
[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Notices]
[Pages 1412-1414]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00067]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71223; File No. SR-CBOE-2013-109]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change Relating to 
Market-Maker Appointment Cost Rebalances

January 2, 2014.

I. Introduction

    On November 1, 2013, Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 proposed rule change to amend its rules regarding 
Market-Maker appointment cost rebalances. The proposed rule change was 
published for comment in the Federal Register on November 19, 2013.\3\ 
The Commission received no comment letters on the proposed rule change. 
This order approves the proposed rule change.
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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. 70856 (November 13, 
2013), 78 FR 69491 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange is proposing to amend its rules regarding Market-Maker 
appointment cost rebalances. According to the Exchange, appointments to 
act as a Market-Maker ``cost'' different

[[Page 1413]]

amounts for different classes (with no classes costing more than 
1.0).\4\ The Exchange places options classes into different tiers, with 
all the classes in a certain tier costing the same amount per 
appointment.\5\ Each Trading Permit held by a Market-Maker has an 
appointment credit of 1.0. For each Trading Permit the Market-Maker 
holds, the Market Maker may select any combination of Hybrid classes 
and Hybrid 3.0 classes, whose aggregate appointment cost does not 
exceed 1.0.\6\
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    \4\ See id. at 69491.
    \5\ For example, all the classes in tier B cost 0.05 per class 
appointment, all the classes in tier E cost .01 per class 
appointment. See id.
    \6\ See CBOE Rule 8.3(c)(iv).
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    Currently, on a quarterly basis, the Exchange may rebalance the 
tiers into which different classes fall, meaning that the Exchange can 
elect to move a class from one tier to another (with that class' 
corresponding appointment cost changing). The Exchange proposes to 
memorialize in proposed CBOE Rule 8.3(c)(iv) that the Exchange will 
announce any rebalances at least ten business days before the rebalance 
takes effect.\7\ Under the proposal, such rebalances will be announced 
to Trading Permit Holders (``TPHs'') via Regulatory Circular.
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    \7\ It is the Exchange's current practice to announce such 
rebalances more than ten business days prior to taking effect, but 
this practice is not codified in CBOE's rules. See Notice, supra 
note 3, at 69491.
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    When the Exchange effects a rebalancing (i.e., changes the 
appointment cost tier for a certain class of options), the class is 
assigned the appointment cost of that new tier. Upon such rebalancing, 
each Market-Maker with a Virtual Trading Crowd (``VTC'') appointment 
\8\ will be required to hold the appropriate number of Trading Permits 
reflecting the revised appointment costs of the Hybrid classes 
constituting the Market-Maker's appointment. Accordingly, when classes 
are rebalanced, the sum of a Market-Maker's appointment costs cannot 
exceed the number of Trading Permits that a Market-Maker holds. Market-
Makers manage their own appointments through an online appointment 
system. The system displays the relevant appointment costs for each 
class, thereby facilitating the ability of a Market-Maker to manage its 
committed and available appointment credits.
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    \8\ A VTC appointment allows a Market-Maker to quote 
electronically in a class.
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    The Exchange proposes to add language to CBOE Rule 8.3(c)(iv) to 
address situations in which a Market-Maker fails to adjust his or her 
appointments and, as a result, the sum of the Market-Maker's 
appointment costs otherwise would exceed the available appointment 
credits based on the number of Trading Permits the Market-Maker holds. 
The proposed new language states: ``[i]f a Market-Maker with a VTC 
appointment holds a combination of appointments whose aggregate revised 
appointment cost is greater than the number of Trading Permits that 
Market-Maker holds, the Market-Maker will be assigned as many Trading 
Permits as necessary to ensure that the Market-Maker no longer holds a 
combination of appointments whose aggregate revised appointment cost is 
greater than the number of Trading Permits that Market-Maker holds.'' 
In the event that a Market-Maker's appointment costs exceed his or her 
available assignment credits as the result of a reassignment of 
appointment costs by the Exchange, and the Exchange needs to allocate 
another trading permit or permits to the Market-Maker, then the 
Exchange also will assess the Market-Maker the corresponding Trading 
Permit fees for the additional Trading Permit(s).\9\
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    \9\ For example, the Exchange described a situation in which a 
Market-Maker's aggregate appointment cost for the classes for which 
it holds Market-Maker appointments prior to a rebalancing is 4.90 
and the Market-Maker holds five Trading Permits (i.e., a total of 
5.0 credits). The Exchange then rebalances the appointment costs of 
classes and announces such rebalancing at least ten days prior to 
the rebalancing takes effect. Upon this rebalancing taking effect, 
the Market-Maker's appointment cost will now be 5.40. If the Market-
Maker does not adjust its appointments prior to such rebalancing 
taking effect, then the Exchange will simply assign that Market-
Maker a sixth Market-Maker Trading Permit (for a total of 6.0 
credits) to cover the Market-Maker's aggregate appointment costs . 
The Exchange also will begin to bill the Market-Maker for the cost 
of the additional sixth permit. See id.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\11\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to promote just and equitable principles of trade, 
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 proposed rule change is consistent with 
Section 6(b)(1) of the Act,\12\ which provides that the Exchange be 
organized and have the capacity to be able to carry out the purposes of 
the Act and to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations thereunder, 
and the rules of the Exchange.
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    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(1).
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    The proposed rule change is designed to allow the Exchange to avoid 
a situation where a Market-Maker has an aggregate appointment cost that 
exceeds the available appointment credits that the Market-Maker holds 
based on the trading permits that he or she possesses. The Exchange 
argues that such a situation would constitute an unfair advantage in 
favor of that Market-Maker.\13\ The Exchange argues that, by preventing 
such situations, the proposed rule change may remove impediments to and 
perfect the mechanism of a free and open market system. In its filing, 
the Exchange noted that it does not have the ability to adjust the VTC 
appointments of a Market-Maker whose aggregate appointment costs 
exceeds his or her available appointment credits. Even if it did have 
such ability, rectifying an appointment cost deficit by removing one or 
more of a Market-Maker's appointments would remove a source of 
liquidity and thus have the potential to negatively affect market 
quality in a particular class on CBOE. Further, allowing a Market-Maker 
to exceed his or her appointment costs would amount to unfair 
discrimination and provide a competitive advantage over other Market-
Makers who stayed within their available appointment credits. As an 
alternative to incurring the expense of an additional trading permit, a 
Market-Maker could, in response to an increase in tier appointment 
costs by CBOE, adjust its appointments on its own initiative.
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    \13\ See Notice, supra note 3, at 69492.
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    In addition, the revised rule would codify the Exchange's current 
practice of notifying TPHs at least ten business days before effecting 
Market-Maker class tier rebalances, which could potentially affect 
their fees if they are required to purchase additional trading permits. 
It also would enable the Exchange to adjust the VTC appointments of a 
Market-Maker whose aggregate appointment cost exceeds the number of 
trading permits that the Market-Maker holds and charge the Market-Maker 
for

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the additional permit(s). The Exchange states that this proposal would 
allow the Exchange to avoid the resource-intensive process of 
instituting regulatory proceedings against these Market-Makers who fall 
out of compliance with the Exchange's rule.\14\ The Commission believes 
that CBOE's proposal is consistent with CBOE's responsibility to be 
organized and have the capacity to be able to enforce compliance by the 
Exchange's members with its rules, and is designed to allow CBOE to 
expeditiously and efficiently maintain a level playing field among its 
Market-Makers with respect to appointment costs following a rebalancing 
of such costs by the Exchange.
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    \14\ See Notice, supra note 3, at 69491.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2013-109) be, and it 
hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\16\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00067 Filed 1-7-14; 8:45 am]
BILLING CODE 8011-01-P


