[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30251-30252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14026]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-443553; File No. SR-CBOE-2001-18]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated To Exempt Certain Deep-in-the-Money Options 
Transactions From the Exchange Marketing Fee

May 25, 2001.
    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 April 10, 2001, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items, I, II, and III below, which Items have been 
prepared by the 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

    The CBOE proposes to make a change to its marketing fee to exempt 
call/put ``combo'' transactions from the fee. The text of the proposed 
rule change is available at the 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 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. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 30252]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Last year CBOE imposed a $.40 per contract marketing fee to collect 
funds that the appropriate Designated Primary Market Maker (``DPM'') 
may use for marketing its services and attracting order flow to the 
CBOE.\3\ Initially, this fee was applicable to all market-maker to 
market-maker options transactions. Thereafter, the Exchange determined 
that the fee was making it unprofitable for market makers to do 
reversal and conversion transactions, in which a market maker trades a 
given amount of an underlying security against an equivalent number of 
call/put ``combos'' through buying the call and selling the put (or 
vice versa) in equal quantities with the same strike price in the same 
expiration month. The Exchange therefore amended its marketing fee to 
waive the fee in the case of call/put combo transactions used in 
reversals and conversions.\4\
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    \3\ See Securities Exchange Act Release No. 43112 (August 3, 
2000), 65 FR 49040 (August 10, 2000) (SR-CBOE-2000-28).
    \4\ See Securities Exchange Act Release No. 44095 (March 23, 
2001), 66 FR 17459 (March 30, 2001) (SR-CBOE-2001-09).
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    The Exchange is now filing this rule change proposal to exempt 
certain ``spreads'' \5\ as well as ``by write'' and ``synthetic'' 
transactions \6\ involving ``deep in the money'' \7\ options. In the 
CBOE's view, these transactions, like reversals and conversions, enable 
popular trading strategies that contribute to market liquidity, but 
they usually have smaller profit margins than other types of trades. 
The CBOE believes that, when the $.40 marketing fee is imposed upon the 
call/put combo transactions, the trades may become unprofitable.
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    \5\ For purposes of this filing, the term ``spread''means an 
options transaction involving the simultaneous purchase and/or sale 
of one or more contracts of at least two different series of the 
same class of options (i.e., options covering the same underlying 
security), which transaction is executed at limit or market prices 
on the floor of the Exchange. E-mail from Chris Hill, Attorney, 
CBOE, to Cyndi Nguyen, Attorney, SEC, dated May 18, 2001.
    \6\ In a ``buy write,'' a market maker buys stock and sells 
calls of a given series in a 1-to-1 ratio, creating the equivalent 
of a sale of puts of the same series. A ``synthetic'' is the 
opposite: The market maker sells stock and buys calls in a 1-to-1 
ratio, creating the equivalent of a purchase of puts of the same 
series.
    \7\ For purposes of marketing fee waivers, the CBOE defines 
``deep in the money'' options as options that are ``in the money'' 
by a minimum of both $10 and 20% of the closing value of the 
underlying security on either the trade date or the date immediately 
prior to the trade date.
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    Consequently, the Exchange has decided to exempt from the marketing 
fee all buy-write and synthetic transactions involving at least 200 
deep-in-the-money options contracts for a particular class, as well as 
spread transaction involving a total of at least 400 deep-in-the-money 
option contracts for a particular class. The Exchange will use trade 
data to determine qualifying transactions, and may require market 
makers to submit documentation showing that specific trades qualify for 
the exemption.
2. Statutory Basis
    The CBOE believes 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) \9\ in particular, in that it is designed to provide 
for the equitable allocation of reasonable dues, fees, and other 
changes 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 CBOE 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

    The proposed rule change 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\ because it establishes or changes a due, fee, or other 
charge imposed by the Exchange. 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.
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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 proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 such filing will also be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to file number SR-CBOE-2001-18 and should be 
submitted by June 26, 2001.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14026 Filed 6-4-01; 8:45 am]
BILLING CODE 8010-01-M