
[Federal Register: July 22, 2008 (Volume 73, Number 141)]
[Notices]               
[Page 42634-42638]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22jy08-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58178; File No. SR-CBOE-2008-40]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1 thereto, To Provide for the Issuance of ITPs

July 17, 2008.

I. Introduction

    On April 9, 2008, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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 proposal to provide for the issuance of up to 50 
Interim Trading Permits (``ITPs''). The proposed rule change was 
published for comment in the Federal Register on April 17, 2008.\3\ The 
Exchange filed Amendment No. 1 to the proposed rule change on May 20, 
2008, which reflected the vote of CBOE members approving the 
proposal.\4\ The Commission received two comment letters regarding the 
proposal,\5\ as well as two letters from CBOE addressing the concerns 
raised by the commenters.\6\ This order approves the proposed rule 
change, as modified by Amendment No. 1.
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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. 57650 (April 11, 
2008), 73 FR 20989 (``Notice'').
    \4\ Amendment No. 1 is technical in nature and is therefore not 
subject to notice and comment. See also General Instruction E to 
Form 19b-4 (concerning completion of action by a self-regulatory 
organization on a proposed rule change). In its amendment, CBOE 
noted that its proposal was approved by an ``overwhelming majority'' 
of the CBOE members who voted thereon. CBOE also confirmed that no 
further action on the part of CBOE is required in connection with 
this proposed rule change.
    \5\ See Letter from Lawrence J. Blum and Michael Mondrus, to 
Nancy M. Morris, Secretary, Commission, dated April 28, 2008 
(``Blum/Mondrus Letter'') and Letter from Mark and Joan Andrew, to 
Nancy M. Morris, Secretary, Commission, dated May 12, 2008 (``Andrew 
Letter'').
    \6\ See Letter from Joanne Moffic-Silver, Executive Vice 
President, General Counsel, and Corporate Secretary, CBOE, to Nancy 
M. Morris, Secretary, Commission, dated May 12, 2008 (``CBOE Letter 
1'') and Letter from Joanne Moffic-Silver, Executive Vice President, 
General Counsel, and Corporate Secretary, CBOE, to Nancy M. Morris, 
Secretary, Commission, dated May 15, 2008 (``CBOE Letter 2'').
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    The proposed rule change would allow the Exchange to issue up to 50 
ITPs, which would grant to the holders thereof the same trading 
privileges on the Exchange as regular transferable Exchange 
memberships. Individuals and organizations that obtain ITPs would be 
able to conduct their activities in a manner similar to holders of 
Exchange memberships and CBOE rules that apply to the holders of 
memberships would also apply to the holders of ITPs. The Exchange has 
proposed the authority to issue these permits in order to address the 
demand for trading access to the Exchange in the event that a shortage 
exists from time to time in the number of transferable Exchange 
memberships available for lease.

II. Discussion

    After careful review of the proposal, the comment letters thereto, 
and the Exchange's response to comments, the Commission finds that the 
proposed rule change, as amended, is consistent with the requirements 
of the Act and the rules and regulations thereunder.\7\ In particular, 
the Commission finds that the Exchange's proposal is consistent with 
the requirements of Section 6(b)(5) of the Act,\8\ which requires that 
the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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 Exchange's proposal is consistent 
with the requirements of Section 6(b)(3) of the Act,\9\ which requires 
that the rules of the exchange assure a fair representation of its 
members in the selection of its directors and administration of its 
affairs and provide that one or more directors shall be representative 
of issuers and investors and not be associated with a member of the 
exchange, broker, or dealer. The Commission also finds that the 
Exchange's proposal is consistent with Section 6(b)(8) of the Act,\10\ 
which requires that the rules of an exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \7\ 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).
    \8\ 15 U.S.C 78f(b)(5).
    \9\ 15 U.S.C 78f(b)(3).
    \10\ 15 U.S.C 78f(b)(8).
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A. Issuances of ITPs Under Proposed Rule 3.27(b)

    The Exchange has proposed various requirements and specified 
certain processes in connection with the issuance of the ITPs. 
Specifically, an individual or organization would have to satisfy all 
requirements and be approved for membership in the Exchange to be 
eligible to apply for an ITP.\11\ The Exchange would be able to issue 
one or more ITPs, subject to a

[[Page 42635]]

cumulative maximum total of 50, if it determines that: (1) There are 
insufficient transferable Exchange memberships available for lease at 
that time at a rate reasonably related to the indicative lease rate to 
meet existing demand for such leases; \12\ and (2) it would be in the 
interest of fair and orderly markets to provide additional trading 
access under the circumstances (collectively, the ``issuance 
findings'').
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    \11\ See proposed CBOE Rule 3.27(b).
    \12\ The ``indicative lease rate'' would be the highest 
``clearing firm floating monthly rate'' of the Clearing Members that 
assist in facilitating at least 10% of the transferable membership 
leases. The ``clearing firm floating monthly rate'' would be the 
floating rate that a Clearing Member designates, in connection with 
transferable membership leases that the Clearing Member assisted in 
facilitating, for leases that utilize that monthly rate.
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    If the Exchange determines to issue ITPs, the Exchange would 
announce the number of ITPs that it would make available (limited by 
the number that are available for issuance, up to a cumulative maximum 
of 50), that the Exchange is taking applications for such permits, the 
objective process the Exchange would follow in issuing such 
permits,\13\ and the beginning and end dates during which individuals 
and organizations must submit applications for such permits.\14\ To be 
eligible to apply for an ITP, an individual or organization must meet 
all of CBOE's requirements for membership in the Exchange and obtain 
CBOE's approval for having met such requirements.\15\ CBOE is not 
proposing to change any of these requirements. An individual would be 
eligible to receive no more than one ITP in connection with a 
particular ITP issuance, with a maximum of eight such permits for a 
member organization and individuals and member organizations affiliated 
with the member organization in connection with that issuance.\16\
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    \13\ The Exchange would issue the ITPs in accordance with one of 
the following objective processes: (1) Random lottery, (2) order in 
time, or (3) another objective process adopted pursuant to a rule 
filing submitted to the Commission under Section 19(b) of the Act, 
15 U.S.C. 78s(b).
    \14\ The Commission notes that although the number of permits to 
be issued is limited to a maximum of 50 permits, the Exchange could 
allocate ITPs in multiple issuances, each time in accordance with 
one of the objective processes. For example, the Exchange could 
decide to issue 10 permits by either an order-in-time process or a 
random lottery process.
    \15\ See proposed CBOE Rule 3.27(b). See also, e.g., CBOE Rules 
3.2 and 3.3 (setting forth qualification requirements for 
individuals and member organizations, including, among other things, 
that the person be registered as a broker or dealer pursuant to 
Section 15 of the Act).
    \16\ See proposed CBOE Rule 3.27(b).
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    Recipients of ITPs and all of their associated persons must remain 
in good standing and must pay all applicable fees, dues, assessments, 
and other charges assessed against CBOE members.\17\ An ITP would be 
non-transferable, except that: (1) A member organization may change the 
designation of the nominee in respect of each ITP it holds, and (2) an 
individual ITP holder may transfer that ITP to a member organization 
with which such individual is then associated.\18\
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    \17\ See proposed CBOE Rule 3.27(f)(ii).
    \18\ See proposed CBOE Rule 3.27(g)(iii).
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    An ITP would remain in effect until the earlier of one of the 
following events: (1) CBOE is converted into a stock corporation or 
memberships in CBOE are converted into stock (collectively, a 
``Demutualization Transaction''), (2) the holder of the ITP notifies 
the Exchange in a form and manner prescribed by the Exchange that the 
holder is terminating that ITP,\19\ (3) the ITP is terminated as a 
result of a regulatory action by the Exchange, or (4) the Exchange 
terminates all ITPs through a rule filing approved by the Commission 
pursuant to Section 19(b) of the Act.\20\ In the event of a 
Demutualization Transaction, holders of ITPs would be guaranteed to 
receive trading permits on the same terms as holders of transferable 
Exchange memberships who are eligible to receive trading permits in 
connection with that transaction.\21\ The Commission notes that this 
provision is designed to ensure that there is no disruption in trading 
access in the event of such a Demutualization Transaction, and thus 
should help to promote the fair and orderly character of the Exchange's 
markets.
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    \19\ If the holder of an ITP fails to notify the Exchange that 
he or she is terminating that ITP by the fifteenth day of the month, 
the holder would be required to pay to the Exchange an amount equal 
to the following month's monthly access fee for an ITP. See Notice, 
supra note 3, 73 FR at 20991. The Exchange could reissue an ITP that 
had been terminated.
    \20\ See proposed CBOE Rule 3.27(c).
    \21\ See proposed CBOE Rule 3.27(e)(ii).
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    The Commission finds that the proposed framework and methodology 
that the Exchange would follow when issuing ITPs represents an 
objective methodology for the allocation of trading permits in a fair 
and reasonable manner and is consistent with the Act. The proposal 
provides the Exchange with the ability to address, from time to time, 
situations in which the demand for full trading access to the Exchange 
exceeds the supply of transferable memberships available for lease. The 
Commission believes that increasing the number of members in that 
situation is consistent with the Act because it would promote market 
liquidity and help to promote the fair and orderly character of CBOE's 
markets. The Commission also believes that the limit on the number of 
permits that may be obtained in any one issuance is consistent with the 
Act, including Section 6(c)(4) of the Act, which permits an exchange to 
limit the number of members of the exchange.\22\ The Commission 
believes that the limit should help minimize the chance for any broker 
or dealer to dominate any particular issuance and should provide a 
broad opportunity for access to the Exchange. Finally, the Commission 
notes that the additional number of permits that CBOE would have 
authority to issue represents a small percentage of its 930 outstanding 
memberships and is consistent with the Act, including Section 6(b)(5) 
thereunder, in that it should permit the Exchange to offer additional 
access where demand so warrants, and should facilitate transactions in 
securities by potentially deepening the pool of liquidity available on 
the Exchange. Therefore, the Commission finds that the provisions of 
the proposal governing the issuance and duration of ITPs are consistent 
with the requirements of the Act.
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    \22\ 15 U.S.C. 78f(c)(4).
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B. Fair Representation of ITP Holders

    The Commission finds that the proposed rule change is consistent 
with Section 6(b)(3) of the Act,\23\ which requires that the rules of 
the exchange assure a fair representation of its members in the 
selection of its directors and administration of its affairs and 
provide that one or more directors shall be representative of issuers 
and investors and not be associated with a member of the exchange, 
broker, or dealer. ITP holders would be members of CBOE and would have 
all rights attendant thereto, except as expressly provided 
otherwise.\24\
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    \23\ 15 U.S.C. 78f(b)(3).
    \24\ The Commission notes that the voting and representation 
rights of ITP holders are substantively identical to the provisions 
addressing the voting and representation rights provided to CBOE 
Stock Exchange (``CBSX'') permit holders that the Commission 
previously approved. See Securities Exchange Act Release No. 55326 
(February 21, 2007), 72 FR 8816 (February 27, 2007) (order approving 
File No. SR-CBOE-2006-107).
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    In particular, an ITP holder, or an officer of an ITP holder, would 
be eligible to serve as an at-large director on the Board of Directors 
of the Exchange (``CBOE Board'') \25\ and on any Exchange committee to 
the same extent that a regular member could serve on

[[Page 42636]]

that committee, except as provided otherwise.\26\ Further, an ITP 
holder, or an officer of an ITP holder, would be eligible to serve on 
CBOE's Nominating Committee in one of the six floor member and firm 
member positions on that committee, notwithstanding the fact that the 
holder of an ITP would not be a regular member or an officer of a 
regular member.\27\
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    \25\ See proposed Section 6.1(a) of the CBOE Constitution. The 
Exchange also proposes to amend Section 6.1(a) to remove a reference 
to the commencement of the classification of the Board that was 
implemented in 2002, because the transition period has now passed.
    \26\ See proposed CBOE Rule 3.27(e)(i). The Commission notes 
that an ITP holder would be eligible to serve on Exchange committees 
that develop and/or review trading rules and would also be eligible 
for appointment to the Exchange's Business Conduct Committee, whose 
members are periodically appointed to conduct hearings for specific 
disciplinary matters. See E-mail from Patrick Sexton, Associate 
General Counsel, CBOE, to Johnna B. Dumler, Special Counsel, 
Division of Trading and Markets, Commission, dated May 20, 2008.
    \27\ See proposed Section 4.1(a) of the CBOE Constitution.
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    ITP holders would have the same voting and petition rights as 
holders of transferable memberships, except that they would have no 
right to vote or petition concerning: (1) Issues that relate to 
Exchange ownership matters, including without limitation those matters 
related to demutualization, mergers, consolidations, dissolution, 
liquidation, transfer, or conversion of assets of the Exchange, and (2) 
matters that relate to Article Fifth(b) \28\ of CBOE's Certificate of 
Incorporation.\29\ This limitation reflects the fact that ITP holders 
would have no interest in the assets or property of the Exchange, and 
would have no right to share in any distribution by the Exchange.\30\
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    \28\ Article Fifth(b) of CBOE's Certificate of Incorporation 
provides certain rights to members of the Board of Trade of the City 
of Chicago, Inc. (``CBOT'') to become members of the CBOE without 
purchasing a separate CBOE membership (the ``Exercise Right''). 
Pursuant to an interpretation of the Exchange that was recently 
approved by the Commission, CBOE believes that the acquisition of 
the CBOT by Chicago Mercantile Exchange Holdings, Inc. resulted in 
no persons any longer qualifying for the Exercise Right. See 
Securities Exchange Act Release No. 57159 (January 15, 2008), 73 FR 
3769 (January 22, 2008) (order approving SR-CBOE-2006-106).
    \29\ See Section 2.6 of the CBOE Constitution and proposed CBOE 
Rule 3.27(g)(i). Under proposed Section 1.1(b) of the CBOE 
Constitution and proposed CBOE Rule 3.27(e)(i), ITP holders in good 
standing would be treated the same as members, except as provided in 
proposed Sections 2.1(c) and 2.6 of the CBOE Constitution, and 
except for purposes of Article Fifth(b) of the Certificate of 
Incorporation, Article Tenth of the Certificate of Incorporation, 
proposed Section 4.1(a) of the CBOE Constitution, proposed Section 
6.1(a) of the CBOE Constitution, and as may be provided in the 
rules. Under Section 2.1(c) of the CBOE Constitution, an ITP holder 
would have no interest in the assets or property of the Exchange and 
no right to share in any distribution by the Exchange. Further, 
Section 2.6 of the CBOE Constitution would grant ITP holders the 
same voting and petition rights as regular members except that an 
ITP holder, like a CBSX member, would not have the right to vote or 
petition concerning the matters discussed above.
    \30\ See proposed Section 2.1(c) of the CBOE Constitution and 
proposed CBOE Rule 3.27(g)(ii).
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C. Trading Rights of ITP Holders and Jurisdiction of the Exchange Over 
ITP Holders

    A holder of an ITP would have the same trading privileges on the 
Exchange as the holder of a transferable Exchange membership.\31\ Those 
rights would include the right to trade on the CBSX and the trading 
rights on the Exchange necessary to become a member of OneChicago, LLC. 
An organization that holds an ITP or that has an ITP registered for it 
in general would be treated the same as a ``member organization'' for 
purposes of the rules.\32\
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    \31\ See proposed CBOE Rule 3.27(e)(i).
    \32\ See id. The Exchange notes that this provision is limited 
to the rules and is subject to the conditions imposed on ITP holder 
status in the CBOE Constitution and rules, including proposed 
Section 1.1(b) of the Constitution and proposed Rule 3.27(e)(i).
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    Holders of ITPs would be ``members'' of the Exchange under Section 
3(a)(3) of the Act.\33\ As members, ITP holders and their associated 
persons would be subject to the regulatory jurisdiction of the Exchange 
under the Act, and the Constitution and rules of the Exchange.\34\ In 
this regard, for instance, ITPs may be suspended or revoked as a result 
of a disciplinary action under the amendments proposed for Rule 17.1. 
In particular, the Exchange would have the authority under proposed 
Rule 2.23 to revoke an ITP if the holder fails to pay any dues, fees, 
assessments, charges, fines or other amounts due to the Exchange within 
six months after such payment is due. In addition, the Exchange would 
have the authority under proposed Rules 16.3(c) and 16.4 to suspend or 
revoke the ITP of a holder that experiences financial difficulty. The 
Exchange also would have the authority under proposed Rule 17.1 to 
suspend or revoke an ITP if the holder has been disciplined by the 
Exchange.
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    \33\ 15 U.S.C. 78c(a)(3)(A).
    \34\ See proposed CBOE Rule 3.27(f)(i). See also 15 U.S.C. 
78f(b)(6) and 15 U.S.C. 78f(c)(3). All Exchange members are required 
to be registered broker dealers. See CBOE Rules 3.2(a)(ii) and 
3.3(a)(ii). The Commission has jurisdiction over all broker dealers.
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    Accordingly, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\35\ which requires an 
exchange to have the capacity to carry out the purposes of the Act and 
to enforce compliance by its members and persons associated with its 
members with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the Exchange. The Commission also finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\36\ 
which requires, among other things, that the rules of the Exchange 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. In particular, ITP 
holders would have the same trading privileges on the Exchange and 
would be subject to the same regulatory jurisdiction of the Exchange as 
are applicable to holders of transferable Exchange memberships.
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    \35\ 15 U.S.C. 78f(b)(1).
    \36\ 15 U.S.C. 78f(b)(5).
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D. Transfer of ITP Holders to Open Leases

    In connection with determining to issue ITPs, the Exchange sought 
and received feedback from the Exchange's Lessors Committee. According 
to the Exchange, some participants on that committee expressed the 
concern that the issuance of ITPs potentially could have a negative 
effect on the lease market for CBOE seats by reducing the demand for 
leases.\37\ Further, the commenters to the proposal, while 
acknowledging CBOE's need to provide additional access to the Exchange, 
also expressed concern that the proposal would negatively impact the 
value of existing memberships and dilute the income stream to lessors 
of current memberships.\38\
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    \37\ See Notice, supra note 3, 73 FR at 20992.
    \38\ See Blum/Mondrus Letter, supra note 5. See also Andrew 
Letter, supra note 5, at 1-2.
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    Specifically, in the Blum/Mondrus Letter, commenters acknowledged 
CBOE's need to provide more trading access to the Exchange, but 
criticized the proposed expansion of access as effecting a reduction in 
the value of existing memberships and diluting the income stream to 
lessors of memberships.\39\ In addition, the Blum/Mondrus Letter argued 
that the Exchange's proposal to issue 50 access permits to itself would 
put the Exchange in competition with seat owners, many of whom lease 
their seats to others.\40\ Further, the Blum/Mondrus Letter noted that 
a petition was being circulated among CBOE members to request that the 
CBOE Board consider an alternate access proposal, and asked the 
Commission to hold hearings on the proposal.\41\ In the Andrew Letter, 
commenters similarly criticized the

[[Page 42637]]

mechanics of the proposed ITP program.\42\ In particular, they argued 
that CBOE would be usurping the historical practice of seat owners 
pricing floor access and receiving revenue therefrom.\43\
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    \39\ See Blum/Mondrus Letter, supra note 5.
    \40\ See id.
    \41\ See id.
    \42\ See Andrew Letter, supra note 5.
    \43\ See id. at 1.
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    In its response to the commenters, the Exchange noted that the CBOE 
Board has explicit legal authority in Section 2.1(a) of CBOE's 
Constitution to adopt the proposed permit plan.\44\ CBOE also noted 
that members would have an opportunity to vote on the merits of the 
plan.\45\ In Amendment No. 1 to the proposed rule change, CBOE 
confirmed that it obtained both the requisite CBOE Board approval and 
membership approval, and confirmed that no further action by CBOE in 
connection with the proposal is necessary.\46\ As approximately 82% of 
CBOE seats are currently leased,\47\ the Commission notes that members 
who lease their seats had an opportunity to be heard on the proposal 
and have subsequently endorsed CBOE's proposed plan.
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    \44\ See CBOE Comment Letter 1, supra note 6, at 1.
    \45\ See id.
    \46\ See Amendment No. 1, supra note 4.
    \47\ Telephone call with Arthur Reinstein, Deputy General 
Counsel, CBOE, Patrick Sexton, Associate General Counsel, CBOE, Stan 
Leimer, Director CBOE Membership Department, CBOE, and Richard 
Holley III, Senior Special Counsel, and Johnna B. Dumler, Special 
Counsel, Division of Trading and Markets, Commission, and J. Daniel 
Aromi, Office of Economic Analysis, Commission, on June 11, 2008 
(``June 11 Telephone Call'').
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    CBOE also noted that its members would be the ultimate 
beneficiaries of the plan and any revenues generated therefrom because 
they are the owners of the Exchange.\48\ CBOE further noted that it is 
not unusual for an exchange to retain trading access fees, and noted 
that it currently does so with respect to CBSX permits.\49\
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    \48\ See CBOE Comment Letter 1, supra note 6, at 2.
    \49\ See id.
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    In addition, CBOE proposed certain features designed to address the 
concerns of lessors of CBOE memberships. To minimize any potential 
negative impact on the market for leased CBOE memberships, the proposal 
provides a process by which CBOE would endeavor to facilitate the 
transfer of holders of ITPs to leases that become available or, if 
necessary, compensate a lessor who holds an unleased seat with a 
monthly payment equal to the indicative lease rate. In particular, if 
the Exchange is notified by one or more lessors that they have 
transferable Exchange memberships available for lease (``open leases'') 
at a rate reasonably related, as determined by the Exchange in its sole 
discretion, to the indicative lease rate, then the Exchange would 
notify each ITP holder of the number of open leases and the names of 
the lessors with those open leases. The ITP holder could contact those 
lessors if the holder is interested in transferring to an open 
lease.\50\ Transfer to an open lease would be entirely voluntary for 
ITP holders.\51\
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    \50\ The Exchange would provide a similar notification to each 
person who is a Temporary Member under Interpretation and Policy .02 
of Rule 3.19, and transfer to an open lease would be entirely 
voluntary. See Notice, supra note 3, 73 FR at 20992, n.16.
    \51\ See Notice, supra note 3, 73 FR at 20992.
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    If, after a reasonable period of time following the process set 
forth in the paragraph above, a lessor notifies the Exchange that the 
lessor continues to have an open lease, the Exchange would compensate 
that lessor through a monthly payment equal to the indicative lease 
rate, provided the lessor is offering for lease the transferable 
membership subject to the open lease at a rate reasonably related to 
the indicative lease rate, as determined by the Exchange in its sole 
discretion.\52\ The lessor may, at any time thereafter, lease that 
membership to any qualified individual or organization and would be 
required to notify the Exchange in the event of such a lease. The 
Exchange would cease compensating the lessor if it receives such a 
notification or otherwise learns the lessor has leased that membership.
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    \52\ The ``indicative lease rate'' would be determined in 
accordance with proposed Rule 3.27(b). See supra note 12 (further 
describing the indicative lease rate). In the event that the number 
of lessors receiving compensation pursuant to this provision becomes 
greater than the number of outstanding ITPs, the Exchange would 
compensate each such lessor on a pro-rated basis.
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    The Commission finds that the aspects of the proposal that relate 
to the Exchange's intention to facilitate the transfer of ITP holders 
to open leases, as well as the Exchange's proposal to compensate 
lessors who hold unleased seats that are offered for lease at a market 
rate when ITPs are outstanding, are consistent with the Act, including 
Section 6(b)(5) thereunder.\53\ In particular, transfers of ITP holders 
to an open lease would be on a voluntary basis at the option of the ITP 
holder. Further, compensation to holders of CBOE transferable 
memberships that are unable to lease their seats at market rates when 
ITPs are outstanding is a business decision of the Exchange that does 
not raise any issues under the Act.
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    \53\ 15 U.S.C. 78f(b)(5).
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    The Commission does not believe that the necessary result of CBOE's 
ITP proposal is a reduction in the value of a CBOE membership or a 
decrease over time in the seat lease income paid to CBOE members. To 
the contrary, as CBOE provides additional trading access to the 
Exchange, the result could be an increase in liquidity that in turn 
increases the value of access to the Exchange. Further, the Commission 
notes that the Exchange has explicit authority in its Constitution to 
issue permits, and that CBOE members were informed of the proposal and 
have voted decidedly in favor of it. The Commission also notes that the 
Exchange currently receives trading access fees for permits to access 
CBSX, and the Commission notes CBOE's point that CBOE members, as 
owners of the Exchange, are the ultimate beneficiaries of the proposed 
permit plan and any revenues generated in connection therewith.
    Similarly, the Commission does not believe that the proposal places 
the Exchange in competition with its members. When the Exchange 
determines to issue ITPs, consistent with the issuance findings, there 
would be insufficient seats available for lease at a rate reasonably 
related to the indicative lease rate. Thus, at the point in time of an 
issuance, the Exchange generally would not be in competition with any 
of its members who have open seats for lease at market rates. Further, 
the Exchange's use of the indicative lease rate is designed so that the 
Exchange will not issue ITPs at below-market rates. In particular, the 
indicative lease rate is an objective metric that is derived from lease 
rates determined by entities unaffiliated with the Exchange \54\ in 
which there is a liquid market for leased seats.\55\ Further, the 
Commission notes that the Exchange considers the highest of the 
``clearing firm floating monthly rates'' when it establishes the 
``indicative lease rate,'' which the Commission believes alleviates the 
potential for any downward pressure on the market lease rate.\56\
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    \54\ See supra note 12 (further describing the indicative lease 
rate).
    \55\ See Notice, supra note 3, 73 FR at 20990 (discussing the 
indicative lease rate) and June 11 Telephone Call, supra note 47. 
The Commission notes that, of the seats that are leased, more than 
83% are currently facilitated by two clearing firms, such that the 
``clearing firm floating monthly rate'' and the corresponding 
``indicative lease'' rate are based on a significant and 
representative portion of the overall leased seat market.
    \56\ See supra note 12 (further describing the indicative lease 
rate).
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    Accordingly, the Commission does not believe that the ITP proposal 
imposes any burden on competition, consistent with Section 6(b)(8) of 
the

[[Page 42638]]

Act,\57\ that is not necessary or appropriate in furtherance of the 
purposes of the Act. Specifically, the Exchange would issue ITPs, 
consistent with the issuance findings, when doing so would be in the 
interest of fair and orderly markets. In CBOE's judgment, therefore, 
the issuance of a limited number of permits through an objective 
methodology would contribute to the vitality of its market, thereby 
increasing the attractiveness of CBOE's market and consequently 
enhancing its value to CBOE members and other users of CBOE's 
facilities. In addition, as discussed above, the Exchange has proposed 
to provide compensation to holders of CBOE memberships that are unable 
to lease their seats at market rates when ITPs are outstanding, which 
the Commission believes would mitigate any potential burden that the 
proposal might represent to lessors of CBOE memberships.
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    \57\ 15 U.S.C 78f(b)(8).
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    Finally, the Commission notes the desire of a commenter to have 
CBOE delay the proposal and have the Commission hold hearings on the 
proposal.\58\ Section 19(b)(1) of the Act \59\ requires CBOE to file 
with the Commission any proposed changes to, or interpretations of, its 
rules and the Commission is thereafter obligated to consider CBOE's 
proposal. In this instance, given the member vote and approval, the 
Commission is acting on CBOE's proposal.
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    \58\ See Blum/Mondrus Letter, supra note 5.
    \59\ 15 U.S.C. 78s(b)(1).
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E. ITP Fees

    Holders of ITPs would be required to pay to the Exchange a monthly 
access fee. The monthly access fee would be established and adjusted 
through a proposed rule change that would be filed with the Commission 
under Section 19(b) of the Act.\60\ Such fees would be due and payable 
in accordance with the provisions of the Exchange fee schedule and 
would be the same for all ITP holders.\61\ Commenters suggested that 
CBOE provide better justification for its claim to floor access 
revenue.\62\ In response, CBOE stated that, because its members own the 
Exchange, they are the ultimate beneficiaries of any revenues that may 
be generated by the permit plan and that the members will have an 
opportunity to be heard on that aspect of the proposal when they vote 
on the proposal.\63\ CBOE also noted that the commenter incorrectly 
suggested that it is unusual for an exchange to set the level of and 
retain trading access fees, and noted that the CBSX permit plan is 
based on that model.\64\ The Commission is not today approving the 
level of the monthly access fee for ITPs and notes that such fees would 
be the subject of a separate proposed rule change. Nevertheless, the 
Commission agrees with CBOE that it is consistent with Section 6(b)(4) 
of the Act \65\ for exchanges to charge for access to their 
facilities.\66\
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    \60\ 15 U.S.C. 78s(b).
    \61\ See proposed CBOE Rule 3.27(f)(ii).
    \62\ See Andrew Letter, supra note 5, at 2.
    \63\ See CBOE Letter 2, supra note 6, at 2. On May 19, 2008, the 
CBOE membership approved the ITP plan. See Amendment No. 1, supra 
note 4.
    \64\ See CBOE Letter 2, supra note 6, at 2. CBOE also sought to 
clarify a reference in the Andrew Letter to trading access funds 
that, according to the Andrew Letter, are being held in ``escrow.'' 
CBOE noted that the fees to be collected under its ITP proposal 
would not be held in escrow and no escrowed funds would be affected 
by its proposal. See id.
    \65\ 15 U.S.C. 78f(b)(4).
    \66\ See, e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251, 11268 (March 6, 2006) (SR-NYSE-
2005-77) (approving a process to determine an access fee for trading 
licenses and noting that the exchange would later file a separate 
proposed rule change to amend its fee schedule to establish the 
price).
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F. Conforming Rule Changes To Accommodate ITPs and Clarifying Changes 
Relating to CBSX Permits

    The Exchange proposed several conforming changes in its rules to 
ensure that individuals and organizations that receive ITPs can conduct 
their activities in a manner similar to holders of Exchange 
memberships.\67\ These changes relate to, among other things, 
registration, designation of nominees, and qualifications. Other 
conforming changes have been made to the rules so that certain 
requirements related to the holders of memberships would apply to the 
holders of ITPs. For example, CBOE would amend Rule 3.2(c) to specify 
that individual ITP holders would be required to have authorized 
trading functions.\68\
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    \67\ See Notice, supra note 3, 73 FR at 20992-94 (describing 
each such proposed rule change).
    \68\ See Notice, supra note 3, 73 FR at 20993.
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    Additionally, though unrelated to the ITP proposal, CBOE also 
proposed to adopt several changes to clarify how CBSX permits currently 
are treated under the Certificate of Incorporation, Constitution, and 
rules. These changes, which adopt certain language that is also being 
proposed for ITPs, are non-substantive in nature and do not modify the 
rights of the holders of such permits or materially alter the status 
quo with respect to the Exchange's operation of CBSX.\69\
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    \69\ For example, the Exchange proposes to change the 
terminology in CBOE Rule 3.26(c) to note that (except as indicated 
therein) CBSX permit holders are treated the ``same as'' members, 
rather than being ``deemed to be'' members for purposes of the 
Certificate of Incorporation, Constitution, and rules. In addition, 
the Exchange is proposing to amend CBOE Rule 3.26(c) to clarify that 
an organization that holds a CBSX permit or that has a CBSX permit 
registered for it shall be treated the same as a ``member 
organization'' for purposes of the CBOE rules. See Notice, supra 
note 3, 73 FR at 20993.
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    The Commission finds that the conforming and clarifying changes 
proposed by the Exchange are consistent with the requirements of 
Section 6 of the Act. In particular, the clarifying and conforming 
changes are non-substantive in nature and should provide greater 
clarity to market participants, including CBOE's members and CBSX 
permit holders, regarding the application and operation of the 
Exchange's rules.

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\70\ that the proposed rule change (SR-CBOE-2008-40), as modified 
by Amendment No. 1 thereto, be, and hereby is approved.
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    \70\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-16747 Filed 7-21-08; 8:45 am]

BILLING CODE 8010-01-P
