Document ID: SEC-2005-0470-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2005-12-29T05:00Z

[Federal Register: December 29, 2005 (Volume 70, Number 249)]
[Notices]               
[Page 77209-77211]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de05-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53016; File No. SR-CBOE-2005-107]

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

December 22, 2005.
    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 December 9, 2005, 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 the 
Exchange. The CBOE has designated this proposal as one establishing or 
changing a due, fee, or other charge imposed by the CBOE under 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 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

    The CBOE proposes to amend its Fees Schedule and its marketing fee 
program. The Exchange states that these changes to the marketing fee 
program would be effective December 12, 2005, and would continue until 
June 2, 2006.
    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
Chicago Board Options Exchange, Inc.--Fees Schedule
[December 1] December 9, 2005
    1. No Change.
    2. MARKETING FEE (6)(16): $[.22].65
    3.-4. No Change.
    FOOTNOTES:
    (1)-(5) No Change.
    (6) Commencing on December 12, 2005, [T]the Marketing Fee will be 
assessed only on transactions of Market-Makers, RMMs, e-DPMs, DPMs, and 
LMMs resulting from orders for less than 1,000 contracts (i) from 
payment accepting firms, or (ii) that have designated a ``Preferred 
Market-Maker'' under CBOE Rule 8.13 at the rate of [$.22] $.65 per 
contract on all classes of equity options, options on HOLDRs, options 
on SPDRs, and options on DIA. The fee will not apply to Market-Maker-
to-Market-Maker transactions or transactions resulting from P/A orders. 
This fee shall not apply to index options and options on ETFs (other 
than options on SPDRs and options on DIA). If less than 80% of the 
marketing fee funds are paid out by the DPM/LMM or [LMM] Preferred 
Market-Maker in a given month, then the Exchange would refund such 
surplus at the end of the month on a pro rata basis based upon 
contributions made by the Market-Makers, RMMs, e-DPMs, DPMs and LMMs. 
However, if 80% or more of the accumulated funds in a given month are 
paid out by the DPM/LMM or [LMM] Preferred Market-Maker, there will not 
be a rebate for that month and the funds will carry over and will be 
included in the pool of funds to be used by the DPM/LMM or [LMM] 
Preferred Market-Maker the following month. At the end of each quarter, 
the Exchange would then refund any surplus, if any, on a pro rata basis 
based upon contributions made by the Market-Makers, RMMs, DPMs, e-DPMs 
and LMMs. CBOE's marketing fee program as described above will be in 
effect until June 2, 2006.
    Remainder of Fees Schedule--No change.

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.

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

1. Purpose
    On November 2, 2005, the CBOE amended its marketing fee program in 
a number of respects in light of the recent adoption of its Preferred 
Market-Maker program.\5\ In particular, the CBOE amended its marketing 
fee program to provide that a Market-Maker will have access to the 
marketing fee funds generated by orders sent to the Exchange 
designating that Market-Maker as a ``Preferred Market-Maker.'' The CBOE 
now proposes to amend its marketing fee program, which changes would be 
effective December 12, 2005, and would continue until June 2, 2006 
(which is the same date that the CBOE's Preferred Market-Maker program 
is scheduled to expire, unless extended).\6\
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    \5\ The Exchange states that, under its Preferred Market-Maker 
program, order providers can send an order to the Exchange 
designating any CBOE Market-Maker (including any DPM, e-DPM, LMM, 
RMM, and Market-Maker) as a Preferred Market-Maker. If the Preferred 
Market-Maker is quoting at the NBBO at the time the order is 
received on CBOE, the Preferred Market-Maker is entitled to a 
participation entitlement of 50% when there is one Market-Maker also 
quoting at the best bid/offer on the Exchange and 40% when there are 
two or more Market-Makers quoting at the best bid/offer on the 
Exchange. See Securities Exchange Act Release No. 52506 (September 
23, 2005), 70 FR 57340 (September 30, 2005) (SR-CBOE-2005-58).
    \6\ See CBOE Rule 8.13.
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Current Marketing Fee Program

    The current marketing fee is assessed upon Designated Primary 
Market-Makers (``DPMs''), Electronic DPMs (``e-DPMs''), Remote Market-
Makers (``RMMs''), Lead Market-Makers (``LMMs''), and Market-Makers at 
a rate

[[Page 77210]]

of $0.22 for every contract they enter into on the Exchange other than 
Market-Maker-to-Market-Maker transactions (which includes all 
transactions between any combination of DPMs, e-DPMs, RMMs, LMMs, and 
Market-Makers).\7\ The marketing fee is assessed in all equity option 
classes and options on HOLDRs[reg], options on SPDRs[reg], and options 
on DIA. The following is a description of the three-step process by 
which the entire pool of funds generated by the marketing fee is 
apportioned between the DPM or LMM, and Preferred Market-Makers.
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    \7\ See Securities Exchange Act Release No. 52818 (November 22, 
2005), 70 FR 71568 (November 29, 2005) (SR-CBOE-2005-91).
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    First, each month all funds generated by the marketing fee are 
collected by the Exchange and recorded according to the DPM or LMM, as 
applicable, station, and class where the option classes subject to the 
fee are traded. If a Market-Maker (including any DPM, e-DPM, LMM, and 
RMM) is designated as a Preferred Market-Maker on an order from a 
payment accepting firm (``PAF''), the Market-Maker will be given access 
to the marketing fee funds generated from that order, even if the 
Preferred Market-Maker did not participate in the execution of the 
order because the Market-Maker was not quoting at the NBBO at the time 
the order was received on the CBOE.
    Second, the DPM or LMM, as applicable, are given access to the 
marketing fee funds generated from all other orders from PAFs in its 
appointed classes in a particular trading station.
    Third, the marketing fee funds generated by orders from non-PAFs, 
if any, are apportioned monthly among the DPM or LMM, and Preferred 
Market-Makers on a on a pro-rata basis, based on the percentage of 
contracts traded by each DPM or LMM, and Preferred Market-Maker against 
orders from PAFs during the month in the option classes located at a 
particular trading station.

Revised Marketing Fee Program--Effective December 12, 2005

    Effective December 12, 2005, the CBOE proposes to amend the fee 
such that it is assessed upon DPMs, LMMs, e-DPMs, RMMs, and Market-
Makers at the rate of $.65 per contract on transactions of Market-
Makers, RMMs, e-DPMs, DPMs, and LMMs resulting from orders for less 
than 1,000 contracts (i) from payment accepting firms (``PAF''), or 
(ii) that have designated a ``Preferred Market-Maker'' under CBOE Rule 
8.13 (``Preferred orders''). The Exchange states that Market-Maker-to-
Market-Maker transactions (which include all transactions between any 
combination of DPMs, e-DPMs, RMMs, LMMs, and Market-Makers) would 
continue to be excluded from the fee, and the CBOE would also now 
exclude transactions of Market-Makers, RMMs, e-DPMs, DPMs, and LMMs 
resulting from inbound P/A orders. The marketing fee would also 
continue to be assessed in all equity option classes and options on 
HOLDRs[supreg], options on SPDRs[supreg], and options on DIA.
    The following is a description of the manner in which funds 
generated by the marketing fee would be allocated between the DPM or 
LMM, and Preferred Market-Makers.
    First, if a Market-Maker (including any DPM, e-DPM, LMM, and RMM) 
is designated as a Preferred Market-Maker on an order for less than 
1,000 contracts, the Market-Maker would be given access to the 
marketing fee funds generated from the Preferred order, even if the 
Preferred Market-Maker did not participate in the execution of the 
Preferred order because the Market-Maker was not quoting at the NBBO at 
the time the Preferred order was received on the CBOE.\8\
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    \8\ For example, assume a Market-Maker is designated as a 
Preferred Market-Maker on an order for 50 contracts which is 
executed on CBOE. Under this first step, the Preferred Market-Maker 
would be given access to a total of $32.50 (50 contracts x $.65), 
whether or not the Preferred Market-Maker traded with the order or 
not.
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    Second, the DPM or LMM, as applicable, would be given access to the 
marketing fee funds generated from all other orders for less than 1,000 
contracts from PAFs in its appointed classes in a particular trading 
station.
    The Exchange states that, as in the current program, the money 
collected would be disbursed by the Exchange according to the 
instructions of the DPM, LMM, or Preferred Market-Maker. These funds 
could only be used to attract order flow to CBOE, and the funds made 
available to the DPM or LMM could only be used to attract orders in the 
option classes located at the trading station where the fee was 
assessed. Thus, a member organization appointed as the DPM at a 
particular trading station on the trading floor could not use the funds 
from that trading station to attract order flow to another trading 
station on the trading floor where that member organization serves as 
the DPM.
    With respect to the rebate provisions of its marketing fee program, 
the Exchange states that currently, if a Preferred Market-Maker does 
not disburse all of the funds generated by the marketing fee in a given 
month, then the funds the Preferred Market-Maker does not disburse are 
made available to the DPM or LMM, as applicable, for the following 
month to attract orders in the classes of options where the DPM or LMM 
is appointed. Going forward, the CBOE proposes to allow the Preferred 
Market-Maker to carry-over any funds it does not disburse in a given 
month to the same extent a DPM or LMM is permitted to do so.
    Thus, the Exchanges states that its marketing fee program as 
amended would provide that if less than 80% of the marketing fee funds 
are paid out by the DPM/LMM or Preferred Market-Maker in a given month, 
then the Exchange would refund such surplus at the end of the month on 
a pro rata basis based upon contributions made by the Market-Makers, 
RMMs, e-DPMs, DPMs, and LMMs. However, if 80% or more of the 
accumulated funds in a given month are paid out by the DPM/LMM or 
Preferred Market-Maker, there would not be a rebate for that month and 
the funds will carry over and would be included in the pool of funds to 
be used by the DPM/LMM or Preferred Market-Maker the following month. 
At the end of each quarter, the Exchange states that it would then 
refund any surplus, if any, on a pro rata basis based upon 
contributions made by the Market-Makers, RMMs, DPMs, e-DPMs, and LMMs.
    The Exchange states that it would not be involved in the 
determination of the terms governing the orders that qualify for 
payment or the amount of any such payment. The Exchange states that it 
would provide administrative support for the program in such matters as 
maintaining the funds, keeping track of the number of qualified orders 
each firm directs to the Exchange, and making the necessary debits and 
credits to reflect the payments that are made. The CBOE states that its 
Market-Makers, RMMs, DPMs, e-DPMs, and LMMs would have no way of 
identifying prior to execution whether a particular order is from a PAF 
or is an order designating a Preferred Market-Maker.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(4) of the Act,\10\ in particular, in that it is designed to 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and other persons using its facilities.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).

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[[Page 77211]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition 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 either solicited or received.

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

    The foregoing proposed rule change has been designated as a fee 
change pursuant to Section 19(b)(3)(A)(ii) of the Act \11\ and Rule 
19b-4(f)(2) \12\ thereunder, because it establishes or changes a due, 
fee, or other charge imposed by the Exchange. Accordingly, the proposal 
will take effect upon filing with the Commission. At any time within 60 
days of the filing of such 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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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \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-2005-107 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number SR-CBOE-2005-107. 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 the 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-2005-107 and should be submitted on or before 
January 19, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-8047 Filed 12-28-05; 8:45 am]

BILLING CODE 8010-01-P