[Federal Register Volume 69, Number 158 (Tuesday, August 17, 2004)]
[Notices]
[Pages 51129-51132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18757]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50175; File No. SR-CBOE-2004-38]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the Chicago Board Options Exchange, Incorporated Relating to 
the Exchange's Fee Schedule for Fiscal Year 2005

August 10, 2004.
    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 July 1, 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 CBOE. On 
July 15, 2004, CBOE filed Amendment No. 1 to the proposed rule 
change.\3\ On August 2, 2004, CBOE filed Amendment No. 2 to the 
proposed rule change.\4\ The proposed rule change, as amended, has been 
filed by CBOE as establishing or changing a due, fee, or other charge, 
pursuant to Section 19(b)(3)(A)(ii) of the Act \5\ and Rule 19b-4(f)(2) 
\6\ 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\ See letter, dated July 9, 2004, from Christopher Hill, 
Senior Attorney, CBOE, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission. In 
Amendment No. 1, CBOE made technical corrections to the proposed 
rule text.
    \4\ See letter, dated July 30, 2004, from Christopher Hill, 
Senior Attorney, CBOE, to Nancy J. Sanow, Assistant Director, 
Division, Commission. In Amendment No. 2, CBOE made additional 
technical corrections to the proposed rule text, clarified the 
applicability of the Prospective Fee Reduction Program, corrected 
references to member Market-Makers, detailed the discount for 
crossed orders, clarified the ETF and Structured Products 
transaction fee cap, and clarified the Index Order Book Official 
execution fee reduction. Amendment No. 2 superseded and replaced the 
proposed rule change and Amendment No. 1 in their entirety.
    \5\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \6\ 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

    CBOE proposes to make various changes to its Fee Schedule for 
Fiscal Year 2005. The text of the proposed rule

[[Page 51130]]

change is available at 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, 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. 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, Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to make certain fee 
reductions, additions and changes. The Exchange represents that the 
proposed rule change is the product of the Exchange's annual budget 
review, and that the fee changes were approved by the Exchange Board of 
Directors pursuant to CBOE Rule 2.22 and will take effect on July 1, 
2004.
    The Exchange proposes to amend the following fees.

a. Index Order Book Official Execution Fee Reduction and Simplification

    For the second consecutive year, the Exchange proposes to reduce 
and simplify the rates it charges for execution of index orders from 
its public customer Order Book. Currently, these fees per contract are 
$0.60 for booked option contracts priced equal to or greater than $2, 
and $0.40 for those priced less than $2. The Exchange proposes to 
reduce these fees to a flat $0.25 per contract, regardless of the 
contract price.

b. Customer Index Large Trade Discounts Continued

    The Exchange proposes to continue its current pilot plan providing 
a customer large trade discount in the form of a cap on customer 
transaction fees, to be in effect through December 31, 2004 for most 
CBOE index option products.\7\ The Exchange represents that it 
determined the contract size at which the cap would be implemented 
after reviewing recent trading activity in each of the index products. 
Floor brokerage fees are not subject to the cap on fees.
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    \7\ The MNX option class will not be included in this program 
since MNX customer fees were reduced in June 2002 to a flat rate of 
$0.15 per contract. See Securities Exchange Act Release No. 46045 
(June 6, 2002), 67 FR 41284 (June 17, 2002) (noticing SR-CBOE-2002-
28).
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    Regular customer transaction fees will continue to be charged up to 
the following quantity of contracts per order, for the following 
underlying indexes:
    1. Dow Jones indexes (including DIA)--charge only the first 7,500 
contracts;
    2. SPX--charge only the first 5,000 contracts; and
    3. OEX (including XEO & OEF), NDX & other indexes (not including 
MNX)--charge only the first 3,000 contracts.

c. Fee Cap on Dividend Spread Transactions

    The Exchange proposes that Market-Maker, firm and broker-dealer 
transaction fees for dividend spread transactions will be capped at 
$2,000 per dividend spread transaction. CBOE defines a dividend spread 
as any trade done to achieve a dividend arbitrage between any two deep-
in-the-money options. The cap will be implemented through the Exchange 
rebating transaction fees for qualifying transactions. To qualify a 
transaction for the cap, a rebate request with supporting documentation 
will need to be submitted to the Exchange.

d. ETF and Structured Products Transaction Fee Cap

    CBOE currently trades certain non-option products, including 
exchange traded funds (``ETFs''), such as index portfolio receipts or 
``IPRs'' \8\ and index portfolio shares or ``IPSs'',\9\ as well as 
structured products.\10\ CBOE represents that competition for order 
flow in some of these products is intense. The Exchange is proposing to 
implement a fee change to eliminate customer transaction fees and to 
cap market maker and member firm transaction fees at $100 per side of a 
transaction in these non-option products. The Exchange believes this 
change will bring CBOE's fees for these products more in-line with fees 
charged by its competitors. As a result, the Exchange believes that the 
fee change will help the Exchange to compete more effectively for order 
flow in these products.
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    \8\ As set forth in Interpretation .02 to CBOE Rule 1.1, the 
term index portfolio receipts or ``IPRs'' means securities that (a) 
represent an interest in a unit investment trust (``Trust'') which 
holds the securities that comprise an index on which a series of 
IPRs is based; (b) are issued by the Trust in a specified aggregate 
minimum number in return for a ``Portfolio Deposit'' consisting of 
specified numbers of shares of stock plus a cash amount; (c) when 
aggregated in the same specified minimum number, may be redeemed 
from the Trust which will pay to the redeeming holder the stock and 
cash then comprising the Portfolio Deposit; and (d) pay holders a 
periodic cash payment corresponding to the regular cash dividends or 
distributions declared and paid with respect to the component 
securities of the stock index on which the IPRs are based, less 
certain expenses and other charges as set forth in the Trust 
prospectus. IPRs are ``UIT interests'' within the meaning of the 
Rules of the Exchange.
    \9\ As set forth in Interpretation .03 to CBOE Rule 1.1, the 
term index portfolio shares or ``IPSs'' means securities that (a) 
are issued by an open-end management investment company based on a 
portfolio of stocks designed to provide investment results that 
correspond generally to the price and yield performance of a 
specified foreign or domestic stock index; (b) are issued by such an 
open-end management investment company in a specified aggregate 
minimum number in return for a deposit of specified number of shares 
of stock and/or a cash amount with a value equal to the next 
determined net asset value; and (c) when aggregated in the same 
specified minimum number, may be redeemed at a holder's request by 
such open-end management investment company which will pay to the 
redeeming holder stock and/or cash with a value equal to the next 
determined net asset value.
    \10\ Structured products currently traded at CBOE include the 
Salomon Smith Barney Holdings Inc. DJIASM Index Equity 
Linked Notes (DSB); Salomon Smith Barney Holdings Inc. S&P 
500[reg] Callable Equity Linked Notes (NSB); and the 
Salomon Smith Barney Holdings Inc. S&P 500[reg] Equity 
Linked Notes (KSB). These products have an expiration date, are cash 
settled, have a limited number of outstanding shares, and trade like 
a stock pursuant to Chapter XXX of the CBOE Rules.
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e. Reduced Floor Broker Fees for Crossed Orders

    The Exchange proposes to reduce the current $0.04 per contract 
floor brokerage fee by 50% when a floor broker crosses an order. 
Currently, in a crossed order, a floor broker is charged either $0.04 
or $0.08 per contract, the lower amount if one side of the crossed 
order is an Equity or QQQ options customer (who is not assessed the 
floor brokerage fee). To be eligible for the discounted rate, the 
executing broker acronym, executing firm number and order ID data will 
need to be the same on both the buy and sell side of an order.

f. Fee Consolidation

    To simplify parts of the Fee Schedule, the Exchange proposes to 
consolidate two sets of current fees. Neither consolidation will change 
the total fees paid.
(1) Technology Fee Consolidated With Member Dues
    CBOE currently assesses a technology fee of $200 per month and 
member dues of $250 per month, billed separately on monthly invoices. 
The Exchange proposes to consolidate these charges as a combined member 
dues of $450 per month. Neither fee will change, but the separate 
billing for the technology fee will be eliminated.

[[Page 51131]]

(2) Trade Match Fee Consolidated With Transaction Fee
    Currently, Section 2 of the Fee Schedule imposes a $.05 per 
contract trade match fee on all transactions other than equity and QQQ 
customer orders. This fee will not change, but to simplify the 
presentation of transaction fees in the Fee Schedule, the Exchange will 
now include the $.05 per contract trade match fees as part of the per 
contract transaction fees listed in the Fee Schedule. As a result of 
this consolidation, the Exchange is deleting references to trade match 
fee in the Fee Schedule.

g. Trading Floor Booth Fee Changes

    The current Fee Schedule includes a different rate for the rental 
of certain booths depending upon whether the firm renting the booth is 
a member of the Options Clearing Corporation (OCC). The Exchange has 
determined that this fee differential should be eliminated. Therefore, 
the Exchange proposes to set the following booth rental fees for all 
CBOE member organizations, regardless of their OCC status. Perimeter 
booths, which are currently $165 per month for OCC member firms and 
$300 per month for non-OCC member firms, will be $185 per month for all 
member organizations. Booths in the OEX pit, which are currently $330 
per month for OCC member firms and $700 per month for non-OCC member 
firms, will be $330 per month for all member organizations. CBOE is 
amending the Fee Schedule to reflect these changes, as well as the fact 
that CBOE no longer has a trading floor (or trading floor booths) on 
its second floor.
    To increase booth space rentals, a booth rental incentive plan will 
continue to be in effect for the period July through December 2004. All 
members and member firms may lease additional perimeter booth space at 
a rate of $100 per month per booth. The discounted price is applicable 
only to booths leased in excess of the quantity leased as of June 1, 
2004. For new members and member firms, the first four booths will be 
assessed at the rate schedule effective July 1, 2004, and any 
additional booths in excess of the initial four will be assessed at the 
reduced lease rate during the incentive period. All booth fees 
discounted under the incentive plan will revert to regular rates on 
January 1, 2005.

h. Prospective Fee Reduction Program Continued

    The Exchange proposes to modify and continue its Prospective Fee 
Reduction Program for fiscal year 2005, beginning on August 1, 2004. 
The Program is intended to limit fees in periods of high volume. CBOE 
represents that it has reviewed and adjusted the threshold for fee 
reductions, as it does each year, to account for the anticipated 
working capital needs of the Exchange for the coming year. Fee 
reductions will be in effect August 1, 2004 under the following 
scenarios:
    If CBOE volume exceeds predetermined average contracts per day 
(CPD) thresholds at the end of any month on a fiscal year-to-date (YTD) 
basis, Market-Maker and DPM transaction fees, as well as floor 
brokerage fees, will be reduced in the subsequent month according to 
the schedule below:

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                                                                       QQQ/
                                   Fees discount     Equities       Indexmarket     DPM trans.         Floor
        FY05 YTD avg. CPD            (percent)      marketmaker        maker           fees          brokerage
                                                    reductions      reductions      reductions      reductions
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1,300,000.......................              10           $.022           $.024           $.012           $.004
1,400,000.......................              15            .033            .036            .018            .006
1,500,000.......................              20            .044            .048            .024            .008
1,600,000.......................              25            .055            .060            .030            .010
1,700,000.......................              30            .066            .072            .036            .012
1,800,000.......................              35            .077            .084            .042            .014
1,900,000.......................              40            .088            .096            .048            .016
2,000,000.......................              45            .099            .108            .054            .018
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    A circular will be distributed notifying the Membership of any fee 
reduction that may be in effect.

i. Miscellaneous Non-Substantive Updates and Revisions

    CBOE notes minor changes in this filing to Fee Schedule Sections 4, 
12, and 18, as well as one subsection of the final section of the Fee 
Schedule, entitled ``Member Transaction Fee Policies and Rebate 
Programs.'' CBOE represents that these revisions are made to reconcile 
minor discrepancies between the Fee Schedule language that was 
submitted to the Commission for approval in previous rule change 
filings and the current Fee Schedule language. CBOE represents that the 
discrepancies appear to have been inadvertently made by Exchange staff 
who were trying to make the Fee Schedule more concise and easier to 
understand. The Exchange represents that in none of these cases was any 
change effected to the fees imposed under the Fee Schedule. 
Nevertheless, the Exchange represents that its Legal Division will 
formally remind Exchange staff that all future changes to the language 
of the Fee Schedule must be submitted to the Commission in the form of 
a rule change filing.

j. Transaction Fee Changes

    In anticipation of changes to the Exchange's Hybrid Trading System 
(hereinafter referred to as ``Hybrid 2.0''), the Exchange proposes the 
following changes to its transaction fees, which are all proposed to be 
effective as of July 1, 2004.\11\
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    \11\ The proposed rule change relating to the Exchange's Hybrid 
Trading System was recently approved by the Commission. See 
Securities Exchange Act Release No. 50003 (July 12, 2004), 69 FR 
43028 (July 19, 2004).
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(1) Market-Makers
    The Exchange represents that, in recognition of the role that 
Market-Makers will continue to play in providing depth and liquidity to 
the Exchange's Hybrid 2.0 markets, as well as to help offset the extra 
costs that Market-Makers are incurring to trade via the Hybrid 2.0 
trading system, the Exchange proposes to reduce the combined total of 
Market-Maker transaction and trade match fees by $.02 per contract, to 
a total of $.22 per contract in equity option classes. Market-Makers 
who will not be trading via the Hybrid 2.0 Trading System (including 
Non-Member market makers and Market-Makers trading in Index option 
classes, where Hybrid 2.0 will not be in use) will not receive the $.02 
per contract reduction. For administrative reasons, the Exchange 
proposes to include in the fee reduction those equity option classes 
that will not

[[Page 51132]]

initially trade on the Hybrid 2.0 platform, because it is anticipated 
that these equity option classes will eventually trade on the Hybrid 
2.0 platform. In the meantime, given the small trading volume of these 
equity option classes, the Exchange represents that it would be 
logistically burdensome for the Exchange and its clearing members to 
distinguish these equity option classes for different fee treatment.
(2) DPM Fees
    The Exchange proposes to reduce the transaction fees of current 
DPMs in Hybrid 2.0 option classes. DPMs who will not be trading via the 
Hybrid 2.0 Trading System (i.e., the DPMs in the QQQs and several other 
Index option classes, where Hybrid 2.0 will not be in use) will not 
receive the per contract reduction.
    CBOE represents that there are several reasons why these proposed 
reductions in DPM fees are reasonable and equitable in this context. 
CBOE represents that 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.\12\ CBOE represents that, notwithstanding the substantial 
additional responsibilities of DPMs, CBOE DPMs have traditionally 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 Act or 
other applicable law. CBOE believes that, due to the additional 
responsibilities borne by DPMs, it is reasonable and equitable under 
the Act for CBOE to assess lower transaction fees to DPMs than to 
Market-Makers.\13\
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    \12\ See CBOE Rule 8.85, ``DPM Obligations.''
    \13\ At the same time, as noted above, the Exchange also 
proposes to reduce Market-Maker fees under this plan.
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    The Exchange believes that it is particularly appropriate to re-
examine DPM fees at the present time, because parts of the Exchange's 
Hybrid 2.0 market structure initiative will effectively reduce the 
current compensation levels of DPMs in the future. CBOE believes that 
it is therefore equitable to reduce DPM transaction fees as a partial 
offset.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\14\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act,\15\ in particular, in that 
the proposed rule change provides for the equitable allocation of 
reasonable dues, fees, and other charges among CBOE members.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement of 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 of 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 Exchange has designated the foregoing proposed rule change, as 
amended, as a fee change pursuant to Section 19(b)(3)(A)(ii) of the Act 
\16\ and subparagraph (f)(2) of Rule 19b-4\17\ thereunder. Accordingly, 
the proposed rule change, as amended, will take effect upon filing with 
the Commission. At any time within 60 days of August 2, 2004, the 
Commission may summarily abrogate such proposed 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.\18\
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    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \17\ 17 CFR 240.19b-4(f)(2).
    \18\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers that period 
to commence on August 2, 2004, the date CBOE filed Amendment No. 2 
to the proposed rule change. See 15 U.S.C. 78s(b)(3)(C).
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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. 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-2004-38 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-2004-38. 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 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-2004-38 
and should be submitted on or before September 7, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18757 Filed 8-16-04; 8:45 am]
BILLING CODE 8010-01-P