
[Federal Register Volume 77, Number 51 (Thursday, March 15, 2012)]
[Notices]
[Pages 15436-15438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6234]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66556; File No. SR-CBOE-2012-022]


 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Its Fees Schedule

March 9, 2012.
    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 March 1, 2012, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. 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.
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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 its Fees Schedule. The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's 
Office of the Secretary, 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 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 Exchange proposes to amend its Fees Schedule. First, the 
Exchange proposes to amend the Customer Large Trade Discount (the 
``Discount'') to state that regular customer transaction fees will only 
be assessed for the first 10,000 CBOE Volatility Index (``VIX'') 
options contracts in a qualifying customer transaction. The Discount is 
intended to cap fees on large customer trades. Currently, there is no 
separate carve-out for VIX options, which means that regular customer 
transaction fees are currently assessed for the first 5,000 VIX options 
contracts in a qualifying customer transaction (the threshold for all 
index options is set at 5,000 contracts other than S&P 500 index 
options, for which the threshold is 10,000 contracts). The Exchange 
offers the Discount in order to encourage growth of new products. VIX 
options trading volume has increased greatly since it began trading, 
and due to increased demand, the Exchange proposes to raise increase 
[sic] the threshold before which customers cease paying transaction 
fees for qualifying VIX options transactions in order to recoup costs 
from developing VIX options, as well as other administrative costs. 
Moreover, because VIX options trade at a significantly lower price than 
the vast majority of other highly-traded index options, the notional 
value of 10,000 VIX options contracts is still much lower than the 
notional value of 5,000 contracts of nearly all other highly-traded 
index options (and 10,000 contracts of S&P 500 index options).\3\
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    \3\ For reference, the February 2012 settlement value for VIX 
options was $20.44. Compare with the February 2012 settlement values 
for NASDAQ 100 index options ($2586.93), Russell 2000 index options 
(($833.16) and S&P 500 index options ($1363.80).
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    The Exchange also proposes to lower the Hybrid Agency Liaison 
(``HAL'') Step-Up Rebate to $0.10 per contract. The HAL system allows 
CBOE Market-Makers to step up to meet the National Best Bid/Offer 
(``NBBO'') before an order is routed to another exchange through the 
Options Order Protection and Locked/Crossed Market Plan referenced in 
Rule 6.80 (``Linkage''). The HAL Step-Up Rebate is the rebate a Market-
Maker receives per each contract against transaction fees generated 
from a transaction on the HAL system in a

[[Page 15437]]

penny pilot class, provided that at least 60% of the market-maker's 
quotes in that class (excluding quotes in LEAPS series) in the prior 
calendar month were on one side of the NBBO. Currently, the rebate is 
$0.15 per contract. The Exchange proposes lowering it to $0.10 per 
contract as a change in the Exchange's competitive offering and in 
order to recoup costs related to Linkage and Exchange administrative 
fees. Further, the Exchange is not aware of any other exchanges that 
offer Market-Makers a rebate for stepping up to meet the NBBO.
    The Exchange also proposes to amend its Linkage fees for customer 
orders. Currently, when CBOE sends a customer order with an original 
size of 100 or more contracts to another exchange(s) through the 
Linkage, CBOE passes through the actual transaction fee assessed by the 
exchange(s) to which the order was routed, minus $0.05 per contract. 
Also, when CBOE currently sends a customer order with an original size 
of 99 or fewer contracts to another exchange(s) through the Linkage, 
CBOE assesses no fee (thereby ``eating'' whatever fee is assessed by 
the exchange(s) to which the order was routed). As orders continue to 
be routed through Linkage, the Exchange finds that it is not currently 
financially prudent to continue to ``eat'' fees or pay for orders 
executed at other exchanges to the current extent.
    As such, CBOE now proposes to eliminate the $0.05 discount for the 
routing of customer orders with an original size of 100 or more 
contracts to another exchange(s) through the Linkage, and instead 
simply pass through the actual transaction fee assessed by the 
exchange(s) to which the order is routed. For customer orders with an 
original size of 99 contracts or fewer routed to another exchange(s) 
through Linkage, CBOE proposes to pass through the actual transaction 
fees assessed by the exchange(s) to which the order was routed, minus 
$0.05 per contract (provided that such exchange(s) assess transaction 
fees). As such, the CBOE will no longer be paying for executions of 
customer orders with an original size of 100 or more contracts routed 
to another exchange through Linkage, or eating the entire costs of 
customer orders with an original size of 99 contracts or fewer routed 
to another exchange(s) through Linkage. These changes put CBOE on a 
more even financial footing with other exchanges that do not subsidize 
the costs of customer orders routed through Linkage. Even after 
instituting the proposed changes, CBOE still offers favorable Linkage 
pricing compared to other exchanges. For example, NYSE Amex, LLC 
(``Amex'') passes through fees for customer orders routed to other 
exchanges through Linkage and assesses its own $0.11 per contract fee 
on top.\4\
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    \4\ See Amex Fee Schedule, Routing Surcharge.
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    The proposed changes are to take effect March 1, 2012.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
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 Section 6(b)(4) of the Act,\6\ which provides that 
Exchange rules may provide for the equitable allocation of reasonable 
dues, fees, and other charges among its Trading Permit Holders and 
other persons using its facilities. Raising the Discount threshold for 
VIX options to 10,000 customer contracts is reasonable because 
customers will still be receiving a discount for large trades that they 
would not otherwise receive, and because that amount is within the 
range of Discount thresholds for other products (the SPX threshold is 
10,000). This change is equitable and not unfairly discriminatory 
because, while the threshold is lower for some products, it is the same 
as for SPX, and because all customers whose large trades qualify for 
the Discount will still receive it. Moreover, because VIX options trade 
at a significantly lower price than the vast majority of other highly-
traded index options, the notional value of 10,000 VIX options 
contracts is still much lower than the notional value of 5,000 
contracts of nearly all other highly-traded index options (and 10,000 
contracts of S&P 500 index options).\7\ Finally, raising the Discount 
threshold to 10,000 for VIX options is equitable and not unfairly 
discriminatory also because the Exchange expended considerable 
resources in developing VIX options and needs to recoup those and other 
related expenses.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(4).
    \7\ See Note 3.
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    Lowering the HAL Step-Up Rebate is reasonable because Market-Makers 
will still be receiving a rebate for stepping up to the NBBO. This 
change is equitable and not unfairly discriminatory because it will 
apply to all qualifying Market-Makers equally, and because it is still 
favorable to other exchanges, which offer no similar rebates for 
stepping up (to the Exchange's knowledge).
    Eliminating the $0.05 discount for the routing of customer orders 
with an original size of 100 or more contracts to another exchange(s) 
through Linkage, and instead simply passing through the actual 
transaction fee assessed by the exchange(s) to which the order is 
routed, is reasonable because a customer will now merely be charged by 
CBOE the amount that CBOE is charged by the exchange(s) that execute 
the customer's order. This change is equitable and not unfairly 
discriminatory for the same reason; it is certainly equitable and not 
unfairly discriminatory to merely pass through the costs being assessed 
for a trade (indeed, it is equitable because that is the exact amount 
being assessed for the trade). Further, this fee will be applied 
equally; all customer orders with an original size of 100 or more 
contracts that are routed to another exchange(s) through Linkage will 
accrue the pass-through amount. Finally, merely passing through the 
costs is favorable to the Linkage arrangement on other exchanges such 
as Amex (which passes through fees for customer orders routed to other 
exchanges through Linkage and assesses its own $0.11 per contract fee 
on top).\8\
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    \8\ See Note 4.
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    Passing through the Linkage fees for customer orders with an 
original size of 99 contracts or less, minus $0.05 per contract, is 
reasonable because a customer will still be assessed a lower amount 
than the cost to CBOE for routing such orders to another exchange(s). 
This is equitable and not unfairly discriminatory because it is 
certainly not unfair to pass through the costs being assessed for a 
trade (especially not when the Exchange is eating $0.05 per contract). 
Further, this fee will be applied equally; all customer orders with an 
original size of 99 contracts or less that are routed to another 
exchange(s) through Linkage will be assessed the actual transaction 
fees assessed by the exchange(s) that execute the orders, minus $0.05 
per contract.
    Finally, the Exchange believes that it is equitable and not 
unfairly discriminatory to continue to assess different Linkage fees 
for customer orders of 100 or more contracts than are assessed for 
orders of 99 or fewer contracts \9\ because customer orders of

[[Page 15438]]

99 or fewer contracts are generally entered by small retail customers, 
whereas customer orders of 100 or greater contracts are generally 
entered by larger, more active customers. Such customers are largely 
more sophisticated than smaller retail customers and have the 
capability to ``link'' orders themselves (send orders to the exchange 
displaying the NBBO), while smaller retail customers often do not have 
such capabilities. As such, CBOE does not want to unduly subsidize 
Linkage orders for parties that are capable of handling that function 
themselves. Moreover, different fee structures are appropriate for 
these different groups due to their different demographics and trading 
characteristics, and the Exchange currently has set this 100-contract 
threshold in multiple places in its Fees Schedule.\10\
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    \9\ Prior to this proposed rule change, the Exchange also 
offered different Linkage fees for customer orders of 100 or more 
contracts (passing through Linkage fees, minus $0.05 per contract) 
than for orders of 99 or fewer contracts (no Linkage fees) (See 
Exchange Fees Schedule, Section 20).
    \10\ See Note 9 and also Exchange Fees Schedule, footnote (9), 
in which the Exchange waives transaction fees for customer orders of 
99 contracts or less in ETF, ETN and HOLDRs options.
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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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \11\ of the Act and paragraph (f) of Rule 19b-4 \12\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend 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.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2012-022 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2012-022. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. 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 No. SR-CBOE-2012-022 and should be 
submitted on or before April 5, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6234 Filed 3-14-12; 8:45 am]
BILLING CODE 8011-01-P


