[Federal Register Volume 68, Number 112 (Wednesday, June 11, 2003)]
[Notices]
[Pages 35035-35037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14643]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47957; File No. SR-CBOE-2003-20]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to Marketing Fee Procedures

May 30, 2003.
    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 May 13, 2003, the Chicago Board Options Exchange, Inc. (``CBOE'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the CBOE. The Commission is publishing this 
notice to solicit comments on the proposed rule change by the CBOE, 
which relates to marketing fee procedures. At the same time, the 
Commission is adopting the proposed rule change as a pilot program on 
an accelerated basis.
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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 hereby proposes to adopt, on a pilot basis, a new 
Interpretation and Policy .12 to CBOE Rule 8.7 specifying the 
procedures by which a trading crowd may determine whether to 
participate in the CBOE's marketing

[[Page 35036]]

fee program.\3\ The text of the proposed rule change is available at 
the CBOE and at the Commission.
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    \3\ The CBOE recently reinstated its payment for order flow 
program. See Exchange Act Release No. 47948 (May 30, 2003) (SR-CBOE-
2003-19).
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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 III 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
    Effective August 1, 2001, the CBOE suspended its $.40 per contract 
marketing fee.\4\ As described in SR-CBOE-2003-19,\5\ the CBOE has 
determined to reinstate its marketing fee program, and proposes to 
adopt the procedures set forth in proposed new Interpretation and 
Policy .12 to CBOE Rule 8.7 to specify how a trading crowd determines 
whether or not to participate in the marketing fee program. The CBOE 
proposes to institute these procedures on a pilot basis to expire one 
year after Commission approval. The Exchange has requested that the 
Commission approve the pilot program on an accelerated basis so that it 
can compete effectively with other exchanges that have marketing fee 
programs.
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    \4\ See Exchange Act Release No. 44717 (August 16, 2001), 66 FR 
44655 (August 24, 2001), (SR-CBOE-2001-43).
    \5\ See Exchange Act Release No. 47948 (May 30, 2003), (SR-CBOE-
2003-19).
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    As described in SR-CBOE-2003-19, the marketing fee will be assessed 
only on those market-maker transactions (including DPMs) resulting from 
orders from customers of payment-accepting firms with which the DPM has 
agreed to pay for that firm's order flow. In the instant filing, the 
CBOE proposes that after the marketing fee initially has been in effect 
for three consecutive calendar months with respect to the option 
classes located at a particular trading station, the members of a 
trading crowd may determine not to continue participating in this 
marketing fee program pursuant to the procedures proposed to be set 
forth in Interpretation .12 to CBOE Rule 8.7, as described below. The 
CBOE asserts that these procedures are substantially the same as the 
procedures contained in Interpretation and Policy .03 to CBOE Rule 
8.95. These procedures were utilized by trading crowds in 1999 to 
indicate that they no longer wish to trade an option class opened for 
trading prior to May 1, 1987.\6\
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    \6\ See Exchange Act Release No. 41641 (July 22, 1999), 64 FR 
41477 (July 30, 1999), granting immediate effectiveness to SR-CBOE-
99-31.
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    The Exchange states that two procedural aspects of the 
administration of the trading crowd vote are embodied in proposed 
Interpretation and Policy .12 to CBOE Rule 8.7: (i) To define which 
trading crowd \7\ members are entitled to participate in the vote; and 
(ii) to adopt voting procedures to be used for purposes of 
determinations made under the rule. The CBOE states that proposed 
Interpretation and Policy .12 provides that eligible trading crowd 
members are those market-makers in the subject trading crowd who have 
transacted at least 80% of their market-maker contracts and 
transactions in each of the three immediately preceding calendar months 
in option classes traded at that trading crowd's station, and who 
continue to be present in the trading crowd in the capacity of a market 
maker at the time of the vote.\8\ According to the CBOE, this assures 
that only those members who are currently engaged as market makers in 
that trading crowd, and who have concentrated their activity in that 
trading crowd over the last three months, participate in the vote.
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    \7\ CBOE Rule 8.8.01 provides that the term ``trading crowd'' is 
synonymous with the term trading ``station.'' That rule defines 
``station'' as ``a location on the trading floor, at which classes 
of option contracts are traded, which classes of options compose all 
or part of a market maker appointment. An appointment must at least 
include all of the classes of options traded at one station.'' The 
same definition of ``trading crowd'' applies to proposed 
Interpretation and Policy .12 to CBOE Rule 8.7.
    \8\ The CBOE represents that it routinely monitors market maker 
trading activity for purposes of determining compliance with CBOE 
Rule 8.7.03 appointment and in-person trading requirements. 
Additionally, the CBOE represents that it has committed to monitor 
market maker trading activity for purposes of determining compliance 
with the electronic quoting requirements proposed in CBOE-2002-05 
(the Hybrid Trading System). As such, the CBOE believes that it has 
the capability to determine who constitutes an eligible trading 
crowd member for purposes of this rule filing.
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Process To Request a Vote
    The CBOE asserts that the DPM or any eligible trading crowd member 
may request that a vote be held by submitting a written request to that 
effect to the Secretary of the Exchange. The Exchange will provide at 
least ten calendar days' posted notice to the trading crowd of the time 
and date of the vote. The Secretary of the Exchange will verify that 
the member requesting a vote is an eligible trading crowd member and 
will keep the identity of such individual confidential.
Trading Crowd Participating in Marketing Fee Program
    The CBOE states that after a trading crowd has participated in the 
marketing fee program for the initial three consecutive calendar month 
period, the trading crowd may determine to opt-out of the program. 
Proposed Interpretation and Policy .12 to CBOE Rule 8.7 provides that a 
trading crowd will be deemed to have indicated that it does not wish to 
continue participating in the marketing fee program only if: (i) The 
question is put to a vote of the eligible trading crowd members;\9\ 
(ii) a majority of the eligible trading crowd members participate in 
the vote; and (iii) a majority of the votes cast are in favor of not 
participating in the marketing fee program. In the event the vote of 
the members of the trading crowd is tied, the marketing fee program 
will remain in effect in that trading crowd for the next three 
consecutive months.
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    \9\ The DPM is considered an eligible trading crowd member and, 
as such, may (but is not required to) participate in the vote. The 
DPM entity is entitled to only one vote regardless of the number of 
nominees or representatives it employs in the trading crowd.
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Trading Crowd Not Participating in Marketing Fee Program
    According to the Exchange, twenty days after a trading crowd votes 
not to participate in the marketing fee program, any eligible trading 
crowd member may then request that another vote be held to determine 
whether the trading crowd should participate in the marketing fee 
program.\10\ In this case, if a majority of the votes cast are in favor 
of participating in the marketing fee program, the trading crowd will 
be deemed to have indicated that it wishes to participate in the 
marketing fee program and the marketing fee program will be in effect 
in that trading crowd for the next three consecutive months. In the 
event that the vote of the members of the trading crowd is tied, the 
trading crowd will be deemed to have indicated that it does not wish to 
participate in the marketing fee program.
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    \10\ The CBOE notes that actual votes may only be held once 
every thirty days. Because there is a ten calendar day notice period 
prior to a vote, however, an eligible trading crowd member may 
request a vote twenty days after the preceding vote.
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    The CBOE asserts that these voting procedures are substantially 
similar to

[[Page 35037]]

the procedures set forth in CBOE Rule 8.95.03 and the procedures set 
forth in CBOE Rule 2.40(d) concerning recommendations of a market-maker 
surcharge under that rule. In other respects, a marketing fee oversight 
committee of the CBOE shall determine administrative procedures for 
conducting the vote. If a payment accepting firm materially changes its 
execution status or a DPM transfers its DPM appointment to a separate 
organization pursuant to CBOE Rule 8.89, any member of the eligible 
trading crowd may then request that a vote be held to determine whether 
or not the trading crowd should participate in the marketing fee 
program by conducting a vote pursuant to the above procedures.
2. Statutory Basis
    The CBOE believes that proposed Interpretation .12 to CBOE Rule 8.7 
will provide fair and orderly procedures for the administration of the 
marketing fee program that the CBOE has determined to reinstate, and 
thus is consistent with and in furtherance of the objectives of Section 
6(b)(5) of the Act \11\ to promote just and equitable principles of 
trade and to remove impediments to and perfect the mechanisms of a free 
and open market.
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    \11\ 15 U.S.C. 78f(b)(5).
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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.

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. 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 
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 number SR-CBOE-2003-20 and 
should be submitted by July 2, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change as a Pilot Program

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of section 6(b)(5) of the 
Act,\12\ and the rules and regulations thereunder applicable to a 
national securities exchange.\13\ Specifically, the Commission believes 
that this proposal, which allows the appropriate trading crowd to 
determine after a three-month period whether to continue to participate 
in the Exchange's marketing fee program, promotes member participation 
in the procedures of the Exchange. Further, the Commission notes that 
the contemplated voting procedures are substantially similar to the 
voting procedures contained in CBOE Rules 8.95.03 and 2.40(d), which 
have previously been reviewed by the Commission.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    Finally, the Commission notes that the Exchange is proposing to 
institute these procedures as a pilot program that will expire one year 
after Commission approval, or such earlier time as the Commission has 
approved the procedures on a permanent basis.
    Accordingly, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\14\ for approving the proposed rule change prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-14643 Filed 6-10-03; 8:45 am]
BILLING CODE 8010-01-P