[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