Document ID: SEC-2012-1323-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2012-08-10T04:00Z

[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47887-47890]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19610]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67597; File No. SR-CBOE-2012-065]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Options Regulatory Fee

August 6, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 47888]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 31, 2012, the Chicago Board Options Exchange, Incorporated (the 
``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. 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 the 
Substance of the Proposed Rule Change

    Chicago Board Options Exchange, Incorporated proposes to amend its 
Options Regulatory Fee. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

1. Purpose
    The Exchange proposes to amend the Options Regulatory Fee (``ORF'') 
to increase it from $0.0045 per contract to $0.0065 per contract in 
order to help offset increased regulatory expenses. The Exchange also 
proposes to apply the ORF to Linkage orders.\3\ The Exchange is 
amending the ORF due to substantial increases in resources devoted to 
regulatory services, including the recent hiring of many new employees, 
increased office space and regulatory systems enhancements. The 
proposed fee would be operative on August 1, 2012.
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    \3\ ``Linkage'' orders refers to orders routed to and executed 
on another exchange pursuant to the Options Order Protection and 
Locked/Crossed Market Plan (the ``Plan'').
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    The ORF is assessed by the Exchange to each Trading Permit Holder 
for all options transactions executed or cleared by the Trading Permit 
Holder that are cleared by The Options Clearing Corporation (``OCC'') 
in the customer range, i.e., transactions that clear in a customer 
account at OCC, excluding Linkage orders, regardless of the marketplace 
of execution. In other words, the Exchange imposes the ORF on all 
customer-range transactions executed by a Trading Permit Holder, even 
if the transactions do not take place on the Exchange.\4\ The ORF also 
is charged for transactions that are not executed by a Trading Permit 
Holder but are ultimately cleared by a Trading Permit Holder. In the 
case where a Trading Permit Holder executes a transaction and a Trading 
Permit Holder clears the transaction, the ORF is assessed to the 
Trading Permit Holder who executed the transaction. In the case where a 
non-Trading Permit Holder executes a transaction and a Trading Permit 
Holder clears the transaction, the ORF is assessed to the Trading 
Permit Holder who clears the transaction. The ORF is collected 
indirectly from Trading Permit Holders through their clearing firms by 
OCC on behalf of the Exchange.
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    \4\ Exchange rules require each Trading Permit Holder to record 
the appropriate account origin code on all orders at the time of 
entry in order to allow the Exchange to properly prioritize and 
route orders and assess transaction fees pursuant to the rules of 
the Exchange and report resulting transactions to the OCC. CBOE 
order origin codes are defined in CBOE Regulatory Circular RG12-057. 
The Exchange represents that it has surveillances in place to verify 
that Trading Permit Holders mark orders with the correct account 
origin code.
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    Customer-range Linkage orders would no longer be excluded from the 
ORF. The Exchange believes that its broad regulatory responsibilities 
with respect to Trading Permit Holder activities, irrespective of where 
their transactions take place, supports applying the ORF to Linkage 
orders. The Exchange has a statutory obligation to enforce compliance 
by Trading Permit Holders and their associated persons with the 
Exchange Act and the Rules of the Exchange and to surveil for other 
manipulative conduct by market participants (including non-Trading 
Permit Holders) trading on the Exchange. The Exchange cannot 
effectively surveil for such conduct without looking at and evaluating 
activity across all options markets. Many of the Exchange's market 
surveillance programs require the Exchange to look at and evaluate 
activity across all options markets, such as surveillance for position 
limit violations, manipulation, frontrunning and contrary exercise 
advice violations/expiring exercise declarations. In addition, the Plan 
requires Participating Options Exchanges to conduct surveillance of 
their respective markets on a regular basis to ascertain the 
effectiveness of the policies and procedures to prevent Trade-Throughs 
and to take prompt action to remedy deficiencies in such policies and 
procedures.\5\ The Exchange also notes the ORFs currently in place at 
other exchanges do not exclude Linkage orders.\6\
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    \5\ See Section 5(a)(ii) of the Plan.
    \6\ The BOX Options Exchange, LLC (``BOX''), the International 
Securities Exchange, LLC (``ISE''), NYSE Arca, Inc. (``NYSEArca''), 
NYSE MKT LLC (``NYSE MKT''), NASDAQ OMX PHLX, LLC (``Phlx'') and 
NASDAQ Stock Market, LLC (``NASDAQ'') all charge ORFs.
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    The ORF is designed to recover a material portion of the costs to 
the Exchange of the supervision and regulation of Trading Permit Holder 
customer options business, including performing routine surveillances, 
investigations, as well as policy, rulemaking, interpretive and 
enforcement activities. The Exchange believes that revenue generated 
from the ORF, when combined with all of the Exchange's other regulatory 
fees and fines, will cover a material portion, but not all, of the 
Exchange's regulatory costs. The Exchange notes that its regulatory 
responsibilities with respect to Trading Permit Holder compliance with 
options sales practice rules have been allocated to FINRA under a 17d-2 
agreement. The ORF is not designed to cover the cost of options sales 
practice regulation.
    The Exchange will continue to monitor the amount of revenue 
collected from the ORF to ensure that it, in combination with its other 
regulatory fees and fines, does not exceed the Exchange's total 
regulatory costs. If the Exchange determines regulatory revenues exceed 
regulatory costs, the Exchange will adjust the ORF by submitting a fee 
change filing to the Commission. The Exchange notifies Trading Permit 
Holders of adjustments to the ORF via regulatory circular.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\7\ Specifically, the 
Exchange believes the proposed rule

[[Page 47889]]

change is consistent with Section 6(b)(4) of the Act, \8\ which 
provides that Exchange rules may provide for the equitable allocation 
of reasonable dues, fees, and other charges among its Permit Holders 
and other persons using its facilities. The Exchange believes the 
proposed fee change is reasonable because the adjustment would serve to 
help offset increased regulatory expenses but does not result in total 
regulatory revenue exceeding total regulatory costs. The Exchange is 
amending the ORF due to substantial increases in resources devoted to 
regulatory services, including the recent hiring of many new employees, 
increased office space and regulatory systems enhancements.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes applying the ORF to customer-range Linkage 
orders is reasonable and appropriate because the Exchange has broad 
regulatory responsibilities with respect to Trading Permit Holder 
activities, irrespective of where their transactions take place. The 
Exchange has a statutory obligation to enforce compliance by Trading 
Permit Holders and their associated persons with the Exchange Act and 
the Rules of the Exchange and to surveil for other manipulative conduct 
by market participants (including non-Trading Permit Holders) trading 
on the Exchange. The Exchange cannot effectively surveil for such 
conduct without looking at and evaluating activity across all options 
markets. Many of the Exchange's market surveillance programs require 
the Exchange to look at and evaluate activity across all options 
markets, such as surveillance for position limit violations, 
manipulation, frontrunning and contrary exercise advice violations/
expiring exercise declarations. In addition, the Plan requires 
Participating Options Exchanges to conduct surveillance of their 
respective markets on a regular basis to ascertain the effectiveness of 
the policies and procedures to prevent Trade-Throughs and to take 
prompt action to remedy deficiencies in such policies and 
procedures.\9\ The Exchange also notes the ORFs currently in place at 
other exchanges do not exclude Linkage orders.\10\
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    \9\ See Section 5(a)(ii) of the Plan.
    \10\ The BOX Options Exchange, LLC (``BOX''), the International 
Securities Exchange, LLC (``ISE''), NYSE Arca, Inc. (``NYSEArca''), 
NYSE MKT LLC (``NYSE MKT''), NASDAQ OMX PHLX, LLC (``Phlx'') and 
NASDAQ Stock Market, LLC (``NASDAQ'') all charge ORFs.
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    The Exchange believes the ORF is equitable and not unfairly 
discriminatory because it is objectively allocated to Trading Permit 
Holders in that it is charged to all Trading Permit Holders on all 
their transactions that clear as customer at the OCC. Moreover, the 
Exchange believes the ORF ensures fairness by assessing higher fees to 
those Trading Permit Holders that require more Exchange regulatory 
services based on the amount of customer options business they conduct. 
Regulating customer trading activity is much more labor intensive and 
requires greater expenditure of human and technical resources than 
regulating non-customer trading activity, which tends to be more 
automated and less labor-intensive. As a result, the costs associated 
with administering the customer component of the Exchange's overall 
regulatory program are materially higher than the costs associated with 
administering the non-customer component (e.g., Trading Permit Holder 
proprietary transactions) of its regulatory program.\11\
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    \11\ If the Exchange changes its method of funding regulation or 
if circumstances otherwise change in the future, the Exchange may 
decide to impose the ORF or a separate regulatory fee on Trading 
Permit Holders if the Exchange deems it advisable.
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    The ORF is designed to recover a material portion of the costs of 
supervising and regulating Trading Permit Holder customer options 
business including performing routine surveillances, investigations, 
examinations, financial monitoring, and policy, rulemaking, 
interpretive, and enforcement activities. The Exchange will continue to 
monitor the amount of revenue collected from the ORF to ensure that it, 
in combination with its other regulatory fees and fines, does not 
exceed the Exchange's total regulatory costs. If the Exchange 
determines regulatory revenues exceed regulatory costs, the Exchange 
will adjust the ORF by submitting a fee change filing to the 
Commission. The Exchange notifies Trading Permit Holders of adjustments 
to the ORF via regulatory circular.

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 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 Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \12\ of the Act and paragraph (f) of Rule 19b-4 \13\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend 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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-065 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2012-065. This file 
number should be included on the subject line if email 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 Web site 
viewing and printing in the Commission's Public Reference Room on 
official business days between the hours of 10 a.m. and

[[Page 47890]]

3 p.m. Copies of such filing also will be available for inspection and 
copying at the principal offices of the Exchange. 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-2012-065, and should be submitted 
on or before August 31, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19610 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P