[Federal Register Volume 71, Number 98 (Monday, May 22, 2006)]
[Notices]
[Pages 29371-29373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-7718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53808; File No. SR-CBOE-2006-33]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Accommodation Liquidations (Cabinet Trades)

May 16, 2006.
    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 4, 2006, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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. 
CBOE has designated this proposal as non-controversial under section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 the provisions of CBOE Rule 6.54 
that pertain to accommodation liquidations (also referred to as 
``cabinet trades'') \5\ to authorize PAR Officials and Floor Brokers to 
represent cabinet orders on the Exchange. The Exchange is also 
proposing various other non-substantive changes to reorganize and 
update the existing text in CBOE Rule 6.54 and to update references in 
the heading of Chapter VII of the CBOE rulebook and CBOE Rule 7.4. The 
text of the proposed rule change is set forth below. Additions are in 
italics and deletions are in [brackets].
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    \5\ Accommodation liquidations are transactions to close out 
positions in worthless or nearly worthless out-of-the-money option 
contracts.
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* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Chapter VI
Doing Business on the Exchange Floor (Rules 6.1-6.85)
* * * * *
Section C: Trading Practices and Procedures
* * * * *
Rule 6.54. Accommodation Liquidations (Cabinet Trades)
    Cabinet t[T]rading under the following terms and conditions shall 
be available in each series of option contracts open for trading on the 
Exchange.
    (a) For classes not trading on the CBOE Hybrid System:
    (i) Trading shall be conducted in accordance with other CBOE Rules 
except as otherwise provided herein.
    (ii) Limit orders labeled at a price of $1 per option contract must 
be placed with the Order Book Official or with a Floor Broker.
    (iii) Orders may be placed for customer, firm, and Market-Maker 
accounts and, to the extent such orders are placed with the Order Book 
Official, priority in the cabinet book will be based upon the sequence 
in which such orders are placed with the Order Book Official.
    [(iii)](iv) Bids or offers for opening transactions at a price of 
$1 per option contract may be placed with the Order Book Official only 
to the extent that the [public order book] cabinet book contains 
unexecuted contra closing orders with which the opening orders 
immediately may be matched. Bids and offers at a price of $1 per option 
contract may also be provided in response to a request for quote by an 
Order Book Official or a Floor Broker, but must yield priority to all 
orders in the cabinet book.
    [(iv) Orders may be placed for customer, firm, and Market-Maker 
accounts, with priority based upon the sequence in which such orders 
are placed with the Order Book Official.]
    (v) Market-Makers shall not be subject to the requirements of Rule 
8.7 for orders placed pursuant to this Rule.
    (vi) The Order Book Official appointed to each class of option 
contracts shall be responsible for $1 orders that are placed with him 
for that class. All bids and offers that are submitted to the Order 
Book Official must be submitted to the Order Book Official in writing 
and displayed as such in accordance with Rule 7.7, and the Order Book 
Official shall effect [all such] transactions during the day by 
matching such orders placed with him or by executing such orders placed 
with him with a Floor Broker representing a contra order.
    (vii) All cabinet transactions at a price of $1 per option contract 
shall be reported to the Exchange following the close of each business 
day.
    (b) For classes trading on the CBOE Hybrid System:
    (i) Trading shall be conducted in accordance with other CBOE Rules 
except as otherwise provided herein.
    (ii) Limit orders labeled at a price of $1 per option contract must 
be traded on the Exchange in a form and manner prescribed by the 
Exchange. Currently, accommodation liquidations are only eligible for 
Exchange trading via open outcry and hence are not eligible for 
placement into the Electronic Book.
. . . Interpretations and Policies
    .01 Order Book Official: An Order Book Official who receives a 
closing buy (sell) order for $1 per option contract shall attempt to 
execute the order against any $1 closing sell (buy) orders in his 
possession. If any part of the buy (sell) order cannot be immediately

[[Page 29372]]

executed, the Order Book Official shall display the $1 bid (offer).
    [Upon receiving a closing sell order for $1 per option contract, 
the Order Book Official shall attempt to execute the order against any 
$1 closing buy orders in his possession. If any part of the sell order 
cannot be immediately executed, the Order Book Official shall display 
the $1 offer.] The Order Book Official may accept bids or offers for 
opening transactions at a price of $1 per contract only to the extent 
that the [public order book] cabinet book already contains closing 
orders for the contra side.
    Upon execution of any $1 per contract orders, the Order Book 
Official shall promptly supply reports of the transaction back to the 
member firms involved. In accordance with (a)(vii) above, he will not 
report the transactions to the Exchange until after the close of each 
business day.
    .02 PAR Officials: For purposes of this Rule, a PAR Official may 
also perform the functions of an Order Book Official.
* * * * *
Chapter VII
Order Book Officials [and Board Brokers] (Rules 7.1--7.50)
* * * * *
Rule 7.4. Obligations for Orders
    (a)-(c) No change.
    (d)(1)-(2) No change.
    (3) The provisions of paragraph (d) of this Rule shall not apply to 
matching [1[cent]] buy and sell orders under Rule 6.54.
    (4) No change.
    (e)-(f) No change.
. . . Interpretations and Policies
    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, the Exchange 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 IV below. The Exchange 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
    An ``accommodation'' or ``cabinet'' trade refers to trades in 
listed options on the Exchange that are worthless or not actively 
traded. Cabinet trading is generally conducted in accordance with CBOE 
rules; CBOE Rule 6.54, Accommodation Liquidations, sets forth specific 
procedures for engaging in cabinet trades. CBOE Rule 6.54 currently 
provides for cabinet trades to occur via open outcry whether or not the 
security class trades on the Exchange's Hybrid Trading System.
    The purpose of the rule change is to amend CBOE Rule 6.54 to 
clarify through proposed Interpretation and Policy .02 that PAR 
Officials \6\ may perform the functions that Order Book Officials 
perform with respect to cabinet trading. Clarifying that PAR Officials 
are authorized to represent cabinet orders and effect cabinet trades is 
consistent with recent amendments to the CBOE rules that established 
the PAR Official position on the Exchange.\7\
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    \6\ A PAR Official is an Exchange employee or independent 
contractor whom the Exchange may designate as being responsible for 
(i) operating the PAR workstation in a DPM trading crowd with 
respect to the classes of options assigned to him/her; (ii) when 
applicable, maintaining the book with respect to the classes of 
options assigned to him/her; and (iii) effecting proper executions 
of orders placed with him/her. See CBOE Rule 7.12.
    \7\ See Securities Exchange Act Release No. 52798 (November 18, 
2005), 70 FR 71344 (November 28, 2005) (File No. SR-CBOE-2005-46) 
(order approving amendments relating to the removal of agency 
responsibilities from DPMs and establishing Exchange PAR Officials).
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    The Exchange is also proposing to amend CBOE Rule 6.54 to authorize 
Floor Brokers to represent cabinet orders and effect cabinet trades. As 
a result, in addition to the existing procedures which permit cabinet 
orders to be placed with an Order Book Official (which, as this rule 
change clarifies, would include a PAR Official fulfilling the duties of 
an Order Book Official) for representation and execution, a Floor 
Broker may now represent and execute a cabinet order in the trading 
crowd, thereby saving the additional time and steps involved in first 
placing a cabinet order with an Order Book Official who would then in 
turn represent and execute the order. Thus, permitting Floor Brokers to 
handle cabinet orders and trades in accordance with the procedures 
described in Rule 6.54 will provide members with additional flexibility 
and assist in the fair, orderly and efficient handling of cabinet 
transactions on the Exchange.
    The revised cabinet trading procedures set forth in the proposed 
rule change will be substantially similar to the procedures that 
currently exist. Under the revised procedures, limit orders labeled at 
a price of $1 per option contract may be still be placed with the Order 
Book Official or, as this rule change proposes, with a Floor Broker or 
a PAR Official. As is the case under the current procedures, cabinet 
orders may be placed for the accounts of customers, firms, and Market-
Makers. To the extent such orders are placed with an Order Book 
Official, priority will continue to be based on the sequence in which 
such orders are placed with the Order Book Official. Also as under the 
current procedures, bids and offers for opening transactions at a price 
of $1 per option contract may be placed with the Order Book Official 
only to the extent that the cabinet contains unexecuted contra closing 
orders with which those opening orders immediately may be matched. 
Under the proposed revisions, bids and offers (whether opening or 
closing a position) at a price of $1 per option contract may also be 
provided in response to a request for quotes by an Order Book Official 
or a Floor Broker, but must yield priority to all orders in the Order 
Book Official's cabinet book. All cabinet transactions will continue to 
be reported to the Exchange following the close of each business day 
and the procedures for maintaining quotation, order and transaction 
information for cabinet transactions will remain unchanged.\8\
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    \8\ Accommodation liquidations as described in CBOE Rule 6.54 
are exempt from the requirements of CBOE Rule 6.24, Required Order 
Information, pertaining to the Consolidated Options Audit Trail. 
However, the Exchange maintains quotation, order and transaction 
information for accommodation liquidations in the same format as the 
COATS data is maintained, and will make such information available 
to the Commission upon request. See Interpretation and Policy .04 to 
CBOE Rule 6.24.
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    The responsibilities of the Order Book Official under the revised 
cabinet trading procedures will be substantially similar to his current 
responsibilities. The Order Book Official will continue to be 
responsible for $1 orders that are placed with him. Further, all bids 
and offers that are submitted to the Order Book Official must continue 
to be submitted in writing and displayed as such in accordance with 
CBOE Rule 7.7. The Order Book Official will continue to effect cabinet 
transactions during the day by matching such orders placed with him or, 
under the revised procedures, by executing orders placed with him with 
a Floor Broker representing a contra order. The Order Book Official 
will also continue to

[[Page 29373]]

supply reports of cabinet transactions he executes back to member 
firms. In addition, the Order Book Official will continue to report 
cabinet transactions to the Exchange after the close of each business 
day.
    Finally, the rule change makes various non-substantive changes to 
reorganize and update the existing text in CBOE Rule 6.54 and update 
references in the heading of Chapter VII of the CBOE rulebook and CBOE 
Rule 7.4.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \9\ in general and furthers the objectives 
of section 6(b)(5) of the Act \10\ in particular in that it is designed 
to promote just and equitable principles of trade, 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\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) \12\ 
thereunder because it (i) does not significantly affect the protection 
of investors or the public interest; (ii) does not impose any 
significant burden on competition; and (iii) does not become operative 
for 30 days from the date on which it was filed, or such shorter time 
as the Commission may designate, provided that the self-regulatory 
organization has given the Commission written notice of its intent to 
file the proposed rule change at least five business days prior to the 
filing date of the proposed rule change.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its attempt to file 
the proposed rule change at least five days prior to the filing 
date.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay of Rule 19b-4(f)(6)(iii) so that the proposed rule 
change may become effective immediately. The Commission believes that 
waiving the pre-filing requirement and the operative delay is 
consistent with the protection of investors and the public interest. 
The Commission notes that the proposal does not substantially change 
the existing cabinet trading procedures, but does provide market 
participants on the Exchange with additional flexibility for handling 
cabinet trades, which should promote the fair, orderly and efficient 
handling of these transactions. Therefore, the Commission has 
determined to waive the 30-day operative delay and allow the proposed 
rule change to become operative immediately.\14\
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    \14\ For purposes only of waiving the operative delay of this 
proposal, the Commission notes that it has considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 No. SR-CBOE-2006-33 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-CBOE-2006-33. 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 Commissions 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-2006-33 and should be submitted on or before June 
12, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-7718 Filed 5-19-06; 8:45 am]
BILLING CODE 8010-01-P