[Federal Register Volume 70, Number 163 (Wednesday, August 24, 2005)]
[Notices]
[Pages 49691-49696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4624]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52295; File No. SR-CFE-2005-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by CBOE Futures Exchange, LLC 
Relating to Its Listing Standards for Security Futures Products

August 18, 2005.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
\1\ (``Act'') and Rule 19b-7 under the Act,\2\ notice is hereby given 
that on July 26, 2005, CBOE Futures Exchange, LLC (``CFE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change described in Items 
I, II and III below, which Items have been prepared by CFE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. CFE also filed the 
proposed rule change with the Commodity Futures Trading Commission 
(``CFTC''), together with a written certification under Section 5c(c) 
of the Commodity Exchange Act (``CEA'') \3\ on July 25, 2005.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description of the Proposed Rule 
Change \4\
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    \4\ With the consent of the CFE, the Commission has made minor 
clarifications to the text of the descriptions in this Part I and to 
the statement of purpose in Part II.A below. Telephone call between 
David Doherty, Attorney, CFE, and Ira Brandriss, Special Counsel, 
and Nathan Saunders, Special Counsel, Division of Market Regulation, 
Commission, August 9, 2005.
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    CFE is proposing to adopt rules regarding listing standards for 
security futures contracts (``Eligibility and Maintenance Criteria'') 
to comply with the requirements under Section 6(h)(3) \5\ of the Act 
and the criteria under Section 2(a)(1)(D)(i) of the CEA.\6\ The text of 
the proposed rule change is available on CFE's Web site (http://cfe.cboe.com), at CFE's principal office, and at the Commission's 
Public Reference Room. The CFE Listing Standards \7\ are, for the most 
part, identical to the sample listing standards (``Sample Listing 
Standards'') included in the Commission's Staff Legal Bulletin No. 15 
(``SLB 15''),\8\ except that the CFE Listing Standards:
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    \5\ 15 U.S.C. 78f(h)(3).
    \6\ 7 U.S.C. 2(a)(1)(D)(i).
    \7\ The CFE Listing Standards are set forth in proposed Policy 
and Procedure VIII, Eligibility and Maintenance Criteria for 
Security Futures.
    \8\ SEC, Division of Market Regulation, Staff Legal Bulletin No. 
15: Listing Standards for Trading Security Futures Products 
(September 5, 2001) (available at http://www.sec.gov/interps/legal/mrslb15.htm).
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     Reflect the modifications to the statutory listing 
standards requirements jointly adopted by the Commission and the CFTC 
with respect to shares of exchange-traded funds (``ETFs''), trust-
issued receipts (``TIRs''), shares of registered closed-end management 
investment companies (``Closed-End Fund Shares''), and American 
Depositary Receipts (``ADRs'');\9\
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    \9\ See Joint Order Granting the Modification of Listing 
Standards Requirements Securities Exchange Act Release No. 46090 
(June 19, 2002), 67 FR 42760 (June 25, 2002) (ETFs, TIRs and Closed-
End Fund Shares); Joint Order Granting the Modification of Listing 
Standards Requirements, Securities Exchange Act Release No. 44725 
(August 20, 2001) (ADRs).
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     Establish an approximately equal dollar-weighting 
methodology for physically-settled futures based on narrow-based 
security indices (all narrow-based security index futures are referred 
to hereafter as ``NBI futures''),\10\ which (i) requires the number of 
shares or receipts of each component security to be rounded up or down 
to the nearest multiple of 100 in the course of the determination of 
the initial index composition and any subsequent rebalancing; (ii) 
contemplates mandatory annual rebalancing of such indices under 
specified circumstances, complemented by CFE's ability to rebalance 
indices on an interim basis if it so elects; and (iii) ensures that 
outstanding contracts will not be affected by any rebalancing; and
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    \10\ CFE Policy and Procedures VIII(C) and VIII(D) contain 
listing requirements that relate to the initial eligibility criteria 
and maintenance standards, respectively, for approximately equal 
dollar-weighted, physically-settled narrow-based security indices.
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     Contain certain provisions that reflect rule changes that 
have been filed by other security futures exchanges since the adoption 
of SLB 15, which vary from the Sample Listing Standards set forth in 
SLB 15.
    CFE is also filing herewith CFE Rules 215, 403, 412-415, 417, 501, 
601-605, 610-615, 1801-1806, and 1901-1906, all of which remain 
unchanged from the CFE Rulebook filed with the Commission as part of 
CFE's notice registration on Form 1-N. These rules are being filed 
herewith because they relate to the listing standard requirements set 
forth in Section 6(h)(3) of the Act \11\ as further described below. 
CFE Rule 517 and CFE Policy and Procedure VII, while also referenced in 
Item II below, are not filed in this proposed rule change because they 
were the subjects of a separate filing by CFE on SEC Form 19b-4.\12\
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    \11\ 15 U.S.C. 78f(h)(3).
    \12\ See File No. SR-CFE-2005-02 (filed July 27, 2005).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    CFE has prepared statements concerning the purpose of, and basis 
for, the proposed rule change, burdens on competition, and comments 
received from its members, participants, and others. The text of these 
statements may be examined at the places specified in Item IV below. 
These statements are set forth in Sections A, B, and C below.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, Proposed Rule Change

    Section 6(h)(3) of the Act \13\ sets forth a number of requirements 
for listing standards applicable to security futures products. Among 
other things, that Section provides that such listing standards must 
(i) be no less restrictive than comparable listing standards for 
options traded on a national securities exchange \14\ and (ii) require 
that trading in security futures products not be readily susceptible to 
manipulation of the price of such products or of the underlying 
securities or options on such securities.\15\
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    \13\ 15 U.S.C. 78f(h)(3).
    \14\ 15 U.S.C. 78f(h)(3)(C).
    \15\ 15 U.S.C. 78f(h)(3)(H).
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1. CFE Listing Standards
    Commission staff published SLB 15, including the Sample Listing 
Standards (which were derived from typical listing standards used by 
exchanges trading options based on securities or security indices), to 
provide guidance as to how an exchange can comply with the foregoing 
requirements. SLB 15 also

[[Page 49692]]

noted that different listing standards could also be consistent with 
the Act.
    The CFE Listing Standards follow the Sample Listing Standards, 
subject to the additional modifications relating to ETFs, TIRs, Closed-
End Fund Shares, and ADRs; the establishment of an additional weighting 
methodology for certain physically-settled NBI futures described under 
Item I above; and certain other rule changes that were filed with the 
Commission and the CFTC by OneChicago, LLC (``OneChicago'') \16\ which 
pertained to OneChicago's listing standards for security futures. 
Therefore, the CFE Listing Standards as set forth herein do not contain 
any listing standards that have not already been reviewed by the 
Commission. The CFE Listing Standards permit CFE to trade both cash-
settled and physically-settled NBI futures on the following types of 
indices: capitalization-weighted, modified capitalization-weighted, 
price-weighted, and equal dollar-weighted. The modifications to SLB 15, 
including the modifications that permit CFE to list approximately 
equal-dollar weighted, physically-settled NBI futures, are explained in 
further detail below.
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    \16\ See SR-OC-2002-04 (Securities Exchange Act Release No. 
47114 (December 31, 2002), 68 FR 837 (January 7, 2003)) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change by 
OneChicago, LLC Relating to Listing Standards for Security Futures 
Products); see also SR-OC-2003-01 (Securities Exchange Act Release 
No. 47356 (February 12, 2003), 68 FR 8064 (February 19, 2003)); SR-
OC-2003-04 (Securities Exchange Act Release No. 47445 (March 5, 
2003), 68 FR 11595 (March 11, 2003)); SR-OC-2003-06 (Securities 
Exchange Act Release No. 48191 (July 17, 2003), 68 FR 43555 (July 
23, 2003)); SR-OC-2003-08 (Securities Exchange Act Release No. 48660 
(October 20, 2003), 68 FR 61027 (October 24, 2003)); and SR-OC-2004-
02 (Securities Exchange Act Release No. 50373 (September 14, 2004), 
69 FR 56470 (September 21, 2004)).
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2. Modifications of SLB 15
    a. Modification of SLB 15 I(A)(i).
    The modifications set forth in the CFE listing standards that 
relate to shares of ETFs, TIRs, Closed-End Fund Shares, and ADRs 
reflect the modifications to the statutory listing standards 
requirements adopted by the Commission and the CFTC subsequent to the 
publication of SLB 15.\17\ These standards are reflected in Section 
A(1)(i) of CFE Policy and Procedure VIII.
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    \17\ See supra note 9.
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    b. Modification of SLB 15 III(A)(ii).
    The modifications that relate to narrow-based security indices are 
intended to allow CFE to provide for an additional weighting 
methodology, called an ``approximately equal dollar-weighted'' 
methodology, that would be available only for physically-settled NBI 
futures, and accordingly, are limited in application to such 
physically-settled contracts. These modifications are designed to 
enhance the usefulness and effectiveness of physically-settled NBI 
futures in connection with hedging, arbitrage and other investment 
strategies.
    The proposed approximately equal dollar-weighted methodology 
contemplates narrow-based security indices consisting of component 
securities in increments that are no less than 100 shares or receipts, 
which corresponds to customary increments for transactions in the 
markets for those securities. For this reason, rounding will be a 
necessary step in the determination of the initial index composition 
and any subsequent rebalancing. The underlying index of a physically-
settled NBI future that uses an approximately equal dollar-weighted 
methodology would be rebalanced annually, but only if the aggregate 
value of the security position with the highest value is two or more 
times greater than the aggregate value of the security position with 
the lowest value in the index for a specified time period. CFE will 
also have the ability to rebalance any approximately equal dollar-
weighted narrow-based security index on an interim basis (but no more 
frequently than quarterly) should this become necessary as a result of 
exceptional changes in the relative values of the component securities. 
As CFE plans to list only physically-settled NBI futures contracts 
expiring on the next two quarterly expiration dates and the nearest two 
serial monthly expiration dates that are not quarterly expiration 
dates, CFE will be able to phase in contracts that are based on a 
rebalanced narrow-based security index, and thereby replace contracts 
with open interest that are based on the previous narrow-based security 
index composition within a short period of time. CFE also believes that 
investors in approximately equal dollar-weighted NBI futures contracts 
should be able to rely on the number of shares or receipts evidencing 
each component security remaining unchanged for the duration of those 
contracts. Therefore, the CFE Listing Standards state that outstanding 
contracts overlying approximately equal dollar-weighted narrow-based 
security indices will not be affected by any rebalancing. The proposed 
listing standards for approximately equal dollar-weighted narrow-based 
security indices are identical to the listing standards for 
approximately equal dollar-weighted narrow-based security indices that 
were set forth in the OneChicago rules prior to a recent filing of an 
immediately effective proposed rule change by OneChicago.\18\ In 
addition, the contents of the CFE Listing Standards, including the 
approximately equal dollar-weighting methodology described above, will 
be publicly available and fully disclosed. These standards are 
reflected in Sections C(1)(ii) and D(1)(ii) of CFE Policy and Procedure 
VIII.
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    \18\ See SR-OC-2005-02 (Securities Exchange Act Release No. 
52180 (July 29, 2005), 70 FR 45464 (August 5, 2005)).
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    c. Modification of SLB 15 I(A)(vi).
    CFE is adopting the initial listing standard implemented by 
OneChicago in SR-OC-2004-02,\19\ which would permit CFE to list a 
single stock future on an underlying security that had trading volume 
of at least 2,400,000 shares in the preceding 12 months. This standard 
is reflected in Section A(1)(vi) of CFE Policy and Procedure VIII.
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    \19\ See supra note 16.
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    d. Modification of SLB 15 I(A)(vii).
    CFE is adopting the initial listing standards implemented by 
OneChicago in SR-OC-2003-01,\20\ which would permit a single stock 
future to be listed on a security that is a ``covered security'' as 
defined under Section 18(b)(1)(A) of the Securities Act of 1933 \21\ if 
the market price of the underlying security has been at least $3.00 for 
the five consecutive business days prior to the date on which CFE 
submits a certificate to The Options Clearing Corporation (``OCC'') for 
listing and trading the futures contract. The market price of the 
underlying security would be measured by the closing price reported in 
the primary market in which the underlying security is traded. CFE 
rules would also require that an underlying security that is not a 
``covered security'' meet the price requirement that it have a market 
price of at least $7.50 for the majority of the business days for the 
three calendar months preceding selection. These standards are 
reflected in Sections A(1)(viii) and A(1)(ix) of CFE Policy and 
Procedure VIII.
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    \20\ See id.
    \21\ 15 U.S.C. 77r(b)(1)(A).
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    e. Modification of SLB 15 II(A)(iv).
    CFE is adopting the maintenance standard implemented by OneChicago 
in SR-OC-2003-04 \22\ (as amended by SR-OC-2003-08),\23\ pursuant to 
which CFE would not open for trading a new delivery month for a single 
stock future trading on CFE if the market price per share of the 
underlying security closed below $3.00 on the previous trading day to 
the expiration day of the nearest expiring contract on the underlying

[[Page 49693]]

security. The market price per share of the underlying security would 
be determined by the closing price reported in the primary market in 
which the underlying security is traded. This standard is reflected in 
Section B(1)(v) of CFE Policy and Procedure VIII.
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    \22\ See supra note 16.
    \23\ See id.
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3. Section 6(h)(3) Requirements
    Section 6(h)(3) of the Act \24\ contains detailed requirements for 
listing standards and conditions for trading applicable to security 
futures products. Set forth below is a summary of each such requirement 
or condition, followed by a brief explanation of how CFE will comply 
with it, whether by particular provisions in the CFE Listing Standards 
or otherwise.
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    \24\ 15 U.S.C. 78f(h)(3).
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    Clause (A) of Section 6(h)(3) of the Act \25\ requires that any 
security underlying a security future be registered pursuant to Section 
12 of the Act.\26\ This requirement is addressed in Sections A(1)(ii), 
B(1)(i), C(1)(ii)(b), and D(1)(ii)(a) of CFE Policy and Procedure VIII.
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    \25\ 15 U.S.C. 78f(h)(3)(A).
    \26\ 15 U.S.C. 78l.
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    Clause (B) of Section 6(h)(3) of the Act \27\ requires that a 
market on which a physically-settled security futures product is traded 
have arrangements in place with a registered clearing agency for the 
payment and delivery of the securities underlying the security futures 
product. CFE has entered into an arrangement with OCC, which is a 
registered clearing agency, relating to the clearing of security 
futures products. By virtue of OCC having in place arrangements with 
the National Securities Clearing Corporation for the delivery of 
securities underlying physically-settled security futures products, CFE 
believes that the payment and delivery of the securities underlying 
CFE's security futures products in accordance with the statutory 
requirements should be ensured.
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    \27\ 15 U.S.C. 78f(h)(3)(B).
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    Clause (C) of Section 6(h)(3) of the Act \28\ provides that listing 
standards for security futures products must be no less restrictive 
than comparable listing standards for options traded on a national 
securities exchange or national securities association registered 
pursuant to Section 15A(a) of the Act.\29\ For the reasons discussed 
under Item II.A.1 above, notwithstanding specified differences between 
the Sample Listing Standards and the CFE Listing Standards, CFE 
believes that the latter are no less restrictive than comparable 
listing standards for exchange-traded options.
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    \28\ 15 U.S.C. 78f(h)(3)(C).
    \29\ 15 U.S.C. 78o-3(a).
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    Clause (D) of Section 6(h)(3) of the Act \30\ requires that each 
security future be based on common stock or such other equity 
securities as the Commission and the CFTC jointly determine 
appropriate. This requirement is addressed in Sections A(1)(i), 
C(1)(ii)(c), and D(1)(ii)(b) of CFE Policy and Procedure VIII.
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    \30\ 15 U.S.C. 78f(h)(3)(D).
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    Clause (E) of Section 6(h)(3) of the Act \31\ requires that each 
security futures product be cleared by a clearing agency that has in 
place provisions for linked and coordinated clearing with other 
clearing agencies that clear security futures products, which permits 
the security futures product to be purchased on one market and offset 
on another market that trades such product. CFE notes that pursuant to 
Section 6(h)(7) of the Act,\32\ the foregoing requirement is deferred 
until the ``compliance date'' (as defined therein). CFE expects OCC 
will have in place procedures complying with the requirements of clause 
(E) upon and after such compliance date.
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    \31\ 15 U.S.C. 78f(h)(3)(E).
    \32\ 15 U.S.C. 78f(h)(7).
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    Clause (F) of Section 6(h)(3) of the Act \33\ requires that only a 
broker or dealer subject to suitability rules comparable to those of a 
national securities association registered pursuant to Section 15A(a) 
of the Act \34\ may effect transactions in a security futures product. 
This requirement is addressed by CFE Rule 605, Sales Practice Rules. 
CFE Rule 605 requires each Trading Privilege Holder (including its 
Related Parties) to comply with the sales practice rules applicable to 
such Trading Privilege Holder from time to time promulgated by the 
National Futures Association or the National Association of Securities 
Dealers, both of which are national securities associations.
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    \33\ 15 U.S.C. 78f(h)(3)(F).
    \34\ 15 U.S.C. 78o-3(a).
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    Clause (G) of Section 6(h)(3) of the Act \35\ requires that each 
security futures product be subject to the prohibition against dual 
trading in Section 4j of the CEA \36\ and the rules and regulations 
thereunder or the provisions of Section 11(a) of the Act \37\ and the 
rules and regulations thereunder. Trading Privilege Holders and their 
Related Parties trading on CFE will be subject to the aforementioned 
statutory and regulatory prohibitions against dual trading by virtue of 
CFE Rule 604, Adherence to Law, which requires them to comply with all 
applicable law. CFE Rules 610 through 613 contain customary provisions 
relating to the priority of customers' orders, trading against 
customers' orders, withholding orders and disclosing orders, consistent 
with CFTC Regulations Sec. Sec.  155.2 through 155.4 \38\ under the 
CEA. CFE notes, however, that the prohibition of dual trading in 
security futures products as set forth in CFTC Regulation Sec.  41.27 
\39\ adopted pursuant to Section 4j(a) of the CEA \40\ by its terms 
only applies to a contract market operating an electronic trading 
system if such market provides participants with a time or place 
advantage or the ability to override a predetermined algorithm.\41\ 
Since those conditions do not exist on CFE, CFE has no specific rule 
prohibiting dual trading.
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    \35\ 15 U.S.C. 78f(h)(3)(G).
    \36\ 7 U.S.C. 6j.
    \37\ 15 U.S.C. 78k(a).
    \38\ 17 CFR 155.2-155.4.
    \39\ 17 CFR 41.27.
    \40\ 7 U.S.C. 6j(a).
    \41\ 17 CFR 41.27(b)(2).
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    Clause (H) of Section 6(h)(3) of the Act \42\ requires that trading 
in a security futures product not be readily susceptible to 
manipulation of the price of such security futures product, nor to 
causing or being used in the manipulation of the price of any 
underlying security, option on such security, or option on a group or 
index including such securities. As discussed above, the eligibility 
and maintenance criteria for security futures products contained in the 
CFE Listing Standards have been designed to ensure that the products 
that will be listed on CFE and the underlying securities will not be 
readily susceptible to price manipulation. In addition, CFE Rules 415, 
Block Trading, 603, Market Manipulation, 614, Pre-Arranged Trades, and 
615, Simultaneous Buying and Selling Orders, either prohibit market 
manipulation outright (for example, CFE Rule 603 forbids generating 
unnecessary volatility or creating a condition where prices do not or 
will not reflect fair market values) or contain standards and 
limitations that are designed to prevent market manipulation.
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    \42\ 15 U.S.C. 78f(h)(3)(H).
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    CFE's position limit standards set forth in CFE Rule 412, Position 
Limits, are designed to prevent market manipulation with respect to 
physically-settled NBI futures through the adoption of the position 
limits established under CFTC Regulation Sec.  41.25.\43\ With respect 
to cash-settled NBI futures, CFE Rule 1902(e), Speculative Position 
Limits, adopts the

[[Page 49694]]

position limit standards set forth in OneChicago Rule 1002(e)(2) and 
applies those standards to all cash-settled NBI futures traded on 
CFE.\44\ Under CFE Rule 1902(e), CFE calculates two numbers: the Market 
Cap Position Limit and the SSF Position Limit. The Market Cap Position 
Limit is based on the market capitalization of each NBI future and the 
notional value compared to the market capitalization of the Chicago 
Mercantile Exchange Inc. (``CME'') position limit for its futures 
contract on Standard & Poor's (``S&P'' 500 Index. The SSF Position 
Limit is based on the current position limit permitted for single stock 
futures under CFTC Regulation Sec.  41.25.\45\ CFE imposes a position 
limit on each cash-settled NBI future equal to the lower of the Market 
Cap Position Limit and the SSF Position Limit, rounded to the nearest 
multiple of 1,000 contracts; provided, however, that if the lower of 
the two limits is less than 500 but not less than 400, the position 
limit for such future is rounded up to 1,000 contracts.
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    \43\ 17 CFR 41.25.
    \44\ Consistent with CFTC Regulation 41.25, position limits 
apply to positions in any cash-settled NBI future held during the 
last five trading days of an expiring contract.
    \45\ 17 CFR 41.25.
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    To calculate the Market Cap Position Limit, CFE determines the 
market capitalization of the S&P 500 Index (as of the selection date 
for the component securities in the index underlying the NBI future), 
then calculates the notional value of a position at the limit of CME's 
S&P 500 Index futures contract (``S&P 500 Notional Value Limit'') \46\ 
and divides the first amount by the second to determine the market 
capitalization ratio (``Market Cap Ratio'').\47\ CFE then determines 
the market capitalization of the index underlying the NBI future 
(``Stock Index Market Cap'') \48\ and the notional value of the index 
underlying the NBI future (``Notional Value'').\49\ To calculate the 
Market Cap Position Limit, CFE divides the Stock Index Market Cap by 
the Notional Value multiplied by the Market Cap Ratio.\50\
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    \46\ The speculative position limit for the CME's S&P 500 Index 
futures contract is 20,000 contracts (in all months combined) and 
the contract multiplier is $250. Thus, S&P 500 Notional Value Limit 
= Level of the S&P 500 Index * 20,000 * 250.
    \47\ Market Cap Ratio = Market Capitalization of the S&P 500 
Index / S&P 500 Notional Value Limit.
    \48\ The Stock Index Market Cap is calculated by adding the 
market capitalizations of each stock comprising the underlying 
narrow-based security index.
    \49\ Notional Value = Level of the index underlying the NBI 
future * contract multiplier.
    \50\ Market Cap Position Limit = Stock Index Market Cap / 
(Notional Value * Market Cap Ratio).
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    To calculate the SSF Position Limit for an NBI future, CFE first 
calculates its Notional Value in the same manner as described 
above.\51\ Then, for each component security in the index underlying 
the NBI future, CFE multiplies the index weight of the component 
security \52\ by the Notional Value to determine the security's 
proportion of the NBI future (``Share Weighting''). CFE then divides 
each security's Share Weighting by its price to calculate the number of 
shares of that security represented in the NBI futures contract 
(``Implied Shares''). CFE then, for each component security in the 
index underlying the NBI future, divides its Implied Shares by 100 to 
obtain the implied number of 100-share contracts of such component 
security in each NBI futures contract. CFE then divides the applicable 
single stock futures contract speculative position limit permitted 
under CFTC Regulation Sec.  41.25(a)(3) \53\ (either 13,500 or 22,500 
contracts) for each component security by the number of implied 100-
share contracts. This equals the number of NBI futures contracts that 
could be held without exceeding the speculative position limit on a 
futures contract on that component security (``Implied SSF Speculative 
Limit''). If a component security qualified for position accountability 
under CFTC Regulation 41.25(a)(3),\54\ that security would be ignored 
for purposes of this calculation. After calculating the Implied SSF 
Speculative Limit for each security in the index underlying the NBI 
future, CFE identifies the lowest Implied SSF Speculative Limit as the 
SSF Position Limit for that NBI future.
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    \51\ See supra note 49.
    \52\ Index weight of the component security = (assigned shares * 
price) of the component security / the sum of (assigned shares * 
price) for each component security.
    \53\ 17 CFR 41.25(a)(3).
    \54\ Id.
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    CFE Rules 413(b), Price Limits; Final Settlement Prices, and 417, 
Regulatory Halts, implement the requirements contained in Rule 6h-1 
under the Act \55\ relating to settlement and regulatory halts with 
respect to security futures products.
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    \55\ 17 CFR 240.6h-1.
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    With respect to final settlement prices, CFE Rule 1902(i), 
Settlement Price, establishes how the final settlement price is 
determined for cash-settled NBI futures. Under CFE Rule 1902(i), a 
special opening quotation of the relevant index underlying the NBI 
future will be derived from the sum of the opening prices \56\ of each 
component stock. When all of the component stocks have opened, the 
final special opening quotation will be calculated and disseminated.
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    \56\ Consistent with 17 CFR 41.1(j), CFE Rule 1902(i)(II)(C)(1) 
defines ``opening price'' as follows: ``Opening price'' means the 
official price at which a security opened for trading during the 
regular trading session of the national securities exchange or 
national securities association that lists the security. If the 
security is not listed on a national securities exchange or a 
national securities association, then ``opening price'' shall mean 
the price at which a security opened for trading on the primary 
market for the security. Under this provision, if a component 
security is an [ADR] traded on a national securities exchange or 
national securities association, the opening price for the ADR would 
be derived from the national securities exchange or national 
securities association that lists it.
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    If the price of one or more of the component securities is not 
readily available \57\ on the day scheduled for determination of the 
final settlement price, the price of the component security or 
securities shall be based on the next available opening price of that 
security, unless the President of the Exchange or his designee for such 
purposes (``Designated Officer'') determines that one or more component 
securities are not likely to open within a reasonable time. If the 
Designated Officer makes such a determination, the price of the 
relevant component security or securities for purposes of calculating 
the final settlement price will be the last trading price of the 
security or securities during the most recent regular trading session 
for such security or securities.
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    \57\ Under CFE Rule 1902(i)(II)(C)(4), the price of a security 
is ``not readily available'' if the underlying market does not open 
on the date set for determination of the final settlement price, or 
if the security does not trade on the securities exchange or 
national securities association that lists the security during 
regular trading hours.
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    CFE Rule 1902(i) also provides that the Rule shall not be used to 
calculate the final settlement price of an NBI future if OCC fixes the 
final settlement price of the NBI future in accordance with OCC's rules 
and by-laws and as permitted under the Commission's Rule 6h-1(b)(3) 
\58\ and CFTC Regulation 41.25(b)(3).\59\
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    \58\ 17 CFR 240.6h-1(b)(3).
    \59\ 17 CFR 41.25(b)(3).
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    Clause (I) of Section 6(h)(3) of the Act \60\ requires that 
procedures be in place for coordinated surveillance among the market on 
which a security futures product is traded, any market on which any 
security underlying the security futures product is traded, and other 
markets on which any related security is traded to detect manipulation 
and insider trading. The relevant provisions are CFE Rules 601, 602 and 
603, which prohibit fraudulent acts, fictitious transactions and market 
manipulation, respectively. CFE notes that it is an affiliate member of 
the Intermarket Surveillance Group (``ISG'') and has executed (1) an 
Agreement to

[[Page 49695]]

Share Market Surveillance and Regulatory Information between CFE and 
the full members of ISG; (2) the Agreement to Share Market Surveillance 
and Regulatory Information between CFE and the affiliate members of 
ISG; and (3) the Addendum for Security Futures Products to agreements 
between the full members of ISG and the affiliate members of ISG 
trading security futures products (including CFE). CFE Rule 215, 
Regulatory Cooperation, permits CFE to enter into these and other 
agreements for the exchange of information and other forms of mutual 
assistance with domestic or foreign self-regulatory organizations, 
associations, boards of trade and their respective regulators. Under 
CFE Rule 215, CFE is authorized to provide information to any such 
organization, association, board of trade or regulator that is a party 
to an information sharing agreement with CFE, in accordance with the 
terms and subject to the conditions set forth in such agreement. 
Additional provisions related to coordinated surveillance are contained 
in Sections A(1)(x)(a), C(1)(ii)(g), and D(1)(ii)(f) of CFE Policy and 
Procedure VIII.
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    \60\ 15 U.S.C. 78f(h)(3)(I).
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    Clause (J) of Section 6(h)(3) of the Act \61\ requires that a 
market on which a security futures product is traded have in place 
audit trails necessary or appropriate to facilitate the coordinated 
surveillance referred to in the preceding paragraph. The audit trail 
capability provided by CBOEdirect, CFE's trade matching engine, will 
create and maintain an electronic transaction history database that 
contains information with respect to all orders, whether executed or 
not, and resulting transactions on CFE. The information recorded with 
respect to each order includes: time received, terms of the order, 
order type, instrument and contract month, price, quantity, account 
type, account designation, user code and clearing firm. This 
information will enable CFE to trace each order back to the clearing 
firm by or through which it was submitted. If any question or issue 
arises as to the source of an order prior to submission by or through a 
clearing firm, CFE will request that the clearing firm provide an 
electronic or other record of the order.
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    \61\ 15 U.S.C. 78f(h)(3)(J).
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    For orders that cannot be immediately entered into CFE systems, and 
therefore will not be recorded electronically by CBOEdirect at the time 
they are placed, CFE Rule 403(b), Order Entry, requires that the 
Clearing Member or, if applicable, the Trading Privilege Holder or the 
Authorized Trader receiving such order must prepare an order form in a 
non-alterable written medium, which must be time-stamped and include 
the account designation, date and other required information (including 
order terms, order type, instrument and contract month, price, and 
quantity). Each such form must be retained for at least five years from 
the time it is prepared. In addition, CFE Rule 501, Books and Records, 
establishes a general recordkeeping requirement pursuant to which each 
Clearing Member and Trading Privilege Holder must keep all books and 
records required to be kept by it pursuant to the CEA, CFTC 
regulations, the Act, regulations under the Act, and CFE Rules. CFE 
Rule 501 also requires that such books and records be made available to 
CFE upon request. Current CFTC regulations require books and records to 
be maintained for a period of five years.\62\
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    \62\ 17 CFR 1.31(a)(1).
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    Pursuant to CFE Rule 415, Block Trading, block trades will be 
entered in CBOEdirect by CFE's operations management after they are 
verbally reported by designated individuals at the Clearing Member for 
the selling party. At the time of each such verbal report, a trade 
identification number will be assigned and provided to the caller. Both 
the buyer and the seller in each trade will then follow up the verbal 
report by submitting a block trade reporting form via facsimile or 
email to CFE. The same procedures generally apply to exchange of future 
for related position (``EFP'') transactions as provided in CFE Rule 
414. Since block trades and EFP transactions involve orders that cannot 
be immediately entered into CFE's systems, the Clearing Members or, if 
applicable, CFE Trading Privilege Holders or CFE Authorized Traders, 
must comply with the recordkeeping procedures specified in the 
preceding paragraph.
    Clause (K) of Section 6(h)(3) of the Act \63\ requires that a 
market on which a security futures product is traded have in place 
procedures to coordinate trading halts between such market and any 
market on which any security underlying the security futures product is 
traded and other markets on which any related security is traded. CFE 
Rule 417, Regulatory Halts, provides for trading in a security future 
to be halted at all times that a regulatory halt has been instituted 
for the relevant underlying security or securities.
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    \63\15 U.S.C. 78f(h)(3)(K).
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    Clause (L) of Section 6(h)(3) of the Act \64\ requires that the 
margin requirements for a security futures product comply with the 
regulations prescribed pursuant to Section 7(c)(2)(B) of the Act.\65\ 
CFE believes that its proposed CFE Rule 517, Customer Margin 
Requirements for Contracts That Are Security Futures, and CFE Policy 
and Procedure VII, Security Futures Market Maker Registration Policy 
and Procedures, which have been filed with the Commission \66\ pursuant 
to Section 19(b)(2) of the Act,\67\ together with a written 
certification under Section 5c(c) of the CEA \68\ regarding customer 
margin, are consistent with the requirements of the Act.
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    \64\ 15 U.S.C. 78f(h)(3)(L).
    \65\ 15 U.S.C. 78g(c)(2)(B).
    \66\ See File No. SR-CFE-2005-02 (filed July 27, 2005).
    \67\ 15 U.S.C. 78s(b)(2).
    \68\ 7 U.S.C. 7a-2(c).
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    CFE Rules 1801-1806 and 1901-1906 set forth the contract rule 
specifications that relate to single stock futures and NBI futures, 
respectively. The contract rule specifications contain information that 
is specific to the trading of those products on CFE and some of the 
specification provisions provide additional detail with respect to 
issues addressed by rule provisions noted above.
    For the reasons discussed above, CFE submits that the CFE Listing 
Standards satisfy the requirements set forth in Section 6(h)(3) of the 
Act.\69\
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    \69\ 15 U.S.C. 78f(h)(3).
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Statutory Basis

    CFE has filed these proposed rules pursuant to Section 19(b)(7) of 
the Act.\70\ CFE believes the CFE Listing Standards are authorized by, 
and consistent with, Section 6(b)(5) of the Act \71\ because they are 
designed to promote just and equitable principles of trade.
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    \70\ 15 U.S.C. 78s(b)(7).
    \71\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CFE 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. Since this rule change in conjunction with 
other related regulatory filings being made by CFE will permit CFE to 
become authorized to provide a trading venue for security futures, this 
rule change serves to enhance and promote competition by allowing an 
additional exchange to list and trade security futures.

[[Page 49696]]

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

    Pursuant to Section 19(b)(7)(B) of the Act,\72\ the proposed rule 
change became effective on July 26, 2005.\73\ Within 60 days of the 
date of effectiveness of the proposed rule change, the Commission, 
after consultation with the CFTC, may summarily abrogate the proposed 
rule change and require that the proposed rule change be re-filed in 
accordance with the provisions of Section 19(b)(1) of the Act.\74\
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    \72\ 15 U.S.C. 78s(b)(7)(B).
    \73\ CFE filed the proposed rule change with the CFTC, together 
with a written certification under Section 5c(c) of the Commodity 
Exchange Act CEA, on July 25, 2005. CFE's written certification 
requested that the proposed rule change become effective on July 26, 
2005, the date that the proposed rule change was filed with the 
Commission.
    \74\ 15 U.S.C. 78s(b)(1).
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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-CFE-2005-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549.
    All submissions should refer to File Number SR-CFE-2005-01. 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, 100 F Street, 
NE., Washington, DC 20549. 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-CFE-2005-01 and should be 
submitted on or before September 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\75\
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    \75\ 17 CFR 200.30-3(a)(75).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4624 Filed 8-23-05; 8:45 am]
BILLING CODE 8010-01-P