Document ID: SEC-2007-1507-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2007-11-02T04:00Z

[Federal Register: November 2, 2007 (Volume 72, Number 212)]
[Notices]               
[Page 62287-62290]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02no07-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56715; File No. SR-CBOE-2007-119]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change Relating to the Criteria for Securities that 
Underlie Options Traded on the Exchange

October 29, 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 October 4, 2007, Chicago Board Options Exchange, Incorporated ( 
``Exchange'' or ``CBOE''), filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change (``Exchange 
Notice'') as described in Items I and II below, which Items have been 
substantially prepared by the Exchange. This order provides notice of 
the proposed rule change and approves the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to permit the initial and continued listing 
and trading on the Exchange of options on Index Multiple Exchange 
Traded Fund Shares (``Index Multiple Units'') and Index Inverse 
Exchange Traded Fund Shares (``Index Inverse Units''). The text of the 
proposed rule change is available on the Exchange's Web site (http://www.cboe.org/Legal
), at the Exchange's Office of the Secretary and at 

the Commission.

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 III 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
    The purpose of the proposed rule change is to revise Rules 5.3, 
Criteria for Underlying Securities, and 5.4, Withdrawal of Approval of 
Underlying Securities, to enable the listing and trading on the 
Exchange of options on Index Multiple Units and Index Inverse Units. 
Index Multiple Units seek to provide investment results, before fees 
and expenses, that correspond to a specified multiple of the percentage 
performance on a given day of a particular foreign or domestic stock 
index. Index Inverse Units seek to provide investment results, before 
fees and expenses, that correspond to the inverse (opposite) of the 
percentage performance on a given day of a particular foreign or 
domestic stock index by a specified multiple. Index Multiple Units and 
Index Inverse Units differ from traditional exchange-traded fund shares 
or ``Units'' in that they do not merely correspond to the performance 
of a given index, but rather attempt to match a multiple or inverse of 
such underlying index performance. The ProShares Ultra Funds, which 
currently trades on the American Stock Exchange (``Amex'') is an 
example of an Index Multiple Unit. Amex also currently lists for 
trading Index Inverse Units, namely the Short Funds and the UltraShort 
Funds.\3\
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    \3\ See Securities Exchange Act Release Nos. 52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (approving the listing and 
trading of Ultra Funds and Short Funds) and 54040 (June 23, 2006), 
71 FR 37629 (June 30, 2006) (approving the listing and trading of 
the UltraShort Funds). The Ultra Funds are expected to gain, on a 
percentage basis, approximately twice (200%) as much as the 
underlying benchmark index and should lose approximately twice 
(200%) as much as the underlying benchmark index when such prices 
decline. The Short Funds are expected to achieve investment results, 
before fees and expenses, that correspond to the inverse or opposite 
of the daily performance (-100%) or an underlying benchmark index. 
Lastly, the UltraShort Funds are expected to achieve investment 
result, before fees and expenses, that correspond to twice the 
inverse or opposite of the daily performance (-200%) of the 
underlying benchmark index.

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[[Page 62288]]

    In order to achieve investment results that provide either a 
positive multiple or inverse of the benchmark index, Index Multiple 
Units or Index Inverse Units may hold a combination of financial 
instruments, including, among other things: stock index futures 
contracts; options on futures; options on securities and indexes; 
equity caps, collars and floors; swap agreements; forward contracts; 
repurchase agreements; and reverse repurchase agreements (the 
``Financial Instruments''). The underlying portfolios of Index Multiple 
Units generally will hold at least 85% of their assets in the component 
securities of the underlying relevant benchmark index. The remainder of 
any assets is devoted to Financial Instruments that are intended to 
create the additional needed exposure to such underlying index 
necessary to pursue its investment objective. Normally, 100% of the 
value of the underlying portfolios of Index Inverse Units will be 
devoted to Financial Instruments and money market instruments, 
including U.S. government securities and repurchase agreements (the 
``Money Market Instruments'').
    Currently, Interpretation and Policy .06 to Rule 5.3 provides 
securities deemed appropriate for options trading shall include shares 
or other securities (``Units'') that are traded on a national 
securities exchange or through the facilities of a national securities 
association and are defined as an NMS stock under Rule 600 of 
Regulation NMS, and that (i) represent interests in registered 
investment companies (or series thereof) organized as an open-end 
management investment companies, unit investment trusts or similar 
entities that hold portfolios of securities comprising or otherwise 
based on or representing investments in indexes or portfolio of 
securities (of that hold securities in one of more other registered 
investment companies that themselves hold such portfolios of 
securities); or (ii) represent interests in a trust or other similar 
entity that holds a specified non-U.S. currency deposited with the 
trust or similar entity when aggregated in some specified minimum 
number may be surrendered to the trust by the beneficial owner to 
receive the specified non-U.S. currency and pays the beneficial owner 
interest and other distributions on deposited non-U.S. currency, if 
any, declared and paid by the trust; or (iii) represent commodity pool 
interests principally engaged, directly or indirectly, in holding and/
or managing portfolios or baskets of securities, commodity futures 
contracts, options on commodity futures contracts, swaps, forward 
contracts and/or options on physical commodities and/or non-U.S. 
currency (``Commodity Pool Units'').
    The Exchange proposes to amend Interpretation and Policy .06 to 
Rule 5.3 to expand the type of options to include the listing and 
trading of options based on Index Multiple Units and Index Inverse 
Units that may hold or invest in any combination of securities, 
Financial Instruments and/or Money Market Instruments. Index Multiple 
Units and Index Inverse Units will continue to otherwise satisfy the 
listing standards in Rule 5.4. The Exchange also proposes to make non-
substantive, technical changes to Interpretation and Policy .06 to and 
to delete duplicative rule text from Interpretation and Policy .06(ii) 
to Rule 5.3. In addition, the Exchange proposes to remove the reference 
to a ``national securities association'' in Interpretation and Policy 
.06 to Rule 5.3.
    As set forth in proposed amended Interpretation and Policy .06 to 
Rule 5.3, Index Multiple Units and Index Inverse Units must be traded 
on a national securities exchange and must be an ``NMS stock'' as 
defined under Rule 600 of Regulation NMS. In addition, Index Multiple 
Units and Index Inverse Units must meet either: (i) The criteria and 
guidelines under Interpretation and Policy .01 to Rule 5.3; or (ii) be 
available for creation or redemption each business day in cash or in 
kind from the investment company at a price related to net asset value. 
In addition, the investment company shall provide that shares may be 
created even though some or all of the securities and/or cash (in lieu 
of the Financial Instruments) needed to be deposited have not been 
received by the investment company, provided the authorized creation 
participant has undertaken to deliver the shares and/or cash as soon as 
possible and such undertaking has been secured by the delivery and 
maintenance of collateral consisting of cash or cash equivalents 
satisfactory to the Unit which underlies the option as described in the 
prospectus.
    The Exchange's current continuing listing standards for options on 
Units will continue to apply.
    The Exchange proposes to amend Interpretation and Policy .08 to 
Rule 5.4 to indicate that the index or portfolio may consist of 
securities, Financial Instruments and/or Money Market Instruments. The 
Exchange also seeks to delete reference to ``national securities 
association'' set forth in Interpretation and Policy .08(b) to Rule 
5.4.
    Under the applicable continued listing criteria in Interpretation 
and Policy .08 to Rule 5.4, options on Units may be subject to the 
suspension of opening transactions as follows: (1) Following the 
initial twelve-month period beginning upon the commencement of trading 
of the Units, there are fewer than 50 record and/or beneficial holders 
of the Units for 30 or more consecutive trading days; (2) the value of 
the index or portfolio of securities, non-U.S. currency, or portfolio 
of commodities including commodity futures contracts, options on 
commodity futures contracts, swaps, forward contracts and/or options on 
physical commodities and/or Financial Instruments and Money Market 
Instruments on which Units are based is no longer calculated or 
available; or (3) such other event occurs or condition exists that in 
the opinion of the Exchange makes further dealing on the Exchange 
inadvisable. Additionally, the Units shall not be deemed to meet the 
requirements for continued approval, and the Exchange shall not open 
for trading any additional series of option contracts of the class 
covering such Index Multiple Units or Index Inverse Units, if the Units 
cease to be an ``NMS stock'' as provided for in paragraph (f) of 
Interpretation and Policy .01 of Rule 5.4 or the Units are halted from 
trading on their primary market.
    The expansion of the types of investments that may be held by Index 
Multiple Units or Index Inverse Units under Interpretation and Policy 
.06 to Rule 5.3 will not have any effect on the rules pertaining to 
position and exercise limits \4\ or margin.\5\
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    \4\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
    \5\ See Rule 12.3, Margin Requirements.
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    This proposal is necessary to enable the Exchange to list and trade 
options on the shares of the Ultra Fund, Short Fund and UltraShort Fund 
of the ProShares Trust.\6\ The Exchange believes the ability to trade 
options on Index Multiple Units and Index Inverse Units will provide 
investors with greater risk management tools. The proposed amendment to 
the Exchange's listing criteria for options on Units is necessary to 
ensure that the Exchange will be able to list options on the Units of 
the ProShares Trust as well as other Index

[[Page 62289]]

Multiple Units or Index Inverse Units that may be introduced in the 
future.
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    \6\ See supra at Note 3.
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    The Exchange represents that its existing surveillance procedures 
applicable to trading in options are adequate to properly monitor the 
trading in Index Multiple Unit options and Index Inverse Unit options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to 
national securities exchanges and, in particular, the requirements of 
section 6(b) of the Act.\7\ Specifically, the Exchange believes the 
proposed rule change is consistent with the section 6(b)(5) \8\ 
requirements that the rules of an exchange be 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.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purpose 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 written comments on 
the proposed rule change.

III. 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-CBOE-2007-119 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-CBOE-2007-119. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal offices 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-2007-119 and should be 
submitted on or before November 23, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful consideration, 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,\9\ and in particular, the requirements of section 6(b) of the 
Act.\10\ Specifically, 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 prevent fraudulent and manipulative acts and 
practices, 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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Surveillance

    The Commission notes that the Exchange has represented that its 
existing surveillance procedures applicable to trading options are 
adequate to properly monitor trading in Index Multiple Units options 
and Index Inverse Units options. In addition, the Exchange represented 
that the expansion of the types of investments that may be held by 
Index Multiple Units or Index Inverse Units under Interpretation and 
Policy .06 to Rule 5.3 will not have any effect on the rules pertaining 
to position and exercise limits \12\ or margin.\13\
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    \12\ See Rules 4.11, Position Limits, and 4.12, Exercise Limits.
    \13\ See Rule 12.3, Margin Requirements.
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Listing and Trading Options on Fund Shares

    The Commission notes that, pursuant to the proposed rule change, 
the Exchange represented that the current continuing listing standards 
for options on Units will continue to apply. These provisions include 
requirements regarding initial and continued listing standards, 
suspension of opening transactions, and trading halts. Proposed amended 
Interpretation and Policy .06 to Rule 5.3, would require that Index 
Multiple Units and Index Inverse Units must be traded on a national 
securities exchange and must be an ``NMS stock'' as defined under Rule 
600 of Regulation NMS.\14\
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    \14\ 17 CFR 242.600(b)(47).
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    The Commission believes that this proposal is necessary to enable 
the Exchange to list and trade options on the shares of the Ultra Fund, 
Short Fund and UltraShort Fund of the ProShares Trust.\15\ The 
Commission believes that the ability to trade options on the Index 
Multiple Units and Index Inverse Units will provide investors with 
additional risk management tools. The Commission further believes that 
the proposed amendment to the Exchange's listing criteria for options 
on Exchange Traded Fund Shares will ensure that the Exchange will be 
able to list options on the Funds of the ProShares Trust as well as 
other Index Multiple Units and Index Inverse Units that may be 
introduced in the future, thereby affording investors greater 
investment choices.
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    \15\ See supra at Note 3.
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    The Commission finds good cause for approving this proposal before 
the

[[Page 62290]]

thirtieth day after the publication of notice thereof in the Federal 
Register, The Commission notes that it recently has approved a 
substantially similar proposal.\16\ This proposed rule filing does not 
raise any new, unique or substantive issues from those raised in the 
prior filing that would preclude the trading of the options on Index 
Multiple Units or Index Inverse Units on the Exchange. Therefore, 
accelerating approval of this proposal should benefit investors by 
creating, without undue delay, additional competition in the market for 
these types of options.
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    \16\ See Securities Exchange Act Release No. 56650 (October 12, 
2007), 72 FR 59123 (October 18, 2007) (approving SR-Amex-2007-35). 
See also SR-ISE-2007-87 (pending rule filing proposing similar 
amendment to options listing criteria).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2007-119) be, and it 
hereby is, approved on an accelerated basis.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-21567 Filed 11-1-07; 8:45 am]

BILLING CODE 8011-01-P