[Federal Register Volume 69, Number 170 (Thursday, September 2, 2004)]
[Notices]
[Pages 53755-53757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2016]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50269; File No. SR-CBOE-2004-42]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to the Calculation of Securities Indexes Underlying 
Options

August 26, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 12, 2004, 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 and II below, which Items have been prepared by the Exchange. 
The CBOE submitted the proposed rule change under section 19(b)(3)(A) 
of the Act \3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the 
proposal 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)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange submits this rule change to amend its rules in order 
to clarify the determination of the source of securities price 
information used to calculate values of certain securities indexes 
underlying options traded on the Exchange. The text of the proposed 
rule change is below. Proposed new language is italicized.
* * * * *

CHAPTER XXIV

Index Options
(Rules 24.1-24.21)
    Rule 24.1-Rule 24.8 No Change.
* * * * *
    Rule 24.9--Terms of Index Option Contracts
    Rule 24.9. (a)-(c) No Change.
* * * * *
    * * * Interpretations and Policies:
    .01-.11 No Change.
    .12 With respect to any securities index on which options are 
traded on the Exchange, the source of the prices of component 
securities used to calculate the current index level at expiration is 
determined by the Reporting Authority for that index.
* * * * *

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 Exchange 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 parts 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 clarify CBOE rules 
related to Index Options as they pertain to the source of pricing 
information for securities that comprise any particular securities 
index on which options are traded on the Exchange. Certain CBOE rules 
may be interpreted in a manner that suggests that the current index 
value at expiration of any particular securities index is determined by 
the opening (or closing) prices of the underlying components as 
reported by each respective underlying component's ``primary market.'' 
To illustrate, Rule 24.9(a)(4) (A.M.-Settled Index Options) provides:

    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 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). (Emphasis added).


[[Page 53756]]


    Rule 24.7(e) provides:

    (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, in accordance 
with the Rules and By-Laws of The Options Clearing Corporation.

    This rule could be interpreted to mean that the primary market for 
each security that comprises an index will always be the source of 
opening and closing prices used in the calculation of the particular 
index's value at expiration. This may not always be the case. To 
illustrate, on May 12, 2004, Dow Jones & Company (``Dow Jones'') 
published a plan to implement a pilot program in which Dow Jones will 
use the opening and closing prices of Nasdaq-listed stocks reported 
from the American Stock Exchange to calculate certain Dow Jones 
Averages.\5\ CBOE currently lists and trades options on several Dow 
Jones indexes, including the Dow Jones Transportation Average and the 
Dow Jones Industrial Average. The Exchange currently trades an options 
contract under the ticker symbol DJX that is based on one-one hundredth 
of the value of the DJIA. As the designated Reporting Authority \6\ for 
the DJIA, Dow Jones is responsible for determining the source for the 
prices used to calculate the opening settlement value for expiring DJX 
series. Under this pilot program, which Dow Jones subsequently 
terminated,\7\ Dow Jones intended to calculate the opening settlement 
value for DJX using the opening prices of two Nasdaq-listed components, 
Microsoft Corporation and Intel Corporation, as reported from the 
American Stock Exchange, rather than the primary-market opening prices 
reported from the Nasdaq National Market System (``NMS'').\8\
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    \5\ On May 12, 2004, Dow Jones issued a press release providing 
the details of its Pilot Program. The press release provides, in 
part that: The program will include two stocks (Intel and 
Microsoft) in the Dow Jones Industrial Average and seven stocks 
(Alexander & Baldwin, C.H. Robinson Worldwide, Expeditors 
International of Washington, J.B. Hunt Transport Services, Northwest 
Airlines, USF Corp. and Yellow Roadway) in the Dow Jones 
Transportation Average.
    \6\ As defined under Rule 24.1(h), a Reporting Authority, ``in 
respect of a particular index means the institution or reporting 
service designated by the Exchange as the official source for 
calculating the level of the index from the reported prices of the 
underlying securities that are the basis of the index and reporting 
such level.''
    \7\ Telephone discussion between James M. Flynn, Attorney, CBOE 
and Florence Harmon, Senior Special Counsel, Division, Commission 
(August 25, 2004).
    \8\ Dow Jones intended to continue using NYSE-reported prices 
for the remaining 28 DJIA components listed on the New York Stock 
Exchange. However, as stated Down Jones terminated this pilot 
program since Nasdaq instituted a ``closing-cross'' process in its 
all-electronic system. Telephone discussion between James M. Flynn, 
Attorney, CBOE and Florence Harmon, Senior Special Counsel, 
Division, Commission (August 25, 2004).
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    In order to avoid investor confusion, CBOE proposes to amend its 
rules to clarify that the Reporting Authority for any securities index 
on which options are traded on CBOE may determine to use the reported 
sale prices for one or more underlying securities from a market that 
may not necessarily be the primary market for that security in 
calculating the appropriate index value.
2. Statutory Basis
    The Exchange 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) \10\ in particular, in that it is 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system.
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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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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

    Because the foregoing rule change constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the self-
regulatory organization, it qualifies for effectiveness on filing 
pursuant to section 19(b)(3)(A)(i) of the Act \11\ and subparagraph 
(f)(1) of Rule 19b-4 thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(1).
    \12\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of such 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.

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2004-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2004-42. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 the 
filing also will be available for inspection and copying at the 
principal offices of the CBOE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2004-42 and should

[[Page 53757]]

be submitted on or before September 23, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2016 Filed 9-1-04; 8:45 am]
BILLING CODE 8010-01-P