[Federal Register Volume 59, Number 69 (Monday, April 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8515]


[[Page Unknown]]

[Federal Register: April 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33855; File No. SR-CBOE-94-11]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., Relating to an Extension to and Amendment 
of the Pilot Program for Fees Due for Post-Trade Date Submission of 
Trade Information

April 4, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
30, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the CBOE. On 
March 31, 1994, the Exchange filed Amendment No. 1 to the proposed rule 
change.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\In Amendment No. 1, the Exchange requests that the pilot 
program for post-trade date submission of trade information be 
extended for six months instead of four months as originally 
proposed. See Letter from Daniel Schneider, Schiff Hardin & White, 
to Brad Ritter, Attorney, Office of Derivatives and Equity 
Oversight, Division of Market Regulation (``Division''), Commission, 
dated March 31, 1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to: (1) Extend until September 30, 1994, a pilot 
program allowing the Exchange to collect fees from members who submit 
trade information pursuant to CBOE Rule 6.51\2\ after the trade date 
(``As of Adds'') for more than a prescribed percentage of transactions 
in any month; (2) revise the fee schedule under CBOE Rule 2.26 for As 
of Adds submitted by individual members; (3) alter the manner in which 
the fees for As of Adds are calculated against individual members; and 
(4) make clarifying revisions to paragraphs (b) and (c) of Rule 2.26. 
The text of the proposed rule change is available at the Office of the 
Secretary, CBOE, and at the Commission.
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    \2\CBOE Rule 6.51 provides, among other things, that (1) a 
participant in each transaction to be designated by the Exchange 
shall immediately report the transaction to the Exchange, (2) for 
each transaction on the Exchange in which he participates, a member 
shall report the transaction as promptly as possible to the member 
for which such transaction was made and/or to the member that will 
clear such transaction, and (3) each business day, each Clearing 
Member shall file with the Exchange trade information covering each 
Exchange transaction made by it or on its behalf during the business 
day.
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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 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 the 
Statutory Basis for, the Proposed Rule Change

    Under CBOE Rule 2.22, the Exchange may impose fees on members for 
the use of Exchange facilities or for any services provided or 
privileges granted by the Exchange. Under Rule 2.26, fees for As of 
Adds are imposed for use of the CBOE's overnight and next-day late-
submission-trade-match processing services when that use exceeds a 
level the Exchange considers to be ``nominal.'' The Exchange represents 
that the As of Adds fees help to reimburse the Exchange for the 
administrative burdens and costs of processing post-trade date 
submissions, and creates an incentive for members to avoid submitting 
trade data after the trade date.
    On October 1, 1993, the Commission approved, on a pilot basis until 
March 31, 1994, a proposed rule change allowing the CBOE to establish 
and collect fees from members who submit more than a stated percentage 
of As of Adds during any month.\3\ Specifically, pursuant to the pilot 
program, any Exchange member firm that fails for more than a stated 
monthly percentage of transactions to submit required transaction 
information on the date a transaction is executed incurs a transaction 
fee of $3.00 for each such trade in excess of the stated monthly 
percentage. Individual exchange members, however, incur a transaction 
fee of $3.00 for each As of Add during the relevant period once they 
exceed their stated monthly percentage. Because the Exchange expects 
the number of As of Adds to decrease over time as a result of these 
fees, the maximum allowable percentage of As of Adds per month is 
structured to decrease periodically. Individual members and clearing 
members that incur fees pursuant to this rule may submit a request for 
verification to the Exchange pursuant to Part A of Chapter XIX of the 
CBOE Rules and may appeal these fees pursuant to Part B of Chapter XIX.
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    \3\See Securities Exchange Act Release No. 32999 (October 1, 
1993), 58 FR 53003 (October 13, 1993) (``Exchange Act Release No. 
32999'').
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    The Exchange represents that during the six months in which As of 
Adds fees have been imposed under the pilot program, the Exchange and 
CBOE members have gained considerable experience with the fee program. 
Among other things, the Exchange states that it has seen the Exchange-
wide percentage of As of Adds submissions remain approximately constant 
despite the fact that there was a substantial increase in Exchange 
trade volume during the pilot program.\4\ According to past experience, 
the Exchange represents that the Exchange-wide percentage of As of Adds 
submissions typically increases during periods of increased Exchange 
trading volume. Accordingly, the Exchange believes the As of Adds fees 
imposed pursuant to the pilot program have been effective in promoting 
a reduced volume of As of Adds submissions.
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    \4\Telephone conversation among Dan Schneider, Schiff Hardin & 
Waite, Sharon Lawson, Assistant Director, Office of Derivatives and 
Equity Oversight, Division, Commission, and Brad Ritter, Attorney, 
Office of Derivatives and Equity Oversight, Division, Commission, on 
March 30, 1994.
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    The Exchange represents that approximately 250 individual members 
who have been assessed As of Adds fees since October 1993, however, 
continue to make late submissions in excess of the ``nominal'' 
percentage level at least every other month. The Exchange believes 
those individual members impose extra trade resolution costs on the 
Exchange, their clearing firms and other members by requiring 
significant levels of special handling for the processing of their late 
submissions. As a result, in addition to extending the pilot program 
for As of Adds fees until September 30, 1994, the Exchange is also 
proposing to amend the pilot program with respect to individual 
members.
    Under the proposal, the Exchange would alter the manner in which As 
of Adds fees are assessed against individual members. First, individual 
members who exceed their stated monthly percentage of allowable As of 
Adds submissions will be assessed a fee for only the number of As of 
Adds exceeding the monthly allowable percentage. Under the present 
pilot program, an individual member can incur relatively sizeable fees 
even if that member exceeds his monthly stated percentage by only one 
As of Add. The proposed amendment will conform the manner in which As 
of Adds fees are computed against individual members with the 
procedures used for clearing members. Secondly, in response to the 
number of individual members who, on a regular basis, continue to 
submit more than a ``nominal'' number of As of Adds, the Exchange 
proposes to increase the As of Adds fee for individual members from 
$3.00 to $10.00 for each trade exceeding an individual member's stated 
monthly percentage. The Exchange believes that this change will 
efficiently reduce the number of As of Adds submissions by individual 
members and, therefore, reduce the burdens and costs associated with 
the handling As of Adds.
    The Exchange further believes that the As of Adds fees, as 
proposed, are set at relatively modest levels. Under the proposal, the 
Exchange states that no individual member is likely to incur a fee in 
excess of $800 per month, and that most assessments are likely to be 
between $50 and $250 per month. Moreover, as is the case currently 
under the pilot program, any member assessed an As of Adds fee may 
request verification from the Exchange pursuant to Part B of Chapter 
XIX of the CBOE Rules and may appeal the fee assessment pursuant to 
Part A thereof.
    In contrast to the change in fee level for individual members, the 
fee level for clearing members is not proposed to be changed. The 
Exchange represents that in its experience, delays and errors by 
individual members are the direct cause for most late trade 
submissions. Moreover, at the $3.00 level, the Exchange states that 
clearing members pay substantial fees even though individual members, 
rather than clearing members, have primary control over the timing of 
submissions. Accordingly, the Exchange believes that the $3.00 fee 
level for clearing members remains both appropriate in absolute terms 
and equitable in relation to the fee assessed against individual 
members.
    Finally, in addition to the changes discussed above, certain 
clarifying amendments are proposed to be made to paragraphs (b) and (c) 
of Rule 2.26. These amendments are being made to (1) clearly 
distinguish between the treatment of individual members and clearing 
members under the rule and (2) specify that a member firm may use the 
verification and appeal processes of Chapter XIX to dispute that it 
acted as the clearing member for a particular individual member (or 
members) during the relevant time period.
    The CBOE believes that the proposed rule change is consistent with 
section 6(b) of the Act in general and furthers the objectives of 
section 6(b)(5) of the Act in particular in that it is designed to 
provide for the equitable allocation of reasonable dues, fees and 
charges among CBOE members.

(B) Self-Regulatory Organization's Statement on Burden on Competition

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

(C) Self-Regulatory Organization's Statement of 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

    The Exchange has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
    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 and, in 
particular, the requirements of section 6(b)(5).\5\ Specifically, the 
Commission finds as it did in originally approving the pilot program 
that imposing fees on members who submit As of Adds for more than a 
prescribed percentage of transactions in any month is likely to offset 
the carrying costs incurred by Exchange members as a result of these 
post-trade date submissions, make trade comparisons on the CBOE more 
efficient in terms of the time and expense involved in trade 
processing, and reduce the risk exposure to investors and Exchange 
clearing members.\6\ Additionally, the Commission continues to believe 
that the pilot program does not raise any due process concerns because 
of the availability of the verification and appeals processes.\7\
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    \5\15 U.S.C. 78f(b)(5) (1988).
    \6\See Exchange Act Release No. 32999, supra note 3.
    \7\Id. The Commission notes that the Exchange shall issue a 
regulatory circular to all CBOE members and options managers 
notifying them of the extension of the pilot program as amended 
herein. The regulatory circular also shall expressly state that all 
members assessed a fee pursuant to the pilot program may submit a 
request for verification and may appeal the fees assessed pursuant 
to Chapter XIX of the CBOE Rules. Telephone conversation between 
Daniel Schneider, Schiff Hardin & Waite, and Brad Ritter, Attorney, 
Office of Derivatives and Equity Oversight, Division, Commission, on 
April 4, 1994.
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    The Commission believes that the proposal to alter the manner in 
which As of Adds fees are calculated against individual members is 
appropriate and more equitable that the manner in which such fees are 
currently calculated. Specifically, by charging individual members a 
fee for only those As of Adds in excess of their stated monthly 
percentage, the situation is avoided whereby an individual member is 
assessed a significant fee for exceeding its stated monthly percentage 
by only one or a few trades. Additionally, the Commission believes that 
calculating the As of Adds fees for individual members in the same 
manner as for clearing members is more an equitable arrangement by 
which to impose these fees and will be less likely to cause confusion 
among Exchange members as to the applicability of the rule.
    The Commission finds that the proposed amendments to sections (b) 
and (c) of Rule 2.26 are merely clarifying amendments which may serve 
to avoid any confusion as to the manner in which the rule applies to 
individual members and clearing members. As a result, the Commission 
believes that these amendments are consistent with the Act.
    Finally, with respect to the proposal to increase the As of Adds 
fee for individual members from $3.00 to $10.00, the Commission has 
some concerns as to whether assessing a fee of $10.00 per trade against 
individual members but only $3.00 per trade against clearing members 
constitutes an equitable allocation of fees among members for purposes 
of the Act. Although the Exchange believes the fees that can be 
incurred are relatively modest, the Commission believes that fee 
assessments of up to $800 per month can be substantial. Nevertheless, 
because such high fees would only be imposed on the most egregious 
offenders of Rule 2.26, the Commission believes the fee structure is 
not totally unreasonable. Furthermore, the Exchange has represented 
that in determining the number of As of Adds submissions each month, it 
cannot determine, without reviewing each individual trade, whether a 
particular As of Adds was submitted late due to the fault of an 
individual member or that member's clearing firm.\8\ As a result, in 
determining whether a member has exceeded its stated monthly percentage 
of allowable As of Adds, each As of Add processed by a member firm is 
counted against both that member firm and the individual member who 
executed the transaction.\9\ Despite these concerns, the Commission 
finds that the proposed increase for individual members is consistent 
with the Act based on the representations by the Exchange that in its 
experience, most As of Adds submissions are the result of late 
submissions by individual members rather than by clearing members, and 
that clearing members often times are delayed in submitting trade data 
because individual members fail to submit trade data to the clearing 
members in a timely manner. As a result, the Commission believes that 
the proposed rule change may serve to reduce the number of monthly As 
of Adds submissions by individual members which should benefit all 
Exchange members, and ultimately investors, by increasing the 
efficiency with which Exchange transactions are processed as well as 
helping the Exchange to defray the additional costs it incurs with the 
processing of those transactions.
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    \8\Telephone conversation among Daniel Schneider, Schiff Hardin 
& Waite, Joanne Moffic-Silver, Associate General Counsel and Chief 
Enforcement Attorney, CBOE, and Brad Ritter, Office of Derivatives 
and Equity Regulation, Division, Commission, on March 25, 1994.
    \9\Id.
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    Because of the Commission's concerns, however, during the six month 
extension of the pilot program the Exchange will be required to: (1) 
Reformulate the As of Adds fee pilot program to ensure that the costs 
borne by the Exchange in processing As of Adds are assessed against 
those members responsible for generating those costs and that the fees 
imposed are equitably allocated between individual members and clearing 
members; and (2) ensure that members, whether individual members or 
clearing members, that consistently submit more than what the Exchange 
deems to be a ``nominal'' number of As of Adds during a relevant 
period, are appropriately sanctioned for violating Exchange rule 
6.51.\10\
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    \10\See supra note 2. The Commission notes that the Exchange has 
already incorporated certain violations of Rule 6.51 into the 
Exchange's Minor Rule Violation Plan. See Exchange Rule 17.50(g)(5). 
The Exchange may wish to consider further amending its Minor Rule 
Violation Plan to better address those individual and clearing 
members that consistently submit more than a nominal number of As of 
Adds. In addition, the Commission continues to expect the CBOE to 
bring full disciplinary proceedings against members for egregious or 
repeat violations of Rule 6.51.
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    In order for the Commission to be able to adequately assess the 
changes to the pilot program subsequently proposed by the Exchange, the 
Exchange will be required to submit to the Commission or before June 
30, 1994, a report commencing with the inception of the pilot program 
on October 1, 1993, and detailing for clearing members and for 
individual members as separate groups: (1) The number of individual 
members and clearing members that have been assessed As of Adds fees; 
(2) the range of the fees imposed from the highest to lowest, and the 
average monthly fee imposed; (3) whether the Exchange has received any 
complaints, either written or otherwise, on the operation of the pilot 
program; (4) the number of times that a request for verification and/or 
an appeal has been lodged concerning As of Adds fee, and the subsequent 
disposition of such actions; (5) the number of As of Adds submitted for 
each month during the pilot program both as an absolute number and as a 
percentage of total Exchange trades; and (6) whether the Exchange has 
taken any disciplinary action against, or commenced any investigations, 
examinations, or inquiries concerning, any of its members for any post-
trade date submission of trade data, and the disposition of such 
actions. In addition, any request for permanent approval or extension 
of the pilot should be submitted to the Commission pursuant to Rule 
19(b) no later than June 30, 1994.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register in order to permit the 
pilot program to remain in effect until September 30, 1994 without 
interruption. Additionally, the Exchange has represented that no 
problems have arisen and no complaints have been received concerning 
the pilot program since its implementation.\11\ Accordingly, the 
Commission believes it is consistent with sections 6(b)(5) and 19(b)(2) 
of the Act to approve the proposed rule change on an accelerated basis.
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    \11\Telephone conversation between Joanne-Moffic Silver, 
Associate General Counsel and Chief Enforcement Attorney, CBOE, and 
Brad Ritter, Attorney, Office of Derivatives and Equity Oversight, 
Division, Commission, on March 18, 1994.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. 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 Section, 450 Fifth Street NW., 
Washington, DC. 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-94-11 and should be 
submitted by May 2, 1994.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act\12\ that the proposed rule change (SR-CBOE-94-11), extending the 
pilot program for fees related to As of Adds until September 30, 1994, 
as amended, is hereby approved.

    \12\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8515 Filed 4-8-94; 8:45 am]
BILLING CODE 8010-01-M