[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24986-24988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12388]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37201; File No. SR-CBOE-96-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to as of 
Add Submissions

May 10, 1996.
    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 April 
15, 1996, the Chicago Board Options Exchange, Inc. (``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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to terminate its fee program for members who, for 
more than a prescribed percentage of transactions, submit trade 
information pursuant to CBOE Rule 6.51 after the date on which the 
trade is executed. (These post-trade date submissions are commonly 
referred to as ``as of adds.'') In conjunction with the foregoing, the 
Exchange also proposes to revise the structure of its as of add summary 
fine program. The text of the proposed rule change is available at the 
Office of the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 
Statutory Basis for, the Proposed Rule Change

    CBOE Rule 6.51 requires, among other things, that (i) a participant 
in each transaction to be designated by the Exchange shall immediately 
report the transaction to the Exchange and (ii) 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.
    On October 1, 1993, the Exchange instituted an as of add fee 
program to collect fees from members who, for more than a prescribed 
percentage of transactions, submit trade information pursuant to Rule 
6.51 after the date on which the trade is executed. This program is set 
forth in CBOE Rule 2.26 and currently functions in the following 
manner. Each individual member is assessed a $10.00 fee for each as of 
add submitted by the member during a given month that is in excess of 
2.4% of the member's trade submissions during that month. Similarly, 
each Clearing Member is assessed a $3.00 fee for each as of add 
submitted by the Clearing Member during a given month that is in excess 
of 1.2% of the Clearing Member's trade submissions during that month. 
In addition, the total fee under the program that may be assessed 
against a member in a given month are capped at $500 for individual 
members and at $1,000 for Clearing Members.
    The reason the Exchange implemented the as of add fee program was 
to allocate the costs borne by the Exchange in processing as of add 
submissions to those members most responsible for generating those 
costs and thereby to encourage the submission of information with 
respect to a trade on the date the trade is executed by creating an 
economic incentive to submit the information on that day. During the 
first year of the program, the percentage of as of add submissions 
declined by 10% even though the Exchange experienced a 37% increase in 
trading volume. Based on past experience, the Exchange estimates that 
had the program not been in effect during that time period, the 
percentage of as of add submissions would have doubled. Since November, 
1994, however, the percentage of as of add submissions has remained 
relatively constant. Therefore, although the program has clearly been 
effective in reducing the percentage of as of add submissions, it no 
longer appears to be causing a reduction in the rate of those 
submissions.
    Accordingly, the Exchange is proposing to terminate the as of add 
fee program and to seek further reductions in the percentage of as of 
add submissions by revising the structure of the Exchange's as of add 
summary fine program.
    The Exchange instituted its as of add summary fine program on 
February 1, 1995. The program is a part of the Exchange's minor rule 
violation plan and is set forth in CBOE Rule

[[Page 24987]]

17.50(g)(7). Under the program, any individual member whose monthly 
percentage of as of add submissions exceeds 7.2% for two consecutive 
months or any Clearing Member whose monthly percentage of as of add 
submissions exceeds 3.6% for two consecutive months is subject to a 
fine of $250 for the first offense, $500 for the second offense, and 
$1,000 for each subsequent offense occurring during any 12 month 
period.
    The Exchange is proposing to revise the structure of the as of add 
summary fine program in four primary respects in order to encourage 
further changes in as of add behavior, and to the extent the Exchange 
collects fines under the program, to help the Exchange defray the 
additional costs it incurs in processing as of add submissions.
    First, the Exchange is proposing to replace the current as of add 
summary fine schedule for individual members. The proposed fine 
schedule would be stricter in two respects: (i) action against an 
individual member under the fine schedule would be triggered when the 
member exceeds the maximum allowable as of add submission percentage in 
a given month instead of when the member exceeds that percentage in two 
consecutive months as is the case under the current fine schedule and 
(ii) the maximum allowable as of add submission percentage under the 
fine schedule would be reduced from its current level of 7.2% to 5%. 
Specifically, the current find schedule for individual members would be 
replaced with the following fine schedule. Any individual member whose 
percentage of as of add submissions in any month exceeds 5% would 
receive a letter of information for the first offense, a letter of 
caution for the second offense, a $500 fine for the third offense, a 
$1,000 fine for the fourth offense, and would be referred to the 
Exchange's Business Conduct Committee for each subsequent offense 
occurring during any 12 month period. In addition, as is currently the 
case, the Exchange would retain the discretion to initiate a formal 
disciplinary proceeding against an individual member pursuant to 
Chapter XVII of the Exchange's rules in the event the Exchange 
determines that any violations of Rule 6.51 are not minor in nature.
    Second, the current as of add summary fine schedule for Clearing 
Members would be deleted and going forward as of add summary fines 
would only be assessed against individual members. The Exchange 
believes that such a fine structure is appropriate because individual 
members have primary control over the timing of trade submissions, and 
in the Exchange's experience, most as of adds are caused by delays and 
errors of individual members. Moreover, Clearing Members generally have 
a greater economic incentive than individual members to reduce as of 
adds because Clearing Members incur personnel and systems costs due to 
the extra work necessary to process as of adds whereas individual 
members do not incur such costs. Therefore, the Exchange believes that 
the most effective manner in which to achieve a reduction in the 
percentage of as of adds is to direct the as of add summary fine 
program toward individual members. Of course, notwithstanding the 
foregoing, the Exchange would still have the ability to initiate a 
formal disciplinary proceeding against a Clearing Member for violations 
of Rule 6.51.
    Third, the Exchange is proposing to implement a verification 
procedure under Rule 17.50 pursuant to which any member who receives an 
as of add summary fine would be able to request verification of that 
fine by the Exchange. Under this procedure, the Exchange would attempt 
to serve any member who incurs an as of add summary fine with a 
disciplinary notice on or before the 10th day of the month immediately 
following the month in which the fine is incurred. The member would 
then have until the 25th day of the month in which the disciplinary 
notice is served to request verification. After the Exchange's 
verification process is completed, it would notify the member in 
writing of the Exchange's determination, and if the member so desired, 
the member could appeal the fine within 30 days after the date of such 
notice in accordance with the appeal procedures under Rule 17.50(d). In 
addition, any member who incurs an as of add summary fine and does not 
request verification would be able to appeal the fine under Rule 
17.50(d) within 30 days after the Exchange's service of the 
disciplinary notice informing the member of the fine. The above-
described verification procedures would function in the same general 
manner as the verification procedures that are currently in place under 
Rule 17.50 for fines imposed for failure to submit accurate trade 
information and for failure to submit trade information to the price 
reporter, and these procedures would serve to replace the current as of 
add verification procedures under Rule 2.26(c) which would be 
eliminated under the proposed rule change along with the remainder of 
Rule 2.26.
    Finally, the current procedures set forth in Rule 2.26(d) which 
permit the Exchange to suspend the as of add fee program would also be 
eliminated along with the remainder of Rule 2.26, and instead, would be 
restated in Rule 17.50 and made applicable to the as of add summary 
fine program. As is currently the case with respect to the as of add 
fee program, these procedures would permit the Exchange's Clearing 
Procedures Committee, with the approval of the President of the 
Exchange, or his designee, to suspend the as of add summary fine 
program for periods no greater than 7 calendar days, plus extensions, 
when unusual circumstances affect the ability of a significant number 
of members to submit trade information on a timely basis.
    The Exchange proposes to implement the proposed rule change within 
45 days after its approval by the commission. The purpose of this time 
interval is to give the Exchange the opportunity to inform members of 
the approval of the proposed rule change in the Exchange's Regulatory 
Bulletin before the rule change is put into effect. The Exchange will 
publish the effective date of the rule change in the Exchange's 
Regulatory Bulletin and will notify the Commission of the effective 
date by letter.
    The Exchange represents 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) in particular, in that the Exchange believes the 
proposed rule change will serve to reduce the percentage of as of add 
submissions thereby benefiting both members and investors by increasing 
the efficiency with which Exchange transactions are processed and by 
reducing the risk exposure to members and investors that results from 
the existence of unresolved trades. Accordingly, the Exchange believes 
that the proposed rule change serves to promote just and equitable 
principles of trade, to remove impediments to and to perfect the 
mechanism of a free and open market and a national market system, and 
in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

[[Page 24988]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, 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 
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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. 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-96-24 and should be 
submitted by June 7, 1996.

    For the Commission, by the division of Market Regulation, 
pursuant to delegated authority.\1\
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    \1\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12388 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M