[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25041]


[[Page Unknown]]

[Federal Register: October 11, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34783; Filed No. SR-CBOE-94-24]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 to the Proposed Rule Change by the Chicago Board Options Exchange, 
Inc. Relating to an Extension of the Pilot Program for Fees Due for 
Post-Trade Data Submission of Trade Information

October 3, 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 July 7, 
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. The 
Exchange subsequently filed Amendment No. 1 to the proposed rule change 
on September 29, 1994.\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 requested an extension of the 
pilot program until December 31, 1994, rather than permanent 
approval. See Letter from Michael Meyer, Schiff, Hardin & Waite, to 
Brad Ritter, Senior Counsel, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Division''), Commission, dated 
September 29, 1994 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to request an extension 
of the ``As-of-Add'' fee [program contained in CBOE Rule 2.26 (``Pilot 
Program''), until December 31, 1994.\2\ Under that rule, individual 
members and member organizations are assessed a monthly fee when they 
submit trade information later than the trade date (each an ``As-of-
Add'') on more than a stated maximum percentage of their monthly 
transatins. The Exchange does not propose to amend Rule 2.26 in any 
respect at this time.
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    \2\Id.
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    Under the Pilot Program, the fee, if any, to an individual member 
is $10.00 for each As-of-Add submitting during a given month in excess 
of the percentage of submissions considered ``nominal'' under paragraph 
(a) of Rule 2.26. The fee to any clearing firm under paragraph (a) of 
Rule 2.26. The fee to any clearing firm under paragraph (b) of that 
rule is $3.00 for each As-of-Add submitted in excess of the ``nominal'' 
monthly percentage. Any member assessed an As-of-Add fee may request 
verification from the Exchange pursuant to Part B of Chapter XIX of 
CBOE's Rules and may appeal the fee assessment pursuant to Part A 
thereof.
    The Pilot Program was initially approved by the Commission on 
October 1, 1993.\3\ Continuation of the Pilot Program, in its present 
form, was approved on April 4, 1994.\4\ In the Continuation Order, the 
Commission required the Exchange, if it wished to make the Pilot 
Program a permanent program, to explain how the Pilot Program reflects 
an equitable allocation of fees among members and to establish a policy 
with respect to discipline of members that repeatedly file an excessive 
number of AS-of-Add.\5\ The Commission also required the CBOE to submit 
a report setting forth particular statistics about the Pilot 
Program.\6\
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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'').
    \4\See Securities Exchange Act Release No. 33855 (April 4, 
1994), 59 FR 17128 (April 11, 1994) (``Continuation Order'').
    \5\Id. Rule 6.51 requires members to submit data for every 
executed trade on the day executed.
    \6\The report was submitted to the Commission on July 5, 1994. 
See Letter from Joanne Moffic-Silver, Associate General Counsel, 
CBOE, to Sharon Lawson, Assistant Director, OMS, Division, 
Commisison, dated June 29, 1994 (``Pilot Report'').
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    The Exchange represents that the Pilot Program serves two purposes. 
First, it helps reimburse the Exchange for the administrative burdens 
and costs of processing post-trade date submission from members. Late 
trade submissions, according to the Exchange, impose special processing 
costs on the Exchange and require significant effort by clearing firms 
and executing brokers to check and resolve late trade reports. The 
Exchange further represents that late trade submissions also can burden 
the Exchange during periods of high volume and create financial risks 
to members during volatile markets. Accordingly, the Exchange believes 
that the As-of-Add fees provide the Exchange with revenues that cover, 
in part, its cost for providing As-of-Add services.
    Second, the Exchange represents that the Pilot Program is designed 
to create economic incentives for members to submit trade data on the 
trade date, thereby relieving the Exchange and Exchnge members of high 
levels of special handling. The Exchange believes that the Pilot 
Program and the incentive effects of the fee are equitably allocated 
among individual members and member organizations. Although individual 
members incur a higher per-submission fee than do clearing members, the 
Exchange states that individual members have primary control over the 
timing of submissions and, in the Exchange's experience, individual 
member errors and delays are the direct cause of most As-of-Adds. The 
fee structure is thus designed to impose greater As-of-Add 
responsibilities on those members, i.e., individual members, whose 
conduct, according to the Exchange creates the biggest share of the 
extra work and extra costs posed by late submissions. Since October 
1993, 354 individual members, and 13 clearing firms, have been assessed 
a fee pursuant to the Pilot Program.\7\
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    \7\The highest fee assessed against an individual member was 
$858 and the average fee assessed was $105.64, while the highest fee 
assessed against a clearing member was $2,406 with average fees 
amounting to $307.07. Id.
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    The Exchange continues to believe that it is also appropriate to 
impose As-of-Add fees on clearing firms that exceed the nominal monthly 
level of As-of-Adds. In the Exchange's experience, clearing firms are 
sometimes the direct or contributing cause of late submissions. The 
Exchange, therefore, believes that a fee imposed on such firms is 
therefore appropriate, in general, as it is for individual members. 
Moreover, the Exchange believes that clearing firms are in the best 
position to identify late-submitting individual members and to prompt 
such members to process trade information on time. In that regard, the 
Exchange represents that the fee to clearing members not only helps 
promote their operational vigilance, but also that of the individual 
members for whom they clear trades.
    In the Continuation Order, the Commission expressed some concern 
about the differing fee levels for individual members as compared to 
clearing firms and requested the Exchange to review the equities 
associated with the fee structure.\8\ The Exchange has reviewed the 
Pilot Program and continues to believe that the levels set in the 
current rule are appropriate for each membership class, for several 
reasons. First, those few clearing firms who have been assessed a fee 
under rule 2.26 have paid substantial amounts.\9\ Fee levels higher 
than those in the current rule would, the Exchange believes, be 
disproportionately severe. Second, clearing firms incur personnel and 
systems costs, which the Exchange estimates to be about $5.00 per As-
of-Add, for the extra work that As-of-Add processing creates. Those 
costs are not incurred by individual members. Accordingly, when the 
$5.00 cost per As-of-Add is added to the $3.00 fine imposed on clearing 
firms for each excessive monthly As-of-Add, the disparity between the 
$10.00 paid by individual members and the $8.00 incurred by clearing 
members is, in the Exchange's opinion, de minimis. Third, the Exchange 
believes that the fee structure places a greater share of the fee 
burden on the members primarily responsible for the excess costs the 
Exchange incurs. The Exchange, therefore, believes that the fee 
differential reflected in the current rule is both appropriate and 
equitable.
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    \8\See supra note 4.
    \9\See supra note 7.
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    Finally, the Exchange believes that the Pilot Program has been, and 
will continue to be, effective in promoting a reduced volume of As-of-
Adds. Individual members' use of As-of-Adds has declined since the 
program was initiated, as have the number of Exchange members that have 
exceeded the allowable monthly levels.\10\ For that reason, the 
Exchange continues to believe that the Pilot Program is effective in 
covering Exchange costs and in improving member behavior. Nonetheless, 
the Exchange believes that As-of-Add processing continues to impose 
burdens on the Exchange and its members, and chronic problems may not 
be fully addressed by fees alone. Accordingly, to the extent that any 
member exceeds the nominal level for six consecutive months, or by a 
significant percentage in any one month without clear justification, 
the Department of Market Operations will refer that member to the 
Division of Regulatory Services for investigation and appropriate 
disciplinary action.\11\ On approval of this proposed rule change, the 
Exchange will issue a Regulatory Circular to members reviewing the 
operation of the program and underscoring the foregoing compliance 
policy.
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    \10\See Pilot Report, supra note 6.
    \11\To date, the Exchange has not initiated any investigations 
or disciplinary actions concerning members' post-trade date 
submission of trade data. Telephone conversation between Daniel 
Schneider, Schiff Hardin & Waite, and Brad Ritter, Senior Counsel, 
OMS, Division, Commission, on October 3, 1994 (``October 3 
Conversation'').
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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 
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 on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received 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).\12\ Specifically, the 
Commission finds, as it did in originally approving the Pilot Program 
and the subsequent extension, that imposing fees on members who submit 
As-of-Adds for more than a prescribed percentage of transactions in any 
month is likely to: (1) Offset the carrying costs incurred by the 
Exchange and Exchange members as a result of these post-trade date 
submissions; (2) make trade comparisons on the CBOE more efficient in 
terms of the time and expense involved in trade processing; and (3) 
reduce the risk exposure to investors and Exchange clearing 
members.\13\ 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.\14\
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    \12\U.S.C. 78f(b)(5) (1988).
    \13\See Exchange Act Release No. 32999, supra note 3, and 
Continuation Order, supra note 4.
    \14\Id. The regulatory circular to be issued upon approval of 
the proposed rule change shall also 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. See October 3 Conversation, supra 
note 11.
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    Although the Exchange believes the fees that can be incurred are 
relatively modest, the Commission believes that the fee assessments, 
which have reached in excess of $800 per month for an individual member 
and in excess of $2,400 per month for a clearing member,\15\ 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-Add 
submissions each month, it cannot determine, without reviewing each 
individual trade, whether a particular As-of-Add was submitted late due 
to the fault of an individual member or that member's clearing 
firm.\16\ 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.\17\ In this 
context, the Commission remains troubled that to the extent that a 
clearing member is responsible for the late submission, the individual 
member can still be assessed a substantive fine, and vice versa.
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    \15\See supra note 7.
    \16\See Continuation Order, supra note 4.
    \17\Id.
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    Despite these concerns, the Commission finds that the differential 
in the per-trade fee amount assessed against clearing members ($3) and 
individual members ($10) is consistent with the Act based on the 
representations by the Exchange that in its experience, most As-of-Adds 
are the result of late submissions by individual members rather than by 
clearing members, and that clearing members are often 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 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.\18\ Although the maximum monthly 
allowable percentage of As-of-Adds for clearing members is lower than 
for individual members, this alone does not address the fee 
differential because clearing members are clearing transactions for 
many Exchange members. The Commission, therefore, continues to 
encourage the Exchange to consider methods of administering the Pilot 
Program to ensure that As-of-Add fees are assessed in a fair and 
equitable manner.
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    \18\The Commission does not necessarily agree with the Exchange 
that when the cost to clearing members of processing As-of-Adds is 
factored in, that the difference between the per-submission 
transaction fees ($10 v. $8) is de minimis.
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    In addition to addressing whether the differential in the per-
submission fee is a fair and equitable allocation, the Commission also 
requested in the Continuation Order,\19\ that the Exchange address why 
the Pilot Programs should not be incorporated into the Exchange's Minor 
Rule Plan\20\ because of the size of some of the fees imposed under the 
Pilot Program.\21\ Although the Exchange has stated that it believes 
the ``fees'' assessed pursuant to the Pilot Program are fair and 
equitable and should not be incorporated into the Minor Rule Plan,\22\ 
the Commission does not believe the issue has been adequately addressed 
by the CBOE. Nevertheless, the Commission has determined to grant a 
limited three month extension to the Pilot Program for two reasons. 
First, no formal complaints have been lodged by members regarding the 
fees assessed to date pursuant to the Pilot Program.\23\ Second, the 
Exchange has represented that it will re-consider the issue of 
incorporating the As-Of Add fees, in some form,\24\ into the Minor Rule 
Plan.
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    \19\See supra note 4.
    \20\See CBOE Rule 17.50.
    \21\See Continuation Order, supra note 4, and supra note 7.
    \22\See Letter from Michael Meyer, Schiff Hardin & Waite, to 
Brad Ritter, Senior Counsel, OMS, Division, Commission, dated 
September 2, 1994.
    \23\See October 3 Conversation, supra note 11.
    \24\See Amendment No. 1, supra note 1. For example, As-of-Add 
fees could be deemed a violation of the Minor Rule Plan only after 
exceeding a certain dollar amount.
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    In order to provide the Exchange with adequate time to assess any 
proposed changes to the Pilot Program, the Exchange has represented to 
the Commission that a proposed rule filing pursuant to Section 19(b) of 
the Act will be submitted by the Exchange on or before November 1, 
1994. In addition, the CBOE will be required to submit with that 
proposed rule change, an updated report containing the information 
requested by the Commission in the Continuation Order.\25\ The 
Commission also notes that it would not be inclined, at this time, to 
grant a further extension of the Pilot Program until the concerns 
raised herein have been addressed by the Exchange.
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    \25\See supra note 4.
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    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 thereto 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 December 
31, 1994 without interruption. Additionally, the Exchange has 
represented that no problems has arisen and no formal complaints have 
been received by the Exchange concerning the pilot program since its 
implementation.\26\ 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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    \26\See October 3 Conversation, supra note 11.
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IV. Solicitation of Comments

    Interested persons are invited to submit written date, 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, N.W., Washington, D.C. 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 
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, 
N.W., Washington, D.C. 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-94-24 and should be 
submitted by November 1, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act\27\ that the proposed rule change (SR-CBOE-94-24), extending the 
pilot program for fees related to As-of-Adds until December 31, 1994, 
is approved.

    \27\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.\28\
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    \28\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25041 Filed 10-7-94; 8:45 am]
BILLING CODE 8010-01-M