Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend CBOE's Rules Related To Credit Default Options, 41367-41369 [E7-14507]

Download as PDF Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56114; File No. SR–CBOE– 2007–81] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend CBOE’s Rules Related To Credit Default Options July 20, 2007. 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 16, 2007, the Chicago Board Options Exchange, Incorporated (‘‘Exchange’’ or ‘‘CBOE’’) 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 substantially by the Exchange. The Exchange has designated the proposed rule change as one constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule under section 19(b)(3)(A)(i) of the Act 3 and Rule 19b–4(f)(1) 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 amend its rules pertaining to Credit Default Options (‘‘CDOs’’) in order to set out certain parameters that the Exchange intends to use for determining the applicable share to be allocated to a Successor Reference Entity if there is a CDO contract adjustment due to a Succession Event.5 The text of the proposed rule change is available on the Exchange’s Web site (http:// www.cboe.org/legal), at the Exchange’s principal office, and at the Commission’s Public Reference Room. jlentini on PROD1PC65 with NOTICES II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(i). 4 17 CFR 240.19b–4(f)(1). 5 The terms ‘‘applicable share,’’ ‘‘Successor Reference Entity,’’ and ‘‘Succession Event’’ are described further below. 2 17 VerDate Aug<31>2005 16:53 Jul 26, 2007 Jkt 211001 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange recently received approval to list and trade Credit Default Options or CDOs, which are binary call options based on Credit Events 6 in one or more debt securities of an issuer or guarantor.7 The Exchange is now proposing to amend Rule 29.4, Adjustments, in order to set out certain parameters that the Exchange intends to use for determining the applicable share to be allocated to a Successor Reference Entity if there is a CDO contract adjustment due to a Succession Event.8 By way of background, the cash settlement amount for a CDO is generally $100,000 per contract (equal to an exercise settlement value of $100 multiplied by a contract multiplier of 1,000) upon automatic exercise if the Exchange confirms a Credit Event.9 If a Credit Event is not confirmed, the cash settlement value will be $0. Among other things, Rule 29.4 provides that CDO contracts will be subject to adjustment and replaced by one or more CDOs derived from Successor Reference Entities based on the applicable share of each Successor Reference Entity. The ‘‘applicable share’’ is a percentage amount used to determine the adjusted cash settlement amount and adjusted contract multiplier applicable to each 6 A ‘‘Reference Obligation’’ is a specific debt security of an issuer or guarantor that underlies a CDO. The set of the Reference Obligation and any other debt security obligation(s) of the issuer or guarantor (other than non-recourse indebtedness) that underlie a CDO are referred to as the ‘‘Relevant Obligations.’’ A ‘‘Credit Event’’ occurs when a Reference Entity has a Failure-to-Pay Default on, any other Event of Default on, and/or a Restructuring of the Relevant Obligation(s). Failureto-Pay Defaults, Events of Default and Restructuring are defined in accordance with the terms of the Relevant Obligation(s) and subject to certain minimum threshold amounts provided in Rule 29.1(c). 7 See Securities Exchange Act Release No. 55871 (June 6, 2007), 72 FR 32372 (June 12, 2007) (SR– CBOE–2006–84). 8 A ‘‘Successor Reference Entity’’ and a ‘‘Succession Event’’ are defined in accordance with the terms of the Relevant Obligation(s). See Rule 29.4(a)(1)(i). 9 See Rule 29.1(a). PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 41367 replacement CDO.10 For example, if there are two Successor Reference Entities that each have an applicable share of 50%, the cash settlement amount for each replacement CDO would be $50,000 (equal to an exercise settlement value of $100 multiplied by the revised contract multiplier of 500). Currently, the rule is silent regarding the calculation of the applicable share. Based on feedback from potential CDO investors and in order to provide more clarity and certainty to such investors, the Exchange is proposing to codify certain parameters that it intends to utilize in determining the applicable share. As set out in the proposed revisions to the rule text, in determining the applicable share the Exchange, as a general rule, would allocate an equal share to each Successor Reference Entity that has succeeded the Reference Entity as issuer and guarantor of (i) at least one Relevant Obligation and (ii) at least 25% of the principal amount of the original Reference Entity’s outstanding debt obligations other than non-recourse indebtedness. If no Successor Reference Entity satisfies the ‘‘at least 25%’’ requirement and the original Reference Entity does not survive following the Succession Event, an equal share will be allocated to the Successor Reference Entity(ies) that succeeded to the largest percentage of the original Reference Entity’s outstanding debt obligations other than non-recourse indebtedness.11 These applicable share parameters would override any contradictory provision in the Relevant Obligation(s) terms. In addition, the Exchange intends to apply these parameters to all presently listed and any future-listed CDO contracts. The following examples illustrate the application of the parameters: • Assume a Succession Event is confirmed by the Exchange in a Reference Entity with $100 million outstanding in debt obligations and, under the terms of the Succession Event, Successor Reference Entity A succeeds to certain Relevant Obligations and other debt obligations totaling $40 million (40% of the original Reference Entity’s outstanding debt obligations), Successor Reference Entity B succeeds to certain Relevant Obligations and other debt obligations totaling $30 10 Every determination by the Exchange pursuant to Rule 29.4 is within the Exchange’s sole discretion, is conclusive and binding on all holders and sellers, and is not subject to review. See Rule 29.4(d). 11 If no Successor Reference Entity satisfies the ‘‘at least 25%’’ requirement and the original Reference Entity survives, then no Succession Event will be deemed to have occurred and the CDO contract will not be adjusted. E:\FR\FM\27JYN1.SGM 27JYN1 jlentini on PROD1PC65 with NOTICES 41368 Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices million (30%), and Successor Reference Entity C succeeds to all other Relevant Obligations and other debt obligations totaling $30 million (30%). A CDO contract overlying Relevant Obligations on the original Reference Entity would be adjusted and replaced with three new CDOs, one each for Successor Reference Entities A, B and C, and each having an equal share value equivalent to 33.333%, the ‘‘applicable share,’’ of the original CDO contract (e.g., 33.333% of $100,000, or $33,333, which is equal to an exercise settlement value of $100 multiplied by the revised contract multiplier of 333.33). • Assume a Succession Event is confirmed by the Exchange in a Reference Entity with $100 million outstanding in debt obligations and, under the terms of the Succession Event, Successor Reference Entity A succeeds to certain Relevant Obligations and other debt obligations totaling $45 million (45% of the original Reference Entity’s outstanding debt obligations), Successor Reference Entity B succeeds to certain Relevant Obligations and other debt obligations totaling $40 million (40%), and Successor Reference Entity C succeeds to all other Relevant Obligations and other debt obligations totaling $15 million (15%). A CDO contract overlying Relevant Obligations on the original Reference Entity would be adjusted and replaced with two new CDOs, one each for Successor Reference Entities A and B, and each having an equal share value equivalent to 50% of the original CDO contract (e.g., 50% of $100,000, or $50,000, which is equal to an exercise settlement value of $100 multiplied by the revised contract multiplier of 500). Successor Reference Entity C’s applicable share would be 0. • Assume a Succession Event is confirmed by the Exchange in a Reference Entity with $100 million outstanding in debt obligations and, under the terms of the Succession Event, Successor Reference Entities A and B each succeed to certain Relevant Obligations and other debt obligations totaling $23 million each (23% of the original Reference Entity’s outstanding debt obligations) and Successor Reference Entities C, D and E each succeed to certain Relevant Obligations and other debt obligations totaling $18 million each (18%). A CDO contract overlying Relevant Obligations on the original Reference Entity would be adjusted and replaced with two new CDOs, one each for Successor Reference Entities A and B, and each having an equal share value equivalent to 50% of the original CDO contract (e.g., 50% of $100,000, or $50,000, which is equal to an exercise settlement value of $100 VerDate Aug<31>2005 16:53 Jul 26, 2007 Jkt 211001 multiplied by the revised contract multiplier of 500). Successor Reference Entities C, D and E’s applicable shares would be 0. As indicated above, the Exchange is proposing to codify these parameters for determining the applicable share of each Successor Reference Entity based on feedback we have received thus far from potential CDO investors. The Exchange believes that setting forth these parameters would clarify how the Exchange intends to administer the Succession Event confirmation process, thereby affording investors additional clarity and certainty regarding the impact of a Succession Event on an outstanding CDO contract. The Exchange also understands that these parameters would be substantially similar to and generally consistent with the practice in the over-the-counter market. Finally, the Exchange is also proposing a non-substantive change to Rule 29.4. Specifically, the Exchange is substituting the phrase ‘‘the adjusted cash settlement amount(s) and the adjusted contract multiplier(s)’’ for ‘‘adjusted unit of trading and the adjusted exercise price’’ in paragraph (c) to be consistent with the use and meaning of those terms elsewhere in the rule text. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations under the Act applicable to national securities exchanges. Specifically, the Exchange believes the proposed rule change is consistent with the section 6(b)(5) 12 which requires that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, to remove impediments to and to perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest. As indicated above, the Exchange believes that setting forth the ‘‘applicable share’’ parameters would clarify how the Exchange intends to administer the Succession Event confirmation process, thereby affording investors additional clarity and certainty regarding the impact of a Succession Event on an outstanding CDO contract. 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 PO 00000 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 Because the foregoing rule change constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule, it has become effective pursuant to section 19(b)(3)(A)(i) of the Act 13 and Rule 19b– 4(f)(1) thereunder.14 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to: rulecomments@sec.gov. Please include File Number SR–CBOE–2007–81 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2007–81. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements 13 15 12 15 U.S.C. 78f(b)(5). Frm 00084 Fmt 4703 14 17 Sfmt 4703 E:\FR\FM\27JYN1.SGM U.S.C. 78s(b)(3)(A)(i). CFR 240.19b–4(f)(1). 27JYN1 Federal Register / Vol. 72, No. 144 / Friday, July 27, 2007 / Notices with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of 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–2007–81 and should be submitted on or before August 17, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–14507 Filed 7–26–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56117; File No. SR–ISE– 2007–47 Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt Generic Listing Standards for IndexLinked Securities jlentini on PROD1PC65 with NOTICES July 23, 2007. 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 June 26, 2007, the International Securities Exchange, LLC (‘‘ISE’’ 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 substantially prepared by the Exchange. On July 17, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. This order 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Aug<31>2005 16:53 Jul 26, 2007 Jkt 211001 provides notice of the proposed rule change, as amended, and approves the proposed rule change, as modified by Amendment No. 1, on an accelerated basis. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to (1) Adopt generic listing standards for equity index-linked securities (‘‘Equity IndexLinked Securities’’), commodity-linked securities (‘‘Commodity-Linked Securities’’), and currency-linked securities (‘‘Currency-Linked Securities,’’ and together with Equity Index-Linked Securities and Commodity-Linked Securities, collectively, ‘‘Index-Linked Securities’’) under new ISE Rule 2130, and (2) make conforming changes to ISE Rules 2100 and 2101 in regard to the adoption of the generic listing standards for IndexLinked Securities. The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, and http:// www.ise.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt new ISE Rule 2130 (Equity Index-Linked Securities, Commodity-Linked Securities and Currency-Linked Securities), which would provide generic listing standards to permit the trading of Index-Linked Securities on the Exchange pursuant to Rule 19b–4(e) under the Act.3 The Exchange seeks to 3 Rule 19b–4(e) provides that the listing and trading of a new derivative securities product by a self-regulatory organization (‘‘SRO’’) shall not be deemed a proposed rule change if the Commission has approved the SRO’s trading rules, procedures, and listing standards for the product class that would include the new derivatives securities PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 41369 be able to list and/or trade Index-Linked Securities without individual Commission approval of each such product pursuant to section 19(b)(2) of the Act.4 In addition, the Exchange proposes to amend ISE Rule 2101(a) to add Index-Linked Securities to the list of securities that will only trade on the Exchange pursuant to unlisted trading privileges (‘‘UTP’’). Thus, while the proposal would allow the Exchange to trade Index-Linked Securities by either listing or trading pursuant to UTP, the Exchange would only trade IndexLinked Securities pursuant to UTP. In order to trade by listing such IndexLinked Securities on the Exchange, the Exchange would first need to seek Commission approval and amend its rules. Finally, the Exchange proposes to amend ISE Rule 2100(c)(7) to add IndexLinked Securities to the definition of Equity Securities. The Exchange represents that any securities it lists and/or trades pursuant to proposed ISE Rule 2130 will satisfy the standards set forth therein. The Exchange states that within five business days after commencement of trading of an Index-Linked Security in reliance on proposed ISE Rule 2130, the Exchange will file a Form 19b–4(e) with the Commission.5 Index-Linked Securities Index-Linked Securities are designed for investors who desire to participate in a specific market segment by providing exposure to one or more identifiable underlying securities, commodities, currencies, derivative instruments, or market indexes of the foregoing (the ‘‘Underlying Index’’ or ‘‘Underlying Indexes’’).6 Index-Linked Securities are the non-convertible debt of an issuer that have a term of at least one year, but not greater than thirty years, and are tied to the performance of the Underlying Index.7 Index-Linked Securities may or may not make interest payments based on dividends or other cash distributions paid on the components comprising the Underlying product, and the SRO has a surveillance program for the product class. See 17 CFR 240.19b–4(e)(1). 4 15 U.S.C. 78s(b)(2). 5 See 17 CFR 240.19b–4(e)(2)(ii) and 17 CFR 249.820. 6 The Exchange states that the holder of an IndexLinked Security may or may not be fully exposed to the appreciation and/or depreciation of the underlying component assets. For example, an Index-Linked Security may be subject to a ‘‘cap’’ on the maximum principal amount to be repaid to holders or a ‘‘floor’’ on the minimum principal amount to be repaid to holders at maturity. 7 E-mail from Laura Clare, Assistant General Counsel, ISE, to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 18, 2007 (confirming the description of IndexLinked Securities). E:\FR\FM\27JYN1.SGM 27JYN1

Agencies

[Federal Register Volume 72, Number 144 (Friday, July 27, 2007)]
[Notices]
[Pages 41367-41369]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14507]



[[Page 41367]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56114; File No. SR-CBOE-2007-81]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend CBOE's Rules Related To Credit Default Options

July 20, 2007.
    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 16, 2007, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 
substantially by the Exchange. The Exchange has designated the proposed 
rule change as one constituting a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule under section 19(b)(3)(A)(i) of the Act 
\3\ and Rule 19b-4(f)(1) 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules pertaining to Credit 
Default Options (``CDOs'') in order to set out certain parameters that 
the Exchange intends to use for determining the applicable share to be 
allocated to a Successor Reference Entity if there is a CDO contract 
adjustment due to a Succession Event.\5\ The text of the proposed rule 
change is available on the Exchange's Web site (http://www.cboe.org/
legal), at the Exchange's principal office, and at the Commission's 
Public Reference Room.
---------------------------------------------------------------------------

    \5\ The terms ``applicable share,'' ``Successor Reference 
Entity,'' and ``Succession Event'' are described further below.
---------------------------------------------------------------------------

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of those statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange recently received approval to list and trade Credit 
Default Options or CDOs, which are binary call options based on Credit 
Events \6\ in one or more debt securities of an issuer or guarantor.\7\ 
The Exchange is now proposing to amend Rule 29.4, Adjustments, in order 
to set out certain parameters that the Exchange intends to use for 
determining the applicable share to be allocated to a Successor 
Reference Entity if there is a CDO contract adjustment due to a 
Succession Event.\8\
---------------------------------------------------------------------------

    \6\ A ``Reference Obligation'' is a specific debt security of an 
issuer or guarantor that underlies a CDO. The set of the Reference 
Obligation and any other debt security obligation(s) of the issuer 
or guarantor (other than non-recourse indebtedness) that underlie a 
CDO are referred to as the ``Relevant Obligations.'' A ``Credit 
Event'' occurs when a Reference Entity has a Failure-to-Pay Default 
on, any other Event of Default on, and/or a Restructuring of the 
Relevant Obligation(s). Failure-to-Pay Defaults, Events of Default 
and Restructuring are defined in accordance with the terms of the 
Relevant Obligation(s) and subject to certain minimum threshold 
amounts provided in Rule 29.1(c).
    \7\ See Securities Exchange Act Release No. 55871 (June 6, 
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84).
    \8\ A ``Successor Reference Entity'' and a ``Succession Event'' 
are defined in accordance with the terms of the Relevant 
Obligation(s). See Rule 29.4(a)(1)(i).
---------------------------------------------------------------------------

    By way of background, the cash settlement amount for a CDO is 
generally $100,000 per contract (equal to an exercise settlement value 
of $100 multiplied by a contract multiplier of 1,000) upon automatic 
exercise if the Exchange confirms a Credit Event.\9\ If a Credit Event 
is not confirmed, the cash settlement value will be $0. Among other 
things, Rule 29.4 provides that CDO contracts will be subject to 
adjustment and replaced by one or more CDOs derived from Successor 
Reference Entities based on the applicable share of each Successor 
Reference Entity. The ``applicable share'' is a percentage amount used 
to determine the adjusted cash settlement amount and adjusted contract 
multiplier applicable to each replacement CDO.\10\ For example, if 
there are two Successor Reference Entities that each have an applicable 
share of 50%, the cash settlement amount for each replacement CDO would 
be $50,000 (equal to an exercise settlement value of $100 multiplied by 
the revised contract multiplier of 500).
---------------------------------------------------------------------------

    \9\ See Rule 29.1(a).
    \10\ Every determination by the Exchange pursuant to Rule 29.4 
is within the Exchange's sole discretion, is conclusive and binding 
on all holders and sellers, and is not subject to review. See Rule 
29.4(d).
---------------------------------------------------------------------------

    Currently, the rule is silent regarding the calculation of the 
applicable share. Based on feedback from potential CDO investors and in 
order to provide more clarity and certainty to such investors, the 
Exchange is proposing to codify certain parameters that it intends to 
utilize in determining the applicable share. As set out in the proposed 
revisions to the rule text, in determining the applicable share the 
Exchange, as a general rule, would allocate an equal share to each 
Successor Reference Entity that has succeeded the Reference Entity as 
issuer and guarantor of (i) at least one Relevant Obligation and (ii) 
at least 25% of the principal amount of the original Reference Entity's 
outstanding debt obligations other than non-recourse indebtedness. If 
no Successor Reference Entity satisfies the ``at least 25%'' 
requirement and the original Reference Entity does not survive 
following the Succession Event, an equal share will be allocated to the 
Successor Reference Entity(ies) that succeeded to the largest 
percentage of the original Reference Entity's outstanding debt 
obligations other than non-recourse indebtedness.\11\ These applicable 
share parameters would override any contradictory provision in the 
Relevant Obligation(s) terms. In addition, the Exchange intends to 
apply these parameters to all presently listed and any future-listed 
CDO contracts.
---------------------------------------------------------------------------

    \11\ If no Successor Reference Entity satisfies the ``at least 
25%'' requirement and the original Reference Entity survives, then 
no Succession Event will be deemed to have occurred and the CDO 
contract will not be adjusted.
---------------------------------------------------------------------------

    The following examples illustrate the application of the 
parameters:
     Assume a Succession Event is confirmed by the Exchange in 
a Reference Entity with $100 million outstanding in debt obligations 
and, under the terms of the Succession Event, Successor Reference 
Entity A succeeds to certain Relevant Obligations and other debt 
obligations totaling $40 million (40% of the original Reference 
Entity's outstanding debt obligations), Successor Reference Entity B 
succeeds to certain Relevant Obligations and other debt obligations 
totaling $30

[[Page 41368]]

million (30%), and Successor Reference Entity C succeeds to all other 
Relevant Obligations and other debt obligations totaling $30 million 
(30%). A CDO contract overlying Relevant Obligations on the original 
Reference Entity would be adjusted and replaced with three new CDOs, 
one each for Successor Reference Entities A, B and C, and each having 
an equal share value equivalent to 33.333%, the ``applicable share,'' 
of the original CDO contract (e.g., 33.333% of $100,000, or $33,333, 
which is equal to an exercise settlement value of $100 multiplied by 
the revised contract multiplier of 333.33).
     Assume a Succession Event is confirmed by the Exchange in 
a Reference Entity with $100 million outstanding in debt obligations 
and, under the terms of the Succession Event, Successor Reference 
Entity A succeeds to certain Relevant Obligations and other debt 
obligations totaling $45 million (45% of the original Reference 
Entity's outstanding debt obligations), Successor Reference Entity B 
succeeds to certain Relevant Obligations and other debt obligations 
totaling $40 million (40%), and Successor Reference Entity C succeeds 
to all other Relevant Obligations and other debt obligations totaling 
$15 million (15%). A CDO contract overlying Relevant Obligations on the 
original Reference Entity would be adjusted and replaced with two new 
CDOs, one each for Successor Reference Entities A and B, and each 
having an equal share value equivalent to 50% of the original CDO 
contract (e.g., 50% of $100,000, or $50,000, which is equal to an 
exercise settlement value of $100 multiplied by the revised contract 
multiplier of 500). Successor Reference Entity C's applicable share 
would be 0.
     Assume a Succession Event is confirmed by the Exchange in 
a Reference Entity with $100 million outstanding in debt obligations 
and, under the terms of the Succession Event, Successor Reference 
Entities A and B each succeed to certain Relevant Obligations and other 
debt obligations totaling $23 million each (23% of the original 
Reference Entity's outstanding debt obligations) and Successor 
Reference Entities C, D and E each succeed to certain Relevant 
Obligations and other debt obligations totaling $18 million each (18%). 
A CDO contract overlying Relevant Obligations on the original Reference 
Entity would be adjusted and replaced with two new CDOs, one each for 
Successor Reference Entities A and B, and each having an equal share 
value equivalent to 50% of the original CDO contract (e.g., 50% of 
$100,000, or $50,000, which is equal to an exercise settlement value of 
$100 multiplied by the revised contract multiplier of 500). Successor 
Reference Entities C, D and E's applicable shares would be 0.
    As indicated above, the Exchange is proposing to codify these 
parameters for determining the applicable share of each Successor 
Reference Entity based on feedback we have received thus far from 
potential CDO investors. The Exchange believes that setting forth these 
parameters would clarify how the Exchange intends to administer the 
Succession Event confirmation process, thereby affording investors 
additional clarity and certainty regarding the impact of a Succession 
Event on an outstanding CDO contract. The Exchange also understands 
that these parameters would be substantially similar to and generally 
consistent with the practice in the over-the-counter market.
    Finally, the Exchange is also proposing a non-substantive change to 
Rule 29.4. Specifically, the Exchange is substituting the phrase ``the 
adjusted cash settlement amount(s) and the adjusted contract 
multiplier(s)'' for ``adjusted unit of trading and the adjusted 
exercise price'' in paragraph (c) to be consistent with the use and 
meaning of those terms elsewhere in the rule text.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to 
national securities exchanges. Specifically, the Exchange believes the 
proposed rule change is consistent with the section 6(b)(5) \12\ which 
requires that the rules of an exchange be designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts, to remove impediments to and to perfect the mechanism for a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. As indicated above, the 
Exchange believes that setting forth the ``applicable share'' 
parameters would clarify how the Exchange intends to administer the 
Succession Event confirmation process, thereby affording investors 
additional clarity and certainty regarding the impact of a Succession 
Event on an outstanding CDO contract.
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    \12\ 15 U.S.C. 78f(b)(5).
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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

    Because the foregoing rule change constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, it has become 
effective pursuant to section 19(b)(3)(A)(i) of the Act \13\ and Rule 
19b-4(f)(1) thereunder.\14\ At any time within 60 days of the filing of 
the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(i).
    \14\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to: rule-comments@sec.gov. Please include 
File Number SR-CBOE-2007-81 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2007-81. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements

[[Page 41369]]

with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of 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-2007-81 and should be submitted on 
or before August 17, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Deputy Secretary.
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    \15\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-14507 Filed 7-26-07; 8:45 am]
BILLING CODE 8010-01-P