[Federal Register Volume 69, Number 230 (Wednesday, December 1, 2004)]
[Notices]
[Pages 69966-69967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3403]



[[Page 69966]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50736; File No. SR-CBOE-2004-68]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. To Adopt a New Marketing Fee

November 24, 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 October 29, 2004, the Chicago Board Options Exchange, Inc. (``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 CBOE. On November 
2, 2004, CBOE submitted Amendment No. 1 to the proposed rule change.\3\ 
The CBOE has designated this proposal as one establishing or changing a 
due, fee, or other charge imposed by the CBOE under Section 
19(b)(3)(A)(ii) of the Act,\4\ and Rule 19b-4(f)(2) thereunder,\5\ 
which renders the proposal effective upon filing with the Commission. 
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.
    \3\ See letter from Andrew D. Spiwak, Director Legal Division 
and Chief Enforcement Attorney, CBOE, to Nancy Sanow, Assistant 
Director, Division of Market Regulation, Commission, dated November 
2, 2004 (``Amendment No. 1''). Amendment No. 1 replaced the 
originally filed proposed rule text in full.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 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 CBOE proposes to adopt a new marketing fee to be imposed on 
transactions of Market-Makers (including Designated Primary Market-
Makers, or DPMs, and electronic Designated Primary Market-Makers, or e-
DPMs) other than Market-Maker-to-Market-Maker transactions. The fee 
will be imposed at the rate of $.22 per contract on all classes of 
equity options. Below is the text of the proposed rule change. Proposed 
new language is italicized; proposed deletions are in [brackets].
Chicago Board Options Exchange, Inc. Fee Schedule
    1. Unchanged.
    2. MARKET MAKER, e-DPM & DPM MARKETING FEE (in option classes in 
which a DPM has been appointed) (6) $.[40]22
    3.-4. Unchanged.
Notes:
    (1)-(5) No Change.
    (6) The Marketing Fee will be assessed only on transactions of 
Market-Makers, e-DPMs and DPMs [resulting from customer orders from 
payment accepting firms with which the DPM has agreed to pay for that 
firm's order flow, and with respect to orders from customers that are 
for 200 contracts or less.] at the rate of $.22 per contract on all 
classes of equity options other than Market-Maker-to-Market-Maker 
transactions. This fee shall not apply to index options and options on 
ETFs. The fee shall apply to options on HOLDRs. Should any surplus of 
the marketing fees at the end of each month occur, those funds would be 
carried forward to the following month. The Exchange would then refund 
such surplus at the end of the quarter, if any, on a pro rata basis 
based upon contributions made by the Market-Makers, e-DPMs and DPMs.
    (7)-(14) No change.

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 its proposal and discussed any 
comments it had received regarding the proposal. 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
    Currently, the CBOE imposes a marketing fee of $.40 per option 
contract on Market-Maker transactions, including transactions of DPMs 
and e-DPMs, in all classes of options in which a DPM has been 
appointed. The marketing fee is assessed only on those Market-Maker, 
DPM and e-DPM transactions resulting from orders from customers of 
payment accepting firms (``payment accepting firms'') with which the 
DPM has agreed to pay for that firm's order flow, and only with respect 
to orders from customers that are for 200 contracts or less.
    The CBOE proposes to replace its current marketing fee that is 
assessed on DPM, e-DPM and Market Maker transactions in all equity 
option classes.\6\ The CBOE states that the purpose of the new 
marketing fee plan is to provide the members of the Exchange with the 
ability to compete for the opportunity to trade with those orders that 
might otherwise be routed to other exchanges. The proposed marketing 
fee would be assessed whereby DPMs, e-DPMs and Market-Makers would be 
debited $.22 for every contract they enter into on the Exchange other 
than Market-Maker-to-Market-Maker transactions, including all 
transaction between any combination of DPMs, e-DPMs, and Market-Makers. 
This fee would not apply to index options and options on ETFs, but 
would apply to options on HOLDRs.\7\
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    \6\ On August 3, 2004, the Exchange amended its marketing fee to 
incorporate e-DPMs as part of the existing marketing fee. See 
Securities Exchange Act Release No. 50212 (August 18, 2004), 69 FR 
52051 (August 24, 2004) (SR-CBOE-2004-55).
    \7\ HOLDRs are trust-issued receipts that represent an 
investor's beneficial ownership of a specified group of stocks. See 
Interpretation and Policy .07 to CBOE Rule 5.3.
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    The CBOE states that all funds generated by the marketing fee would 
be collected by the Exchange and recorded according to the DPM, 
station, and class where the options subject to the fee are traded 
(``Trading Crowds''). The money collected would be disbursed by the 
Exchange according to the instructions of the DPM. According to the 
Exchange, those funds would be available to the DPM solely for those 
Trading Crowds where the fee was assessed and could only be used by 
that DPM to attract orders in the classes of options for which the fee 
was assessed. The CBOE states that funds collected from e-DPMs would 
only be used to attract order flow for the classes in which the e-DPM 
is appointed. According to the CBOE, the Marketing Fee Oversight 
Committee, which the Exchange's Board of Directors has previously 
established, would conduct a quarterly review to determine the 
effectiveness of the proposed marketing fee and may recommend to the 
Exchange that it modify the fee in the future based upon its 
effectiveness.
    Similar to the current marketing fee program, the Exchange states 
that it would not be involved in the determination of the terms 
governing the orders that qualify for payment or the amount of any 
payment. The Exchange would provide administrative support for the 
program in such matters as maintaining the funds, keeping track of the 
number of qualified orders each firm directs to the Exchange, and

[[Page 69967]]

making the necessary debits and credits to the accounts of the traders 
and the payment accepting firms to reflect the payments that are made. 
According to the CBOE, fees collected during a calendar month would 
only be available to the DPM for payment for that calendar month's 
order flow. The Exchange believes that the rate of $.22 would generally 
result in all funds being paid out at the end of the calendar month.
    The CBOE states that the Marketing Fee Oversight Committee would 
review, on a quarterly basis, any surplus. Should any surplus of the 
marketing fees at the end of each month occur, those funds would be 
carried forward to the following month. The Exchange would then refund 
such surplus at the end of the quarter, if any, on a pro rata basis 
based upon contributions made by the Market-Makers. The Exchange 
believes that refunds, if any, would be de minimis. Thus, the Exchange 
states that refunding any surplus at the end of a quarter, rather than 
on a monthly basis, would be more efficient for Exchange 
administration.
    The Exchange believes that the $.22 per contract is an equitable 
allocation of a reasonable fee among CBOE members and is designed to 
enable the CBOE to compete with other markets in attracting options 
order flow in multiply traded options.
    According to the CBOE, it is important to note that Exchange 
Market-Makers, DPMs, and e-DPMs would have no way of identifying prior 
to execution whether a particular order is from a payment-accepting 
firm, or from a firm that does not accept payment for their order flow.
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 the CBOE's 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 that is 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

    The CBOE neither solicited nor received written comments 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)(ii) of the Act \10\ and subparagraph 
(f)(2) of Rule 19b-4 thereunder.\11\ Accordingly, the proposal will 
take effect upon filing with the Commission. At any time within 60 days 
after the filing of the proposed rule change, the Commission may 
summarily abrogate the 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.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(2).
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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-2004-68 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-2004-68. 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 Room. Copies of the 
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-2004-68 and should be submitted on or before 
December 22, 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. E4-3403 Filed 11-30-04; 8:45 am]
BILLING CODE 8010-01-P