[Federal Register Volume 73, Number 241 (Monday, December 15, 2008)]
[Notices]
[Pages 76075-76078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-29556]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59060; File No. SR-CBOE-2008-115]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to 
FLEX Options Expirations

December 5, 2008.
    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 November 19, 2008, 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 
Exchange. 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 regarding permissible 
expiration dates for Flexible Exchange Options (``FLEX Options'').\3\ 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.org/Legal), CBOE, and at the Commission.
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    \3\ FLEX Options provide investors with the ability to customize 
basic option features including size, expiration date, exercise 
style, and certain exercise prices. FLEX Options can be FLEX Index 
Options or FLEX Equity Options. FLEX Index Options are index options 
that are subject to the FLEX rules in Chapters XXIVA or XXIVB of the 
CBOE Rules. FLEX Index Options Series may be approved and open for 
trading on any index that has been approved for Non-FLEX Options 
trading or for warrant trading on the Exchange. FLEX Equity Options 
are options on specified equity securities that are subject to the 
FLEX rules in Chapters XXIVA or XXIVB of the CBOE Rules. FLEX Equity 
Options may be on underlying securities that have been approved by 
the Exchange in accordance with CBOE Rule 5.3, which includes but is 
not limited to stock options and exchange-traded fund options. In 
addition, other products are permitted to be traded pursuant to the 
FLEX trading procedures. For example, credit options are eligible 
for trading as FLEX Options pursuant to the FLEX rules in Chapters 
XXIVA and XXIVB. See CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and 
(c)(1), 24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.19.
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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 purpose of the filing is to modify the permissible expiration 
dates for FLEX Options. These options are governed by Exchange Chapters 
XXIVA and XXIVB. Under current CBOE Rules 24A.4 and 24B.4, FLEX Options 
may not expire on any business day that falls on, or within two 
business days of, a third Friday-of-the-month expiration day for any 
Non-FLEX Option (an ``Expiration Friday'').\4\ However, subject to 
certain aggregation requirements for cash settled options, the current 
FLEX Rules do permit the expiration of FLEX Options on the same day 
that Non-FLEX

[[Page 76076]]

quarterly index options (``QIX'') and Non-FLEX Weeklys Options 
expire.\5\
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    \4\ For example, under the current rule, a FLEX option could 
expire on the Tuesday before Expiration Friday, but could not expire 
on the Wednesday or Thursday before Expiration Friday. Similarly, a 
FLEX option could expire on the Wednesday after Expiration Friday, 
but could not expire on the Monday or Tuesday after Expiration 
Friday. This restriction is hereinafter referred to as the ``three 
business day'' expiration restriction.
    \5\ Rules 24A.7(d) and 24B.7(d) provide that:
    (1) Commencing at the close of trading two business days prior 
to the last trading day of the calendar quarter, positions in P.M. 
Settled FLEX Index Options (i.e., FLEX Index Options having an 
exercise settlement value determined by the level of the index at 
the close of trading on the last trading day before expiration) 
shall be aggregated with positions in Quarterly Index Options on the 
same index with the same expiration (``comparable QIX options'') and 
shall be subject to the position limits set forth in Rule 24.4, 
24.4A or 24.4B, as applicable.
    (2) Commencing at the close of trading two business days prior 
to the last trading day of the week, positions in FLEX Options that 
are cash settled (i.e., FLEX Index Options or Credit Default 
Options) shall be aggregated with positions in Short Term Option 
Series on the same underlying (e.g., same underlying index as a FLEX 
Index Option) with the same means for determining exercise 
settlement value (e.g., opening or closing prices of the underlying 
index) and same expiration (``comparable Weekly options'') and shall 
be subject to the position limits set forth in Rule 24.4, 24.4A, 
24.4B or 29.5, as applicable.
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    The Exchange is now proposing to eliminate the expiration date 
restriction so that FLEX Options may expire on any business day. 
Although the expiration date restrictions would be eliminated, the 
Exchange notes that certain position limit and reporting requirements 
will continue to apply. FLEX Index Options overlying all industry 
indexes, all micro narrow-based indexes, and certain broad-based 
indexes remain subject to position limits under CBOE Rules 24A.7 and 
24B.7. FLEX Index Options on certain other broad-based indexes 
(specifically the BXM, DJX, NDX, OEX, RUT, SPX, VIX, VXD, VXN, XEO, 
CBOE S&P 500 Three-Month Realized Variance and S&P 500 Three-Month 
Realized Volatility), and FLEX Equity Options are not subject to 
position limits but remain subject to reporting requirements under CBOE 
Rules 24A.7 and 24B.7. Additionally, all FLEX options remain subject to 
the position reporting requirements of CBOE Rule 4.13(a).\6\ Moreover, 
the Exchange and member organizations each have the authority, pursuant 
to CBOE Rule 12.10, to impose additional margin as deemed advisable.
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    \6\ CBOE Rule 4.13(a) provides that ``[i]n a manner and form 
prescribed by the Exchange, each member shall report to the 
Exchange, the name, address, and social security or tax 
identification number of any customer who, acting alone, or in 
concert with others, on the previous business day maintained 
aggregate long or short positions on the same side of the market of 
200 or more contracts of any single class of option contracts dealt 
in on the Exchange. The report shall indicate for each such class of 
options, the number of option contracts comprising each such 
position and, in the case of short positions, whether covered or 
uncovered.'' For purposes of this Rule, the term ``customer'' in 
respect of any member includes ``the member, any general or special 
partner of the member, any officer or director of the member, or any 
participant, as such, in any joint, group or syndicate account with 
the member or with any partner, officer or director thereof.'' CBOE 
Rule 4.13(d).
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    Beyond the above-described position limit and reporting 
requirements, for FLEX Options that expire on Expiration Friday, the 
proposed rule change includes an aggregation requirement under CBOE 
Rules 24A.7 and 24B.7 for position limit purposes. Specifically, for as 
long as the options positions remain open, positions in FLEX Options 
that expire on Expiration Friday shall be aggregated with positions in 
Non-FLEX Options on the same underlying (e.g., the same underlying 
security in the case of a FLEX Equity Option and the same underlying 
index in the case of a FLEX Index Option) (referred to as ``comparable 
Non-FLEX Options''). Such FLEX Options and comparable Non-FLEX Options 
would be subject to the position limits that are applicable to the Non-
FLEX Options.\7\ The aggregation requirement would apply to both cash 
and physically settled options.
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    \7\ Thus, as soon as a FLEX Option position that expires on 
Expiration Friday is opened and as long as that position remains 
open, it would be subject to the position limit aggregation 
requirement at the position limits that are applicable to Non-FLEX 
Options. By comparison, the position limit aggregation requirement 
for FLEX Index Options that expire on the same date as Non-FLEX QIX 
or Weekly Options only applies as of the close of trading two 
business days prior to the last trading day of the calendar quarter 
or week, as applicable. See note 5, supra; see also CBOE Rules 4.11, 
Position Limits (which contains position limits for Non-FLEX Equity 
Options); 24.4, Position Limits for Broad-Based Index Options; 
24.4A, Position Limits for Industry Index Options; 24.4B, Position 
Limits for Options on Micro Narrow-Based Indexes as Defined Under 
Rule 24.2(d); and 29.5, Position Limits (which contains position 
limits for Credit Options).
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    In addition, in the case of FLEX Index Options only, the proposed 
rule change provides that FLEX Index Options expiring on or within two 
business days of an Expiration Friday may not have an exercise 
settlement value on the expiration date determined by reference to the 
closing price of the index.\8\ These limitations on exercise settlement 
value calculations are intended to serve as a safeguard against 
potential adverse effects that might be associated with triple 
witching.\9\ Once approved, the Exchange intends to evaluate the 
continued need for maintaining this safeguard and may consider 
proposing changes through a separate rule change filing.
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    \8\ A closing exercise settlement value (also referred to as a 
``p.m. settlement'') is determined by reference to the reported 
level of the index as derived from the closing prices of the 
component securities. See CBOE Rules 24A.4(b)(2) and 24B.4(b)(2).
    \9\ The expiration of the contracts for stock index futures, 
stock index options, and stock options all expire on the same days 
occurring on the third Friday of March, June, September, and 
December (which is referred to as ``triple witching''). The 
Exchange's proposed limitations on p.m. settlements would apply 
during triple witching expirations, as well as on all other 
Expiration Fridays.
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    In conjunction with the elimination of the expiration date 
restriction, the proposed rule change also states that, provided the 
options on an underlying security or index are otherwise eligible for 
FLEX trading, FLEX Options will be permitted in puts and calls that do 
not have the same exercise style, same expiration date and same 
exercise price as Non-FLEX Options that are already available for 
trading on the same underlying security or index. The proposed rule 
change also provides that FLEX Options will be permitted before (but 
not after) the options are listed for trading as Non-FLEX Options. Once 
and if an option series is listed for trading as a Non-FLEX Option 
series, (i) all existing open positions established under the FLEX 
trading procedures shall be fully fungible with transactions in the 
respective Non-FLEX Option series, and (ii) any further trading in the 
series would be as Non-FLEX options subject to the Non-FLEX trading 
procedures and rules.
    For example, a FLEX Trader could establish a FLEX Option position 
in a European-style, am-settled SPX 1650 Call option series with an 
expiration of Aug 16, 2013 (which would be an Expiration Friday). In 
such an instance, once and if the Non-FLEX, European-style, am-settled 
SPX 1650 Call option series that expires on August 16, 2013 is listed 
for trading, the established FLEX Option position would be fully 
fungible with transactions in the Non-FLEX Option series. Any further 
trading in the series would be as Non-FLEX Options subject to the Non-
FLEX trading procedures.
    CBOE believes that expanding the eligible dates for FLEX 
expirations is important and necessary to the Exchange's efforts to 
create a product and market that provides members and investors 
interested in FLEX-type options with an improved but comparable 
alternative to the over-the-counter (``OTC'') market in customized 
options, which can take on contract characteristics similar to FLEX 
Options but are not subject to the same restrictions (such as the three 
business day expiration restriction or the p.m. settlement 
restriction). By expanding the eligible expiration dates for FLEX 
Options, market participants will now 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

[[Page 76077]]

able to trade these customized options in an exchange environment in 
several ways, including, but not limited to the following: (1) Enhanced 
efficiency in initiating and closing out positions; (2) increased 
market transparency; and (3) heightened contra-party creditworthiness 
due to the role of The Options Clearing Corporation (``OCC'') as issuer 
and guarantor of FLEX Options. CBOE also believes this change is 
consistent and more competitive with the existing practice for trading 
flex-style options on futures exchanges.\10\
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    \10\ For example, expiration dates for Chicago Mercantile 
Exchange (``CME'') flex options may be specified for any exchange 
business day up to and including the day of determination of the 
final settlement price of the underlying futures contract. In 
addition, CME flex options are permitted in puts and calls that do 
not have the same underlying futures contract, same strike price, 
same exercise style, and same expiration date as standard listed 
options that are already available for trading. Trading in standard 
options under certain flexible trading procedures is permitted prior 
to the listing of such standard options. Once and if the standard 
options are listed, all existing open positions established under 
the flexible trading procedures are fully fungible with transactions 
in the standard option series, and any further trading in the series 
is as standard options subject to the standard option trading 
procedures. See, e.g., CME Rules 351A.31A and 357A.31A, and CME 
Equity Futures and Options 2007 Information Guide at pages 46-47, 
located at http://www.cme.com/files/EquityIndexManual.pdf.
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    CBOE notes that when the FLEX Option rules were initially proposed 
and approved almost sixteen years ago, the Exchange was uncertain what 
market impacts, if any, excessive FLEX positions would have on the 
market or on firms.\11\ To minimize the risk of adverse market effects, 
at the time the FLEX rules were first introduced the Exchange put in 
place certain position limit boundaries (which have been modified over 
time) and the requirement that the FLEX expiration date be no closer 
than three business days from any Non-FLEX Option Expiration Friday. 
However, in light of the Exchange's experience in trading FLEX Options 
to date, specifically with respect to the diversity in FLEX Option 
trading, the relatively small percentage FLEX Options trading compared 
to overall trading on the Exchange, and the lack of market disruptions 
or problems caused by or on existing FLEX Option expirations, CBOE no 
longer believes that the three business day expiration restriction is 
necessary to insulate Non-FLEX expirations from the potential adverse 
market impacts of FLEX expirations.\12\ To the contrary, CBOE believes 
that the restriction actually places the Exchange at a competitive 
disadvantage to its OTC and futures counter-parts in the market for 
customized options, and unnecessarily limits market participants' 
ability to trade in an exchange environment that offers the added 
benefits of transparency, price discovery, liquidity, and financial 
stability.
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    \11\ See Securities Exchange Act Release Nos. 31361 (October 27, 
1992) 57 FR 52655 (November 4, 1992)(SR-CBOE-92-17) (notice of 
filing of proposed rule change relating to Flexible Exchange 
Options) and 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) 
(Order approving SR-CBOE-92-17). At the time of the proposal, the 
Exchange also anticipated that there would be limited secondary 
trading in any FLEX Option series having a particular expiration 
date due to the diversity inherent in FLEX Options and that FLEX 
expiration concentrations should be rare. These observations appear 
to be accurate for the trading in FLEX Options to date.
    \12\ In further support of its proposal, the Exchange also notes 
that it is not aware of any market disruptions or problems caused by 
customized options in the OTC or futures markets that expire on or 
near Expiration Friday. Moreover, to the extent there may be a risk 
of adverse market effects attributable to options that would 
otherwise be traded in a non-transparent fashion in the OTC market, 
CBOE believes that such risk would be lessened by making these 
customized options eligible for trading in an exchange environment 
because of the added transparency, price discovery, liquidity, and 
financial stability available.
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    Although the expiration date restrictions would be eliminated, the 
Exchange notes that the above-described position limit and reporting 
requirements will continue to apply. Moreover, the Exchange and member 
organizations each have the authority, pursuant to CBOE Rule 12.10, to 
impose additional margin as deemed advisable. CBOE believes these 
existing safeguards serve sufficiently to help monitor open interest in 
FLEX Option series and significantly reduce any risk of adverse market 
effects that might occur as a result of large FLEX exercises in FLEX 
Option series that expire near Non-FLEX expirations. Beyond this, 
however, CBOE is also proposing to impose the above-described 
aggregation requirement for FLEX Options that have the same expiration 
as comparable Non-FLEX Options at the position limit amounts that are 
applicable to the Non-FLEX Options, and the above-described limitations 
on FLEX Index Option p.m. settlements. Further, it is anticipated that 
there would continue to be limited secondary trading in any FLEX Option 
series having a particular expiration date due to the diversity 
inherent in FLEX Options and that FLEX expiration concentrations should 
be rare.
    In proposing this change to the eligible FLEX expiration dates, 
CBOE is cognizant of the need for market participants to have 
substantial options transaction capacity and flexibility to hedge their 
substantial investment portfolios, on the one hand, and the potential 
for adverse effects on the market or on firms that might be 
attributable to excessive FLEX positions which expire near or at the 
expiration date for Non-FLEX Options, on the other hand. CBOE is also 
cognizant of the OTC market, in which no position limit, expiration 
date and p.m. settlement restrictions apply. In light of these 
considerations,\13\ CBOE believes this change is appropriate and 
reasonable and that it will provide market participants with additional 
flexibility to determine expiration dates and choice of venue that best 
comport with investors' particular needs.
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    \13\ Besides the fact that OTC customized options are not 
subject to a restriction on expiration date and p.m. settlement, the 
Exchange notes that FLEX Options can be designated as American-style 
(which can be exercised at any time up to the day before expiration) 
or European- or European-Capped-style (which can be exercised only 
at expiration). Though it is possible for FLEX Options that are 
American-styled to be exercised any time, including during the three 
business day expiration restriction period, there have been no 
market disruptions or problems caused by the early exercise of 
American-style FLEX options at or near Non-FLEX expirations. In 
addition, it is not uncommon for similar products across markets to 
have the same expiration dates. For example, the contracts for stock 
index futures, stock index options, and stock options all expire on 
the same triple witching days occurring on the third Friday of 
March, June, September, and December.
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    Finally, the Exchange has confirmed with the OCC that OCC can 
configure its systems to support the expiration of FLEX Options on any 
business day.
2. Statutory Basis
    By expanding permissible expiration dates for FLEX Options, the 
Exchange believes the proposed rule change is consistent with Section 
6(b) of the Act \14\ in general and furthers the objectives of Section 
6(b)(5) of the Act \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 protect investors and the public interest. The proposed 
rule change would provide members and investors with additional 
opportunities to trade customized options in an exchange environment, 
and investors would benefit as a result.
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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 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.

[[Page 76078]]

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 self-regulatory organization 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-2008-115 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-115. 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-2008-115 and should be 
submitted on or before January 5, 2009.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).


Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-29556 Filed 12-12-08; 8:45 am]
BILLING CODE 8011-01-P