[Federal Register Volume 68, Number 76 (Monday, April 21, 2003)]
[Notices]
[Pages 19588-19591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9699]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47659; File No. SR-CBOE-2002-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Regarding Closing-
Only Transactions

April 10, 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 June 27, 2002, the Chicago Board Options Exchange, Inc. (``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 CBOE. On April 2, 
2003, the CBOE filed Amendment No. 1 that entirely replaced the 
original rule filing.\3\ The Commission is publishing this notice to

[[Page 19589]]

solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Andrew Spiwak, Director Legal Division and 
Chief Enforcement Attorney, CBOE, to John Roeser, Special Counsel, 
Division of Market Regulation, Commission, dated April 1, 2003.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to address certain issues 
regarding closing-only transactions. Below is the text of the proposed 
rule change. Additions are italicized.
* * * * *

Chapter V Securities Dealt in Designation of Securities

* * * * *

Withdrawal of Approval of Underlying Securities

    Rule 5.4. Whenever the Exchange determines that an underlying 
security previously approved for Exchange option transactions does not 
meet the then current requirements for continuance of such approval or 
for any other reason should no longer be approved, the Exchange will 
not open for trading any additional series of options of the class 
covering that underlying security and therefore two floor officials, in 
consultation with a designated senior executive officer of the 
Exchange, may prohibit any opening purchase transactions in series of 
options of that class previously opened (except that (i) opening 
transactions by market-makers executed to accommodate closing 
transactions of other market participants and (ii) opening transactions 
by CBOE member organizations to facilitate the closing transactions of 
public customers executed as crosses pursuant to and in accordance with 
CBOE Rule 6.74(b) or (d) may be permitted), to the extent it deems such 
action necessary or appropriate; provided, however, that where 
exceptional circumstances have caused an underlying security not to 
comply with the Exchange's current approval maintenance requirements, 
regarding number of publicly held shares or publicly held principal 
amount, number of shareholders, trading volume or market price, the 
Exchange, in the interest of maintaining a fair and orderly market or 
for the protection of investors, may determine to continue to open 
additional series of option contracts of the class covering that 
underlying security. When all option contracts in respect of any 
underlying security that is no longer approved have expired, the 
Exchange may make application to the Securities and Exchange Commission 
to strike from trading and listing all such option contracts.
    * * * Interpretations and Policies:
* * * * *
    .05 If prior to the delisting of a class of option contracts 
covering an underlying security which has been found not to meet the 
Exchange's requirements for continued approval, the Exchange shall 
determine that the underlying security again meets the Exchange's 
requirements for such underlying security, the Exchange, may open for 
trading additional series of options of that class, and two floor 
officials, in consultation with a designated senior executive officer 
of the Exchange, may lift any restriction on opening purchase 
transactions imposed under this Rule.
* * * * *
    .08 Securities consisting of shares or other securities (``Units'') 
that represent interests in registered investment companies (or series 
thereof) organized as open-end management investment companies, unit 
investment trusts or similar entities that were initially approved for 
options trading pursuant to Interpretation and Policy .06 under Rule 
5.3 shall be deemed not to meet the Exchange's requirements for 
continued approval, and the Exchange shall not open for trading any 
additional series of option contracts of the class covering such Units, 
in accordance with the terms of paragraph (f) of Interpretation and 
Policy .01 of this Rule 5.4. In addition, two floor officials, in 
consultation with a designated senior executive officer of the 
Exchange, shall consider the suspension of opening transactions in any 
series of options of the class covering Units in any of the following 
circumstances:
    (a) In the case of options covering Units approved pursuant to 
clause (D)(x) under Interpretation and policy .06 of Rule 5.3, in 
accordance with the terms of paragraphs (a), (b), (c) and (d) of 
Interpretation and Policy .01 of this Rule 5.4;
    (b) In the case of options covering Units approved pursuant to 
clause (D)(y) under Interpretation and Policy .06 of Rule 5.3, 
following the initial twelve-month period beginning upon the 
commencement of trading in the Units on a national securities exchange 
or as NMS securities through the facilities of a national securities 
association there are fewer than 50 record and/or beneficial holders of 
such Units for 30 or more consecutive trading days; or
    (c) The value of the index or portfolio of securities on which the 
Units are based is no longer calculated or available.
    .09 Absent exceptional circumstances, securities initially approved 
for options trading pursuant to Interpretation and Policy .07 under 
Rule 5.3 (such securities are defined and referred to in that 
Interpretation and Policy as ``Trust Issued Receipts'') shall not be 
deemed to meet the Exchange's requirements for continued approval, and 
the Exchange shall not open for trading any additional series of option 
contracts of the class covering such Trust Issued Receipts, whenever 
the Trust Issued Receipts are delisted and trading in the Receipts is 
suspended on a national securities exchange, or the Trust Issued 
Receipts are no longer traded as national market securities through the 
facilities of a national securities association. In addition, two floor 
officials, in consultation with a designated senior executive officer 
of the Exchange, shall consider the suspension of opening transactions 
in any series of options of the class covering Trust Issued Receipts in 
any of the following circumstances:
    (1) In accordance with the terms of paragraphs (a) through (g) of 
Interpretation and Policy .01 of this Rule 5.4 in the case of options 
covering Trust Issued Receipts when such options were approved pursuant 
to paragraph (a)(i) of Interpretation and Policy .07 under Rule 5.3;
    (2) The Trust has more than 60 days remaining until termination and 
there are fewer than 50 record and/or beneficial holders of Trust 
Issued Receipts for 30 or more consecutive trading days;
    (3) The trust has fewer than 50,000 receipts issued and 
outstanding;
    (4) The market value of all receipts issued and outstanding is less 
than $1,000,000; or
    (5) Such other event shall occur or condition exist that in the 
opinion of the Exchange makes further dealing in such options on the 
Exchange inadvisable.
* * * * *

Chapter VIII Market-Makers, Trading Crowds and Modified Trading Systems

* * * * *

Section B: Trading Crowds

* * * * *

Firm Disseminated Market Quotes

Rule 8.51

* * * * *
    Interpretations and Policies:
    .11 If, pursuant to paragraph (e) of this Rule, non-firm mode 
applies to an options class because the security underlying such 
options class has been delisted and is subsequently traded on

[[Page 19590]]

the OTC Bulletin Board, Pink Sheets or similar trading system, and 
opening transactions have been prohibited pursuant to CBOE Rule 5.4, 
the Exchange shall monitor the activity or condition of the market and 
paragraph (e)(4) of this Rule shall not apply.
* * * * *

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 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 proposed rule change would amend CBOE Rule 5.4 and add an 
interpretation to CBOE Rule 8.51 to address certain issues dealing with 
options that have closing-only restrictions. The proposed change to 
CBOE Rule 5.4 would give two floor officials, in consultation with a 
designated senior executive officer of the Exchange, the authority to 
prohibit opening purchase transactions for equity options whenever the 
Exchange has determined that an underlying security previously approved 
for Exchange option transactions does not meet the current requirements 
for continuance of such approval. For example, the proposed rule change 
would be applicable when a security underlying an option has been 
delisted and is subsequently traded on the OTC Bulletin Board, Pink 
Sheets or similar trading system. In the aforementioned situation, the 
rule would also permit certain types of opening transactions by members 
to accommodate the closing transactions of other market participants. 
Specifically, in these situations, the rule would permit: (i) Opening 
transactions by market-makers executed to accommodate closing 
transactions of other market participants and (ii) opening transactions 
by CBOE member organizations to facilitate the closing transactions of 
public customers executed as crosses pursuant to and in accordance with 
CBOE Rule 6.74(b) or (d) (Crossing Orders). Similar changes are 
proposed to Interpretations and Policies .05 (to lift restrictions on 
opening transactions if the underlying security, which previously did 
not meet the Exchange's listing standards, again meets the Exchange's 
listing standards), .08 (for securities consisting of shares or other 
securities that represent interests in registered investment companies 
organized as open-end management investment companies, unit investment 
trusts or similar entities) and .09 (for Trust Issued Receipts). 
Currently, the Exchange has the authority to prohibit an opening 
purchase transaction in an option, but must seek approval through the 
Office of the Chairman. This proposed rule change to grant this 
authority to two floor officials and a senior executive officer of the 
Exchange would make CBOE Rule 5.4 consistent with other CBOE rules 
involving trading halts and similar types of actions for index options 
and provides for greater efficiency when invoking a restriction or 
prohibition in a delisted or restricted option class.\4\
---------------------------------------------------------------------------

    \4\ See Exchange Rules 6.3 Trading Halts and Rule 24.7 Trading 
Halts, Suspensions, or Primary Market Closure.
---------------------------------------------------------------------------

    The proposed change to Interpretation and Policy .11 under CBOE 
Rule 8.51 deals with the implementation of non-firm mode for options 
that are restricted to closing-only transactions. Currently, CBOE Rule 
8.51(e)(4) requires that when a series or class of option is in non-
firm mode for purposes of the firm quote rule, the DPM and floor 
officials must review and reaffirm the condition of the market every 30 
minutes. The proposed change to the interpretation and policies of CBOE 
Rule 8.51 sets forth that in situations in which opening transactions 
have been prohibited in an option where the underlying security has 
been delisted and is subsequently traded on the OTC Bulletin Board, 
Pink Sheets or a similar trading system, and the Exchange has invoked 
that only closing transactions may occur, as set forth above, the 
Exchange would monitor the activity or condition of the market. 
However, the DPM and floor officials would not be required to review 
and reaffirm the market conditions causing the non-firm mode 
designation every 30 minutes. The Exchange believes it is necessary to 
invoke non-firm mode pursuant to Exchange Rule 8.51(e) when a security 
is no longer listed on a national securities exchange or traded through 
a national securities association and reported as a national market 
system security, due to the fact that the Exchange is unable to 
directly receive an electronic quotation feed from the OTC Bulletin 
Board or Pink Sheets. The Exchange believes that in these specific 
situations, the Exchange is incapable of collecting quotations in the 
underlying security that accurately reflect the true state of the 
market. For these options, the market conditions that caused the non-
firm mode designation will not change. Therefore, the Exchange believes 
that the need to review market conditions every 30 minutes is not 
necessary.\5\ In addition, the Exchange would be required to notify 
investors of the non-firm mode through the dissemination of a message 
code via OPRA. Furthermore, the Exchange would issue a Regulatory 
Circular to its members reflecting trading restrictions as described 
above.
---------------------------------------------------------------------------

    \5\ The Exchange represents, and the proposed rule would 
require, that the Exchange would monitor the market conditions, as 
is required by Rule 11Ac1-1 under the Act. 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \6\ in general and furthers the objectives of 
Section 6(b)(5) \7\ in particular in that it promotes just and 
equitable principles of trade and protects investors and the public 
interest. Further, the Exchange believes that the proposed rule change 
to CBOE Rule 5.4 promotes just and equitable principles of trade by 
granting floor officials authority along with a senior executive 
officer of the Exchange, which is consistent with authority granted to 
floor officials and a senior executive officer of the Exchange in other 
Exchange rules dealing with similar situations, such as trading halts 
and those applicable to index options.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed change to the Interpretation and Policy .11 of CBOE 
Rule 8.51 is designed to protect investors and the public interest. 
Since the market conditions for options that are subject to closing-
only restrictions are not likely to change, the need to review and 
reaffirm the market conditions every 30 minutes is not necessary in a 
closing transaction only restriction situation.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE believes that the proposed rule change does not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 19591]]

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 self-regulatory organization 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, as amended, 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 also will be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-2002-36 and should be submitted by May 12, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9699 Filed 4-18-03; 8:45 am]
BILLING CODE 8010-01-P