Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to an Extension to and Amendment of the Pilot Program for Fees Due for Post-Trade Date Submission of Trade Information

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33855; File No. SR-CBOE-94-11]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the Chicago

Board Options Exchange, Inc., Relating to an Extension to and Amendment

of the Pilot Program for Fees Due for Post-Trade Date Submission of

Trade Information

April 4, 1994.

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 March

30, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I and II below, which Items have been prepared by the CBOE. On

March 31, 1994, the Exchange filed Amendment No. 1 to the proposed rule

change.\1\ The Commission is publishing this notice to solicit comments

on the proposed rule change from interested persons.

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\1\In Amendment No. 1, the Exchange requests that the pilot

program for post-trade date submission of trade information be

extended for six months instead of four months as originally

proposed. See Letter from Daniel Schneider, Schiff Hardin & White,

to Brad Ritter, Attorney, Office of Derivatives and Equity

Oversight, Division of Market Regulation (``Division''), Commission,

dated March 31, 1994.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The CBOE proposes to: (1) Extend until September 30, 1994, a pilot

program allowing the Exchange to collect fees from members who submit

trade information pursuant to CBOE Rule 6.51\2\ after the trade date

(``As of Adds'') for more than a prescribed percentage of transactions

in any month; (2) revise the fee schedule under CBOE Rule 2.26 for As

of Adds submitted by individual members; (3) alter the manner in which

the fees for As of Adds are calculated against individual members; and

(4) make clarifying revisions to paragraphs (b) and (c) of Rule 2.26.

The text of the proposed rule change is available at the Office of the

Secretary, CBOE, and at the Commission.

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\2\CBOE Rule 6.51 provides, among other things, that (1) a

participant in each transaction to be designated by the Exchange

shall immediately report the transaction to the Exchange, (2) for

each transaction on the Exchange in which he participates, a member

shall report the transaction as promptly as possible to the member

for which such transaction was made and/or to the member that will

clear such transaction, and (3) 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.

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II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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 the

Statutory Basis for, the Proposed Rule Change

Under CBOE Rule 2.22, the Exchange may impose fees on members for

the use of Exchange facilities or for any services provided or

privileges granted by the Exchange. Under Rule 2.26, fees for As of

Adds are imposed for use of the CBOE's overnight and next-day late-

submission-trade-match processing services when that use exceeds a

level the Exchange considers to be ``nominal.'' The Exchange represents

that the As of Adds fees help to reimburse the Exchange for the

administrative burdens and costs of processing post-trade date

submissions, and creates an incentive for members to avoid submitting

trade data after the trade date.

On October 1, 1993, the Commission approved, on a pilot basis until

March 31, 1994, a proposed rule change allowing the CBOE to establish

and collect fees from members who submit more than a stated percentage

of As of Adds during any month.\3\ Specifically, pursuant to the pilot

program, any Exchange member firm that fails for more than a stated

monthly percentage of transactions to submit required transaction

information on the date a transaction is executed incurs a transaction

fee of $3.00 for each such trade in excess of the stated monthly

percentage. Individual exchange members, however, incur a transaction

fee of $3.00 for each As of Add during the relevant period once they

exceed their stated monthly percentage. Because the Exchange expects

the number of As of Adds to decrease over time as a result of these

fees, the maximum allowable percentage of As of Adds per month is

structured to decrease periodically. Individual members and clearing

members that incur fees pursuant to this rule may submit a request for

verification to the Exchange pursuant to Part A of Chapter XIX of the

CBOE Rules and may appeal these fees pursuant to Part B of Chapter XIX.

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\3\See Securities Exchange Act Release No. 32999 (October 1,

1993), 58 FR 53003 (October 13, 1993) (``Exchange Act Release No.

32999'').

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The Exchange represents that during the six months in which As of

Adds fees have been imposed under the pilot program, the Exchange and

CBOE members have gained considerable experience with the fee program.

Among other things, the Exchange states that it has seen the Exchange-

wide percentage of As of Adds submissions remain approximately constant

despite the fact that there was a substantial increase in Exchange

trade volume during the pilot program.\4\ According to past experience,

the Exchange represents that the Exchange-wide percentage of As of Adds

submissions typically increases during periods of increased Exchange

trading volume. Accordingly, the Exchange believes the As of Adds fees

imposed pursuant to the pilot program have been effective in promoting

a reduced volume of As of Adds submissions.

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\4\Telephone conversation among Dan Schneider, Schiff Hardin &

Waite, Sharon Lawson, Assistant Director, Office of Derivatives and

Equity Oversight, Division, Commission, and Brad Ritter, Attorney,

Office of Derivatives and Equity Oversight, Division, Commission, on

March 30, 1994.

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The Exchange represents that approximately 250 individual members

who have been assessed As of Adds fees since October 1993, however,

continue to make late submissions in excess of the ``nominal''

percentage level at least every other month. The Exchange believes

those individual members impose extra trade resolution costs on the

Exchange, their clearing firms and other members by requiring

significant levels of special handling for the processing of their late

submissions. As a result, in addition to extending the pilot program

for As of Adds fees until September 30, 1994, the Exchange is also

proposing to amend the pilot program with respect to individual

members.

Under the proposal, the Exchange would alter the manner in which As

of Adds fees are assessed against individual members. First, individual

members who exceed their stated monthly percentage of allowable As of

Adds submissions will be assessed a fee for only the number of As of

Adds exceeding the monthly allowable percentage. Under the present

pilot program, an individual member can incur relatively sizeable fees

even if that member exceeds his monthly stated percentage by only one

As of Add. The proposed amendment will conform the manner in which As

of Adds fees are computed against individual members with the

procedures used for clearing members. Secondly, in response to the

number of individual members who, on a regular basis, continue to

submit more than a ``nominal'' number of As of Adds, the Exchange

proposes to increase the As of Adds fee for individual members from

$3.00 to $10.00 for each trade exceeding an individual member's stated

monthly percentage. The Exchange believes that this change will

efficiently reduce the number of As of Adds submissions by individual

members and, therefore, reduce the burdens and costs associated with

the handling As of Adds.

The Exchange further believes that the As of Adds fees, as

proposed, are set at relatively modest levels. Under the proposal, the

Exchange states that no individual member is likely to incur a fee in

excess of $800 per month, and that most assessments are likely to be

between $50 and $250 per month. Moreover, as is the case currently

under the pilot program, any member assessed an As of Adds fee may

request verification from the Exchange pursuant to Part B of Chapter

XIX of the CBOE Rules and may appeal the fee assessment pursuant to

Part A thereof.

In contrast to the change in fee level for individual members, the

fee level for clearing members is not proposed to be changed. The

Exchange represents that in its experience, delays and errors by

individual members are the direct cause for most late trade

submissions. Moreover, at the $3.00 level, the Exchange states that

clearing members pay substantial fees even though individual members,

rather than clearing members, have primary control over the timing of

submissions. Accordingly, the Exchange believes that the $3.00 fee

level for clearing members remains both appropriate in absolute terms

and equitable in relation to the fee assessed against individual

members.

Finally, in addition to the changes discussed above, certain

clarifying amendments are proposed to be made to paragraphs (b) and (c)

of Rule 2.26. These amendments are being made to (1) clearly

distinguish between the treatment of individual members and clearing

members under the rule and (2) specify that a member firm may use the

verification and appeal processes of Chapter XIX to dispute that it

acted as the clearing member for a particular individual member (or

members) during the relevant time period.

The CBOE believes 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) of the Act in particular in that it is designed to

provide for the equitable allocation of reasonable dues, fees and

charges among CBOE members.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The CBOE does not believe that the proposed rule change will impose

a burden on competition.

(C) Self-Regulatory Organization's Statement of 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 Exchange has requested that the proposed rule change be given

accelerated effectiveness pursuant to Section 19(b)(2) of the Act.

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).\5\ Specifically, the

Commission finds as it did in originally approving the pilot program

that imposing fees on members who submit As of Adds for more than a

prescribed percentage of transactions in any month is likely to offset

the carrying costs incurred by Exchange members as a result of these

post-trade date submissions, make trade comparisons on the CBOE more

efficient in terms of the time and expense involved in trade

processing, and reduce the risk exposure to investors and Exchange

clearing members.\6\ Additionally, the Commission continues to believe

that the pilot program does not raise any due process concerns because

of the availability of the verification and appeals processes.\7\

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\5\15 U.S.C. 78f(b)(5) (1988).

\6\See Exchange Act Release No. 32999, supra note 3.

\7\Id. The Commission notes that the Exchange shall issue a

regulatory circular to all CBOE members and options managers

notifying them of the extension of the pilot program as amended

herein. The regulatory circular also shall expressly state that all

members assessed a fee pursuant to the pilot program may submit a

request for verification and may appeal the fees assessed pursuant

to Chapter XIX of the CBOE Rules. Telephone conversation between

Daniel Schneider, Schiff Hardin & Waite, and Brad Ritter, Attorney,

Office of Derivatives and Equity Oversight, Division, Commission, on

April 4, 1994.

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The Commission believes that the proposal to alter the manner in

which As of Adds fees are calculated against individual members is

appropriate and more equitable that the manner in which such fees are

currently calculated. Specifically, by charging individual members a

fee for only those As of Adds in excess of their stated monthly

percentage, the situation is avoided whereby an individual member is

assessed a significant fee for exceeding its stated monthly percentage

by only one or a few trades. Additionally, the Commission believes that

calculating the As of Adds fees for individual members in the same

manner as for clearing members is more an equitable arrangement by

which to impose these fees and will be less likely to cause confusion

among Exchange members as to the applicability of the rule.

The Commission finds that the proposed amendments to sections (b)

and (c) of Rule 2.26 are merely clarifying amendments which may serve

to avoid any confusion as to the manner in which the rule applies to

individual members and clearing members. As a result, the Commission

believes that these amendments are consistent with the Act.

Finally, with respect to the proposal to increase the As of Adds

fee for individual members from $3.00 to $10.00, the Commission has

some concerns as to whether assessing a fee of $10.00 per trade against

individual members but only $3.00 per trade against clearing members

constitutes an equitable allocation of fees among members for purposes

of the Act. Although the Exchange believes the fees that can be

incurred are relatively modest, the Commission believes that fee

assessments of up to $800 per month can be substantial. Nevertheless,

because such high fees would only be imposed on the most egregious

offenders of Rule 2.26, the Commission believes the fee structure is

not totally unreasonable. Furthermore, the Exchange has represented

that in determining the number of As of Adds submissions each month, it

cannot determine, without reviewing each individual trade, whether a

particular As of Adds was submitted late due to the fault of an

individual member or that member's clearing firm.\8\ As a result, in

determining whether a member has exceeded its stated monthly percentage

of allowable As of Adds, each As of Add processed by a member firm is

counted against both that member firm and the individual member who

executed the transaction.\9\ Despite these concerns, the Commission

finds that the proposed increase for individual members is consistent

with the Act based on the representations by the Exchange that in its

experience, most As of Adds submissions are the result of late

submissions by individual members rather than by clearing members, and

that clearing members often times are delayed in submitting trade data

because individual members fail to submit trade data to the clearing

members in a timely manner. As a result, the Commission believes that

the proposed rule change may serve to reduce the number of monthly As

of Adds submissions by individual members which should benefit all

Exchange members, and ultimately investors, by increasing the

efficiency with which Exchange transactions are processed as well as

helping the Exchange to defray the additional costs it incurs with the

processing of those transactions.

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\8\Telephone conversation among Daniel Schneider, Schiff Hardin

& Waite, Joanne Moffic-Silver, Associate General Counsel and Chief

Enforcement Attorney, CBOE, and Brad Ritter, Office of Derivatives

and Equity Regulation, Division, Commission, on March 25, 1994.

\9\Id.

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Because of the Commission's concerns, however, during the six month

extension of the pilot program the Exchange will be required to: (1)

Reformulate the As of Adds fee pilot program to ensure that the costs

borne by the Exchange in processing As of Adds are assessed against

those members responsible for generating those costs and that the fees

imposed are equitably allocated between individual members and clearing

members; and (2) ensure that members, whether individual members or

clearing members, that consistently submit more than what the Exchange

deems to be a ``nominal'' number of As of Adds during a relevant

period, are appropriately sanctioned for violating Exchange rule

6.51.\10\

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\10\See supra note 2. The Commission notes that the Exchange has

already incorporated certain violations of Rule 6.51 into the

Exchange's Minor Rule Violation Plan. See Exchange Rule 17.50(g)(5).

The Exchange may wish to consider further amending its Minor Rule

Violation Plan to better address those individual and clearing

members that consistently submit more than a nominal number of As of

Adds. In addition, the Commission continues to expect the CBOE to

bring full disciplinary proceedings against members for egregious or

repeat violations of Rule 6.51.

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In order for the Commission to be able to adequately assess the

changes to the pilot program subsequently proposed by the Exchange, the

Exchange will be required to submit to the Commission or before June

30, 1994, a report commencing with the inception of the pilot program

on October 1, 1993, and detailing for clearing members and for

individual members as separate groups: (1) The number of individual

members and clearing members that have been assessed As of Adds fees;

(2) the range of the fees imposed from the highest to lowest, and the

average monthly fee imposed; (3) whether the Exchange has received any

complaints, either written or otherwise, on the operation of the pilot

program; (4) the number of times that a request for verification and/or

an appeal has been lodged concerning As of Adds fee, and the subsequent

disposition of such actions; (5) the number of As of Adds submitted for

each month during the pilot program both as an absolute number and as a

percentage of total Exchange trades; and (6) whether the Exchange has

taken any disciplinary action against, or commenced any investigations,

examinations, or inquiries concerning, any of its members for any post-

trade date submission of trade data, and the disposition of such

actions. In addition, any request for permanent approval or extension

of the pilot should be submitted to the Commission pursuant to Rule

19(b) no later than June 30, 1994.

The Commission finds good cause for approving the proposed rule

change prior to the thirtieth day after the date of publication of

notice of filing thereof in the Federal Register in order to permit the

pilot program to remain in effect until September 30, 1994 without

interruption. Additionally, the Exchange has represented that no

problems have arisen and no complaints have been received concerning

the pilot program since its implementation.\11\ Accordingly, the

Commission believes it is consistent with sections 6(b)(5) and 19(b)(2)

of the Act to approve the proposed rule change on an accelerated basis.

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\11\Telephone conversation between Joanne-Moffic Silver,

Associate General Counsel and Chief Enforcement Attorney, CBOE, and

Brad Ritter, Attorney, Office of Derivatives and Equity Oversight,

Division, Commission, on March 18, 1994.

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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 NW., Washington, DC 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 in the

Commission's Public Reference Section, 450 Fifth Street NW.,

Washington, DC. 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-94-11 and should be

submitted by May 2, 1994.

It is therefore ordered, pursuant to section 19(b)(2) of the

Act\12\ that the proposed rule change (SR-CBOE-94-11), extending the

pilot program for fees related to As of Adds until September 30, 1994,

as amended, is hereby approved.

\12\15 U.S.C. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-8515 Filed 4-8-94; 8:45 am]

BILLING CODE 8010-01-M