Comments of OneChicago LLC on S7-14-02

OneChicago LLC

June 6, 2002

BY ELECTRONIC MAIL

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Assessments on Security Futures Transactions and Fees on Sales
of Securities Resulting from Physical Settlement of Security Futures
pursuant to Section 31 of the Exchange Act (File No. S7-14-02)

Dear Mr. Katz:

OneChicago, LLC ("OneChicago") appreciates the opportunity to express its views regarding the proposal by the Securities and Exchange Commission (the "Commission") to establish methods for the calculation of fees under section 31 of the Securities Exchange Act of 1934 ("Exchange Act") in respect of security futures transactions.¹ See Exchange Act Release No. 34-45854.

Section 31(b) of the Exchange Act requires each national securities exchange to pay a fee at a rate equal to $15 per $1 million of the "aggregate dollar amount of sales of securities transacted . . . on such national exchange."² The Commission has accordingly proposed to apply the statutory language literally and require that such fee be based upon the price of each security futures contract that results in physical delivery.

OneChicago believes, however, that this aspect of the Commission's proposal is more complicated than necessary and would not be feasible to implement. OneChicago, therefore, recommends that the Commission adopt an alternative approach that would base the Section 31(b) fee on the final settlement price for security futures contracts.

The Commission's proposal, which would base the Section 31(b) fee on the price at which a contract that has resulted in delivery was initially sold, would require the exchanges or The Options Clearing Corporation ("OCC") to identify which of those contracts was the one that had resulted in delivery. This data, however, is not maintained by OCC or other clearing organizations and would have to be obtained from the party making the delivery.³ Although the books and records of customers and others should contain this information, nothing in the Commission's rules or regulations of the Commodity Futures Trading Commission ("CFTC") requires that this information be retained by persons who are not market professionals or that it be provided to the national securities exchanges or OCC.

This process would be complicated further by the fact that futures contracts may be bought and sold by a market participant one or more times before the contract expires. Market-makers and other professionals may establish and liquidate positions in a given contract dozens or hundreds of times during the life of a contract. Although futures contracts are ordinarily liquidated on a first in-first out basis, CFTC Regulation 1.46, 17 C.F.R. § 1.46, permits a customer to hold open long and short positions in the same contract and, if the positions are closed prior to delivery, designate which positions are to be so offset. Thus, a customer who has sold futures contracts on multiple dates and at multiple prices is free to designate which contract is to be applied against an existing open long position or closed by a subsequent purchase. Consequently, the Commission's proposal would compel each clearing organization responsible for calculating section 31(b) fees for securities delivered upon settlement of security futures contracts to undertake an extended procedure to validate the original transaction price. To reach the ultimate customer to ascertain which contracts were designated for delivery the clearing organization may need to work back through their clearing members and other intermediaries involved in the transactions to identify and communicate with the customer. Such a process would undoubtedly entail substantial costs and delays to determine the original transaction price.

Although the exchanges conceivably could engage in an elaborate form of tracing to determine which of a customer's open positions had resulted in delivery, OneChicago believes that the Commission, the national securities exchanges and market participants would be better served by the adoption of an alternative approach that calculates the Section 31(b) fee based on the final settlement price for any security futures contract that results in delivery. One of the advantages of this approach is that the relevant information is readily ascertainable by the exchanges, OCC and the Commission at no additional cost since all deliveries are required to be made at the final settlement price (the intervening marks-to-market having served to bridge the difference between the prices at which buyers and sellers may have entered into their positions in the first place).

* * *

The Commission and its staff should not hesitate to call upon OneChicago if we can answer any questions or provide the Commission with any additional information.

Yours truly,

/s/ C. Robert Paul

C. Robert Paul
General Counsel
OneChicago
141 West Jackson Boulevard
Suite 2208A
Chicago, Illinois 60604
(312) 424-8515
paul@onechicago.com

cc: William J. Rainer

__________________________

¹ OneChicago is a joint venture among the Chicago Board Options Exchange, Incorporated, Chicago Mercantile Exchange Inc. and the Board of Trade of the City of Chicago, Inc. that was formed to provide an exchange for trading security futures products.
² Exchange Act Section 31(c) imposes comparable obligations on a national securities association.
³ Although a clearing organization will record the price of every trade that it accepts for clearance, those trades are not identified to particular customers on the books of the clearing organization. Furthermore, a trade once cleared will be marked to market daily and will no longer be carried on the books of the clearing organization at its original trade price.

¹	OneChicago is a joint venture among the Chicago Board Options Exchange, Incorporated, Chicago Mercantile Exchange Inc. and the Board of Trade of the City of Chicago, Inc. that was formed to provide an exchange for trading security futures products.
²	Exchange Act Section 31(c) imposes comparable obligations on a national securities association.
³	Although a clearing organization will record the price of every trade that it accepts for clearance, those trades are not identified to particular customers on the books of the clearing organization. Furthermore, a trade once cleared will be marked to market daily and will no longer be carried on the books of the clearing organization at its original trade price.