[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Notices]
[Pages 41839-41842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17791]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64834; File No. SR-CBOE-2011-057]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to PAR Official Fees in Volatility Index Options
July 7, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on June 29, 2011, Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Chicago Board Options Exchange, Incorporated (``CBOE'' or
``Exchange'') proposes to amend its Fees Schedule effective July 1,
2011 to establish volume threshold tiers for the assessment of PAR
Official Fees in Volatility Index Options classes based on the
percentage of volume that is effected by a PAR Official on behalf of an
order originating firm or, as applicable, an executing firm. The text
of the proposed rule change is availableon the Exchange's Web site
(http://www.cboe.org/legal), at the Exchange's Office of the Secretary
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, 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. CBOE has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
[[Page 41840]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
CBOE is proposing to amend its Fees Schedule effective July 1, 2011
to establish volume threshold tiers for the assessment of PAR Official
Fees in Volatility Index Options. CBOE amended its Fees Schedule to
establish distinct PAR Official Fees in Volatility Index Options in
March 2011.\3\ PAR Official Fees apply to all orders executed by a PAR
Official, except for customer orders (``C'' origin code) that are not
directly routed to the trading floor (an order that is directly routed
to the trading floor is directed to a PAR Official for manual handling
by use of a field on the order ticket). Currently, CBOE assesses PAR
Official Fees in Volatility Index Options in the amount of $.03 per
contract and, like Floor Brokerage Fees, a discounted rate of $.015 per
contract applies for crossed orders.\4\ These fees help to offset the
Exchange's costs of providing PAR Official services (e.g., salaries,
etc).
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\3\ See Securities Exchange Act Release No. 64070 (March 11,
2011), 76 FR 15025 (March 18, 2011) (SR-CBOE-2011-022).
\4\ PAR Official Fees and Floor Brokerage Fees for cross orders
are assessed at a discounted rate because these Fees are assessed
``per side'' and thus, these fees are equal to the amount assessed
for one standard (non-cross) order.
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PAR Official Fees compensate CBOE for providing overflow services
to order originating firms or, as applicable, executing firms,
particularly Floor Brokers,\5\ when they do not have personnel
available to act as agent. CBOE is proposing to establish volume
threshold tiers in Volatility Index Options for the assessment of PAR
Official Fees. Those order originating firms or executing firms that
maintain sufficient staff to manage their floor brokerage operations
and thus, do not rely heavily on CBOE personnel to execute their orders
will be subject to lower PAR Official Fees than those order originating
firms, or as applicable, executing firms that route a significant
portion of their orders to PAR Officials for execution. CBOE believes
that those firms that rely heavily on PAR Officials to conduct their
floor brokerage business, such that PAR Officials execute more than an
incidental number of orders on their behalf, may obtain a minimum
number of Trading Permits to access the floor. Thus, these firms
subsidize their floor brokerage operations at CBOE's expense in that
PAR Officials are either contractors paid by CBOE or CBOE employees.
Under the current proposal, Trading Permit Holders that routinely rely
on PAR Officials to execute their orders in Volatility Index Options
will be subject to higher PAR Official Fees as CBOE is, in effect,
subsidizing their floor brokerage operations and going beyond the
Exchange's intent to provide PAR Official services as a supplementary
means of execution for overflow orders.
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\5\ CBOE Rule 6.70 provides: ``A Floor Broker is an individual
(either a Trading Permit Holder or a nominee of a TPH organization)
who is registered with the Exchange for the purpose, while on the
Exchange floor, of accepting and executing orders received from
Trading Permit Holders or from registered broker-dealers. A Floor
Broker shall not accept an order from any other source unless he is
the nominee of a TPH organization approved to transact business with
the public in accordance with Rule 9.1. In the event the
organization is approved pursuant to Rule 9.1, a Floor Broker who is
the nominee of such organization may then accept orders directly
from public customers where (i) The organization clears and carries
the customer account or (ii) the organization has entered into an
agreement with the public customer to execute orders on its behalf.
Among the requirements a Floor Broker must meet in order to register
pursuant to Rule 9.1 is the successful completion of an examination
for the purpose of demonstrating an adequate knowledge of the
securities business.''
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CBOE currently assesses the same amount for PAR Official Fees and
Floor Brokerage Fees in Volatility Index Options.\6\ In establishing
the same fee amounts for Floor Brokerage Fees and PAR Official Fees,
CBOE eliminated the disparity that existed between the amounts assessed
for Floor Brokerage Fees and PAR Official Fees in Volatility Index
Options. However, CBOE did not take into consideration the pricing
advantage gained by those firms that continue to execute a significant
number of orders through a PAR Official rather than obtain an
appropriate amount of Trading Permits to staff their floor brokerage
operations.
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\6\ Floor Brokerage Fees are also assessed in OEX and SPX
trading crowds but there are currently no PAR Officials in OEX or
SPX trading crowds.
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CBOE is proposing to amend the Fees Schedule to establish volume
threshold tiers for the assessment of the PAR Official Fees in
Volatility Index Options. Specifically, CBOE is proposing to assess PAR
Official Fees based on the percentage of an order originating firm's
or, as applicable, an executing firm's total monthly volume in
Volatility Index Options that is effected by a PAR Official during a
calendar month. The percentage will be calculated on a monthly basis by
dividing the number of contracts executed by PAR Officials on behalf of
an order originating firm or executing firm (as applicable) in
Volatility Index Options by the total number of contracts executed in
open outcry (by or on behalf of an order originating firm or, as
applicable, an executing firm) in Volatility Index Options. The
following sets forth the tier levels and specific fees that would be
assessed to orders that are subject to PAR Official Fees in Volatility
Index Options classes:
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% monthly
volume Crossed
Tier level executed Standard orders (per
through PAR orders side)
official
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1............................................................... 0-24.99 $.03 $.015
2............................................................... 25-49.99 .06 .03
3............................................................... 50-74.99 .09 .045
4............................................................... 75-100 .12 .06
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For example, a Floor Broker Trading Permit Holder would be assessed
$.06 for all standard (non-cross) orders and $.03 for all crossed
orders executed by a PAR Official on behalf of the Floor Broker during
a calendar month if 25.5% of the Floor Broker Trading Permit Holder's
total monthly (open outcry) volume in Volatility Index Options is
executed by a PAR Official (Tier 2).
Reliance on PAR Officials as the primary means of execution is
inconsistent with the Exchange's intent to provide PAR Official
services as a supplementary means of execution for incidental orders.
CBOE recently addressed similar concerns with the PAR Official Fees
that are assessed in classes other than Volatility Index Options by
establishing a threshold tier that assesses PAR Official Fees based on
the percentage of an order originating firm's or, as applicable, an
executing firm's total monthly volume that is effected by a PAR
Official during a
[[Page 41841]]
calendar month.\7\ CBOE elected to exclude Volatility Index Options
classes from the tier structure at that time because Volatility Index
Options classes are the only classes at CBOE where Floor Brokerage Fees
are also assessed. Specifically, CBOE assesses Floor Brokerage Fees in
its proprietary options products. However, Volatility Index Options
classes are the only proprietary classes where there is also a PAR
Official available to execute orders in the trading crowd. Thus, CBOE
maintained set PAR Official Fees in Volatility Index Options so that
the PAR Official Fees and Floor Brokerage Fees were consistent in these
classes.
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\7\ See Securities Exchange Act Release No. 64217 (April 6,
2011), 76 FR 20793 (April 13, 2011) (SR-CBOE-2011-030).
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After further evaluation, CBOE has determined that Trading Permit
Holders continue to rely on PAR Officials for execution of orders as
they are able to avoid the cost to obtain additional Trading Permits to
adequately staff their business. Therefore, CBOE is proposing to
establish a similar tier structure setting forth the PAR Official Fees
in Volatility Index Options. CBOE is proposing to assess higher PAR
Official Fees at each tier level in Volatility Index Options than the
amounts assessed in other classes to account for the amount assessed
for Floor Brokerage Fees in Volatility Index Option classes. As CBOE
currently assesses flat Floor Brokerage Fees of $.03 per contract for
standard orders and $.015 per contract for crossed orders, CBOE is
proposing to establish a tier structure where the lowest tier amount is
equivalent to the Floor Brokerage Fees assessed in Volatility Index
Options. Thus, CBOE will not implement a fee structure that would
provide an incentive for Floor Brokers to route a certain percentage of
their orders to a PAR Official to avoid the Floor Brokerage Fees. CBOE
believes that the proposed tier levels are reasonable and equitable in
that, as provided above, PAR Officials are intended to provide overflow
services to Trading Permit Holders. Further, each order originating
firm or executing firm (as applicable) has the ability to control the
number of orders that are routed to a PAR Official and thus, the amount
of PAR Official Fees that will be assessed on a monthly basis.
An additional consideration when evaluating the equitability of the
proposed tier structure is the cost of each Trading Permit. For
example, Floor Broker Trading Permit Holders are subject to a $6,000
per month Trading Permit Fee.\8\ A Floor Broker Trading Permit Holder
that requires ten Floor Broker Trading Permits to adequately staff its
business is subject to a cost of $60,000 per month for Trading Permit
Fees (totaling $720,000 per year). By comparison, a Trading Permit
Holder that routes the majority of its orders to PAR Officials for
execution and maintains one Trading Permit is subject to a $6,000 per
month Trading Permit Fee ($72,000 annually). The existing PAR Official
Fee structure that imposes a flat per contract fee does not provide an
incentive for firms to adequately staff their business as each Trading
Permit Holder is currently assessed the same PAR Official Fees.
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\8\ See CBOE Fees Schedule, Section 10.
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As provided above, PAR Officials are intended to provide overflow
services to Trading Permit Holders. CBOE never intended PAR Officials
to serve as the primary means of execution for order originating firms
or executing firms. Heavy reliance on PAR Officials subjects the
Exchange to the additional expense and undue strain of providing the
additional staffing of PAR Officials. CBOE believes that this proposal
will ``level the playing field'' between those Trading Permit Holders
that rely incidentally on PAR Officials and those Trading Permit
Holders that rely heavily on PAR Officials by basing the PAR Official
Fees on an order originating firm's or, as applicable, an executing
firm's overall reliance on a PAR Official to conduct their business.
Trading Permit Holders that adequately staff their business operations
and rely incidentally on PAR Officials are incurring higher costs to
retain a sufficient number of Trading Permits and should not be subject
to the same amount for PAR Official Fees incurred by a Trading Permit
Holder that relies disproportionately on PAR Officials to conduct its
floor brokerage business because it does not maintain an adequate
number of Trading Permits to conduct its floor brokerage business and
further, is not subject to the cost of the additional Trading Permits
required to adequately staff its business.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Securities Exchange Act of 1934 (``Act''),\9\ in
general, and furthers the objectives of Section 6(b)(4) \10\ of the Act
in particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees, and other charges among its
Trading Permit Holders and other persons using its facilities. The
Exchange believes the proposed change is equitable, reasonable and not
unfairly discriminatory, in that, in general, PAR Official Fees are
intended to help the Exchange recover its costs of providing PAR
Official services to Trading Permit Holders and the proposed change is
intended to reasonably allocate such costs to order originating firms
and executing firms based on the amount of business they conduct
through PAR Officials. Specifically, the proposed fee tier structure is
equitable in that all order originating firms or, as applicable,
executing firms, are assessed the same fees at each tier level for
orders executed by a PAR Official in Volatility Index Options. CBOE's
proposal to establish a tier structure where the lowest tier amount is
equivalent to the Floor Brokerage Fees assessed in Volatility Index
Options classes is reasonable as CBOE assesses Floor Brokerage Fees in
its proprietary products, (including Volatility Index Options classes),
and Volatility Index Options classes are the only classes where a PAR
Official is available to execute orders at CBOE where Floor Brokerage
Fees are also assessed. Further, the proposed fee structure is not
unfairly discriminatory because the tiers are based on the percentage
of activity executed by a PAR Official. Each firm has the ability to
route fewer orders to a PAR Official in Volatility Index Options, such
that they are not subject to higher PAR Official Fees.
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\9\ 15 U.S.C. 78f(b).
\10\ 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 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 with respect to 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) of the Act \11\ and subparagraph (f)(2) of Rule 19b-4 \12\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is
[[Page 41842]]
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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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 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 [email protected]. Please include
File Number SR-CBOE-2011-057 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2011-057. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. 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-2011-057 and should be
submitted on or before August 5, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-17791 Filed 7-14-11; 8:45 am]
BILLING CODE 8011-01-P