[Federal Register Volume 69, Number 146 (Friday, July 30, 2004)]
[Notices]
[Pages 45861-45863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17397]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50058; File No. SR-CBOE-2004-48]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to Exchange Transaction Fees for DPMs 
and e-DPMs

July 22, 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 July 20, 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. 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 make a change to its Fee Schedule to maintain 
an equitable allocation of reasonable fees in the context of the CBOE's 
new market structure initiatives.
    The text of the proposed rule change is available at the Office of 
the Secretary, 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 Exchange 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 Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of

[[Page 45862]]

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 order to enhance competition and better service the needs of the 
investing community, the CBOE is continuing its efforts to provide an 
enhanced Hybrid market model of trading that combines the superior 
depth and liquidity of floor-based Market-Makers and Designated Primary 
Market-Makers (``DPMs'') with the speed and convenience of electronic 
trading.
    To that end, the CBOE has established an enhanced market model for 
equity options seeking to combine advanced technology with the broadest 
possible base of liquidity providers.\3\ This new system is 
collectively referred to throughout this filing as ``Hybrid 2.0.'' As 
further explained in this filing, a new category of market participants 
would function in Hybrid 2.0 as follows:
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    \3\ See Securities Exchange Act Release No. 50003 (July 12, 
2004), 69 FR 43028 (July 19, 2004 (approving File No. SR-CBOE-2004-
24).
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    Electronic DPMs (``e-DPMs'') would operate as competing specialists 
and be allowed to stream quotes into their appointed option classes 
without having to be physically present in the trading crowd. e-DPMs 
would be required to continuously stream quotes in a specified 
percentage of series of a broad number of option classes. They would 
have special eligibility requirements and would have to meet market 
performance standards.
    In order to maintain an equitable allocation of Exchange costs and 
fees among the new category of market participants, as well as existing 
CBOE DPMs and Market-Makers, particularly in light of the additional 
costs the Exchange is incurring in providing new categories of 
electronic market access through Hybrid 2.0, the Exchange proposes 
several changes to the Exchange Fee Schedule.
Lower Fees and Alternative Fixed Fee Option for DPMs
    The Exchange has already reduced the transaction fees of current 
DPMs in Hybrid 2.0 option classes by cutting the current DPM 
transaction fees to a total of $.12 per contract.\4\ The Exchange now 
proposes to offer current DPMs the opportunity to elect a fixed rate 
schedule (described in more detail below) instead of the current 
assessment of transaction fees on a per-contract basis. The alternative 
fixed rate schedule is also designed to reduce the DPMs' current fee 
obligations.
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    \4\ See File No. SR-CBOE-2004-38.
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    As the Exchange also noted in SR-CBOE-2004-38, there are several 
reasons why these reductions in DPM fees are both reasonable and 
equitable in this context. DPMs, in addition to being required to 
fulfill all the responsibilities of Market-Makers under CBOE Rule 8.7, 
are also responsible for fulfilling numerous additional 
responsibilities specified in CBOE Rule 8.85 that regular Market-Makers 
are not required to fulfill, most notably to provide continuous market 
quotations for each class and series allocated to the DPM.\5\ 
Notwithstanding the substantial additional responsibilities of DPMs, 
CBOE DPMs have until recently paid the same transaction fees as those 
of CBOE Market-Makers. The Exchange respectfully submits that such 
equal fees in the past have been a product of Exchange policy, rather 
than a requirement of the Exchange Act or other applicable law. Due to 
the additional responsibilities borne by DPMs, the CBOE believes that 
it is reasonable and equitable under the Act for the CBOE to assess 
lower transaction fees to DPMs than to Market-Makers.
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    \5\ See CBOE Rule 8.85 ``DPM Obligations,'' which sets forth 
numerous DPM obligations.
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    Again, as noted in SR-CBOE-2004-38, the Exchange believes it is 
particularly appropriate to re-examine DPM fees at the present time 
because the recent approval of some of the Exchange's Hybrid 2.0 market 
structure initiatives, as established in the approval of SR-CBOE-2004-
24, is effectively reducing the compensation levels of DPMs. 
Specifically, DPMs have been compensated in part for their additional 
responsibilities through the participation entitlement formulas 
established pursuant to Exchange Rule 8.87. Under the Hybrid 2.0 market 
structure initiatives approved in SR-CBOE-2004-24, however, DPMs would 
now be required to share their previous participation entitlements with 
the new e-DPMs. The CBOE believed that it was therefore equitable to 
reduce DPM transaction fees from $.24 per contract to $.12 per contract 
to offset their reduced revenues from their reduced participation 
entitlement through lower transaction fees, as established in SR-CBOE-
2004-38, and believes that it is also equitable to reduce DPM 
transaction fees by providing the alternative fixed fee arrangement 
proposed here.
Alternative Fixed Annual Fee
    As part of its effort to reduce DPM transaction fees, the Exchange 
now proposes to offer DPMs, as well as e-DPMs, the alternative, as of 
October 1, 2004, to choose a fixed annual fee of $1.75 million instead 
of the current assessment of transaction fees on a per-contract basis 
for its DPM and e-DPM transactions only \6\ in all equity option 
classes.
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    \6\ The fixed fee does not cover any floor brokerage fees.
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    Linkage fees and credits for CBOE DPMs electing the fixed annual 
fee would be treated as follows. Section 21 of the CBOE Fee Schedule 
(as established in SR-CBOE-2004-08) provides that the CBOE would credit 
back to DPMs all CBOE transaction fees that CBOE DPMs incur from 
outgoing Principal Acting as Agent (P/A) orders. DPMs electing to pay 
the fixed fee would neither be charged CBOE transaction fees for CBOE 
transactions related to such outgoing P/A orders, nor would they 
receive the above-mentioned corresponding credit back for such fees. 
However, pursuant to the second phase of linkage fee relief specified 
in SR-CBOE-2004-08, all CBOE DPMs, including those electing the fixed 
annual fee, who pay transaction fees at other exchanges to execute P/A 
orders there, would receive a credit of up to 50% of CBOE DPM 
transaction charges for each such order (or up to $.06 per contract, 
with the total of such credits not to exceed the total amount of 
inbound linkage transaction fees received by the CBOE) to help offset 
the transaction fees of other exchanges that CBOE DPMs incur in filling 
P/A orders at those exchanges.
    The Exchange would review the level of the fixed annual fee 
periodically as part of its annual budget process. As with all fee 
changes, any proposed changes to the fixed annual fee would be filed 
with the Commission.
e-DPM Fees
    The Exchange proposes to set the transaction fee levels for e-DPMs 
at $.22 per contract (the Market-Maker rate) through the end of July, 
and $.25 per contract thereafter, in order to minimize the difficulties 
for the CBOE and its clearing members to process this fee change intra-
month. The CBOE believes that the e-DPM transaction fee level is 
appropriately set higher than those of on-floor DPMs because the 
Exchange would incur additional systems and other logistical costs both 
initially and on an ongoing basis in order to establish and maintain 
the infrastructure needed

[[Page 45863]]

to enable market participation as an e-DPM.
    As noted earlier, e-DPMs would have the option to elect the same 
fixed annual fee described above for regular DPMs, in recognition of 
the responsibilities that e-DPMs would shoulder in assisting the 
regular DPMs in their quoting responsibilities.\7\
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    \7\ The fixed fee would be one payment of $1.75 million, even if 
the member organization holds appointments as both one or more 
regular DPMs and one or more e-DPMs.
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2. Statutory Basis
    The Exchange believes that 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) 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 does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of 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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Exchange, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(2) 
of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 15 U.S.C. 78s(b)(3)(A).
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    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.

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-2004-48 on the subject line.
Paper Comments
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-48. 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-2004-48 and should be submitted on or before August 20, 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. 04-17397 Filed 7-29-04; 8:45 am]
BILLING CODE 8010-01-P