Document ID: SEC-2016-0586-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2016-04-05T04:00Z

[Federal Register Volume 81, Number 65 (Tuesday, April 5, 2016)]
[Notices]
[Pages 19653-19656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07686]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77479; File No. SR-CBOE-2016-026]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule To Amend the Fees Schedule

March 30, 2016.
    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 28, 2016, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Fees Schedule. 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 
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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FLEX Broad-Based Index Options provide users with the ability to 
customize key contract terms, like exercise prices, exercise styles, 
expiration dates and exercise settlement values. Pursuant to CBOE Rules 
24A.5 and 24B.5, to initiate a FLEX transaction, a Submitting Trading 
Permit Holder submits a Request for Quotes (``RFQs'') to a FLEX Post 
Official or into CBOE's Hybrid System.\3\ FLEX-participating Trading 
Permit Holders (``FLEX Traders''), who have elected to receive RFQs, 
may then enter bids and offers responsive to each RFQ during a 
specified Request Response Period.\4\
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    \3\ See CBOE Rules 24A.5 and 24B.5.
    \4\ Id. See CBOE Rules 24A.5 and 24B.5 for additional 
information regarding FLEX trading procedures.
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    On March 21, 2016, the Exchange will begin offering Asian style 
settlement and Cliquet style settlement for certain FLEX Broad-Based 
Index Options. In general, Asian style settlement provides for payout 
based on the average of prices of a broad-based index on pre-determined 
dates over a specified time period, and Cliquet style settlement 
provides for a payout that is the greater of $0 or the (positive) sum 
of ``capped'' monthly returns of a broad-based index on pre-determined 
dates over a specified period of time. These settlement types are also 
referred to as ``Exotics'' due to their untraditional nature.
    After surveying potential FLEX Broad-Based Index Options users, the 
Exchange learned that indexed annuity writers (insurance companies) 
extensively use over-the-counter (``OTC'') options with Asian and 
Cliquet style settlement as a crediting method.\5\ Because of the level 
of customization that FLEX Broad-Based Index options provide, the 
Exchange is introducing exchange-traded products that would provide 
potential market users with an alternative to the OTC market in 
customized options. The new settlement types were approved pursuant to 
a CBOE rule filing on July 10, 2015.\6\
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    \5\ A ``crediting method'' is the method used to measure the 
change in the underlying index (e.g., point-to-point or annual 
reset).
    \6\ See Securities Exchange Act Release No. 75312 (July 10, 
2016), 80 FR 42152 (July 16, 2016) (SR-CBOE-2015-044).
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Proposed Change
    The Exchange proposes an Exotic Surcharge of $0.25 to be assessed 
on all customer (``C'' origin code) Exotic contracts executed on 
CBOE.\7\ The Exotic surcharge will be assessed to those FLEX Traders 
who trade customer orders in FLEX Asian and Cliquet options.
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    \7\ The Exchange initially filed the proposed fee changes on 
March 17, 2016 (SR-CBOE-2016-020). On March 18, 2016, the Exchange 
withdrew that filing and replaced it with SR-CBOE-2016-022. On March 
24, 2016, the Exchange withdrew SR-CBOE-2016-022 and replaced it 
with SR-CBOE-2016-025. On March 28, 2016 the Exchange withdrew SR-
CBOE-2016-025 and replaced it with this filing.
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    The Exchange also proposes a FLEX Asian and Cliquet FLEX Trader 
Incentive Program (``Program''). The Program will provide monthly 
payments to FLEX Traders who trade orders with origin codes other than 
``C'' against customer orders in FLEX Asian and Cliquet options. A 
compensation pool

[[Page 19654]]

equal to the lesser of 20% of customer exchange fees for Exotics 
(collected from customer orders traded against orders with origin codes 
other than ``C'') or $50,000 will be available each month.\8\ For 
example: (1) On SPX contracts, CBOE expects to collect $1.00 per 
contract (customer transaction fee of $0.44 \9\ + $0.10 CFLEX surcharge 
\10\ + $0.21 Hybrid 3.0 execution surcharge \11\ + $0.25 customer 
exotic surcharge); (2) on XSP contracts, CBOE expects to collect $0.35 
per contract ($0.00 customer transaction fee + $0.10 CFLEX surcharge + 
$0.25 customer exotic surcharge); (3) on DJX and RUT contracts, CBOE 
expects to collect $0.53 per contract ($0.18 customer transaction fee + 
$0.10 CFLEX surcharge + $0.25 customer exotic surcharge); and (4) on 
NDX contracts, CBOE expects to collect $0.43 per contract ($0.18 
standard index exchange fee + $0.25 customer exotic surcharge).
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    \8\ Fees collected from customer-to-customer FLEX Asian and 
Cliquet option transactions would be excluded from the compensation 
pool. Further, fees collected from contracts executed in a FLEX 
Trader's customer-to-customer transactions would not be included to 
determine the FLEX Trader's share of the compensation pool. Customer 
fees would be assessed normally on both sides of the transaction.
    \9\ SPX contract transaction fees are dependent upon premium 
prices. The parenthetical and the examples below assume executions 
at a premium price of $1.00 or greater.
    \10\ CFLEX surcharge fees are capped at $250 per trade and 
assessed on electronic FLEX transactions. The parenthetical and the 
examples below assume the $250 cap was not reached on any individual 
transaction and that the transactions were entered electronically.
    \11\ The Hybrid 3.0 execution surcharge is assessed for 
transactions in SPX contracts executed via the Hybrid 3.0 system. 
The parenthetical and the examples below assume the SPX transactions 
were executed via the Hybrid 3.0 system.
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    A FLEX Trader will be entitled to a pro-rata share of the monthly 
compensation pool based on the customer order fees collected from 
customer orders traded against that FLEX Trader's orders with origin 
codes other than ``C'' in FLEX Asian and Cliquet options each month. 
The Exchange believes the Program will incentivize FLEX Traders to 
provide liquidity in FLEX Asian and Cliquet options. The Program shall 
be in place until December 31, 2016 or until total average daily volume 
in Exotics exceeds 15,000 contracts for three consecutive months, 
whichever comes first. At the time the FLEX Asian & Cliquet FLEX Trader 
Incentive Program ends, the Exchange will submit a rule filing removing 
the program from the fee schedule and notice shall be given via 
regulatory circular.
    The following examples demonstrate how the program will work when 
both the monthly cap is and is not reached.

                                       Example 1--Monthly Cap Not Reached
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                                                   Total exotic
                                                     contracts
                                                  traded for the
                                                      month,
              Index                Customer fees   customer-to-    FLEX Trader 1   FLEX Trader 2   FLEX Trader 3
                                   per contract     orders with
                                                   origin codes
                                                    other than
                                                       ``C''
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SPX.............................           $1.00          18,000           4,000           6,500           7,500
XSP.............................            0.35          10,500           2,500           3,000           5,000
DJX.............................            0.53          10,500           2,500           3,000           5,000
RUT.............................            0.53           3,000             500           1,000           1,500
NDX.............................            0.43           1,800             300             500           1,000
Total monthly Customer fees            29,604.00  ..............        6,594.00        9,885.00       13,125.00
 collected from Customer orders
 traded against orders with
 origin codes other than ``C''..
FLEX Trader % of fees collected   ..............  ..............          22.27%          33.39%          44.34%
 from Customer-to-orders with
 origin codes other than ``C''..
Compensation pool amount (i.e.          5,920.80  ..............  ..............  ..............  ..............
 20% of the Customer fees
 collected).....................
FLEX Trader's pro-rata share of   ..............  ..............        1,318.80        1,977.00        2,625.00
 compensation pool..............
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                                        Example 2--Monthly Cap is Reached
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                                                   Total exotic
                                                     contracts
                                                  traded for the
                                                      month,
              Index                Customer fees   customer-to-    FLEX Trader 1   FLEX Trader 2   FLEX Trader 3
                                   per contract     orders with
                                                   origin codes
                                                    other than
                                                       ``C''
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SPX.............................           $1.00         180,000          40,000          65,000          75,000
XSP.............................            0.35         105,000          25,000          30,000          50,000
DJX.............................            0.53         105,000          25,000          30,000          50,000
RUT.............................            0.53          30,000           5,000          10,000          15,000
NDX.............................            0.43          18,000           3,000           5,000          10,000
Total monthly Customer fees           296,040.00  ..............      $65,940.00      $98,850.00     $131,250.00
 collected from Customer orders
 traded against orders with
 origin codes other than ``C''..
FLEX Trader % of fees collected   ..............  ..............          22.27%          33.39%          44.34%
 from Customer-to-orders with
 origin codes other than ``C''..
Compensation pool amount (i.e.         50,000.00  ..............  ..............  ..............  ..............
 20% of the Customer fees
 collected is 59,208.00, so cap
 applied).......................

[[Page 19655]]

 
FLEX Trader's pro-rata share of   ..............  ..............      $11,137.01      $16,695.38      $22,167.61
 compensation pool..............
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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.\12\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \13\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with 
Section 6(b)(4) of the Act,\14\ which requires that Exchange rules 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its Trading Permit Holders and other persons using 
its facilities.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the Exotic Surcharge of $0.25 is 
reasonable because the amount of the new fee is within the range of 
surcharges assessed for customer transactions in other products (for 
example, customers are currently assessed a $0.21 Hybrid 3.0 Execution 
Surcharge (which essentially acts as a customer priority surcharge) in 
SPX options). Furthermore, the Exchange believes customers are willing 
to pay premium exchange fees on FLEX Asian and Cliquet options to 
obtain traditional exchange-traded benefits, like price discovery, 
transparency and centralized clearing.
    The Exchange believes that it is equitable and not unfairly 
discriminatory to assess the Exotic Surcharge to customers and not 
other market participants because customers are not subject to 
additional costs for effecting transactions in FLEX Broad-Based Index 
options that are applicable to other market participants, such as 
license surcharges. Additionally, customers are not subject to fees for 
effecting transactions in general that are applicable to other market 
participants, such as connectivity fees and fees relating to Trading 
Permits, and are not subject to the same obligations as other market 
participants, including regulatory and compliance requirements and 
quoting obligations.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to offer FLEX Traders a pro-rata share of a compensation 
pool equal to the lesser of 20% of the customer exchange fees collected 
on FLEX Asian and Cliquet options (from customer orders traded against 
orders with origin codes other than ``C'') or $50,000. FLEX Asian and 
Cliquet options currently trade exclusively in the OTC market. The 
traditional benefits of exchange-traded options cannot be realized 
unless there is liquidity in the FLEX markets as compared to OTC. 
Providing FLEX Traders with incentives to trade FLEX Asian and Cliquet 
options should result in a more robust price discovery process that 
will result in better execution prices for customers. In addition, FLEX 
Traders in broad-based index options have equal opportunity to receive 
and respond to RFQs in FLEX Asian and Cliquet options and accordingly 
equal opportunity to receive a pro-rata allocation of the compensation 
pool (based upon the share of total fees collected from customer 
contracts against which the respective FLEX Trader trades orders with 
origin codes other than ``C'' orders).

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

    The Exchange does not believe that the proposed rule changes will 
impose any burdens on competition that are not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. While different transaction 
fees are assessed to different market participants, different market 
participants have different obligations and circumstances as noted 
above. Furthermore the incentive program encourages market participants 
to bring liquidity in FLEX Asian and Cliquet options to the Exchange 
(which benefits all market participants).
    The Exchange does not believe that the proposed rule changes will 
impose any burden on intermarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As of March 21, 
2016, CBOE will be the only exchange to trade FLEX Asian and Cliquet 
options. To the extent that the proposed changes make CBOE a more 
attractive marketplace for market participants at other exchanges, such 
market participants are welcome to become CBOE market participants. 
Finally, as mentioned above, FLEX Asian and Cliquet options on the CBOE 
will provide competition with OTC products while providing the benefits 
of trading on an exchange.

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) of the Act \15\ and paragraph (f) of Rule 19b-4 \16\ 
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

[[Page 19656]]

public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission will institute proceedings to determine whether 
the proposed rule change should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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-2016-026 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2016-026. 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, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 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-2016-026 and should be 
submitted on or before April 26, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07686 Filed 4-4-16; 8:45 am]
 BILLING CODE 8011-01-P