[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24986-24988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12388]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37201; File No. SR-CBOE-96-24]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to as of
Add Submissions
May 10, 1996.
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 April
15, 1996, the Chicago Board Options Exchange, Inc. (``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 the self-regulatory
organization. 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
The CBOE proposes to terminate its fee program for members who, for
more than a prescribed percentage of transactions, submit trade
information pursuant to CBOE Rule 6.51 after the date on which the
trade is executed. (These post-trade date submissions are commonly
referred to as ``as of adds.'') In conjunction with the foregoing, the
Exchange also proposes to revise the structure of its as of add summary
fine program. The text of the proposed rule change is available at the
Office of the Secretary, CBOE 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. 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
Statutory Basis for, the Proposed Rule Change
CBOE Rule 6.51 requires, among other things, that (i) a participant
in each transaction to be designated by the Exchange shall immediately
report the transaction to the Exchange and (ii) 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.
On October 1, 1993, the Exchange instituted an as of add fee
program to collect fees from members who, for more than a prescribed
percentage of transactions, submit trade information pursuant to Rule
6.51 after the date on which the trade is executed. This program is set
forth in CBOE Rule 2.26 and currently functions in the following
manner. Each individual member is assessed a $10.00 fee for each as of
add submitted by the member during a given month that is in excess of
2.4% of the member's trade submissions during that month. Similarly,
each Clearing Member is assessed a $3.00 fee for each as of add
submitted by the Clearing Member during a given month that is in excess
of 1.2% of the Clearing Member's trade submissions during that month.
In addition, the total fee under the program that may be assessed
against a member in a given month are capped at $500 for individual
members and at $1,000 for Clearing Members.
The reason the Exchange implemented the as of add fee program was
to allocate the costs borne by the Exchange in processing as of add
submissions to those members most responsible for generating those
costs and thereby to encourage the submission of information with
respect to a trade on the date the trade is executed by creating an
economic incentive to submit the information on that day. During the
first year of the program, the percentage of as of add submissions
declined by 10% even though the Exchange experienced a 37% increase in
trading volume. Based on past experience, the Exchange estimates that
had the program not been in effect during that time period, the
percentage of as of add submissions would have doubled. Since November,
1994, however, the percentage of as of add submissions has remained
relatively constant. Therefore, although the program has clearly been
effective in reducing the percentage of as of add submissions, it no
longer appears to be causing a reduction in the rate of those
submissions.
Accordingly, the Exchange is proposing to terminate the as of add
fee program and to seek further reductions in the percentage of as of
add submissions by revising the structure of the Exchange's as of add
summary fine program.
The Exchange instituted its as of add summary fine program on
February 1, 1995. The program is a part of the Exchange's minor rule
violation plan and is set forth in CBOE Rule
[[Page 24987]]
17.50(g)(7). Under the program, any individual member whose monthly
percentage of as of add submissions exceeds 7.2% for two consecutive
months or any Clearing Member whose monthly percentage of as of add
submissions exceeds 3.6% for two consecutive months is subject to a
fine of $250 for the first offense, $500 for the second offense, and
$1,000 for each subsequent offense occurring during any 12 month
period.
The Exchange is proposing to revise the structure of the as of add
summary fine program in four primary respects in order to encourage
further changes in as of add behavior, and to the extent the Exchange
collects fines under the program, to help the Exchange defray the
additional costs it incurs in processing as of add submissions.
First, the Exchange is proposing to replace the current as of add
summary fine schedule for individual members. The proposed fine
schedule would be stricter in two respects: (i) action against an
individual member under the fine schedule would be triggered when the
member exceeds the maximum allowable as of add submission percentage in
a given month instead of when the member exceeds that percentage in two
consecutive months as is the case under the current fine schedule and
(ii) the maximum allowable as of add submission percentage under the
fine schedule would be reduced from its current level of 7.2% to 5%.
Specifically, the current find schedule for individual members would be
replaced with the following fine schedule. Any individual member whose
percentage of as of add submissions in any month exceeds 5% would
receive a letter of information for the first offense, a letter of
caution for the second offense, a $500 fine for the third offense, a
$1,000 fine for the fourth offense, and would be referred to the
Exchange's Business Conduct Committee for each subsequent offense
occurring during any 12 month period. In addition, as is currently the
case, the Exchange would retain the discretion to initiate a formal
disciplinary proceeding against an individual member pursuant to
Chapter XVII of the Exchange's rules in the event the Exchange
determines that any violations of Rule 6.51 are not minor in nature.
Second, the current as of add summary fine schedule for Clearing
Members would be deleted and going forward as of add summary fines
would only be assessed against individual members. The Exchange
believes that such a fine structure is appropriate because individual
members have primary control over the timing of trade submissions, and
in the Exchange's experience, most as of adds are caused by delays and
errors of individual members. Moreover, Clearing Members generally have
a greater economic incentive than individual members to reduce as of
adds because Clearing Members incur personnel and systems costs due to
the extra work necessary to process as of adds whereas individual
members do not incur such costs. Therefore, the Exchange believes that
the most effective manner in which to achieve a reduction in the
percentage of as of adds is to direct the as of add summary fine
program toward individual members. Of course, notwithstanding the
foregoing, the Exchange would still have the ability to initiate a
formal disciplinary proceeding against a Clearing Member for violations
of Rule 6.51.
Third, the Exchange is proposing to implement a verification
procedure under Rule 17.50 pursuant to which any member who receives an
as of add summary fine would be able to request verification of that
fine by the Exchange. Under this procedure, the Exchange would attempt
to serve any member who incurs an as of add summary fine with a
disciplinary notice on or before the 10th day of the month immediately
following the month in which the fine is incurred. The member would
then have until the 25th day of the month in which the disciplinary
notice is served to request verification. After the Exchange's
verification process is completed, it would notify the member in
writing of the Exchange's determination, and if the member so desired,
the member could appeal the fine within 30 days after the date of such
notice in accordance with the appeal procedures under Rule 17.50(d). In
addition, any member who incurs an as of add summary fine and does not
request verification would be able to appeal the fine under Rule
17.50(d) within 30 days after the Exchange's service of the
disciplinary notice informing the member of the fine. The above-
described verification procedures would function in the same general
manner as the verification procedures that are currently in place under
Rule 17.50 for fines imposed for failure to submit accurate trade
information and for failure to submit trade information to the price
reporter, and these procedures would serve to replace the current as of
add verification procedures under Rule 2.26(c) which would be
eliminated under the proposed rule change along with the remainder of
Rule 2.26.
Finally, the current procedures set forth in Rule 2.26(d) which
permit the Exchange to suspend the as of add fee program would also be
eliminated along with the remainder of Rule 2.26, and instead, would be
restated in Rule 17.50 and made applicable to the as of add summary
fine program. As is currently the case with respect to the as of add
fee program, these procedures would permit the Exchange's Clearing
Procedures Committee, with the approval of the President of the
Exchange, or his designee, to suspend the as of add summary fine
program for periods no greater than 7 calendar days, plus extensions,
when unusual circumstances affect the ability of a significant number
of members to submit trade information on a timely basis.
The Exchange proposes to implement the proposed rule change within
45 days after its approval by the commission. The purpose of this time
interval is to give the Exchange the opportunity to inform members of
the approval of the proposed rule change in the Exchange's Regulatory
Bulletin before the rule change is put into effect. The Exchange will
publish the effective date of the rule change in the Exchange's
Regulatory Bulletin and will notify the Commission of the effective
date by letter.
The Exchange represents 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) in particular, in that the Exchange believes the
proposed rule change will serve to reduce the percentage of as of add
submissions thereby benefiting both members and investors by increasing
the efficiency with which Exchange transactions are processed and by
reducing the risk exposure to members and investors that results from
the existence of unresolved trades. Accordingly, the Exchange believes
that the proposed rule change serves to promote just and equitable
principles of trade, to remove impediments to and to perfect the
mechanism of a free and open market and a national market system, and
in general, to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
[[Page 24988]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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, 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
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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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-96-24 and should be
submitted by June 7, 1996.
For the Commission, by the division of Market Regulation,
pursuant to delegated authority.\1\
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\1\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12388 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M
