Document ID: SEC-2006-0114-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-01-31T05:00Z

[Federal Register: January 31, 2006 (Volume 71, Number 20)]
[Notices]               
[Page 5093-5094]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja06-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53172; File No. SR-CBOE-2006-07]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Dividend, Merger, and Short Stock 
Interest Spread Fee Cap Program

January 24, 2006.
    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 January 13, 2006, 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. CBOE 
has designated the proposed rule change as one establishing or changing 
a due, fee, or other charge, pursuant to Section 19(b)(3)(A)(ii) of the 
Act \3\ and Rule 19B-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 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

    CBOE proposes to amend its Fees Schedule to amend the definitions 
of dividend, merger and short stock interest spreads for purposes of 
the Exchange's strategy fee cap program.
    The text of the proposed rule change is available on CBOE's Web 
site at http://www.cboe.com, at the Office of the Secretary at CBOE, 

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 proposal. 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 currently caps market-maker, firm, and broker-dealer 
transaction fees associated with dividend spread, merger spread and 
short stock interest spread transactions (``Strategy Fee Cap''). The 
definition of each strategy is set forth on the CBOE Fees Schedule.\5\ 
The Strategy Fee Cap is in effect as a pilot program that is due to 
expire on March 1, 2006.
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    \5\ See CBOE Fees Schedule, fn. 13.
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    The Exchange proposes to amend the definitions of dividend, merger 
and short stock interest spreads for purposes of the Strategy Fee Cap 
program, in order to add clarity and to make the definitions more 
consistent with each other.
    First, the Exchange proposes to amend the definitions of dividend, 
merger, and short stock interest spreads in order to clarify that 
transactions done to achieve a dividend, merger or short stock interest 
arbitrage do not necessarily need to be ``spreads'' in order to qualify 
for the Strategy Fee Cap. According to the market participants 
(generally professionals) that engage in these strategies, each of 
these strategies can be achieved either by purchasing and selling the 
same option series or different options series. Accordingly, as 
explained in further detail below, the Exchange proposes to revise each 
definition to refer to each strategy as a ``strategy'' instead of as a 
``spread'' and to change each definition in certain respects to make 
clear that transactions done to achieve a dividend, merger, or short 
stock interest arbitrage that involve only one options series may also 
qualify for the Strategy Fee Cap.
    Second, the Exchange is also proposing changes to the definition of 
each strategy to better reflect the similarities between the 
strategies. Dividend, merger, and short stock interest strategies are 
strategies that have similar economic risks and are executed in similar 
ways. As explained in more detail below, each proposed definition will 
be clarified to reflect that each strategy involves the ``purchase, 
sale and exercise'' of options. Each proposed definition will also be 
clarified to reflect that the options involved must be of the ``same 
class''.
    The Exchange defines a dividend spread for purposes of the Strategy 
Fee Cap as any trade done to achieve a dividend arbitrage between any 
two deep-in-the-money options. The Exchange proposes to change 
``dividend spread'' to ``dividend strategy'', and proposes to define a 
dividend strategy as ``transactions done to achieve a dividend 
arbitrage involving the purchase, sale and exercise of in-the-money 
options of the same class, executed prior to the date on which the 
underlying stock goes ex-dividend.'' The word ``two'' is not included 
in the new definition so that transactions involving only a single 
options series that are done to achieve a dividend arbitrage may also 
qualify for the Strategy Fee Cap. The word ``deep'' is also not 
included in the new definition because the options used do not 
necessarily need to be deep-in-the-money options and also because of 
the difficulty in defining what constitutes ``deep'' in-the-money. The 
definition is clarified by making explicit two requirements: the 
options must be of the same class and the transactions must be effected 
prior to the date on which the underlying stock goes ex-dividend.
    The Exchange defines a merger spread for purposes of the Strategy 
Fee Cap as a transaction executed pursuant to a strategy involving the 
simultaneous purchase and sale of options of the same class and 
expiration date, but with different strike prices, followed by the 
exercise of the resulting long options position, each executed prior to 
the date on which shareholders of record are required to elect their 
respective form of consideration, i.e., cash or stock. The Exchange 
proposes to change ``merger spread'' to ``merger strategy'', and 
proposes to define a merger strategy as ``transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of options 
of the same class and expiration date, executed prior to the date on 
which shareholders of record are required to elect their respective 
form of consideration, i.e., cash or stock.'' The proposed definition 
does not include the words ``but with different strike prices'' so that 
transactions involving only a single options series that are done to 
achieve

[[Page 5094]]

a merger arbitrage may also qualify for the Strategy Fee Cap. The word 
``simultaneous'' is also not included in the new definition because the 
purchase and sale transactions do not necessarily need to be executed 
simultaneously.
    The Exchange defines a short stock interest spread for purposes of 
the Strategy Fee Cap as a spread that uses two deep in-the-money put 
options followed by the exercise of the resulting long position of the 
same class in order to establish a short stock interest arbitrage 
position. The Exchange proposes to change ``short stock interest 
spread'' to ``short stock interest strategy'', and proposes to define a 
short stock interest strategy as ``transactions done to achieve a short 
stock interest arbitrage involving the purchase, sale and exercise of 
in-the-money options of the same class.'' The words ``spread'' and 
``two'' are not included in the new definition so that transactions 
involving only a single options series that are done to achieve a short 
stock interest arbitrage may also qualify for the Strategy Fee Cap. The 
word ``deep'' is not included in the new definition for the same 
reasons it was removed from the definition of dividend strategy. Also, 
``put'' is not included in the new definition because a short stock 
interest strategy can be accomplished using either calls or puts.
    The Exchange proposes one additional minor clarifying change to 
footnote 13 of the Fees Schedule. The Exchange proposes to clarify that 
the $50,000 per month fee cap is ``per initiating member'' as well as 
per initiating firm, because the cap also applies to individual members 
effecting these strategies.
    The Exchange believes that accommodating these transactions by 
keeping fees low will attract additional liquidity to the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act \6\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \7\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees, and other charges among its members and issuers and other persons 
using its facilities.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 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

    No written comments were solicited or received 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)(ii) of the Act \8\ and subparagraph (f)(2) of Rule 19b-4 
thereunder \9\ because it establishes or changes a due, fee, or other 
charge. 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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    \8\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \9\ 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 rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-CBOE-2006-07. 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 such 
filing also will be available for inspection and copying at the 
principal office of 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-2006-07 and should be submitted on or before February 21, 2006.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-1165 Filed 1-30-06; 8:45 am]

BILLING CODE 8010-01-P