[Federal Register Volume 66, Number 198 (Friday, October 12, 2001)]
[Notices]
[Pages 52164-52166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25701]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44906; File No. SR-CBOE-2001-53]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated To Allow Spread Orders Involving Certain Broad-
Based Index Options and Options on Exchange Traded Funds To Be Executed 
at a Single Trading Post

October 4, 2001.
    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 September 20, 2001, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') 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

[[Page 52165]]

prepared by the Exchange. On October 2, 2001, CBOE submitted Amendment 
No. 1 to the proposal.\3\ CBOE filed the proposal 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 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Jaime Galvan, Attorney, CBOE, to Michael 
Gaw, Division of Market Regulation, Commission, dated October 1, 
2001 (``Amendment No. 1''). In Amendment No. 1, CBOE made a minor 
change to the proposed rule text to clarify that the appropriate 
Floor Procedure Committee may determine to make only spread orders 
based on a combination of related broad-based index options eligible 
to be handled pursuant to CBOE Rule 24.19.
    \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 amend CBOE Rule 24.19, OEX-SPX Spread 
Orders, to apply its terms to certain order broad-based index options 
and options on exchange traded fund shares listed and traded on the 
Exchange. The text of the proposed rule change is available at the 
principal office 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, 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 these statements may be examined at the places specified in 
Item IV below. CBOE 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
    In 1997, the Commission approved CBOE Rule 24.19 which sets forth a 
special procedure to facilitate the transaction of both legs of a 
spread order between OEX and SPX options at either the OEX or the SPX 
trading post.\6\ The Exchange believes that CBOE Rule 24.19 has 
provided both customers and traders of OEX and SPX options an efficient 
manner of conducting business involving the two option classes while 
protecting the customer orders in the customer limit order books of 
both products and the customer orders being represented in the crowd at 
both trading posts.
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    \6\ See Securities Exchange Act Release No. 38782 (June 26, 
1997), 62 FR 35862 (July 2, 1997) (SR-CBOE-97-15).
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    The purpose of the proposed rule change is to apply CBOE Rule 24.19 
to spread orders involving certain other broad-based index options and 
options on exchange traded fund shares derived from broad-based indices 
(``ETF Options'') that are currently listed and traded on the Exchange, 
in addition to OEX and SPX options. The additional broad-based index 
options that would be included under CBOE Rule 24.19 are options on the 
Mini-NDX Index (MNX\SM\) and the Nasdaq 100 Index (NDX).\7\ The ETF 
Options that would be included under CBOE Rule 24.19 are options on the 
iShares S&P 100 Index Fund (OEF) and Nasdaq 100 Tracking Stock 
(QQQ).\8\ The Exchange is not proposing to change any of the procedures 
in the Rule for representing and filing spread orders. Customers and 
traders alike often employ spread strategies using these products for 
hedging and risk management. The Exchange believes that expanding the 
applicability of Rule 24.19 to these products will encourage the use of 
spread orders involving these products and provide an alternative to 
cross market hedging of these products.
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    \7\ The Exchange is also proposing to explicitly include XEO 
options under CBOE Rule 24.19. XEO options are a new series of OEX 
options with a European-style, rather than American-style, exercise 
feature. See Securities Exchange Act Release No. 44556 (July 16, 
2001), 66 FR 38046 (July 20, 2001). Because of their relation to OEX 
options, the Exchange already deems XEO options to be subject to 
CBOE Rule 24.19.
    \8\ OEF options are options overlying shares of the iShares S&P 
100 Index Fund, an exchange traded fund based on the S&P 100 Index. 
QQQ options are options overlying the Nasdaq 100 Index Tracking 
Stock, an exchange traded fund designed to track the performance of 
the Nasdaq 100 Index. CBOE has determined to treat options on 
exchange traded fund shares that are derived from broad-based 
indices like broad-based index options, and generally to apply to 
these products the same rules that are applicable to broad-based 
index options. CBOE believes that options on exchange traded fund 
shares derived from broad-based indices, such as OEF and QQQ 
options, share trading characteristics similar to broad-based index 
options and, therefore, the same rules should apply to both.
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    Paragraph (a) of CBOE Rule 24.19 would be revised to define a 
``Broad-Based Index Option'' for purposes of the rule to mean MNX, NDX, 
OEX, XEO, OEF, QQQ, and SPX options, and any other broad-based index 
option or ETF Option that is determined by the appropriate Floor 
Procedure Committee to create an appropriate hedge with any other 
Broad-Based Index Option under CBOE Rule 24.19. Revised paragraph (a) 
also would define a ``Multi-Class Broad-Based Index Option Spread 
Order'' (``Multi-Class Spread Order'') as an order to buy a stated 
number of contracts of a Broad-Based Index Option and to sell an equal 
number, or an equivalent number, of contracts of a different Broad-
Based Index Option. The proposed amendments to CBOE Rule 24.19 would 
apply only to Multi-Class Spread Orders composed of: (1) Any 
combination of MNX, NDX, or QQQ (MNX-NDX, MNX-QQQ, and NDX-QQQ); (2) 
any combination of OEF, OEX, XEO, or SPX (OEX-SPX, OEX-OEF, OEF-SPX, 
etc.); and (3) any other combination of related Broad-Based Index 
Options as determined by the appropriate Floor Procedure Committee.
    When making its determination what products and spread strategies 
would be eligible for execution pursuant to CBOE Rule 24.19, the 
appropriate Floor Procedure Committee would consider, among other 
things, whether the particular index options classes under 
consideration are derived from the same underlying index, whether the 
particular index options classes have underlying indices that have a 
close relationship in their price movement, and whether there is 
customer demand for the particular spread strategy. The Exchange has 
proposed to include the spread orders listed above under CBOE Rule 
24.19 because of customer demand for these strategies for hedging and 
risk management purposes. For example, spread strategies between OEX/
XEO and OEF options are used to hedge risk as they are each based on 
the S&P 100. \9\ Likewise, spread strategies between MNX, NDX, and QQQ 
options are proposed to be included under CBOE Rule 24.19, as each of 
these options classes are based on the Nasdaq 100 Index, and each 
option class is frequently used to hedge positions in one of the other 
classes. Spread strategies between OEF and SPX would be included under 
CBOE Rule 24.19 as OEF options, like OEX and XEO options, can also be 
hedged with SPX options.
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    \9\ CBOE states that OEF options are about 1/10th the size of 
OEX and XEO options.
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    The procedures to be followed in representing and filling a Multi-
Class Spread Order, set forth in paragraph (b) of CBOE Rule 24.19, 
remain the same as the current procedures for representing and filing 
an OEX-SPX spread order, except for one minor change. The Exchange 
proposes to revise paragraph (b)(i) of CBOE Rule 24.19 to provide that, 
immediately after a Multi-Class

[[Page 52166]]

Spread Order is represented at the primary trading station or 
concurrent with the announcement of such order, the member initiating 
the order must contact the Order Book Official or the DPM, as 
applicable, at the other trading station. This change is required due 
to the fact that the MNX, NDX, OEF, and QQQ trading crowds are DPM 
trading crowds.
    As is currently the case, paragraph (b)(iii) of CBOE Rule 24.19 
will provide that a member holding a Multi-Class Spread Order that is 
priced net in a multiple of the minimum increment will have priority 
over bids and offers in the trading crowd if both legs of the spread 
would trade at a price that is at least equivalent to quotes in the 
crowd. Similarly, such an order will have priority over bids and offers 
in the customer limit order books so long as: (1) No leg of the order 
would trade at a price outside the currently displayed bids or offers, 
or bids or offers in the customer limit order book; and (2) at least 
one leg of the order would trade at a price that is better than the 
corresponding bid or offer in one of the books.
    The Exchange believes that expanding the application of CBOE Rule 
24.19 to the products and spread orders listed above, so that both legs 
of such spread orders can be executed at the same post, will result in 
tighter and more competitive markets for such orders, benefiting both 
customers and traders.
2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with and 
furthers the objectives of Section 6(b)(5) Act\10\ in that it is 
designed to perfect the mechanisms of a free and open market and to 
protect investors and the public interest. CBOE believes that the 
proposed rule will further these statutory goals by allowing for the 
efficient conduct of Multi-Class Broad-Based Index Option Spread Orders 
that will be beneficial to both customers and traders.
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    \10\ 15 U.S.C. 78f(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 a 
burden on competition that is not necessary or appropriate in 
furtherance of 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

    CBOE has asserted that, because the foregoing proposed rule change 
does not (1) Significantly affect the protection of investors or the 
public interest; (2) impose any significant burden on competition; and 
(3) 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), it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \11\ and 
Rule 19b-4(f)(6) thereunder.\12\ In addition, CBOE gave the Commission 
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. 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 the furtherance of the purposes of the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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 is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 provision 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-2001-53 and 
should be submitted by November 2, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-25701 Filed 10-11-01; 8:45 am]
BILLING CODE 8010-01-M