Document ID: SEC-2010-0607-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2010-04-22T04:00Z

[Federal Register: April 22, 2010 (Volume 75, Number 77)]
[Notices]               
[Page 21076-21077]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap10-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61915; File No. SR-CBOE-2010-033]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated: Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend the Strategy Fee Cap Program

April 15, 2010.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on March 26, 
2010, 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 prepared by CBOE. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.

 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 strategy fee cap program. 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.

 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 section (A), 
(B), and (C) below, of the most significant aspects of such statements.

 (a) Purpose

    The Exchange caps market-maker, firm, and broker-dealer transaction 
fees associated with dividend, merger and short stock interest 
strategies, as described in Footnote 13 of the CBOE Fees Schedule 
(``Strategy Fee Cap''). Specifically, market-maker, firm and broker-
dealer transaction fees are capped at $1,000 for all (i) Dividend 
strategies,\1\ (ii) merger strategies \2\ and (iii) short stock 
interest strategies \3\ executed on the same trading day in the same 
options class. In addition, such transaction fees for these strategies 
are further capped at $25,000 per month per initiating member or firm.
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    \1\ A dividend strategy is defined 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.
    \2\ A merger strategy is defined as transactions done to achieve 
a merger arbitrage involving the purchase, sale and exercise of 
options of the same class and expiration date, 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.
    \3\ A short stock interest strategy is defined 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.
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    The Exchange proposes a limited expansion of the Strategy Fee Cap 
program. Specifically, the Exchange proposes to cap market-maker and 
broker-dealer transaction fees at $1,000 for all reversals, conversions 
and jelly roll strategies (as defined below) executed on the same 
trading day in the same Flexible Exchange (FLEX) option class, 
excluding any option class on which the Exchange charges the surcharge 
fee under Footnote 14 of the CBOE Fees Schedule. As under the current 
program, such transaction fees would be further capped at $25,000 per 
month per initiating member or firm, and to qualify transactions for 
the cap a rebate request with supporting documentation must be 
submitted to the Exchange within 3 business days of the 
transactions.\4\
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    \4\ In addition, the Exchange proposes to amend Footnote 13 of 
the Fees Schedule to clarify that ``license fees'' has the same 
meaning as ``Surcharge Fees'' and that the pass-through of Surcharge 
Fees is only applicable to the cap on dividend, merger and short 
stock interest strategies since the cap on reversals, conversions 
and jelly roll strategies excludes any option class on which the 
Exchange assesses the Surcharge Fee.
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    Reversals, conversions and jelly roll strategies are included in 
the strategy fee cap programs of other exchanges.\5\ Reversals and 
conversions are transactions that employ calls, puts and the underlying 
security to lock in a nearly risk free profit. Reversals are 
established by combining a short security position with a short put and 
a long call position that shares the same strike and expiration. 
Conversions employ long positions in the underlying security that 
accompany long puts and short calls sharing the same strike and 
expiration.
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    \5\ See the options fee schedules of NYSE Amex, LLC and NYSE 
Arca, LLC.
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    A Jelly Roll is a long calendar call spread combined with the same 
short calendar put spread, or vice versa. This option strategy aims to 
profit from a time value spread through the purchase and sale of two 
call and two put options, each with different expiration dates. A Jelly 
Roll is created by entering into two separate positions simultaneously. 
One position involves buying a put and selling a call with the same 
strike price and expiration. The second position involves selling a put 
and buying a call, with the same strike price, but a different 
expiration from the first position. Below is an example of a Jelly Roll 
strategy execution.

XYZ Jun/Oct 25 Jelly Roll:
--Buy XYZ Jun 25 put and sell XYZ Jun 25 call
--Sell XYZ Oct 25 Put and buy XYZ Oct 25 call

Market BBO:

Jun 25 call .51 at .53
Jun 25 put .72 at .74
Oct 25 call 1.52 at 1.55
Oct 25 put 2.35 at 2.39

    .74(long Jun put) + 1.52(long Oct call)-.51(short Jun call)-
2.35(short Oct put) = .60 credit received for the Jelly roll.
    The proposed fee change would become operative on March 29, 2010.
    The Exchange proposes to amend Footnote 6 of the Fees Schedule in 
conjunction with the proposed expansion of the strategy fee cap to 
include reversals, conversions and jelly roll strategies. Specifically, 
the Exchange proposes to amend Footnote 6 to clarify that the marketing 
fee will not

[[Page 21077]]

apply to any of the strategies identified and/or defined in Footnote 
13.

 (b) Statutory Basis

    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Securities Exchange Act of 1934 (``Act''),\6\ in 
general, and furthers the objectives of Section 6(b)(4) \7\ 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 
members and other persons using its facilities. The Exchange believes 
excluding member firm transaction fees from the proposed fee cap is 
consistent with the Act because member firm transaction fees are 
reduced under the Member Firm Proprietary Sliding Scale program. 
Market-maker transaction fees are reduced under the Liquidity Provider 
Sliding Scale, however market-makers are required to prepay annual fees 
for the first two tiers of the sliding scale in order to be eligible 
for the fee rates in the lowest tiers while there is no similar 
requirement for firms under the Member Firm Proprietary Sliding Scale. 
Also, member firm transaction fees are lower than broker-dealer 
transaction fees. In addition, the Exchange believes expansion of the 
Strategy Fee Cap program would benefit market participants who trade 
these strategies by lowering their fees and allow the Exchange to 
remain competitive with other exchanges that offer similar fee cap 
programs.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
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A. 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.

 B. 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 \8\ and subparagraph (f)(2) of Rule 19b-4 \9\ 
thereunder. 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).
    \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-2010-033 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-2010-033. 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 such 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 
sbmit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-CBOE-2010-033 and should be 
submitted on or before May 13, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-9275 Filed 4-21-10; 8:45 am]
BILLING CODE 8011-01-P