[Federal Register Volume 70, Number 165 (Friday, August 26, 2005)]
[Notices]
[Pages 50433-50435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-16963]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52313; File No. SR-CBOE-2005-41]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to the 
Elimination of Position and Exercise Limits on NDX Options

August 22, 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 May 23, 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, II, and III below, which Items have been prepared by the CBOE. 
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to eliminate position and 
exercise limits for options on the Nasdaq 100 Index (``NDX''). 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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV 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 proposes to eliminate position and exercise limits for 
options on the NDX, a broad-based securities index. In November 2001, 
the Commission granted permanent approval to a CBOE pilot program that 
eliminated position and exercise limits for options on the S&P 500 
Index (``SPX''), the S&P 100 Index (``OEX''), and the Dow Jones 
Industrial Average (``DJX'').\3\ The Exchange believes that the 
circumstances and considerations relied upon in approving the 
elimination of position and exercise limits for options on those broad-
based indexes equally apply to this proposal relating to NDX position 
and exercise limits.
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    \3\ See Securities Exchange Act Release No. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (order granting permanent 
approval to the elimination of position and exercise limits on the 
SPX, OEX, and DJX) (``Permanent Approval Order''). See also 
Securities Exchange Act Release No. 40969 (January 22, 1999), 64 FR 
4911 (February 1, 1999) (order approving the original pilot program) 
(``Pilot Approval Order'').
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    In the Permanent Approval Order relating to SPX, OEX, and DJX 
options, the Commission cited several reasons for allowing the Exchange 
to eliminate position and exercise limits for these options. First, the 
Commission expressed its belief that the enormous capitalization of 
each index and the deep liquid markets for the securities underlying 
each index significantly reduced concerns of market manipulation or 
disruptions in the underlying markets.\4\ The Commission previously had 
also noted the active trading volume for options on the

[[Page 50434]]

respective indexes.\5\ The CBOE believes that NDX shares these factors 
in common with the SPX, OEX, and DJX. As of the date of this rule 
filing, the approximate market capitalizations of the SPX, OEX, and DJX 
were $10.97 trillion, $5.94 trillion, and $3.7 trillion, respectively. 
The average daily trading volumes (``ADTVs'') for all underlying 
components of the indexes were 1,250, 560, and 250 million shares, 
respectively, and the ADTV for options on the indexes were 253,981 
contracts, 72,809 contracts, and 30,938 contracts, respectively.\6\ The 
CBOE believes that the NDX has very comparable characteristics. The 
market capitalization for the NDX is $1.84 trillion dollars, the ADTV 
for the underlying securities is 420 million shares, and the options 
ADTV is 44,008 contracts.
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    \4\ See Permanent Approval Order, supra note 3.
    \5\ See Pilot Approval Order, supra note 3.
    \6\ ADTVs are calculated over the previous three months of 
trading.
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    Secondly, with respect to SPX, OEX, and DJX options, the Commission 
noted that the financial requirements imposed by both the Exchange and 
the Commission help to address concerns that a CBOE member or its 
customer(s) may try to maintain an inordinately large unhedged position 
in the indexes.\7\ These identical financial requirements also apply to 
NDX options. Under CBOE rules, the Exchange has the authority to impose 
additional margin upon accounts maintaining underhedged positions, and 
is further able to monitor accounts to determine when such action is 
warranted. As noted in the Exchange's rules, the clearing firm carrying 
such an account would be subject to capital charges under Rule 15c3-1 
under the Act \8\ to the extent of any resulting margin deficiency.\9\
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    \7\ See Permanent Approval Order, supra note 3.
    \8\ 17 CFR 240.15c3-1.
    \9\ See Interpretation and Policy .04 to CBOE Rule 24.4. 
Clarified as per telephone conversation between Ira Brandriss, 
Special Counsel, and Theodore Venuti, Attorney, Division of Market 
Regulation, Commission, and James M. Flynn, Attorney II, Legal 
Division, CBOE, on August 12, 2005 (``Telephone Conversation of 
August 12, 2005'').
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    Finally, the Exchange believes that with regard to SPX, OEX, and 
DJX options, the Commission relied substantially on the Exchange's 
ability to provide surveillance and reporting safeguards to detect and 
deter trading abuses arising from the elimination of position and 
exercise limits in options on these indexes. The Exchange represents 
that it monitors trading in NDX options in much the same manner as 
trading in SPX, OEX, and DJX options and that the current CBOE 
surveillance procedures are more than adequate to continue monitoring 
NDX options. Additionally, the Exchange proposes to impose a reporting 
requirement on CBOE members (other than CBOE market-makers) and member 
organizations that trade NDX options. This reporting requirement, which 
is currently imposed on members and member organizations that trade SPX 
and OEX options, would require each member or member organization that 
maintains in excess of 100,000 NDX contracts on the same side of the 
market, for its own account or for the account of a customer, to report 
information as to whether the positions are hedged and provide 
documentation as to how such contracts are hedged, in a manner and form 
required by the Exchange's Department of Market Regulation.\10\ The 
Exchange also may specify other reporting requirements, as well as the 
limit at which the reporting requirement may be triggered.\11\
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    \10\ See Interpretation and Policy .03 to CBOE Rule 24.4.
    \11\ Id.
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    In the interest of consistency, the Exchange also proposes to amend 
Exchange rules relating to the trading of FLEX broad-based index 
options to reflect that there shall be no exercise or position limits 
on NDX options and to adopt the 100,000 contract reporting requirement 
for NDX FLEX options.\12\ Thus, the provisions in CBOE Rule 24A.7(b) 
applicable specifically to SPX and OEX FLEX options shall also apply to 
NDX FLEX options.\13\
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    \12\ See CBOE Rules 24A.7 and 24A.8. The text of Rule 24A.8 is 
not amended by this proposed rule change.
    \13\ This would include the authority of the Exchange to impose 
additional margin on accounts maintaining underhedged positions in 
these options. Telephone Conversation of August 12, 2005, supra 
note.
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    The Exchange believes that eliminating position and exercise limits 
for NDX options and FLEX options is consistent with CBOE Rules relating 
to similar broad-based indexes and also allows CBOE members and their 
customers greater hedging and investment opportunities.
2. Statutory Basis
    By placing position and exercise limits for NDX options on an equal 
basis with other similar broad-based index options, the Exchange 
believes that this proposed rule change 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, serve to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and to protect investors and the public interest.
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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 CBOE believes that the proposed rule change would 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the CBOE consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2005-41 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-2005-41. 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

[[Page 50435]]

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, 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 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 publicly available. All submissions should refer to 
File Number SR-CBOE-2005-41 and should be submitted on or before 
September 16, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05-16963 Filed 8-25-05; 8:45 am]
BILLING CODE 8010-01-P