

[Federal Register: February 6, 2007 (Volume 72, Number 24)]
[Notices]               
[Page 5476-5479]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe07-67]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55193; File No. SR-CBOE-2006-111]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Exchange Fees for Fiscal Year 2007

January 30, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 22, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``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 CBOE. The CBOE has designated this proposal as one establishing 
or changing a due, fee, or other charge imposed by the CBOE under 
Section 19(b)(3)(A)(ii) of the Act \3\ and Rule 19b-4(f)(2) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission.\5\ 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\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
    \5\ The Exchange has proposed that the changes to the Fees 
Schedule take effect on January 1, 2007.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the CBOE Fees Schedule (``Fees 
Schedule'') to make various changes for fiscal year 2007. The text of 
the proposed rule change is available at the CBOE, on the Exchange's 
Web site at http://www.cboe.com, and in 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 these 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 aspects of such 
statements.

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

1. Purpose
    The purpose of this proposed rule change is to amend the Fees 
Schedule to make various fee changes. The proposed changes are the 
product of the Exchange's annual budget review. The Exchange proposes 
to amend the fees as noted below.
a. Options Transaction Fees
    The Exchange proposes to revise per contract transaction fees in 
order to remain competitive and to streamline its Fees Schedule.
    Equity Options: The Exchange proposes to charge all CBOE liquidity 
providers (CBOE market-maker, Designated Primary Market-Maker 
(``DPM''), Electronic Designated Primary Market-Maker (``e-DPM''), Lead 
Market-Maker (``LMM'') and Remote Market-Maker (``RMM'')) 
(collectively, ``Liquidity Providers'') a $.20 per contract transaction 
fee.\6\ Currently, market-makers (including LMMs) are charged $.22 per 
contract; DPMs are charged $.16 per contract; e-DPMs are charged $.25 
per contract; and RMMs are charged $.26 per contract.
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    \6\ The $.20 per contact transaction fee is the standard 
Liquidity Provider transaction fee and will be eligible for 
reduction pursuant to the ``Liquidity Provider Sliding Scale,'' 
described in Section II.A.1.b. below.
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    Member firm proprietary transaction fees are currently $.20 per 
contract for facilitation of customer orders and $.24 per contract for 
non-facilitation orders. The Exchange proposes to charge a flat fee of 
$.20 per contract for all member firm proprietary transactions. The 
public customer transaction fee would remain at $.00, but public 
customer transactions would be subject to the proposed Customer Complex 
Order Fee.\7\ Broker-dealer and non-member

[[Page 5477]]

market-maker transaction fees would be unchanged (at $.25 per contract 
and $.26 per contract, respectively).
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    \7\ See infra Section II.A.1.e.
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    The Exchange proposes to increase the Options Intermarket Linkage 
(``Linkage'') transaction fee from $.24 per contract to $.26 per 
contract. This fee would match the Linkage transaction fee of at least 
one other options exchange.\8\
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    \8\ See Securities Exchange Act Release No. 54430 (September 12, 
2006), 71 FR 55257 (September 21, 2006) (SR-NYSEArca-2006-20).
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    Index Options: The Exchange also proposes to charge index options 
\9\ Liquidity Providers a $.20 per contract transaction fee. Currently, 
those rates range from $.15 per contract to $.26 per contract. The 
member firm proprietary transaction fee (both facilitation and non-
facilitation orders) is proposed to be $.20 per contract.
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    \9\ The index options transaction fee schedule includes 
transaction fees for options on exchange-traded funds (``ETFs'') 
except QQQQ and SPDR options, and options on Holding Company 
Depositary Receipts (``HOLDRs'').
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    Public customer fees for transactions in index, ETF, and HOLDRs 
options currently range from $.15 per contract to $.45 per contract. 
The Exchange proposes to charge public customers $.18 per contract, 
with the following exceptions. The Exchange proposes to charge 
customers a flat $.30 per contract for transactions in options on the 
S&P 100 Index (``OEX'' and ``XEO'') instead of the current rates of 
$.35 and $.20 per contract rates depending on the premium. The Exchange 
proposes to charge customers for transactions in options on the S&P 500 
Index (``SPX'') $.44 per contract if the premium is greater than or 
equal to $1 and $.27 per contract if the premium is less than $1, 
instead of the current $.45 and $.25 per contract rates depending on 
the premium. The Exchange proposes to charge customers a flat $.40 per 
contract for transactions in options on the Jumbo Dow Jones Industrial 
Average (``DXL''), Morgan Stanley Retail Index (``MVR'') and CBOE 
Volatility Index (``VIX'') instead of the current $.45 and $.25 per 
contract rates depending on the premium.
    Broker-dealer transaction fees in index, ETF, and HOLDRs options 
currently range from $.25 per contract to $.45 per contract. The 
Exchange proposes to charge broker-dealers a flat $.25 per contract, 
except for OEX, XEO, and SPX options. OEX and XEO options broker-dealer 
fees are proposed to be $.30 per contract, and SPX options broker-
dealer fees are proposed to be $.40 per contract. Non-member market-
maker transaction fees in index, ETF, and HOLDRs options currently 
range from $.17 per contract to $.47 per contract. The Exchange 
proposes to charge non-member market-makers a flat $.26 per contract, 
except for OEX, XEO, and SPX options, which are proposed to be $.30 per 
contract for OEX and XEO and $.40 per contract for SPX.
    Linkage transaction fees in index, ETF, and HOLDRs options 
currently range from $.20 per contract to $.45 per contract. The 
Exchange proposes to charge a flat $.26 per contract fee for Linkage 
transactions.\10\
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    \10\ See supra note 8.
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    QQQQ and SPDR Options: The Exchange proposes to increase the 
customer transaction fee in S&P 500 Depositary Receipts (``SPDR'') 
options from $.15 per contract to $.18 per contract. The public 
customer transaction fee for QQQQ options would remain at $0.00, but 
public customer transactions would be subject to the proposed Customer 
Complex Order Fee.\11\ All other proposed changes to the QQQQ and SPDR 
options transaction fees mirror the changes described above for equity 
options.
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    \11\ See infra Section II.A.1.e.
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    Surcharge Fees: The Exchange currently charges a $.10 per contract 
surcharge fee on all contracts traded by the DPM and market-makers in 
options on the Russell 2000 Index (``RUT'').\12\ The RUT surcharge fee 
is assessed by the Exchange to help it recoup license fees the Exchange 
pays to the Frank Russell Company for its license to trade the RUT 
product. Similarly, the Exchange charges a $.10 per contract surcharge 
fee on all contracts traded by market-makers in options on Dow Jones 
indexes, except for DJX options and options on DIAMONDS (``DIA''), to 
help it recoup license fees paid to Dow Jones.
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    \12\ See Fees Schedule, Footnote 12.
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    The Exchange proposes to amend the RUT and Dow Jones surcharge fees 
by expanding application of the fees to transactions of all market 
participants in these options, except for public customers (i.e., CBOE 
and non-member market-maker, member firm and broker-dealer). The 
amended Dow Jones surcharge fee would apply only to DJX and DXL 
options. These surcharge fees would also apply to Linkage orders.
    In addition, the Exchange proposes to adopt a similar $.04 per 
contract surcharge fee on all contracts traded by market participants 
in OEX, XEO, and SPX options, except for public customers.
    The proposed surcharge fees are similar to the surcharge fee 
currently assessed by the Exchange on transactions in MNX and NDX 
options \13\ and are similar to surcharge fees charged by other 
exchanges.
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    \13\ See Fees Schedule, Footnote 15.
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b. Liquidity Provider Sliding Scale
    The Exchange proposes to adopt a program to reduce a Liquidity 
Provider's per contract transaction fee based on the number of 
contracts the Liquidity Provider trades in a month, based on the 
following sliding scale:

------------------------------------------------------------------------
                                                                  Rate
                Tiers                   Contracts per month     (cents)
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First...............................  First 50,000...........         20
Second..............................  Next 950,000...........         18
Third...............................  Next 1,500,000.........         15
Fourth..............................  Next 1,500,000.........         10
Fifth...............................  Above 4,000,000........          2
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    The sliding scale would apply to all Liquidity Providers for 
transactions in all products. A Liquidity Provider's $.20 per contract 
rate will be reduced if the Liquidity Provider reaches the volume 
thresholds set forth in the sliding scale in a month. As a Liquidity 
Provider's monthly volume increases, its per contract transaction fee 
will decrease. Under the sliding scale, the first 50,000 contracts 
traded in a month would be assessed at $.20 per contract. The next 
950,000 contracts traded (up to 1 million total contracts traded) would 
be assessed at $.18 per contract. The next 1.5 million contracts traded 
(up to 2.5 million total contracts traded) would be assessed at $.15 
per contract, and the next 1.5 million contracts traded (up to 4 
million total contracts traded) would be assessed at $.10 per contract. 
All

[[Page 5478]]

contracts above 4 million contracts traded in a month would be assessed 
at $.02 per contract. The Exchange will aggregate the trading activity 
of separate Liquidity Provider firms for purposes of the sliding scale 
if there is at least 75% common ownership between the firms as 
reflected on each firm's Form BD, Schedule A.\14\
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    \14\ A Liquidity Provider's monthly contract volume would be 
determined at the firm affiliation level (e.g., if five Liquidity 
Provider individuals are affiliated with member firm ABC as 
reflected by Exchange records for the entire month, all of the 
volume from those five individual Liquidity Providers will count 
towards firm ABC's sliding scale transaction fees for that month).
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    The Exchange proposes to provide Liquidity Providers with two 
incentives to prepay annual transaction fees. First, in order to be 
eligible to participate in the sliding scale above 1 million contracts 
(i.e., at the $.15 per contract rate and lower), a Liquidity Provider 
would be required to prepay their transaction fees for the first two 
tiers of the sliding scale for the entire year (i.e., $2.172 million). 
Second, if a Liquidity Provider prepays annual fees for the first four 
tiers of the sliding scale, the Liquidity Provider would receive a 
$500,000 prepayment discount (total amount of the prepayment would be 
$6.172 million instead of $6.672 million).
    Contract volume resulting from dividend, merger, and short stock 
interest strategies as defined in Footnote 13 of the Fees Schedule 
would not apply towards reaching the sliding scale volume thresholds, 
since that volume may have already received fee reductions as described 
in Footnote 13 of the Fees Schedule.
    The Exchange believes the proposed sliding scale is objective in 
that the fee reductions are based solely on reaching stated volume 
thresholds, similar to the operation of the Exchange's current 
Prospective Fee Reduction Program.\15\ The sliding scale is intended to 
replace both the Prospective Fee Reduction Program and the Fixed Annual 
Fee Program.\16\
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    \15\ See infra Section II.A.1.c.
    \16\ See infra Section II.A.1.d.
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c. Prospective Fee Reduction Program
    The Exchange proposes to discontinue its Prospective Fee Reduction 
Program for fiscal year 2007. This program served to limit market-maker 
and DPM fees in periods of high volume.\17\ The Exchange is eliminating 
this program due to the implementation of the Liquidity Provider 
Sliding Scale described above.
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    \17\ See Fees Schedule, Section 19.
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d. Fixed Annual Fee
    The Exchange proposes to eliminate the fixed annual fee program for 
DPMs and e-DPMs, which is currently set forth in Section 23 of the Fees 
Schedule. This program offered DPMs and e-DPMs the alternative of 
choosing a fixed annual fee of $2.25 million instead of being assessed 
transaction fees on a per contract basis for its DPM, e-DPM, and RMM 
transactions in equity options classes. The Exchange is eliminating 
this program due to the implementation of the Liquidity Provider 
Sliding Scale described above.
e. Customer Complex Order Fee
    The Exchange proposes to adopt a customer transaction fee for 
certain complex orders in equity and QQQQ options (``Complex 
Orders'').\18\ Specifically, the exchange proposes to adopt a 
transaction fee of $.18 per contract for Complex Orders \19\ that 
``take liquidity'' from the Exchange's complex order book. The fee 
would be charged only for the leg of the Complex Order consisting of 
the most contracts.
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    \18\ Currently, no customer transaction fees are assessed in 
equity options and QQQQ options.
    \19\ Complex orders are defined in CBOE Rule 6.53C.
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    For purposes of the proposed fee, an order ``takes liquidity'' when 
it interacts with a complex order residing on the complex order book. 
The Exchange will not charge customers for Complex Orders if they are 
the liquidity provider (i.e., they are first on the complex order 
book).\20\
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    \20\ The Exchange will determine the liquidity provider and the 
liquidity taker based on time (i.e., the order that arrives first on 
the complex order book is the liquidity provider).
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    The proposed fee would apply solely to Complex Orders that take 
liquidity from the complex order book. Complex Orders that trade 
against orders in the Exchange's regular order book (``EBook'') or 
against the displayed individual series quotes would not be assessed 
the fee. Also, Complex Orders that rest in the complex order book 
before executing would not be assessed the fee.
    Much like broker-dealers, public customers that use sophisticated 
trading systems are able to take liquidity quickly from the complex 
order book. The Exchange believes the proposed fee is appropriate in 
that it would place such customer orders on a more equal footing with 
broker-dealer complex orders that are currently subject to transaction 
fees. According to the Exchange, the proposed fee is substantially 
similar to another exchange's fee that was recently approved by the 
Commission.\21\
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    \21\ See Securities Exchange Act Release No. 54751 (November 14, 
2006), 71 FR 67667 (SR-ISE-2006-56).
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f. Member Firm Proprietary and Firm Facilitation Fee Cap
    The Exchange currently caps member firm proprietary and firm 
facilitation fees at $100,000 per month per firm.\22\ The Exchange 
proposes to increase the cap to $125,000 per month per firm. No other 
changes to this program are proposed.
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    \22\ See Fees Schedule, Section 20.
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g. Customer Large Trade Discount Program
    The Exchange proposes to amend the Customer Large Trade Discount 
program. The Customer Large Trade Discount program provides a discount 
in the form of a cap on the quantity of customer contracts that are 
assessed transaction fees for most CBOE index, ETF, and HOLDRs 
options.\23\ Currently, customer transaction fees are charged only up 
to the first 5,000 contracts per order in Dow Jones options (including 
DIA) and SPX options, and only up to the first 3,000 contracts per 
order in other index, ETF, and HOLDRs options. The Exchange proposes 
to: (i) Increase the SPX options cap to 7,500 contracts; (ii) reduce 
the DIA options cap to 3,000 contracts; and (iii) for those index 
options currently capped at 3,000 contracts, increase the cap to 5,000 
contracts. The cap for other ETF and HOLDRs options would remain 
unchanged at 3,000 contracts.
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    \23\ See Fees Schedule, Section 18.
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h. ORS Order Cancellation Fee
    CBOE currently assesses an executing clearing firm $1 for each 
cancelled Order Routing System (``ORS'') order in excess of the number 
of orders that the executing clearing member executes in a month (``ORS 
Order Cancellation Fee'').\24\ The ORS Order Cancellation Fee is not 
charged if less than 500 ORS orders are cancelled in the month. The 
purpose of the ORS Cancellation Fee is to ease order backlogs on ORS.
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    \24\ See Fees Schedule, Section 14.
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    Some correspondent firms route their orders through multiple CBOE 
executing clearing firms. Although the individual correspondent firm 
may cancel more orders than are filled, they may not incur the ORS 
Cancellation Fee because the executing clearing firm's total mix of 
orders from all their correspondents has more fills than cancels.
    The Exchange proposes to address this situation by calculating the 
ORS

[[Page 5479]]

Cancellation Fee by the cancellation activity of each correspondent 
firm (and the executing clearing firm's own cancellation activity when 
it self clears), rather than by the aggregate cancellation activity of 
the executing clearing firm. Correspondent firms using multiple 
executing clearing firms would be evaluated separately, per executing 
clearing firm. The Exchange will be able to provide executing clearing 
members with information regarding the cancellation activity of each of 
its correspondent firms so that the executing clearing member can pass 
through any cancellation fees.
    In addition, the Exchange proposes to increase the ORS Cancellation 
Fee from $1.00 to $1.25 per cancelled ORS order.
    The Exchange proposes that the following ORS cancellation activity 
would be exempt from the fee: (i) Cancelled ORS orders that improve the 
Exchange's prevailing bid-offer (``BBO'') market when received; and 
(ii) fill and cancellation activity occurring within the first one 
minute of trading following the opening of each option class. The 
Exchange believes the foregoing cancel activity is not an inappropriate 
use of systems capacity and therefore should not be subject to the fee.
    The Exchange believes that the proposed ORS Cancellation Fee is 
similar to the cancellation fee of another exchange.\25\
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    \25\ See Securities Exchange Act Release No. 53862 (May 24, 
2006), 71 FR 31244 (June 1, 200) (SR-ISE-2006-23).
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i. DPM Facilities Fee
    The Exchange proposes to eliminate the DPM facilities fee, which 
the Exchange charges DPMs each month for use of Exchange floor trading 
stations. The elimination of this fee is intended to provide fee relief 
to DPMs in light of a recently adopted fee that DPMs may incur in 
fiscal year 2007.\26\
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    \26\ See Securities Exchange Act Release No. 54804 (November 21, 
2006), 71 FR 69150 (November 29, 2006) (SR-CBOE-2006-98) (Hybrid 
Electronic Quoting Fee).
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j. Miscellaneous, Non-substantive Changes
    The Exchange proposes various non-substantive clean-up changes to 
its Fees Schedule. The Section of the Fees Schedule entitled ``Index 
Customer Boxes'' under ``Member Transaction Fee Policies and Rebate 
Programs'' is proposed to be deleted, as that program is superseded by 
the Customer Large Trade Discount Program.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\27\ in general, and furthers the objectives of Section 6(b)(4) 
\28\ of the Act, in particular, in that it is designed to provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among CBOE members and other persons using its facilities.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 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

    Because the foregoing rule change establishes or changes a due, 
fee, or other charge imposed by the Exchange, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \29\ and subparagraph (f)(2) 
of Rule 19b-4 \30\ thereunder. At any time within 60 days of the filing 
of the proposed rule change, the Commission may summarily abrogate such 
rule change 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 Act.\31\
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    \29\ 15 U.S.C. 78s(b)(3)(A).
    \30\ 17 CFR 240.19b-4(f)(2).
    \31\ Id.
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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 rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-111 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-2006-111. 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-2006-111 and should be submitted on or before 
February 27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1860 Filed 2-5-07; 8:45 am]

BILLING CODE 8010-01-P
