[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Notices]
[Pages 12481-12483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4514]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57414; File No. SR-BSE-2008-12]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Make Permanent Two Pilot Programs That Increase Position and Exercise
Limits on Equity Options
March 3, 2008.
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 February 29, 2008, the Boston Stock Exchange, Inc. (``Exchange'' or
``BSE'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been substantially prepared by the Exchange.
The Exchange has designated this proposal as non-controversial under
Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6)
thereunder,\4\ which renders the proposed rule change effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 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 amend the Rules of the Boston Options
Exchange (``BOX''). The Exchange is proposing to make permanent the
position and exercise limits that the Exchange is currently applying to
equity options on a pilot basis. The text of the rule proposal is
available on the Exchange's Web site (http://www.bostonstock.com), at
the offices of the Exchange, 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 these 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 proposed rule change is to make permanent two
pilot programs that increase position and exercise limits for equity
options. To permanently establish the two pilot programs, the Exchange
proposes to amend Section 7 (Position Limits) and
[[Page 12482]]
Section 9 (Exercise Limits) to Chapter III of the BOX Rules. Section 7
subjects equity options to one of five different position limits
depending on the trading volume and outstanding shares of the
underlying security. Section 9 establishes exercise limits for the
corresponding options at the same levels as the corresponding
security's position limits.\5\
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\5\ Section 9 of Chapter III of the BOX Rules states, ``... no
Options Participant shall exercise, for any account in which it has
an interest or for the account of any Customer, a long position in
any options contract where such Options Participant or Customer,
acting alone or in concert with others, directly or indirectly, has
or will have: (i) Exercised within any five (5) consecutive business
days aggregate long positions in any class of options traded on BOX
in excess of'' the established limits set by the Exchange.
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The first pilot program, the ``Section 7(a) Pilot Program,''
commenced on March 3, 2005, and provides for an increase to the
standard (or ``non-pilot'') position and exercise limits for equity
option contracts and for options on the PowerShares QQQ Trust
(``QQQQ'').\6\
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\6\ The Section 7(a) Pilot Program was approved by the
Commission on March 3, 2005. See Securities Exchange Act Release No.
51317 (March 3, 2005), 70 FR 12254 (March 11, 2005) (SR-BSE-2005-
10). The Section 7(a) Pilot Program has been extended five times for
six month periods by the Commission, and expires on March 1, 2008.
See Securities Exchange Act Release Nos. 52264 (August 15, 2005), 70
FR 48992 (August 22, 2005) (SR-BSE-2005-37); 53347 (February 22,
2006), 71 FR 10573 (March 1, 2006) (SR-BSE-2006-07); 54388 (August
30, 2006), 71 FR 52833 (September 7, 2006) (SR-BSE-2006-32); 55260
(February 8, 2007), 72 FR 7487 (February 15, 2007) (SR-BSE-2007-04);
and 56268 (August 15, 2007), 72 FR 47092 (August 22, 2007) (SR-BSE-
2007-41). In connection with the March 21, 2007 transfer of
sponsorship of the Nasdaq-100 Trust, the name of the trust was
changed to the ``PowerShares QQQ Trust.'' See QQQQ prospectus
available at http://www.powershares.com/pdf/P-QQQ-PRO-1.pdf.
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The second pilot program, the ``iShares Russell 2000 Index Fund
(`IWM') Option Pilot Program,'' commenced on January 23, 2007, and
increases the position and exercise limits for IWM options from 250,000
contracts to 500,000 contracts.\7\
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\7\ The IWM Position Limit Pilot Program doubles the position
and exercise limits for IWM options under the Section 7(a) Pilot
Program. See BOX Rules, Chapter III, Section 7, Supplementary
Material .02. Absent both of these pilot programs, the standard
position and exercise limits for IWM options are 75,000 option
contracts. The proposal that established the IWM Option Pilot
Program was effective upon filing. See Securities Exchange Act
Release No. 55171 (January 25, 2007), 72 FR 4549 (January 31, 2007)
(SR-BSE-2007-03). The IWM Option Pilot Program has been extended
twice by the Commission and expires on March 1, 2008. See Securities
Exchange Act Release Nos. 56051 (July 12, 2007), 72 FR 39469 (July
18, 2007) (SR-BSE-2007-30); and 57173 (January 18, 2008), 73 FR 4653
(January 25, 2008) (SR-BSE-2008-03).
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Violations
Both pilot programs were in effect during the period of January 1,
2007 through January 1, 2008. Any violations of the position limits
established during the pilot period which may have occurred during this
time were deemed inadvertent--due primarily to miscounting, technical
problems, or a misinterpretation of position limit calculation
methodologies. None of these violations were deemed to be a result of
manipulative activities.
Growth in Options Market
Since the last position limit increase, there has been an
exponential increase in the overall volume of exchange traded options.
Part of this volume is attributable to a corresponding increase in the
number of overall market participants. This growth in market
participants has in turn brought about additional depth and increased
liquidity in exchange traded options.
Manipulation
Since the last position limit increase, and throughout the duration
of the two pilot programs, the Exchange has not encountered any
regulatory issues regarding the applicable position limits, and states
that there is a lack of evidence of market manipulation schemes, which
justifies making permanent the Section 7(a) and IWM Option Pilot
Programs.
The Exchange believes that position and exercise limits, at the
non-pilot levels, no longer serve their stated purpose. As the
anniversary of listed options trading approaches its 35th year, the
Exchange believes that the existing surveillance procedures and
reporting requirements at the BSE, and other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. The Exchange's procedures include
daily monitoring of market movements via automated surveillance
techniques to identify unusual activities in both options and their
underlying securities.
Accordingly, the Exchange represents that its surveillance
procedures and reporting procedures, in conjunction with the financial
requirements and risk management review procedures already in place at
the clearing firms and the Options Clearing Corporation, will serve to
adequately address any concerns the Commission may have with respect to
account(s) engaging in any manipulative schemes or assuming too high a
level of risk exposure.
Financial Requirements
The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a member or its customer may try to maintain an
inordinately large unhedged position in an equity option.
Inability To Compete; Retreat to OTC Market
The Exchange has no reason to believe that the current trading
volume in equity options will not continue. Rather, the Exchange
expects continued options volume growth as opportunities for investors
to participate in the options markets increase and evolve. The Exchange
believes that the non-pilot position and exercise limits are
restrictive, and maintaining those limits will hamper the listed
options markets from being able to compete fairly and effectively with
the over-the-counter markets.
No Adverse Consequences From Past Increases
Equity option position limits have been gradually expanded from
1,000 contracts in 1973 to the current level of 75,000 contracts for
the largest and most actively traded equity options. To date, there
have been no adverse effects on the markets as a result of these past
increases in the limits for equity option contracts.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\8\ in general, and Section
6(b)(5) of the Act,\9\ in particular, in that it is designed to promote
just and equitable principles of trade, to prevent fraudulent and
manipulative acts, 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 in that it will, if
approved, provide uniform greater position and exercise limits for
options traded on the options exchanges.
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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
The Exchange 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 has neither solicited nor received comments on the
proposed rule change.
[[Page 12483]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated the proposed rule change as one that:
(1) Does not significantly affect the protection of investors or the
public interest; (2) does not impose any significant burden on
competition; and (3) does not become operative for 30 days from the
date of filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest.
Therefore, the foregoing rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule
19b-4 thereunder.\11\ The Exchange notes that the proposed rule change
is based on a similar proposal recently approved by the Commission.\12\
The Exchange has asked the Commission to waive the operative delay to
permit the proposed rule change to become operative prior to the 30th
day after filing.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of 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 Exchange has fulfilled this requirement.
\12\ See Securities Exchange Act Release No. 57352 (February 19,
2008), 73 FR 10076 (February 25, 2008) (order granting accelerated
approval to SR-CBOE-2008-07).
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The Section 7(a) Pilot Program and the IWM Option Pilot Program
were scheduled to expire on March 1, 2008. The Commission believes that
waiving the 30-day operative delay of the Exchange's proposal is
consistent with the protection of investors and the public interest
because it will allow the position and exercise limits to remain at
consistent levels during the transition from the pilot programs to
permanent status.\13\ Therefore, the Commission designates the proposal
to be operative upon filing.
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\13\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate the 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.
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 [email protected]. Please include
File No. SR-BSE-2008-12 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-BSE-2008-12. 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 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-BSE-2008-12 and should be
submitted on or before March 28, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4514 Filed 3-6-08; 8:45 am]
BILLING CODE 8011-01-P