

[Federal Register: August 1, 2006 (Volume 71, Number 147)]
[Notices]               
[Page 43545-43547]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au06-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54216; File No. SR-CBOE-2006-58]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment 
No. 1 Thereto Regarding DPM and E-DPM Membership Ownership Requirements 
and the Ultimate Matching Algorithm

July 26, 2006.
    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 14, 2006, the 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 substantially 
prepared by the Exchange. The CBOE filed Amendment No. 1 to the 
proposed rule change on July 18, 2006.\3\ 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.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rules relating to membership ownership 
requirements. CBOE also proposes to amend the provisions of CBOE Rules 
6.45A and 6.45B which provide that a DPM or Lead Market Maker (``LMM'') 
utilizing more than one membership in the trading crowd where a class 
is traded will count as two market participants for purposes of 
Component A of the Ultimate Matching Algorithm (``UMA''). The text of 
the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.com), at the Office of the Secretary, CBOE 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, the Exchange 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 those statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    CBOE Rules 8.85 and 8.92 require that a DPM organization and e-DPM 
organization, respectively, own a certain number of Exchange 
memberships. Specifically, with respect to DPM organizations, CBOE Rule 
8.85 requires that each DPM organization own one Exchange membership 
for each trading location at which the organization serves as a DPM. 
CBOE Rule 8.92 requires that until July 12, 2007, each e-DPM 
organization is required to own one Exchange membership for every 30 
products allocated to the e-DPM, or lease one Exchange membership for 
every 20 products allocated to the e-DPM.\4\
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    \4\ After July 12, 2007, each e-DPM organization is required to 
own one Exchange membership for every 30 products allocated to the 
e-DPM.
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    CBOE proposes to modify these membership ownership requirements in 
connection with the Exchange's determination to apply a specific 
``appointment cost'' to each options class allocated to a DPM 
organization or an e-DPM organization. With respect to DPM 
organizations, CBOE Rule 8.85, as proposed to be amended, would require 
that each DPM organization own one Exchange membership, and own or 
lease such additional Exchange memberships as may be necessary based on 
the aggregate ``appointment cost'' for the classes allocated to the DPM 
organization. Each membership owned or leased by the DPM organization 
would have an appointment credit of 1.0. The appointment costs for the 
Hybrid 2.0 Option Classes and the Non-Hybrid Classes allocated to the 
DPM organization would be the same as the appointment costs set forth 
in CBOE Rule 8.3. The appointment cost for Hybrid Option Classes would 
be .01 per class.
    For example, if the DPM organization has been allocated such number 
of options classes that its aggregate appointment cost is 1.6, the DPM 
organization would be required to own at least one Exchange membership, 
and own or lease one additional Exchange membership. As it currently 
does for purposes of Remote Market Maker (``RMMs'') and Market-Maker

[[Page 43546]]

appointments, the Exchange would rebalance the ``tiers'' set forth in 
proposed CBOE Rule 8.3(c)(i), excluding the ``AA'' and ``A+'' tiers, 
once each calendar quarter, which could result in additions or 
deletions to their composition. When a class changes ``tiers'' it would 
be assigned the ``appointment cost'' of that tier. Upon rebalancing, 
each DPM organization would be required to own or lease the appropriate 
number of Exchange memberships reflecting the revised ``appointment 
costs'' of the classes that have been allocated to it. CBOE Rule 8.85 
also would provide that a DPM organization is required to own or lease 
the appropriate number of Exchange memberships at the time a new 
options class allocated to it pursuant to CBOE Rule 8.95 begins 
trading.
    Additionally, because member organizations may be approved and 
function in a number of capacities at CBOE, including as a DPM 
organization, e-DPM organization, and as an RMM, CBOE proposes to allow 
the DPM organization to use any excess membership capacity in its 
capacity as an RMM or e-DPM. Specifically, in the event the member 
organization approved as the DPM organization is also approved to act 
as an RMM and/or e-DPM, and has excess membership capacity above the 
aggregate appointment cost for the classes allocated to it as the DPM, 
the member organization would be permitted to utilize the excess 
membership capacity to quote electronically in an appropriate number of 
Hybrid 2.0 Classes in the capacity of an RMM and not trade in open 
outcry, or to quote electronically in the Hybrid 2.0 Classes in which 
it is appointed an e-DPM. For example, if the DPM organization has been 
allocated such number of option classes that its aggregate appointment 
cost is 1.6, the member organization could request an appointment as an 
RMM in any combination of Hybrid 2.0 Classes whose aggregate 
``appointment cost'' does not exceed .40. The member organization would 
not function as a DPM in any of these additional classes. In the event 
the member organization utilizes any excess membership capacity to 
quote electronically in some additional Hybrid 2.0 Classes as an RMM or 
e-DPM, it would be required to comply with the provisions of CBOE Rules 
8.4(c) and Rule 8.93(vii), respectively.
    With respect to e-DPMs, CBOE Rule 8.92, as proposed to be amended, 
would require that each e-DPM organization own one Exchange membership, 
and own or lease such additional Exchange memberships as may be 
necessary based on the aggregate ``appointment cost'' for the classes 
allocated to the e-DPM organization. Each membership owned or leased by 
the e-DPM organization would have an appointment credit of 1.0. The 
appointment costs per Hybrid 2.0 Class, which are categorized by 
``tiers'', would be identical to the tiers and appointment costs set 
forth in CBOE Rules 8.3(c)(i) and 8.4(d) that have been structured for 
purposes of RMMs and Market Maker appointments.
    If the e-DPM organization has been allocated such number of option 
classes that its aggregate appointment cost is 6.6, the e-DPM 
organization would be required to own at least one Exchange membership, 
and own or lease six additional Exchange memberships. The Exchange 
would rebalance the ``tiers'' (excluding the ``AA'' and ``A+'' tiers) 
once each calendar quarter, which could result in additions or 
deletions to their composition. When a class changes ``tiers'' it would 
be assigned the ``appointment cost'' of that tier. Upon rebalancing, 
each e-DPM organization would be required to own or lease the 
appropriate number of Exchange memberships reflecting the revised 
``appointment costs'' of the classes that have been allocated to it.
    Similar to DPM organizations, CBOE proposes that in the event the 
member organization approved as the e-DPM organization is also approved 
to act as an RMM and/or DPM, and has excess membership capacity above 
the aggregate appointment cost for the classes allocated to it as the 
e-DPM, the member organization would be permitted to utilize the excess 
membership capacity to quote electronically in of Hybrid 2.0 Classes in 
the capacity of a RMM and not trade in open outcry, and/or to quote 
electronically and trade in open outcry in the classes in which it is 
appointed a DPM. For example, if the member organization has been 
allocated such number of option classes that its aggregate appointment 
cost is 6.6, the member organization could request an appointment as an 
RMM in any combination of Hybrid 2.0 Classes whose aggregate 
``appointment cost'' did not exceed .40. The member organization would 
not function as an e-DPM in any of these additional classes. In the 
event the member organization utilizes any excess membership capacity 
to quote electronically in some additional Hybrid 2.0 Classes as an RMM 
or DPM, it would be required to comply with the provisions of CBOE 
Rules 8.4(c) and 8.85(a)(v), respectively. In connection with this 
change, CBOE proposes to delete the restriction in CBOE Rule 8.92 which 
states that memberships used to satisfy the membership ownership 
requirements may not be used to comply with the DPM membership 
ownership requirement of Rule 8.85(e).
    Finally, CBOE proposes to amend the provisions of CBOE Rules 6.45A 
for DPMs and 6.45B for DPMs and LMMs, which provide that a DPM or LMM 
utilizing more than one membership in the trading crowd where a class 
is traded shall count as two market participants for purposes of 
Component A of UMA. Because each membership owned or leased by a DPM 
(or LMM) would now have an appointment credit of 1.0, and because each 
class in which a DPM (or LMM) has an appointment would have a specific 
appointment cost associated with it, CBOE does not believe that 
requiring a DPM (or LMM) to utilize a full membership to count as two 
market participants for purposes of Component A of UMA is reasonable. 
Rather, CBOE believes that it is more appropriate and reasonable to 
require that a DPM (or LMM) exclusively use the portion of a 
membership(s) representing one-half the total appointment cost of the 
classes allocated to the DPM (or, in which the LMM has been appointed) 
at a particular trading station in order to count as two market 
participants, and not for any other purpose.
    For example, if a DPM's appointment cost is 2.2 for the classes 
allocated to it at a particular trading station, pursuant to proposed 
amendments to CBOE Rule 8.85(e), the DPM would be required to own one 
membership and own or lease two additional memberships. In addition, 
the DPM would be permitted to choose to count as two market 
participants for purposes of Component A of the Algorithm if the DPM 
exclusively utilizes 1.1 (one-half of 2.2) of the membership(s) it owns 
or leases in order to count as two market participants, and not utilize 
the 1.1 of the memberships for any other purpose. In this example, to 
comply with the membership ownership requirements and to count as two 
market participants for purposes of Component A, the DPM would be 
required to own one membership, and own or lease three additional 
memberships to satisfy its total cost of 3.3 (2.2 + 1.1).
    In amending CBOE Rules 6.45A and 6.45B, CBOE proposes to make it 
optional for a DPM (or LMM) to choose whether to exclusively use the 
portion of its membership(s) representing one-half the total 
appointment cost of the classes allocated to the DPM at a particular 
trading station in order to count as two market participants, or 
instead to use the excess membership

[[Page 43547]]

capacity to quote electronically in Hybrid 2.0 Classes.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with the Act 
and the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\5\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \6\ requirements 
that the rules of an exchange be designed to remove impediments to and 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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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 the 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-58 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-58. 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 inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the CBOE. 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-2006-58 and should be submitted on or before August 
22, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-12324 Filed 7-31-06; 8:45 am]

BILLING CODE 8010-01-P
