Document ID: SEC-2006-0907-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-07-19T04:00Z

[Federal Register: July 19, 2006 (Volume 71, Number 138)]
[Notices]
[Page 41062-41064]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19jy06-145]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54133; File No. SR-CBOE-2006-49]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment
No. 1 Thereto To Modify Its Short Term Option Series Pilot Program To
Permit the Listing of Up To Seven Series Per Class

July 12, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 27, 2006, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Exchange filed Amendment No. 1 to the proposed rule
change on July 11, 2006.\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, a partial amendment, the Exchange
corrected a typographical error in the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to modify its Short Term Option Series pilot
program (``Pilot Program'') to change the number of series that may be
listed for a class selected to participate in the Pilot Program from
five to seven. The text of the proposed rule change, as amended, is set
forth below. Proposed new language is in italics; deletions are in
[brackets].
* * * * *

Rule 5.5. Option Contracts Open for Trading

    (a)-(c) No change.
    (d) Short Term Option Series Pilot Program. After an option class
has been approved for listing and trading on the Exchange, the Exchange
may open for trading on any Friday that is a business day (``Short Term
Option Opening Date'') series of options on that class that expire on
the next Friday that is a business day (``Short Term Option Expiration
Date''). If the Exchange is not open for business on a Friday, the
Short Term Option Opening Date will be the first business day
immediately prior to that Friday. Similarly, if the Exchange is not
open for business on a Friday, the Short Term Option Expiration Date
will be the first business day immediately prior to that Friday.
    Regarding Short Term Option Series, [no new Short Term Option
Series may be added after the open of business on the Short Term Option
Opening Date and] no Short Term Option Series may expire in the same
week in which monthly option series on the same class expire.
    The Exchange may continue to list Short Term Option Series until
the Short Term Option Series Pilot Program expires on July 12, 2007.

. . . Interpretations and Policies

    .01-.02 No change.
    .03 Except for Short Term Option Series, the Exchange usually will
open four expiration months for each class of options open for trading
on the Exchange: The first two being the two nearest months, regardless
of the quarterly cycle on which that class trades; the third and fourth
being the next the two months of the quarterly cycle previously
designated by the Exchange for that specific class. (For example, if
the Exchange listed, in late April, a new stock option on a January-
April-July-October quarterly cycle, the Exchange would list the two
nearest term months (May and June) and the next two expiration months
of the cycle (July and October).) When the May series expires, the
Exchange would add January series. When the June series expires, the
Exchange would add August series as the next nearest month, and would
not add April).
    Regarding Short Term Option Series, the Exchange may select up to
five currently listed option classes on which Short Term Option Series
may be opened on any Short Term Option Opening Date. In addition to the
five-option class restriction, the Exchange also may list Short Term
Option Series on any option classes that are selected by other
securities exchanges that employ a similar Pilot Program under their
respective rules. For each option class eligible for participation in
the Short Term Option Series Pilot Program, the Exchange may open up to
[five] seven Short Term Option Series for each expiration date in that
class. The strike price of each Short Term Option Series will be fixed
at a price per share, with [at least two] approximately the same number
of strike prices being opened above and [two strike prices] below the
value of the underlying security or calculated index value at about the
time

[[Page 41063]]

that the Short Term Option Series [is] are initially opened for trading
on the Exchange (e.g., if seven series are initially opened, there will
be at least three strike prices above and three strike prices below the
value of the underlying security or calculated index value). If the
Exchange opens less than seven Short Term Option Series for a Short
Term Option Expiration Date, additional series may be opened for
trading on the Exchange when the Exchange deems it necessary to
maintain an orderly market, to meet customer demand or when the market
price of the underlying security moves substantially from the exercise
price or prices of the series already opened.
    .04-.09 No change.
* * * * *

Rule 24.9 Terms of Index Option Contracts

    (a) General.
    (1) No Change.
    (2) Expiration Months. Index option contracts may expire at three-
month intervals or in consecutive months. The Exchange may list up to
six expiration months at any one time, but will not list index options
that expire more than twelve months out. Notwithstanding the preceding
restriction, until the expiration in November 2004, the Exchange may
list up to seven expiration months at any one time for the SPX, MNX and
DJX index option contracts, provided one of those expiration months is
November 2004.
    Short Term Option Series Pilot Program. Notwithstanding the
preceding restriction, after an index option class has been approved
for listing and trading on the Exchange, the Exchange may open for
trading on any Friday that is a business day (``Short Term Option
Opening Date'') series of options on that class that expire on the next
Friday that is a business day (``Short Term Option Expiration Date'').
If the Exchange is not open for business on a Friday, the Short Term
Option Opening Date will be the first business day immediately prior to
that Friday. Similarly, if the Exchange is not open for business on a
Friday, the Short Term Option Expiration Date will be the first
business day immediately prior to that Friday.
    The Exchange may continue to list Short Term Option Series until
the Short Term Option Series Pilot Program expires on July 12, 2007.
    Regarding Short Term Option Series, the Exchange may select up to
five currently listed option classes on which Short Term Option Series
may be opened on any Short Term Option Opening Date. In addition to the
five-option class restriction, the Exchange also may list Short Term
Option Series on any option classes that are selected by other
securities exchanges that employ a similar Pilot Program under their
respective rules. For each index option class eligible for
participation in the Short Term Option Series Pilot Program, the
Exchange may open up to [five] seven Short Term Option Series on index
options for each expiration date in that class. The strike price of
each Short Term Option Series will be fixed at a price per share, with
[at least two] approximately the same number of strike prices being
opened above and [two strike prices] below the calculated value of the
underlying index at about the time that the Short Term Option Series
[is] are initially opened for trading on the Exchange (e.g., if seven
series are initially opened, there will be at least three strike prices
above and three strike prices below the value of the underlying
security or calculated index value). If the Exchange has opened less
than seven Short Term Option Series for a Short Term Option Expiration
Date, additional series may be opened for trading on the Exchange when
the Exchange deems it necessary to maintain an orderly market, to meet
customer demand or when the current value of the underlying index moves
substantially from the exercise price or prices of the series already
opened. No Short Term Option Series on an index option class may expire
in the same week during which any monthly option series on the same
index class expire or, in the case of QIXs, in the same week during
which the QIXs expire.
    (3)-(5) No change.
    (b)-(c) No change.

. . . Interpretations and Policies:

    .01-.11 No change.
* * * * *

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
    On July 12, 2005, the Commission approved the Pilot Program.\4\ The
Pilot Program allows CBOE to list and trade Short Term Option Series,
which would expire one week after the date on which a series is opened.
Under the Pilot Program, CBOE can select up to five approved options
classes on which Short Term Option Series could be opened.\5\ A series
could be opened on any Friday that is a business day and would expire
on the next Friday that is a business day.\6\ If a Friday were not a
business day, the series could be opened (or would expire) on the first
business day immediately prior to that Friday.\7\
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    \4\ See Securities Exchange Act Release No. 52011 (July 12,
2005), 70 FR 41451 (July 19, 2005) (SR-CBOE-2004-63) (approving
Short Term Option Series on a pilot basis through July 12, 2006).
The Pilot Program has since been extended through July 12, 2007. See
Securities Exchange Act Release No. 53984 (June 14, 2006), 71 FR
35718 (June 21, 2006) (SR-CBOE-2006-48) (notice of filing and
immediate effectiveness of extension of the Pilot Program).
    \5\ A Short Term Option Series could be opened in any options
class that satisfied the applicable listing criteria under CBOE
rules (i.e., stock options, options on exchange-traded funds as
defined under Interpretation and Policy .06 to CBOE Rule 5.3, or
options on indexes). The Exchange can also list and trade Short Term
Option Series on any options class that is selected by another
exchange that employs a similar pilot program, though to date the
Exchange is not aware of any other exchanges listing Short Term
Option Series.
    \6\ Under the Pilot Program, Short Term Option Series are
settled in the same manner as the monthly expiration series in the
same class. Thus, if the monthly option contract for a particular
class would be A.M.-settled, as most index options are, the Short
Term Option Series for that class also would be A.M.-settled; if the
monthly option contract for a particular class were P.M.-settled, as
most non-index options are, the Short Term Option Series for that
class also would be P.M.-settled. The Exchange notes that certain
monthly expiration index options--specifically, American- and
European-style options on the S&P 100 Index (OEX and XEO,
respectively)--are P.M.-settled. Therefore, Short Term Option Series
in these series would also be P.M.-settled. Similarly, Short Term
Option Series for a particular class are physically settled or cash-
settled in the same manner as the monthly option contract in that
class.
    \7\ Additionally, CBOE will not open a Short Term Option Series
in the same week that the corresponding monthly options series is
expiring, because the monthly options series in its last week before
expiration is functionally equivalent to the Short Term Option
Series.
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    The current terms of the Pilot Program provide that the Exchange
usually would open five Short Term Option Series for each expiration
date in that class. In addition, the strike price of each Short Term
Option Series is fixed at a price per share, with at least two strike
prices above and two strike prices below the value of the underlying

[[Page 41064]]

security or calculated index value at about the time that the Short
Term Option Series is opened.\8\ CBOE is now proposing to modify these
terms of the Pilot Program to provide that up to seven (as opposed to
five) Short Term Option Series may be opened in an options class
selected for the program for each expiration date. Approximately the
same number of strike prices would be opened above and below the value
of the underlying security or calculated index value at about the time
the Short Term Option Series are initially opened for trading. For
example, if seven series are initially opened, there will be at least
three strike prices above and three strike prices below the value of
the underlying security or calculated index value. In addition, the
Exchange is proposing that, if the Exchange has opened less than seven
Short Term Option Series in a particular options class for a given
expiration date, additional series in that class may be opened for
trading on the Exchange when the Exchange deems it necessary to
maintain an orderly market, to meet customer demand, or when the
current value of the underlying index moves substantially from the
exercise price or prices of the series already opened. In any event,
the total number of series for a given expiration date will not exceed
seven.
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    \8\ The interval between strike prices on a Short Term Option
Series is the same as with the corresponding monthly options series.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \9\ in general, and furthers the
objectives of section 6(b)(5) of the Act \10\ in particular, in that it
is designed to promote just and equitable principles of trade, to
prevent fraudulent and manipulative acts, to remove impediments to and
to perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest. The Exchange believes that the proposed modification to the
Pilot Program would result in a continuing benefit to investors, by
allowing the Exchange to maintain an orderly market and meet customer
demand, and accommodate instances where the underlying security or
index value may move substantially. As such, the Exchange believes the
change would increase the utility of the Pilot Program, consistent with
the Pilot Program's objectives.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would
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

    Written comments were neither solicited nor received with respect
to the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 e-mail to rule-comments@sec.gov. Please include

File Number SR-CBOE-2006-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2006-49. This file
number should be included on the subject line if e-mail 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 inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will 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 Number SR-CBOE-2006-49 and should be submitted on or before August
9, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-11388 Filed 7-18-06; 8:45 am]

BILLING CODE 8010-01-P