[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17656]


[[Page Unknown]]

[Federal Register: July 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34376; File No. SR-CBOE-94-12]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Modification of Fees for Failure To Observe OEX RAES Requirements

July 14, 1994.
    On April 1, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend CBOE Rule 24.17, ``RAES Eligibility 
in OEX,'' to change the eligibility standards under which individuals, 
member organizations and joint accounts may participate in the CBOE's 
Retail Automatic Execution System (``RAES'') for Standard & Poor's 100 
Index (``OEX'') options. Among other things, the CBOE proposes to 
eliminate the automatic disqualification provision from CBOE Rule 24.17 
and replace the rule's current $500.00 fee for failures to comply with 
RAES log-on and log-off requirements with the following fee schedule: a 
$100.00 fee for each of the first three failures to comply with the 
log-on or log-off requirements in one calendar year; a $250.00 fee for 
each of the fourth through sixth such failures in one calendar year; 
and a $500.00 fee for all subsequent failures to comply with the log-on 
and log-off requirements in one calendar year.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
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    Notice of the proposed rule change was published for comment in the 
Federal Register in Securities Exchange Act Release No. 34128 (May 27, 
1994), 59 FR 28907 (June 3, 1994). No comments were received on the 
proposal.
    In May 1993 Exchange Rule 24.17 was amended to establish, among 
other things, more rigorous log-on and log-off requirements for 
participants in OEX RAES.\3\ For example, group members who previously 
were logged on automatically by the Exchange must now log on at their 
own initiative each time they enter the trading crowd. Likewise, 
members who previously were not required to log off the system each 
time they left the trading crowd must now do so.
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    \3\See Securities Exchange Act Release No. 32248 (April 30, 
1993), 58 FR 27596 (``RAES Approval Order'').
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    In view of these additional log-on and log-off requirements, the 
Exchange believes that the $500.00 fees currently due from members who 
do not log on or log off as required are excessive. The proposed rule 
change therefore establishes a new graduated fee schedule, under which 
the fee amount will increase in relation to the number of times within 
any one calendar year that a member does not log on or log off as 
required. Specifically, during each calendar year, a $100.00 fee will 
be due for each of the first three times that a member fails to observe 
the log-on or log-off requirements; a $250.00 fee will be due for each 
of the fourth through sixth such times; and a $500.00 fee will be due 
for all subsequent times. In addition, the CBOE proposes to assess a 
$500.00 fee on any member participating in a joint account or nominee 
account held by a member organization if the member logs onto OEX RAES 
but thereafter terminates participation prior to the next succeeding 
expiration date without either joining another OEX RAES account or 
terminating membership on the Exchange.
    In addition, the CBOE proposes to eliminate the automatic 
disqualification provisions in CBOE Rule 24.17. Specifically, the 
Exchange proposes to delete the provisions which provide that a 
individuals's, participating nominee's, or joint account member's 
failure to meet his RAES obligations will disqualify him from signing 
onto RAES for such time period as the OEX Floor Procedure Committee 
(``OFPC'') determines. The CBOE also proposes to allow an individual 
required to sign onto RAES immediately prior to expiration to apply to 
the OFPC for prospective relief from the log-on requirements during a 
particular expiration cycle. The proposal states that in deciding such 
applications, the OFPC may limit the grant of relief by imposing time 
periods during which the applicant will not be eligible to participate 
in RAES.
    Members who fail to observe CBOE Rule 24.17 can be subject to a 
variety of sanctions.\4\ The CBOE states that the fees suggested in the 
proposed rule change, like the fees imposed currently under CBOE Rule 
24.17, do not constitute disciplinary action. Nevertheless, the review 
procedures in Chapter 19, ``Hearings and Review,'' of the Exchange's 
rules will be available with respect to the assessment of the proposed 
fees. Under those procedures, a member may seek verification of fees 
charged by the Exchange. If the member is not satisfied with the 
verification of fees, he may request a hearing before a panel of three 
or more members of the Exchange's Appeals Committee. At the hearing the 
appellant may be represented by counsel and may cross examine 
witnesses.\5\
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    \4\Under CBOE Rule 24.17(b)(v), the OFPC may bar, restrict, or 
condition a joint account's participation in RAES if any member 
fails to meet the OEX market maker requirements. Under CBOE Rule 
24.17(c)(vi), the OFPC may bar, restrict, or condition a member 
organization's participation in RAES if any nominee on RAES in OEX 
fails to meet the OEX market maker requirements. CBOE Rule 
24.17(e)(ii) provides several sanctions for failures to comply with 
the requirements of CBOE Rule 24.17, including disciplinary action 
under, among others, CBOE Rule 6.20, ``Admission to and Conduct on 
the Trading Floor,'' and Chapter XVII, ``Discipline,'' of the CBOE's 
rules. In addition, the OFPC may take remedial action, including 
suspension of a member's eligibility for participation on RAES and 
other remedies appropriate under Chapter VIII, ``Market Makers, 
Trading Crowds, and Modified Trading Systems,'' of the CBOE's rules.
    \5\See CBOE Rules 19.3, ``Procedure Following Applications for 
Hearing,'' and 19.4, ``Hearing.''
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    In addition, the decision of the Exchange's Appeals Committee panel 
is subject to review by the Board of Directors of the Exchange on the 
Board's own motion, on the written request of the appellant, or at the 
request of the Exchange's President or the relevant Exchange Committee 
Chairman. The review must be conducted by the Board or by a Board 
Committee consisting of at least three Directors (other than Directors 
who sat on the Appeals Committee in the matter). An appellant has an 
opportunity to address issues raided specifically by the Board or the 
Committee, and in addition may submit oral or written arguments if the 
Board so allows in its discretion.\6\
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    \6\See CBOE Rule 19.5, ``Review.''
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    The Exchange believes that the proposed fee schedule is appropriate 
and equitable given the additional requirements imposed on participants 
in OEX RAES in the RAES Approval Order. Furthermore, to ensure that all 
members are treated alike under the RAES Approval Order, the Exchange 
will apply the revised fee schedule retroactively from April 30, 1993, 
the effective date of the RAES Approval Order.\7\
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    \7\By an Exchange Bulletin dated May 11, 1994, the CBOE notified 
its members of the proposed reduction in the fees due for failures 
to comply with the log-on and log-off requirements of CBOE Rule 
24.17 and the retroactive application of the reduced fees.
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    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5), in particular, in that it is designed to 
allocate reasonable dues, fees and charges among CBOE members and to 
promote the efficiency and effectiveness of the CBOE's automatic 
execution system.
    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).\8\ The Commission 
believes that the elimination of the automatic disqualification 
provisions of CBOE Rule 24.17, the introduction of a graduated fee 
schedule for failures to comply with the RAES log-on and log-off 
requirements, and the provision allowing individuals to apply to the 
OFPC for prospective relief from the requirement to log onto RAES on 
the business day immediately prior to expiration are designed to make 
the rules applicable to OEX RAES participation fairer and more flexible 
while maintaining the integrity of the RAES system for OEX options. The 
proposal is designed to ensure that there is adequate market maker 
participation at all times in OEX RAES and that market makers are 
properly logged onto the system. The presence of an adequate number of 
market makers protects investors and contributes to the maintenance of 
fair and orderly markets by helping the Exchange to maintain the 
continued availability to RAES for OEX, thereby contributing to the 
effective and efficient execution of public investor orders at the best 
available prices.
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    \8\15 U.S.C. 78f(b)(5) (1982).
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    The Commission also believes that it is reasonable for the CBOE to 
eliminate the provisions of CBOE Rule 24.17 allowing for automatic 
disqualification from RAES for failures to satisfy RAES obligations 
because the fees imposed for failing to meet participation requirements 
should provide a sufficient deterrent to ensure adequate market maker 
participation in OEX RAES.\9\ In this regard, the Commission notes that 
in addition to the graduated fees for failures to comply with the RAES 
log-on and log-off requirements, the proposal establishes a $500.00 fee 
for any member organization who logs onto RAES and later terminates 
participation on RAES prior to the next expiration cycle without 
participating in another OEX RAES account or terminating membership 
with the Exchange. The Commission believes that these fees should deter 
participating OEX RAES market makers from abandoning their commitment 
to RAES for other than good cause. Nevertheless, the Commission expects 
the CBOE to monitor OEX RAES participation and to consider altering the 
requirements should adequate participation not be maintained after 
these changes are implemented, particularly during periods of high 
volatility.
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    \9\The Commission notes that under CBOE Rule 24.17(e)(i) the 
chairperson of the OFPC, in consultation with a senior Exchange 
executive officer, may require members of the trading crowd as 
defined in CBOE Rule 8.50 to log onto RAES if OEX RAES participation 
appears to be inadequate. If inadequate, RAES participation 
continues, then the chairperson of the OFPC, in consultation with a 
senior Exchange executive officer, may request the participation of 
all market makers whether or not they are members of the OEX crowd.
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    In addition, the Commission believes that the proposal to allow a 
member to apply to the OFPC for prospective relief from the requirement 
to log onto RAES on the business day prior to expiration is designed to 
provide flexibility and to accommodate the needs of individual members 
while continuing to ensure adequate RAES participation. The Commission 
notes that the proposal allows the OFPC to limit the grant of relief by 
imposing time periods during which the applicant will not be eligible 
to participate in RAES.
    The Commission believes that the proposal is also consistent with 
section 6(b)(5) under the Act in that it is designed to facilitate 
transactions in securities. The CBOE believes that the current $500.00 
fee for failures to comply with the OEX RAES log-on and log-off 
requirements is excessive in light of the log-on and log-off 
requirements established under the RAES Approval Order. Based upon this 
determination, the Commission believes that it is reasonable for the 
Exchange to replace the current $500.00 fee with a graduated fee 
schedule and allow the Exchange to impose higher fees for repeated 
failures, which should encourage compliance with the log-on and log-off 
requirements and may increase the Exchange's ability to deter repeat 
offenders. The CBOE has distributed an Exchange Bulletin describing the 
new fee schedule and the application of the fees to April 30, 1993, the 
effective date for implementation of the original $500.00 fee. The 
Commission believes that this notification, and the fact that the 
graduated fees will be lower than the fees that the CBOE can impose 
currently under the original $500.00 fee, help to ensure that the fees 
for failures to comply with the log-on and log-off requirements are 
imposed fairly.
    Moreover, the Commission believes that the right to appeal the fees 
imposed under CBOE Rule 24.17 pursuant to Chapter 19 of the CBOE's 
rules should help to safeguard the procedural rights of OEX RAES 
participants. In summary, under these limited and unusual 
circumstances, the Commission believes that the CBOE may implement 
these lower fees as of April 30, 1993.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-94-12), is hereby 
approved.

    \10\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17656 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M