[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Notices]
[Pages 1412-1414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00067]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71223; File No. SR-CBOE-2013-109]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Approving a Proposed Rule Change Relating to
Market-Maker Appointment Cost Rebalances
January 2, 2014.
I. Introduction
On November 1, 2013, Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its rules regarding
Market-Maker appointment cost rebalances. The proposed rule change was
published for comment in the Federal Register on November 19, 2013.\3\
The Commission received no comment letters on the proposed rule change.
This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70856 (November 13,
2013), 78 FR 69491 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange is proposing to amend its rules regarding Market-Maker
appointment cost rebalances. According to the Exchange, appointments to
act as a Market-Maker ``cost'' different
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amounts for different classes (with no classes costing more than
1.0).\4\ The Exchange places options classes into different tiers, with
all the classes in a certain tier costing the same amount per
appointment.\5\ Each Trading Permit held by a Market-Maker has an
appointment credit of 1.0. For each Trading Permit the Market-Maker
holds, the Market Maker may select any combination of Hybrid classes
and Hybrid 3.0 classes, whose aggregate appointment cost does not
exceed 1.0.\6\
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\4\ See id. at 69491.
\5\ For example, all the classes in tier B cost 0.05 per class
appointment, all the classes in tier E cost .01 per class
appointment. See id.
\6\ See CBOE Rule 8.3(c)(iv).
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Currently, on a quarterly basis, the Exchange may rebalance the
tiers into which different classes fall, meaning that the Exchange can
elect to move a class from one tier to another (with that class'
corresponding appointment cost changing). The Exchange proposes to
memorialize in proposed CBOE Rule 8.3(c)(iv) that the Exchange will
announce any rebalances at least ten business days before the rebalance
takes effect.\7\ Under the proposal, such rebalances will be announced
to Trading Permit Holders (``TPHs'') via Regulatory Circular.
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\7\ It is the Exchange's current practice to announce such
rebalances more than ten business days prior to taking effect, but
this practice is not codified in CBOE's rules. See Notice, supra
note 3, at 69491.
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When the Exchange effects a rebalancing (i.e., changes the
appointment cost tier for a certain class of options), the class is
assigned the appointment cost of that new tier. Upon such rebalancing,
each Market-Maker with a Virtual Trading Crowd (``VTC'') appointment
\8\ will be required to hold the appropriate number of Trading Permits
reflecting the revised appointment costs of the Hybrid classes
constituting the Market-Maker's appointment. Accordingly, when classes
are rebalanced, the sum of a Market-Maker's appointment costs cannot
exceed the number of Trading Permits that a Market-Maker holds. Market-
Makers manage their own appointments through an online appointment
system. The system displays the relevant appointment costs for each
class, thereby facilitating the ability of a Market-Maker to manage its
committed and available appointment credits.
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\8\ A VTC appointment allows a Market-Maker to quote
electronically in a class.
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The Exchange proposes to add language to CBOE Rule 8.3(c)(iv) to
address situations in which a Market-Maker fails to adjust his or her
appointments and, as a result, the sum of the Market-Maker's
appointment costs otherwise would exceed the available appointment
credits based on the number of Trading Permits the Market-Maker holds.
The proposed new language states: ``[i]f a Market-Maker with a VTC
appointment holds a combination of appointments whose aggregate revised
appointment cost is greater than the number of Trading Permits that
Market-Maker holds, the Market-Maker will be assigned as many Trading
Permits as necessary to ensure that the Market-Maker no longer holds a
combination of appointments whose aggregate revised appointment cost is
greater than the number of Trading Permits that Market-Maker holds.''
In the event that a Market-Maker's appointment costs exceed his or her
available assignment credits as the result of a reassignment of
appointment costs by the Exchange, and the Exchange needs to allocate
another trading permit or permits to the Market-Maker, then the
Exchange also will assess the Market-Maker the corresponding Trading
Permit fees for the additional Trading Permit(s).\9\
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\9\ For example, the Exchange described a situation in which a
Market-Maker's aggregate appointment cost for the classes for which
it holds Market-Maker appointments prior to a rebalancing is 4.90
and the Market-Maker holds five Trading Permits (i.e., a total of
5.0 credits). The Exchange then rebalances the appointment costs of
classes and announces such rebalancing at least ten days prior to
the rebalancing takes effect. Upon this rebalancing taking effect,
the Market-Maker's appointment cost will now be 5.40. If the Market-
Maker does not adjust its appointments prior to such rebalancing
taking effect, then the Exchange will simply assign that Market-
Maker a sixth Market-Maker Trading Permit (for a total of 6.0
credits) to cover the Market-Maker's aggregate appointment costs .
The Exchange also will begin to bill the Market-Maker for the cost
of the additional sixth permit. See id.
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III. Discussion and Commission's Findings
After careful review, 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.\10\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\11\ which
requires, among other things, that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system and, in general, to protect
investors and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers. The
Commission also finds that the proposed rule change is consistent with
Section 6(b)(1) of the Act,\12\ which provides that the Exchange be
organized and have the capacity to be able to carry out the purposes of
the Act and to enforce compliance by its members and persons associated
with its members, with the Act, the rules and regulations thereunder,
and the rules of the Exchange.
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\10\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\11\ 15 U.S.C. 78f(b)(5).
\12\ 15 U.S.C. 78f(b)(1).
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The proposed rule change is designed to allow the Exchange to avoid
a situation where a Market-Maker has an aggregate appointment cost that
exceeds the available appointment credits that the Market-Maker holds
based on the trading permits that he or she possesses. The Exchange
argues that such a situation would constitute an unfair advantage in
favor of that Market-Maker.\13\ The Exchange argues that, by preventing
such situations, the proposed rule change may remove impediments to and
perfect the mechanism of a free and open market system. In its filing,
the Exchange noted that it does not have the ability to adjust the VTC
appointments of a Market-Maker whose aggregate appointment costs
exceeds his or her available appointment credits. Even if it did have
such ability, rectifying an appointment cost deficit by removing one or
more of a Market-Maker's appointments would remove a source of
liquidity and thus have the potential to negatively affect market
quality in a particular class on CBOE. Further, allowing a Market-Maker
to exceed his or her appointment costs would amount to unfair
discrimination and provide a competitive advantage over other Market-
Makers who stayed within their available appointment credits. As an
alternative to incurring the expense of an additional trading permit, a
Market-Maker could, in response to an increase in tier appointment
costs by CBOE, adjust its appointments on its own initiative.
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\13\ See Notice, supra note 3, at 69492.
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In addition, the revised rule would codify the Exchange's current
practice of notifying TPHs at least ten business days before effecting
Market-Maker class tier rebalances, which could potentially affect
their fees if they are required to purchase additional trading permits.
It also would enable the Exchange to adjust the VTC appointments of a
Market-Maker whose aggregate appointment cost exceeds the number of
trading permits that the Market-Maker holds and charge the Market-Maker
for
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the additional permit(s). The Exchange states that this proposal would
allow the Exchange to avoid the resource-intensive process of
instituting regulatory proceedings against these Market-Makers who fall
out of compliance with the Exchange's rule.\14\ The Commission believes
that CBOE's proposal is consistent with CBOE's responsibility to be
organized and have the capacity to be able to enforce compliance by the
Exchange's members with its rules, and is designed to allow CBOE to
expeditiously and efficiently maintain a level playing field among its
Market-Makers with respect to appointment costs following a rebalancing
of such costs by the Exchange.
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\14\ See Notice, supra note 3, at 69491.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-CBOE-2013-109) be, and it
hereby is, approved.
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\15\ 15 U.S.C. 78s(b)(2).
\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00067 Filed 1-7-14; 8:45 am]
BILLING CODE 8011-01-P