[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35473-35475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3150]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51830; File No. SR-CBOE-2005-26]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of a Proposed Rule Change and Amendment No. 1 Thereto Relating to the 
Terms of Index Option Contracts Listed on the Exchange

June 13, 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 March 16, 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 Exchange. 
On June 9, 2005, CBOE submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons and to 
grant accelerated approval to the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4, dated June 9, 2005 (``Amendment No. 1). 
Amendment No. 1 replaced the original rule filing in its entirety. 
In Amendment No. 1, CBOE made certain clarifications to the proposed 
rule text by referencing Interpretation and Policy .12 to Rule 24.9 
(determination of pricing sources used in the calculation of an 
index) and further clarified the rationale for pursuing this rule 
change.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules relating to the terms of 
index option contracts listed on the Exchange. The text of the proposed 
rule change is below. Proposed new language is in italics; deletions 
are in brackets.
* * * * *
CHAPTER XXIV
Index Options
Rule 24.1--Rule 24.8 No Change
* * * * *
Rule 24.9--Terms of Index Option Contracts
    Rule 24.9. (a) General.
    (1)-(3) No Change.
    (4) A.M.-Settled Index Options. 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] the opening 
[(opening)] prices of the underlying securities on such day, as 
determined by the market for such security selected by the Reporting 
Authority pursuant to Interpretation and Policy .12 to Rule 24.9, 
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).
    The following A.M.-settled index options are approved for trading 
on the Exchange:
    (i)-(lxxiv) No Change.
* * * * *
    (5) Other Methods of Determining Exercise Settlement Value. 
Exercise settlement values for the following index options are 
determined as specified in this paragraph:
    (i) No Change.
    (ii) [Nasdaq 100 Stock Index. The current index value at expiration 
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. The current index value for 
such purposes shall be calculated by the Nasdaq Stock Market, Inc. 
(``Nasdaq'') and reported to the CBOE using the volume weighted prices 
(``VWPs'') of the securities underlying the Nasdaq-100 Index, which 
VWPs shall be calculated according to the then current volume-weighted 
averaging methodology developed by Nasdaq.
    (iii) ]CBOE Volatility Indexes and CBOE Increased-Value Volatility 
Indexes. The current index value at expiration 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. The current index value for such purposes shall be 
calculated by the Chicago Board Options Exchange as a Special Opening 
Quotation (SOQ) of each respective Volatility or Increased-Value 
Volatility Index using the sequence of opening prices of the options 
that comprise each Index. The opening price for any series in which 
there is no trade shall be the average of that option's bid price and 
ask price as determined at the opening of trading.
    (b)-(c) No Change.
    * * * Interpretations and Policies:
    .01-.12 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, 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 purpose of the proposed rule change is to clarify CBOE rules 
relating to the determination of opening prices for securities that 
underlie certain A.M.-settled index options traded on the Exchange and 
to clarify CBOE rules relating to the determination of the exercise 
settlement value for certain

[[Page 35474]]

option contracts that are based on the Nasdaq 100 Index.
    Currently, CBOE Rule 24.9(a)(4) provides that the current index 
value at expiration of an A.M.-settled index option is determined 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.'' The Exchange believes it important to clarify 
in CBOE Rules that, although the settlement values of an A.M.-settled 
index are generally determined from the first reported sale of the 
securities that underlie the index, the specific methodology for 
ascertaining the opening prices is largely determined by factors 
outside of the CBOE's control. Specifically, these factors include the 
fact that (1) the Reporting Authority \4\ for a particular index may 
not always be using the primary market for a particular index component 
security \5\ and/or (2) the opening price for any particular component 
security used to calculate the index may not always be the first 
reported sale of that security, regardless of whether the Reporting 
Authority is using the underlying security's primary market as the 
pricing source.\6\
---------------------------------------------------------------------------

    \4\ CBOE Rule 24.1(h) defines a Reporting Authority as `` * * * 
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 bases of the index and reporting 
such level.''
    \5\ Interpretation and Policy .12 to CBOE Rule 24.9 provides 
that, ``[w]ith 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.''
    \6\ Although the Reporting Authority has discretion in selecting 
the source (i.e., primary market or other securities exchange) of 
pricing for securities that underlie the index, the opening price 
must be determined in accordance with the rules of the securities 
exchange (or Nasdaq) that the Reporting Authority selects as the 
source of pricing to be used in the calculation of the index.
    Additionally, and as is consistent with CBOE Rule 24.9(a)(4), 
the Reporting Authority will be required to use the opening price in 
the calculation of the index value, not the closing price from the 
previous trading day.
---------------------------------------------------------------------------

    To emphasize factor (1) above, the Exchange proposes to reference 
existing Interpretation and Policy .12 to Rule 24.9 \7\ in paragraph 
(4) to CBOE Rule 24.9(a). Regarding factor (2) above, there may be 
circumstances in which the opening price for a particular component(s) 
underlying an index may not be the first reported sale for that 
component. To illustrate, Nasdaq has recently received approval to 
utilize a single opening pricing methodology (``Nasdaq Official Opening 
Price'') for securities traded through Nasdaq.\8\ Through this new 
methodology, the Nasdaq Official Opening Price reported by Nasdaq for a 
security may not always be the first reported sale. As such, referring 
to opening prices as the ``first reported sale,'' as is currently 
described in CBOE Rule 24.9(a)(4), is simply not accurate.
---------------------------------------------------------------------------

    \7\ See supra at Note 4 and see also Securities Exchange Act 
Release No. 50269 (August 26, 2004); 69 FR 53755 (September 2, 2004) 
(Notice of Filing and Immediate Effectiveness of proposed rule 
change adding Interpretation and Policy .12 to Rule 24.9). Telephone 
conversation between Terri Evans, Special Counsel, Division of 
Market Regulation, Commission, and James Flynn, Attorney, CBOE, on 
June 10, 2005.
    \8\ See Securities Exchange Act Release No. 50405 (September 16, 
2004); 69 FR 57118 (September 23, 2004).
---------------------------------------------------------------------------

    Therefore, the Exchange proposes to amend CBOE Rule 24.9(a)(4), in 
part, (1) to eliminate reference to the term ``first reported sale'' 
and (2) to reflect that the opening prices of the underlying securities 
at expiration of an A.M.-settled index option will be determined by the 
market (securities exchange or Nasdaq) for such security selected by 
the Reporting Authority, as consistent with Interpretation and Policy 
.12 to Rule 24.9.
    Additionally, this rule filing proposes to revise Rule 
24.9(a)(5)(ii), which describes the manner in which Nasdaq determines 
the exercise settlement value for the Nasdaq 100 Index. Until recently, 
as described in Rule 24.9(a)(5)(ii), Nasdaq calculated the exercise 
settlement value for the Nasdaq 100 Index using the volume weighted 
prices (``VWP'') of the securities underlying the Nasdaq 100 Index. 
Nasdaq now uses a new methodology that, essentially, relies on a single 
price of each security that underlies the Nasdaq 100 Index.\9\ As 
Nasdaq will no longer be using a special VWP methodology for 
calculating the exercise settlement value for the Nasdaq 100 Index and, 
relying instead on the general provision in CBOE Rule 24.9(a)(4),\10\ 
CBOE proposes to merely eliminate the VWP description entirely from 
CBOE Rule 24.9(a)(5).
---------------------------------------------------------------------------

    \9\ Id.
    \10\ Telephone conversation between Terri Evans, Special 
Counsel, Division of Market Regulation, Commission, and James Flynn, 
Attorney, CBOE, on June 10, 2005 (changing reference from 
Interpretation and Policy .12 to Rule 24.9(a)(4).
---------------------------------------------------------------------------

2. Statutory Basis
    Because these proposed amendments serve to clarify existing rules 
relating to the determination of the opening prices for the securities 
that underlie indexes on which the Exchange lists options and also 
clarifies the method for determining the exercise settlement value for 
certain option contracts that are based on the Nasdaq 100 Index, the 
Exchange believes that the proposed rule change is consistent with and 
furthers the objectives of Section 6(b)(5) of the Act,\11\ in that it 
is designed 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    This 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

    The CBOE neither solicited nor received comments with respect to 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
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-2005-26 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CBOE-2005-26. 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

[[Page 35475]]

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. 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-2005-26 and should be 
submitted on or before July 11, 2005.

IV. Commission 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.\12\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 6(b)(5) of the 
Act,\13\ which requires, in part, that the rules of an exchange be 
designed 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. The Commission believes that 
the proposed rule change reflects the change in methodology for 
calculating the index settlement value of the Nasdaq 100 Index and 
clarifies that the settlement values of A.M. settled index options may 
be determined using an opening price other than the first reported 
sale.
---------------------------------------------------------------------------

    \12\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission finds good cause for accelerating approval of the 
proposed rule change, as amended, prior to the thirtieth day after 
publication in the Federal Register. The Commission notes that 
accelerating approval of the proposed rule change will allow the 
Exchange to timely reflect in its rules the manner in which Nasdaq 
proposes to calculate the current index value at expiration for the 
Nasdaq 100 Index starting with the June 2005 expiration. Accordingly, 
the Commission finds good cause, consistent with Section 19(b)(2) of 
the Act,\14\ to approve the proposed rule change, as amended, on an 
accelerated basis.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change, as amended (File No. SR-CBOE-
2005-26), be approved on an accelerated basis.
---------------------------------------------------------------------------

    \15\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3150 Filed 6-17-05; 8:45 am]
BILLING CODE 8010-01-P