[Federal Register Volume 59, Number 69 (Monday, April 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8515]
[[Page Unknown]]
[Federal Register: April 11, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33855; File No. SR-CBOE-94-11]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Board Options Exchange, Inc., Relating to an Extension to and Amendment
of the Pilot Program for Fees Due for Post-Trade Date Submission of
Trade Information
April 4, 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 March
30, 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. On
March 31, 1994, the Exchange filed Amendment No. 1 to the proposed rule
change.\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 requests that the pilot
program for post-trade date submission of trade information be
extended for six months instead of four months as originally
proposed. See Letter from Daniel Schneider, Schiff Hardin & White,
to Brad Ritter, Attorney, Office of Derivatives and Equity
Oversight, Division of Market Regulation (``Division''), Commission,
dated March 31, 1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to: (1) Extend until September 30, 1994, a pilot
program allowing the Exchange to collect fees from members who submit
trade information pursuant to CBOE Rule 6.51\2\ after the trade date
(``As of Adds'') for more than a prescribed percentage of transactions
in any month; (2) revise the fee schedule under CBOE Rule 2.26 for As
of Adds submitted by individual members; (3) alter the manner in which
the fees for As of Adds are calculated against individual members; and
(4) make clarifying revisions to paragraphs (b) and (c) of Rule 2.26.
The text of the proposed rule change is available at the Office of the
Secretary, CBOE, and at the Commission.
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\2\CBOE Rule 6.51 provides, among other things, that (1) a
participant in each transaction to be designated by the Exchange
shall immediately report the transaction to the Exchange, (2) for
each transaction on the Exchange in which he participates, a member
shall report the transaction as promptly as possible to the member
for which such transaction was made and/or to the member that will
clear such transaction, and (3) each business day, each Clearing
Member shall file with the Exchange trade information covering each
Exchange transaction made by it or on its behalf during the business
day.
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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 the
Statutory Basis for, the Proposed Rule Change
Under CBOE Rule 2.22, the Exchange may impose fees on members for
the use of Exchange facilities or for any services provided or
privileges granted by the Exchange. Under Rule 2.26, fees for As of
Adds are imposed for use of the CBOE's overnight and next-day late-
submission-trade-match processing services when that use exceeds a
level the Exchange considers to be ``nominal.'' The Exchange represents
that the As of Adds fees help to reimburse the Exchange for the
administrative burdens and costs of processing post-trade date
submissions, and creates an incentive for members to avoid submitting
trade data after the trade date.
On October 1, 1993, the Commission approved, on a pilot basis until
March 31, 1994, a proposed rule change allowing the CBOE to establish
and collect fees from members who submit more than a stated percentage
of As of Adds during any month.\3\ Specifically, pursuant to the pilot
program, any Exchange member firm that fails for more than a stated
monthly percentage of transactions to submit required transaction
information on the date a transaction is executed incurs a transaction
fee of $3.00 for each such trade in excess of the stated monthly
percentage. Individual exchange members, however, incur a transaction
fee of $3.00 for each As of Add during the relevant period once they
exceed their stated monthly percentage. Because the Exchange expects
the number of As of Adds to decrease over time as a result of these
fees, the maximum allowable percentage of As of Adds per month is
structured to decrease periodically. Individual members and clearing
members that incur fees pursuant to this rule may submit a request for
verification to the Exchange pursuant to Part A of Chapter XIX of the
CBOE Rules and may appeal these fees pursuant to Part B of Chapter XIX.
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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'').
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The Exchange represents that during the six months in which As of
Adds fees have been imposed under the pilot program, the Exchange and
CBOE members have gained considerable experience with the fee program.
Among other things, the Exchange states that it has seen the Exchange-
wide percentage of As of Adds submissions remain approximately constant
despite the fact that there was a substantial increase in Exchange
trade volume during the pilot program.\4\ According to past experience,
the Exchange represents that the Exchange-wide percentage of As of Adds
submissions typically increases during periods of increased Exchange
trading volume. Accordingly, the Exchange believes the As of Adds fees
imposed pursuant to the pilot program have been effective in promoting
a reduced volume of As of Adds submissions.
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\4\Telephone conversation among Dan Schneider, Schiff Hardin &
Waite, Sharon Lawson, Assistant Director, Office of Derivatives and
Equity Oversight, Division, Commission, and Brad Ritter, Attorney,
Office of Derivatives and Equity Oversight, Division, Commission, on
March 30, 1994.
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The Exchange represents that approximately 250 individual members
who have been assessed As of Adds fees since October 1993, however,
continue to make late submissions in excess of the ``nominal''
percentage level at least every other month. The Exchange believes
those individual members impose extra trade resolution costs on the
Exchange, their clearing firms and other members by requiring
significant levels of special handling for the processing of their late
submissions. As a result, in addition to extending the pilot program
for As of Adds fees until September 30, 1994, the Exchange is also
proposing to amend the pilot program with respect to individual
members.
Under the proposal, the Exchange would alter the manner in which As
of Adds fees are assessed against individual members. First, individual
members who exceed their stated monthly percentage of allowable As of
Adds submissions will be assessed a fee for only the number of As of
Adds exceeding the monthly allowable percentage. Under the present
pilot program, an individual member can incur relatively sizeable fees
even if that member exceeds his monthly stated percentage by only one
As of Add. The proposed amendment will conform the manner in which As
of Adds fees are computed against individual members with the
procedures used for clearing members. Secondly, in response to the
number of individual members who, on a regular basis, continue to
submit more than a ``nominal'' number of As of Adds, the Exchange
proposes to increase the As of Adds fee for individual members from
$3.00 to $10.00 for each trade exceeding an individual member's stated
monthly percentage. The Exchange believes that this change will
efficiently reduce the number of As of Adds submissions by individual
members and, therefore, reduce the burdens and costs associated with
the handling As of Adds.
The Exchange further believes that the As of Adds fees, as
proposed, are set at relatively modest levels. Under the proposal, the
Exchange states that no individual member is likely to incur a fee in
excess of $800 per month, and that most assessments are likely to be
between $50 and $250 per month. Moreover, as is the case currently
under the pilot program, any member assessed an As of Adds fee may
request verification from the Exchange pursuant to Part B of Chapter
XIX of the CBOE Rules and may appeal the fee assessment pursuant to
Part A thereof.
In contrast to the change in fee level for individual members, the
fee level for clearing members is not proposed to be changed. The
Exchange represents that in its experience, delays and errors by
individual members are the direct cause for most late trade
submissions. Moreover, at the $3.00 level, the Exchange states that
clearing members pay substantial fees even though individual members,
rather than clearing members, have primary control over the timing of
submissions. Accordingly, the Exchange believes that the $3.00 fee
level for clearing members remains both appropriate in absolute terms
and equitable in relation to the fee assessed against individual
members.
Finally, in addition to the changes discussed above, certain
clarifying amendments are proposed to be made to paragraphs (b) and (c)
of Rule 2.26. These amendments are being made to (1) clearly
distinguish between the treatment of individual members and clearing
members under the rule and (2) specify that a member firm may use the
verification and appeal processes of Chapter XIX to dispute that it
acted as the clearing member for a particular individual member (or
members) during the relevant time period.
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 of 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 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).\5\ Specifically, the
Commission finds as it did in originally approving the pilot program
that imposing fees on members who submit As of Adds for more than a
prescribed percentage of transactions in any month is likely to offset
the carrying costs incurred by Exchange members as a result of these
post-trade date submissions, make trade comparisons on the CBOE more
efficient in terms of the time and expense involved in trade
processing, and reduce the risk exposure to investors and Exchange
clearing members.\6\ 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.\7\
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\5\15 U.S.C. 78f(b)(5) (1988).
\6\See Exchange Act Release No. 32999, supra note 3.
\7\Id. The Commission notes that the Exchange shall issue a
regulatory circular to all CBOE members and options managers
notifying them of the extension of the pilot program as amended
herein. The regulatory circular also shall 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. Telephone conversation between
Daniel Schneider, Schiff Hardin & Waite, and Brad Ritter, Attorney,
Office of Derivatives and Equity Oversight, Division, Commission, on
April 4, 1994.
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The Commission believes that the proposal to alter the manner in
which As of Adds fees are calculated against individual members is
appropriate and more equitable that the manner in which such fees are
currently calculated. Specifically, by charging individual members a
fee for only those As of Adds in excess of their stated monthly
percentage, the situation is avoided whereby an individual member is
assessed a significant fee for exceeding its stated monthly percentage
by only one or a few trades. Additionally, the Commission believes that
calculating the As of Adds fees for individual members in the same
manner as for clearing members is more an equitable arrangement by
which to impose these fees and will be less likely to cause confusion
among Exchange members as to the applicability of the rule.
The Commission finds that the proposed amendments to sections (b)
and (c) of Rule 2.26 are merely clarifying amendments which may serve
to avoid any confusion as to the manner in which the rule applies to
individual members and clearing members. As a result, the Commission
believes that these amendments are consistent with the Act.
Finally, with respect to the proposal to increase the As of Adds
fee for individual members from $3.00 to $10.00, the Commission has
some concerns as to whether assessing a fee of $10.00 per trade against
individual members but only $3.00 per trade against clearing members
constitutes an equitable allocation of fees among members for purposes
of the Act. Although the Exchange believes the fees that can be
incurred are relatively modest, the Commission believes that fee
assessments of up to $800 per month 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 Adds submissions each month, it
cannot determine, without reviewing each individual trade, whether a
particular As of Adds was submitted late due to the fault of an
individual member or that member's clearing firm.\8\ 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.\9\ Despite these concerns, the Commission
finds that the proposed increase for individual members is consistent
with the Act based on the representations by the Exchange that in its
experience, most As of Adds submissions are the result of late
submissions by individual members rather than by clearing members, and
that clearing members often times are 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 submissions 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.
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\8\Telephone conversation among Daniel Schneider, Schiff Hardin
& Waite, Joanne Moffic-Silver, Associate General Counsel and Chief
Enforcement Attorney, CBOE, and Brad Ritter, Office of Derivatives
and Equity Regulation, Division, Commission, on March 25, 1994.
\9\Id.
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Because of the Commission's concerns, however, during the six month
extension of the pilot program the Exchange will be required to: (1)
Reformulate the As of Adds fee pilot program to ensure that the costs
borne by the Exchange in processing As of Adds are assessed against
those members responsible for generating those costs and that the fees
imposed are equitably allocated between individual members and clearing
members; and (2) ensure that members, whether individual members or
clearing members, that consistently submit more than what the Exchange
deems to be a ``nominal'' number of As of Adds during a relevant
period, are appropriately sanctioned for violating Exchange rule
6.51.\10\
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\10\See supra note 2. The Commission notes that the Exchange has
already incorporated certain violations of Rule 6.51 into the
Exchange's Minor Rule Violation Plan. See Exchange Rule 17.50(g)(5).
The Exchange may wish to consider further amending its Minor Rule
Violation Plan to better address those individual and clearing
members that consistently submit more than a nominal number of As of
Adds. In addition, the Commission continues to expect the CBOE to
bring full disciplinary proceedings against members for egregious or
repeat violations of Rule 6.51.
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In order for the Commission to be able to adequately assess the
changes to the pilot program subsequently proposed by the Exchange, the
Exchange will be required to submit to the Commission or before June
30, 1994, a report commencing with the inception of the pilot program
on October 1, 1993, and detailing for clearing members and for
individual members as separate groups: (1) The number of individual
members and clearing members that have been assessed As of Adds fees;
(2) the range of the fees imposed from the highest to lowest, and the
average monthly fee imposed; (3) whether the Exchange has received any
complaints, either written or otherwise, on the operation of the pilot
program; (4) the number of times that a request for verification and/or
an appeal has been lodged concerning As of Adds fee, and the subsequent
disposition of such actions; (5) the number of As of Adds submitted for
each month during the pilot program both as an absolute number and as a
percentage of total Exchange trades; and (6) whether the Exchange has
taken any disciplinary action against, or commenced any investigations,
examinations, or inquiries concerning, any of its members for any post-
trade date submission of trade data, and the disposition of such
actions. In addition, any request for permanent approval or extension
of the pilot should be submitted to the Commission pursuant to Rule
19(b) no later than June 30, 1994.
The Commission finds good cause for approving the proposed rule
change 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 September 30, 1994 without
interruption. Additionally, the Exchange has represented that no
problems have arisen and no complaints have been received concerning
the pilot program since its implementation.\11\ 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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\11\Telephone conversation between Joanne-Moffic Silver,
Associate General Counsel and Chief Enforcement Attorney, CBOE, and
Brad Ritter, Attorney, Office of Derivatives and Equity Oversight,
Division, Commission, on March 18, 1994.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, 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 NW., Washington, DC 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
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 NW.,
Washington, DC. 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-94-11 and should be
submitted by May 2, 1994.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act\12\ that the proposed rule change (SR-CBOE-94-11), extending the
pilot program for fees related to As of Adds until September 30, 1994,
as amended, is hereby approved.
\12\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.\13\
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\13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8515 Filed 4-8-94; 8:45 am]
BILLING CODE 8010-01-M
