[Federal Register Volume 77, Number 177 (Wednesday, September 12, 2012)]
[Notices]
[Pages 56247-56250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22396]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67794; File No. SR-CBOE-2012-068]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Suspension of and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove a Proposed Rule Change To
Amend the Customer Large Trade Discount
September 6, 2012.
I. Introduction
On July 11, 2012, Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the
[[Page 56248]]
Securities and Exchange Commission (the ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder,\2\ a rule change relating to the
Customer Large Trade Discount (the ``Discount'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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CBOE proposed to amend the Discount for any executing Trading
Permit Holder (``TPH'') whose affiliate \3\ is the issuer of one or
more securities, the combined total asset value of which is $1 billion
or greater, that are based on or track the performance of VIX
futures.\4\ CBOE designated the proposed rule change as immediately
effective upon filing with the Commission pursuant to Section
19(b)(3)(A) of the Exchange Act.\5\ The Commission published notice of
filing of the proposed rule change in the Federal Register on July 26,
2012.\6\ To date, the Commission has not received any comment letters
on the Exchange's proposed rule change.
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\3\ CBOE defines ``affiliate'' as ``a person who, directly or
indirectly, controls, is controlled by, or is under common control
with, such other person.'' CBOE Rule 1.1(j). CBOE Rule 1.1(k)
defines ``control'' as ``the power to exercise a controlling
influence over the management or policies of a person, unless such
power is solely the result of an official position with such person.
Any person who owns beneficially, directly or indirectly, more than
20% of the voting power in the election of directors of a
corporation, or more than 25% of the voting power in the election of
directors of any other corporation which directly or through one or
more affiliates owns beneficially more than 25% of the voting power
in the election of directors of such corporation, shall be presumed
to control such corporation.'' CBOE Rule 1.1(ff) defines ``person''
as ``an individual, partnership (general or limited), joint stock
company, corporation, limited liability company, trust or
unincorporated organization, or any governmental entity or agency or
political subdivision thereof.''
\4\ CBOE Volatility Index[supreg] (``VIX'') measures market
expectations of near term volatility conveyed by S&P 500 index
option prices. Options on VIX offer a way for market participants to
buy and sell option volatility. VIX option prices reflect the
market's expectation of the VIX level at expiration and are
exclusively traded on CBOE. See http://www.cboe.com/micro/VIX/VIXoptionsFAQ.aspx.
\5\ 15 U.S.C. 78s(b)(3)(A). Although the proposed rule change
was effective upon filing, CBOE indicated that the fee change would
take effect on August 1, 2012. See Notice, infra note 6, at 43880.
\6\ See Securities Exchange Act Release No. 67481 (July 20,
2012) 77 FR 43879 (``Notice'').
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Pursuant to Section 19(b)(3)(C) of the Exchange Act, the Commission
hereby is: (1) Temporarily suspending the proposed rule change; and (2)
instituting proceedings to determine whether to approve or disapprove
the proposal.
II. Summary of the Proposed Rule Change
The Exchange's proposal amended the Discount, which caps regular
customer transaction fees on a per-order basis for large customer
trades.\7\ Specifically, CBOE's proposal lowered the transaction fee
cap in VIX options from 10,000 contracts to 7,500 contracts per order
in a qualifying calendar month but only for TPHs who have an affiliate
that issues one or more securities, the combined total value of which
is $1 billion or greater, that are based on or track the performance of
VIX futures (a ``qualifying affiliate'').\8\ Pursuant to that recent
change, incremental volume above 7,500 contracts in a single order is
not assessed a regular customer transaction fee for TPHs with such an
affiliate. TPHs that do not have a qualifying affiliate do not qualify
for the lower fee cap and continue to be assessed the regular customer
transaction fee up to the first 10,000 contracts in VIX options.
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\7\ Prior to the proposal, CBOE charged all TPHs transaction
fees on the first 10,000 contracts in a single order in VIX options.
For example, if a broker-dealer submitted a single order for 12,000
VIX contracts, the broker-dealer was only charged a transaction fee
on the first 10,000 contracts and the remaining 2,000 contracts were
not charged a transaction fee. The Discount also caps customer
transaction fees up to the first 10,000 contracts for SPX; up to the
first 5,000 contracts for other index options; and up to the first
3,000 contracts for ETF, ETN and HOLDRs options. Threshold levels
for the other products subject to the Discount were not changed by
this rule filing.
\8\ On the first business day following the end of a calendar
month, the Exchange will multiply the reported net asset value of
each security that is based on or tracks the performance of VIX
futures (as reported on the final calendar day of the month) by the
amount of outstanding shares in that security to determine the total
asset value of that security. See Notice, supra note 6, at 43880.
The Exchange will then amalgamate the total asset values of all the
securities that are based on or track the performance of VIX futures
issued by the same issuer to determine if such issuer reaches the $1
billion threshold. See id. If it does, the affiliated TPH would
qualify for the 7,500 contract breakpoint for that month.
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III. Suspension of the CBOE Proposal
Pursuant to Section 19(b)(3)(C) of the Exchange Act,\9\ at any time
within 60 days of the date of filing of a proposed rule change pursuant
to Section 19(b)(1) of the Exchange Act,\10\ the Commission summarily
may temporarily suspend the change in the rules of a self-regulatory
organization if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange
Act.
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\9\ 15 U.S.C. 78s(b)(3)(C).
\10\ 15 U.S.C. 78s(b)(1).
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The Commission believes it is appropriate in the public interest to
temporarily suspend the proposal to solicit comment on and evaluate
further the statutory basis for CBOE's proposal to lower the fee-cap
for only certain TPHs, specifically those TPHs that have a qualifying
affiliate.
In justifying its proposal, the Exchange stated that the proposal
is reasonable because it allows TPHs with a qualifying affiliate to pay
lower fees for large customer VIX options transactions.\11\ The
Exchange also argued that the proposed rule change is equitable \12\
and not unfairly discriminatory \13\ ``because it is intended to
incentivize the creation and issuance of securities that are based on
or track the performance of VIX futures, which provides more trading
opportunities for all market participants.'' \14\ The Exchange further
stated that the lower threshold for qualifying TPHs encourages such
TPHs to bring more customer VIX options orders to the Exchange \15\ and
the resulting increased volume and liquidity would benefit all market
participants that trade VIX options.\16\ The Exchange did not in its
filing specifically analyze the burden, if any, of the fee change on
competition.\17\ For example, if both TPH 1 and TPH 2
bring a 12,000 contract order to CBOE, but only TPH 1 has a
qualifying affiliate, CBOE's analysis did not address why it is not
unfairly discriminatory or a burden on competition for TPH 1,
but not TPH 2, to qualify for the lower discount level.
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\11\ See Notice, supra note 5, at 43880. See also Section
6(b)(4) of the Exchange Act, which requires that the rules of a
national securities exchange ``provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities.''
\12\ See Section 6(b)(4) of the Exchange Act, which requires
that the rules of a national securities exchange ``provide for the
equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other persons using its
facilities.''
\13\ See Section 6(b)(5) of the Exchange Act, which requires,
among other things, that the rules of a national securities exchange
not be ``designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.''
\14\ See Notice, supra note 5, at 43880.
\15\ See id.
\16\ See id.
\17\ See Section 6(b)(8) of the Exchange Act, which requires
that the rules of a national securities exchange ``not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of [the Exchange Act].'' See also Item 4 of Form 19b-4
(``Self-Regulatory Organization's Statement on Burden on Competition
(``Form 19b-4 Information'')). 17 CFR 249.819.
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In temporarily suspending the fee change, the Commission intends to
further assess whether the resulting fee-cap disparity between TPHs
trading VIX options is consistent with the statutory
[[Page 56249]]
requirements applicable to a national securities exchange under the
Exchange Act. In particular, the Commission will assess whether the
proposed rule change satisfies the standards under the Exchange Act and
the rules thereunder requiring, among other things, that an exchange's
rules provide for the equitable allocation of reasonable fees among
members, issuers, and other persons using its facilities; not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers; and do not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\18\
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\18\ See 15 U.S.C. 78f(b)(4), (5) and (8).
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Therefore, the Commission finds that it is appropriate in the
public interest,\19\ for the protection of investors, and otherwise in
furtherance of the purposes of the Exchange Act, to temporarily suspend
the proposed rule change.
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\19\ For purposes of temporarily suspending the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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IV. Proceedings to Determine Whether to Approve or Disapprove the CBOE
Proposal
In addition to temporarily suspending the proposal, the Commission
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C)
\20\ and 19(b)(2) of the Exchange Act \21\ to determine whether the
Exchange's proposed rule change should be approved or disapproved.
Further, pursuant to Section 19(b)(2)(B) of the Exchange Act,\22\ the
Commission hereby is providing notice of the grounds for disapproval
under consideration. The Commission believes it is appropriate to
institute proceedings at this time in view of the significant legal and
policy issues raised by the proposal. Institution of proceedings does
not indicate, however, that the Commission has reached any conclusions
with respect to the issues involved.
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\20\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily
suspends a proposed rule change, Section 19(b)(3)(C) of the Exchange
Act requires that the Commission institute proceedings under Section
19(b)(2)(B) to determine whether a proposed rule change should be
approved or disapproved.
\21\ 15 U.S.C. 78s(b)(2).
\22\ 15 U.S.C. 782(b)(2)(B). Section 19(b)(2)(B) of the Exchange
Act also provides that proceedings to determine whether to
disapprove a proposed rule change must be concluded within 180 days
of the date of publication of notice of the filing of the proposed
rule change. See id. The time for conclusion of the proceedings may
be extended for up to 60 days if the Commission finds good cause for
such extension and publishes its reasons for so finding. See id.
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As discussed above, pursuant to CBOE's proposal, TPHs that have a
qualifying affiliate (i.e., that issues securities valued at $1 billion
or greater that are based on or track the performance of VIX futures)
pay a lower transaction fee for large VIX customer options orders as
compared to TPHs that do not have such an affiliate. The Exchange Act
and the rules thereunder require that an exchange's rules, among other
things, provide for the equitable allocation of reasonable fees among
members, issuers, and other persons using its facilities; not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers; and do not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. The Commission solicits comment on whether the proposal is
consistent with these Exchange Act standards and whether CBOE has
sufficiently met its burden in presenting a statutory analysis of how
its proposal meets these standards.
In particular, the grounds for disapproval under consideration
include whether CBOE's proposal is consistent with the following
sections of the Exchange Act:
Section 6(b)(4) of the Exchange Act, which requires that
the rules of a national securities exchange ``provide for the equitable
allocation of reasonable dues, fees, and other charges among its
members and issuers and other persons using its facilities;''\23\
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\23\ 15 U.S.C. 78f(b)(4).
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Section 6(b)(5) of the Exchange Act, which requires, among
other things, that the rules of a national securities exchange not be
``designed to permit unfair discrimination between customers, issuers,
brokers, or dealers;'' \24\ and
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\24\ 15 U.S.C. 78f(b)(5).
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Section 6(b)(8) of the Exchange Act, which requires that
the rules of a national securities exchange ``not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of [the Exchange Act].'' \25\
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\25\ 15 U.S.C. 78f(b)(8).
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The Commission intends to assess whether CBOE's proposal is
consistent with these and other Exchange Act standards.
V. Commission's Solicitation of Comments
The Commission requests written views, data, and arguments with
respect to the concerns identified above as well as any other relevant
concerns. Such comments should be submitted by October 3, 2012.
Rebuttal comments should be submitted by October 17, 2012. Although
there do not appear to be any issues relevant to approval or
disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\26\
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\26\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Exchange Act
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal, in
addition to any other comments they may wish to submit about the
proposed rule change. In particular, the Commission seeks comment on
the following:
As noted above, Section 6(b)(4) of the Exchange Act,
requires that the rules of a national securities exchange ``provide for
the equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other persons using its facilities.''
The Commission seeks comment on whether it is an equitable allocation
of reasonable dues to charge lower transaction fees to TPHs that have a
qualifying affiliate for VIX customer options orders as compared to
TPHs that do not have such an affiliate;
Section 6(b)(5) of the Exchange Act requires, among other
things, that the rules of a national securities exchange not be
``designed to permit unfair discrimination between customers, issuers,
brokers or dealers.'' The Commission seeks comment on whether
discrimination on the basis of whether a TPH has an affiliation with an
issuer of securities that are based on or track the performance of VIX
futures is a ``fair'' basis for discrimination among its participants
with respect to the fees charged by the Exchange for the execution of
customer orders in VIX options;
The Commission seeks comment on whether the filing was
sufficient under Section 19(b) of the Exchange Act in addressing issues
regarding the basis for discrimination between a TPH with a qualifying
affiliate and a TPH that is not so affiliated, and whether the basis
for such discrimination is fair, and why or why not;
Section 6(b)(8) of the Exchange Act requires that the
rules of a national
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securities exchange ``not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of [the
Exchange Act].'' The Commission seeks comment on whether the filing was
sufficient in addressing issues regarding the potential effects of the
proposed fee change on competition, and what, if any, impact the
proposed fee change might have on competition; and
Whether the proposed fee change will affect competition in
the market for VIX options or the broader market, and if so, how and
what type of impact might it have.
Interested persons are invited to submit written data, views, and
arguments concerning the proposed rule changes, including whether the
proposed rule change is consistent with the Exchange 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 email to [email protected]. Please include
File Number SR-CBOE-2012-68 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-2012-68. The file
number should be included on the subject line if email 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 such 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 publicly available. All
submissions should refer to File Number SR-CBOE-2012-68 and should be
submitted on or before October 3, 2012. Rebuttal comments should be
submitted by October 17, 2012.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Exchange Act,\27\ that File No. SR-CBOE-2012-68, be and hereby is,
temporarily suspended. In addition, the Commission is instituting
proceedings to determine whether the proposed rule change should be
approved or disapproved.
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\27\ 15 U.S.C. 78s(b)(3)(C).
\28\ 17 CFR 200.30-3(a)(57) and (58).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22396 Filed 9-11-12; 8:45 am]
BILLING CODE 8011-01-P