[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17656]
[[Page Unknown]]
[Federal Register: July 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34376; File No. SR-CBOE-94-12]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to
Modification of Fees for Failure To Observe OEX RAES Requirements
July 14, 1994.
On April 1, 1994, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposal to amend CBOE Rule 24.17, ``RAES Eligibility
in OEX,'' to change the eligibility standards under which individuals,
member organizations and joint accounts may participate in the CBOE's
Retail Automatic Execution System (``RAES'') for Standard & Poor's 100
Index (``OEX'') options. Among other things, the CBOE proposes to
eliminate the automatic disqualification provision from CBOE Rule 24.17
and replace the rule's current $500.00 fee for failures to comply with
RAES log-on and log-off requirements with the following fee schedule: a
$100.00 fee for each of the first three failures to comply with the
log-on or log-off requirements in one calendar year; a $250.00 fee for
each of the fourth through sixth such failures in one calendar year;
and a $500.00 fee for all subsequent failures to comply with the log-on
and log-off requirements in one calendar year.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
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Notice of the proposed rule change was published for comment in the
Federal Register in Securities Exchange Act Release No. 34128 (May 27,
1994), 59 FR 28907 (June 3, 1994). No comments were received on the
proposal.
In May 1993 Exchange Rule 24.17 was amended to establish, among
other things, more rigorous log-on and log-off requirements for
participants in OEX RAES.\3\ For example, group members who previously
were logged on automatically by the Exchange must now log on at their
own initiative each time they enter the trading crowd. Likewise,
members who previously were not required to log off the system each
time they left the trading crowd must now do so.
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\3\See Securities Exchange Act Release No. 32248 (April 30,
1993), 58 FR 27596 (``RAES Approval Order'').
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In view of these additional log-on and log-off requirements, the
Exchange believes that the $500.00 fees currently due from members who
do not log on or log off as required are excessive. The proposed rule
change therefore establishes a new graduated fee schedule, under which
the fee amount will increase in relation to the number of times within
any one calendar year that a member does not log on or log off as
required. Specifically, during each calendar year, a $100.00 fee will
be due for each of the first three times that a member fails to observe
the log-on or log-off requirements; a $250.00 fee will be due for each
of the fourth through sixth such times; and a $500.00 fee will be due
for all subsequent times. In addition, the CBOE proposes to assess a
$500.00 fee on any member participating in a joint account or nominee
account held by a member organization if the member logs onto OEX RAES
but thereafter terminates participation prior to the next succeeding
expiration date without either joining another OEX RAES account or
terminating membership on the Exchange.
In addition, the CBOE proposes to eliminate the automatic
disqualification provisions in CBOE Rule 24.17. Specifically, the
Exchange proposes to delete the provisions which provide that a
individuals's, participating nominee's, or joint account member's
failure to meet his RAES obligations will disqualify him from signing
onto RAES for such time period as the OEX Floor Procedure Committee
(``OFPC'') determines. The CBOE also proposes to allow an individual
required to sign onto RAES immediately prior to expiration to apply to
the OFPC for prospective relief from the log-on requirements during a
particular expiration cycle. The proposal states that in deciding such
applications, the OFPC may limit the grant of relief by imposing time
periods during which the applicant will not be eligible to participate
in RAES.
Members who fail to observe CBOE Rule 24.17 can be subject to a
variety of sanctions.\4\ The CBOE states that the fees suggested in the
proposed rule change, like the fees imposed currently under CBOE Rule
24.17, do not constitute disciplinary action. Nevertheless, the review
procedures in Chapter 19, ``Hearings and Review,'' of the Exchange's
rules will be available with respect to the assessment of the proposed
fees. Under those procedures, a member may seek verification of fees
charged by the Exchange. If the member is not satisfied with the
verification of fees, he may request a hearing before a panel of three
or more members of the Exchange's Appeals Committee. At the hearing the
appellant may be represented by counsel and may cross examine
witnesses.\5\
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\4\Under CBOE Rule 24.17(b)(v), the OFPC may bar, restrict, or
condition a joint account's participation in RAES if any member
fails to meet the OEX market maker requirements. Under CBOE Rule
24.17(c)(vi), the OFPC may bar, restrict, or condition a member
organization's participation in RAES if any nominee on RAES in OEX
fails to meet the OEX market maker requirements. CBOE Rule
24.17(e)(ii) provides several sanctions for failures to comply with
the requirements of CBOE Rule 24.17, including disciplinary action
under, among others, CBOE Rule 6.20, ``Admission to and Conduct on
the Trading Floor,'' and Chapter XVII, ``Discipline,'' of the CBOE's
rules. In addition, the OFPC may take remedial action, including
suspension of a member's eligibility for participation on RAES and
other remedies appropriate under Chapter VIII, ``Market Makers,
Trading Crowds, and Modified Trading Systems,'' of the CBOE's rules.
\5\See CBOE Rules 19.3, ``Procedure Following Applications for
Hearing,'' and 19.4, ``Hearing.''
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In addition, the decision of the Exchange's Appeals Committee panel
is subject to review by the Board of Directors of the Exchange on the
Board's own motion, on the written request of the appellant, or at the
request of the Exchange's President or the relevant Exchange Committee
Chairman. The review must be conducted by the Board or by a Board
Committee consisting of at least three Directors (other than Directors
who sat on the Appeals Committee in the matter). An appellant has an
opportunity to address issues raided specifically by the Board or the
Committee, and in addition may submit oral or written arguments if the
Board so allows in its discretion.\6\
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\6\See CBOE Rule 19.5, ``Review.''
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The Exchange believes that the proposed fee schedule is appropriate
and equitable given the additional requirements imposed on participants
in OEX RAES in the RAES Approval Order. Furthermore, to ensure that all
members are treated alike under the RAES Approval Order, the Exchange
will apply the revised fee schedule retroactively from April 30, 1993,
the effective date of the RAES Approval Order.\7\
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\7\By an Exchange Bulletin dated May 11, 1994, the CBOE notified
its members of the proposed reduction in the fees due for failures
to comply with the log-on and log-off requirements of CBOE Rule
24.17 and the retroactive application of the reduced fees.
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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
Sections 6(b)(4) and 6(b)(5), in particular, in that it is designed to
allocate reasonable dues, fees and charges among CBOE members and to
promote the efficiency and effectiveness of the CBOE's automatic
execution system.
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).\8\ The Commission
believes that the elimination of the automatic disqualification
provisions of CBOE Rule 24.17, the introduction of a graduated fee
schedule for failures to comply with the RAES log-on and log-off
requirements, and the provision allowing individuals to apply to the
OFPC for prospective relief from the requirement to log onto RAES on
the business day immediately prior to expiration are designed to make
the rules applicable to OEX RAES participation fairer and more flexible
while maintaining the integrity of the RAES system for OEX options. The
proposal is designed to ensure that there is adequate market maker
participation at all times in OEX RAES and that market makers are
properly logged onto the system. The presence of an adequate number of
market makers protects investors and contributes to the maintenance of
fair and orderly markets by helping the Exchange to maintain the
continued availability to RAES for OEX, thereby contributing to the
effective and efficient execution of public investor orders at the best
available prices.
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\8\15 U.S.C. 78f(b)(5) (1982).
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The Commission also believes that it is reasonable for the CBOE to
eliminate the provisions of CBOE Rule 24.17 allowing for automatic
disqualification from RAES for failures to satisfy RAES obligations
because the fees imposed for failing to meet participation requirements
should provide a sufficient deterrent to ensure adequate market maker
participation in OEX RAES.\9\ In this regard, the Commission notes that
in addition to the graduated fees for failures to comply with the RAES
log-on and log-off requirements, the proposal establishes a $500.00 fee
for any member organization who logs onto RAES and later terminates
participation on RAES prior to the next expiration cycle without
participating in another OEX RAES account or terminating membership
with the Exchange. The Commission believes that these fees should deter
participating OEX RAES market makers from abandoning their commitment
to RAES for other than good cause. Nevertheless, the Commission expects
the CBOE to monitor OEX RAES participation and to consider altering the
requirements should adequate participation not be maintained after
these changes are implemented, particularly during periods of high
volatility.
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\9\The Commission notes that under CBOE Rule 24.17(e)(i) the
chairperson of the OFPC, in consultation with a senior Exchange
executive officer, may require members of the trading crowd as
defined in CBOE Rule 8.50 to log onto RAES if OEX RAES participation
appears to be inadequate. If inadequate, RAES participation
continues, then the chairperson of the OFPC, in consultation with a
senior Exchange executive officer, may request the participation of
all market makers whether or not they are members of the OEX crowd.
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In addition, the Commission believes that the proposal to allow a
member to apply to the OFPC for prospective relief from the requirement
to log onto RAES on the business day prior to expiration is designed to
provide flexibility and to accommodate the needs of individual members
while continuing to ensure adequate RAES participation. The Commission
notes that the proposal allows the OFPC to limit the grant of relief by
imposing time periods during which the applicant will not be eligible
to participate in RAES.
The Commission believes that the proposal is also consistent with
section 6(b)(5) under the Act in that it is designed to facilitate
transactions in securities. The CBOE believes that the current $500.00
fee for failures to comply with the OEX RAES log-on and log-off
requirements is excessive in light of the log-on and log-off
requirements established under the RAES Approval Order. Based upon this
determination, the Commission believes that it is reasonable for the
Exchange to replace the current $500.00 fee with a graduated fee
schedule and allow the Exchange to impose higher fees for repeated
failures, which should encourage compliance with the log-on and log-off
requirements and may increase the Exchange's ability to deter repeat
offenders. The CBOE has distributed an Exchange Bulletin describing the
new fee schedule and the application of the fees to April 30, 1993, the
effective date for implementation of the original $500.00 fee. The
Commission believes that this notification, and the fact that the
graduated fees will be lower than the fees that the CBOE can impose
currently under the original $500.00 fee, help to ensure that the fees
for failures to comply with the log-on and log-off requirements are
imposed fairly.
Moreover, the Commission believes that the right to appeal the fees
imposed under CBOE Rule 24.17 pursuant to Chapter 19 of the CBOE's
rules should help to safeguard the procedural rights of OEX RAES
participants. In summary, under these limited and unusual
circumstances, the Commission believes that the CBOE may implement
these lower fees as of April 30, 1993.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-CBOE-94-12), is hereby
approved.
\10\15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17656 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M
