[Federal Register Volume 59, Number 195 (Tuesday, October 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25041]
[[Page Unknown]]
[Federal Register: October 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34783; Filed No. SR-CBOE-94-24]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 to the Proposed Rule Change by the Chicago Board Options Exchange,
Inc. Relating to an Extension of the Pilot Program for Fees Due for
Post-Trade Data Submission of Trade Information
October 3, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S. C. 78s(b)(1), notice is hereby given that on July 7,
1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the CBOE. The
Exchange subsequently filed Amendment No. 1 to the proposed rule change
on September 29, 1994.\1\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\In Amendment No. 1 the Exchange requested an extension of the
pilot program until December 31, 1994, rather than permanent
approval. See Letter from Michael Meyer, Schiff, Hardin & Waite, to
Brad Ritter, Senior Counsel, Office of Market Supervision (``OMS''),
Division of Market Regulation (``Division''), Commission, dated
September 29, 1994 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The purpose of the proposed rule change is to request an extension
of the ``As-of-Add'' fee [program contained in CBOE Rule 2.26 (``Pilot
Program''), until December 31, 1994.\2\ Under that rule, individual
members and member organizations are assessed a monthly fee when they
submit trade information later than the trade date (each an ``As-of-
Add'') on more than a stated maximum percentage of their monthly
transatins. The Exchange does not propose to amend Rule 2.26 in any
respect at this time.
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\2\Id.
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Under the Pilot Program, the fee, if any, to an individual member
is $10.00 for each As-of-Add submitting during a given month in excess
of the percentage of submissions considered ``nominal'' under paragraph
(a) of Rule 2.26. The fee to any clearing firm under paragraph (a) of
Rule 2.26. The fee to any clearing firm under paragraph (b) of that
rule is $3.00 for each As-of-Add submitted in excess of the ``nominal''
monthly percentage. Any member assessed an As-of-Add fee may request
verification from the Exchange pursuant to Part B of Chapter XIX of
CBOE's Rules and may appeal the fee assessment pursuant to Part A
thereof.
The Pilot Program was initially approved by the Commission on
October 1, 1993.\3\ Continuation of the Pilot Program, in its present
form, was approved on April 4, 1994.\4\ In the Continuation Order, the
Commission required the Exchange, if it wished to make the Pilot
Program a permanent program, to explain how the Pilot Program reflects
an equitable allocation of fees among members and to establish a policy
with respect to discipline of members that repeatedly file an excessive
number of AS-of-Add.\5\ The Commission also required the CBOE to submit
a report setting forth particular statistics about the Pilot
Program.\6\
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\3\See Securities Exchange Act Release No. 32999 (October 1,
1993), 58 FR 53003 (October 13, 1993) (``Exchange Act Release No.
32999'').
\4\See Securities Exchange Act Release No. 33855 (April 4,
1994), 59 FR 17128 (April 11, 1994) (``Continuation Order'').
\5\Id. Rule 6.51 requires members to submit data for every
executed trade on the day executed.
\6\The report was submitted to the Commission on July 5, 1994.
See Letter from Joanne Moffic-Silver, Associate General Counsel,
CBOE, to Sharon Lawson, Assistant Director, OMS, Division,
Commisison, dated June 29, 1994 (``Pilot Report'').
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The Exchange represents that the Pilot Program serves two purposes.
First, it helps reimburse the Exchange for the administrative burdens
and costs of processing post-trade date submission from members. Late
trade submissions, according to the Exchange, impose special processing
costs on the Exchange and require significant effort by clearing firms
and executing brokers to check and resolve late trade reports. The
Exchange further represents that late trade submissions also can burden
the Exchange during periods of high volume and create financial risks
to members during volatile markets. Accordingly, the Exchange believes
that the As-of-Add fees provide the Exchange with revenues that cover,
in part, its cost for providing As-of-Add services.
Second, the Exchange represents that the Pilot Program is designed
to create economic incentives for members to submit trade data on the
trade date, thereby relieving the Exchange and Exchnge members of high
levels of special handling. The Exchange believes that the Pilot
Program and the incentive effects of the fee are equitably allocated
among individual members and member organizations. Although individual
members incur a higher per-submission fee than do clearing members, the
Exchange states that individual members have primary control over the
timing of submissions and, in the Exchange's experience, individual
member errors and delays are the direct cause of most As-of-Adds. The
fee structure is thus designed to impose greater As-of-Add
responsibilities on those members, i.e., individual members, whose
conduct, according to the Exchange creates the biggest share of the
extra work and extra costs posed by late submissions. Since October
1993, 354 individual members, and 13 clearing firms, have been assessed
a fee pursuant to the Pilot Program.\7\
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\7\The highest fee assessed against an individual member was
$858 and the average fee assessed was $105.64, while the highest fee
assessed against a clearing member was $2,406 with average fees
amounting to $307.07. Id.
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The Exchange continues to believe that it is also appropriate to
impose As-of-Add fees on clearing firms that exceed the nominal monthly
level of As-of-Adds. In the Exchange's experience, clearing firms are
sometimes the direct or contributing cause of late submissions. The
Exchange, therefore, believes that a fee imposed on such firms is
therefore appropriate, in general, as it is for individual members.
Moreover, the Exchange believes that clearing firms are in the best
position to identify late-submitting individual members and to prompt
such members to process trade information on time. In that regard, the
Exchange represents that the fee to clearing members not only helps
promote their operational vigilance, but also that of the individual
members for whom they clear trades.
In the Continuation Order, the Commission expressed some concern
about the differing fee levels for individual members as compared to
clearing firms and requested the Exchange to review the equities
associated with the fee structure.\8\ The Exchange has reviewed the
Pilot Program and continues to believe that the levels set in the
current rule are appropriate for each membership class, for several
reasons. First, those few clearing firms who have been assessed a fee
under rule 2.26 have paid substantial amounts.\9\ Fee levels higher
than those in the current rule would, the Exchange believes, be
disproportionately severe. Second, clearing firms incur personnel and
systems costs, which the Exchange estimates to be about $5.00 per As-
of-Add, for the extra work that As-of-Add processing creates. Those
costs are not incurred by individual members. Accordingly, when the
$5.00 cost per As-of-Add is added to the $3.00 fine imposed on clearing
firms for each excessive monthly As-of-Add, the disparity between the
$10.00 paid by individual members and the $8.00 incurred by clearing
members is, in the Exchange's opinion, de minimis. Third, the Exchange
believes that the fee structure places a greater share of the fee
burden on the members primarily responsible for the excess costs the
Exchange incurs. The Exchange, therefore, believes that the fee
differential reflected in the current rule is both appropriate and
equitable.
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\8\See supra note 4.
\9\See supra note 7.
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Finally, the Exchange believes that the Pilot Program has been, and
will continue to be, effective in promoting a reduced volume of As-of-
Adds. Individual members' use of As-of-Adds has declined since the
program was initiated, as have the number of Exchange members that have
exceeded the allowable monthly levels.\10\ For that reason, the
Exchange continues to believe that the Pilot Program is effective in
covering Exchange costs and in improving member behavior. Nonetheless,
the Exchange believes that As-of-Add processing continues to impose
burdens on the Exchange and its members, and chronic problems may not
be fully addressed by fees alone. Accordingly, to the extent that any
member exceeds the nominal level for six consecutive months, or by a
significant percentage in any one month without clear justification,
the Department of Market Operations will refer that member to the
Division of Regulatory Services for investigation and appropriate
disciplinary action.\11\ On approval of this proposed rule change, the
Exchange will issue a Regulatory Circular to members reviewing the
operation of the program and underscoring the foregoing compliance
policy.
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\10\See Pilot Report, supra note 6.
\11\To date, the Exchange has not initiated any investigations
or disciplinary actions concerning members' post-trade date
submission of trade data. Telephone conversation between Daniel
Schneider, Schiff Hardin & Waite, and Brad Ritter, Senior Counsel,
OMS, Division, Commission, on October 3, 1994 (``October 3
Conversation'').
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The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) of the Act in particular in that it is designed to
provide for the equitable allocation of reasonable dues, fees and
charges among CBOE members.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
a burden on competition.
(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 respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has requested that the proposed rule change be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and in
particular, the requirements of Section 6(b)(5).\12\ Specifically, the
Commission finds, as it did in originally approving the Pilot Program
and the subsequent extension, that imposing fees on members who submit
As-of-Adds for more than a prescribed percentage of transactions in any
month is likely to: (1) Offset the carrying costs incurred by the
Exchange and Exchange members as a result of these post-trade date
submissions; (2) make trade comparisons on the CBOE more efficient in
terms of the time and expense involved in trade processing; and (3)
reduce the risk exposure to investors and Exchange clearing
members.\13\ Additionally, the Commission continues to believe that the
Pilot Program does not raise any due process concerns because of the
availability of the verification and appeals processes.\14\
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\12\U.S.C. 78f(b)(5) (1988).
\13\See Exchange Act Release No. 32999, supra note 3, and
Continuation Order, supra note 4.
\14\Id. The regulatory circular to be issued upon approval of
the proposed rule change shall also expressly state that all members
assessed a fee pursuant to the pilot program may submit a request
for verification and may appeal the fees assessed pursuant to
Chapter XIX of the CBOE Rules. See October 3 Conversation, supra
note 11.
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Although the Exchange believes the fees that can be incurred are
relatively modest, the Commission believes that the fee assessments,
which have reached in excess of $800 per month for an individual member
and in excess of $2,400 per month for a clearing member,\15\ can be
substantial. Nevertheless, because such high fees would only be imposed
on the most egregious offenders of Rule 2.26, the Commission believes
the fee structure is not totally unreasonable. Furthermore, the
Exchange has represented that in determining the number of As-of-Add
submissions each month, it cannot determine, without reviewing each
individual trade, whether a particular As-of-Add was submitted late due
to the fault of an individual member or that member's clearing
firm.\16\ As a result, in determining whether a member has exceeded its
stated monthly percentage of allowable As-of-Adds, each As-of-Add
processed by a member firm is counted against both that member firm and
the individual member who executed the transaction.\17\ In this
context, the Commission remains troubled that to the extent that a
clearing member is responsible for the late submission, the individual
member can still be assessed a substantive fine, and vice versa.
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\15\See supra note 7.
\16\See Continuation Order, supra note 4.
\17\Id.
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Despite these concerns, the Commission finds that the differential
in the per-trade fee amount assessed against clearing members ($3) and
individual members ($10) is consistent with the Act based on the
representations by the Exchange that in its experience, most As-of-Adds
are the result of late submissions by individual members rather than by
clearing members, and that clearing members are often delayed in
submitting trade data because individual members fail to submit trade
data to the clearing members in a timely manner. As a result, the
Commission believes that the proposed rule change may serve to reduce
the number of monthly As-of-Adds by individual members which should
benefit all Exchange members, and ultimately investors, by increasing
the efficiency with which Exchange transactions are processed as well
as helping the Exchange to defray the additional costs it incurs with
the processing of those transactions.\18\ Although the maximum monthly
allowable percentage of As-of-Adds for clearing members is lower than
for individual members, this alone does not address the fee
differential because clearing members are clearing transactions for
many Exchange members. The Commission, therefore, continues to
encourage the Exchange to consider methods of administering the Pilot
Program to ensure that As-of-Add fees are assessed in a fair and
equitable manner.
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\18\The Commission does not necessarily agree with the Exchange
that when the cost to clearing members of processing As-of-Adds is
factored in, that the difference between the per-submission
transaction fees ($10 v. $8) is de minimis.
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In addition to addressing whether the differential in the per-
submission fee is a fair and equitable allocation, the Commission also
requested in the Continuation Order,\19\ that the Exchange address why
the Pilot Programs should not be incorporated into the Exchange's Minor
Rule Plan\20\ because of the size of some of the fees imposed under the
Pilot Program.\21\ Although the Exchange has stated that it believes
the ``fees'' assessed pursuant to the Pilot Program are fair and
equitable and should not be incorporated into the Minor Rule Plan,\22\
the Commission does not believe the issue has been adequately addressed
by the CBOE. Nevertheless, the Commission has determined to grant a
limited three month extension to the Pilot Program for two reasons.
First, no formal complaints have been lodged by members regarding the
fees assessed to date pursuant to the Pilot Program.\23\ Second, the
Exchange has represented that it will re-consider the issue of
incorporating the As-Of Add fees, in some form,\24\ into the Minor Rule
Plan.
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\19\See supra note 4.
\20\See CBOE Rule 17.50.
\21\See Continuation Order, supra note 4, and supra note 7.
\22\See Letter from Michael Meyer, Schiff Hardin & Waite, to
Brad Ritter, Senior Counsel, OMS, Division, Commission, dated
September 2, 1994.
\23\See October 3 Conversation, supra note 11.
\24\See Amendment No. 1, supra note 1. For example, As-of-Add
fees could be deemed a violation of the Minor Rule Plan only after
exceeding a certain dollar amount.
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In order to provide the Exchange with adequate time to assess any
proposed changes to the Pilot Program, the Exchange has represented to
the Commission that a proposed rule filing pursuant to Section 19(b) of
the Act will be submitted by the Exchange on or before November 1,
1994. In addition, the CBOE will be required to submit with that
proposed rule change, an updated report containing the information
requested by the Commission in the Continuation Order.\25\ The
Commission also notes that it would not be inclined, at this time, to
grant a further extension of the Pilot Program until the concerns
raised herein have been addressed by the Exchange.
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\25\See supra note 4.
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The Commission finds good cause for approving the proposed rule
change and Amendment No. 1 thereto prior to the thirtieth day after the
date of publication of notice of filing thereof in the Federal Register
in order to permit the pilot program to remain in effect until December
31, 1994 without interruption. Additionally, the Exchange has
represented that no problems has arisen and no formal complaints have
been received by the Exchange concerning the pilot program since its
implementation.\26\ Accordingly, the Commission believes it is
consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve the
proposed rule change on an accelerated basis.
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\26\See October 3 Conversation, supra note 11.
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IV. Solicitation of Comments
Interested persons are invited to submit written date, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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
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 Section, 450 Fifth Street,
N.W., Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-94-24 and should be
submitted by November 1, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act\27\ that the proposed rule change (SR-CBOE-94-24), extending the
pilot program for fees related to As-of-Adds until December 31, 1994,
is approved.
\27\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25041 Filed 10-7-94; 8:45 am]
BILLING CODE 8010-01-M
