Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Order Approving a Proposed Rule Change and Partial Amendment No. 1 Relating to Margin Requirements for Complex Options Spreads, 75512-75513 [E5-7522]

Download as PDF 75512 Federal Register / Vol. 70, No. 243 / Tuesday, December 20, 2005 / Notices Dated: December 15, 2005. Jonathan G. Katz, Secretary. [FR Doc. 05–24294 Filed 12–16–05; 11:13 am] Commission granted two extensions of the pilot period.6 The Exchange has proposed to add definitions of a ‘‘long condor spread,’’ ‘‘short iron butterfly spread’’ and ‘‘short iron condor spread’’ to Rule 12.3(a). BILLING CODE 8010–01–P These definitions cover six of the seven strategies identified in the Circular. Each definition covers two strategies SECURITIES AND EXCHANGE identified in the Circular because each COMMISSION definition provides for a base strategy, in which all options expire at the same [Release No. 34–52950; File No. SR–CBOE– time, and a calendar spread strategy, in 2004–53] which a long option may expire after the other options expire concurrently. Self-Regulatory Organizations; The Exchange has proposed a revision Chicago Board Options Exchange, to its current definition of a butterfly Incorporated; Order Approving a spread to provide for the remaining Proposed Rule Change and Partial strategy, a calendar spread version of Amendment No. 1 Relating to Margin the long butterfly spread. These Requirements for Complex Options revisions consist of (1) splitting the Spreads current butterfly spread definition into December 14, 2005. two definitions, one for the long butterfly spread and one for the short I. Introduction butterfly spread, (2) fashioning the two On July 30, 2004, the Chicago Board definitions so that they are consistent Options Exchange, Incorporated with the style and format of the new (‘‘CBOE’’ or the ‘‘Exchange’’) filed with definitions referred to in the prior the Securities and Exchange paragraph, and (3) providing for a Commission (‘‘Commission’’) a calendar spread version in the long proposed rule change related to margin butterfly spread definition. requirements for complex options In the Circular, call options were spreads under Section 19(b)(1) of the utilized to construct three of the seven Securities Exchange Act of 1934 (the strategy examples. Each of these three ‘‘Act’’) 1 and Rule 19b–4.2 On August 23, strategies has a parallel application with 2005, the Exchange filed a partial put options. For brevity, the put option amendment to its proposed rule versions were not specifically identified change.3 The proposed rule change, as in the Circular, but the Circular was amended, was published in the Federal intended to apply to the put option Register on November 14, 2005.4 The counterpart of each of the strategies Commission received no comments on demonstrated with call options. Both the proposal. the put and call option versions are provided for in the newly proposed rule II. Description definitions. The remaining four complex spread strategies originally identified in The CBOE has proposed to the Circular involved both call options incorporate the provisions of a Regulatory Circular (RG03–066—Margin and put options (that is, ‘‘iron’’ strategies). Each of these four strategies Requirements for Certain Complex has a reciprocal configuration (that is, Spreads, dated August 13, 2003) (the the call options can precede the put ‘‘Circular’’) into the Exchange’s margin rules (Chapter 12). The Circular presents options in ascending sequence of exercise prices). However, there is no an interpretation of current margin need to address the reciprocal variations requirements that allows the Exchange because there is no benefit from a to derive, and put into effect, margin requirements for certain complex option margin requirement standpoint of including them in the iron strategy spreads. The Commission approved the definitions. Circular on a one-year pilot basis.5 The According to the Exchange, each of 1 15 U.S.C. 78s(b)(1). the complex spreads identified in the 2 17 CFR240.19b–4. proposed rule can be derived by 3 SR–CBOE–2004–53: Amendment No. 1. CBOE, combining and netting two or more in coordination with the New York Stock Exchange, option spreads (that is, the butterfly Inc. (‘‘NYSE’’), filed the partial amendment to conform the complex spreads strategies to which its spread, the box spread and the time spread) that already are identified in the rule amendments apply to those of the NYSE. margin rules and ascribed a margin requirement. Furthermore, the sum of the margin required on the basic option spreads that can be combined and netted to form a complex spread covers the maximum risk of the complex spread and, as in the Circular, is the margin requirement specified in the proposed rules. Each of the subject complex spread strategies has a known and limited risk when configured as specified in the proposed definitions. The Exchange has proposed to revise current Rule 12.3(c)(5)(C)(6) to provide a margin requirement for each of the long condor spread, short iron butterfly spread and short iron condor spread. The Exchange noted that the proposed rule prohibits European style options in the case of the calendar version of a complex spread and requires that the interval between each option series be equal in the case of all complex spread strategies. Unlike the Circular, the proposed rules would not limit complex spreads to a margin account. The Exchange also has proposed a revision to Rule 12.3(e)—Customer Cash Account—Spreads, that adds the long condor spread, short iron butterfly spread and short iron condor spread as strategies permitted to be established and carried in a cash account, provided they are composed of cash-settled, European style options that all expire at the same time. The Exchange noted that it has received no negative comments concerning the Circular since it was issued. Moreover, the Exchange is not aware of any negative consequences as a result of applying the margin requirements permitted by the Circular. 4 See Securities Exchange Act Release No. 52739 (Nov. 4, 2005); 70 FR 69173 (Nov. 14, 2005). 5 See Securities Exchange Act Release No. 48306 (Aug. 8, 2003), 68 FR 48974 (Aug. 15, 2003) (approving SR–CBOE–2003–24). 7 In approving this proposal rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 19:23 Dec 19, 2005 Jkt 208001 6 See Securities Exchange Act Release No. 50164 (Aug. 6, 2004), 69 FR 50405 (Aug. 16, 2004) and Securities Exchange Act Release No. 51407 (Mar. 22, 2005), 70 FR 15669 (Mar. 28, 2005). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 III. Discussion and Commission Findings After careful review, 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.7 In particular, the Commission believes that the proposed rule change is consistent with Section 6(b)(5) of the Act,8 which requires that the rules of the exchange be designed, among other things, to remove impediments to and perfect the mechanisms of a free and open market, and, in general, to protect investors and the public interest. The Commission finds that amending the rules to permit complex option spread strategies that are the net result of combining two or E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 70, No. 243 / Tuesday, December 20, 2005 / Notices more spread strategies that are currently recognized in the Exchange’s margin rules is consistent with the requirements of Section 6(b)(5) because the amendments will allow the Exchange to set levels of margin that more precisely represent the actual net risk of the option positions in the account and enable customers to implement these strategies more efficiently. these changes become effective February 1, 2006. 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. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,9 that the proposed rule change (File No. SR– CBOE–2004–53), as amended, be, and it hereby is, approved. In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Jonathan G. Katz, Secretary. [FR Doc. E5–7522 Filed 12–19–05; 8:45 am] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52949; File No. SR–CBOE– 2005–104] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change to Amend its Rules Governing the Hours of Trading in Equity Options and Narrow-Based Index Options December 13, 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 6, 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The CBOE proposes to amend its rules governing the hours of trading in equity options and narrow-based index options. The Exchange proposes that 9 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 10 17 VerDate Aug<31>2005 19:23 Dec 19, 2005 Jkt 208001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this rule change is to amend the CBOE’s rules governing the hours of trading in equity options and narrow-based index options. Specifically, the CBOE proposes to amend its rules to change the close of the normal trading hours in equity options and in narrow-based index options from 3:02 p.m. (Chicago time) to 3 p.m. (Chicago time). After the change, the time of the close of trading in these CBOE options will correspond to the normal time set for the close of trading on the primary exchanges listing the stocks underlying the CBOE options. The primary exchanges generally close at 3 p.m. (Chicago time). According to the Exchange, in 1997, the CBOE decided to change its closing time for equity options and narrowbased index options from 3:10 p.m. to 3:02 p.m. At the time, the CBOE determined that there were reasons to continue trading options for a limited period of time after the close of trading of the primary markets for the underlying securities. Specifically, the Exchange believed that the extended period allowed for options traders to respond to late reports of closing prices over the consolidated tape. If the price of a late reported trade on an underlying security was substantially different from the previous reported price, the extended trading session gave options traders the opportunity to bring options quotes in line with the closing price of the underlying security. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 75513 However, because of improvements in the processing and reporting of transactions, the CBOE believes that there are no longer significant delays in the reporting of closing prices; and therefore, a two minute session is no longer needed to trade options after the underlying securities close trading. Additionally, the Exchange believes that pricing aberrations can occur if an option is traded when the underlying stock is no longer trading, since there is a close relationship in the price of the underlying stock and the overlying option. As a result, the CBOE believes that it is difficult for the market to price options accurately when the underlying security is not trading. As noted above, the Exchange also proposes to change the closing time for narrow-based indexes under CBOE Rule 24.6 because these indexes are subject to the same pricing problems as options on individual stocks. According to the CBOE, a significant news announcement on one component of a narrow-based index could have a significant effect on that index. However, the Exchange is not at this time proposing to change the closing time of 3:15 p.m. for broadbased index options because it does not believe that a significant news announcement by the issuer of one component stock of a broad-based index is likely to have a significant effect on the price of that broad-based index. Accordingly, the CBOE proposes to amend its rules, including CBOE Rules 6.1, 6.2, 12.3, 24.6, and 24.16, in which references are made to a 3:02 p.m. closing time for equity options and narrow-based index options. The Exchange notes that if it were to unilaterally modify its closing time, the existence of dissimilar closing times applicable to the different options exchanges would likely lead to confusion for options investors and broker–dealers. Accordingly, in September 2005, the Exchange requestedfrom the Commission’s Division of Market Regulation express authorization to jointly discuss this operational issue with the other options exchanges who are participants in the Options Price Reporting Authority,3 and received such authorization.4 The CBOE believes that all of the options exchanges will make similar changes to 3 See letter from Joanne Moffic-Silver, Executive Vice President, General Counsel & Corporate Secretary, CBOE, to Robert L.D. Colby, Deputy Director, Division of Market Regulation (‘‘Division’’), Commission, dated September 16, 2005. 4 See letter from Robert L.D. Colby, Deputy Director, Division, Commission, to Joanne MofficSilver, Executive Vice President, General Counsel and Secretary, CBOE, dated September 16, 2005. E:\FR\FM\20DEN1.SGM 20DEN1

Agencies

[Federal Register Volume 70, Number 243 (Tuesday, December 20, 2005)]
[Notices]
[Pages 75512-75513]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-7522]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52950; File No. SR-CBOE-2004-53]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Partial 
Amendment No. 1 Relating to Margin Requirements for Complex Options 
Spreads

December 14, 2005.

I. Introduction

    On July 30, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change related to margin 
requirements for complex options spreads under Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4.\2\ On 
August 23, 2005, the Exchange filed a partial amendment to its proposed 
rule change.\3\ The proposed rule change, as amended, was published in 
the Federal Register on November 14, 2005.\4\ The Commission received 
no comments on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR240.19b-4.
    \3\ SR-CBOE-2004-53: Amendment No. 1. CBOE, in coordination with 
the New York Stock Exchange, Inc. (``NYSE''), filed the partial 
amendment to conform the complex spreads strategies to which its 
rule amendments apply to those of the NYSE.
    \4\ See Securities Exchange Act Release No. 52739 (Nov. 4, 
2005); 70 FR 69173 (Nov. 14, 2005).
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II. Description

    The CBOE has proposed to incorporate the provisions of a Regulatory 
Circular (RG03-066--Margin Requirements for Certain Complex Spreads, 
dated August 13, 2003) (the ``Circular'') into the Exchange's margin 
rules (Chapter 12). The Circular presents an interpretation of current 
margin requirements that allows the Exchange to derive, and put into 
effect, margin requirements for certain complex option spreads. The 
Commission approved the Circular on a one-year pilot basis.\5\ The 
Commission granted two extensions of the pilot period.\6\
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    \5\ See Securities Exchange Act Release No. 48306 (Aug. 8, 
2003), 68 FR 48974 (Aug. 15, 2003) (approving SR-CBOE-2003-24).
    \6\ See Securities Exchange Act Release No. 50164 (Aug. 6, 
2004), 69 FR 50405 (Aug. 16, 2004) and Securities Exchange Act 
Release No. 51407 (Mar. 22, 2005), 70 FR 15669 (Mar. 28, 2005).
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    The Exchange has proposed to add definitions of a ``long condor 
spread,'' ``short iron butterfly spread'' and ``short iron condor 
spread'' to Rule 12.3(a). These definitions cover six of the seven 
strategies identified in the Circular. Each definition covers two 
strategies identified in the Circular because each definition provides 
for a base strategy, in which all options expire at the same time, and 
a calendar spread strategy, in which a long option may expire after the 
other options expire concurrently.
    The Exchange has proposed a revision to its current definition of a 
butterfly spread to provide for the remaining strategy, a calendar 
spread version of the long butterfly spread. These revisions consist of 
(1) splitting the current butterfly spread definition into two 
definitions, one for the long butterfly spread and one for the short 
butterfly spread, (2) fashioning the two definitions so that they are 
consistent with the style and format of the new definitions referred to 
in the prior paragraph, and (3) providing for a calendar spread version 
in the long butterfly spread definition.
    In the Circular, call options were utilized to construct three of 
the seven strategy examples. Each of these three strategies has a 
parallel application with put options. For brevity, the put option 
versions were not specifically identified in the Circular, but the 
Circular was intended to apply to the put option counterpart of each of 
the strategies demonstrated with call options. Both the put and call 
option versions are provided for in the newly proposed rule 
definitions. The remaining four complex spread strategies originally 
identified in the Circular involved both call options and put options 
(that is, ``iron'' strategies). Each of these four strategies has a 
reciprocal configuration (that is, the call options can precede the put 
options in ascending sequence of exercise prices). However, there is no 
need to address the reciprocal variations because there is no benefit 
from a margin requirement standpoint of including them in the iron 
strategy definitions.
    According to the Exchange, each of the complex spreads identified 
in the proposed rule can be derived by combining and netting two or 
more option spreads (that is, the butterfly spread, the box spread and 
the time spread) that already are identified in the margin rules and 
ascribed a margin requirement. Furthermore, the sum of the margin 
required on the basic option spreads that can be combined and netted to 
form a complex spread covers the maximum risk of the complex spread 
and, as in the Circular, is the margin requirement specified in the 
proposed rules. Each of the subject complex spread strategies has a 
known and limited risk when configured as specified in the proposed 
definitions. The Exchange has proposed to revise current Rule 
12.3(c)(5)(C)(6) to provide a margin requirement for each of the long 
condor spread, short iron butterfly spread and short iron condor 
spread.
    The Exchange noted that the proposed rule prohibits European style 
options in the case of the calendar version of a complex spread and 
requires that the interval between each option series be equal in the 
case of all complex spread strategies. Unlike the Circular, the 
proposed rules would not limit complex spreads to a margin account. The 
Exchange also has proposed a revision to Rule 12.3(e)--Customer Cash 
Account--Spreads, that adds the long condor spread, short iron 
butterfly spread and short iron condor spread as strategies permitted 
to be established and carried in a cash account, provided they are 
composed of cash-settled, European style options that all expire at the 
same time.
    The Exchange noted that it has received no negative comments 
concerning the Circular since it was issued. Moreover, the Exchange is 
not aware of any negative consequences as a result of applying the 
margin requirements permitted by the Circular.

III. Discussion and Commission Findings

    After careful review, 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.\7\ In particular, the Commission believes that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\8\ 
which requires that the rules of the exchange be designed, among other 
things, to remove impediments to and perfect the mechanisms of a free 
and open market, and, in general, to protect investors and the public 
interest. The Commission finds that amending the rules to permit 
complex option spread strategies that are the net result of combining 
two or

[[Page 75513]]

more spread strategies that are currently recognized in the Exchange's 
margin rules is consistent with the requirements of Section 6(b)(5) 
because the amendments will allow the Exchange to set levels of margin 
that more precisely represent the actual net risk of the option 
positions in the account and enable customers to implement these 
strategies more efficiently.
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    \7\ In approving this proposal rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-CBOE-2004-53), as 
amended, be, and it hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7522 Filed 12-19-05; 8:45 am]
BILLING CODE 8010-01-P
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