Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to the Elimination of Position and Exercise Limits on NDX Options, 62147-62149 [E5-5973]

Download as PDF Federal Register / Vol. 70, No. 208 / Friday, October 28, 2005 / Notices for NDX options and FLEX options is consistent with Amex rules relating to similar broad-based indexes and would also allow Amex members and their customers greater hedging and investment opportunities. III. Discussion After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.9 The Commission believes the proposed rule change is consistent with Section 6(b)(5) of the Act, which requires 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 foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general to protect investors and the public interest.10 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. The Commission notes that it continues to believe that the fundamental purposes of position and exercise limits remain valid. Nevertheless, the Commission believes that experience with the trading of index options as well as enhanced reporting requirements and the Exchange’s surveillance capabilities have made it possible to approve the elimination of position and exercise limits on certain broad-based index options. Thus, in 2002, the Commission approved an Amex proposal to eliminate permanently position and exercise limits for options on the XMI and XII.11 The Commission believes that the considerations upon which it relied in approving the elimination of position and exercise limits for XMI and XII 9 In approving this rule proposal, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). 11 See XMI/XII Permanent Approval Order, supra note 5. VerDate Aug<31>2005 18:15 Oct 27, 2005 Jkt 208001 options equally apply with respect to options on the NDX. As noted by the Amex, the market capitalization of the NDX as of the date of filing of the proposal was $1.86 trillion. The ADTV for the period from January 1, 2005 through May 31, 2005 for all underlying components of the index was 425.8 million shares. The Commission believes that the enormous market capitalization of the NDX and the deep, liquid market for the underlying component securities significantly reduce concerns regarding market manipulation or disruption in the underlying market. Removing position and exercise limits for NDX options may also bring additional depth and liquidity, in terms of both volume and open interest, to NDX options without significantly increasing concerns regarding intermarket manipulation or disruption of the options or the underlying securities. In addition, the Commission believes that financial requirements imposed by both the Exchange and the Commission adequately address concerns that an Amex member or its customer may try to maintain an inordinately large unhedged position in NDX options. Current risk-based haircut and margin 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.12 Under the proposal, the Amex also would have the authority under its rules to impose a higher margin requirement upon an account maintaining an under-hedged position when it determines a higher requirement is warranted. As noted in the Amex rules, the clearing firm carrying the account would be subject to capital charges under Rule 15c3–1 under the Act to the extent of any margin deficiency resulting from the higher margin requirement. Finally, in approving the elimination of position and exercise limits for options on the XMI and XII, the Commission took note of the enhanced surveillance and reporting safeguards that the Amex had adopted to allow it to detect and deter trading abuses that might arise as a result.13 The Amex represents that it monitors trading in NDX options in the same manner as 12 See Securities Exchange Act Release No. 41011 (February 1, 1999), 64 FR 6405 (February 9, 1999) (notice of filing and order granting accelerated approval to proposed rule change implementing pilot program to eliminated position and exercise limits for XMI and XII options) (‘‘XMI/XII Pilot Approval Order’’). 13 See, in particular, XMI/XII Pilot Approval Order, supra note 12. PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 62147 trading in XMI options. These safeguards, including the 100,000contract reporting requirement described above, would allow the Amex to monitor large positions in order to identify instances of potential risk and to assess and respond to any market concerns at an early stage. In this regard, the Commission expects the Amex to take prompt action, including timely communication with the Commission and other marketplace self-regulatory organizations responsible for oversight of trading in component stocks, should any unanticipated adverse market effects develop. Moreover, as previously noted, the Exchange has the flexibility to specify other reporting requirements, as well as to vary the limit at which the reporting requirements may be triggered. The Commission further notes that in eliminating position and exercise limits for FLEX NDX options, the Amex is adopting the same additional rules for these options as for FLEX XMI options. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,14 that the proposed rule change (SR–Amex–2005– 063) be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Jonathan G. Katz, Secretary. [FR Doc. E5–5974 Filed 10–27–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52650; File No. SR-CBOE– 2005–41] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving Proposed Rule Change Relating to the Elimination of Position and Exercise Limits on NDX Options October 21, 2005. I. Introduction On May 23, 2005, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 14 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 15 17 E:\FR\FM\28OCN1.SGM 28OCN1 62148 Federal Register / Vol. 70, No. 208 / Friday, October 28, 2005 / Notices thereunder,2 a proposed rule change to amend its rules to eliminate position and exercise limits for options on the Nasdaq 100 Index (‘‘NDX’’). The Commission published the proposed rule change for comment in the Federal Register on August 26, 2005.3 On October 5, 2005, the CBOE filed Amendment No. 1 to the proposed rule change.4 The Commission received no comments on the proposal. This order approves the proposed rule change. II. Description of the Proposal The CBOE proposes to amend its rules to eliminate position and exercise limits for options on the NDX, a broad-based security index. In connection with this change, options on the NDX would be subject to specific reporting requirements and additional margin provisions imposed by the CBOE with respect to options on the S&P 500 Index (‘‘SPX’’), the S&P 100 Index (‘‘OEX’’), and the Dow Jones Industrial Average (‘‘DJX’’), the three broad-based index options that, under the Exchange’s current rules, are not subject to position and exercise limits. The Exchange noted that in approving the elimination of position limits for SPX, OEX, and DJX options, the Commission considered the enormous capitalization of each of these indexes and the deep and liquid markets for the securities underlying each index significantly reduced concerns of market manipulation or disruption in the underlying markets.5 The CBOE noted that the market capitalization of NDX, as of the date of filing of the proposed rule change, was $1.84 trillion and the average daily trading volume (‘‘ADTV’’), in the aggregate, for the component securities of the NDX, for the period three months prior to the date of filing of the proposed rule change, was 420 million shares. For the same period, the ADTV for options on the NDX was 44,008 contracts. The Exchange also stated that in the SPX/OEX/DJX Permanent Approval 2 17 CFR 240.19b-4. Exchange Act Release No. 52313 (August 22, 2005), 70 FR 50433 (‘‘Notice’’). 4 In Amendment No. 1, the CBOE made a technical revision to a table in the rule text of the proposed rule change to reflect that the NDX is the Nasdaq 100 Index (Full Value). This technical amendment did not require notice and comment, as it did not affect the substance of the rule filing. 5 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) (‘‘SPX/OEX/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) (‘‘SPX/OEX/DJX Pilot Approval Order’’). 3 Securities VerDate Aug<31>2005 18:15 Oct 27, 2005 Jkt 208001 Order, the Commission noted that the financial requirements imposed by both the Exchange and the Commission serve to address any concerns that an Exchange member or its customer(s) may try to maintain an inordinately large unhedged position in SPX/OEX/ DJX options. The CBOE noted that these same financial requirements would apply equally to NDX options. The Exchange further noted that it 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 6 to the extent of any resulting margin deficiency.7 The CBOE indicated that the Commission, in the SPX/OEX/DJX Permanent Approval Order, 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 on SPX, OEX, and DJX options. The Exchange represents that it monitors the trading in NDX options in the same manner as trading in SPX, OEX, and DJX options and that the current CBOE surveillance procedures are adequate to continue monitoring NDX options. In addition, the Exchange intends to impose a reporting requirement on CBOE members (other than CBOE marketmakers) or member organizations who trade NDX options. This reporting requirement, which is currently imposed on members who trade SPX and OEX options, would require members or member organizations who maintain in excess of 100,000 NDX option contracts on the same side of the market, for their own accounts or for the account of customers, 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. The Exchange also would be permitted to specify other reporting requirements, as well as the limit at CFR 240.15c3–1. 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. which the reporting requirement may be triggered.8 Finally, the CBOE proposes to amend Exchange rules relating to the trading of FLEX broad-based index options to eliminate position and exercise limits on FLEX NDX options, and to adopt for NDX FLEX options the same 100,000 contract reporting requirement and additional margin provisions that apply for SPX and OEX FLEX options. 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 would also allow CBOE members and their customers greater hedging and investment opportunities. III. Discussion After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.9 In particular, the Commission believes the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act, which requires 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 foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and in general to protect investors and the public interest.10 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. The Commission notes that it continues to believe that the fundamental purposes of position and exercise limits remain valid. Nevertheless, the Commission believes that experience with the trading of index options as well as enhanced reporting requirements and the 6 17 7 See PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 8 See Interpretation and Policy .03 to CBOE Rule 24.4. 9 In approving this rule proposal, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). E:\FR\FM\28OCN1.SGM 28OCN1 Federal Register / Vol. 70, No. 208 / Friday, October 28, 2005 / Notices Exchange’s surveillance capabilities have made it possible to approve the elimination of position and exercise limits on certain broad-based index options. Thus, in 2001, the Commission approved a CBOE proposal to eliminate permanently position and exercise limits for options on the SPX, OEX, and DJX.11 The Commission believes that the considerations upon which it relied in approving the elimination of position and exercise limits for SPX, OEX, and DJX options equally apply with respect to options on the NDX. As noted by the CBOE, the market capitalization of the NDX as of the date of filing of the proposal was $1.84 trillion. The ADTV for the period three months prior to the date of filing of the proposed rule change for all underlying components of the index was 420 million shares. The Commission believes that the enormous market capitalization of the NDX and the deep, liquid market for the underlying component securities significantly reduce concerns regarding market manipulation or disruption in the underlying market. Removing position and exercise limits for NDX options may also bring additional depth and liquidity, in terms of both volume and open interest, to NDX options without significantly increasing concerns regarding intermarket manipulation or disruption of the options or the underlying securities. In addition, the Commission believes that financial requirements imposed by both the Exchange and the Commission adequately address concerns that a CBOE member or its customer may try to maintain an inordinately large unhedged position in NDX options. Current risk-based haircut and margin 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.12 Under the proposal, the CBOE also would have the authority under its rules to impose a higher margin requirement upon an account maintaining an under-hedged position when it determines a higher requirement is warranted. As noted in the CBOE rules, the clearing firm carrying the account would be subject to capital charges under Rule 15c3–1 under the Act to the extent of any margin deficiency resulting from the higher margin requirement. Finally, in approving the elimination of position and exercise limits for options on the SPX, OEX, and DJX, the Commission took note of the enhanced surveillance and reporting safeguards that the CBOE had adopted to allow it to detect and deter trading abuses that might arise as a result.13 The CBOE represents that it monitors trading in NDX options in much the same manner as trading in SPX, OEX, and DJX options. These safeguards, including the 100,000-contract reporting requirement described above, would allow the CBOE to monitor large positions in order to identify instances of potential risk and to assess and respond to any market concerns at an early stage. In this regard, the Commission expects the CBOE to take prompt action, including timely communication with the Commission and other marketplace self-regulatory organizations responsible for oversight of trading in component stocks, should any unanticipated adverse market effects develop. Moreover, as previously noted, the Exchange has the flexibility to specify other reporting requirements, as well as to vary the limit at which the reporting requirements may be triggered. The Commission further notes that in eliminating position and exercise limits for FLEX NDX options, the CBOE is adopting the same additional rules for these options as for FLEX SPX and OEX options. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,14 that the proposed rule change (SR–CBOE–2005– 41) be, and it hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Jonathan G. Katz, Secretary. [FR Doc. E5–5973 Filed 10–27–05; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52659; File No. SR–CBOE– 2005–85] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Rule Change To Adopt a Market Turner Priority for Index Options and Options on ETFs on the Exchange’s Hybrid System October 24, 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 October 14, 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 and II below, which Items have been prepared by the CBOE. The Exchange has filed the proposal pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b– 4(f)(6) thereunder,4 which 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 Exchange proposes to modify its Hybrid System rule regarding priority and allocation of trades in index options and options on ETFs to adopt a market turner priority. The Exchange has designated this proposal as noncontroversial and has requested that the Commission waive the 30-day preoperative waiting period contained in Rule 19b–4(f)(6)(iii) under the Act.5 The text of the proposed rule change is available on 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 BILLING CODE 8010–01–P In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed 1 15 11 See SPX/OEX/DJX Permanent Approval Order, supra note 5. 12 See SPX/OEX/DJX Pilot Approval Order, supra note 5. VerDate Aug<31>2005 18:15 Oct 27, 2005 Jkt 208001 62149 13 See, in particular, SPX/OEX/DJX Pilot Approval Order, supra note 5. 14 15 U.S.C. 78s(b)(2). 15 17 CFR 200.30–3(a)(12). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6). 5 17 CFR 240.19b–4(f)(6)(iii). 2 17 E:\FR\FM\28OCN1.SGM 28OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 208 (Friday, October 28, 2005)]
[Notices]
[Pages 62147-62149]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-5973]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52650; File No. SR-CBOE-2005-41]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving Proposed Rule Change Relating to the 
Elimination of Position and Exercise Limits on NDX Options

October 21, 2005.

I. Introduction

    On May 23, 2005, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

[[Page 62148]]

thereunder,\2\ a proposed rule change to amend its rules to eliminate 
position and exercise limits for options on the Nasdaq 100 Index 
(``NDX''). The Commission published the proposed rule change for 
comment in the Federal Register on August 26, 2005.\3\ On October 5, 
2005, the CBOE filed Amendment No. 1 to the proposed rule change.\4\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 52313 (August 22, 2005), 
70 FR 50433 (``Notice'').
    \4\ In Amendment No. 1, the CBOE made a technical revision to a 
table in the rule text of the proposed rule change to reflect that 
the NDX is the Nasdaq 100 Index (Full Value). This technical 
amendment did not require notice and comment, as it did not affect 
the substance of the rule filing.
---------------------------------------------------------------------------

II. Description of the Proposal

    The CBOE proposes to amend its rules to eliminate position and 
exercise limits for options on the NDX, a broad-based security index. 
In connection with this change, options on the NDX would be subject to 
specific reporting requirements and additional margin provisions 
imposed by the CBOE with respect to options on the S&P 500 Index 
(``SPX''), the S&P 100 Index (``OEX''), and the Dow Jones Industrial 
Average (``DJX''), the three broad-based index options that, under the 
Exchange's current rules, are not subject to position and exercise 
limits.
    The Exchange noted that in approving the elimination of position 
limits for SPX, OEX, and DJX options, the Commission considered the 
enormous capitalization of each of these indexes and the deep and 
liquid markets for the securities underlying each index significantly 
reduced concerns of market manipulation or disruption in the underlying 
markets.\5\ The CBOE noted that the market capitalization of NDX, as of 
the date of filing of the proposed rule change, was $1.84 trillion and 
the average daily trading volume (``ADTV''), in the aggregate, for the 
component securities of the NDX, for the period three months prior to 
the date of filing of the proposed rule change, was 420 million shares. 
For the same period, the ADTV for options on the NDX was 44,008 
contracts.
---------------------------------------------------------------------------

    \5\ 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) (``SPX/OEX/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) (``SPX/OEX/DJX Pilot Approval Order'').
---------------------------------------------------------------------------

    The Exchange also stated that in the SPX/OEX/DJX Permanent Approval 
Order, the Commission noted that the financial requirements imposed by 
both the Exchange and the Commission serve to address any concerns that 
an Exchange member or its customer(s) may try to maintain an 
inordinately large unhedged position in SPX/OEX/DJX options. The CBOE 
noted that these same financial requirements would apply equally to NDX 
options. The Exchange further noted that it 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 \6\ to the extent of any resulting margin deficiency.\7\
---------------------------------------------------------------------------

    \6\ 17 CFR 240.15c3-1.
    \7\ 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.
---------------------------------------------------------------------------

    The CBOE indicated that the Commission, in the SPX/OEX/DJX 
Permanent Approval Order, 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 on SPX, OEX, and DJX options. The Exchange represents 
that it monitors the trading in NDX options in the same manner as 
trading in SPX, OEX, and DJX options and that the current CBOE 
surveillance procedures are adequate to continue monitoring NDX 
options. In addition, the Exchange intends to impose a reporting 
requirement on CBOE members (other than CBOE market-makers) or member 
organizations who trade NDX options. This reporting requirement, which 
is currently imposed on members who trade SPX and OEX options, would 
require members or member organizations who maintain in excess of 
100,000 NDX option contracts on the same side of the market, for their 
own accounts or for the account of customers, 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. The Exchange also would be 
permitted to specify other reporting requirements, as well as the limit 
at which the reporting requirement may be triggered.\8\
---------------------------------------------------------------------------

    \8\ See Interpretation and Policy .03 to CBOE Rule 24.4.
---------------------------------------------------------------------------

    Finally, the CBOE proposes to amend Exchange rules relating to the 
trading of FLEX broad-based index options to eliminate position and 
exercise limits on FLEX NDX options, and to adopt for NDX FLEX options 
the same 100,000 contract reporting requirement and additional margin 
provisions that apply for SPX and OEX FLEX options.
    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 would also allow CBOE members and 
their customers greater hedging and investment opportunities.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\9\ 
In particular, the Commission believes the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act, which 
requires 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 foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and in general to 
protect investors and the public interest.\10\
---------------------------------------------------------------------------

    \9\ In approving this rule proposal, the Commission notes that 
it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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.
    The Commission notes that it continues to believe that the 
fundamental purposes of position and exercise limits remain valid. 
Nevertheless, the Commission believes that experience with the trading 
of index options as well as enhanced reporting requirements and the

[[Page 62149]]

Exchange's surveillance capabilities have made it possible to approve 
the elimination of position and exercise limits on certain broad-based 
index options. Thus, in 2001, the Commission approved a CBOE proposal 
to eliminate permanently position and exercise limits for options on 
the SPX, OEX, and DJX.\11\
---------------------------------------------------------------------------

    \11\ See SPX/OEX/DJX Permanent Approval Order, supra note 5.
---------------------------------------------------------------------------

    The Commission believes that the considerations upon which it 
relied in approving the elimination of position and exercise limits for 
SPX, OEX, and DJX options equally apply with respect to options on the 
NDX.
    As noted by the CBOE, the market capitalization of the NDX as of 
the date of filing of the proposal was $1.84 trillion. The ADTV for the 
period three months prior to the date of filing of the proposed rule 
change for all underlying components of the index was 420 million 
shares. The Commission believes that the enormous market capitalization 
of the NDX and the deep, liquid market for the underlying component 
securities significantly reduce concerns regarding market manipulation 
or disruption in the underlying market. Removing position and exercise 
limits for NDX options may also bring additional depth and liquidity, 
in terms of both volume and open interest, to NDX options without 
significantly increasing concerns regarding intermarket manipulation or 
disruption of the options or the underlying securities.
    In addition, the Commission believes that financial requirements 
imposed by both the Exchange and the Commission adequately address 
concerns that a CBOE member or its customer may try to maintain an 
inordinately large unhedged position in NDX options. Current risk-based 
haircut and margin 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.\12\ Under the proposal, the CBOE also would have the 
authority under its rules to impose a higher margin requirement upon an 
account maintaining an under-hedged position when it determines a 
higher requirement is warranted. As noted in the CBOE rules, the 
clearing firm carrying the account would be subject to capital charges 
under Rule 15c3-1 under the Act to the extent of any margin deficiency 
resulting from the higher margin requirement.
---------------------------------------------------------------------------

    \12\ See SPX/OEX/DJX Pilot Approval Order, supra note 5.
---------------------------------------------------------------------------

    Finally, in approving the elimination of position and exercise 
limits for options on the SPX, OEX, and DJX, the Commission took note 
of the enhanced surveillance and reporting safeguards that the CBOE had 
adopted to allow it to detect and deter trading abuses that might arise 
as a result.\13\ The CBOE represents that it monitors trading in NDX 
options in much the same manner as trading in SPX, OEX, and DJX 
options. These safeguards, including the 100,000-contract reporting 
requirement described above, would allow the CBOE to monitor large 
positions in order to identify instances of potential risk and to 
assess and respond to any market concerns at an early stage. In this 
regard, the Commission expects the CBOE to take prompt action, 
including timely communication with the Commission and other 
marketplace self-regulatory organizations responsible for oversight of 
trading in component stocks, should any unanticipated adverse market 
effects develop. Moreover, as previously noted, the Exchange has the 
flexibility to specify other reporting requirements, as well as to vary 
the limit at which the reporting requirements may be triggered.
---------------------------------------------------------------------------

    \13\ See, in particular, SPX/OEX/DJX Pilot Approval Order, supra 
note 5.
---------------------------------------------------------------------------

    The Commission further notes that in eliminating position and 
exercise limits for FLEX NDX options, the CBOE is adopting the same 
additional rules for these options as for FLEX SPX and OEX options.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-2005-41) be, and it 
hereby is, approved.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5973 Filed 10-27-05; 8:45 am]
BILLING CODE 8010-01-P

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