Document ID: SEC-2007-1672-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Boston Stock Exchange, Inc.
Posted Date: 2007-12-10T05:00Z

[Federal Register: December 10, 2007 (Volume 72, Number 236)]
[Notices]               
[Page 69720-69723]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10de07-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56889; File No. SR-BSE-2007-49]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
and Amendment No. 1 Thereto Relating to Position and Exercise Limits

December 3, 2007.
    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 November 9, 2007, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by BSE. On 
November 20, 2007, BSE submitted Amendment No. 1 to the proposed rule 
change. The Exchange has filed the proposal pursuant to section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate position and exercise limits for 
options on the Russell 2000 Index (``RUT''), to increase the standard 
position and exercise limits for options on the Russell 2000 Growth 
Index (``IWO''), and to specify that reduced-value options on broad-
based security indices for which full-value options have no position 
and exercise limits will similarly have no position and exercise 
limits. The text of the proposed rule change is available at BSE, the 
Commission's Public Reference Room, and http://www.bostonstock.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, BSE 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. BSE 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 changes to section 5 (Position Limits for 
Broad-Based Index Options) and section 7

[[Page 69721]]

(Exemptions from Position Limits) of Chapter XIV of the Boston Options 
Exchange (``BOX'') Trading Rules. The purpose of the proposed changes 
is to eliminate position and exercise limits for options on RUT, a 
broad-based securities index that is multiply-listed and heavily 
traded,\5\ to increase the standard position and exercise limits for 
options on IWO,\6\ and to amend Section 5 of Chapter XIV of the BOX 
Trading Rules to specify that reduced-value options on broad-based 
security indices for which full-value options have no position and 
exercise limits will similarly have no position and exercise limits.
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    \5\ The current position and exercise limits under Chapter XIV, 
Sections 5 and 7, respectively, of the BOX Trading Rules for RUT 
options are 25,000 contracts.
    \6\ The current position and exercise limits under Chapter XIV, 
Sections 5 and 7, respectively, of the BOX Trading Rules for IWO 
options are 25,000 contracts.
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    Currently, the Full Size Nasdaq 100 Index Options (``NDX'') has no 
position limits for option contracts overlying NDX. In this regard, the 
Exchange proposes to eliminate position limits on the Mini Nasdaq 100 
Index Options (``MNX'').
Eliminate Position and Exercise Limits for RUT Options
    The Exchange believes that the circumstances and considerations 
relied upon in approving the elimination of position and exercise 
limits for other heavily traded broad-based index options (e.g., 
options on NDX) equally apply to the current proposal relating to RUT 
position and exercise limits.\7\
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    \7\ See Securities Exchange Act Release No. 54397 (August 31, 
2006), 71 FR 53142 (September 8, 2006) (SR-BSE-2005-11) (``NDX/MNX 
Approval Order'').
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    In approving the elimination of position limits for NDX options, 
the Commission considered the capitalization of this index and the deep 
and liquid markets for the securities underlying the index 
significantly reduced concerns of market manipulation or disruption in 
the underlying markets. The Commission also noted the active trading 
volume for options on the index. The Exchange believes that RUT shares 
these factors in common with NDX. As of July 31, 2007, the approximate 
market capitalization of NDX was $2.28 trillion, the average daily 
trading volume (``ADTV'') for the components of NDX was 572 million, 
and the ADTV for options on NDX was 64,003 contracts per day. The 
Exchange believes RUT has very comparable characteristics. The market 
capitalization for RUT is $1.73 trillion dollars, the ADTV for the 
underlying securities is 535 million shares, and the ADTV for the 
option is 79,000 contracts.
    In approving the elimination of position and exercise limits for 
NDX, the Commission also noted the financial requirements imposed by 
both the Exchange and the Commission serve to address any concerns that 
an Exchange Participant or its customer(s) may try to maintain an 
inordinately large unhedged position in options on NDX. The Exchange 
notes that these financial requirements also apply to RUT options. 
Under Exchange rules, the Exchange also has the authority to impose 
additional margin upon accounts maintaining underhedged positions, and 
is further able to monitor account to determine when such action is 
warranted. As noted in the Exchange's rules, the clearing firm carrying 
such an account would be subject to capital charges under Rule 15c3-1 
under the Act \8\ to the extent of any resulting margin deficiency.\9\
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    \8\ 17 CFR 240.15c3-1.
    \9\ See Chapter XIV, Section 7(a)(14) of the BOX Trading Rules.
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    In approving the elimination of position and exercise limits for 
NDX, the Commission relied heavily on the Exchange's ability to provide 
surveillance and reporting safeguards to detect and deter trading 
abuses arising from the elimination of position and exercise limits in 
options on the index. The Exchange represents that it monitors the 
trading in RUT options in the same manner as trading in NDX options and 
that the current BOX surveillance procedures are adequate to continue 
monitoring RUT options. In addition, the Exchange intends to impose a 
reporting requirement on Exchange Participants who trade RUT or NDX 
options. This reporting requirement will require Participants who 
maintain in excess of 100,000 RUT option contracts on the same side of 
the market, for their own accounts or for the account of customers, to 
report information as to whether the positions are hedged and provide 
documentation as to how such contracts are hedged, in a manner and form 
required by the Exchange. The Exchange may also specify other reporting 
requirements, as well as the limit at which the reporting requirement 
may be triggered.
    The Exchange believes that eliminating position and exercise limits 
for RUT options is consistent with rules relating to similar broad-
based indices and also allows Exchange Participants and their customers 
greater hedging and investment opportunities.
Elimination of Position Limits for Reduced-Value Options on Broad-
Based-Indices for Which There Are No Position and Exercise Limits for 
Full-Value Options
    The Exchange lists and trades reduced-value options on broad-based 
indices for which the Exchange also lists and trades full-value options 
(e.g., MNX Options). When the Exchange received approval to list and 
trade MNX options, the proscribed position and exercise limits were 
equivalent to the reduced-value contract factor (e.g., 10) multiplied 
by the applicable position and exercise limits for the full-value 
options on the same broad-based index on other exchanges.\10\ For 
example, when the Exchange received approval to list and trade NDX and 
MNX options,\11\ the position and exercise limits for MNX (1/10th NDX 
value) options were 750,000 contracts, which was equal to the 
applicable factor (10) multiplied by the original position limit for 
NDX options (75,000 contracts) on other exchanges. However, since 
position and exercise limits do not apply for NDX,\12\ the Exchange now 
proposes to eliminate position and exercise limits for MNX. The 
Exchange further proposes to amend section 5 of Chapter XIV of the BOX 
Trading Rules to state that reduced-value options on broad-based 
security indices for which full-value options have no position and 
exercise limits, will similarly have no position and exercise limits.
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    \10\ See NDX/MNX Approval Order, supra note 7.
    \11\ Id.
    \12\ Id.
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    In addition, because position and exercise limits for reduced-value 
options are aggregated with full-value options for purposes of 
determining compliance with position and exercise limits, the Exchange 
proposes amending section 7, Subsection 13 of Chapter XIV of the BOX 
Trading Rules to reflect that such aggregation will apply when 
calculating reporting requirements (e.g., 10 MNX options equal 1 NDX 
full-value contract). Further, the Exchange proposes to delete rule 
text from Section 7(a)(5) of Chapter XIV of the BOX Trading Rules 
because, pursuant to this proposed rule change, there is no longer a 
need for an exemption from position limits for MNX options.
Increase Position and Exercise Limits for IWO Options
    The Exchange believes that increasing position and exercise limits 
for IWO options is consistent with Exchange rules relating to similar 
broad-based indices. According to Chapter XIV, Section 5 of the BOX 
Trading Rules, the

[[Page 69722]]

position limit for a broad-based index option shall be 25,000 contracts 
on the same side of the market unless specified otherwise. The proposed 
change will increase these limits for IWO to 50,000 contracts, with no 
more than 30,000 near-term. Such a change will allow Exchange 
Participants and their customers greater hedging and investment 
opportunities. In addition, an increase in the position and exercise 
limits for IWO creates uniformity with such limits for IWO on other 
exchanges \13\ and is necessary to eliminate any confusion among 
members of multiple exchanges regarding which position and exercise 
limits apply to them.
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    \13\ See, e.g., International Securities Exchange Rule 2004(a); 
Chicago Board Options Exchange Rule 24.4(a); and American Stock 
Exchange Rule 904C.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\14\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\15\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling and processing information with respect to, and 
facilitating transactions in securities, 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. 
Further, the Exchange notes that this proposed rule change is similar 
to proposals filed by the American Stock Exchange LLC (``Amex'') and 
the Chicago Board Options Exchange, Incorporated (``CBOE'') that were 
recently approved by the Commission.\16\
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See Securities Exchange Act Release Nos. 56351 (September 
4, 2007), 72 FR 51875 (September 11, 2007) (SR-Amex-2007-81); and 
56350 (September 4, 2007), 72 FR 51878 (September 11, 2007) (SR-
CBOE-2007-79).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Because the forgoing rule change does not: (1) Significantly affect 
the protection of investors or the public interest; (2) impose any 
significant burden on competition; and (3) become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\19\ 
However, Rule 19b-4(f)(6)(iii) \20\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because such waiver 
will allow BSE members and their customers greater hedging and 
investment opportunities in RUT and IWO options without further delay. 
The Commission notes that it recently approved similar proposals filed 
by CBOE and Amex to eliminate position and exercise limits for RUT 
options.\21\ Moreover, the Commission previously approved position and 
exercise limits of 50,000 contracts, with no more than 30,000 contracts 
near-term, for IWO options on other exchanges. \22\ The Commission 
believes that BSE's proposal to eliminate position and exercise limits 
for RUT options and to increase position and exercise limits for IWO 
options raises no new issues. For these reasons, the Commission 
designates the proposed rule change to be operative upon filing with 
the Commission.\23\
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    \19\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Exchange has requested the Commission to waive 
this five-day pre-filing notice requirement. The Commission hereby 
grants this request.
    \20\ Id.
    \21\ See supra note 16.
    \22\ See supra note 13.
    \23\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change the Commission may summarily abrogate 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.\24\
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    \24\ 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-
day period within which the Commission may summarily abrogate the 
proposal, the Commission considers the period to commence on 
November 20, 2007, the date on which the Exchange submitted 
Amendment No. 1.
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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 e-mail to rule-comments@sec.gov. Please include 

File Number SR-BSE-2007-49 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BSE-2007-49. 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

[[Page 69723]]

available for inspection and copying 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 the 
filing also will be available for inspection and copying at the 
principal office of BSE. 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-BSE-2007-49 and should be submitted on or before December 31, 2007.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23816 Filed 12-7-07; 8:45 am]

BILLING CODE 8011-01-P