Document ID: SEC-2006-0217-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-02-16T05:00Z

[Federal Register: February 16, 2006 (Volume 71, Number 32)]
[Notices]               
[Page 8321-8324]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16fe06-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53266; File No. SR-CBOE-2005-59]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change and Amendment Nos. 1 and 2 Thereto Relating to 
Listing Standards for Broad-Based Index Options

February 9, 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 August 3, 2005, 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 and II below. On October 24, 2005, the CBOE filed Amendment No. 
1 to the proposed rule change.\3\ On February 6, 2006, the CBOE filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission

[[Page 8322]]

is publishing this notice to solicit comments on the proposed rule 
change, as amended, from interested persons and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaces the original filing in its 
entirety, includes several non-substantive revisions that provide 
clearer and more accurate listing standards.
    \4\ Amendment No. 2 makes a technical revision to CBOE Rule 
24.2(a) to include a reference to proposed new paragraph 24.2(f), 
which was inadvertently omitted from the original rule filing and 
Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules to adopt generic listing standards 
for broad-based index options. The text of the proposed rule change is 
available on CBOE's Web site (http://www.cboe.com), at the CBOE's 

Office of the Secretary, and at the Commission's Public Reference Room.

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 CBOE 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.

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

1. Purpose
    The CBOE proposes to adopt CBOE Rule 24.2(f) to establish initial 
listing standards for broad-based index options. The proposal will 
allow the CBOE to list, pursuant to Rule 19b-4(e) under the Act,\5\ 
broad-based index options that meet the initial listing standards in 
CBOE Rule 24.2(f). The listing standards require that the underlying 
index be broad-based, as defined in CBOE Rule 24.1(i)(1); \6\ that 
options on the index be a.m.-settled; that the index be capitalization-
weighted, modified capitalization-weighted, price-weighted, or equal 
dollar-weighted; and that the index be comprised of at least 50 
securities, all of which must be ``NMS stocks,'' as defined in Rule 600 
of Regulation NMS.\7\ In addition, CBOE Rule 24.2(f) requires that: the 
index's component securities meet certain minimum market 
capitalization,\8\ eligibility,\9\ and average daily trading volume 
requirements; \10\ no single component security account for more than 
10% of the weight of the index and that the five highest weighted 
component securities represent no more than 33% of the weight of the 
index in the aggregate; \11\ non-U.S. component securities that are not 
subject to comprehensive surveillance agreements represent no more than 
20% of the weight of the index in the aggregate; \12\ the index value 
be widely disseminated at least once every 15 seconds by the Options 
Price Reporting Authority (``OPRA''), the Consolidated Tape Association 
Plan/Consolidated Quotation Plan (``CTA/CQ''), the Nasdaq Index 
Dissemination Service (``NIDS'') or by one or more major market data 
vendors during the time options on the index are traded on the 
Exchange; \13\ the Exchange reasonably believes it has adequate system 
capacity to support the trading of options on the index; \14\ an equal 
dollar-weighted index is rebalanced at least once every calendar 
quarter; \15\ if an index is maintained by a broker-dealer, the index 
is calculated by a third-party who is not a broker-dealer, and the 
broker-dealer has erected an informational barrier around its personnel 
who have access to information concerning changes in, and adjustments 
to, the index; \16\ and that the CBOE have written surveillance 
procedures in place with respect to the index options.\17\
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    \5\ 17 CFR 240.19b-4(e).
    \6\ CBOE Rule 24.1(i)(1) defines ``broad-based index'' to mean 
``an index designed to be representative of a stock market as a 
whole or of a range of companies in unrelated industries.''
    \7\ See proposed CBOE Rules 24.2(f)(1), (2), (3), (4) and (9). 
Rule 600 of Regulation NMS defines an ``NMS stock'' to mean ``any 
NMS security other than an option.'' An ``NMS security'' is defined 
as ``any security or class of securities for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan, or an effective national 
market system plan for reporting transactions in listed options.'' 
See 17 CFR 242.600.
    \8\ See proposed CBOE Rule 24.2(f)(5), which requires that 
component securities that account for at least 95% of the weight of 
the index have a market capitalization of at least $75 million, 
except that component securities that account for at least 65% of 
the weight of the index have a market capitalization of at least 
$100 million.
    \9\ See proposed CBOE Rule 24.2(f)(6), which requires that 
component securities that account for at least 80% of the weight of 
the index satisfy the requirements of Rule 5.3 applicable to 
individual underlying securities. CBOE Rule 5.3 requires in part 
that underlying securities of options listed and traded on the CBOE 
be ``NMS stocks'' as defined in Rule 600 of Regulation NMS, 17 CFR 
242.600, and have at least a 7 million share float, 2000 holders, 
total annual trading volume of 2.4 million shares and a minimum 
price of $3 per share, and that the issuer must be in compliance 
with its obligations under the Act.
    \10\ See proposed CBOE Rule 24.2(f)(7), which requires that each 
component security that accounts for at least 1% of the weight of 
the index has an average daily trading volume of at least 90,000 
shares during the last six month period.
    \11\ Proposed CBOE Rule 24.2(f)(8).
    \12\ Proposed CBOE Rule 24.2(f)(10).
    \13\ Proposed CBOE Rule 24.2(f)(11).
    \14\ Proposed CBOE Rule 24.2(f)(12).
    \15\ Proposed CBOE Rule 24.2(f)(13).
    \16\ Proposed CBOE Rule 24.2(f)(14).
    \17\ Proposed CBOE Rule 24.2(f)(15).
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    The CBOE also proposes to adopt CBOE Rule 24.2(g), which 
establishes maintenance standards for broad-based index options listed 
pursuant to CBOE Rule 24.2(f). Specifically, under proposed CBOE Rule 
24.2(g)(1), the requirements set forth above must continually be 
satisfied, except that the minimum market capitalization, eligibility, 
and average daily trading volume requirements outlined above, and the 
requirement that no single component security account for more than 10% 
of the weight of the index and that the five highest weighted component 
securities represent no more than 33% of the weight of the index in the 
aggregate, must be satisfied only as of the first day of January and 
July of each calendar year. In addition, proposed CBOE Rule 24.2(g)(2) 
provides that the number of component securities in the index (which 
initially must be at least 50) may not increase or decrease by more 
than 10% from the number of component securities in the index at the 
time of its initial listing. If the option fails to meet these 
maintenance standards, the CBOE may not open for trading any additional 
series of options of that class unless the continued listing of the 
class of index options has been approved by the Commission under 
Section 19(b)(2) of the Act.\18\
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    \18\ 15 U.S.C. 78s(b)(2).
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    In addition, the CBOE proposes to apply current CBOE Rule 24.4(a), 
which establishes a position limit of 25,000 contracts on the same side 
of the market, with a restriction of no more than 15,000 contracts in 
the near-term series, to broad-based index options listed pursuant to 
CBOE Rule 24.2(f). Options listed pursuant to proposed CBOE Rule 
24.2(f) will, in all other aspects, be traded pursuant to the 
Exchange's trading rules and procedures applicable to index options, 
and be covered under the Exchange's existing surveillance procedures 
for index options.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with Section 
6(b) \19\ of the Act in general and furthers the objectives of Section 
6(b)(5) \20\ in particular in that it should promote just and equitable 
principles of trade, serve to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
protect investors and the public

[[Page 8323]]

interest. According to CBOE, the adoption of the proposed rule change 
will enable CBOE to act expeditiously in listing options on new broad-
based security indexes in the same manner currently afforded to narrow-
based indexes as defined under Rule 24.2(b). In addition, CBOE believes 
that the proposed rule change will remove impediments to a free and 
open market place by providing competition for new products. CBOE 
further believes that the proposed rule change will permit CBOE to more 
effectively bring new products to the marketplace for competition, as 
well as permit CBOE to compete with other new products that may be 
introduced to the marketplace.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 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 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 neither received nor solicited written comments on the 
proposal.

III. 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-2005-59 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-2005-59. 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 CBOE. 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-2005-59 and should be submitted on or before March 
9, 2006.

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\21\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\22\ 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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    \21\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    To list options on a particular broad-based index, the CBOE 
currently must file a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Act \23\ and Rule 19b-4 thereunder.\24\ 
However, Rule 19b-4(e) \25\ provides that the listing and trading of a 
new derivative securities product by a self-regulatory organization 
(``SRO'') will not be deemed a proposed rule change pursuant to Rule 
19b-4(c)(1) \26\ if the Commission has approved, pursuant to Section 
19(b) of the Act,\27\ the SRO's trading rules, procedures, and listing 
standards for the product class that would include the new derivative 
securities product, and the SRO has a surveillance program for the 
product class.
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    \23\ 15 U.S.C. 78s(b)(1).
    \24\ 17 CFR 240.19b-4.
    \25\ 17 CFR 240.19b-4(e).
    \26\ 17 CFR 240.19b-4(c)(1).
    \27\ 15 U.S.C. 78s(b).
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    As described more fully above and in CBOE's filing, the CBOE 
proposes to establish listing standards for broad-based index options. 
The Commission's approval of the CBOE's listing standards for broad-
based index options will allow options that satisfy the listing 
standards to begin trading pursuant to Rule 19b-4(e),\28\ without 
constituting a proposed rule change within the meaning of Section 19(b) 
of the Act \29\ and Rule 19b-4 thereunder,\30\ for which notice and 
comment and Commission approval is necessary.\31\ The CBOE's ability to 
rely on Rule 19b-4(e) \32\ to list broad-based index options that meet 
the requirements of CBOE Rule 24.2(f) potentially reduces the time 
frame for bringing these securities to the market, thereby promoting 
competition and making new broad-based index options available to 
investors more quickly.
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    \28\ 17 CFR 240.19b-4(e).
    \29\ 15 U.S.C. 78s(b).
    \30\ 17 CFR 240.19b-4.
    \31\ When relying on Rule 19b-4(e), 17 CFR 240.19b-4(e), the SRO 
must submit Form 19b-4(e) to the Commission within five business 
days after the SRO begins trading the new derivative securities 
product. See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (File No. S7-13-98).
    If the underlying index does not satisfy all of the conditions 
in the listing standards contained in proposed CBOE Rule 24.2(f), 
the CBOE would be required to file a proposed rule change with the 
Commission pursuant to Section 19(b)(2) of the Act, 15 U.S.C. 
78s(b)(2), and obtain Commission approval to list options on that 
index.
    \32\ 17 CFR 240.19b-4(e).
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    The Commission notes that the CBOE has represented that it has 
adequate trading rules, procedures, listing standards, and a 
surveillance program for broad-based index options. CBOE's existing 
index option trading rules and procedures will apply to broad-based 
index options listed pursuant to CBOE Rule 24.2(f). Other existing CBOE 
rules, including provisions addressing sales practices and margin 
requirements, also will apply to these options. In addition, the CBOE 
proposes to establish position and exercise limits of 25,000 contracts 
on the same side of the market, with a restriction of no more than 
15,000 contracts in the near-term series, for broad-based index options 
listed pursuant to CBOE Rule 24.2(f), by applying CBOE Rule 24.4(a) to 
such

[[Page 8324]]

options.\33\ The Commission believes that the proposed position and 
exercise limits should serve to minimize potential manipulation 
concerns.
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    \33\ See CBOE Rule 24.4(a). Under CBOE Rule 24.5, the exercise 
limits for index option contracts are equivalent to the position 
limits prescribed for option contracts with the nearest expiration 
date in CBOE Rule 24.4 or 24.4A.
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    The CBOE represents that it has adequate surveillance procedures 
for broad-based index options and that it intends to apply its existing 
surveillance procedures for index options to monitor trading in broad-
based index options listed pursuant to CBOE Rule 24.2(f). In addition, 
because CBOE Rule 24.2(f) requires that each component of an index be 
an ``NMS stock,'' as defined in Rule 600 of Regulation NMS under the 
Act,\34\ each index component must be listed on a registered national 
securities exchange or Nasdaq. Accordingly, the CBOE will have access 
to information concerning trading activity in the component securities 
of an underlying index through the Intermarket Surveillance Group 
(``ISG'').\35\ CBOE Rule 24.2(f) also provides that non-U.S. index 
components that are not subject to a comprehensive surveillance sharing 
agreement between the CBOE and the primary market(s) trading the index 
components may comprise no more than 20% of the weight of the 
index.\36\ The Commission believes that these requirements will help to 
ensure that the CBOE has the ability to monitor trading in broad-based 
index options listed pursuant to CBOE Rule 24.2(f) and in the component 
securities of the underlying indexes.
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    \34\ 17 CFR 242.600.
    \35\ The ISG was formed on July 14, 1983, to, among other 
things, coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets. 
All of the registered national securities exchanges and the National 
Association of Securities Dealers, Inc., are members of the ISG. In 
addition, futures exchanges and non-U.S. exchanges and associations 
are affiliate members of the ISG.
    \36\ However, such non-U.S. index components, as ``NMS stocks,'' 
would be registered under Section 12 of the Act, 15 U.S.C. 78l, and 
listed and traded on a national securities exchange or Nasdaq, where 
there is last sale reporting.
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    The Commission believes that the requirements in CBOE Rule 24.2(f) 
regarding, among other things, the minimum market capitalization, 
trading volume, and relative weightings of an underlying index's 
component stocks are designed to ensure that the markets for the 
index's component stocks are adequately capitalized and sufficiently 
liquid, and that no one stock dominates the index. In addition, CBOE 
Rule 24.2(f) requires that the underlying index be ``broad-based,'' as 
defined in CBOE Rule 24.1(i)(1).\37\ The Commission believes that these 
requirements minimize the potential for manipulating the underlying 
index.
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    \37\ See supra note 6.
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    The Commission believes that the requirement in CBOE Rule 24.2(f) 
that the current index value be widely disseminated at least once every 
15 seconds by OPRA, CTA/CQ, NIDS, or by one or more major market data 
vendors during the time an index option trades on the CBOE should 
provide transparency with respect to current index values and 
contribute to the transparency of the market for broad-based index 
options. In addition, the Commission believes, as it has noted in other 
contexts, that the requirement in CBOE Rule 24.2(f) that an index 
option be settled based on the opening prices of the index's component 
securities, rather than on closing prices, could help to reduce the 
potential impact of expiring index options on the market for the 
index's component securities.\38\
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    \38\ See, e.g., Securities Exchange Act Release No. 30944 (July 
21, 1992), 57 FR 33376 (July 28, 1992) (order approving a CBOE 
proposal to establish opening price settlement for S&P 500 Index 
options).
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    The Exchange has requested accelerated approval of the proposed 
rule change. The Commission finds good cause for approving the proposed 
rule change, as amended, prior to the 30th day after the date of 
publication of the notice of filing in the Federal Register. The 
proposal implements listing and maintenance standards and position and 
exercise limits for broad-based index options substantially the same as 
those recently approved for the International Securities Exchange, 
which were subject to the full public comment period, with no comments 
received.\39\ The Commission does not believe that the Exchange's 
proposal raises any novel regulatory issues. Therefore, the Commission 
finds good cause, consistent with Section 19(b)(2) of the Act,\40\ to 
approve the proposed rule change, as amended, on an accelerated basis.
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    \39\ See Securities Exchange Act Release No. 52578 (October 7, 
2005), 70 FR 60590 (October 18, 2005). See also Securities Exchange 
Act Release No. 52781 (November 16, 2005), 70 FR 70898 (November 23, 
2005) (order approving on an accelerated basis generic broad-based 
index option listing standards for the American Stock Exchange).
    \40\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-CBOE-2005-59), as amended, 
is hereby approved on an accelerated basis.
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    \41\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-2197 Filed 2-15-06; 8:45 am]

BILLING CODE 8010-01-P