[Federal Register Volume 73, Number 16 (Thursday, January 24, 2008)]
[Notices]
[Pages 4293-4295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-1178]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57161; File No. SR-CBOE-2006-36]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change as Modified by 
Amendments No. 1 and 2 Thereto Regarding FLEX Equity Option Opening 
Transactions

January 16, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 14, 2006, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange''), filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been 
substantially prepared by CBOE. On December 24, 2007, the Exchange 
filed Amendments No. 1 \3\ and 2 \4\ 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.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ Amendment No. 2 replaced Amendment No. 1 in its entirety. 
The purpose of Amendment 2 was to (i) modify the proposed formula 
contained in Rule 24A.4 applicable to determining the minimum value 
size for FLEX Equity Options in new series to change the minimum 
contract component from the originally proposed 100 contracts to 150 
contracts, and make this change applicable on a 1\1/2\-year pilot 
program basis; (ii) propose changes to the formula applicable to 
determining the minimum value size in currently-opened series; (iii) 
include corresponding amendments to Rule 24B.4; and (iv) provide 
additional information in the Purpose section of the filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its rules regarding the minimum value size 
for an opening transaction in FLEX Equity Option series on a pilot 
program basis. The text of the proposed rule change is available on the 
Exchange's Web site (http://www.cboe.org/Legal), at the Office of the 
Secretary, CBOE 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, CBOE 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 those 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 purpose of the filing is to modify the minimum value size for 
an opening transaction (other than FLEX Quotes responsive to a FLEX 
Request for Quotes) in any FLEX Equity Option \5\ series in which there 
is no open interest at the time the Request for Quotes is submitted. 
Currently, the minimum opening transaction value size in the case of a 
FLEX Equity Options series is the lesser of (i) 250 contracts or (ii) 
the number of contracts overlying $1 million in the underlying 
securities.\6\ The Exchange proposes to reduce the ``250 contracts'' 
component to ``150 contracts;'' the $1 million underlying value 
component will continue to apply unchanged.\7\
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    \5\ FLEX Equity Options are flexible exchange-traded options 
contracts which overlie equity securities. FLEX Equity Options 
provide investors with the ability to customize basic option 
features including size, expiration date, exercise style, and 
certain exercise prices.
    \6\ Under this formula, an opening transaction in a FLEX Equity 
series in a stock priced at $40 or more would reach the $1 million 
limit before it would reach the contract size limit, i.e., 250 
contracts times the multiplier (100) times the stock price ($40) 
equals $1 million in underlying value. For a FLEX Equity series in a 
stock priced at less than $40, the 250 contract size limit applies.
    \7\ Under this proposed formula, an opening transaction in a 
FLEX Equity series in a stock priced at approximately $66.67 or more 
would reach the $1 million limit before it would reach the contract 
size limit, i.e., 150 contracts times the multiplier (100) times the 
stock price ($66.67) equals just over $1 million in underlying 
value. For a FLEX Equity series in a stock priced at less than 
$66.67, the 150 contract size limit would apply.
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    The proposal would become effective on a pilot program basis for a 
period of 1\1/2\ years. If the Exchange were to propose an extension, 
expansion, or permanent implementation of the program, the Exchange 
would submit, along with a filing proposing any necessary amendments to 
the program, a pilot program report. The report would include, for the 
period during which the program was in effect: (i) Data and analysis on 
the open interest and trading volume in FLEX Equity Options for which 
series were opened with a minimum opening size of 150 to 249 contracts 
and less than $1 million in underlying value; and (ii) analysis on the 
types of investors that initiated opening FLEX Equity Options 
transactions (i.e., institutional, high net worth, or retail, if any). 
The report would be submitted to the Commission at least ninety days 
prior to the expiration date of the 1\1/2\ year pilot program.
    The Exchange believes that the reduction of the minimum value size 
for opening a series in the manner proposed provides FLEX-participating 
members with greater flexibility in structuring the terms of FLEX 
Equity Options that best comports with their and their customers' 
particular needs. The Exchange notes that the opening size requirement 
for FLEX Equity Options was originally put in place to limit 
participation in FLEX Equity Options to sophisticated, high net worth 
investors rather than retail investors.\8\ Based on the Exchange's 
experience to date with such options, it appears that the existing 250 
contract component is too large to accommodate the needs of FLEX-
participating members and their institutional and high net worth

[[Page 4294]]

customers and thus has become overly restrictive. In particular, the 
Exchange has recently received numerous requests from broker-dealers 
representing institutional investors that the minimum value size for 
opening transactions be reduced.
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    \8\ The existing customer base for FLEX Options includes both 
institutional investors and high net worth individuals.
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    In proposing the reduction of the 250 contract component to 150 
contracts, CBOE is cognizant of the desire to continue to provide the 
requisite amount of investor protection that the minimum opening size 
requirement was originally designed to achieve, on the one hand, and 
the need for market participants to have the flexibility to serve their 
customers' particular investment needs, on the other hand. As discussed 
further below, CBOE is also aware of the over-the-counter (``OTC'') 
market in customized options, which can take on contract 
characteristics similar to FLEX Options but for which similar opening 
size restrictions do not apply. In light of these considerations, CBOE 
believes it is appropriate to modify the FLEX Equity Option minimum 
opening size requirement in the manner proposed. By reducing the 250 
contract component to 150 contracts, the Exchange believes FLEX-
participating members could better serve the needs of investors, while 
maintaining a requirement substantial enough to limit participation to 
investors who have adequate resources, thereby continuing to provide 
the requisite amount of investor protection that the opening size 
requirement was originally designed to achieve. Also, limiting the term 
of the program to a period of 1\1/2\ years would give the Exchange time 
to consider whether it should request that the program should be 
extended, expanded, and/or made permanent. If so, CBOE would seek 
Commission approval.
    In further support of its proposal, the Exchange notes that the 
minimum value size for currently-opened FLEX Equity Option series is 
already set at 100 contracts, and the minimum size for FLEX Quotes 
entered in response to a FLEX Request for Quotes is set at 25 contracts 
(whether in a new series or in a currently-opened series).\9\ If FLEX 
Equity Option transactions can occur in increments of 100 or more 
contracts in subsequent opening transactions, the Exchange believes it 
is reasonable to permit the initial series opening transaction size to 
be 150 contracts (or $1 million in underlying value, whichever is 
less).
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    \9\ Specifically, the minimum value size for a transaction in 
any currently-opened FLEX Equity Option series is 100 contracts in 
the case of opening transactions and 25 contracts in the case of 
closing transactions (or any lesser amount in a closing transaction 
that represents the remaining underlying size, whichever is less). 
Additionally, the minimum value size for a FLEX Quote entered in 
response to a Request for Quotes in FLEX Equity Options is the 
lesser of 25 contracts or the remaining underlying size in a closing 
transaction. See Exchange Rules 24A.4(a)(4)(iii)-(iv) and 
24B.4(a)(5)(iii)-(iv). A ``FLEX Quote'' refers to (i) FLEX bids and 
offers entered by Market-Makers and (ii) orders to purchase and 
orders to sell FLEX Options entered by Exchange members other than 
Market-Makers, in each case in response to a Request for Quotes. See 
CBOE Rules 24A.1(h) and 24B.1(k).
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    The Exchange also believes that modifying the minimum opening 
transaction value size in this way will further broaden the base of 
institutional investors that use FLEX Equity Options to manage their 
trading and investment risk, including investors that currently trade 
in the OTC market for customized options which, as indicated above, can 
take on contract characteristics similar to FLEX Options but for which 
similar opening size restrictions do not apply. By reducing the minimum 
opening size requirements for FLEX Equity Options, market participants 
will have greater flexibility in determining whether to execute their 
customized options in an exchange environment or in the OTC market. 
CBOE believes market participants benefit from being able to trade 
these customized options in an exchange environment in several ways, 
including, but not limited to, enhanced efficiency in initiating and 
closing out positions; increased market transparency; and heightened 
contra-party creditworthiness due to the role of The Options Clearing 
Corporation as issuer and guarantor of FLEX Options.
    Finally, the Exchange is also proposing to modify the minimum value 
size for an opening transaction in a currently-opened FLEX Equity 
series (other than FLEX Quotes responsive to a FLEX Request for 
Quotes). As discussed above, presently, the minimum transaction value 
size for an opening transaction in a currently-opened series is 100 
contracts. The Exchange is proposing to modify the minimum size formula 
to the lesser of (i) 100 contracts or (ii) the number of contracts 
overlying $1 million in the underlying securities. This change would 
only impact those FLEX Equity series in which the underlying stock is 
trading at $100 or more.\10\
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    \10\ Under this proposed formula, a transaction in a currently-
opened FLEX Equity series in a stock priced at $100 or more would 
reach the $1 million limit before it would reach the contract size 
limit, i.e., 100 contracts times the multiplier (100) times the 
stock price ($100) equals $1 million in underlying value.
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    The FLEX minimum size requirements have generally provided that the 
minimum size for subsequent opening transactions in a currently-opened 
series is smaller than the minimum size needed to initially open the 
series. Therefore, Exchange believes that this change is necessary for 
there to be consistency between the minimum size requirements for new 
series and currently-opened series when the underlying stock is trading 
at $100 or more. For example, a new FLEX Equity series in a stock 
trading at $110 could open with an initial transaction size of 91 
contracts, i.e., 91 contracts times the multiplier (100) times the 
stock price ($110) equals just over $1 million in underlying value. 
Once the series is opened, absent the proposed change, any further 
opening transactions would require a minimum contract size of 100 
contracts. However, if the initial series opening can occur with a 91 
contract transaction, the Exchange believes that it is reasonable to 
permit the size of subsequent opening transactions in the series to be 
for 91 contracts.
2. Statutory Basis
    By providing FLEX-participating members and their customers greater 
flexibility to trade FLEX Equity Options by lowering from 250 to 150 
the minimum number of contracts required to open a series, the Exchange 
believes the proposed rule change is consistent with Section 6(b) of 
the Act \11\ in general and furthers the objectives of Section 6(b)(5) 
of the Act \12\ 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, in general, protect investors and the public interest.
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    \11\ 15 U.S.C. 78(f)(b).
    \12\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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

    Within 35 days of the date of publication of this notice in the 
Federal

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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 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-2006-36 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-2006-36. 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 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 available publicly. All 
submissions should refer to File Number SR-CBOE-2006-36 and should be 
submitted on or before February 14, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.
Nancy M. Morris,
Secretary.
[FR Doc. E8-1178 Filed 1-23-08; 8:45 am]
BILLING CODE 8011-01-P