Document ID: SEC-2006-0119-0001
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 5090-5092]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja06-76]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53171; File No. SR-CBOE-2005-117)]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Its Dividend and Merger 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 December 23, 2005, the Chicago Board Options Exchange, Incorportated 
(``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 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 relating to its dividend 
and merger spread transaction 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'' transactions at 
$2,000 for all dividend spread transactions executed on the same 
trading day in the same options class.\5\ A similar fee cap is 
currently in place for market-maker, firm, and broker-dealer 
transaction fees associated with ``merger spread'' transactions.\6\ 
These fee caps are in effect as a pilot program (``Strategy Fee Cap'') 
that is due to expire on March 1, 2006.\7\
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    \5\ A ``dividend spread'' is defined as any trade done to 
achieve a dividend arbitrage between any two deep-in-the-money 
options.
    \6\ A ``merger spread'' transaction is defined 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.
    \7\ See Securities Exchange Act Release Nos. 51468 (April 1, 
2005), 70 FR 17742 (April 7, 2005); 51828 (June 13, 2005), 70 FR 
35475 (June 20, 2005); and 52374 (September 1, 2005), 70 FR 53402 
(September 8, 2005).
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    The Exchange proposes to amend its Strategy Fee Cap program in the 
following respects: (i) To reduce the $2,000 per day per class fee cap 
to $1,000 per day per class; (ii) to add ``short stock interest'' 
spreads; (iii) to add a monthly fee cap of $50,000 per initiating firm; 
(iv) to provide that the Exchange may pass on the full amount of any 
royalty or license fees to trade participants on dividend, merger and 
short stock interest spreads; (v) to rebate floor brokerage fees 
associated with dividend, merger and short stock

[[Page 5091]]

interest spread transactions; and (vi) to reduce the time period in 
which dividend, merger and short stock interest spread rebate request 
forms must be submitted to the Exchange. The proposed modifications to 
the Strategy Fee Cap program are intended to make the Exchange's 
program more competitive with the strategy fee cap programs adopted by 
other exchanges.\8\
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    \8\ See, e.g., Securities Exchange Act Release Nos. 51787 (June 
6, 2005), 70 FR 34174 (June 13, 2005); and 52297 (August 18, 2005), 
70 FR 49687 (August 24, 2005).
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    First, the Exchange proposes to reduce the $2,000 per day per class 
fee cap to $1,000 per day per class. Thus, market-maker, firm, and 
broker-dealer transaction fees will be capped at $1,000 for all 
dividend and merger spread transactions executed on the same trading 
day in the same options class. The Exchange is reducing its per day, 
per class fee cap to match the fee cap of another exchange.\9\
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    \9\ See PCX Options Fee Schedule.
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    Second, the Exchange proposes to include short stock interest 
spreads in the Strategy Fee Cap program. Market-maker, firm, and 
broker-dealer transaction fees will be capped at $1,000 for all short 
stock interest spread transactions executed on the same trading day in 
the same options class. A short stock interest spread is defined 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.\10\ The fee cap on 
short stock interest spreads will be subject to the same pilot program 
applicable to dividend and merger spreads expiring on March 1, 2006.
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    \10\ See Securities Exchange Act Release No. 51787 (June 6, 
2005), 70 FR 34174 (June 13, 2005).
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    Third, the Exchange proposes to further cap transaction fees 
associated with dividend, merger and short stock interest spreads at 
$50,000 per month, initiating firm. The proposed $50,000 per month fee 
cap is also intended to match the fee cap of another exchange.\11\
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    \11\ Id.
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    Fourth, the Exchange proposes to pass on the full amount of any 
royalty or license fees to trade participants on dividend, merger and 
short stock interest spreads. Certain classes of options listed on the 
Exchange have as their underlying issue licensed products that carry a 
royalty fee, or license fee, on every contract traded. These fees are 
assessed by the issuing agency, and are not Exchange transaction fees. 
License fees that are charged to the Exchange are passed on to the 
actual participants executing the trade. Even though some of the fees 
are passed on, the Strategy Fee Cap would prevent the Exchange from 
recovering these fees in their entirety if they were to be included as 
transaction fees. If license fees were to be included as transaction 
fees, the Exchange would face the possibility of having to pay out 
substantial fees while the Strategy Fee Cap would limit the amount the 
Exchange would be able to pass on to trade participants. Because of the 
negative financial implications to the Exchange, the Exchange will not 
include license or royalty fees associated with dividend, merger and 
short stock interest spreads in the calculation of the $1,000 per day 
per class fee cap and the $50,000 per month fee cap. Other exchanges 
have proposed similar changes to their strategy fee caps.\12\
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    \12\ See, e.g., Securities Exchange Act Release Nos. 52935 
(December 9, 2005), 70 FR 75525 (December 20, 2005); and 53115 
(January 13, 2006), 71 FR 3600 (January 23, 2006).
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    Fifth, the Exchange proposes to rebate floor brokerage fees 
associated with dividend, merger, and short stock interest spread 
transactions. The Exchange believes rebating floor brokerage fees for 
these spread transactions is necessary in order for the Exchange to be 
competitive in attracting these strategies, in that other exchanges do 
not assess variable floor brokerage fees or significantly discount 
floor brokerage fees.
    Lastly, under the current Strategy Fee Cap program, a rebate 
request form, along with supporting documentation (e.g., clearing firm 
transaction data), must be submitted to the Exchange within 30 days of 
the transactions in order to qualify transactions for the cap. The 
Exchange proposes to reduce the time period in which dividend, merger, 
and short stock interest spread rebate request forms must be submitted 
to the Exchange from within 30 days of the transactions to within 3 
business days of the transactions. The Exchange believes the reduced 
submission time period will assist the Exchange in more efficiently 
processing the rebate requests. The Exchange believes that while the 
submission timeframe has been reduced, market participants eligible for 
the program should be able to meet the proposed deadline. The 
submission of a rebate request form shall also be required for the 
floor brokerage fee rebate. Such rebate request form must also be 
submitted to the Exchange within 3 business days of the transactions.
    The Exchange intends to implement the proposed changes to the 
Strategy Fee Cap effective January 3, 2006.
2. Statutory Basis
    The Exchange believes that its proposal to amend its schedule of 
fees is consistent with Section 6(b) of the Act \13\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \14\ 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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    \13\ 15 U.S.C. 78f(b).
    \14\ 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 \15\ and subparagraph (f)(2) of Rule 19b-4 
thereunder \16\ 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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    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \16\ 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-2005-117 on the subject line.

[[Page 5092]]

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-2005-117. 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-2005-117 and should be submitted on or before February 21, 
2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-1162 Filed 1-30-06; 8:45 am]

BILLING CODE 8010-01-P