[Federal Register: January 24, 2008 (Volume 73, Number 16)]
[Notices]
[Page 4293-4295]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24ja08-119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57161; File No. SR-CBOE-2006-36]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change as Modified by
Amendments No. 1 and 2 Thereto Regarding FLEX Equity Option Opening
Transactions
January 16, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 14, 2006, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange''), filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been
substantially prepared by CBOE. On December 24, 2007, the Exchange
filed Amendments No. 1 \3\ and 2 \4\ to the proposed rule change. 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\ Amendment No. 1 replaced the original filing in its
entirety.
\4\ Amendment No. 2 replaced Amendment No. 1 in its entirety.
The purpose of Amendment 2 was to (i) modify the proposed formula
contained in Rule 24A.4 applicable to determining the minimum value
size for FLEX Equity Options in new series to change the minimum
contract component from the originally proposed 100 contracts to 150
contracts, and make this change applicable on a 1\1/2\-year pilot
program basis; (ii) propose changes to the formula applicable to
determining the minimum value size in currently-opened series; (iii)
include corresponding amendments to Rule 24B.4; and (iv) provide
additional information in the Purpose section of the filing.
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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 regarding the minimum value size
for an opening transaction in FLEX Equity Option series on a pilot
program basis. The text of the proposed rule change is available on the
Exchange's Web site (http://www.cboe.org/Legal), at the Office of the
Secretary, CBOE 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, 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 those statements may be examined at the places specified in
Item IV 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 filing is to modify the minimum value size for
an opening transaction (other than FLEX Quotes responsive to a FLEX
Request for Quotes) in any FLEX Equity Option \5\ series in which there
is no open interest at the time the Request for Quotes is submitted.
Currently, the minimum opening transaction value size in the case of a
FLEX Equity Options series is the lesser of (i) 250 contracts or (ii)
the number of contracts overlying $1 million in the underlying
securities.\6\ The Exchange proposes to reduce the ``250 contracts''
component to ``150 contracts;'' the $1 million underlying value
component will continue to apply unchanged.\7\
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\5\ FLEX Equity Options are flexible exchange-traded options
contracts which overlie equity securities. FLEX Equity Options
provide investors with the ability to customize basic option
features including size, expiration date, exercise style, and
certain exercise prices.
\6\ Under this formula, an opening transaction in a FLEX Equity
series in a stock priced at $40 or more would reach the $1 million
limit before it would reach the contract size limit, i.e., 250
contracts times the multiplier (100) times the stock price ($40)
equals $1 million in underlying value. For a FLEX Equity series in a
stock priced at less than $40, the 250 contract size limit applies.
\7\ Under this proposed formula, an opening transaction in a
FLEX Equity series in a stock priced at approximately $66.67 or more
would reach the $1 million limit before it would reach the contract
size limit, i.e., 150 contracts times the multiplier (100) times the
stock price ($66.67) equals just over $1 million in underlying
value. For a FLEX Equity series in a stock priced at less than
$66.67, the 150 contract size limit would apply.
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The proposal would become effective on a pilot program basis for a
period of 1\1/2\ years. If the Exchange were to propose an extension,
expansion, or permanent implementation of the program, the Exchange
would submit, along with a filing proposing any necessary amendments to
the program, a pilot program report. The report would include, for the
period during which the program was in effect: (i) Data and analysis on
the open interest and trading volume in FLEX Equity Options for which
series were opened with a minimum opening size of 150 to 249 contracts
and less than $1 million in underlying value; and (ii) analysis on the
types of investors that initiated opening FLEX Equity Options
transactions (i.e., institutional, high net worth, or retail, if any).
The report would be submitted to the Commission at least ninety days
prior to the expiration date of the 1\1/2\ year pilot program.
The Exchange believes that the reduction of the minimum value size
for opening a series in the manner proposed provides FLEX-participating
members with greater flexibility in structuring the terms of FLEX
Equity Options that best comports with their and their customers'
particular needs. The Exchange notes that the opening size requirement
for FLEX Equity Options was originally put in place to limit
participation in FLEX Equity Options to sophisticated, high net worth
investors rather than retail investors.\8\ Based on the Exchange's
experience to date with such options, it appears that the existing 250
contract component is too large to accommodate the needs of FLEX-
participating members and their institutional and high net worth
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customers and thus has become overly restrictive. In particular, the
Exchange has recently received numerous requests from broker-dealers
representing institutional investors that the minimum value size for
opening transactions be reduced.
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\8\ The existing customer base for FLEX Options includes both
institutional investors and high net worth individuals.
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In proposing the reduction of the 250 contract component to 150
contracts, CBOE is cognizant of the desire to continue to provide the
requisite amount of investor protection that the minimum opening size
requirement was originally designed to achieve, on the one hand, and
the need for market participants to have the flexibility to serve their
customers' particular investment needs, on the other hand. As discussed
further below, CBOE is also aware of the over-the-counter (``OTC'')
market in customized options, which can take on contract
characteristics similar to FLEX Options but for which similar opening
size restrictions do not apply. In light of these considerations, CBOE
believes it is appropriate to modify the FLEX Equity Option minimum
opening size requirement in the manner proposed. By reducing the 250
contract component to 150 contracts, the Exchange believes FLEX-
participating members could better serve the needs of investors, while
maintaining a requirement substantial enough to limit participation to
investors who have adequate resources, thereby continuing to provide
the requisite amount of investor protection that the opening size
requirement was originally designed to achieve. Also, limiting the term
of the program to a period of 1\1/2\ years would give the Exchange time
to consider whether it should request that the program should be
extended, expanded, and/or made permanent. If so, CBOE would seek
Commission approval.
In further support of its proposal, the Exchange notes that the
minimum value size for currently-opened FLEX Equity Option series is
already set at 100 contracts, and the minimum size for FLEX Quotes
entered in response to a FLEX Request for Quotes is set at 25 contracts
(whether in a new series or in a currently-opened series).\9\ If FLEX
Equity Option transactions can occur in increments of 100 or more
contracts in subsequent opening transactions, the Exchange believes it
is reasonable to permit the initial series opening transaction size to
be 150 contracts (or $1 million in underlying value, whichever is
less).
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\9\ Specifically, the minimum value size for a transaction in
any currently-opened FLEX Equity Option series is 100 contracts in
the case of opening transactions and 25 contracts in the case of
closing transactions (or any lesser amount in a closing transaction
that represents the remaining underlying size, whichever is less).
Additionally, the minimum value size for a FLEX Quote entered in
response to a Request for Quotes in FLEX Equity Options is the
lesser of 25 contracts or the remaining underlying size in a closing
transaction. See Exchange Rules 24A.4(a)(4)(iii)-(iv) and
24B.4(a)(5)(iii)-(iv). A ``FLEX Quote'' refers to (i) FLEX bids and
offers entered by Market-Makers and (ii) orders to purchase and
orders to sell FLEX Options entered by Exchange members other than
Market-Makers, in each case in response to a Request for Quotes. See
CBOE Rules 24A.1(h) and 24B.1(k).
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The Exchange also believes that modifying the minimum opening
transaction value size in this way will further broaden the base of
institutional investors that use FLEX Equity Options to manage their
trading and investment risk, including investors that currently trade
in the OTC market for customized options which, as indicated above, can
take on contract characteristics similar to FLEX Options but for which
similar opening size restrictions do not apply. By reducing the minimum
opening size requirements for FLEX Equity Options, market participants
will have greater flexibility in determining whether to execute their
customized options in an exchange environment or in the OTC market.
CBOE believes market participants benefit from being able to trade
these customized options in an exchange environment in several ways,
including, but not limited to, enhanced efficiency in initiating and
closing out positions; increased market transparency; and heightened
contra-party creditworthiness due to the role of The Options Clearing
Corporation as issuer and guarantor of FLEX Options.
Finally, the Exchange is also proposing to modify the minimum value
size for an opening transaction in a currently-opened FLEX Equity
series (other than FLEX Quotes responsive to a FLEX Request for
Quotes). As discussed above, presently, the minimum transaction value
size for an opening transaction in a currently-opened series is 100
contracts. The Exchange is proposing to modify the minimum size formula
to the lesser of (i) 100 contracts or (ii) the number of contracts
overlying $1 million in the underlying securities. This change would
only impact those FLEX Equity series in which the underlying stock is
trading at $100 or more.\10\
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\10\ Under this proposed formula, a transaction in a currently-
opened FLEX Equity series in a stock priced at $100 or more would
reach the $1 million limit before it would reach the contract size
limit, i.e., 100 contracts times the multiplier (100) times the
stock price ($100) equals $1 million in underlying value.
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The FLEX minimum size requirements have generally provided that the
minimum size for subsequent opening transactions in a currently-opened
series is smaller than the minimum size needed to initially open the
series. Therefore, Exchange believes that this change is necessary for
there to be consistency between the minimum size requirements for new
series and currently-opened series when the underlying stock is trading
at $100 or more. For example, a new FLEX Equity series in a stock
trading at $110 could open with an initial transaction size of 91
contracts, i.e., 91 contracts times the multiplier (100) times the
stock price ($110) equals just over $1 million in underlying value.
Once the series is opened, absent the proposed change, any further
opening transactions would require a minimum contract size of 100
contracts. However, if the initial series opening can occur with a 91
contract transaction, the Exchange believes that it is reasonable to
permit the size of subsequent opening transactions in the series to be
for 91 contracts.
2. Statutory Basis
By providing FLEX-participating members and their customers greater
flexibility to trade FLEX Equity Options by lowering from 250 to 150
the minimum number of contracts required to open a series, the Exchange
believes the proposed rule change is consistent with Section 6(b) of
the Act \11\ in general and furthers the objectives of Section 6(b)(5)
of the Act \12\ 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, protect investors and the public interest.
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\11\ 15 U.S.C. 78(f)(b).
\12\ 15 U.S.C. 78(f)(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
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
Within 35 days of the date of publication of this notice in the
Federal
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Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which CBOE consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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-2006-36 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-2006-36. 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 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-2006-36 and should be
submitted on or before February 14, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E8-1178 Filed 1-23-08; 8:45 am]
BILLING CODE 8011-01-P