[Federal Register Volume 69, Number 234 (Tuesday, December 7, 2004)]
[Notices]
[Pages 70728-70731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3513]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50759; File No. SR-CBOE-2004-74]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Options on Revised-Value Versions of 
the European-Style Exercise, P.M.-Settled Option Contract on the 
Standard & Poor's 100 Stock Index

November 30, 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 November 17, 2004, 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 and II below, which items have been prepared by the CBOE. The 
Exchange has filed the proposal as a ``non-controversial'' rule change 
pursuant to section 19(b)(3)(A)(iii) of the Act,\3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders the proposal effective upon filing 
with the Commission.\5\ 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)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The CBOE asked the Commission to waive the 30-day operative 
delay. See Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to introduce for trading revised-value versions 
of the European-style, P.M.-settled option contract on the Standard & 
Poor's 100 Stock Index that is currently listed and traded on the 
Exchange. The text of the proposed rule change is below. Proposed new 
language is in italics.
CHAPTER XXIV
Index Options
* * * * *
Rule 24.9--Terms of Index Option Contracts
    Rule 24.9(a)-(c) No Change.
    * * * Interpretations and Policies:
    .01 The procedures for adding and deleting strike prices for index 
options are provided in Rule 5.5 and Interpretations and Policies 
related thereto, as otherwise generally provided by Rule 24.9, and 
include the following:
    (a) The interval between strike prices will be no less than $5.00; 
provided, that in the case of the following classes of index options, 
the interval between strike prices will be no less than $2.50:
    [Add the following to the end of the current list]
    European-Style Exercise S&P 100 Index Options (XEO) (\1/5\th 
value), if the strike price is less than $200.00.
    (b)-(d) No change.
    .02-.11 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, 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 those 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Since July 2001, the Exchange has listed for trading cash-settled 
and P.M.-settled options with European-style exercise on the Standard & 
Poor's 100 Stock Index (``S&P 100 Index'').\6\ These options trade on 
the CBOE under the symbol XEO.\7\ The purpose of this proposed rule 
change filing is to allow the Exchange to list European-style exercise, 
cash-settled, P.M.-settled options on (1) an increased-value version of 
the XEO, and (2) a reduced-value version of the XEO. The Exchange

[[Page 70729]]

is proposing to offer these particular new versions of the XEO option 
to accommodate the needs of a broader range of investors than is 
currently served by listing options only on the XEO.
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    \6\ The S&P 100 Index is a broad-based, capitalization-weighted 
index that is based on 100 highly capitalized stocks from a broad 
range of industries. CBOE has traded cash-settled options with 
American-style exercise on the S&P 100 Index since 1983, under the 
trading symbol OEX.
    \7\ See Securities Exchange Act Release No. 44556 (July 16, 
2001), 66 FR 38046 (July 20, 2001) (Notice of Filing and Immediate 
Effectiveness which allowed CBOE to list European-style exercise, 
cash-settled options on the XEO).
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Increased-Value Options on the XEO

    CBOE proposes to list a European-style exercise, cash-settled, 
P.M.-settled option that is based on two times the value of the XEO 
(``Increased-Value XEO''). The Exchange believes that offering 
Increased-Value XEO options will attract large institutional customers 
who seek a greater exposure to the underlying component stocks that 
make up the S&P 100 Index. With one Increased-Value XEO contract, an 
institutional customer will be able to gain twice the exposure to the 
S&P 100 Index than with one normal XEO contract.

Reduced-Value Options on the XEO

    CBOE also proposes to list a European-style exercise, cash-settled, 
P.M.-settled option that is based on one-fifth (\1/5\th) the value of 
the XEO (``Reduced-Value XEO''). The Exchange believes that offering 
Reduced-Value XEO options will allow CBOE to attract additional 
business from customers that may not otherwise be able to invest in 
regular XEO or Increased-Value XEO options. To illustrate, currently an 
October XEO 545 call would cost an investor approximately $710, whereas 
with a Reduced-Value XEO, the \1/5\th version of the same call would 
only cost an investor $142.\8\ The Exchange believes that the Reduced-
Value XEO will allow retail investors to obtain a hedge that is more 
proportionate to their respective positions in the stocks that comprise 
the S&P 100 Index and that will not require as large an outlay of 
capital as the regular XEO options.
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    \8\ Estimates are based on a randomly selected last sale price 
(intra day) for the 2004 OCT 545.00 call on the XEO during the 
September 15, 2004, trading day.
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    The Exchange believes that both the Reduced-Value and Increased-
Value options on the XEO should attract a wider range of investors and, 
in turn, create a more active and liquid trading environment for S&P 
100 Index options. The Exchange will continue listing and trading the 
current XEO options contract and both the Increased-Value XEO options 
and the Reduced-Value XEO options will trade under their own respective 
trading symbols.
    The Commission and The Options Clearing Corporation will be 
notified of the new trading symbols and CBOE will issue a circular 
detailing the option contract specifications to CBOE membership prior 
to the listing of options series on the Increased-Value and Reduced-
Value XEO. Additionally, the Exchange will disseminate prices for the 
Increased-Value and Reduced-Value XEO contracts every 15 seconds 
through the Option Price Reporting Authority.
    Strike price intervals on the Increased-Value XEO shall be 
identical to the strike price intervals for normal XEO options, which 
are currently set to bracket the S&P Index in 5-point increments. 
Strike prices for Reduced-Value XEO options will be set to bracket the 
index in 2\1/2\ point increments for strikes at or below 200 and in 5-
point increments above 200. The minimum tick size for Increased-Value 
and Reduced-Value XEO 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 Increased-Value and Reduced-Value XEO contracts will be from 
8:30 a.m. to 3:15 p.m. c.s.t.

Position Limits

    Consistent with CBOE Rule 24.4(d), there are no position limits for 
broad-based index option contracts on the OEX,\9\ or similarly, for XEO 
options.\10\ The approval order giving CBOE the authority to list 
options on the XEO notes that, because the only difference between OEX 
and XEO options is the manner in which the respective contracts are 
exercised (i.e., ``American-style'' versus ``European-style''), XEO 
series may also be traded without position limits for the purposes of 
CBOE Rule 24.4(d).\11\ Similarly, the Exchange believes that Increased-
Value and Reduced-Value XEO options are no different than the regular 
XEO options, other than the fact that one contract is based on twice 
the value of the S&P 100 Index, and one contract is based on one-fifth 
the value of the S&P 100 Index, respectively. As such, Increased-Value 
and Reduced-Value XEO options shall not be subject to any position 
limits.
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    \9\ See Securities Exchange Act Release No. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (order approving CBOE's rule 
change, which proposed the elimination of position and exercise 
limits for OEX, SPX, and DJX index options).
    \10\ See supra note 7.
    \11\ See supra note 9.
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Exercise and Settlement

    Exercise and settlement on both the Increased-Value XEO and the 
Reduced-Value XEO options will be identical to existing XEO options. 
Series in both the Increased-Value XEO and the Reduced-Value XEO 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. (c.s.t.) on the business day preceding the last day of 
trading in the component securities of the Index (ordinarily the 
Thursday before expiration Saturday, unless there is an intervening 
holiday). The exercise-settlement value of the Index at option 
expiration will be calculated by Standard and Poor's based on the 
exercise-settlement value, OEX, is calculated using the last (closing) 
reported sales price in the primary market of each component stock on 
the last business day before the expiration date. 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.

S&P 100 Index Maintenance

    Because the underlying S&P 100 Index is monitored and maintained by 
Standard and Poor's, Standard and Poor's will be responsible for making 
all necessary adjustments to the S&P 100 Index 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, change the market value of the Index 
and would require the use of an index divisor to effect adjustments.

Surveillance

    Because the S&P 100 Index underlying the increased-value and the 
reduced-value options remains unchanged, the Exchange will use the same 
procedures used in the surveillance of XEO options for surveillance in 
the trading of the Increased-Value XEO and Reduced-Value XEO options. 
Further, CBOE represents that these surveillance procedures are 
adequate to monitor the trading in both Increased-Value XEO and 
Reduced-Value XEO options, as well as in LEAPS on the same respective 
options.

[[Page 70730]]

Margin

    The S&P 100 Index is a ``broad-based index'' and, under CBOE margin 
rules the margin requirement for a short put or call on each respective 
Increased-Value XEO and Reduced-Value XEO option contract shall be 100% 
of the current market value of the contract plus up to 15% of the 
respective underlying index value.\12\ More specifically, for purchases 
of puts or calls with more than 9 months until expiration, customers 
must deposit and continue to maintain 75% of the total cost of the 
option's current market value. When time to expiration reaches 9 
months, the option no longer has value for margin purposes. Purchases 
of puts or calls with 9 months or less until expiration must be paid 
for in full. Writers of uncovered puts or calls must deposit and 
continue to maintain 100% of the option proceeds plus 15% of the 
aggregate contract value (current index level x $100) minus the amount 
by which the option is out-of-the-money, if any, subject to a minimum 
for calls of option proceeds plus 10% of the aggregate contract value 
and a minimum for puts of option proceeds plus 10% of the aggregate 
exercise price amount.\13\
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    \12\ See CBOE Rule 12.3(c)(5)(A).
    \13\ For calculating maintenance margin, the option's current 
market value, as opposed to the total cost/option proceeds method, 
must be used. Additional margin may be required pursuant to CBOE 
Rule 12.10.
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    The Exchange also notes that Interpretation and Policy .04 to CBOE 
Rule 24.4, which authorizes the imposition of additional margin in OEX 
positions, shall also apply to all XEO option series, which are based 
on the same underlying index as OEX option series.\14\
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    \14\ See supra note 7.
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Other Exchange Rules Applicable

    Except as modified herein, the Rules in Chapter XXIV will govern 
the trading of Increased-Value XEO and Reduced-Value XEO options on the 
Exchange. Additionally, in accordance with CBOE Rule 24A.4(b) (Special 
Terms for FLEX Index Options), CBOE reserves the right to approve and 
open for trading FLEX options on the Increased-Value XEO and Reduced-
Value XEO and, in accordance with CBOE Rule 24A.7(a)(i), because the 
Increased-Value XEO and Reduced-Value XEO are both broad-based indexes, 
there shall be no position or exercise limits for these FLEX index 
options. Finally, CBOE affirms that it possesses the necessary systems 
capacity to support new series that would result from the introduction 
of the aforementioned index options.
2. Statutory Basis
    The Exchange believes that the addition of Increased-Value XEO and 
Reduced-Value XEO option series creates new investment options for a 
broader range of customers that will appeal to many institutions, 
professional traders, and investors. The Exchange believes that the 
introduction of these options will attract additional order-flow to the 
index floor and will increase liquidity in these options in the market 
in general. For these reasons, the Exchange believes that the proposed 
rule change is consistent with section 6(b) of the Act \15\ in general, 
and in particular with section 6(b)(5) of the Act \16\ in that it is 
designed to promote just and equitable principles of trade as well as 
to protect investors and the public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 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.

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

    The Exchange asserts that the foregoing proposed rule change has 
become effective upon filing pursuant to section 19(b)(3)(A) of the Act 
\17\ and Rule 19b-4(f)(6) thereunder \18\ because it does not:
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(6).
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    (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 of filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange satisfied the five-day 
pre-filing requirement. The Exchange further requested that the 
Commission waive the 30-day operative delay, as specified in Rule 19b-
4(f)(6)(iii), and designate the proposed rule change to become 
operative on November 18, 2004. The Commission notes that the proposed 
rule change does not raise any new, novel or complex regulatory issues 
because the Exchange currently trades the XEO contracts.\20\ The 
proposed rule change would permit a reduced value version and an 
increased value version of the XEO products to be traded. These 
products should accommodate the needs of a broader range of investors 
investing in the options market. The Commission believes, therefore, 
that it is consistent with the protection of investors and the public 
interest to waive the 30-day pre-operative period in this case, and has 
determined to designate the operative date to be November 18, 2004, the 
date requested by the Exchange.\21\ Allowing the rule change to become 
operative on November 18, 2004, will allow the Exchange to begin 
listing and trading the new options as soon as possible after the 
November expiration and will allow investors to establish positions 
during the earliest portion of the monthly cycle.
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ See supra note 7.
    \21\ For the 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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    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.\22\
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    \22\ See section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
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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. 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-2004-74 on the subject line.

[[Page 70731]]

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-2004-74. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office 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-2004-74 and should be submitted on or before December 28, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-3513 Filed 12-6-04; 8:45 am]
BILLING CODE 8010-01-P