[Federal Register Volume 69, Number 44 (Friday, March 5, 2004)]
[Notices]
[Pages 10492-10494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4906]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49341; File No. SR-CBOE-2004-08]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the Chicago Board Options Exchange, Incorporated To Establish a Fee Cap 
of $75,000 Per Month for Member Firms on All Firm Proprietary and Firm 
Facilitation Trading in CBOE Products, To Reinstate the Prospective Fee 
Reduction Program, and To Credit DPM P/A Linkage Order Transaction Fees

March 1, 2004.
    Pursuantto 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 February 2, 2004, the Chicago Board Options Exchange, Incorporated 
(``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 
Exchange. On February 23, 2004, the Exchange filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as amended, has 
been filed by the CBOE as establishing or changing a due, fee, or other 
charge, pursuant to section 19 (b)(3)(A)(ii) \3\ of the Act and Rule 
19b-4(f)(2) \4\ thereunder, which renders the proposal effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to make several changes to its Fee Schedule 
to (1) establish a fee cap of $75,000 per month for member firms on all 
firm proprietary and firm facilitation trading in CBOE products; (2) 
reestablish the

[[Page 10493]]

Prospective Fee Reduction Program for February and March 2004; and (3) 
credit DPMs for transaction fees they incur in executing outbound 
``principal acting as agent'' (``P/A'') orders under the intermarket 
linkage program. 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
    Fee Cap. The purpose of the proposed rule change is to establish a 
monthly fee cap of $75,000 per CBOE member organization \5\ on all firm 
proprietary and firm facilitation trading across all CBOE products. 
CBOE stated that the fee cap in this proposal is functionally 
equivalent to File No. SR-Phlx-2003-61, which the Philadelphia Stock 
Exchange (``Phlx'') submitted effective upon filing on August 29, 
2003,\6\ in which the Phlx established a monthly fee cap of $50,000 for 
specified transaction charges by specified member organizations.
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    \5\ This proposal applies to member organizations for orders for 
the proprietary account of any member or non-member broker dealer 
that derives more than 35% of its annual, gross revenues from 
commissions and principal transactions with customers. Member 
organizations will be required to verify this amount to the Exchange 
by certifying that they have reached this threshold and by 
submitting a copy of their annual report, which was prepared in 
accordance with Generally Accepted Accounting Principles (``GAAP''). 
In the event that a member organization has not been in business for 
one year, the most recent quarterly reports, prepared in accordance 
with GAAP, will be accepted. As part of this proposal, this footnote 
will be included in the CBOE Fee Schedule.
    \6\ See Securities Exchange Act Release No. 48459 (September 8, 
2003), 68 FR 54034 (September 15, 2003).
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    In addition, as the Phlx did in SR-Phlx-2003-61, the CBOE proposes 
to adopt a license fee of $0.10 per contract side for transactions in 
all licensed products other than the S&P 100[reg] Index Options (OEX) 
\7\ (collectively, the ``licensed products'') that will be imposed on 
transactions in these products by member organizations that reach the 
$75,000 monthly fee cap described above. Thus, when a CBOE member 
organization exceeds the $75,000 cap on the fees described above, the 
organization will be charged $75,000 plus the license fee of $0.10 per 
contract side for any transactions in licensed products in addition to 
those transactions that were included in reaching the $75,000 level. In 
other words, the $0.10 per contract side license fee is in addition to 
the proposed $75,000 per month cap, if the cap is reached, on the 
products described above.
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    \7\ Currently, the most actively traded option classes in this 
category include options on the S&P 500[reg] Index (SPX), the NASDAQ 
100[reg] Index Tracking StockSM (QQQ) the CBOE Mini-NDX 
Index (MNXSM), the Nasdaq-100[reg] Index (NDX), the Dow 
Jones Industrial Average (DJX), DIAMONDS[reg] (DIA), and the Russell 
2000[reg] Index (RUT).
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    Prospective Fee Reduction Program. In recognition of high trading 
volume and positive financial results for the first six months of this 
fiscal year, the Exchange proposes to reimplement a Prospective Fee 
Reduction Program, as has previously been done.\8\ Under the renewed 
program, CBOE Market-Makers (as defined in CBOE Rule 8.1) will have 
their transaction fees reduced from standard rates by $.02 per contract 
side. In addition, the CBOE will reduce all floor brokerage fees by 
$.003 per contract side. These reductions will be in effect for 
February and March 2004 only. During this time, the Exchange will 
continue to monitor its financial results to determine whether the 
Prospective Fee Reduction Program should be continued, modified, or 
eliminated.
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    \8\ See e.g., Securities Exchange Act Release No. 46266 (July 
25, 2002), 67 FR 49969 (August 1, 2002).
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    Credits to DPM for Fees Relating to Duplicate Linkage Transactions. 
Under the intermarket Linkage, CBOE DPMs are required in certain 
circumstances to send a P/A order to another exchange, in order to 
obtain the National Best Bid or Offer (``NBBO'') price for their 
customers. The DPM pays transaction fees to the other exchange as well 
as the OCC to execute this P/A order at the other exchange. Then, under 
the Linkage procedure, when the DPM receives a fill of its P/A order 
from the other exchange, the CBOE DPM must then retrade the order back 
to their customer, again resulting in transaction fees, this time from 
CBOE and the OCC. Thus, the Linkage procedure's requirement to retrade 
means that DPMs who send such P/A orders to other exchanges incur 
duplicate transaction and Options Clearing Corporation (``OCC'') fees 
on P/A orders that substantially increase the costs of such 
transactions for the DPMs. To help offset these additional costs, the 
Exchange proposes a two-phased relief. First, the CBOE proposes to 
rebate all CBOE transaction and trade match fees related to the orders 
that CBOE DPMs fulfill by sending P/A transactions to other exchanges 
(i.e., the fees from the ``retrade''). At current rates, this is $0.24 
per contract.
    Second, in order to help offset the Linkage costs that the DPMs are 
assessed on P/A orders by the OCC and the other exchanges, the CBOE 
will credit CBOE DPMs an additional 50% of the CBOE transaction and 
trade match fees related to each outbound P/A transactions. At current 
rates, this is $0.12 per contract. This second rebate will be funded by 
the amount of total transaction and trade match fees that CBOE receives 
from incoming P/A orders from other exchanges (``incoming P/A fees''), 
and the aggregate amount rebated in the second rebate will be limited 
to no more than the total amount of incoming P/A fees.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Act,\9\ in general, and furthers the objectives of 
section 6(b)(4) of the Act \10\ in particular, in that it is designed 
to provide for the equitable allocation of reasonable dues, fees, and 
other charges among Exchange members.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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 with respect to the 
proposed rule change.

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

    The foregoing proposed rule change, as amended, has become 
effective pursuant to section 19(b)(3)(A)(ii) of the

[[Page 10494]]

Act \11\ and Rule 19b-4(f)(2) \12\ thereunder, because it changes a fee 
imposed by the Exchange. At any time within 60 days of the filing of 
the proposed rule change, as amended, 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.\13\
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    \11\ 15 U.S.C. 78(s)(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
    \13\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 
60-day abrogation period, the Commission considers the period to 
commence on February 23, 2004, the date the CBOE filed Amendment No. 
1.
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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, 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-CBOE-2004-08. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review your comments more efficiently, comments should be 
sent in hardcopy or by e-mail but not by both methods. 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-2004-08 and should be 
submitted by March 26, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4906 Filed 3-4-04; 8:45 am]
BILLING CODE 8010-01-P