Document ID: SEC-2006-0443-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.
Posted Date: 2006-04-04T04:00Z

[Federal Register: April 4, 2006 (Volume 71, Number 64)]
[Notices]               
[Page 16845-16847]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04ap06-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53558; File No. SR-CBOE-2006-28]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change and Amendment No. 1 Thereto To Clarify the 
Application of Certain Exchange Rules to the Trading of Options on 
Exchange-Traded Fund Shares

March 28, 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 March 16, 2006, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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. On March 27, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ The Exchange filed the proposed rule change as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ which 
renders the proposal effective upon filing with the Commission. 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, the Exchange made minor clarifying and 
technical changes to the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 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 make amendments to clarify the application 
of certain Exchange rules to the trading of options on exchange-traded 
fund (``ETF'') shares.
    The text of the proposed rule change, as amended, is available on 
the Exchange's Web site (http://www.cboe.com), at the Exchange'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 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 those statements may be examined at the places specified in 
Item IV below and is set forth in Sections A, B, and C below.

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

1. Purpose
    The Exchange currently trades, among other things, options on ETFs. 
In conjunction with a recent review of Exchange rules, this filing 
proposes to make amendments to clarify the application of certain 
Exchange rules to the trading of ETF options.
    First, this filing proposes to make certain clarifying changes to 
CBOE Rule 6.3. CBOE Rule 6.3 pertains to trading halts and provides 
generally that Exchange Floor Officials may halt trading in any 
security in the interests of maintaining a fair and orderly market. 
Though the rule has general applicability to all securities traded on 
the Exchange and authorizes trading halts in any such security, certain 
of the factors identified in the rule that may be considered in making 
a decision to halt trading vary depending on the particular type of 
Exchange traded security while other factors apply generally to all 
securities.
    For example, the rule currently references factors for considering 
halts in the case of (i) a stock option, (ii) any security other than 
an option, and (iii) an index warrant or an index UIT interest and also 
references general, non-security type specific factors pertaining to 
rotations and unusual conditions or circumstances.\6\ The rule is being 
amended to change the references in the list of factors from particular 
types of securities (such as ``stock options'') to more general 
references (such as ``an option on a security'').
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    \6\ The existing rule text provides that ``[a]mong the factors 
that may be considered in making [a determination to halt trading] 
are whether: (i) In the case of a stock option, trading in the 
underlying security has been halted or suspended in the primary 
market, (ii) in the case of a stock option, the opening of such 
underlying security has been delayed because of unusual 
circumstances, (iii) in the case of any security other than an 
option, (A) the opening of such security has been delayed due to 
order imbalances, (B) the Exchange has been advised that the issuer 
of the security is about to make an important announcement affecting 
such issue, or (C) trading in such security has been halted or 
suspended in the primary market for such security. (iv) In the case 
of an index warrant or an index UIT interest, trading in index 
options has been halted pursuant to the provisions of Rule 24.7, (v) 
the extent to which the rotation has been completed or other factors 
regarding the status of the rotation, or (vi) other unusual 
conditions or circumstances are present.'' CBOE Rule 6.3(a).
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    Additionally, the Exchange is proposing to add similar clarifying 
language in Interpretation .04 of CBOE Rule 6.3, which addresses 
trading halts on the Exchange when a regulatory halt in an underlying 
stock has been declared in the primary market (a ``regulatory halt''). 
Since such regulatory halts may be declared for securities other than 
stock options, such as ETF options, Interpretation .04 is being amended 
to clarify that, in general, a halt on the Exchange can be made when 
there is a regulatory halt in the underlying security. This revision 
makes clear Interpretation .04's applicability to stock options, ETF 
options, and any other such options for which there is an underlying 
security.
    Second, this filing proposes to amend CBOE Rule 7.4, which rule 
pertains to certain obligations of Order Book Officials (``OBOs''). 
Specifically, CBOE Rule 7.4(a)(2) describes what types of orders shall 
ordinarily be accepted by an OBO and certain OBO responsibilities 
pertaining to the processing of orders that are submitted

[[Page 16846]]

through the Intermarket Options Linkage (``Linkage Orders''). This 
current rule states that for those index option classes on the 
Exchange's Hybrid Trading System (``Hybrid'') that are not assigned a 
Designated Primary Market-Maker (``DPM''), the OBO shall be responsible 
for (i) routing Principal Acting as Agent (P/A) orders and Satisfaction 
orders to other markets based on prior written instructions that must 
be provided by the Lead Market-Maker (``LMM'') to the OBO and (ii) 
handling all Linkage Orders or portions of Linkage Orders received by 
the Exchange that are not automatically executed.
    The Exchange currently has some options on ETFs that are not 
assigned to a DPM and that trade on Hybrid. One example is the DIAMOND 
(DIA) options. The intent of CBOE Rule 7.4 has always been that the 
responsibilities of the OBO is not only for index options classes on 
Hybrid that are not assigned a DPM but also for ETF options classes on 
Hybrid that are not assigned a DPM. However, the rule is currently 
unclear in making this point. For this reason, the Exchange is 
proposing that in CBOE Rule 7.4(a)(2), ``ETF options'' be added to the 
rule's current language to clarify that an OBO's responsibilities 
pertaining to the process of Linkage Orders applies for both (i) index 
options classes and (ii) ETF option classes, that are on Hybrid and 
that are not assigned a DPM.
    Third, this filing proposes to amend CBOE Rule 8.15, which governs 
the LMM and Supplemental Market-Maker (``SMM'') appointment process in 
non-Hybrid classes, to make the list of factors considered in selecting 
LMMs and SMMs consistent with the language in the Exchange rule 
governing LMM appointments in Hybrid classes. Specifically, the current 
factors in CBOE Rule 8.15(a)(1) that are considered in selecting LMMs 
and SMMs in non-Hybrid classes include: Adequacy of capital, experience 
in trading index options, presence in the trading crowd, adherence to 
Exchange rules and ability to meet certain other obligations.
    Similarly, current CBOE Rule 8.15A governs the factors that are 
considered in selecting LMMs in Hybrid classes.\7\ The current factors 
in CBOE Rule 8.15A(a)(1) include: Adequacy of capital, experience in 
trading index options or options on ETFs, presence in the trading 
crowd, adherence to Exchange rules and ability to meet certain other 
obligations. The factors used in selecting LMMs and SMMs for both 
Hybrid and non-Hybrid classes are the same except for the additional 
factor of experience in trading options on ETFs for Hybrid classes.
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    \7\ SMMs do not exist in Hybrid.
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    This filing proposes to amend CBOE Rule 8.15 to add experience in 
trading ``options on ETFs'' as an additional factor used in selecting 
LMMs and SMMs in non-hybrid classes. Currently, options on ETFs are 
traded on both Hybrid and non-Hybrid classes. For this reason, the 
Exchange is proposing to make CBOE Rule 8.15 consistent with the 
factors used in CBOE Rule 8.15A.
2. Statutory Basis
    By proposing to make certain amendments to clarify the application 
of certain Exchange Rules as they pertain to the trading of options on 
ETF shares, the Exchange believes the proposed rule change is 
consistent with Section 6(b) of the Act \8\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \9\ 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 in general to protect 
investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the foregoing proposed rule change, as amended, does not: 
(i) Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
Exchange has given the Commission written notice of its intent to file 
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 proposed rule change, as amended, has 
become effective pursuant to Section 19(b)(3)(A) of the Act \10\ and 
Rule 19b-4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). The Commission notes that the 
Exchange satisfied the pre-filing five-day notice requirement.
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    At any time within 60 days of the filing of the 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.\12\
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    \12\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change, as 
amended, under Section 19(b)(3)(C) of the Act, the Commission 
considers the period to commence on March 27, 2006, the date on 
which the Exchange filed Amendment No. 1. See 15 U.S.C. 
78s(b)(3)(C).
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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, 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-2006-28 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-2006-28. 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

[[Page 16847]]

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-2006-28 and should be submitted on or before April 
25, 2006.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
Nancy M. Morris,
Secretary.
[FR Doc. E6-4799 Filed 4-3-06; 8:45 am]

BILLING CODE 8010-01-P