[Federal Register Volume 70, Number 50 (Wednesday, March 16, 2005)]
[Notices]
[Pages 12916-12917]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1141]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51346; File No. SR-CBOE-2005-08]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 Thereto by the Chicago Board Options Exchange, Incorporated 
Relating to Listing Standards for Options on Narrow-Based Security 
Indexes

March 9, 2005.
    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 14, 2005, 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. On 
March 3, 2005, the Exchange amended its proposal.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is approving the proposal on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Amendment No. 1, dated March 3, 2005 (``Amendment No. 
1''). In Amendment No. 1, the Exchange supplemented its description 
of the modified market capitalization methodology. Amendment No. 1 
replaced the CBOE's original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its rules regarding listing 
standards for options on narrow-based security indexes. The text of the 
proposed rule change is available on the CBOE's Web site (http://www.cboe.com), at the CBOE's Office of the Secretary, and at the 
Commission's Public Reference Room.

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 III 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 CBOE is proposing to amend CBOE Rule 24.2(b), which provides 
for generic listing standards that allow the Exchange to list and trade 
options on certain narrow-based stock indexes pursuant to Rule 19b-4(e) 
under the Act.\4\ Rule 19b-4(e) provides that the listing and trading 
of a new derivatives securities product by a self-regulatory 
organization shall not be deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4,\5\ if the Commission has approved, 
pursuant to Section 19(b) of the Act,\6\ the self-regulatory 
organization's trading rules, procedures, and listing standards for the 
product class that would include the new derivatives securities 
product, and the self-regulatory organization has a surveillance 
program for the product class.\7\ Thus, CBOE Rule 24.2(b) allows the 
Exchange to list options on certain narrow-based securities indexes 
pursuant to Rule 19b-4(e) under the Act \8\ without having to submit a 
formal rule change under Section 19(b) of the Act \9\ as long as the 
stock indexes satisfy the requisite criteria provided for under CBOE 
Rule 24.2(b).\10\ One of these criteria, provided for under CBOE Rule 
24.2(b)(2), requires that the subject index be capitalization-weighted, 
price-weighted, or equal-dollar weighted and consist of ten or more 
component securities.
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    \4\ 17 CFR 240.19b-4(e).
    \5\ 17 CFR 240.19b-4(c)(1).
    \6\ 15 U.S.C. 78s(b).
    \7\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998).
    \8\ 17 CFR 240.19b-4(e).
    \9\ 15 U.S.C. 78s(b).
    \10\ See Securities Exchange Act Release No. 41374 (May 5, 
1999), 64 FR 25936 (May 13, 1999) (Order approving CBOE Rule 
24.2(b)--Generic Narrow-Based Index Listing Criteria).
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    The Exchange hereby proposes to amend CBOE Rule 24.2(b)(2) to 
include the modified capitalization-weighted methodology as an 
acceptable generic listing standard for options on a narrow-based 
index.\11\ In addition to being a widely established method of 
weighting securities indexes,\12\ the modified capitalization-weighted 
methodology is already an approved criterion under the Exchange's 
generic listing standards for micro narrow-based securities indexes, as 
provided under CBOE Rule 24.2(d)(2).\13\ As such, the CBOE believes it 
is appropriate to adopt the modified capitalization-weighted 
methodology as a standard for listing options on narrow-based indexes 
that satisfy the Exchange's generic listing criteria for options on 
narrow-based securities indexes under CBOE Rule 24.2(b).
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    \11\ A modified capitalization weighted index is similar to a 
capitalization weighted index, where the components are weighted 
according to the total market value compared to the market value of 
the outstanding shares, except that an adjustment to the weighting 
of one or more of the components occurs. The general purposes for 
using this methodology are to: (1) Retain the economic attributes of 
capitalization weighting; (2) promote portfolio weight 
diversification; (3) reduce index performance distortion by 
preserving the capitalization ranking of companies; and (4) reduce 
market impact on the smallest underlying components from necessary 
weight rebalancing.
    \12\ For example, indexes such as the Nasdaq-100 Index, KBW Bank 
Index, KBW Capital Markets Index, and the Goldman Sachs Technology 
Indexes are calculated using the modified capitalization-weighted 
methodology.
    \13\ See Securities Exchange Act Release No. 49932 (June 28, 
2004), 69 FR 40994 (July 7, 2004) (Order approving the CBOE's micro 
narrow-based securities index generic listing standards).
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2. Statutory Basis
    The CBOE believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\14\ in general, and furthers 
the objectives of Section 6(b)(5),\15\ in particular, in that it should 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest. The CBOE believes that the adoption of the proposed rule 
change, as amended, also would enable the CBOE to act expeditiously in 
listing options on new narrow-based security indexes using standards 
that are currently applicable to options on micro narrow-based indexes 
listed on the Exchange.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 this proposed rule change, as amended, 
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 or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 12917]]

arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2005-08 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-2005-08. 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 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-2005-08 and should be submitted by April 6, 2005.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange,\16\ and, in particular, the requirements of Section 6(b)(5) 
thereunder.\17\ The proposed rule change, as amended, would facilitate 
the listing and trading of options on certain types of narrow-based 
securities indexes on the Exchange for the benefit of its members and 
their customers, specifically those that are calculated using the 
modified capitalization-weighted methodology and otherwise meet all 
applicable generic listing standards under CBOE Rule 24.2(b). The 
Commission also notes that the modified capitalization-weighted 
methodology is an established method for calculating securities 
indexes, including the Nasdaq 100 index, and has been approved, 
pursuant to Rule 19b-4(e) under the Act,\18\ as a generic listing 
standard for index-based securities.\19\ Accordingly, the Commission 
believes that approving this proposed rule change, as amended, would 
promote a fair, orderly, and competitive options market.
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    \16\ In approving this rule, the Commission notes that it has 
considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 17 CFR 240.19b-4(e).
    \19\ See Securities Exchange Act Release Nos. 51256 (February 
25, 2005), 70 FR 10447 (March 3, 2005); 49932 (June 28, 2004), 69 FR 
40994 (July 7, 2004) (Order approving the CBOE's micro narrow-based 
securities index generic listing standards).
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    The Exchange has requested that this proposed rule change, as 
amended, be given accelerated effectiveness pursuant to Section 
19(b)(2) of the Act.\20\ The Commission finds good cause for approving 
this proposed rule change, as amended, prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register. The 
Commission believes that accelerating the effectiveness of the proposed 
rule change, as amended, would facilitate the availability of 
additional investment choices to investors. In addition, the Commission 
notes that it has previously approved the modified market 
capitalization methodology in generic listing standards for other 
derivative products. Accordingly, the Commission believes that there is 
good cause, consistent with Sections 6(b)(5) and 19(b)(2) of the 
Act,\21\ to approve the proposal, as amended, on an accelerated basis.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change, as amended, (SR-CBOE-2005-10) 
is hereby approved on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).

    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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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-1141 Filed 3-15-05; 8:45 am]
BILLING CODE 8010-01-P