[Federal Register Volume 69, Number 79 (Friday, April 23, 2004)]
[Notices]
[Pages 22110-22112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9192]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49575; File No. SR-CBOE-2004-13]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, and Amendment No. 1 Thereto, by the Chicago Board Options 
Exchange, Inc. Relating to Retroactive Crediting of DPM Principal 
Acting as Agent Order Transaction Fees

April 16, 2004.
    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 March 9, 2004, 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. On March 31, 
2004, the CBOE submitted Amendment No. 1 to the proposed rule 
change.\3\ 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\ See Letter from Chris Hill, Attorney, CBOE, to Nancy Sanow, 
Assistant Director, Commission, dated March 26, 2004 (``Amendment 
No. 1''). In Amendment No. 1, the CBOE submitted a new Form 19b-4, 
which replaced and superceded the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to change its Fee Schedule to retroactively 
credit Designated Primary Market-Makers (``DPMs'') for transaction fees 
they incur in executing outbound ``principal acting as agent'' (``PA'') 
Orders, as defined in the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (the ``Linkage Plan'').
    The text of the proposed fee schedule is below. Proposed additions 
are in italics. Proposed deletions are in [brackets].
* * * * *

[[Page 22111]]

Chicago Board Options Exchange, Incorporated Rules

FEE SCHEDULE

May 1, 2004
    1-20. (No Change).
21. DPM Fees Credit Relating to Duplicate Transactions re Linkage
    Effective July 1, 2003 [February 2, 2004], DPM transaction and 
trade match fees generated from ``scratched'' (or linked) transactions 
with outbound principal acting as agent (PA) orders will be credited to 
DPMs (currently $.24 per contract). In addition, when DPMs incur fees 
to execute PA orders at other exchanges, those DPMs will be credited up 
to an additional 50% of the CBOE transaction and trade match fees 
related to those outbound PA transactions, up to the amount of total 
fees CBOE receives from inbound linkage [in bound] transaction and 
trade match fees. At current rates, this amounts to an additional 
credit of up to $.12 per contract, for a total credit of up to $.36 per 
contract.
* * * * *

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 had 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 purpose of this proposed rule change is to amend the Exchange 
fee schedule to retroactively establish certain fee relief that was 
provided prospectively in a previous CBOE rule change filing \4\ and to 
clarify when such relief is available.
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    \4\ See Securities Exchange Act Release No. 49341 (March 1, 
2004), 69 FR 10492 (March 5, 2004) (Notice of Filing and Immediate 
Effectiveness of SR-CBOE-2004-08).
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    As explained in that previous proposed rule change, pursuant to 
Linkage Plan, CBOE DPMs are required in certain circumstances to send a 
PA Order to another exchange in order to obtain the National Best Bid 
or Offer (``NBBO'') price for their customers. The DPM usually pays 
transaction fees to the other exchange as well as to the Options 
Clearing Corporation (``OCC'') to execute this PA Order at the other 
exchange. Then, under the Linkage procedure,\5\ when the DPM receives a 
fill of its PA Order from the other exchange, the CBOE DPM must then 
re-trade the order back to their customer, resulting in additional 
transaction fees (this time from CBOE and the OCC.) Thus, the Linkage 
procedure's requirement to re-trade means that DPMs who send such PA 
Orders to other exchanges may incur duplicate transaction and OCC fees 
on PA Orders that substantially increase the costs of such transactions 
for the DPMs.
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    \5\ ``Linkage procedure'' describes the process that CBOE DPMs 
undergo to fulfill the Customer order underlying a PA Order after 
another exchange fills the PA Order. The CBOE believes that this 
process is uniform among exchanges that are Participants in the 
Linkage Plan. Telephone conversation between Chris Hill, Attorney, 
CBOE and Tim Fox, Attorney, Commission on April 12, 2004.
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    In SR-CBOE-2004-08,\6\ the Exchange established a two-phased relief 
to offset these additional costs. First, the CBOE established rebates 
for all CBOE transaction and trade match fees related to the orders 
that CBOE DPMs fulfill by sending PA transactions to other exchanges 
(i.e., the fees from the ``re-trade.'') At current rates, this is $0.24 
per contract.
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    \6\ See supra note 4.
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    Second, in order to help offset the transaction-related costs that 
the DPMs are assessed on PA orders sent to other exchanges by the OCC 
and the other exchanges, the Exchange credits CBOE DPMs who incur such 
costs an additional 50% of the CBOE transaction and trade match fees 
related to each outbound PA transaction. 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 
PA orders from other exchanges (``incoming PA fees''), and the 
aggregate amount rebated in the second rebate will be limited to no 
more than the total amount of incoming PA fees.
    SR-CBOE-2004-08 \7\ established the fee changes described above 
prospectively pursuant to Section 19(b)(3)(A)(ii) of the Act \8\ and 
Rule 19b-4(f)(2) thereunder.\9\ In this filing, the Exchange proposes 
to extend this relief retroactively back to all applicable transactions 
occurring since the start of the CBOE fiscal year on July 1, 2003.
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    \7\ Id.
    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \9\ 17 CFR 240.19b-4(f)(2).
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2. Statutory Basis
    The CBOE believes that the proposed rule is consistent with Section 
6(b) of the Act,\10\ in general, and furthers the objectives of section 
6(b)(4) \11\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 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

    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, as amended; or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an E-mail to [email protected]. Please 
include File Number SR-CBOE-2004-13 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission,

[[Page 22112]]

450 Fifth Street, NW., Washington, DC 20549-0609. All submissions 
should refer to File Number SR-CBOE-2004-13. 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, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of such filing also will be available for inspection and copying 
at the principal office of the CBOE. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2004-13 and should be submitted on 
or before May 14, 2004.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9192 Filed 4-22-04; 8:45 am]
BILLING CODE 8010-01-P