SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-59441; File No. 10-191)
February 24, 2009
Form 1 Application and Exhibits
* This exhibit index summarizes the exhibits required by the Form 1 Application for Registration as a National Securities Exchange.
A copy of the constitution, articles of incorporation or association with all subsequent amendments, and of existing by-laws or corresponding rules or instruments, whatever the name, of the applicant.
C2 Options Exchange, Incorporated (“C2” or “Exchange”) is applying to register as a national securities exchange pursuant to Section 6(a) of the Securities Exchange Act of 1934. The following materials are submitted in response to this Exhibit A:
A copy of all written rulings, settled practices having the effect of rules, and interpretations of the Governing Board or other committee of the applicant in respect of any provisions of the constitution, by-laws, rules, or trading practices of the applicant which are not included in Exhibit A.
For each subsidiary or affiliate of the applicant, and for any entity with whom the applicant has a contractual or other agreement relating to the operation of an electronic trading system to be used to effect transactions on the exchange ("System"), provide the following information:
The attached documents for these exhibits can be viewed at the Commission’s Public Reference Room.
Table of Subsidiaries and Affiliates
For each subsidiary or affiliate of the exchange, provide unconsolidated financial statements for the latest fiscal year. Such financial statements shall consist, at a minimum, of a balance sheet and an income statement with such footnotes and other disclosures as are necessary to avoid rendering the financial statements misleading. If any affiliate or subsidiary is required by another Commission rule to submit annual financial statements, a statement to that effect with a citation to the other Commission rule, may be provided in lieu of the financial statements required here.
The attached documents for these exhibits can be viewed at the Commission’s Public Reference Room.
Table of Documents Attached Hereto
Pursuant to Securities Exchange Act Rules 6a-2 and 17Ab2-1, respectively, the National Stock Exchange, Inc. and The Options Clearing Corporation are required to submit annual financial statements directly to the Commission.
Financial statements for CTA/CQ are filed with the Form 1 of the New York Stock Exchange.
CBOE acquired DerivaTech Corporation in order to acquire The Options Toolbox educational software. The software is distributed through Chicago Board Options Exchange, Incorporated. DerivaTech Corporation’s only assets are software. It had no revenue or expenses.
The Options Exchange, Incorporated is inactive and no part of the capital has been paid. A financial statement is not available.
Describe the manner of operation of the System. This description should include the following:
C2 proposes to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Exchange will be owned by its parent company, Chicago Board Options Exchange, Incorporated (“CBOE”), which will elect all directors of the Board of Directors of the Exchange, except for those directors approved by Trading Permit Holders pursuant to Article III, Section 3.1 of the By-Laws of the Exchange. The Trading Permit Holders of the Exchange (“TPHs”) will consist of those broker-dealers admitted to transact on the Exchange. TPHs will be subject to the rules of the Exchange, and will have representation on the Exchange’s Board of Directors and committees. TPHs who are not also shareholders of CBOE shall not have any ownership interest in the Exchange.
Once registered, the Exchange will operate a fully automated electronic options trading platform to buy or sell securities with a continuous, automated matching function. Liquidity will be derived from quotes as well as orders to buy and orders to sell submitted to the Exchange electronically by TPHs from remote locations. There will be no Exchange trading floor. There will be two types of Participants on the System- Market-Makers with certain affirmative and negative market making obligations and all other Participants.
Access to the Exchange will be open to broker-dealers registered under Section 15(b) of the Exchange Act that meet the standards for membership set forth in proposed Exchange Chapter 3. Further, all CBOE members in good standing will be eligible for a Permit to trade on C2. TPHs will be subject to fees for executions on the Exchange as set forth in the Rules of the Exchange or as may otherwise be determined by the Exchange from time-to-time pursuant to a fee schedule. Permits will not be transferable except in the event of a change in control of a Permit Holder subject to meeting certain criteria. A more detailed description of the Permit Holder criteria is set forth in Chapter 3 of the Exchange’s proposed rules. See Exhibit B, supra.
This exhibit describes, in summary form, the proposed operation of the Exchange. A more detailed description of the proposed Exchange is set forth in the proposed By-Laws and Rules of the Exchange. See Exhibits A and B to this Application.
B. Access to the Exchange (#1)
Access. TPHs will access the Exchange electronically through the use of a variety of systems. The Exchange will not accept telephone orders.
The Exchange has designed its systems to allow TPHs to individually determine the best method for accessing the Exchange. Thus, TPHs may develop their own customized front-end software using protocols determined by the Exchange, or may use third-party vendors to route orders to the Exchange via a front end or service bureau configuration. TPHs will be able to access the Exchange remotely through a variety of methods and connections that support a minimum data exchange rate, as may be determined by the Exchange from time-to-time.
Direct access to the Exchange is available to TPHs at an Internet Protocol (“IP”) address by one or more of the following methods: (i) electronic access at the Exchange’s IP network address by the TPH’s own software, via communications that are compliant with the Financial Information Exchange (“FIX”) protocol application programmer interface (“API”) provided by the Exchange; (ii) electronic access at the IP network address maintained by the Exchange by the TPH’s own software that is compliant with the API provided by the Exchange; or (iii) other means of access provided from time to time by the Exchange.
TPHs provide a unique IP address to the Exchange for each requested connection, and the Exchange then configures its routers to only allow access from the TPH’s IP address to a dedicated IP address on the Exchange’s order handling network. In this way, only authorized TPHs can gain access to the Exchange via registered physical IP addresses.
TPHs will be responsible for having procedures reasonably designed for safeguarding access to the Exchange and for notifying the Exchange upon learning that such safeguards have been compromised. Connectivity to the Exchange will occur through secure telecommunications “ports” or points of entry. Specifically, each TPH will be assigned a specific port, or multiple ports, each of which has a unique session identification code provided only to such TPH.
Non-TPH Access. The Exchange plans to become a participant in the Intermarket Options Linkage Plan or any successor plan (“Linkage Plan”). If admitted as a participant to the Linkage Plan, other plan participants would be able to send orders to the Exchange in accordance with the terms of the Linkage Plan.
Non-TPHs also may access the Exchange pursuant to Exchange rules governing “sponsored access” to the Exchange. The Exchange plans to permit access to the Exchange to entities (“Sponsored Participants”) whose access is authorized in advance by one or more TPHs (“Sponsoring Participant”) in accordance with Exchange Rules. The Sponsoring Participant must agree to be responsible for all orders entered into on the Exchange by the Sponsored Participant. In addition, Sponsored Participants must agree to comply with all applicable Rules of the Exchange governing the entry, execution, reporting, clearing and settling of orders in securities eligible for trading on the Exchange.
C. Entry and Display of Quotations and Orders in the System (#2)
Entry of Orders/Quotes on the Exchange. Orders entered into the Exchange must be priced and must have a designated size (limit orders) or must be orders to buy or sell a stated amount of a security at the national best bid or offer when the order reaches the Exchange (market orders). Like limit orders, quotes entered by Market-Makers must be priced and must have a designated size. Orders will be accepted for any security traded on the Exchange, whether submitted by a TPH on a proprietary or agency basis, in any size. Quotes may only be submitted by Exchange Market-Makers.
TPHs may submit the following orders to the Exchange: Day; Good ‘til Canceled; Contingency (including All-Or-None, Immediate Or Cancel, Market On Close, Fill Or Kill, Stop, and Reserve); and Complex Orders (including Spreads, Combination, Straddle, Strangle, Ratio, Butterfly, Box/Roll, Collar and Risk Reversal). Each of these types of orders is described in detail in proposed Exchange Rule 6.10. The Exchange will maintain a full audit trail of every order submitted to the Exchange’s System. TPHs may receive status reports regarding orders submitted to the Exchange or change or cancel an order at any time before that order is executed on the Exchange. Based on Exchange system functionality, a locked or crossed market will not be displayed by the Exchange with respect to orders to buy and orders to sell submitted to the Exchange unless allowed pursuant Exchange Rules or a national market system plan governing locked and crossed markets.
All options will be traded in decimals on the Exchange and consistent with the Penny Pilot.1
Display of Orders/Quotes. All orders/quotes submitted to the Exchange will be displayed unless designated otherwise by the Member submitting the order (e.g. the non-displayed portion of a Reserve Order). Orders/Quotes submitted to the Exchange shall be displayed on an anonymous basis (except for attributable orders which allow voluntary disclosure of ID information) at the price specified by the submitting Participant. Non-displayed orders will not be displayed to any Participants and will not have time priority over displayed orders. In addition, the Exchange intends to become a participant in the Options Price Reporting Authority Plan (“OPRA Plan”) and will collect and submit to OPRA the best buy and sell interest displayed on the Exchange in accordance with the terms of the OPRA Plan.
D. Execution, Reporting, Clearance and Settlement Procedures (#3)
The Exchange will employ opening process structured to match the greatest number of pending buy and sell orders. Pre-opening orders will be accepted. Prior to opening a series, the expected opening price and size is provided to Participants so that imbalances may be offset. After the start of trading in the underlying security, the Exchange will open each series at a price that executes the greatest amount of pre-opening interest and that does not trade-through the NBBO (if one exists).
Non-opening trades on the Exchange will occur when a buy order/quote and a sell order/quote match on the Exchange’s order book. Pursuant to proposed Rule 6.12, all orders are matched according to either price-time priority or pro-rata priority (as determined by the Exchange on a class-by-class basis). In addition, public customer and/or market turner priority overlays are also available at the Exchange’s discretion on a series-by-series basis (a market turner is the first order/quote received by the system at a price that improves the Exchange’s disseminated market- the market turner is conveyed priority up to a designated percentage of all inbound orders that trade against the market turner until the market turner interest is exhausted). In the event that less than the full size of an order is executed, whether displayed or non-displayed, the unexecuted size of the order will continue to reside on the Exchange’s order book, and if displayed, will be redisplayed at such price. The non-reserve portion of any partially executed orders retain priority and precedence at the same price.
In executing orders submitted to the Exchange’s Book, the Exchange will not distinguish between orders submitted by TPHs for their own accounts and orders submitted by TPHs for their customers (unless public customer priority is activated for a class). All Exchange TPHs will submit orders to the Exchange from remote locations and have equal access to orders residing on the Exchange. Similarly, because orders on the Exchange will be executed automatically, no Participant of the Exchange will have the ability to control the timing of execution (other than to change or cancel an order/quote prior to execution).
The Exchange may also make available certain additional order processing and matching features. For example, a complex order auction system will be available for auctioning, resting, and executing complex orders submitted to the system (these orders, if marketable, could be auctioned for price improvement). Other mechanisms that may be utilized by the Exchange include: the Simple Auction Liaison system (which auctions straight orders for price improvement above the NBBO), the Automated Improvement Mechanism (which affords Participants an opportunity to cross orders after an auction), and the Solicitation Auction Mechanism (which allows Participants representing agency orders the opportunity to cross large size solicited orders after an auction).
Trade Reporting. The Exchange intends to become an OPRA participant and will report trades pursuant to the terms of the OPRA Plan.
Clearance and Settlement of Exchange Trades. The Exchange will report matched trades to the Options Clearing Corporation and will require TPHs to give up the name of a Clearing Participant through whom the transaction will be cleared.
E. Exchange Fees (#4)
Fees Generally. The Exchange may prescribe such reasonable fees, and assessments or other charges as it may deem appropriate and as consistent with the Exchange Act. The Exchange intends to establish a Fee Schedule setting forth all applicable transaction and other fees. Actual fee amounts will not be determined until close to launch because they will need to reflect the competitive landscape at that time.
The Exchange may charge permit application fees, connectivity fees, and bandwidth fees. Exchange TPHs will be solely responsible for all telecommunications costs and all other expenses incurred in linking to, and maintaining links to, the Exchange. The Exchange may determine to revise or impose different fees upon its TPHs and Sponsoring Participants from time-to-time.
F. Procedures for Ensuring Compliance with Exchange Usage Guidelines (#5)
The Exchange System contains embedded order/quote entry and trade guidelines. All data representing an order/quote must comply with these guidelines. TPHs cannot override these embedded guidelines. With respect to technical standards, prior to allowing a new TPH to begin trading, the Exchange and the TPH will thoroughly test the TPH’s connectivity. In addition, the TPH may enter orders/quotes in test securities to ensure compatibility with the Exchange’s system protocol. A TPH may begin trading only after the TPH and the Exchange are satisfied that both the TPH’s hardware and software meet the Exchange’s standards.
TPHs also must agree to maintain an adequate connection to the Exchange as defined from time-to-time by the Exchange that includes a connection of sufficient speed and equipment of minimum quality.
G. Hours of Operation and Proposed Commencement of the Exchange (#6)
The Exchange proposes to operate Monday to Friday from 8:30 a.m. Chicago Time to 3:15 p.m. Chicago Time, or during any other day or time approved by the Board of Directors of the Exchange.
The Exchange proposes to commence operations during the second quarter of 2009 subject to the Commission’s approval of its Form 1 Application for Registration as a National Securities Exchange.
H. Exchange Users Manual (#7)
As discussed above, TPHs will be provided with the Exchange’s technical specifications, which will enable them to develop or purchase their own, customized front-end software for interfacing with the Exchange. TPHs also may use third-party vendors to route orders to the Exchange via a front end or service bureau configuration. The Exchange makes available to prospective TPHs all necessary API connectivity documentation and technical specifications on the internet.
I. Possession of Funds or Securities (#8)
The Exchange will not hold funds or securities of its TPHs.
|Name||Title||Date of Commencement|
|William J. Brodsky||Chief Executive Officer||[UPON APPROVAL]|
|Edward J. Joyce||President||[UPON APPROVAL]|
|Edward T. Tilly||Vice Chairman||[UPON APPROVAL]|
|Philip M. Slocum||Vice-President||[UPON APPROVAL]|
|Alan J. Dean||Chief Financial Officer||[UPON APPROVAL]|
|Joanne Moffic-Silver||Secretary||[UPON APPROVAL]|
|Donald R. Patton||Treasurer||[UPON APPROVAL]|
The Exchange anticipates that its Board of Directors will initially be the same as that of the Chicago Board Options Exchange, Incorporated, as shown below. Pursuant to Article Twelfth of the Certificate of Incorporation, the incorporator of the Corporation shall appoint the initial Board members. Directors of the Exchange will serve staggered, two-year terms.
|Type of Business||Date of Commencement|
|William J. Brodsky|
Chief Executive Officer
|Securities Exchange||[UPON APPROVAL]|
|Bradley G. Griffith|
|Market Maker||[UPON APPROVAL]|
|Mark F. Duffy|
|Market Maker||[UPON APPROVAL]|
|David A. Fisher|
|Market Maker||[UPON APPROVAL]|
|Stuart J. Kipnes|
|Benjamin R. Londergan|
|Market Maker||[UPON APPROVAL]|
|Anthony D. McCormick|
|Kevin L. Murphy|
|John E. Smollen|
|Market Maker||[UPON APPROVAL]|
|Jonathan B. Werts|
|William R. Power|
|Lessor Member||[UPON APPROVAL]|
|James R. Boris|
|Retired President & CEO, EVEREN Capital Corp.||[UPON APPROVAL]|
|Robert J. Birnbaum|
|Retired President & CEO, NYSE; AMEX||[UPON APPROVAL]|
|Janet P. Froetscher|
|President & CEO, National Safety Council||[UPON APPROVAL]|
|Duane R. Kullberg|
|Retired CEO, Anderson Worldwide||[UPON APPROVAL]|
|R. Eden Martin|
|President, The Commercial Club of Chicago; Of Counsel, Sidley Austin LLP||[UPON APPROVAL]|
|Executive VP, General Counsel & Chief Compliance and Risk Management Officer, General Mills, Inc.||[UPON APPROVAL]|
|Susan M. Phillips|
|Dean & Professor of Finance, School of Business and Public Management, The George Washington University||[UPON APPROVAL]|
|Samuel K. Skinner|
|Former Chairman and CEO, USF Corporation; Former U.S. Secretary of Transportation||[UPON APPROVAL]|
|Carole E. Stone|
|Former Director, New York State Division of the Budget||[UPON APPROVAL]|
|Howard L. Stone|
|Former Senior Managing Director, American Express Tax and Business Services||[UPON APPROVAL]|
|Eugene S. Sunshine|
|Senior Vice President for Business and Finance, Northwestern University||[UPON APPROVAL]|
The committees of the Board shall consist of an Executive Committee, an Audit Committee, a Compensation Committee, a Regulatory Oversight Committee, a Nominating and Governance Committee and such other standing and special committees as may be approved by the Board. Upon the approval of C2’s Form 1 Application for Registration as a National Securities Exchange by the Commission, and after the appointment of the Board and the Nominating and Governance Committee, the Nominating and Governance Committee shall recommend, and the Board shall appoint, persons to sit on the standing committees of the Board, consistent with Article IV of the Exchange’s Bylaws.
This Exhibit is applicable only to exchanges that have one or more owners, shareholders, or partners that are not also members of the exchange. If the exchange is a corporation, please provide a list of each shareholder that directly owns 5% or more of a class of a voting security of the applicant. If the exchange is a partnership, please provide a list of all general partners and those limited and special partners that have the right to receive upon dissolution, or have contributed, 5% or more of the partnership’s capital. For each of the persons listed in the Exhibit K, please provide the following:
C2 will be wholly-owned by Chicago Board Options Exchange, Incorporated (“CBOE”). CBOE will exercise “control” over the Exchange, as that term is defined in the Form 1 instructions.
Describe the exchange’s criteria for membership in the exchange. Describe conditions under which members may be subject to suspension or termination with regard to access to the exchange. Describe any procedures that will be involved in the suspension or termination of a member.
A Permit Holder must be registered as a broker-dealer pursuant to Section 15 of the Securities Exchange Act of 1934. A CBOE member in good standing is eligible to receive one C2 Trading Permit (regardless of the number of CBOE memberships owned by that CBOE member).
Every Applicant must have and maintain membership in another options exchange registered under the Act and that is not registered solely under Section 6(g) of the Act.
The Exchange may deny or condition an Applicant from becoming a Permit Holder for the same reasons that the Commission may deny or revoke a broker-dealer registration and for those reasons required or allowed under the Act.
The Exchange also may deny or condition an Applicant from becoming a Permit Holder when the Applicant:
(i) is a broker-dealer and (A) has a net worth (excluding personal assets) below $25,000 if the applicant is an individual, (B) has a net worth (excluding personal assets) below $50,000 if the applicant is an organization, (C) has financial difficulties involving an amount that is more than 5% of the applicant's net worth, or (D) has a pattern of failure to pay just debts;
(ii) is unable satisfactorily to demonstrate a capacity to adhere to all applicable Exchange, Commission, Clearing Corporation, and Federal Reserve Board policies, rules, and regulations, including those concerning record-keeping, reporting, finance, and trading procedures;
(iii) would bring the Exchange into disrepute; or
(iv) for such other cause as the Exchange reasonably may decide.
The Exchange may determine not to permit a Permit Holder to continue being a Permit Holder or may condition such continuance as a Permit Holder if the Permit Holder:
(i) fails to meet any of the qualification requirements for being a Permit Holder after approval as a Permit Holder;
(ii) fails to meet any condition placed by the Exchange on being a Permit Holder; or
(iii) violates any agreement with the Exchange.
The Exchange’s denials from, and imposition of conditions upon, becoming or continuing to be a Permit Holder may be appealed under Chapter XIX of the Exchange’s rules.
The Exchange may determine in accordance with the provisions of this Rule not to allow a Permit Holder or associated person of a Permit Holder to continue being a Permit Holder or associated with a Permit Holder, or to condition such continuance as a Permit Holder or associated person, if the Permit Holder or associated person is or becomes subject to a statutory disqualification under the Act.
If a Permit Holder or associated person of a Permit Holder who is or becomes subject to a statutory disqualification under the Act wants to continue being a Permit Holder or associated with a Permit Holder, the Permit Holder or associated person must, within 10 days of becoming subject to a statutory disqualification, submit an application to the Exchange, in a form and manner prescribed by the Exchange, seeking to continue being a Permit Holder or associated with a Permit Holder notwithstanding the statutory disqualification.
Following the receipt of such an application, or in the event the Exchange becomes aware that a Permit Holder or associated person of a Permit Holder is subject to a statutory disqualification and has failed to submit such an application within the required time period, the Exchange shall appoint a panel composed of three Permit Holders or persons associated with Permit Holders to conduct a hearing concerning the matter.
The hearing panel shall hold a hearing to determine whether to permit the Permit Holder or associated person of a Permit Holder to continue being a Permit Holder or associated with a Permit Holder, and if so, whether to condition such continuance as a Permit Holder or associated person.
Following the hearing, the hearing panel shall prepare a decision. The Board or its designee may determine within 7 days after the issuance of the hearing panel’s decision to order review of the decision. If the Board or its designee does not order review of the hearing panel’s decision, the hearing panel’s decision shall become the final decision of the Exchange.
If the Board or its designee orders review of the hearing panel’s decision, the review shall be conducted by the Board or its designee or a panel thereof composed of at least 3 members of the Board. The decision of the Board or its designee shall be in writing, shall be promptly provided to the subject of the proceeding, and shall be the final decision of the Exchange.
Provide an alphabetical list of all members, participants, subscribers or other users, including the following information:
C2 has not commenced operations and currently has no Permit Holders/Members.
Provide a schedule for each of the following:
C2 has not commenced operations and, therefore, it has no securities that are listed or traded on the Exchange. The Exchange will not list or trade non-option securities. Upon the effectiveness of its Form 1 Application for Registration as a National Securities Exchange, the Exchange intends to trade listed option contracts.
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