Document ID: SEC-2008-1443-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2008-10-21T04:00Z

[Federal Register: October 21, 2008 (Volume 73, Number 204)]
[Notices]               
[Page 62577-62578]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21oc08-115]                         

[[Page 62577]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58778; File No. SR-CBOE-2008-90]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change Related 
to Trades in Restricted Classes

    On August 29, 2008, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE Rules 6.25 and 
24.16 (collectively, the ``Obvious Error Rules'') to permit the 
nullification of opening transactions that do not satisfy the 
requirement of CBOE Rule 5.4 (withdrawal of approval of underlying 
security) and to clarify certain provisions in CBOE Rule 5.4 and the 
Obvious Error Rules. The proposed rule change was published for comment 
in the Federal Register on September 13, 2008.\3\ The Commission 
received no comment letters on the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 58460 (September 4, 
2008), 73 FR 53060.
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    The Exchange proposes to amend the Obvious Error Rules to permit 
the nullification of opening transactions in ``restricted series'' that 
do not satisfy the requirements of CBOE Rule 5.4.\4\ Currently, when 
the Exchange makes a determination that trading in a series is 
restricted pursuant to CBOE Rule 5.4, the Exchange notifies the 
membership of that determination through issuance of a regulatory 
circular. In addition, the Exchange's systems are programmed to 
automatically restrict the entry of electronic opening transactions. 
However, opening orders entered in open outcry are not systemically 
prevented and, in addition, opening market-maker activity is still 
permitted both electronically and in open outcry. As a result, it is 
possible that an opening transaction that does not satisfy the 
requirements of CBOE Rule 5.4 may occur inadvertently. In order to 
address these scenarios, the Exchange proposes to permit the 
nullification of opening transactions in CBOE Rule 5.4 restricted 
series provided notification is received by designated personnel in the 
Exchange's control room from any member or person associated with a 
member that believes it participated in such transaction within the 
timeframes prescribed in CBOE Rules 6.25(b)(1) and 24.16(b)(1). In 
addition, absent unusual circumstances, designated personnel in the 
control room (either on their own motion or upon request of a member) 
would initiate action within sixty (60) minutes of such a transaction. 
Such actions would be reviewed and determinations rendered by the 
senior official in the control room. Any determinations rendered by the 
senior official would be subject to the same review procedures as 
determinations rendered by Trading Officials.
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    \4\ In relevant part, CBOE Rule 5.4 provides that, whenever the 
Exchange determines that an underlying security previously approved 
for Exchange option transactions does not meet the then current 
requirements for continuance of such approval or for any other 
reason should no longer be approved, the Exchange will not open for 
trading any additional series of options of the class covering that 
underlying security and therefore two floor officials, in 
consultation with a designated senior executive officer of the 
Exchange, may prohibit any opening purchase transactions in series 
of options of that class previously opened (except that (i) opening 
transactions by Market-Makers executed to accommodate closing 
transactions of other market participants and (ii) opening 
transactions by CBOE member organizations to facilitate the closing 
transactions of public customers executed as crosses pursuant to and 
in accordance with paragraph (b) or (d) of CBOE Rule 6.74, Crossing 
Orders, may be permitted), to the extent it deems such action 
necessary or appropriate (such series are referred to herein and in 
the proposed new text in CBOE Rules 6.25 and 24.16 as ``restricted 
series''); provided, however, that where exceptional circumstances 
have caused an underlying security not to comply with the Exchange's 
current approval maintenance requirements, regarding number of 
publicly held shares or publicly held principal amount, number of 
shareholders, trading volume or market price the Exchange, in the 
interest of maintaining a fair and orderly market or for the 
protection of investors, may determine to continue to open 
additional series of option contracts of the class covering that 
underlying security.
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    The Exchange also proposes to permit a member to initiate an 
Obvious Error Rule action by contacting either a Trading Official or 
designated personnel in the control room. Under the current rule, a 
member is only permitted to contact Trading Officials to initiate such 
action. Once either a Trading Official or a control room designee is 
contacted, all reviews and determinations will continue to be rendered 
by Trading Officials except that, as proposed herein, actions to 
nullify an opening trade in a restricted series will be reviewed and 
determinations rendered by the senior official in the control room.
    Lastly, the Exchange proposes to clarify in the text of CBOE Rule 
5.4 that the restrictions on opening transactions contained in the 
rule, as well as the related exceptions, apply to both opening 
purchases and opening sales in restricted series. The Exchange notes 
that its intention is that the restrictions, and related exceptions, 
also apply to opening sales; however, the current rule text indicates 
that the restrictions are applicable only to opening purchase 
transactions. Proposed changes to the rule text make this clear.
    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 and, in 
particular, the requirements of section 6(b) of the Act \5\ and the 
rules and regulations thereunder. Specifically, the Commission finds 
that the proposal is consistent with section 6(b)(5) of the Act,\6\ in 
that the proposal 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.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, in approving proposals relating to 
adjustment or nullification of trades involving obvious errors, it has 
stated that the determination of whether an obvious error has occurred 
and the process for reviewing such a determination should be based on 
specific and objective criteria and subject to specific and objective 
procedures.\7\ The Commission believes that the CBOE's proposal 
provides specific and objective criteria for determining when 
transactions in restricted classes should be nullified. Specifically, 
under the rule, opening transactions that do not satisfy the 
requirement of CBOE Rule 5.4 will be nullified. Market participants 
will be on notice that trading in a series is restricted pursuant to 
CBOE Rule 5.4 through a regulatory circular. The Commission also 
believes that other proposed changes to the Obvious Error Rules and 
Rule 5.4 are specific and objective.
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    \7\ See, e.g., Securities Exchange Release Nos. 54228 (July 27, 
2006), 71 FR 44066 (August 3, 2006) (SR-CBOE-2006-14) (approving 
revisions to CBOE's Obvious Error Rule) and 48097 (June 26, 2003), 
68 FR 39604 (July 2, 2003) (SR-CBOE-2003-10) (approving revisions to 
CBOE's Obvious Error Rule).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-2008-90) is hereby 
approved.
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    \8\ 15 U.S.C. 78s(b)(2).

[[Page 62578]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-24971 Filed 10-20-08; 8:45 am]

BILLING CODE 8011-01-P