[Federal Register Volume 72, Number 248 (Friday, December 28, 2007)]
[Notices]
[Pages 73919-73921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25187]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57005; File No. SR-CBOE-2007-122]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change as Modified by
Amendment No. 1 Thereto Amending Its Obvious Error Rule for Options on
Indices, ETFs, and HOLDRS
December 20, 2007.
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 October 31, 2007, 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 substantially
prepared by the Exchange. On December 14, 2007, the CBOE submitted
Amendment No. 1 to the proposed rule change. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, 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 CBOE Rule 24.16, which is the
Exchange's rule applicable to the nullification and adjustment of
transactions in index options, options on exchange-traded funds
(``ETFs''), and options on HOLding Company Depository ReceiptS
(``HOLDRS''). The Exchange is proposing to amend the rule to change the
manner in which it applies the obvious price error provision to
transactions occurring as part of the Hybrid Opening System (``HOSS'')
process. The text of the proposed rule change is available at the
Exchange, the Commission's Public Reference Room, and http://www.cboe.com.
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
The Exchange is proposing to amend CBOE Rule 24.16, which is its
obvious error rule pertaining to index options, options on ETFs, and
options on HOLDRS. The proposal would revise the obvious price error
provision that pertains to transactions occurring as part of the HOSS
opening rotation process. Currently, Rule 24.16 provides that an
obvious price error would be deemed to have occurred when the execution
price of a buy (sell) transaction is above (below) the fair market
value of the option by at least a prescribed minimum error amount.\3\
For purposes of transactions occurring on HOSS, ``fair market value''
is currently defined as the midpoint of the first quote after the
transaction(s) in question that does not reflect the erroneous
transaction(s). The Exchange is proposing to revise the fair market
value calculation to provide additional conditions that would apply
during regular HOSS rotations and during HOSS rotations in index
options series that are being used to calculate the final settlement
price of volatility indexes. The additional conditions are intended to
reasonably factor the amount of available liquidity into the fair
market value calculation during these rotations.
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\3\ For example, for series trading with normal bid-ask
differentials as established in CBOE Rule 8.7(b)(iv), the prescribed
minimum error amount is as follows: $0.125 if the fair market value
is below $2, $0.20 if the fair market value is $2 to $5, $0.25 if
the fair market value is above $5 to 10, $0.40 if the fair market
value is above $10 to 20, and $0.50 if the fair market value is
above $20. See CBOE Rule 24.16(a)(1).
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With respect to regular HOSS rotations, the Exchange is proposing
to add a condition that the option contract quantity subject to
nullification or adjustment would not exceed the size of the first
quote after the transaction(s) in question that does not reflect the
erroneous transaction(s).\4\ For example, assume that the opening
transactions in series XYZ totaled 200 contracts at a price $0.75. Also
assume that a member representing non-CBOE Market-Maker A sold 200
contracts, trading 100 contracts with CBOE Market-Maker B and 100
contracts with non-CBOE Market-Maker C. Finally, assume that the first
quote after the transaction in question that does not reflect the
erroneous transaction is bid 100 contracts for $0.95 and offered 150
contracts at $1.15. In this scenario, an erroneous sell transaction
would be deemed to have occurred in accordance with the obvious price
error provision because the $0.75 price received by non-CBOE Market-
Maker A is at least $0.125 lower than the fair market value of
$1.05.\5\ In addition, because the size of the bid in the first quote
after that does not reflect the erroneous transaction is for 100
contracts, up to 100 contracts executed on the opening on behalf of
non-CBOE Market-Maker A would be subject to
[[Page 73920]]
nullification or adjustment under the obvious price error provision.\6\
Any nullifications or adjustments would occur on a pro rata basis
considering the overall size of the HOSS opening trade. Thus, 50
contracts executed against CBOE Market-Maker B would have a price
adjustment to $1.05 (provided the adjusted price does not violate A's
limit price) and 50 contracts executed against non-CBOE Market-Maker C
would have a price adjustment to $1.05 (provided the adjusted price
does not violate A's or C's limit price).
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\4\ For erroneous sell transactions, the size of the bid would
be used. For erroneous buy transactions, the size of the offer would
be used.
\5\ $1.05 is the midpoint of $0.95 and $1.15.
\6\ A HOSS transaction involving a non-CBOE Market-Maker is
adjusted based on the first non-erroneous quote after the erroneous
transaction on CBOE, provided the price does not violate the non-
CBOE Market-Maker's limit price. Otherwise, the transaction is
nullified. See Rule 24.16(a)(1)(ii)(B) and (c)(3).
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With respect to HOSS rotations in index options series being used
to calculate the final settlement price of a volatility index,\7\ the
Exchange is proposing to add a condition that the first quote after the
transaction(s) in question that does not reflect the erroneous
transaction(s) must be for at least the overall size of the HOSS
opening transaction(s).\8\ If the size of the quote is less than the
overall size of the opening transaction(s), then the obvious price
error provision shall not apply. For example, if the opening trade in
Series XYZ is for a total of 200 contracts and the bid or offer, as
applicable, of the first quote after the transaction(s) in question
that does not reflect the erroneous transaction(s) is for 500
contracts, then the quote would be used to determine the fair market
value and whether an obvious price error occurred. If the bid or offer,
as applicable, of the quote is for only 100 contracts, then the trade
would not be subject to nullification or adjustment under the obvious
price error provision.
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\7\ The Exchange states that CBOE's and the CBOE Futures
Exchange, LLC's (a designated contract market approved by the
Commodity Futures Trading Commission and a wholly-owned subsidiary
of CBOE) rules provide for the listing and trading of options and
futures, as applicable, on various volatility indexes. This proposed
obvious price error provision would be utilized only for those index
options series used to calculate the final settlement price of a
volatility index and only on the final settlement date of the
options and futures contracts on the applicable volatility index in
each expiration month. Thus, for example, the proposed obvious price
error provision would be used for the relevant Standard & Poor's 500
Stock Index (``SPX'') options series on settlement days for CBOE
Volatility Index (``VIX'') options and futures contracts. The
Exchange notes that, during the final settlement date, traders
holding hedged volatility futures positions to settlement can be
expected to trade out of their SPX options on that date. Traders who
hold short, hedged VIX futures would liquidate that hedge by selling
their SPX options, while traders holding long, hedged VIX positions
would liquidate their hedge by buying SPX options. In order to seek
convergence with the VIX final settlement value, these traders would
be expected to liquidate their hedges by submitting orders in the
appropriate SPX option series during the SPX opening on the final
settlement date of the VIX futures contract. To the extent: (i)
traders who are liquidating hedges predominately are on one side of
the market (e.g., seek to buy the particular SPX options); and (ii)
those traders' orders predominate over other orders during the SPX
opening on the final settlement date for the VIX futures contract,
trades to liquidate hedges may contribute to an order imbalance
during the SPX opening on that date. The same is equally applicable
with respect to the final settlement dates of other volatility index
options and futures. In light of this potential for a large order
imbalance in the applicable series on these dates, the Exchange
believes that the application of a modified obvious price error
provision is reasonable and appropriate and will contribute to a
fair and orderly opening.
\8\ See supra note 4.
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2. Statutory Basis
The Exchange believes 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, 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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\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 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 by the Exchange 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 Exchange consents, the Commission will:
A. By order approve the 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-2007-122 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-2007-122. 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, on official business days between the hours
of 10 a.m. and 3 p.m. 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-2007-122 and should be
submitted on or before January 18, 2008.
[[Page 73921]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25187 Filed 12-27-07; 8:45 am]
BILLING CODE 8011-01-P