[Federal Register Volume 71, Number 174 (Friday, September 8, 2006)]
[Notices]
[Pages 53148-53150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-14855]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54395; File No. SR-CBOE-2006-58]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Amendment No. 
1 Thereto Regarding DPM and e-DPM Membership Ownership Requirements and 
the Ultimate Matching Algorithm

August 31, 2006.

I. Introduction

    On June 14, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to change membership ownership requirements. 
The CBOE filed Amendment No. 1 to the proposed rule change on July 18, 
2006,\3\ which proposed to change certain aspects of the Ultimate 
Matching Algorithm (``UMA''). The proposed rule change was published 
for comment in the Federal Register on August 1, 2006.\4\ The 
Commission received no comments on the proposal, as amended. This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ See Securities Exchange Act Release No. 54216 (July 26, 
2006), 71 FR 35471.
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II. Description of the Proposal

    CBOE Rules 8.85 and 8.92 require that a DPM organization and e-DPM 
organization, respectively, own a certain number of Exchange 
memberships. Specifically, with respect to DPM organizations, CBOE Rule 
8.85 requires that each DPM organization own one Exchange membership 
for each trading location at which the organization serves as a DPM. 
CBOE Rule 8.92 requires that until July 12, 2007, each e-DPM 
organization is required to own one Exchange membership for every 30 
products allocated to the e-DPM, or

[[Page 53149]]

lease one Exchange membership for every 20 products allocated to the e-
DPM.\5\
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    \5\ After July 12, 2007, each e-DPM organization is required to 
own one Exchange membership for every 30 products allocated to the 
e-DPM.
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    CBOE proposes to modify these membership ownership requirements in 
connection with the Exchange's determination to apply a specific 
``appointment cost'' to each options class allocated to a DPM 
organization or an e-DPM organization. With respect to DPM 
organizations, CBOE Rule 8.85, as proposed to be amended, would require 
that each DPM organization own one Exchange membership, and own or 
lease such additional Exchange memberships as may be necessary based on 
the aggregate ``appointment cost'' for the classes allocated to the DPM 
organization. Each membership owned or leased by the DPM organization 
would have an appointment credit of 1.0. The appointment costs for the 
Hybrid 2.0 Option Classes and the Non-Hybrid Classes allocated to the 
DPM organization would be the same as the appointment costs set forth 
in CBOE Rule 8.3. The appointment cost for Hybrid Option Classes would 
be .01 per class.
    For example, if the DPM organization has been allocated such number 
of options classes that its aggregate appointment cost is 1.6, the DPM 
organization would be required to own at least one Exchange membership, 
and own or lease one additional Exchange membership. As it currently 
does for purposes of Remote Market Maker (``RMMs'') and Market-Maker 
appointments, the Exchange would rebalance the ``tiers'' set forth in 
proposed CBOE Rule 8.3(c)(i), excluding the ``AA'' and ``A+'' tiers, 
once each calendar quarter, which could result in additions or 
deletions to their composition. When a class changes ``tiers'' it would 
be assigned the ``appointment cost'' of that tier. Upon rebalancing, 
each DPM organization would be required to own or lease the appropriate 
number of Exchange memberships reflecting the revised ``appointment 
costs'' of the classes that have been allocated to it. CBOE Rule 8.85 
also would provide that a DPM organization is required to own or lease 
the appropriate number of Exchange memberships at the time a new 
options class allocated to it pursuant to CBOE Rule 8.95 begins 
trading.
    Additionally, because member organizations may be approved and 
function in a number of capacities at CBOE, including as a DPM 
organization, e-DPM organization, and as an RMM, CBOE proposes to allow 
the DPM organization to use any excess membership capacity in its 
capacity as an RMM or e-DPM. Specifically, in the event the member 
organization approved as the DPM organization is also approved to act 
as an RMM and/or e-DPM, and has excess membership capacity above the 
aggregate appointment cost for the classes allocated to it as the DPM, 
the member organization would be permitted to utilize the excess 
membership capacity to quote electronically in an appropriate number of 
Hybrid 2.0 Classes in the capacity of an RMM and not trade in open 
outcry, or to quote electronically in the Hybrid 2.0 Classes in which 
it is appointed an e-DPM. For example, if the DPM organization has been 
allocated such number of option classes that its aggregate appointment 
cost is 1.6, the member organization could request an appointment as an 
RMM in any combination of Hybrid 2.0 Classes whose aggregate 
``appointment cost'' does not exceed .40. The member organization would 
not function as a DPM in any of these additional classes. In the event 
the member organization utilizes any excess membership capacity to 
quote electronically in some additional Hybrid 2.0 Classes as an RMM or 
e-DPM, it would be required to comply with the provisions of CBOE Rules 
8.4(c) and Rule 8.93(vii), respectively. CBOE is also proposing similar 
changes to CBOE Rule 8.92, to apply to e-DPM organizations.
    Finally, CBOE proposes to amend the provisions of CBOE Rules 6.45A 
for DPMs and 6.45B for DPMs and LMMs, which provide that a DPM or LMM 
utilizing more than one membership in the trading crowd where a class 
is traded would count as two market participants for purposes of 
Component A of UMA. Under the proposal, a DPM (or LMM) would be 
required to exclusively use the portion of a membership(s) representing 
one-half the total appointment cost of the classes allocated to the DPM 
(or, in which the LMM has been appointed) at a particular trading 
station in order to count as two market participants, and not for any 
other purpose.
    For example, if a DPM's appointment cost is 2.2 for the classes 
allocated to it at a particular trading station, pursuant to proposed 
amendments to CBOE Rule 8.85(e), the DPM would be required to own one 
membership and own or lease two additional memberships. In addition, 
the DPM would be permitted to choose to count as two market 
participants for purposes of Component A of the Algorithm if the DPM 
exclusively utilizes 1.1 (one-half of 2.2) of the membership(s) it owns 
or leases in order to count as two market participants, and not utilize 
the 1.1 of the memberships for any other purpose. In this example, to 
comply with the membership ownership requirements and to count as two 
market participants for purposes of Component A, the DPM would be 
required to own one membership, and own or lease three additional 
memberships to satisfy its total cost of 3.3 (2.2 + 1.1).
    In amending CBOE Rules 6.45A and 6.45B, CBOE proposes to make it 
optional for a DPM (or LMM) to choose whether to exclusively use the 
portion of its membership(s) representing one-half the total 
appointment cost of the classes allocated to the DPM at a particular 
trading station in order to count as two market participants, or, 
instead, to use the excess membership capacity to quote electronically 
in Hybrid 2.0 Classes.

III. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, the requirements of Section 6 of the Act \6\ and 
the rules and regulations thereunder.\7\ The Commission specifically 
finds that the proposed rule change is consistent with Section 6(b)(5) 
of the Act \8\ in that it is designed to promote just and equitable 
principles of trade, to remove impediments and to perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The Commission 
believes that the proposal to apply the appointment cost structure that 
currently governs RMMs and Market Makers to DPMs and e-DPMs is 
reasonable. The Commission notes that there will continue to be a DPM 
allocated to each equity options class. Moreover, permitting DPMs and 
e-DPMs to use any excess membership capacity to trade options classes 
as RMM or DPM/e-DPM should enable them to more efficiently use their 
seats. Finally, the Commission believes that in light of the proposed 
changes to the appointment cost structure, the proposed changes to UMA, 
and the circumstances under which a DPM or

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LMM may count as two market participants, are consistent with the Act.
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    \6\ 15 U.S.C. 78f.
    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2006-58), as amended, is 
approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-14855 Filed 9-7-06; 8:45 am]
BILLING CODE 8010-01-P