[Federal Register Volume 70, Number 137 (Tuesday, July 19, 2005)]
[Notices]
[Pages 41451-41453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3812]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52011; File No. SR-CBOE-2004-63]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 2 
Thereto To List and Trade Short Term Option Series

July 12, 2005.

I. Introduction

    On October 12, 2004, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to initiate a one-year pilot 
program that would allow the Exchange to list and trade option series 
that expire one week after being opened (``Short Term Option Series''). 
The Exchange filed Amendment No. 1 with the Commission on January 21, 
2005.\3\ The amended proposal was published for comment in the Federal 
Register on February 16, 2005.\4\ The Commission received one comment 
letter regarding the proposal.\5\ The Exchange filed Amendment No. 2 
with the Commission on April 26, 2005.\6\ This notice and order 
requests

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comment on Amendment No. 2 and approves the proposal, as amended, on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ See Securities Exchange Act Release No. 51172 (February 9, 
2005), 70 FR 7979.
    \5\ See letter from Michael J. Ryan, Executive Vice President 
and General Counsel, American Stock Exchange, to Jonathan G. Katz, 
Secretary, Commission, dated March 10, 2005 (``Amex Letter'').
    \6\ Amendment No. 2 replaced the original filing and Amendment 
No. 1 in their entirety. Amendment No. 2 proposes that Short Term 
Option Series listed on currently approved option classes would 
settle in the same manner (i.e., with respect to A.M. or P.M. 
settlement and cash or physical settlement) as do the monthly 
expiration series in the same option class.
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II. Description of Proposed Rule

    CBOE proposes to amend its rules to establish a pilot program to 
list and trade Short Term Option Series, which would expire one week 
after the date on which a series is opened. Under the proposal, the 
Exchange could select up to five approved option classes \7\ on which 
Short Term Option Series could be opened. A series could be opened on 
any Friday that is a business day and would expire at the close of 
business on the next Friday that is a business day. If a Friday were 
not a business day, the series could be opened (or would expire) on the 
first business day immediately prior to that Friday.
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    \7\ A Short Term Option Series could be opened in any option 
class that satisfied the applicable listing criteria under CBOE 
rules (i.e., stock options, options on exchange-traded funds as 
defined under Interpretation and Policy .06 to CBOE Rule 5.3, or 
options on indexes).
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    Under the pilot program, the Exchange also could list and trade 
Short Term Option Series on any option class that is selected by 
another exchange that employs a similar pilot program. Limiting the 
number of such option classes would ensure that the addition of new 
series through the pilot program would have only a negligible impact on 
the Exchange's and the Options Price Reporting Authority's (``OPRA'') 
quoting capacity. Also, limiting the term of the pilot program to a 
period of one year would allow the Exchange and the Commission to 
determine whether the Short Term Option Series program should be 
extended, expanded, and/or made permanent.
    As originally proposed, all Short Term Option Series would be P.M.-
settled. However, in Amendment No. 2, CBOE revised the proposal so that 
a Short Term Option Series would be settled in the same manner as the 
monthly expiration series in the same class. If the monthly option 
contract for a particular class were A.M.-settled, as most index 
options are,\8\ the Short Term Option Series for that class also would 
be A.M.-settled; if the monthly option contract for a particular class 
were P.M.-settled, as most non-index options are, the Short Term Option 
Series for that class also would be P.M.-settled. Similarly, Short Term 
Option Series for a particular class would be physically settled or 
cash-settled in the same manner as the monthly option contract in that 
class. The Exchange usually would open five Short Term Option Series 
for each expiration date in that class. The strike price of each Short 
Term Option Series would be fixed at a price per share, with at least 
two strike prices above and two strike prices below the value of the 
underlying stock or calculated index value at about the time that the 
Short Term Option Series is opened. CBOE would not open a Short Term 
Option Series in the same week that the corresponding monthly option 
series is expiring, because the monthly option series in its last week 
before expiration is functionally equivalent to the Short Term Option 
Series. The interval between strike prices on Short Term Option Series 
would be the same as with the corresponding monthly option series. CBOE 
would aggregate a Short Term Option Series with its corresponding 
monthly option series for purposes of the Exchange's rules on position 
limits.
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    \8\ The Exchange notes, however, that certain monthly expiration 
index options--specifically, American- and European-style options on 
the S&P 100 Index (OEX and XEO, respectively)--are P.M.-settled. 
Therefore, the Short Term Option Series in these index options would 
also be P.M.-settled.
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    The Exchange represented that it has the system capacity to 
adequately handle the new option series contemplated by this proposal. 
The Exchange provided to the Commission information in a confidential 
submission to support that representation.
    CBOE proposed that the pilot program extend one year from the date 
of this approval.

III. Discussion

    After careful review, the Commission finds that the proposal, as 
amended, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange.\9\ In particular, the Commission believes that the proposal 
is consistent with the requirements of Section 6(b)(5) of the Act,\10\ 
which requires, among other things, that the rules of a national 
securities 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.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that listing and trading Short Term Option 
Series, under the terms described in CBOE's proposal, will further the 
public interest by offering investors new means of managing their risk 
exposures and carrying out their investment objectives. The Commission 
also believes that the pilot program strikes a reasonable balance 
between the Exchange's desire to offer a wider array of investment 
opportunities and the need to avoid unnecessary proliferation of option 
series that could compromise options quotation capacity. The Commission 
expects CBOE to monitor the trading and quotation volume associated 
with the additional option series created under the pilot program and 
the effect of these additional series on the capacity of the 
Exchange's, OPRA's, and vendors' systems.
    The Commission received one comment letter on the proposed rule 
change.\11\ The commenter questioned the appropriateness of P.M. 
settlement for Short Term Option Series on indexes, given the 
Commission's historical concern that P.M.-settled index options have 
the potential to increase volatility in the underlying equity market.
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    \11\ See Amex Letter, supra note 5.
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    The Commission shares the commenter's concern. In Amendment No. 2, 
CBOE revised its proposal so that all Short Term Option Series will be 
settled in the same manner as the corresponding monthly expiration 
series in the same class. Consequently, the majority of Short Term 
Option Series on indexes will be A.M.-settled, as are the majority of 
regular index options. The Commission believes that this amendment 
adequately addresses any concerns regarding settlement time.
    Pursuant to Section 19(b)(2) of the Act,\12\ the Commission finds 
good cause for approving the amended proposal prior to the thirtieth 
day after the publication of Amendment No. 2 in the Federal Register. 
Amendment No. 2 proposes that Short Term Option Series listed on 
currently approved option classes will settle in the same manner (i.e., 
with respect to A.M. or P.M. settlement and cash or physical 
settlement) as do their corresponding monthly expiration series in the 
same option class. The Commission finds good cause to accelerate 
approval of the amended proposal because CBOE's approach to settlement 
times for the new Short Term Option Series is consistent with prior 
Commission guidance regarding options settlement times generally.
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    \12\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments Concerning Amendment No. 2

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

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arguments concerning Amendment No. 2, including whether it 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-2004-63 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-2004-63. 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 Exchange. 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-2004-63 and should be submitted on or before August 
9, 2005.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-CBOE-2004-63), as 
amended, is approved, and that Amendment No. 2 thereto is approved on 
an accelerated basis, as a pilot program, through July 12, 2006.
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    \13\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson
Assistant Secretary
[FR Doc. E5-3812 Filed 7-18-05; 8:45 am]
BILLING CODE 8010-01-P