[Federal Register Volume 67, Number 215 (Wednesday, November 6, 2002)]
[Notices]
[Pages 67673-67676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46743; File No. SR-CBOE-2002-26]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. To Increase Position 
and Exercise Limits for Options on the DIAMONDS Trust

October 30, 2002.
    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 May 20, 2002, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to increase position and exercise limits for 
options on the DIAMONDS Trust (``DIA'') to 300,000 contracts on the 
same side of the market. The Exchange's reporting requirements for 
DIAMONDS Trust options will serve to identify options holdings and 
information concerning

[[Page 67674]]

the hedging of these positions. The text of the proposed rule change is 
set forth below. Proposed new language is italicized; proposed 
deletions are in brackets.
* * * * *
Chapter IV--Business Conduct
Rule 4.11. Position Limits NO CHANGE
    * * * Interpretations and Policies:
    .01 through .06 NO CHANGE.
    .07 The position limits under Rule 4.11 applicable to options on 
shares or other securities that represent interests in registered 
investment companies (or series thereof) organized as open-end 
management investment companies, unit investment trusts or similar 
entities that satisfy the criteria set forth in Interpretation and 
Policy .06 under Rule 5.3 shall be the same as the position limits 
applicable to equity options under Rule 4.11 and Interpretations and 
Policies thereunder. The position limits under Rule 4.11 applicable to 
options on the Nasdaq-100 Index Tracking StockSM (``QQQ'') 
and the DIAMONDS Trust (DIA) shall be 300,000 option contracts.
* * * * *
Rule 4.12. Exercise Limits NO CHANGE
    * * * Interpretations and Policies:
    .01 NO CHANGE.
    .02 The exercise limits established under Rule 4.12 in respect of 
options on shares or other securities that represent interests in 
registered investment companies (or series thereof) organized as open-
end management investment companies, unit investment trusts or similar 
entities that satisfy the criteria set forth in Interpretation and 
Policy .06 under Rule 5.3 shall be equivalent to the position limits 
prescribed for such options in Interpretation and Policy .07[6] under 
Rule 4.11, subject to any exemptions granted in respect of such 
position limits.
* * * * *
Rule 4.13. Reports Related to Position Limits
    (a) NO CHANGE.
    (b) In addition to the reporting requirement described in paragraph 
(a) of this Rule, each member (other than an Exchange market-maker or 
DPM) that maintains a position in excess of 10,000 non-FLEX equity 
option contracts or 100,000 QQQ or DIA contracts on the same side of 
the market on behalf of its own account or for the account of a 
customer, shall report information as to whether such positions are 
hedged, and provide documentation to as to how such contracts are 
hedged, in a manner and form prescribed by the Exchange. In addition, 
whenever the Exchange determines based on a report to the Department of 
Market Regulation or otherwise, that a higher margin requirement is 
necessary in light of the risks associated with an under-hedged QQQ or 
DIA option position in excess of 100,000 contracts or Non-FLEX equity 
option position in excess of 10,000 contracts on the same side of the 
market, the Exchange may consider imposing additional margin upon the 
account maintaining such under-hedged position, pursuant to its 
authority under Exchange Rule 12.10. Additionally, it should be noted 
that the clearing firm carrying the account will be subject to capital 
charges under SEC Rule 15c3-1 to the extent of any margin deficiency 
resulting from the higher margin requirements.
    (c)-(d) NO CHANGE.
* * * * *

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 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. 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 Commission has stated that position and exercise limits ``must 
not be established at levels that are so low as to discourage 
participation in the options market by institutions and other investors 
with substantial hedging needs or to prevent specialists and market-
makers from adequately meeting their obligations to maintain a fair and 
orderly market.'' \3\
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    \3\ See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 189-91 
(Comm. Print 1978).
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    The DIAMONDS Trust, based on the Dow Jones Industrial Average, is 
among the most actively traded exchange-traded funds, averaging 4.5 
million shares per day during the previous six months. Moreover, the 
components comprising the fund are themselves among the most actively 
traded and widely held securities listed in the U.S. As shown in the 
following table, the average number of shares outstanding for the 30 
components of the DJIA is 2.55 billion shares, ranging from a high of 
9.9 billion shares (General Electric Co.) to a low of 291.7 million 
shares (Eastman Kodak Co.). The 6-month average daily trading volume 
ranges from a high of 48 million shares per day (Intel Corp.) to a low 
of 2 million shares per day (Caterpillar, Inc.).

------------------------------------------------------------------------
                                            Shares out     Stock volume
     Ticker            Company name         (millions)       6-mo ADV
------------------------------------------------------------------------
1 INTC           INTEL CORP.............        6,703.00      48,065,436
2 MSFT           MICROSOFT CORP.........        5,415.46      29,527,880
3 GE             GENERAL ELECTRIC CO....        9,935.63      23,410,290
4 C              CITIGROUP INC..........        5,165.40      13,221,095
5 T              AT&T CORP..............        3,566.31      12,964,184
6 XOM            EXXON MOBIL CORPORATION        6,792.60      10,953,032
7 HPQ            HEWLETT-PACKARD CO.....        3,019.17      10,634,250
8 JPM            JP MORGAN CHASE & CO...        1,990.20      10,080,997
9 IBM            INTL BUSINESS MACHINES         1,716.94       8,435,996
                  CORP.
10 DIS           THE WALT DISNEY CO.....        2,039.34       8,013,419
11 WMT           WAL-MART STORES INC....        4,451.23       7,512,838
12 JNJ           JOHNSON & JOHNSON......        3,047.15       7,264,796
13 SBC           SBC COMMUNICATIONS INC.        3,340.17       7,064,081

[[Page 67675]]

 
14 HD            HOME DEPOT INC.........        2,350.05       6,898,992
15 MRK           MERCK & CO., INC.......        2,271.09       6,878,693
16 MO            PHILIP MORRIS COMPANIES        2,147.30       5,855,147
                  INC.
17 AXP           AMERICAN EXPRESS CO....        1,340.95       5,017,522
18 KO            COCA-COLA CO/THE.......        2,484.72       4,773,278
19 MCD           MCDONALD'S CORPORATION.        1,271.96       4,682,622
20 BA            BOEING CO..............          838.71       3,947,814
21 GM            GENERAL MOTORS CORP....          560.50       3,845,899
22 HON           HONEYWELL INTERNATIONAL          814.97       3,721,316
                  INC.
23 AA            ALCOA INC..............          846.65       3,578,749
24 PG            PROCTER & GAMBLE CO....        1,299.61       3,223,338
25 DD            DU PONT (E.I.) DE                992.95       3,137,774
                  NEMOURS.
26 IP            INTERNATIONAL PAPER CO.          482.72       2,851,071
27 EK            EASTMAN KODAK CO.......          291.74       2,811,618
28 UTX           UNITED TECHNOLOGIES              472.86       2,540,922
                  CORP.
29 MMM           3M CO..................          389.35       2,014,652
30 CAT           CATERPILLAR INC........          343.45       1,988,112
                                         -----------------
                  Average...............        2,546.07       8,830,527
------------------------------------------------------------------------

    The Exchange notes that there are currently no position limits for 
DJX options, which are the same size and have an equivalent economic 
payoff as options on DIAMONDS. Based on DIAMONDS portfolio holdings as 
of May 6, 2002, the proposed position limit of 300,000 contracts 
represents a holding of just over 2 million shares of each security 
comprising the DJIA, which is less than 1% of each components' 
outstanding shares and, in most cases, equal to no more than 1 day's 
trading volume. The 300,000 contract position limit is currently in 
place for options on the Nasdaq-100 Index Tracking Stock (QQQ). The 
Exchange believes that increasing position limits for this product will 
lead to a more liquid and competitive market environment for DIA 
options that will benefit customers interested in this product.

Reporting Requirements

    Consistent with the reporting requirement for QQQ options, the 
Exchange will require that each member or member organization that 
maintains a position on the same side of the market in excess of 
100,000 contracts in the DIA option class, for its own account or for 
the account of a customer report certain information. This data would 
include, but would not be limited to, the option position, whether such 
position is hedged and if so, a description of the hedge and if 
applicable, the collateral used to carry the position. Exchange market-
makers (including DPMs) would continue to be exempt from this reporting 
requirement as market-maker information can be accessed through the 
Exchange's market surveillance systems. In addition, the general 
reporting requirement for customer accounts that maintain a position in 
excess of 200 contracts will remain at this level for DIA options.\4\
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    \4\ See CBOE Rule 4.13(a).
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2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) of the Act,\5\ in general, and furthers the 
objectives of Section 6(b)(5),\6\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles 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, to protect investors 
and the public interest and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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

    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 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 the Exchange 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. 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 provisions 
of 5 U.S.C. 552, will be available for inspection and copying at 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

[[Page 67676]]

submissions should refer to the File No. SR-CBOE-2002-26 and should be 
submitted by November 27, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28130 Filed 11-5-02; 8:45 am]
BILLING CODE 8010-01-P