[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14723-14725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7225]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47548; File No. SR-CBOE-2003-13]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Governing the Settlement Procedures for Index 
Options in Certain Unusual Circumstances

March 20, 2003.
    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 March 19, 2003, 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 prepared by the 
Exchange. CBOE asserts that this proposal meets the criteria of

[[Page 14724]]

section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder \4\ 
and is, therefore, immediately 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).
    \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

    CBOE proposes to amend its rules governing the settlement 
procedures for its index options in certain unusual circumstances. 
Below is the text of the proposed rule change. New language is in 
italics; deleted language is in brackets.
* * * * *

Rule 24.7--Trading Halts, Suspensions, or Primary Market Closure

Rule 24.7.
    (a)-(d) No change.
    (e) When the primary market for a security underlying the current 
index value of an index option does not open for trading, halts trading 
prematurely, or otherwise experiences a disruption of normal trading on 
a given day, or if a particular security underlying the current index 
value of an index option does not open for trading, halts trading 
prematurely, or otherwise experiences a disruption of normal trading on 
a given day in its primary market, the price of that security shall be 
determined, for the purposes of calculating the current index value at 
expiration, [based on the opening price of that security on the next 
day that its primary market is open for trading. This procedure shall 
not be used if the current index value at expiration is fixed] in 
accordance with the Rules and By-Laws of The Options Clearing 
Corporation.
    Interpretations and Policies: No change.
* * * * *

Rule 24.9--Terms of Index Option Contracts

Rule 24.9
    (a)-(1)-(3) No Change.
    (4) A.M.-Settled Index Options. The last day of trading for A.M.-
settled index options shall be the business day preceding the last day 
of trading in the underlying securities prior to expiration. The 
current index value at the expiration of an A.M.-settled index option 
shall be determined, for all purposes under these Rules and the Rules 
of the Clearing Corporation, on the last day of trading in the 
underlying securities prior to expiration, by reference to the reported 
level of such index as derived from first reported sale (opening) 
prices of the underlying securities on such day, except that [(i) I]in 
the event that the primary market for an underlying security does not 
open for trading, halts trading prematurely, or otherwise experiences a 
disruption of normal trading on that day, or in the event that the 
primary market for an underlying security is open for trading on that 
day, but that particular security does not open for trading, halts 
trading prematurely, or otherwise experiences a disruption of normal 
trading on that day, the price of that security shall be determined, 
for the purposes of calculating the current index value at expiration, 
as set forth in Rule 24.7(e).[, unless the current index value at 
expiration is fixed in accordance with the Rules and By-Laws of The 
Options Clearing Corporation. (ii) In the event that the primary market 
for an underlying security is open for trading on that day, but that 
particular security does not open for trading on that day, the price of 
that security, for the purposes of calculating the current index value 
at expiration, shall be the last reported sale price of the security.]
    Remainder of Rule: 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, 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
    The prospect of imminent war with Iraq has again prompted CBOE to 
review its settlement procedures for index options to ensure that the 
final settlement value of such options converges with the corresponding 
values of the underlying stock index or stock index future, in the 
event of any market disruption. The Exchange believes that ensuring 
this convergence is vital to eliminating any unplanned arbitrage risk 
for public customers and other investors, as was set forth in greater 
detail in a previous CBOE filing (SR-CBOE-2000-02).\5\
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    \5\ See Securities Exchange Act Release No. 42857 (May 30, 
2000), 65 FR 36185 (June 7, 2000) (notice of filing of and 
Commission order granting accelerated approval to proposed rule 
change).
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    SR-CBOE-2000-02 amended CBOE Rules 24.7(e) and 24.9(a)(4) to ensure 
convergence of the values of options and their underlying securities in 
the event that a primary market for one or more of the component 
securities of such indexes failed to open. In making these changes, 
CBOE noted that it

recognize[d] the authority of the Options Clearing Corporation 
(``OCC'') to establish a final settlement value for index options in 
the event of a primary market closure pursuant to its Rules and By-
Laws. The rule change proposed here makes clear that such action by 
the OCC would take precedence in determining any final index 
settlement value.\6\

    \6\ 65 FR at 36186.
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    The changes that CBOE made to its settlement rules in SR-CBOE-2000-
02 were designed to mirror the rules of futures markets like the 
Chicago Mercantile Exchange (``CME''), which trades some of the index 
products underlying CBOE's index options. Since the approval of SR-
CBOE-2000-02, however, the CME has changed its rules again. Even more 
importantly, the Commission recently approved changes to the OCC's 
rules and by-laws in order to give OCC ``broad discretionary authority 
to adjust settlement values for OCC-cleared index options and futures 
whenever, and in whatever manner, OCC deems appropriate to avoid a 
disconnect between the futures and options markets or among the futures 
markets.''\7\
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    \7\ See Securities Exchange Act Release No. 46561 (September 26, 
2002), 67 FR 61943, 61944 (October 2, 2002) (Commission approval of 
SR-OCC-2002-09).
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    In light of these changes, particularly those giving the OCC 
authority to ensure convergence between the settlement values of OCC-
cleared index options and their underlying futures or other securities, 
the Exchange believes it can best ensure this convergence by amending 
CBOE Rules 24.7(e) and 24.9(a)(4) to make clear that--in cases where 
either a primary market for a security underlying the current index 
value of an index option, or just a particular such security, does not 
open for trading, halts trading prematurely, or otherwise experiences a 
disruption of normal trading--the price of that security shall be 
determined, for the purposes of calculating the current index value at 
expiration, in accordance

[[Page 14725]]

with the rules and by-laws of the OCC. This filing implements those 
changes.
2. Statutory Basis
    The Exchange believes that the proposed changes to CBOE Rules 
24.7(e) and 24.9(a)(4) are consistent with and in furtherance of the 
provisions of section 6(b)(5) of the Act.\8\ CBOE believes that, by 
establishing Exchange rules that make clear that current index option 
settlement values in the event of market disruption shall be determined 
in accordance with the rules and by-laws of the OCC, this filing will 
help public customers and market-makers alike to be better able to use 
stock index options to predictably hedge their transactions in stock 
index futures and/or the underlying stocks themselves. CBOE further 
believes that this rule change would improve the efficiency of, remove 
impediments to, and perfect the mechanism of, a free and open market 
and a national market system, thus better protecting investors and the 
public interest.
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    \8\ 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 would impose 
any burden on competition 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 asserts that, because the foregoing proposed rule change does 
not: (i) significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed (or 
such shorter time as the Commission may designate), it has become 
effective pursuant to section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\ 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 furtherance of the purposes of the Act.\11\
    A proposed rule change filed under Rule 19b-4(f)(6) normally would 
not become operative prior to 30 days after the date of the filing. 
However, Rule 19b-4(f)(6) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. CBOE has requested that the Commission waive the 
30-day pre-operative waiting period. The Commission believes that 
waiving the 30-day period is consistent with the protection of 
investors and the public interest. The Commission has previously found 
that allowing OCC to have authority to determine settlement prices for 
OCC-cleared index options in times of market disruptions is consistent 
with the Act,\12\ and the Exchange's proposal incorporates by reference 
the OCC's ability to exercise that authority with respect to CBOE-
traded index options. The Commission believes that market participants 
should be able to benefit immediately from this clarification and that 
no purpose would be served by delaying the operative date of this rule 
change for 30 days. Accordingly, the Commission hereby determines to 
waive the 30-day pre-operative period, and the proposed rule change 
becomes operative immediately.\13\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ See 15 U.S.C. 78s(b)(3)(C).
    \12\ See 67 FR at 91944.
    \13\ For purposes only of accelerating the operative date of 
this proposal, 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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    Rule 19b-4(f)(6) also requires the self-regulatory organization 
submitting the proposed rule change to give 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, or such shorter time as 
designated by the Commission. CBOE has requested that the Commission 
waive the five-day pre-filing requirement, and the Commission hereby 
grants that request.

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 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-2003-13 and 
should be submitted by April 16, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7225 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P