[Federal Register Volume 70, Number 53 (Monday, March 21, 2005)]
[Notices]
[Pages 13559-13560]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1211]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51370; File No. SR-CBOE-2005-22]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated To Adopt an 
Inactivity Fee To Be Charged Against Remote Market-Makers That Fail To 
Commence Quoting in Their Appointed Classes

March 15, 2005.
    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 15, 2005, 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. 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

    CBOE proposes to adopt an inactivity fee to be charged against 
Remote Market-Makers (``RMMs'') that fail to commence quoting in their 
appointed classes. The text of the proposed rule change is available on 
the CBOE's Web site (http://www.cboe.com), at the CBOE's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 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 Exchange received approval of its RMM Program on March 14, 
2005.\3\ During the next several weeks, the Exchange will begin a 
solicitation process whereby members that are interested in becoming an 
RMM will submit to the Exchange their appointment requests.\4\ As the 
Exchange does not have unlimited systems bandwidth capacity to support 
an unlimited number of members quoting electronically in each product, 
it was necessary to develop procedures by which electronic quoting 
appointments would be allocated to members in the instance where demand 
(i.e., the number of members requesting an appointment) exceeds supply 
(i.e., the actual number of appointments). CBOE Rule 8.3A describes 
these procedures. In order to prevent a member that obtains an 
electronic appointment in a product from not initiating quoting in that 
product, the Exchange proposes to adopt an inactivity fee that would 
apply in two instances, as described below.
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    \3\ See Securities Exchange Act Release No. 51366.
    \4\ CBOE Rule 8.4(d) describes the appointment process for RMMs.
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Retaining Appointment Without Quoting

    This aspect of the proposed inactivity fee is structured to apply 
only in those rare instances when an RMM receives an appointment, 
retains its appointment, but does not submit quotes in that product 
during any portion of the rollout of the RMM Program. If an RMM 
receives an appointment and does not commence quoting in that appointed 
product within thirty days after the termination of the rollout of the 
RMM Program, the RMM would be assessed a $1,000 inactivity fee and the 
Exchange would reallocate the product to the next member on the waiting 
list (in accordance with proposed CBOE Rule 8.3A.) The Exchange 
represents that the RMM Program rollout would terminate no sooner than 
July 15, 2005. The inactivity fee (and subsequent reallocation) would 
occur on a per product basis. For example, if during the requisite 
measurement period an RMM does not submit quotes in five products in 
which it requested and received an allocation, it would be assessed a 
$5,000 fee and the five products would be reallocated.

Relinquishing Appointment Without Quoting

    The second instance in which the inactivity fee would apply occurs 
when an RMM receives an appointment in a product and subsequently 
relinquishes its appointment in that product (prior to termination of 
the RMM Program rollout) without having submitted any quotes during the 
requisite period. Using the example above in which an RMM requested and 
received an appointment in five classes, a $1,000 inactivity fee would 
be assessed for each product in which the RMM terminates its 
appointment prior to the end of the rollout of the RMM Program provided 
the RMM has not submitted any quotes prior to its relinquishing the 
appointment.
    The CBOE believes that the imposition of an inactivity fee is 
necessary in order to prevent members from receiving appointments in 
products for which they have no ability to quote or no intention of 
quoting. Without the fee, members could obtain multiple appointments 
and choose not to quote. The CBOE believes that this would affect the 
overall viability of the RMM Program on two fronts. First, it would 
deprive the Exchange of transaction revenue and, second, it would 
prevent other members on the waiting list from quoting. The ability of 
one member to hoard appointments could severely affect the amount of 
liquidity offered by keeping other ready, willing, and able-to-quote 
members from quoting. In this regard, the CBOE believes that the $1,000 
fee represents a conservative estimate of the amount of revenue the 
Exchange would lose when an RMM receives an appointment in a class but 
chooses not to submit quotes. An RMM very easily may avoid assessment 
of the fee simply by submitting quotes during any point of the rollout 
of the RMM Program.
    The CBOE represents that members would have ample time to have 
their systems fully operational prior to the

[[Page 13560]]

termination of the rollout of the RMM Program. In this regard, the 
Exchange anticipates notifying all RMMs of the products they have 
received as part of their appointment by approximately April 15, 2005. 
The Exchange anticipates that the RMM rollout will begin April 28, 
2005. Even with respect to classes that rollout towards the end of the 
period, RMMs would still have no fewer than 30 days during which to 
quote before they are subject to being assessed an inactivity fee. In 
the event an RMM uses a leased membership to receive appointed 
products, the lessee (and not the lessor) would be assessed the fee. 
The Exchange believes it is reasonable to assess the fee upon the 
lessee in this instance because it is the party that requested the 
appointment, received the appointment, and failed to quote the 
appointment.
    The Exchange provides for one exception to the inactivity fee. RMM 
organizations that relinquish appointments during the requisite period 
by virtue of the fact that they obtained an appointment in the 
identical product either as a Designated Primary Market-Maker (``DPM'') 
or Electronic DPM (``e-DPM'') would not be required to pay the 
inactivity fee. The Exchange believes it is reasonable to exempt an RMM 
from payment of the fee in this limited instance because it would be 
required to quote the product in its new status as DPM or e-DPM.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with the Act 
and the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, the requirements of section 
6(b) of the Act.\5\ Specifically, CBOE believes the proposed rule 
change is consistent with section 6(b)(4) of the Act \6\ in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among CBOE members.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    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 comments.

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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change 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-2005-22 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-2005-22. 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-2005-22 and should be submitted on or before April 11, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1211 Filed 3-18-05; 8:45 am]
BILLING CODE 8010-01-P