Document ID: SEC-2011-0514-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2011-04-13T04:00Z

[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Notices]
[Pages 20793-20796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8791]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64217; File No. SR-CBOE-2011-030]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to PAR Official Fees

April 6, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 30, 2011, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``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

[[Page 20794]]

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

    Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to amend its Fees Schedule to establish volume 
threshold tiers for the assessment of PAR Official Fees based on the 
percentage of volume that is effected by a PAR Official on behalf of an 
order originating firm or, as applicable, an executing firm. The 
proposed volume thresholds will apply in all options classes that have 
a PAR Official available to execute orders (``PAR Official Classes''), 
except Volatility Index Options. The text of the proposed rule change 
is available on the Exchange's Web site (http://www.cboe.org/legal), 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 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. CBOE 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
    CBOE is proposing to amend its Fees Schedule effective April 1, 
2011 to establish volume threshold tiers for the assessment of PAR 
Official Fees in all PAR Official Classes \3\ other than Volatility 
Index Options.\4\ CBOE amended its Fees Schedule to establish PAR 
Official Fees in January 2011.\5\ These fees apply to all orders 
executed by a PAR Official,\6\ except for customer orders (``C'' origin 
code) that are not directly routed to the trading floor (an order that 
is directly routed to the trading floor is directed to a PAR Official 
for manual handling by use of a field on the order ticket). In classes 
other than Volatility Index Options, such orders are currently charged 
$.02 per contract and, like floor brokerage fees, a discounted rate of 
$.01 per contract applies for crossed orders. These fees help to offset 
the Exchange's costs of providing PAR Official services (e.g., 
salaries, etc). CBOE believes that the proposed tier structure will 
more equitably and appropriately assess the PAR Official Fees to those 
Trading Permit Holders that rely more heavily on PAR Officials to 
conduct their floor brokerage business. Reliance on PAR Officials as 
the primary means of execution is inconsistent with the Exchange's 
intent to provide PAR Official services as a supplementary means of 
execution for incidental orders. CBOE believes that, after further 
consideration, the existing fee structure does not allocate these fees 
currently to take into consideration the amount that Trading Permit 
Holders rely on PAR Officials such that those Trading Permit Holders 
that incidentally use PAR Officials are assessed the same fee as 
Trading Permit Holders that routinely conduct their business through 
PAR Officials and rely heavily on PAR Officials for the execution of 
orders.
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    \3\ Currently, CBOE does not have a PAR Official available to 
execute orders in the OEF, OEX, SPX and XEO options classes.
    \4\ CBOE amended its Fees Schedule in March 2011 to establish 
distinct PAR Official Fees for Volatility Index Options to eliminate 
the disparity between Floor Brokerage Fees and PAR Official Fees 
assessed in Volatility Index Options. CBOE will continue to assess 
the PAR Official Fees in Volatility Index Options established in SR-
CBOE-2011-022. See Securities Exchange Act Release No. 64070 (March 
11, 2011), 76 FR 15025 (March 18, 2011) (SR-CBOE-2011-022).
    \5\ See Securities Exchange Act Release No. 67301 (January 11, 
2011), 76 FR 2934 (January 18, 2011) (SR-CBOE-2010-116).
    \6\ A PAR Official is an Exchange employee or independent 
contractor whom the Exchange may designate as being responsible for 
(i) operating the PAR workstation in a Designated Primary Market-
Maker trading crowd with respect to the classes of options assigned 
to him/her; (ii) when applicable, maintaining the book with respect 
to the classes of options assigned to him/her; and (iii) effecting 
proper executions of orders placed with him/her. The PAR Official 
may not be affiliated with any Trading Permit Holder that is 
approved to act as a Market-Maker. See CBOE Rule 7.12.
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    CBOE is proposing to amend the Fees Schedule to establish volume 
threshold tiers for the assessment of the PAR Official Fees in all PAR 
Official Classes except Volatility Index Options. Specifically, CBOE is 
proposing to assess PAR Official Fees based on the percentage of an 
order originating firm's or, as applicable, an executing firm's total 
monthly volume that is effected by a PAR Official during a calendar 
month. The percentage will be calculated on a monthly basis by dividing 
the number of contracts executed by PAR Officials on behalf of an order 
originating firm or executing firm (as applicable) by the total number 
of contracts executed in open outcry (by or on behalf of an order 
originating firm or, as applicable, an executing firm) in PAR Official 
Classes. Contracts in Volatility Index Options shall be excluded from 
this calculation. The following sets forth the tier levels and specific 
fees that would be assessed to orders that are subject to PAR Official 
Fees:

 
------------------------------------------------------------------------
                                    % Monthly
                                      volume                   Crossed
            Tier level               executed     Standard      orders
                                   through PAR     orders     (per side)
                                     official
------------------------------------------------------------------------
1................................      0-24.99          N/A          N/A
2................................     25-49.99         $.02         $.01
3................................     50-74.99          .03         .015
4................................       75-100          .04          .02
------------------------------------------------------------------------

    For example, a Floor Broker Trading Permit Holder would be assessed 
$.02 for all standard (non-cross) orders and $.01 for all crossed 
orders executed by a PAR Official on behalf of the Floor Broker during 
a calendar month if 25.5% of the Floor Broker Trading Permit Holder's 
total monthly (open outcry) volume in PAR Official Classes is executed 
by a PAR Official (Tier 2).
    The PAR Official Fees compensate CBOE for providing overflow 
services to

[[Page 20795]]

order originating firms or, as applicable, executing firms, 
particularly Floor Brokers,\7\ when they do not have personnel 
available to act as agent. Some Trading Permit Holders or TPH 
organizations obtain only one or two Floor Broker Trading Permits, 
making it unlikely that, regardless of business level, they could cover 
all locations on the Exchange and thus rely on CBOE personnel as part 
of the Floor Broker's daily, ongoing business operations. CBOE is 
proposing to establish volume threshold tiers to reduce or eliminate 
PAR Official Fees for those order originating firms or executing firms 
that maintain sufficient staff to manage their floor brokerage 
operations and thus, do not rely heavily on CBOE personnel to execute 
their orders. CBOE believes that those firms that rely heavily on PAR 
Officials to conduct their floor brokerage business, such that PAR 
Officials execute more than an incidental number of orders on their 
behalf, may obtain a minimum number of Trading Permits to access the 
floor. Thus, these firms subsidize their floor brokerage operations at 
CBOE's expense in that PAR Officials are either contractors paid by 
CBOE or CBOE employees. Under the current proposal, Trading Permit 
Holders that routinely rely on PAR Officials to execute their orders 
will be subject to higher PAR Official Fees as CBOE is, in effect, 
subsidizing their floor brokerage operations and going beyond the 
Exchange's intent to provide PAR Official services as a supplementary 
means of execution for overflow orders.
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    \7\ CBOE Rule 6.70 provides: ``A Floor Broker is an individual 
(either a Trading Permit Holder or a nominee of a TPH organization) 
who is registered with the Exchange for the purpose, while on the 
Exchange floor, of accepting and executing orders received from 
Trading Permit Holders or from registered broker-dealers. A Floor 
Broker shall not accept an order from any other source unless he is 
the nominee of a TPH organization approved to transact business with 
the public in accordance with Rule 9.1. In the event the 
organization is approved pursuant to Rule 9.1, a Floor Broker who is 
the nominee of such organization may then accept orders directly 
from public customers where (i) the organization clears and carries 
the customer account or (ii) the organization has entered into an 
agreement with the public customer to execute orders on its behalf. 
Among the requirements a Floor Broker must meet in order to register 
pursuant to Rule 9.1 is the successful completion of an examination 
for the purpose of demonstrating an adequate knowledge of the 
securities business.''
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    An additional consideration when evaluating the equitability of the 
proposed tier structure is the cost of each Trading Permit. For 
example, Floor Broker Trading Permit Holders are subject to a $6,000 
per month Trading Permit Fee.\8\ A Floor Broker Trading Permit Holder 
that requires ten Floor Broker Trading Permits to adequately staff its 
business is subject to a cost of $60,000 per month for Trading Permit 
Fees (totaling $720,000 per year). By comparison, a Trading Permit 
Holder that routes the majority of its orders to PAR Officials for 
execution and maintains one Trading Permit is subject to a $6,000 per 
month Trading Permit Fee ($72,000 annually). The existing PAR Official 
Fee structure that imposes a flat per contract fee does not provide an 
incentive for firms to adequately staff their business as each Trading 
Permit Holder is currently assessed the same PAR Official Fees.
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    \8\ See CBOE Fees Schedule, Section 10.
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    As provided above, PAR Officials are intended to provide overflow 
services to Trading Permit Holders. CBOE never intended PAR Officials 
to serve as the primary means of execution for order originating firms 
or executing firms. Heavy reliance on PAR Officials subjects the 
Exchange to the additional expense and undue strain of providing the 
additional staffing of PAR Officials. CBOE believes that this proposal 
will ``level the playing field'' between those Trading Permit Holders 
that rely incidentally on PAR Officials and those Trading Permit 
Holders that rely heavily on PAR Officials by basing the PAR Official 
Fees on an order originating firm's or, as applicable, an executing 
firm's overall reliance on a PAR Official to conduct their business. 
Trading Permit Holders that adequately staff their business operations 
and rely incidentally on PAR Officials are incurring higher costs to 
retain a sufficient number of Trading Permits and should not be subject 
to the same amount for PAR Official Fees incurred by a Trading Permit 
Holder that relies disproportionately on PAR Officials to conduct its 
floor brokerage business because it does not maintain an adequate 
number of Trading Permits to conduct its floor brokerage business and 
further, is not subject to the cost of the additional Trading Permits 
required to adequately staff its business.
    Based on the data generated for January 2011, approximately 40% of 
CBOE Floor Broker Trading Permit Holders would fall under Tier 1 and 
would no longer be subject to PAR Official Fees. In addition, 
approximately one-third of the Floor Broker Trading Permit Holders fall 
under Tier 4, having a PAR Official execute more than 75% of the 
Trading Permit Holder's total monthly volume executed in open outcry in 
PAR Official Classes. The proposed volume threshold tiers apportion the 
higher cost to those Floor Broker Trading Permit Holders that rely 
heavily on PAR Officials to conduct their daily business. For these 
reasons, CBOE believes that the proposed implementation of volume 
threshold tiers is appropriate and establishes an objective standard 
for the equitable assessment of the PAR Official Fees.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Securities Exchange Act of 1934 (``Act''), \9\ in 
general, and furthers the objectives of Section 6(b)(4) \10\ of the Act 
in particular, in that it is designed to provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
trading permit holders and other persons using its facilities. The 
Exchange believes the proposed change is equitable, reasonable and not 
unfairly discriminatory, in that, in general, PAR Official Fees are 
intended to help the Exchange recover its costs of providing PAR 
Official services to Trading Permit Holders and the proposed change is 
intended to reasonably allocate such costs to order originating firms 
and executing firms based on the amount of business they conduct 
through PAR Officials. Specifically, the proposed fee tier structure is 
equitable in that all order originating firms or, as applicable, 
executing firms, are assessed the same fees at each tier level for 
orders executed by a PAR Official. Further, the proposed fee structure 
is not unfairly discriminatory because the tiers are based on the 
percentage of activity executed by a PAR Official. Each firm has the 
ability to route fewer orders to a PAR Official, such that they are not 
subject to higher PAR Official Fees.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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 with respect to 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) of the Act \11\ and subparagraph (f)(2) of

[[Page 20796]]

Rule 19b-4 \12\ 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 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-2011-030 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-2011-030. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office 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-2011-030 and should be 
submitted on or before May 4, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8791 Filed 4-12-11; 8:45 am]
BILLING CODE 8011-01-P