[Federal Register Volume 69, Number 18 (Wednesday, January 28, 2004)]
[Notices]
[Pages 4189-4192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1761]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49111; File No. SR-CBOE-2003-51]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and No. 2 Thereto by the Chicago Board 
Options Exchange, Inc. Relating to the Listing and Trading of Options 
on Certain Russell Indexes

January 21, 2004.
    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 October 30, 2003, 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 November 
25, 2003, the Exchange filed an amendment to the proposed rule

[[Page 4190]]

change.\3\ On January 6, 2004, the Exhange filed another amendment to 
the proposed rule change.\4\ The Commission is publishing this notice, 
as amended, 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 James M. Flynn, Attorney, Legal Division, 
CBOE, to Kelly Riley, Senior Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated November 21, 2003 
(``Amendment No. 1''). In Amendment No. 1, CBOE expands its 
Statement on Burden on Competition in response to Item 4 of the Form 
19b-4.
    \4\ See Letter from James M. Flynn, Attorney, Legal Division, 
CBOE, to Yvonne Fraticelli, Special Counsel, Division, dated January 
6, 2004 (``Amendment No. 2''). In Amendment No. 2, CBOE expands its 
Statement on Comments on the Proposed Rule Change Received from 
Members, Participants or Others in response to Item 5 of the Form 
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 amend certain rules to provide for the listing 
and trading on the Exchange of options on the following broad-based 
indexes:

Russell Top 200[reg] Index
Russell Top 200[reg] Growth Index
Russell Top 200[reg] Value Index

    The Exhange represents that options on these indexes will be cash-
settled and will have European-style exercise provisions.

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 and discussed 
any comments it received on the proposed rule. 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 purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style, stock index options on 
the Russell Top 200'' Index, Russell Top 200[reg] Growth Index and 
Russell Top 200[reg] Value Index (``Russell 200 Indexes''). Each 
Russell 200 Index is a capitalization-weighted index containing various 
groups of stocks drawn from the 200 largest companies in the Russell 
1000 Index, which is drawn from the largest 3,000 companies 
incorporated in the U.S. and its territories. These 3,000 companies 
represent approximately 98% of the investable U.S. equity market. The 
Exchange represents that all index components are traded on the New 
York Stock Exchange (``NYSE''), the American Stock Exchange (``AMEX''), 
or the NASDAQ and are ``reported securities'' as defined in Rule 11Aa3-
1 of the Act. CBOE currently is approved to trade options on the 
following Russell Indexes.\5\
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    \5\ See Securities Exchange Act Release Nos. 31382 (October 30, 
1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-92-02) and 48591 
(October 2, 2003), 68 FR 58728 (SR-CBOE-2003-17).
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Russell 2000[reg] Index
Russell 2000[reg] Growth Index
Russell 2000[reg] Value Index
Russell 1000[reg] Index
Russell 1000[reg] Growth Index
Russell 1000[reg] Value Index
Russell 3000[reg] Index
Russell 3000[reg] Growth Index
Russell 3000[reg] Value Index
Russell MidCap[reg] Index
Russell MidCap[reg] Growth Index
Russell MidCap[reg] Value Index
Index Design
    Each of the three Russell 200 Indexes is designed to be a 
comprehensive representation of the Large Cap sector of the investable 
United States equity market. These indexes are capitalization-weighted 
and include only common stocks belonging to corporations domiciled in 
the United States and its territories and that are traded on the NYSE, 
NASDAQ or the AMEX. Stocks are weighted by their ``available'' market 
capitalization, which is calculated by multiplying the primary market 
price by the ``available'' shares; that is, total shares outstanding 
less corporate cross-owned shares, ESOP and LESOP-owned \6\ shares 
comprising 10% or more of shares outstanding, unlisted share classes 
and shares held by an individual, a group of individuals acting 
together, or a corporation not in the index that owns 10% or more of 
the shares outstanding. Below is a brief description of each index:
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    \6\ ESOP and LESOP-owned shares represent, generally, those 
shares of a corporation that are owned through employee stock 
ownership plans.

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------------------------------------------------------------------------
Russell Top 200[reg] Index.............  Measures the performance of the
                                          200 largest companies in the
                                          Russell 1000 Index, which
                                          represents approximately 74%
                                          of the total market
                                          capitalization of the Russell
                                          1000 Index.
Russell Top 200[reg] Growth Index......  Measures the performance of
                                          those Russell Top 200
                                          companies with higher price-to-
                                          book ratios and higher
                                          forecasted growth values. The
                                          stocks are also members of the
                                          Russell 1000 Growth index.
Russell Top 200[reg] Value Index.......  Measures the performance of
                                          those Russell Top 200
                                          companies with lower price-to-
                                          book ratios and lower
                                          forecasted growth values. The
                                          stocks are also members of the
                                          Russell 1000 Value index.
------------------------------------------------------------------------

     All companies listed on the NYSE, AMEX or NASDAQ are considered 
for inclusion in the universe of stocks that comprise the Russell 200 
Indexes with the following exceptions: (1) Stocks trading less than 
$1.00 per share on May 31; (2) Non-U.S. incorporated companies; and (3) 
preferred and convertible preferred stock, redeemable shares, 
participating preferred stock, warrants and rights, trust receipts, 
royalty trusts, limited liability companies, bulletin board, pink sheet 
stocks, closed-end investment companies, limited partnerships, and 
foreign stocks.
    The Russell Top 200 Growth Index and the Russell Top 200 Value 
Index are both subsets of the Russell Top 200 Index, which itself is a 
subset of the Russell 1000 and Russell 3000 Indexes. These Growth and 
Value versions of the Russell Top 200 Index may contain common 
components, but the capitalization of those components is apportioned 
so that the sum of the total capitalization of the Russell Top 200 
Growth and Russell Top 200 Value indexes equals the total 
capitalization of the Russell Top 200 Index. The CBOE represents that 
as of September 30, 2003, the Russell Top 200 Growth Index and the 
Russell Top 200 Value Index have 129 and 140 components, respectively.
    According to the CBOE, on September 30, 2003, the stocks comprising 
the Russell Top 200 Index, Russell Top 200 Growth Index, and Russell 
Top 200 Value Index had an average market capitalization of $35.7 
billion ranging from a high of $298 billion (General Electric Co.) to a 
low of $4.9 billion (FOX Entertainment Group, Inc.).\7\ The number of 
available shares outstanding ranged from a high of 9.99 billion 
(General Electric Co.) to a low of 66.7 million (M & T Bank Corp.), and 
averaged 1.04 billion shares. The six-month average daily trading 
volume for Russell Top 200 Index components was

[[Page 4191]]

5.68 million shares per day, ranging from a high of 59.96 million 
shares per day (Intel Corp.) to a low of 314,000 shares per day (M & T 
Bank Corp.). The CBOE represents that as of September 30, 2003, all of 
the Russell Top 200 Index components satisfied CBOE's listing criteria 
for equity options as set forth in CBOE Rule 5.3.
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    \7\ See Exhibit B to the Form 19b-4.
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    The Russell Top 200 Index has a total capitalization of $7.2 
trillion and the total capitalization of the Russell Top 200 Growth and 
Russell Top 200 Value Indexes is $3.9 trillion and $3.3 trillion, 
respectively. All of the components of the Russell Top 200 Index, the 
Russell Top 200 Growth Index, and the Russell Top 200 Value Index are 
options-eligible.
Calculation
    The values of each Index are currently being calculated by Reuters 
on behalf of the Frank Russell Company and will be disseminated at 15-
second intervals during regular CBOE trading hours to market 
information vendors via the Options Price Reporting Authority 
(``OPRA'').
    The CBOE notes that the methodology used to calculate the value of 
each of the Russell 200 Indexes is similar to the methodology used to 
calculate the value of other well-known market-capitalization weighted 
indexes. The level of each index reflects the total market value of the 
component stocks relative to a particular base period and is computed 
by dividing the total market value of the companies in each index by 
its respective index divisor. The divisor is adjusted periodically to 
maintain consistent measurement of each index. The following is a table 
of base dates and the respective index levels as of September 30, 2003:

------------------------------------------------------------------------
                              Base date/Base index
            Index                     value          9/30/03 index value
------------------------------------------------------------------------
Russell Top 200[reg] Index..      3/16/00 / 400.00                249.51
Russell Top 200[reg] Growth       3/16/00 / 400.00                191.94
 Index......................
Russell Top 200[reg] Value        3/16/00 / 400.00                324.72
 Index......................
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Index Option Trading
    According to the CBOE, options on these indexes shall be A.M.-
settled. In addition to regular index options, the Exchange may provide 
for the listing of long-term index option series (``LEAPS[reg]'') in 
accordance with CBOE Rule 24.9.
    For options on each index, strike prices will be set to bracket the 
respective index in 2.5-point increments for strikes below $200 and 5 
point increments for strikes at or above $200. The minimum tick size 
for series trading below $3 will be 0.05 and for series trading above 
$3 the minimum tick will be 0.10. The trading hours for options on all 
of the indexes will be from 8:30 a.m. to 3:15 p.m. Chicago time. The 
proposed contract specifications for the Russell 200 Index Options is 
set forth in Exhibit C to the Form 19b-4.
Maintenance
    The CBOE represents that the Russell 200 Indexes will be monitored 
and maintained by the Frank Russell Company. The Frank Russell Company 
will be responsible for making all necessary adjustments to the indexes 
to reflect component deletions, share changes, stock splits, stock 
dividends (other than an ordinary cash dividend), and stock price 
adjustments due to restructuring, mergers, or spin-offs involving the 
underlying components. Some corporate actions, such as stock splits and 
stock dividends, require simple changes to the available shares 
outstanding and the stock prices of the underlying components. Other 
corporate actions, such as share issuances and changes in the market 
value of an index would require the use of an index divisor to effect 
adjustments.
    The Exchange represents that the Russell 200 Indexes are re-
constituted annually on June 30 and such reconstitution is based on 
prices and available shares outstanding as of the preceding May 31. New 
index components are added only as part of the annual re-constitution 
and, after which, should a stock be removed from an index for any 
reason, it cannot be replaced until the next re-constitution.
    Although CBOE is not involved in the maintenance of any of the 
Russell 200 Indexes, the Exchange represents that it will monitor each 
Russell 200 Index on an annual basis, at which point the Exchange will 
notify the Commission if: (1) The number of securities in each index 
drops by \1/3\ or more; (2) 10% or more of the weight of each index is 
represented by component securities having a market value of less than 
$75 million; (3) less than 80% of the weight of each Index is 
represented by component securities that are eligible for options 
trading pursuant to CBOE Rule 5.3; (4) 10% or more of the weight of 
each index is represented by component securities trading less than 
20,000 shares per day; or (5) the largest component security accounts 
for more than 15% of the weight of each index or the largest five 
components in the aggregate account for more than 50% of the weight of 
each index.
Surveillance
    The Exchange represents that CBOE's surveillance procedures are 
adequate to monitor the trading in options and LEAPS on the Russell 200 
Indexes. Further, the Exchange shall have complete access to the 
information regarding the trading activity of the underlying 
securities.
Exercise and Settlement
    The proposed options on each index will expire on the Saturday 
following the third Friday of the expiration month. Trading in the 
expiring contract month will normally cease at 3:15 p.m. (Chicago time) 
on the business day preceding the last day of trading in the component 
securities of each index (ordinarily the Thursday before expiration 
Saturday, unless there is an intervening holiday). The exercise 
settlement value of each index at option expiration will be calculated 
by Reuters on behalf of the Frank Russell Company based on the opening 
prices of the component securities on the last business day prior to 
expiration. If a component security fails to open for trading, the 
exercise settlement value will be determined in accordance with CBOE 
Rules 24.7(e) and 24.9(a)(4). When the last trading day is moved 
because of Exchange holidays (such as when CBOE is closed on the Friday 
before expiration), the last trading day for expiring options will be 
Wednesday and the exercise settlement value of index options at 
expiration will be determined at the opening of regular trading on 
Thursday.
Position Limits
    The Exchange proposes to establish position limits for options on 
the Russell 200 Indexes at 50,000 contracts on either side of the 
market, and no more than 30,000 of such contracts may be in the series 
in the nearest expiration month. These limits are identical to the

[[Page 4192]]

limits applicable to options on the Russell 2000 Index as specified 
under Rule 24.4(a).
Exchange Rules Applicable
    Except as modified herein, the Rules in Chapter XXIV will govern 
the trading of options on the aforementioned Russell 200 Indexes on the 
Exchange. Additionally, CBOE affirms that it possesses the necessary 
systems capacity to support new series that would result from the 
introduction of the Russell 200 Index options. CBOE also has been 
informed that OPRA has the capacity to support such new series.\8\
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    \8\ See Letter from Joe Corrigan, Executive Director, OPRA, to 
William Speth, Director of Research, CBOE, dated October 21, 2003.
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2. Statutory Basis
    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act,\9\ in general and furthers the objectives of 
Section 6(b)(5) of the Act,\10\ in particular in that it will permit 
trading in options on a broad range of indexes pursuant to rules 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE notes that it is proposing to trade options on the Russell 
200 Indexes pursuant to a license granted to the CBOE by Frank Russell 
Company (``Russell'') on December 30, 2002 (the ``Russell License''). 
By its terms, the Russell License is exclusive in respect of cash-
settled, U.S. dollar-denominated index options for the duration of its 
term (which extends until December 31, 2004, unless renewed), unless 
the CBOE fails to achieve specified levels of trading activity in which 
event Russell is able to cause the license to become nonexclusive.
    The CBOE represents that it does not believe its proposal to trade 
options on the Russell 200 Indexes will impose any burden on 
competition, notwithstanding the exclusivity provisions of the Russell 
License. To the contrary, the CBOE believes that its proposal to trade 
options on the Russell 200 Indexes should be viewed as enhancing 
competition in the market for broad-based index options by providing 
for the trading on the CBOE of new classes of options that will compete 
with other broad-based index options and other indexed derivatives 
traded on the CBOE and in other markets.
    The CBOE believes that Russell, like many other developers of 
broad-based securities indexes, has chosen to license its indexes for 
option trading on an exclusive basis because it believes its ability to 
realize the value of the indexes it owns is enhanced by licensing these 
properties on an exclusive, rather than on a non-exclusive, basis. 
Accordingly, the CBOE believes that such exclusivity gives Russell an 
incentive to develop and license additional indexes for derivatives 
trading, expanding the range of competing indexed derivative products 
available to investors. Reflecting this, the CBOE notes that the active 
competition that currently exists among indexed derivative products 
(including index options, index futures, options and futures on 
exchange-traded funds, etc.) and among the markets that trade these 
products (including securities exchanges, futures exchanges, the over-
the-counter market, etc.) will be made even more vigorous by the 
introduction of trading on the CBOE in options on the Russell 200 
indexes as proposed herein.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Following submission of this proposed rule change to the 
Commission, the International Securities Exchange (``ISE'') submitted a 
comment letter to the Commission regarding the proposed rule change on 
November 13, 2003. The CBOE responded to that comment letter through 
the submission of Amendment No. 1 to this proposed rule change, which 
amended Item 4 of the Form 19b-4, and a letter to the Commission, dated 
December 12, 2003. Each of these letters also cited and included 
previous CBOE submissions to the Commission with respect to the subject 
of ISE's comments.\11\
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    \11\ The Commission notes that CBOE's Amendments and submissions 
are included in the public file and are available for review at the 
Commission and the CBOE.
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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 
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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
CBOE-2003-51. 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, comments should be sent in hardcopy or by e-
mail but not by both methods. 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 CBOE. All 
submissions should refer to File No. SR-CBOE-2003-51 and should be 
submitted by February 18, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1761 Filed 1-27-04; 8:45 am]
BILLING CODE 8010-01-P