[Federal Register: September 11, 2007 (Volume 72, Number 175)]
[Notices]
[Page 51878-51880]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11se07-112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56350; File No. SR-CBOE-2007-79]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Accelerated Approval of Proposed Rule
Change and Amendment No. 1 Thereto To Eliminate Position and Exercise
Limits for Options on the Russell 2000 Index, and To Specify That
Certain Reduced-Value Options on Broad-Based Security Indexes Have No
Position and Exercise Limits
September 4, 2007.
I. Introduction
On July 17, 2007, 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 eliminate position and
exercise limits for options on the Russell 2000 Index (``RUT'') and to
specify that reduced-value options on broad-based security indexes for
which full-value options have no position and exercise limits similarly
have no position and exercise limits. On August 2, 2007, the Exchange
filed Amendment No. 1 to the proposed rule change. The proposed rule
change was published for comment in the Federal Register on August 9,
2007 for a 15-day comment period.\3\ The Commission received no
comments on the proposed rule change. This order approves the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 56191 (August 2,
2007), 72 FR 44894.
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II. Description of the Proposal
CBOE proposes to amend Rules 24.4 and 24.5 to eliminate position
and exercise limits for options on RUT, a broad-based security index.
In connection with this change, RUT options would be subject to
specific reporting requirements and additional margin provisions
imposed by CBOE with respect to options on the Standard & Poor's 500
Index (``SPX''), the Standard & Poor's 100 Index (``OEX''), the Dow
Jones Industrial Average (``DJX''), and the Nasdaq-100 Index (``NDX''),
other broad-based index options that, under the Exchange's current
rules, are not subject to position and exercise limits.
The Exchange notes that in approving the elimination of position
and exercise limits for SPX, OEX, DJX, and NDX options, the Commission
considered the enormous capitalization of each of these indexes and the
deep and liquid markets for the securities underlying each index that
significantly reduced concerns of market manipulation or disruption in
the underlying markets.\4\ CBOE noted that the market capitalization of
RUT, as of the date of filing of the proposed rule change, was $1.73
trillion and the average daily trading volume (``ADTV''), in the
aggregate, for the component securities of RUT, for the period as of
three months prior to the date of filing of the proposed rule change,
was 535 million shares. For the same period, the ADTV for options on
RUT was 79,000 contracts.
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\4\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (``SPX/OEX/
DJX Permanent Approval Order''); and 52650 (October 21, 2005), 70 FR
62147 (October 28, 2005) (SR-CBOE-2005-41) (``NDX Approval Order'')
(collectively, ``SPX/OEX/DJX/NDX Approval Orders''). See also
Securities Exchange Act Release No. 40969 (January 22, 1999), 64 FR
4911 (February 1, 1999) (SR-CBOE-98-23) (``SPX/OEX/DJX Pilot
Approval Order'').
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The Exchange also states that in the SPX/OEX/DJX/NDX Approval
Orders, the Commission noted that the financial requirements imposed by
both the Exchange and the Commission serve to address any concerns that
an Exchange member or its customer(s) may try to maintain an
inordinately large unhedged position in the index options. CBOE notes
that these same financial requirements would apply equally to RUT
options. The Exchange further notes that it has the authority to impose
additional margin upon accounts maintaining underhedged positions and
is able to monitor accounts 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 \5\ to the extent of any resulting margin deficiency.\6\
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\5\ 17 CFR 240.15c3-1.
\6\ See Interpretation and Policy .04 to CBOE Rule 24.4.
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CBOE indicates that the Commission, in the SPX/OEX/DJX/NDX Approval
Orders, relied substantially 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 on
SPX, OEX, DJX, and NDX options. The Exchange represents that it
monitors the trading in RUT options in the same manner as trading in
SPX, OEX, DJX, and NDX options and that the current CBOE surveillance
procedures are adequate to continue monitoring RUT options. In
addition, the Exchange intends to impose a reporting requirement on
CBOE members or member organizations (other than CBOE market-makers)
that trade RUT options. This reporting requirement, which is currently
imposed on members who trade SPX, OEX, and NDX options, would require
members or member organizations 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's
Department of Market Regulation.\7\ The Exchange also would be
permitted to specify other reporting requirements, as well as the limit
at which the reporting requirement may be triggered.\8\
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\7\ See Interpretation and Policy .03 to CBOE Rule 24.4. The
reporting requirement for DJX options is triggered at 1 million
contracts.
\8\ Id.
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In addition, CBOE proposes to amend Rule 24A.7 relating to the
trading of FLEX broad-based index options to eliminate position and
exercise limits on FLEX RUT options, and to adopt for FLEX RUT options
the same 100,000 contract reporting requirement and the additional
margin provisions that currently apply to FLEX SPX, OEX, and NDX
options. The Exchange believes that eliminating position and exercise
limits for RUT options and FLEX RUT options is consistent with CBOE
rules relating to similar broad-based indexes and also would allow CBOE
members and their customers greater hedging and investment
opportunities.
The Exchange notes that it lists and trades several reduced-value
options on broad-based indexes for which the Exchange also lists and
trades full-value options (e.g., Mini-SPX Index (``XSP'') options,
Mini-Russell 2000 Index (``RMN'') options, and Mini-Nasdaq-100 Index
(``MNX'') options). The Exchange states that when it received approval
to list and trade reduced-value options on broad-based indexes, the
proscribed position and exercise limits were equivalent to the reduced-
value contract
[[Page 51879]]
factor (e.g., 10) multiplied by the applicable position and exercise
limits for the full-value option on the same broad-based index. In
other words, the Exchange's existing rules applicable to position and
exercise limits for full-value broad-based index options are used to
calculate the position and exercise limits for reduced-value options.
Conversely, when the Exchange's rules specifically state that
certain full-value broad-based index options have no position and
exercise limits, the same equally applies to reduced-value options on
those same broad-based indexes. The Exchange proposes to amend Rules
24.4 and 24.5 in order to codify this provision. 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 to amend Rules 24.4
and 24A.7 to reflect that such aggregation will apply when calculating
reporting requirements.
Finally, the Exchange proposes to make technical changes to Rules
24.4, 24.5, and 24A.7 to specify that there are no position and
exercise limits for European-Style Exercise S&P 100 Index options
(``XEO'') and FLEX XEO options, and to add XEO options to the position
reporting and margin rules.\9\ The Exchange notes that the only
difference between OEX and XEO options is the manner in which the
respective contracts are exercised (i.e. American-style versus
European-style).
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\9\ See Securities Exchange Act Release No. 44556 (July 16,
2001), 66 FR 38046 (July 20, 2001) (SR-CBOE-2001-39) (``XEO Approval
Order'').
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III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
exchange.\10\ In particular, the Commission believes the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act, which requires that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principals of trade, to foster cooperation
and coordination with persons engaged in 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.\11\
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\10\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\11\ 15 U.S.C. 78f(b)(5). [FEDREG][VOL]*[/VOL][NO]*[/
NO][DATE]*[/DATE][NOTICES][NOTICE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT][/PREAMB][SUPLINF][HED]*[/HED]
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Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.
These rules are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate or
disrupt the underlying market so as to benefit the holder of the
options position.
The Commission notes that it continues to believe that the
fundamental purposes of position and exercise limits remain valid.
Nevertheless, the Commission believes that experience with the trading
of index options as well as enhanced reporting requirements and the
Exchange's surveillance capabilities have made it possible to approve
the elimination of position and exercise limits on certain broad-based
index options. Thus, in 2001, the Commission approved a CBOE proposal
to eliminate permanently position and exercise limits for options on
SPX, OEX, and DJX,\12\ and, in 2005, the Commission approved a CBOE
proposal to eliminate permanently position and exercise limits for
options on NDX.\13\ The Commission believes that the considerations
upon which it relied in approving the elimination of position and
exercise limits for SPX, OEX, DJX, and NDX options equally apply with
respect to options on RUT.
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\12\ See SPX/OEX/DJX Permanent Approval Order, supra note 4.
\13\ See NDX Approval Order, supra note 4.
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As noted by CBOE, the market capitalization of RUT as of the date
of filing of the proposal was $1.73 trillion. The ADTV for the period
as of three months prior to the date of filing of the proposed rule
change for all underlying components of the index was 535 million
shares. The Commission believes that the enormous market capitalization
of RUT and the deep, liquid market for the underlying component
securities significantly reduce concerns regarding market manipulation
or disruption in the underlying market. Removing position and exercise
limits for RUT options may also bring additional depth and liquidity,
in terms of both volume and open interest, to RUT options without
significantly increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.
In addition, the Commission believes that financial requirements
imposed by both the Exchange and the Commission adequately address
concerns that a CBOE member or its customer may try to maintain an
inordinately large unhedged position in RUT options. Current risk-based
haircut and margin methodologies serve to limit the size of positions
maintained by any one account by increasing the margin and/or capital
that a member must maintain for a large position held by itself or by
its customer.\14\ Under the proposal, CBOE also would have the
authority under its rules to impose a higher margin requirement upon an
account maintaining an under-hedged position when it determines a
higher requirement is warranted. As noted in the CBOE rules, the
clearing firm carrying the account would be subject to capital charges
under Rule 15c3-1 under the Act to the extent of any margin deficiency
resulting from the higher margin requirement.
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\14\ See SPX/OEX/DJX Pilot Approval Order, supra note 4.
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In approving the elimination of position and exercise limits for
options on the SPX, OEX, DJX, and NDX, the Commission took note of the
enhanced surveillance and reporting safeguards that CBOE had adopted to
allow it to detect and deter trading abuses that might arise as a
result.\15\ CBOE represents that it monitors trading in RUT options in
much the same manner as trading in SPX, OEX, DJX, and NDX options.
These safeguards, including the 100,000-contract reporting requirement
described above, would allow CBOE to monitor large positions in order
to identify instances of potential risk and to assess and respond to
any market concerns at an early stage. In this regard, the Commission
expects CBOE to take prompt action, including timely communication with
the Commission and other marketplace self-regulatory organizations
responsible for oversight of trading in component stocks, should any
unanticipated adverse market effects develop. Moreover, as previously
noted, the Exchange has the flexibility to specify other reporting
requirements, as well as to vary the limit at which the reporting
requirements may be triggered.
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\15\ See id. and NDX Approval Order, supra note 4.
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The Commission further notes that in eliminating position and
exercise limits for FLEX RUT options, CBOE is adopting the same
additional rules for these options that currently exist for FLEX SPX,
OEX, and NDX options.
[[Page 51880]]
In addition, the Commission notes that the Exchange's existing
rules applicable to position and exercise limits for full-value broad-
based index options are used to calculate the position and exercise
limits for reduced-value options. The Exchange proposes to amend its
rules for those specified broad-based index options that do not have
position and exercise limits to specifically state that there will not
be position and exercise limits on the reduced-value options on those
same broad-based index options. The Exchange also proposes to amend its
rules to state that reduced-value options will be aggregated with full-
value options when calculating reporting requirements.
The Exchange also is making technical corrections to its rules to
reflect that there are no position and exercise limits for XEO options.
The Commission notes that position and exercise limits for XEO options
were previously eliminated and CBOE is simply updating its rules to
reflect this fact.\16\
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\16\ See XEO Approval Order, supra note 9; see also SPX/OEX/DJX
Permanent Approval Order, supra note 4.
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The Commission finds good cause, consistent with section 19(b)(2)
of the Act,\17\ to grant accelerated approval of the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission notes, as stated
above, that RUT has similar characteristics to the other broad-based
indexes for which position and exercise limits have been eliminated for
options on those indexes. Specifically, the Commission believes that
the enormous market capitalization of RUT and the deep, liquid market
for the underlying component securities significantly reduce concerns
regarding market manipulation or disruption in the underlying market.
The Commission received no comments regarding the proposed rule change
and the Commission believes that the proposed rule change raises no new
regulatory issues of material concern. The Commission believes that
accelerating approval of the proposed rule change will allow CBOE
members and their customers greater hedging and investment
opportunities with respect to RUT options without further delay.
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\17\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-CBOE-2007-79), as modified
by Amendment No. 1, be, and it hereby is, approved on an accelerated
basis.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-17784 Filed 9-10-07; 8:45 am]
BILLING CODE 8010-01-P