[Federal Register Volume 68, Number 55 (Friday, March 21, 2003)]
[Notices]
[Pages 13972-13974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6828]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47508; File No. SR-CBOE-2003-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by Chicago Board Options 
Exchange, Incorporated To Establish a Four-Month Pilot Program 
Implementing the Market Share Incentive Plan

March 14, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4\2\ thereunder, notice is hereby given that 
on February 19, 2003, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to 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 CBOE. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to establish a four-month pilot program that 
makes a change to its Fee Schedule in order to implement a Market Share 
Incentive Plan. The text of the proposed rule change, showing the 
proposed fee schedule, is available at the principal offices of 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
    The CBOE proposes a four-month pilot program called the Market 
Share Incentive Plan (``MIP''). The MIP, which commenced on March 1, 
2003, and will continue through June 30, 2003, will initially apply to 
the 300 CBOE equity option classes with the largest total trading 
volume nationwide (the ``top 300 classes'') \3\ as well as options on 
the NASDAQ 100[reg] Index Tracking Stock (``QQQ'') (collectively, the 
``pilot MIP classes.'') The MIP is designed to provide an incentive to 
CBOE Designated Primary Market-Makers (``DPMs'') and market-makers to 
increase CBOE's share of national volume in the pilot MIP classes by 
continually maintaining highly competitive quotes with deeper, more 
liquid markets and tighter spreads.
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    \3\ The top 300 classes represent approximately 85% of total 
CBOE equity option contract volume. The CBOE believes it would not 
be practical to include the remaining equity option classes in the 
MIP pilot program, given the swings in market share that can occur 
in such lower volume classes.
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    The MIP will do this by providing two types of fee refunds to DPMs 
and market-makers who achieve the following specified market share 
thresholds in the pilot MIP classes.

[[Page 13973]]

a. Maintaining CBOE Market Share At or Above 25%
    DPMs and market makers in the pilot MIP classes who maintain a CBOE 
market share of 25% in those classes in a particular month will receive 
a transaction fee refund of $0.01 per contract for their transactions 
in those classes during that month. The refund per contract will 
increase by $0.01 for each 1% increase in CBOE market share above 25%, 
up to a maximum of a $0.16 per contract refund for a 40% CBOE market 
share, as set forth in the following table:

 Table I.--Per Contract Credit for Maintaining 25% or Better CBOE Market
                                  Share
------------------------------------------------------------------------
                                                              Credit per
                  Market share  (percent)                    MM contract
------------------------------------------------------------------------
25.0.......................................................        $0.01
26.0.......................................................         0.02
27.0.......................................................         0.03
28.0.......................................................         0.04
29.0.......................................................         0.05
30.0.......................................................         0.06
31.0.......................................................         0.07
32.0.......................................................         0.08
33.0.......................................................         0.09
34.0.......................................................         0.10
35.0.......................................................         0.11
36.0.......................................................         0.12
37.0.......................................................         0.13
38.0.......................................................         0.14
39.0.......................................................         0.15
40.0.......................................................         0.16
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b. Increasing CBOE Market Share
    Additionally, where the DPM and market makers in a pilot MIP class 
succeed in increasing the CBOE monthly market share in that class by 1% 
over the prior six-month rolling average CBOE market share for the 
class, the DPM and market-makers will receive a $0.01 per contract 
refund in their transaction fees in that class for that month. The 
refund per contract will increase by $0.01 for each additional 1% 
increase in CBOE market share over the prior six-month rolling average 
up to a maximum of a $0.08 per contract refund for an 8% increase in 
CBOE market share, as set forth in the following table:

       Table II.--Per Contract Credit for Increasing Market Share
------------------------------------------------------------------------
                                                              Credit per
              Market share increase  (percent)               MM contract
------------------------------------------------------------------------
1.0........................................................        $0.01
2.0........................................................         0.02
3.0........................................................         0.03
4.0........................................................         0.04
5.0........................................................         0.05
6.0........................................................         0.06
7.0........................................................         0.07
8.0........................................................         0.08
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c. General Provisions
    As is customary with the CBOE's billing practices, MIP refunds will 
be provided after the close of a given month. At the end of each month, 
CBOE will calculate the market share of each option class and then send 
a credit through to each clearing firm, which will then credit 
individual market maker and DPM accounts. All market makers and DPMs 
will be provided with reports showing the total credit they received 
along with details supporting CBOE's calculations. In no case will the 
monthly aggregate fee refunds under the MIP program in any option class 
exceed $0.24 per contract, which is the current total of transaction 
and trade match fees currently paid by DPMs and market-makers.
    The MIP will be funded by discontinuing the existing Prospective 
Fee Reduction Program \4\ (``Program'') for all equity as well as the 
QQQ option classes during the same time period that the MIP is in 
effect.\5\ The current Prospective Fee Reduction Program will remain in 
effect for all option classes other than the equity and the QQQ option 
classes.
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    \4\ For the current CBOE fiscal year, the Program provides that 
if at the end of the second or third quarter of the Exchange's 
fiscal year, the Exchange's average contract volume per day on a 
fiscal year-to-date basis exceeds one of certain predetermined 
volume thresholds, the Exchange's market-maker transaction fees will 
be reduced in the following fiscal quarter in accordance with a fee 
reduction schedule. The temporary discontinuation of the Program has 
taken effect as part of this proposed rule change. Telephone 
conversation between Christopher Hill, Attorney, CBOE, and Cyndi 
Rodriguez, Special Counsel, Division of Market Regulation 
(``Division''), Commission, on March 13, 2003.
    \5\ The Commission notes that the temporary discontinuation of 
the Program for the pilot MIP classes has taken effect as part of 
this proposed rule change.
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    According to the CBOE, the objective of the MIP program is similar 
to those of so-called ``shortfall fee'' programs \6\ that became 
effective upon filing and were published by the Commission for several 
other options exchanges.\7\ However, the CBOE believes that unlike 
``shortfall fee'' programs, which penalize members when they fall below 
established market share expectations, the CBOE will use the MIP to 
provide positive incentives for members to increase their market share 
by continually maintaining highly competitive quotes.
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    \6\ The CBOE believes that the goal of such ``shortfall fee'' 
programs is to encourage trading volume on the exchange. Telephone 
conversation among Christopher Hill, Attorney, CBOE and Cyndi 
Rodriguez, Special Counsel, Division, and Tim Fox, Attorney, 
Division, Commission, on March 6, 2003.
    \7\ See Securities Exchange Act Release No. 45351 (January 29, 
2002), 67 FR 5631 (February 6, 2002) (SR-PCX-2001-51); Securities 
Exchange Act Release No. 43201 (August 23, 2000), 65 FR 52465 
(August 29, 2000) (SR-PHLX-00-07).
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act \8\ in general, and furthers the 
objectives of section 6(b)(4) of the Act \9\ in particular, in that it 
is designed to provide for the equitable allocation of reasonable dues, 
fees, and other charges 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 Exchange believes that the proposed rule change will impose no 
burden on competition 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

    No written comments were solicited or received in response to the 
proposed rule change.

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

    The proposed rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act \10\ and rule 19b-4(f)(2)\11\ thereunder 
because it establishes or changes a due, fee, or other charge imposed 
by the CBOE. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions

[[Page 13974]]

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 File No. SR-CBOE-2003-06 and 
should be submitted by April 11, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6828 Filed 3-20-03; 8:45 am]
BILLING CODE 8010-01-P