    Under new paragraph (c) of the rule, letters of guarantee and 
authorization filed with the Exchange will remain in effect until a 
written notice of revocation has been filed with the TPH Department and 
the revocation becomes effective or the letter of guarantee or 
authorization otherwise becomes invalid pursuant to Exchange rules. A 
written notice of revocation will become effective as soon as the 
Exchange is able to process the revocation. A revocation will in no way 
relieve a Clearing TPH of responsibility for transactions guaranteed 
prior to the effectiveness of the revocation.
    Under new paragraph (d) of the rule, if the OCC restricts the 
activities of a Clearing TPH or suspends a Clearing TPH as a Clearing 
Member of the OCC, the Exchange will be permitted to give effect to the 
restriction or suspension. For example, if the OCC restricts 
transactions cleared by a Clearing TPH to ``closing only'' 
transactions, the Exchange similarly will be able to restrict 
transactions on the Exchange for clearance by that Clearing TPH as a 
Clearing Member of the OCC to ``closing only'' transactions; if the OCC 
suspends a Clearing TPH, the Exchange similarly will be able to prevent 
access and connectivity to the Exchange by the suspended Clearing TPH.
    Under new paragraph (e) of the rule, if a Clearing TPH's status as 
a Clearing Member of the OCC is terminated or if a Clearing TPH's 
status as a CBOE TPH is terminated, all letters of guarantee and 
authorization on file with the Exchange from that Clearing TPH will no 
longer be valid, effective as of the time the Exchange processes the 
invalidation of those letters. Similarly, under new paragraph (f) of 
the rule, if a Clearing TPH has been suspended as a Clearing Member of 
the OCC or as a CBOE TPH, all existing letters of guarantee and 
authorization from that Clearing TPH will be invalid during the period 
of the suspension, effective as soon as the Exchange processes the 
invalidation of those letters.\6\ New paragraph (g) of the rule 
provides that the invalidation of a letter of guarantee or 
authorization will in no way relieve the Clearing TPH that issued the 
letter of guarantee or authorization of responsibility from 
transactions guaranteed prior to the effectiveness of the invalidation.
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    \6\ The Exchange states that it will endeavor to process 
revocations and invalidations under proposed Rules 3.28(c) and 
3.28(f) in a timely manner. See Notice, supra note 3, at 76321.
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    Lastly, under the terms of new paragraph (h) of the rule, if a TPH 
does not have a required letter of guarantee or authorization for 
period of ninety consecutive days, its trading permit(s) and status as 
a TPH shall automatically terminate.
    Changes to Rule 6.72 (Letters of Authorization). The Exchange 
proposes to amend CBOE Rule 6.72 to provide that a letter of 
authorization previously filed with the Exchange will remain effective 
until a written notice of revocation has been filed with the TPH 
Department and the revocation becomes effective or until such time that 
the letter of authorization otherwise becomes invalid under CBOE's 
rules. In the event a written notice of revocation is provided, the 
Exchange is proposing to provide that the revocation shall become 
effective as soon as the Exchange is able to process it.\7\ The 
Exchange also proposes to eliminate a provision that allows a Clearing 
TPH to request that the Exchange post notice of the revocation.
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    \7\ Currently, the rule sets forth a specific time period for 
the effectiveness revocations.
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    The Exchange also proposes to add an internal cross reference, 
which provides that letters of authorization issued for Floor Brokers 
under Rule 6.72 will be subject to Rule 3.28.\8\ The effects of this 
addition would:
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    \8\ Previously, letters of authorization issued to Floor Brokers 
were governed only by Rule 6.72.
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     Allow CBOE to prevent access to its marketplace if a Floor 
Broker TPH does not have an effective letter of authorization on file 
with the Exchange;
     Allow CBOE to take action necessary to give effect to 
actions by the Clearing Corporation, such as restricting the activities 
of a Clearing TPH or suspending a Clearing TPH;
     Allow CBOE to invalidate a Floor Broker's letter of 
authorization if it was issued by a Clearing TPH whose Clearing TPH 
status as a Clearing Member of the OCC is terminated or if a Clearing 
TPH's status as a CBOE TPH is terminated effective as soon as the 
Exchange is able to process the invalidation of the letter of 
authorization;
     Allow CBOE to invalidate a Floor Broker's letter of 
authorization, if it was issued by a Clearing TPH who has been 
suspended as a Clearing Member of the OCC or as a CBOE TPH, during the 
period of the suspension effective as soon as the Exchange is able to 
process the invalidation of the letter of authorization;
     Provide that the invalidation of a letter of authorization 
shall in no way relieve the Clearing TPH that issued the letter of 
authorization of responsibility from transactions guaranteed prior to 
the effectiveness of the invalidation; and
     Automatically terminate the trading permit(s) and TPH 
status of a Floor Broker if the Floor Broker does not have a required 
letter of guarantee or

[[Page 11251]]

authorization in place for ninety consecutive days.
    Changes to Rule 8.5 (Letters of Guarantee). The Exchange proposes 
to amend CBOE Rule 8.5 to provide that a letter of guarantee previously 
filed with the Exchange will remain effective until a written notice or 
revocation has been filed with the TPH Department and the revocation 
becomes effective or until such time that the letter of guarantee 
otherwise becomes invalid under CBOE's rules. In the event a written 
notice of revocation is provided, the Exchange is proposing to provide 
that the revocation shall become effective as soon as the Exchange is 
able to process it.\9\ The Exchange also proposes to eliminate a 
provision that allows a Clearing TPH to request that the Exchange post 
notice of the revocation.
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    \9\ Currently, the rule sets forth a specific time period for 
the effectiveness revocations.
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    Additionally, the Exchange proposes to add an internal cross-
reference, which provides that letters of guarantee issued for Market-
Makers under Rule 8.5 will be subject to Rule 3.28.\10\ The effects of 
this addition would:
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    \10\ Previously, letters of authorization issued to Market 
Makers were governed only by Rule 8.5.
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     Allow CBOE to prevent access to its marketplace if a 
Market-Maker TPH does not have an effective letter of guarantee on file 
with the Exchange;
     Allow CBOE to take action necessary to give effect to 
actions by the Clearing Corporation, such as restricting the activities 
of a Clearing TPH or suspending a Clearing TPH;
     Allow CBOE to invalidate a Market-Maker's letter of 
guarantee if it was issued by a Clearing TPH whose Clearing TPH status 
as a Clearing Member of the OCC is terminated or if a Clearing TPH's 
status as a CBOE TPH is terminated effective as soon as the Exchange is 
able to process the invalidation of the letter of guarantee;
     Allow CBOE to invalidate a Market-Maker's letter of 
guarantee, if it was issued by a Clearing TPH who has been suspended as 
a Clearing Member of the OCC or as a CBOE TPH, during the period of the 
suspension effective as soon as the Exchange is able to process the 
invalidation of the letter of guarantee;
     Provide that the invalidation of a letter of guarantee 
shall in no way relieve the Clearing Trading Holder that issued the 
letter of guarantee of responsibility from transactions guaranteed 
prior to the effectiveness of the invalidation; and
     Automatically terminate the trading permit(s) and TPH 
status of a Market-Maker if the Market-Maker does not have a required 
letter of guarantee or authorization in place for ninety consecutive 
days.

Further, the Exchange proposes to delete Interpretations and Policies 
.01, .02 and .04 from Rule 8.5 because it states that they are 
obsolete.\11\
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    \11\ The Exchange states that it no longer trades the product 
referenced in .01, and .02 and .04 are obsolete because the OCC is 
no longer involved in approving CBOE letters of guarantee. See 
Notice, supra note 3, at 76322.
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    Changes to Rules 24A.15 and 24B.13 (Letters of Guarantee or 
Authorization). The Exchange proposes to amend Rules 24A.15 and 24B.13, 
which relate to FLEX options, by deleting a provision in each rule 
relating to OCC approval of letters of guarantee that are being amended 
to include FLEX option transactions. According to the Exchange, that 
provision is obsolete because the OCC is no longer involved in 
approving CBOE letters of guarantee.\12\
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    \12\ See id.
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    Additionally, the Exchange proposes to add an internal cross-
reference, which provides that letters of guarantee or authorization 
issued for FLEX Market-Makers and Floor Brokers under Rules 24A.15 and 
24B.13 will be subject to Rule 3.28.\13\ The effects of this addition 
would:
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    \13\ Previously, letters of authorization issued to FLEX Market-
Makers or Floor Brokers were only governed by Rules 24A.15 and 
24B.15.
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     Allow CBOE to prevent access to its marketplace if a FLEX 
Market-Maker or Floor Broker TPH does not have an effective letter of 
guarantee or authorization on file with the Exchange;
     Allow CBOE to take action necessary to give effect to 
actions by the Clearing Corporation, such as restricting the activities 
of a Clearing TPH or suspending a Clearing TPH;
     Allow CBOE to invalidate a FLEX Market-Maker or Floor 
Broker TPH's letter of guarantee or authorization if it was issued by a 
Clearing TPH whose Clearing TPH status as a Clearing Member of the OCC 
is terminated or if a Clearing TPH's status as a CBOE TPH is terminated 
effective as soon as the Exchange is able to process the invalidation 
of the letter of guarantee or authorization;
     Allow CBOE to invalidate a FLEX Market-Maker or Floor 
Broker TPH's letter of guarantee or authorization, if it was issued by 
a Clearing TPH who has been suspended as a Clearing Member of the OCC 
or as a CBOE TPH, during the period of the suspension effective as soon 
as the Exchange is able to process the invalidation of the letter of 
guarantee or authorization;
     Provide that the invalidation of a letter of guarantee or 
authorization shall in no way relieve the Clearing Trading Holder that 
issued the letter of guarantee or authorization of responsibility from 
transactions guaranteed prior to the effectiveness of the invalidation; 
and
     Automatically terminate the trading permit(s) and TPH 
status of a FLEX Market-Maker or Floor Broker if the FLEX Market-Maker 
or Floor Broker does not have a required letter of guarantee or 
authorization in place for ninety consecutive days.
    Changes to Rules 26.11 (Market-Makers) and 26.13 (Floor Broker 
Financial Requirements). CBOE Rules 26.11 and 26.13 relate to market 
basket contracts, which the Exchange does not currently list for 
trading. The Exchange proposes to amend those rules by deleting a 
provision in each rule relating to OCC approval of letters of guarantee 
that are amended to include market basket transactions.\14\
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    \14\ The Exchange states that provision is obsolete because the 
OCC is no longer involved in approving CBOE letters of guarantee. 
See Notice, supra note 3, at 76323.
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    Additionally, the Exchange proposes to add an internal cross-
reference, which provides that letters of guarantee or authorization 
issued for Market-Makers in market basket contracts, and letters of 
authorization issued for Floor Brokers in market basket contracts, 
under Rules 26.11 and 26.13, respectively, will be subject to Rule 
3.28.\15\ The effects of this addition would:
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    \15\ Those letters of guarantee or authorization issued to 
Market-Makers and Floor Brokers in market basket contracts 
previously were governed only by Rules 26.11 and 26.13.
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     Allow CBOE to prevent access to its marketplace if a 
Market-Maker or Floor Broker TPH in market basket contracts does not 
have an effective letter of guarantee or authorization on file with the 
Exchange;
     Allow CBOE to take action necessary to give effect to 
actions by the Clearing Corporation, such as restricting the activities 
of a Clearing TPH or suspending a Clearing TPH;
     Allow CBOE to invalidate a market basket Market-Maker or 
Floor Broker TPH's letter of guarantee or authorization if it was 
issued by a Clearing TPH whose Clearing TPH status as a Clearing Member 
of the OCC is terminated or if a Clearing TPH's status as a CBOE TPH is 
terminated effective as soon as the Exchange is able to process the 
invalidation of the letter of guarantee or authorization;
     Allow CBOE to invalidate a market basket Market-Maker or 
Floor Broker

[[Page 11252]]

TPH's letter of guarantee or authorization, if it was issued by a 
Clearing TPH who has been suspended as a Clearing Member of the OCC or 
as a CBOE TPH, during the period of the suspension effective as soon as 
the Exchange is able to process the invalidation of the letter of 
guarantee or authorization;
     Provide that the invalidation of a letter of guarantee or 
authorization shall in no way relieve the Clearing Trading Holder that 
issued the letter of guarantee or authorization of responsibility from 
transactions guaranteed prior to the effectiveness of the invalidation; 
and
     Automatically terminate the trading permit(s) and TPH 
status of a Market-Maker or Floor Broker in market basket contracts if 
the Market-Maker or Floor Broker in market basket contracts does not 
have a required letter of guarantee or authorization in place for 
ninety consecutive days.

II. Discussion and Commission's Findings

    After careful review, 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.\16\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\17\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to 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. The Exchange's proposal will 
remove impediments to and to perfect the mechanism for a free and open 
market and, in general, protect investors by requiring that a TPH have 
an effective and unrestricted letter of guarantee, which will help 
prevent the execution of trades on CBOE that ultimately may not be able 
to be cleared and settled.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposed rule change is also 
consistent with the Section 6(b)(7) of the Act,\18\ which requires that 
the rules of an exchange provide a fair procedure for the denial of 
membership to any person seeking membership therein and the prohibition 
or limitation by an exchange of any person with respect to access to 
services offered by the exchange. Under the proposed rule change, a TPH 
without an effective letter of guarantee or authorization will not be 
able to continue to trade on the Exchange and, if a TPH does not have a 
required letter of guarantee or authorization in place for ninety 
consecutive days, the permit of the TPH is automatically terminated. 
The Commission believes that it is appropriate to prohibit a TPH from 
trading on CBOE without a financial guarantee, and the 90-day period 
provides the TPH adequate time to cure its deficiency. The Commission 
notes that CBOE stated that the automatic termination provision does 
not prohibit or limit a previously terminated TPH from applying again 
to become a TPH once the TPH acquires the required letter of guarantee 
or authorization.\19\
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    \18\ 15 U.S.C. 78f(b)(7).
    \19\ See Notice, supra note 3, at 76324.
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-CBOE-2012-124) be, and it 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03428 Filed 2-14-13; 8:45 am]
BILLING CODE 8011-01-P


