[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Notices]
[Pages 8713-8716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4118]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49275; File No. SR-CBOE-2003-47]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. To Simplify the Manner in Which Contrary Exercise 
Advices Are Submitted and To Extend by One Hour the Time for Members 
and Member Organizations To Submit Contrary Exercise Advices

February 18, 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 January 26, 2004, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') submitted to 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. The Exchange 
filed the proposed rule change under paragraph (f)(6) of Rule 19b-4 
under the Act.\3\ 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\ 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 Rules 11.1 and 17.50 and to 
issue

[[Page 8714]]

a Regulatory Circular to simplify the manner in which Contrary Exercise 
Advices (``CEAs''), and similarly advice cancels, are submitted to the 
Exchange in light of The Options Clearing Corporation's (``OCC'') 
procedures. The Exchange also proposes new procedures to allow 
additional time for members and member organizations to submit CEAs for 
certain accounts. The text of the proposed rule change is available at 
the CBOE and at the Commission.

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 Exchange proposes to modify its exercise notification 
requirements. The purpose of the proposed rule change is to amend CBOE 
Rules 11.1 and 17.50 and to issue a Regulatory Circular to simplify the 
manner in which CEAs, and similarly advice cancels, are submitted to 
the Exchange in light of the procedures of OCC. The Exchange also 
proposes new procedures to allow additional time for members and member 
organizations to submit CEAs for certain accounts. OCC has an 
established procedure, under OCC Rule 805, known as ``Exercise-by-
Exception'' or ``Ex-by-Ex,'' that provides for the automatic exercise 
of certain options that are in-the-money by a specified amount. Under 
the Ex-by-Ex process, option holders holding option contracts that are 
in-the-money by a requisite amount and who wish to have their contracts 
automatically exercised need to take no further action.
    However, under OCC Rule 805, option holders who do not want their 
options automatically exercised or who want their options to be 
exercised under different parameters than that of the Ex-by-Ex 
procedures must file a CEA with CBOE in accordance with CBOE Rule 11.1 
and instruct OCC of their ``contrary intention.'' The rule is designed, 
in part, to deter individuals from taking improper advantage of late 
breaking news by requiring evidence of an option holder's intention to 
exercise or not exercise expiring equity options via the submission of 
a CEA. Members and member organizations satisfy the filing requirement 
by manually submitting a CEA form or by electronically submitting the 
CEA through OCC's electronic communications system.
    If OCC has waived the Ex-by-Ex procedure for an options class, 
members and member organizations must either: (1) Submit to the 
Exchange an exercise instruction in a manner specified by the Exchange 
within the applicable time limit if the holder intends to exercise the 
option, or (2) take no action and allow the option to expire without 
being exercised. In cases where the Ex-by-Ex procedure has been waived, 
OCC rules require that an affirmative Exercise Notice be submitted to 
OCC in order to exercise such options, whether or not an exercise 
instruction has been submitted to the Exchange.
    The Exchange states that one of the primary goals of CBOE Rule 11.1 
is to maintain a level playing field between holders of long and short 
positions in expiring equity options.\4\ CBOE believes that after 
trading has ended on the final trading day before expiration, persons 
who are short the option have no way to close out their short 
positions. To put all option holders on equal footing, CBOE Rule 11.1 
attempts to keep to a minimum the time period in which a holder can 
exercise an equity option after the close of trading on the last 
business day prior to expiration.\5\ The current exercise cutoff time 
for an option holder to decide whether or not to exercise an equity 
option is fixed at 4:30 p.m. Central Standard Time (``CT'') on the 
business day immediately prior to the expiration date.\6\ In the 
interests of clarifying the exercise notification procedures and 
simplifying CBOE Rule 11.1, the Exchange proposes to issue a Regulatory 
Circular that would contain much of the details of these procedures 
that previously were contained in CBOE Rule 11.1, but as herein 
amended.
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    \4\ Another component of CBOE Rule 11.1 governs the exercising 
of American-style cash-settled index option contracts. See current 
Interpretation and Policy .03 to CBOE Rule 11.1.
    \5\ Expiration, commonly known as ``Expiration Friday,'' is 
generally the last business day prior to the expiration of an option 
contract.
    \6\ The ``expiration date'' of an options contract generally is 
the Saturday immediately following the third Friday of the 
expiration month of such options. See OCC By-Laws Article I(E)(16).
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    The proposed Regulatory Circular would describe the Exchange's 
regular procedures and cutoff times for the submission of exercise 
notifications to the Exchange for non-cash-settled equity options under 
CBOE Rule 11.1, as detailed below. This Regulatory Circular shall be 
deemed a rule of the Exchange subject to the rule change provisions 
under the Act and the rules thereunder.
    The proposed Regulatory Circular would reiterate the Ex-by-Ex 
procedures under OCC Rule 805 as provided in CBOE Rule 11.1(a) with 
relation to option holders' preferences for exercising or not 
exercising options. Specifically, an option holder may decide to do 
nothing and allow the determination to be made in accordance with OCC 
Rule 805, or submit a CEA or an advice cancel.
    The proposed Regulatory Circular would provide for the cutoff time 
by which option holders have to decide to exercise or not exercise an 
expiring option. Current CBOE Rule 11.1 imposes a uniform 4:30 p.m. 
(CT) cutoff time for both an option holder's decision to exercise or 
not exercise an option and for a member or member organization to 
submit the CEA to the Exchange, regardless of whether the CEA is for a 
customer or a non-customer account.
    Although the cutoff time for an option holder to decide whether or 
not to exercise an expiring option shall remain unchanged at 4:30 p.m. 
(CT), the Exchange proposes in CBOE Rule 11.1 and in the proposed 
Regulatory Circular to have an extended cutoff time of 5:30 p.m. (CT) 
for members and member organizations to submit CEAs to the Exchange for 
customer accounts. The Exchange also proposes to allow members and 
member organizations to submit CEAs for non-customer accounts by 5:30 
p.m. (CT), but only if such member or member organization employs an 
electronic procedure with time stamp recording for the submission of 
exercise instructions by options holders. Members and member 
organizations would have to establish fixed procedures to insure secure 
time stamps in connection with the utilization of the aforementioned 
electronic time stamp provision. If a member organization does not 
employ an electronic time stamp and appropriate procedures to ensure 
secure time stamps, the member organization would have to submit CEAs 
for non-customer accounts by 4:30 p.m. (CT).
    CBOE believes that granting members and member organizations 
additional time to submit CEAs (or advice cancels) to the Exchange is 
necessary to address a concern that a 4:30 p.m. (CT) cutoff time is 
problematic for customer accounts due to logistical difficulties in the 
time required to receive customer exercise instructions, and, 
subsequently, to process them through retail branch

[[Page 8715]]

systems and back offices before submitting them to the Exchange. The 
Exchange believes that extending the cutoff times for CEAs and advice 
cancels for non-customer accounts, if electronically time stamped, is 
fair and provides for consistent regulation. The Exchange does not 
propose to extend the submission cutoff time for member organizations 
that manually submit CEAs and advice cancels due to the difficulties 
involved in monitoring a manual procedure.
    Section (d) of the proposed Regulatory Circular would provide for 
procedures that a member organization that has accepted the 
responsibility to indicate final exercise decisions on behalf of other 
members or non-member firms must follow. Section (d) of the proposed 
Regulatory Circular would also allow a member organization to establish 
earlier cutoff times for accepting final exercise decisions in expiring 
options, but not later cutoff times.
    Consistent with current CBOE rules,\7\ section (e) of the proposed 
Regulatory Circular would allow members and member organizations to 
make final exercise decisions after the exercise cutoff time, but 
before expiration without having submitted a CEA: (1) To remedy 
mistakes made in good faith; (2) to take appropriate actions due to a 
failure to reconcile unmatched Exchange options transactions; or (3) 
where exceptional circumstances have restricted an option holder's 
ability to inform a member organization of a decision regarding 
exercise, or a member organization's ability to receive such a decision 
by the cutoff time. The burden of establishing such exceptions would 
rest solely on the member or member organization seeking application of 
such exception. Section (e) of the proposed Regulatory Circular would 
also provide for reporting and record keeping obligations with relation 
to these exceptions.
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    \1\ See also Proposed CBOE Rule 11.1(f).
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    Certain provisions of CBOE Rule 11.1, both current and proposed, 
shall be maintained within the body of CBOE Rule 11.1 itself, as 
opposed to the Regulatory Circular. The procedures and cutoff times 
that would apply in unusual circumstances are specifically described in 
proposed CBOE Rule 11.1(d).
    The proposed rule change also would permit the CBOE to establish 
different exercise cutoff times as an exception to amended CBOE Rule 
11.1(b), and the procedures proposed in the Regulatory Circular, to 
address situations where the Exchange has advance prior knowledge or 
warning of a modified trading session at expiration, or in the case of 
``unusual circumstances.'' Specifically, proposed CBOE Rule 11.1(c) 
would apply when a different or modified close of trading is announced. 
In such cases, the Exchange would have forewarning of the event and 
would be required to provide notice of a change in the exercise cutoff 
time by 4:30 p.m. (CT) on the business day prior to the last trading 
day before expiration. Under such circumstances, the deadline for 
making a final decision to exercise or not exercise would be 1 hour and 
28 minutes following the time announced for the close of trading on 
that day. With respect to the submission of a CEA by members and member 
organizations, the cutoff time would be 2 hours and 28 minutes after 
the close of trading for customer accounts and non-customer accounts 
where the member firm employs an electronic procedure with time stamp 
for the submission of exercise instructions. Member firms that do not 
employ an electronic submission procedure for exercise instructions 
would be required to submit a CEA within 1 hour and 28 minutes after 
the close of trading for its non-customer accounts.
    Similarly, proposed CBOE Rule 11.1(d)(1) would permit the Exchange 
to extend the cutoff time period for the decision to exercise or not 
exercise expiring options, as well as the submission of a CEA due to 
unusual circumstances, such as systems capacity constraints or market 
imbalances. Furthermore, proposed CBOE Rule 11.1(d)(2) would permit the 
Exchange, with one (1) business day prior advance notice by 11 a.m. 
(CT), to establish a reduced cutoff time for the decision to exercise 
or not exercise expiring options as well as the submission of the CEA 
in a specific option class, due to unusual circumstances that involve 
the underlying security, such as a significant news event that arises 
after the close. The Exchange believes that this flexibility would 
further maintain a level playing field between persons holding long and 
short positions in expiring options. The Exchange states that this 
proposed rule change corresponds to a rule change by the American Stock 
Exchange, LLC (``Amex'') that was approved by the Commission.\8\
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    \8\ See infra note 19.
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with section 6(b) of the Act in general \9\ and furthers the objectives 
of section 6(b)(5) in particular,\10\ in that it will improve the 
option exercise process and thus is designed to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information regarding the exercise of outstanding option 
contracts, to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general, 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 Exchange 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.

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

    No written comments were solicited with respect to the proposed 
rule change. However, the Options Operation Sub-Group of the OCC Round 
Table Committee submitted a letter to the Intermarket Surveillance 
Group requesting that the options exchanges amend their rules to 
provide for a 5:30 p.m. (CT) deadline for the submission of customer 
exercise notifications by clearing firms.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change has been filed by the Exchange pursuant to 
section 19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\12\ Because the foregoing proposed rule change: (1) 
Does not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for thirty 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 \13\ and Rule 19b-4(f)(6)\14\ thereunder.\15\

[[Page 8716]]

    A proposed rule change filed under Rule 19b-4(f)(6)\16\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The CBOE has requested 
that the Commission waive the thirty-day operative date specified in 
Rule 19b-4(f)(6)(iii)\17\ in order to conform its rules pertaining to 
the submission of exercise notifications with those of other options 
exchanges.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission.
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the thirty-day operative date 
is consistent with the protection of investors and the public interest 
\18\ because it will allow the CBOE to immediately implement rules 
similar to ones already in place at the other options exchanges,\19\ 
and will simplify the manner in which CEAs, and similarly advice 
cancels, are submitted to the Exchange. For these reasons, the 
Commission designates the proposed rule change as effective and 
operative immediately. At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate such 
proposed 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.
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    \18\ 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. 15 U.S.C. 
78c(f).
    \19\ See Securities Exchange Act Release Nos. 47885 (May 16, 
2003), 68 FR 28309 (May 23, 2003) (SR-Amex-2001-92); 49191 (February 
4, 2004), 69 FR 7055 (February 12, 2004) (SR-BSE-2004-04); 48505 
(September 17, 2003), 68 FR 55680 (September 26, 2003) (SR-ISE-2003-
20); 48640 (October 16, 2003), 68 FR 60757 (October 23, 2003) (SR-
PCX-2003-47); and 48639 (October 16, 2003), 68 FR 60764 (October 23, 
2003) (SR-Phlx-2003-65).
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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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-CBOE-2003-47. 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 Exchange. All 
submissions should refer to File No. SR-CBOE-2003-47 and should be 
submitted by March 17, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4118 Filed 2-24-04; 8:45 am]
BILLING CODE 8010-01-P