[Federal Register Volume 66, Number 153 (Wednesday, August 8, 2001)]
[Notices]
[Pages 41639-41640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19855]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44629; File No. SR-CBOE-2001-36]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Chicago Board Options Exchange, Inc. and Amendment 
No. 1 To Exempt Certain Spread Transactions From the Marketing Fee and 
To Amend the Definition of Deep-in-the-Money Options To Include a 
Spread Traded at Maximum Value

July 31, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 21, 2001, the Chicago Board Options Exchange, Inc. (``CBOE'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I, II, and III below, which 
Items the CBOE has prepared. The CBOE filed Amendment No. 1 to the 
proposed rule change on July 18, 2001.\3\ The Commission is publishing 
this notice to solicit comments from interested persons on the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ See letter from Steve Youhn, Legal Division, CBOE, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated July 17, 2001. The CBOE originally submitted the 
filing pursuant to Section 19(b)(3)(A) of the Act. The CBOE has 
submitted the amended filing pursuant to Section 19(b)(2) of the 
Act.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to exempt certain spread transactions from its 
marketing fee. The text of the proposed rule change is available at the 
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, 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In August 2000, the CBOE imposed a $0.40 per contract marketing fee 
to collect funds to be used by the appropriate Designated Primary 
Market Maker (``DPM'') to attract order flow to the CBOE.\4\ Initially, 
this fee was applicable to all market-maker-to-market-maker options 
transactions. Thereafter, the CBOE determined that the imposition of 
the marketing fee made it unprofitable for market makers to do banking-
type transactions (i.e., reversals and conversions) on the CBOE. 
Therefore, the CBOE waived the fee for call/put combination 
transactions used in reversals and conversions.\5\
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    \4\ See Securities Exchange Act Release No. 43112 (August 3, 
2000), 65 FR 490040 (August 10, 2000) (approving SR-CBOE-2000-28).
    \5\ See Securities Exchange Act Release No. 4495 (March 23, 
2001), 66 FR 17459 (March 30, 2001) (approving SR-CBOE-2001-09).
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    In May 2001, the CBOE waived imposition of the marketing fee for 
spread transactions involving a total of at least 400 contracts of 
``deep in the money'' options, as well as ``buy write'' and 
``synthetic'' transactions involving at least 200 contracts of ``deep 
in the money'' options bought or sold in a 1-to-1 ratio versus 
stock.\6\ The terms of that filing provided that the waivers contained 
therein were to become effective on May 1, 2001. The CBOE now proposes 
to change the effective date of the waivers described in SR-CBOE-2001-
18 from May 1, 2001 to July 1, 2001. The effect of this change would be 
to impose retroactively the marketing fee on the transactions described 
in SR-CBOE-2001-18 for the months of May and June.\7\ These 
transactions would become exempt from the marketing fee as of July 1, 
2001.
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    \6\ See Securities Exchange Act Release No. 44355 (May 25, 
2001), 66 FR 30251 (June 5, 2001).
    \7\ While this filing retroactively imposes the marketing fee 
upon the transactions described in SR-CBOE-2001-18, the CBOE notes 
that it previously collected these fees for the transactions that 
occurred during May and June 2001. With respect to the transactions 
described in SR-2001-18, the CBOE states that it will not be 
necessary to collect any additional monies for the months of May and 
June 2001.
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    Furthermore, the CBOE proposes to exempt from the marketing fee 
``deep in the money'' put versus stock spread orders of 200 or more 
contracts. In the CBOE's view, these transactions, like reversals, 
conversions, and spread transactions, contribute to market liquidity 
but they too must be done at a smaller profit margin than other types 
of trades. The CBOE believes that

[[Page 41640]]

imposition of the marketing fee makes these transactions unprofitable 
to execute on an exchange. The CBOE also proposes that the effective 
date of these exemptions be July 1, 2001.
    Finally, the CBOE proposes to amend the definition of ``deep in the 
money'' options to include ``spreads traded at maximum value,'' which 
are spreads that trade at a price equal to or greater than the 
difference between the two strike prices of the affected option series. 
Currently, the CBOE defines ``deep in the money'' options as those 
options that are in the money by a minimum of both $10 and 20% of the 
closing value of the underlying security on either the trade date or 
the date immediately prior to the trade date. According to the CBOE, if 
the options series involved in the spread have strike prices that are 
less than $10 apart, it would be impossible for these positions to be 
considered ``deep in the money'' under the current definition. 
Nevertheless, because these positions do trade at maximum value, the 
CBOE believes that it is appropriate that they be classified as ``deep 
in the money.''
    For purposes of uniformity, the CBOE proposes that all of the fee 
waivers contained in the footnote 10 of its Fee Schedule would become 
effective July 1, 2001. Therefore, effective July 1, 2001, the CBOE 
proposes to waive the 40-cent marketing fee for the following options 
transactions: (a) Spread transactions involving a total of at least 400 
contracts of ``deep in the money'' options; (b) ``buy write'' and 
``synthetic'' transactions involving at least 200 contracts of ``deep 
in the money'' options bought or sold in a 1-to-1 ratio versus stock; 
and (c) ``deep in the money'' put versus stock spread orders of 200 or 
more contracts.
2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with 
Section 6(b) of the Act,\8\ in general, and furthers the objectives of 
Section 6(b)(4) \9\ in particular, in that it is designed to provide 
for the equitable allocation of reasonable dues, fees, and other 
changes among CBOE members.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The CBOE neither solicited nor received written comments with 
respect to the proposed rule change.

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

    Within 35 days of the date of 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 CBOE consents, the Commission will:
    (A) By order approve such 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, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to the File 
No. SR-CBOE-2001-36 and should be submitted by August 29, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19855 Filed 8-7-01; 8:45 am]
BILLING CODE 8010-01-M