Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval to a Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto Relating to Position Limits and Exercise Limits, 10010-10013 [E5-807]
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10010
Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Notices
Other Minor Rule Changes
IV. Solicitation of Comments
The Exchange proposes to amend the
definition of ‘‘market participant’’ in
CBOE Rule 6.45A to remove the inperson requirement from MMs. The
Exchange proposes definitions in CBOE
Rule 1.1(aaa) for the terms ‘‘Hybrid
Trading System’’ and ‘‘Hybrid 2.0
Program.’’
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
2. Statutory Basis
The Exchange believes that the
proposal, as amended, would enhance
liquidity on the Exchange. For this
reason, the Exchange believes the
proposed rule change, as amended, is
consistent with the Act and the rules
and regulations under the Act
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b) of the
Act.29 Specifically, the Exchange
believes the proposed rule change is
consistent with the Section 6(b)(5) 30
requirements that the rules of an
exchange be designed to promote just
and equitable principles of trade,
prevent fraudulent and manipulative
acts and, in general, to protect investors
and the public interest.
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 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
The Exchange neither solicited nor
received comments on the proposal.
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 such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
29 15
30 15
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2004–58 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–CBOE–2004–58. 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 (https://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, 450 Fifth Street, NW.,
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
available publicly. All submissions
should refer to File Number SR–CBOE–
2004–58 and should be submitted on or
before March 22, 2005.
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BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.31
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–801 Filed 2–28–05; 8:45 am]
[Release No. 34–51244; File No. SR–CBOE–
2003–30]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Order Granting Accelerated Approval
to a Proposed Rule Change and
Amendment Nos. 1, 2, 3, and 4 Thereto
Relating to Position Limits and
Exercise Limits
February 23, 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 July 9,
2003, 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 and II
below, which Items have been prepared
by the Exchange. On January 8, 2004,
the CBOE filed Amendment No. 1 to the
proposed rule change.3 On October 29,
2004, the CBOE filed Amendment No. 2
to the proposed rule change.4 On
February 10, 2005, the CBOE filed
Amendment No. 3 to the proposed rule
change.5 On February 15, 2005, the
CBOE filed Amendment No. 4 to the
proposed rule change.6 The Commission
is publishing this notice to solicit
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See letter from James M. Flynn, Attorney II,
Legal Division, CBOE, to Sharon Lawson, Senior
Special Counsel, Division of Market Regulation
(‘‘Division’’), Commission, dated January 7, 2004
(‘‘Amendment No. 1’’).
4 See letter from Edward J. Joyce, President and
Chief Operating Officer, CBOE, to Nancy Sanow,
Assistant Director, Division, Commission, dated
October 28, 2004 (‘‘Amendment No. 2’’).
5 Amendment No. 3, which replaced and
superseded the original filing and the first and
second amendments in their entireties, eliminated,
among other things, certain hedge exemptions that
were proposed in the original filing, requested that
the increases to the standard position and exercise
limits proposed in the filing be adopted as a sixmonth pilot program, and requested accelerated
approval of the proposed rule change.
6 Amendment No. 4, which replaced and
superseded the original filing and the previous
amendments in their entireties, retained the
changes made by Amendment No. 3 and made
technical corrections to the filing.
1 15
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Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Notices
comments on the proposed rule change,
as amended, from interested persons
and is accelerating approval of the
proposed rule change, as amended, on
a pilot basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The CBOE proposes to amend
Exchange Rule 4.11 and Exchange Rule
4.12 to increase the standard position
limits and exercise limits for equity
option contracts and options on the
Nasdaq-100 Index Tracking Stock
(‘‘QQQQ’’). The text of the proposed
rule change is available on the CBOE’s
Web site (https://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 received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item III 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 is proposing several
changes to Exchange Rule 4.11 (Position
Limits) and, accordingly, to Exchange
Rule 4.12 (Exercise Limits). Exchange
Rule 4.11 subjects equity options to one
of five different position limits
depending on the trading volume and
outstanding shares of the underlying
security. Exchange Rule 4.12 establishes
exercise limits for the corresponding
options at the same levels as the
corresponding security’s position
limits.7
Standard Position and Exercise Limits
The Exchange is proposing to adopt a
pilot program for a period of six months
7 Exchange Rule 4.12 states ‘‘* * * no member
shall exercise, for any account in which it has an
interest or for the account of any customer, a long
position in any options contract where such
member or customer, acting alone or in concert
with others, directly or indirectly * * * has or will
have exercised within any five consecutive business
days aggregate long positions in any class of options
dealt in on the Exchange in excess of [the
established limits set by the Exchange]. * * *’’
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during which the standard position and
exercise limits for options on the QQQQ
and for equity option classes traded on
the Exchange would be increased to the
following levels:
Current equity
option contract limit
Proposed equity
option contract limit
13,500
22,500
31,500
60,000
75,000
25,000
50,000
75,000
200,000
250,000
Current QQQQ
option contract limit
Proposed QQQQ
option contract limit
300,000
900,000
The standard position limits were last
increased on December 31, 1998.8 Since
that time there has been a steady
increase in the number of accounts that,
(a) approach the position limit; (b)
exceed the position limit; and (c) are
granted an exemption to the standard
limit. Several member firms have
petitioned the Exchange to either
eliminate position limits, or in lieu of
total elimination, increase the current
levels and expand the available hedge
exemptions. A review of available data
indicates that the majority of accounts
that maintain sizable positions are in
those option classes subject to the
60,000 and 75,000 tier limits. There also
has been an increase in the number of
accounts that maintain sizable positions
in the lower three tiers. In addition,
overall volume in the options market
has continually increased over the past
five years. The Exchange believes that
the increase in options volume and lack
of evidence of market manipulation
occurrences over the past twenty years
justifies the proposed increases in the
position and exercise limits.
The Exchange also proposes the
adoption of a new equity hedge
exemption to the existing exemptions
currently provided under Interpretation
and Policy .04 to Exchange Rule 4.11.
Specifically, new Interpretation and
Policy .04(a)(5) to Exchange Rule 4.11
would allow for a ‘‘reverse collar’’ hedge
exemption to apply when a long call
position is accompanied by a short put
position, and the long call expires with
the short put. In addition, the strike
price of the long call must equal or
exceed the short put, and each long call
and short put position must be hedged
with 100 shares of the underlying
security (or other adjusted number of
shares). Neither side of the long call
8 See Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(SR–CBOE–98–25) (approval of increase in position
limits and exercise limits).
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short put can be in-the-money at the
time the position is established. The
Exchange believes this is consistent
with the existing Interpretation and
Policy .04(a)(4) to Exchange Rule 4.11,
which provides for an exemption for a
‘‘collar,’’ and Interpretation and Policy
.04(a)(2) and (3) to Exchange Rule 4.11,
which provide for a hedge exemption
for reverse conversions and conversions,
respectively.
Manipulation
The CBOE believes that position and
exercise limits, at their current levels,
no longer serve their stated purpose.
The Commission has previously stated
that:
Since the inception of standardized
options trading, the options exchanges have
had rules imposing limits on the aggregate
number of options contracts that a member
or customer could hold or exercise. These
rules are intended to prevent the
establishment of options positions that can
be used or might create incentives to
manipulate or disrupt the underlying market
so as to benefit the options position. In
particular, position and exercise limits are
designed to minimize the potential for minimanipulations and for corners or squeezes of
the underlying market. In addition such
limits serve to reduce the possibility for
disruption of the options market itself,
especially in illiquid options classes.9
As the anniversary of listed options
trading approaches its thirty-second
year, the Exchange believes that the
existing surveillance procedures and
reporting requirements at the CBOE,
other options exchanges, and at the
several clearing firms are capable of
properly identifying unusual and/or
illegal trading activity. In addition,
routine oversight inspections of CBOE’s
regulatory programs by the Commission
have not uncovered any material
inconsistencies or shortcomings in the
manner in which the Exchange’s market
surveillance is conducted. These
procedures utilize daily monitoring of
market movements via automated
surveillance techniques to identify
unusual activity in both options and in
underlying stocks. Furthermore, the
significant increases in unhedged
options capital charges resulting from
the September 1997 adoption of riskbased haircuts in combination with the
Exchange margin requirements
applicable to these products under
Exchange rules, serve as a more effective
protection than do position limits.10
9 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11) (approval of increase in position
limits and exercise limits for OEX index options).
10 See Securities Exchange Act Release No. 38248
(February 6, 1997), 62 FR 6474 (February 12, 1997)
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Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Notices
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D or 13G.11 Options
positions are part of any reportable
positions and, thus, cannot be legally
hidden. In addition, Exchange Rule
4.13, which requires members to file
reports with the Exchange for any
customer or member who held aggregate
long or short positions of 200 or more
option contracts of any single class for
the previous day, will remain
unchanged and will continue to serve as
an important part of the Exchange’s
surveillance efforts.
The Exchange believes that restrictive
equity position limits prevent large
customers, such as mutual funds and
pension funds, from using options to
gain meaningful exposure to individual
stocks. This can result in lost liquidity
in both the options market and the stock
market. In addition, the Exchange has
found that restrictive limits and narrow
hedge exemption relief restrict member
firms from adequately facilitating
customer order flow and offsetting the
risks of such facilitations in the listed
options market. The fact that position
limits are calculated on a gross rather
than a delta basis also is an impediment.
Financial Requirements
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a
member or its customer may try to
maintain an inordinately large
unhedged position in an equity option.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by any one
account by increasing the margin and/
or capital that a member must maintain
for a large position held by itself or by
its customer. It also should be noted that
the Exchange has the authority under
Exchange Rule 12.3(h) and Exchange
Rule 12.10 to impose higher margin
requirements upon a member or
member organization when the
Exchange determines that higher
requirements are warranted. Also, the
Commission’s net capital rule, Rule
15c3–1 under the Act,12 imposes a
capital charge on members to the extent
of any margin deficiency resulting from
the higher margin requirement.
Finally, equity position limits have
been gradually expanded from 1,000
contracts in 1973 to the current level of
75,000 contracts for options on the
largest and most active underlying
(File No. S7–7–94) (adopting risk-based haircuts);
and CBOE Rule 12.3 (Margins).
11 17 CFR 240.13d–1.
12 17 CFR 240.15c3–1.
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14:21 Feb 28, 2005
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securities. To date, the Exchange
believes that there have been no adverse
affects on the market as a result of these
past increases in the limits for equity
option contracts.
Housekeeping Changes
The Exchange is proposing to amend
Exchange Rule 4.11 by deleting the
requirement that notice of position limit
information be manually posted on the
Exchange Bulletin Board. With the
advance of technologies, position limits
are now communicated to the
membership largely through electronic
media. Currently, applicable position
limits are posted on the CBOE Internet
site and on the Options Clearing
Corporation Internet site and are sent
electronically via e-mail to those
member firms that have requested this
type of notification. Paper copies of the
position limits also are available to the
trading floor community upon request.
Posting a paper list, which is quite long
and consumes a large amount of space,
on the Exchange Bulletin Board is an
outdated requirement that no longer
serves a purpose. Therefore, the
Exchange proposes to amend the
language to state that position limit
information must be posted publicly.
The Exchange also proposes a minor
change to Interpretation and Policy .06
to Exchange Rule 4.11 to correct the
‘‘Example’’ pertaining to the equity
hedge exemption. The current Example
inaccurately refers to the equity hedge
exemption being limited to two times
the standard limit. This limitation was
removed in a previous rule filing,13 and
is thus no longer relevant. Currently,
there is no position limit restriction for
qualified hedge strategies under the
equity hedge exemption policy.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
and furthers the objectives of Section
6(b)(5) of the Act,14 in that it is designed
to perfect the mechanisms of a free and
open market and to protect investors
and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change would impose
any burden on competition.
13 See Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(SR–CBOE–98–25) (approval of increase in position
limits and exercise limits).
14 15 U.S.C. 78f(b)(5).
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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. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2003–30 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–CBOE–2003–30. 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 (https://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, 450 Fifth Street, NW.,
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–
2003–30 and should be submitted on or
before March 22, 2005.
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Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Notices
IV. Commission’s Findings and Order
Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder,
applicable to a national securities
exchange.15 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,16 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanisms of a free and
open market and to protect investors
and the public interest.
The Commission notes that standard
position and exercise limits have not
been increased in six years, during
which time overall options market
volume has continually increased, and
the number of accounts that approach
the current limits, exceed them, and are
granted exemptions from the limits has
also increased. The CBOE believes,
among other things, that restrictive
position limits result in lost liquidity by
preventing large customers from using
options to gain meaningful exposure to
individual stocks. In view of the
Exchange’s representations concerning
its surveillance procedures and
capabilities of identifying unusual or
illegal trading activity, as well as other
protections against market manipulation
noted in the proposal, the Commission
believes that it is appropriate at this
time to approve the proposed increases
in position and exercise limits for a
pilot program of six months.
The Commission also believes that the
proposal to implement the ‘‘reverse
collar’’ hedge exemption is consistent
with the existing hedge exemption
relating to the ‘‘collar’’ strategy, which
has already been approved by the
Commission. The additional
amendments appropriately adjust the
requirement that the Exchange post
reasonable notice of new position limits
to reflect current technology, and
eliminate an inaccuracy in the Exchange
rules.
The CBOE has requested that the
Commission find good cause for
approving the proposed rule change
prior to the thirtieth day after
publication of notice thereof in the
Federal Register. The Commission
believes that it is appropriate to
accelerate approval of the proposed rule
change so that the pilot program,
intended to ease restrictions that inhibit
liquidity in the options market,
consistent with the protection of
investors, may begin without delay.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,17 for approving the proposed
rule change, as amended, prior to the
thirtieth day after the date of
publication of notice thereof in the
Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,18 that the
proposed rule change (SR–CBOE–2003–
30), as amended, is hereby approved on
an accelerated basis for a pilot period to
expire on August 23, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.19
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–807 Filed 2–28–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51243; File No. SR–PCX–
2004–130]
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change by the
Pacific Exchange, Inc. Relating to Fees
for Late FOCD Forms
February 23, 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 December
23, 2004, the Pacific Exchange, Inc.
(‘‘PCX’’ or ‘‘Exchange’’), through its
wholly owned subsidiary PCX Equities,
Inc. (‘‘PCXE’’), filed with the Securities
and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) the proposed
rule change as described in Items I, II
and III below, which Items have been
prepared by the self-regulatory
organization. The PCX has designated
this proposal as one establishing or
changing a due, fee, or other charge
imposed by the PCX under Section
19(b)(3)(A)(ii) of the Act,3 which
15 In
approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
16 15 U.S.C. 78f(b)(4).
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14:21 Feb 28, 2005
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PO 00000
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The PCX proposes to amend the PCXE
rules to adopt new fees for late
Financial and Operational Compliance
Department (‘‘FOCD’’) required forms.
The text of the proposed rule change is
below. Proposed new language is in
italics. Proposed deletions are in
brackets.
Rules of the Pacific Exchange, Inc.
Rule 11
Business Conduct
*
*
*
*
*
Prevention of the Misuse of Material,
Nonpublic Information
Rule 11.3(a) Every OTP Holder or
OTP Firm must establish, maintain and
enforce written policies and procedures
reasonably designed, taking into
consideration the nature of such OTP
Holder or OTP Firm’s business, to
prevent the misuse of material, nonpublic information by such OTP Holder
or OTP Firm or persons associated with
such OTP Holder or OTP Firm. OTP
Holders or OTP Firms for whom the
Exchange is the Designated Examining
Authority (‘‘DEA’’) that are required,
pursuant to Rule 4.5, to file SEC form
X–17A–5, with the Exchange on an
annual or more frequent basis must file
contemporaneously with the submission
for the calendar year end ITSFEA
compliance acknowledgments stating
that the procedures mandated by this
Rule have been established, enforced
and maintained. Any OTP Holder or
OTP Firm or Associated Person who
becomes aware of a possible misuse of
material, non-public information must
promptly notify the Exchange’s Options
Surveillance Department.
(b) Any OTP Holder or OTP Firm who
fails to file a compliance
acknowledgment form in a timely
manner shall be subject to a late filing
charge of $500.00 for each occurrence.
Repeated or aggravated failure to file
may be referred to the Enforcement
Department for appropriate disciplinary
action.
Commentary .01–.03—No change.
17 15
U.S.C. 78s(b)(2).
18 15 U.S.C. 78s(b)(2).
19 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
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*
*
*
*
*
Disclosure of Financial Arrangements of
OTP Holders
Rule 11.11(a)—No change.
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]]>Agencies
[Federal Register Volume 70, Number 39 (Tuesday, March 1, 2005)]
[Notices]
[Pages 10010-10013]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-807]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51244; File No. SR-CBOE-2003-30]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
to a Proposed Rule Change and Amendment Nos. 1, 2, 3, and 4 Thereto
Relating to Position Limits and Exercise Limits
February 23, 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 July 9, 2003, 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 and II below, which Items have been prepared by the Exchange.
On January 8, 2004, the CBOE filed Amendment No. 1 to the proposed rule
change.\3\ On October 29, 2004, the CBOE filed Amendment No. 2 to the
proposed rule change.\4\ On February 10, 2005, the CBOE filed Amendment
No. 3 to the proposed rule change.\5\ On February 15, 2005, the CBOE
filed Amendment No. 4 to the proposed rule change.\6\ The Commission is
publishing this notice to solicit
[[Page 10011]]
comments on the proposed rule change, as amended, from interested
persons and is accelerating approval of the proposed rule change, as
amended, on a pilot basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from James M. Flynn, Attorney II, Legal Division,
CBOE, to Sharon Lawson, Senior Special Counsel, Division of Market
Regulation (``Division''), Commission, dated January 7, 2004
(``Amendment No. 1'').
\4\ See letter from Edward J. Joyce, President and Chief
Operating Officer, CBOE, to Nancy Sanow, Assistant Director,
Division, Commission, dated October 28, 2004 (``Amendment No. 2'').
\5\ Amendment No. 3, which replaced and superseded the original
filing and the first and second amendments in their entireties,
eliminated, among other things, certain hedge exemptions that were
proposed in the original filing, requested that the increases to the
standard position and exercise limits proposed in the filing be
adopted as a six-month pilot program, and requested accelerated
approval of the proposed rule change.
\6\ Amendment No. 4, which replaced and superseded the original
filing and the previous amendments in their entireties, retained the
changes made by Amendment No. 3 and made technical corrections to
the filing.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to amend Exchange Rule 4.11 and Exchange Rule
4.12 to increase the standard position limits and exercise limits for
equity option contracts and options on the Nasdaq-100 Index Tracking
Stock (``QQQQ''). The text of the proposed rule change is available on
the CBOE's Web site (https://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 received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III 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 is proposing several changes to Exchange Rule 4.11
(Position Limits) and, accordingly, to Exchange Rule 4.12 (Exercise
Limits). Exchange Rule 4.11 subjects equity options to one of five
different position limits depending on the trading volume and
outstanding shares of the underlying security. Exchange Rule 4.12
establishes exercise limits for the corresponding options at the same
levels as the corresponding security's position limits.\7\
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\7\ Exchange Rule 4.12 states ``* * * no member shall exercise,
for any account in which it has an interest or for the account of
any customer, a long position in any options contract where such
member or customer, acting alone or in concert with others, directly
or indirectly * * * has or will have exercised within any five
consecutive business days aggregate long positions in any class of
options dealt in on the Exchange in excess of [the established
limits set by the Exchange]. * * *''
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Standard Position and Exercise Limits
The Exchange is proposing to adopt a pilot program for a period of
six months during which the standard position and exercise limits for
options on the QQQQ and for equity option classes traded on the
Exchange would be increased to the following levels:
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Current equity option contract Proposed equity option contract
limit limit
------------------------------------
13,500 25,000
22,500 50,000
31,500 75,000
60,000 200,000
75,000 250,000
------------------------------------
Current QQQQ option contract limit Proposed QQQQ option contract limit
------------------------------------
300,000 900,000
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The standard position limits were last increased on December 31,
1998.\8\ Since that time there has been a steady increase in the number
of accounts that, (a) approach the position limit; (b) exceed the
position limit; and (c) are granted an exemption to the standard limit.
Several member firms have petitioned the Exchange to either eliminate
position limits, or in lieu of total elimination, increase the current
levels and expand the available hedge exemptions. A review of available
data indicates that the majority of accounts that maintain sizable
positions are in those option classes subject to the 60,000 and 75,000
tier limits. There also has been an increase in the number of accounts
that maintain sizable positions in the lower three tiers. In addition,
overall volume in the options market has continually increased over the
past five years. The Exchange believes that the increase in options
volume and lack of evidence of market manipulation occurrences over the
past twenty years justifies the proposed increases in the position and
exercise limits.
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\8\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25) (approval of
increase in position limits and exercise limits).
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The Exchange also proposes the adoption of a new equity hedge
exemption to the existing exemptions currently provided under
Interpretation and Policy .04 to Exchange Rule 4.11. Specifically, new
Interpretation and Policy .04(a)(5) to Exchange Rule 4.11 would allow
for a ``reverse collar'' hedge exemption to apply when a long call
position is accompanied by a short put position, and the long call
expires with the short put. In addition, the strike price of the long
call must equal or exceed the short put, and each long call and short
put position must be hedged with 100 shares of the underlying security
(or other adjusted number of shares). Neither side of the long call
short put can be in-the-money at the time the position is established.
The Exchange believes this is consistent with the existing
Interpretation and Policy .04(a)(4) to Exchange Rule 4.11, which
provides for an exemption for a ``collar,'' and Interpretation and
Policy .04(a)(2) and (3) to Exchange Rule 4.11, which provide for a
hedge exemption for reverse conversions and conversions, respectively.
Manipulation
The CBOE believes that position and exercise limits, at their
current levels, no longer serve their stated purpose. The Commission
has previously stated that:
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.
These rules are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate
or disrupt the underlying market so as to benefit the options
position. In particular, position and exercise limits are designed
to minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market. In addition such limits serve to
reduce the possibility for disruption of the options market itself,
especially in illiquid options classes.\9\
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\9\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11) (approval of
increase in position limits and exercise limits for OEX index
options).
As the anniversary of listed options trading approaches its thirty-
second year, the Exchange believes that the existing surveillance
procedures and reporting requirements at the CBOE, other options
exchanges, and at the several clearing firms are capable of properly
identifying unusual and/or illegal trading activity. In addition,
routine oversight inspections of CBOE's regulatory programs by the
Commission have not uncovered any material inconsistencies or
shortcomings in the manner in which the Exchange's market surveillance
is conducted. These procedures utilize daily monitoring of market
movements via automated surveillance techniques to identify unusual
activity in both options and in underlying stocks. Furthermore, the
significant increases in unhedged options capital charges resulting
from the September 1997 adoption of risk-based haircuts in combination
with the Exchange margin requirements applicable to these products
under Exchange rules, serve as a more effective protection than do
position limits.\10\
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\10\ See Securities Exchange Act Release No. 38248 (February 6,
1997), 62 FR 6474 (February 12, 1997) (File No. S7-7-94) (adopting
risk-based haircuts); and CBOE Rule 12.3 (Margins).
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[[Page 10012]]
Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\11\ Options positions are
part of any reportable positions and, thus, cannot be legally hidden.
In addition, Exchange Rule 4.13, which requires members to file reports
with the Exchange for any customer or member who held aggregate long or
short positions of 200 or more option contracts of any single class for
the previous day, will remain unchanged and will continue to serve as
an important part of the Exchange's surveillance efforts.
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\11\ 17 CFR 240.13d-1.
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The Exchange believes that restrictive equity position limits
prevent large customers, such as mutual funds and pension funds, from
using options to gain meaningful exposure to individual stocks. This
can result in lost liquidity in both the options market and the stock
market. In addition, the Exchange has found that restrictive limits and
narrow hedge exemption relief restrict member firms from adequately
facilitating customer order flow and offsetting the risks of such
facilitations in the listed options market. The fact that position
limits are calculated on a gross rather than a delta basis also is an
impediment.
Financial Requirements
The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a member or its customer may try to maintain an
inordinately large unhedged position in an equity option. Current
margin and risk-based haircut methodologies serve to limit the size of
positions maintained by any one account by increasing the margin and/or
capital that a member must maintain for a large position held by itself
or by its customer. It also should be noted that the Exchange has the
authority under Exchange Rule 12.3(h) and Exchange Rule 12.10 to impose
higher margin requirements upon a member or member organization when
the Exchange determines that higher requirements are warranted. Also,
the Commission's net capital rule, Rule 15c3-1 under the Act,\12\
imposes a capital charge on members to the extent of any margin
deficiency resulting from the higher margin requirement.
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\12\ 17 CFR 240.15c3-1.
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Finally, equity position limits have been gradually expanded from
1,000 contracts in 1973 to the current level of 75,000 contracts for
options on the largest and most active underlying securities. To date,
the Exchange believes that there have been no adverse affects on the
market as a result of these past increases in the limits for equity
option contracts.
Housekeeping Changes
The Exchange is proposing to amend Exchange Rule 4.11 by deleting
the requirement that notice of position limit information be manually
posted on the Exchange Bulletin Board. With the advance of
technologies, position limits are now communicated to the membership
largely through electronic media. Currently, applicable position limits
are posted on the CBOE Internet site and on the Options Clearing
Corporation Internet site and are sent electronically via e-mail to
those member firms that have requested this type of notification. Paper
copies of the position limits also are available to the trading floor
community upon request. Posting a paper list, which is quite long and
consumes a large amount of space, on the Exchange Bulletin Board is an
outdated requirement that no longer serves a purpose. Therefore, the
Exchange proposes to amend the language to state that position limit
information must be posted publicly.
The Exchange also proposes a minor change to Interpretation and
Policy .06 to Exchange Rule 4.11 to correct the ``Example'' pertaining
to the equity hedge exemption. The current Example inaccurately refers
to the equity hedge exemption being limited to two times the standard
limit. This limitation was removed in a previous rule filing,\13\ and
is thus no longer relevant. Currently, there is no position limit
restriction for qualified hedge strategies under the equity hedge
exemption policy.
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\13\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25) (approval of
increase in position limits and exercise limits).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act,\14\ in
that it is designed to perfect the mechanisms of a free and open market
and to protect investors and the public interest.
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\14\ 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 would
impose any burden on competition.
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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2003-30 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CBOE-2003-30. 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 (https://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, 450 Fifth
Street, NW., 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-2003-30 and should be submitted on or before March 22, 2005.
[[Page 10013]]
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder, applicable to a national
securities exchange.\15\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\16\
which requires, among other things, that the rules of a national
securities exchange be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanisms of a free and open
market and to protect investors and the public interest.
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\15\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(4).
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The Commission notes that standard position and exercise limits
have not been increased in six years, during which time overall options
market volume has continually increased, and the number of accounts
that approach the current limits, exceed them, and are granted
exemptions from the limits has also increased. The CBOE believes, among
other things, that restrictive position limits result in lost liquidity
by preventing large customers from using options to gain meaningful
exposure to individual stocks. In view of the Exchange's
representations concerning its surveillance procedures and capabilities
of identifying unusual or illegal trading activity, as well as other
protections against market manipulation noted in the proposal, the
Commission believes that it is appropriate at this time to approve the
proposed increases in position and exercise limits for a pilot program
of six months.
The Commission also believes that the proposal to implement the
``reverse collar'' hedge exemption is consistent with the existing
hedge exemption relating to the ``collar'' strategy, which has already
been approved by the Commission. The additional amendments
appropriately adjust the requirement that the Exchange post reasonable
notice of new position limits to reflect current technology, and
eliminate an inaccuracy in the Exchange rules.
The CBOE has requested that the Commission find good cause for
approving the proposed rule change prior to the thirtieth day after
publication of notice thereof in the Federal Register. The Commission
believes that it is appropriate to accelerate approval of the proposed
rule change so that the pilot program, intended to ease restrictions
that inhibit liquidity in the options market, consistent with the
protection of investors, may begin without delay. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\17\ for approving the proposed rule change, as amended, prior to
the thirtieth day after the date of publication of notice thereof in
the Federal Register.
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\17\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-CBOE-2003-30), as amended,
is hereby approved on an accelerated basis for a pilot period to expire
on August 23, 2005.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-807 Filed 2-28-05; 8:45 am]
BILLING CODE 8010-01-P
