Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto to Trade Delayed Start Option Series, 52944-52948 [E7-18216]

Download as PDF jlentini on PROD1PC65 with NOTICES 52944 Federal Register / Vol. 72, No. 179 / Monday, September 17, 2007 / Notices 11. The names and nationalities of all foreign principals for whom the applicant is currently or has previously been registered pursuant to the Foreign Agents Registration Act, 22 U.S.C. 611 et seq., and the dates of all registration periods; 12. Names, addresses, telephone and, if available, email addresses of three individuals authorized to provide information to USTR concerning the applicant’s qualifications for service, including the applicant’s familiarity with international trade laws and other areas of expertise, character, reliability and judgment; and 13. A short statement of qualifications in light of Article 8.1 of the DSU, including information relevant to the applicant’s familiarity with international trade, services or other issues covered by the WTO agreements, and availability for service. USTR encourages the submission of documents in Adobe PDF format as attachments to an electronic mail. Interested persons who make submissions by electronic mail should not provide separate cover letters; information that might appear in a cover letter should be included in the submission itself. Similarly, to the extent possible, any attachments to the submission should be included in the same file as the submission itself, and not as separate files. Information provided by applicants will be used by USTR for the purpose of selecting candidates for nomination to the WTO list. Further information concerning potential conflicts may be requested from individuals and the possibility of significant conflicts will be taken into consideration in evaluating applicants. U.S. citizens who are current members of the WTO list and are interested in continuing to serve on the list need not reapply in response to this notice. Individuals who have previously applied but have not been selected for nomination may reapply. USTR will contact applicants that qualify for further consideration as nominees regarding any additional information that may be required. This notice contains a collection of information provision subject to the Paperwork Reduction Act (PRA) which has been approved by OMB. Notwithstanding any other provision of law, no person is required to respond to nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the PRA unless that collection of information displays a currently valid OMB number. This notice’s collection of information VerDate Aug<31>2005 17:00 Sep 14, 2007 Jkt 211001 burden is only for those persons who wish to voluntarily apply for nomination to the WTO list. It is expected that the collection of information burden will be under 3 hours. 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[FR Doc. 07–4597 Filed 9–14–07; 8:45 am] BILLING CODE 3190–W7–M OFFICE OF PERSONNEL MANAGEMENT Federal Employees Health Benefits Program: Medically Underserved Areas for 2008 Office of Personnel Management. ACTION: Notice of Medically Underserved Areas for 2008. AGENCY: Frm 00098 Fmt 4703 Sfmt 4703 U.S. Office of Personnel Management. Howard C. Weizmann, Deputy Director. [FR Doc. E7–18215 Filed 9–14–07; 8:45 am] BILLING CODE 6325–39–P SUMMARY: The Office of Personnel Management (OPM) has completed its annual determination of the States that qualify as Medically Underserved Areas under the Federal Employees Health Benefits (FEHB) Program for calendar year 2008. This is necessary to comply with a provision of the FEHB law that mandates special consideration for enrollees of certain FEHB plans who receive covered health services in States with critical shortages of primary care physicians. Accordingly, for calendar year 2008, OPM’s calculations show that the following states are Medically Underserved Areas under the FEHB Program: Alabama, Arizona, Idaho, Kentucky, Louisiana, Mississippi, PO 00000 Missouri, Montana, New Mexico, North Dakota, South Carolina, South Dakota, and Wyoming. For the 2008 calendar year Texas and West Virginia are being removed from the list, and no new states have been added. DATES: Effective Date: January 1, 2008. FOR FURTHER INFORMATION CONTACT: Ingrid Burford, 202–606–0004. SUPPLEMENTARY INFORMATION: FEHB law (5 U.S.C. 8902(m)(2)) mandates special consideration for enrollees of certain FEHB plans who receive covered health services in States with critical shortages of primary care physicians. The FEHB law also requires that a State be designated as a Medically Underserved Area if 25 percent or more of the population lives in an area designated by the Department of Health and Human Services (HHS) as a primary medical care manpower shortage area. Such States are designated as Medically Underserved Areas for purposes of the FEHB Program, and the law requires non-HMO FEHB plans to reimburse beneficiaries, subject to their contract terms, for covered services obtained from any licensed provider in these States. FEHB regulations (5 CFR 890.701) require OPM to make an annual determination of the States that qualify as Medically Underserved Areas for the next calendar year by comparing the latest HHS State-by-State population counts on primary medical care manpower shortage areas with U.S. Census figures on State resident populations. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56378; File No. SR–CBOE– 2006–90] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto to Trade Delayed Start Option Series September 10, 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 November 1 15 2 17 E:\FR\FM\17SEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 17SEN1 Federal Register / Vol. 72, No. 179 / Monday, September 17, 2007 / Notices 7, 2006, 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 substantially prepared by CBOE. On September 5, 2007, the Exchange filed Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to introduce for trading a new type of option, called Delayed Start Option SeriesTM (‘‘DSO’’). CBOE proposes to be able to list a DSOTM on any security index option that is already approved for trading on the Exchange. The text of the proposed rule change is available on the Exchange’s Web site (https:// www.cboe.com), at the Office of the Secretary, CBOE and at the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, CBOE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. CBOE has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. jlentini on PROD1PC65 with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange currently lists and trades standardized options. Options are standardized in that at the inception of trading, the terms of the option contracts are typically uniform and fixed, such as the expiration date, the exercise style (American or European), strike price, settlement feature (cash vs. physical), etc.4 The Exchange proposes to introduce for trading a new type of security index option product called Delayed Start Option Series (‘‘DSOs’’). DSOs will possess all of the 3 Amendment No. 1 replaces the original filing in its entirety. 4 Cf. Flex Options, which allow parties to designate certain terms of the transaction. VerDate Aug<31>2005 17:00 Sep 14, 2007 Jkt 211001 characteristics of existing index options with one variation: At the commencement of trading of a particular DSO, and until a predetermined date (the ‘‘strike setting date’’), there will be no set exercise price. Instead, prior to the opening of the particular DSO series, a preestablished methodology will be applied to determine the strike price of the DSO. In addition, prior to the opening of the particular DSO series, the Exchange will fix the expiration date of the DSO and the date on which the exercise price will be established (the strike setting date). The methodology, as well as the purpose of DSOs, is described in greater detail below. Volatility. The DSO is designed primarily to allow customers to manage risk associated with the volatility of a particular security index. Volatility is one of the most important determinants of an option’s price, because any change in the volatility of a security will consequently change the price of a standard index option contract. Consequently, any time an investor takes a position in a standard index option contract, that investor will necessarily be exposed to the volatility of the level (or calculated value) of the underlying security or security index. The effect of a change in volatility on the price of an option contract is quantified by what is referred to as an option’s vega (or volatility exposure). Vega is derived from the formula used to price options and is itself dependent on factors that contribute to an option’s price. The two major determinants of an index option’s vega are the relationship between an option’s strike price and the level of the underlying index and the amount of time left until the option matures. DSOs have been designed to address the dependence of an index option’s vega on the relationship between the option’s strike price and the underlying index level. Generally, an at-the-money option has the highest vega because an at-the-money option has the greatest uncertainty as to whether it will expire in- or out-of-the-money. DSOs will be useful tools to manage volatility risk because prior to the strike setting date, the DSO’s price will be most sensitive to changes in implied volatility, and changes in the index level will have less impact on a DSO’s price. The introduction of DSOs will provide members and investors with an exchange-traded product to assist them in managing the risks associated with changes in volatility. CBOE believes that providing a standardized contract with transparent markets and the guarantee of a clearinghouse (i.e., The Options PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 52945 Clearing Corporation (‘‘OCC’’)) will benefit investors. Product Description. DSOs will be identical to other options series that currently trade except that instead of specifying a specific index value number for the exercise price, the exercise price will be specified in terms of a specific method for fixing such a number. This method will provide that the strike price is fixed based on the closing value of the underlying index on a predetermined strike setting date prior to expiration. The particular strike setting date will be specified at the time the DSO is initially opened for trading and will be no sooner than one month, and no later than twelve months, after the series’ opening. The particular expiration date will also be specified at the time the DSO is initially opened for trading and will be no later than what is currently permitted under CBOE rules.5 Initially, CBOE will establish the strike setting dates for all series of DSOs at three months prior to the option’s expiration date. Each DSO series that is issued as such will trade without an exercise price until three months prior to expiration, at which point the option’s exercise price will be fixed based on the underlying index’s closing price. After the strike setting date, and up until the expiration date, the DSO will trade the same as any other option in the same index class. The Exchange may determine to issue series of DSOs with more or less time than three months between the strike setting date and expiration date. As indicated above, the particular strike setting date and the expiration date, and thus the corresponding length of the interval between the strike setting date and expiration, will be set prior to issuance of each particular series. No changes to any terms of existing DSO series will be made once the series commences trading. There are two primary reasons for varying the length of time between the strike setting date and expiration. First, the volatility implied by an option’s price varies mainly with strike price and time to expiration. The volatility implied by an option with four months to expiration can be different than that implied by an option with three months to expiration. Second, not only does the implied volatility vary with strike price and time to expiration but changes in the level of implied volatility also vary with strike price and time to expiration. For example, the implied volatility of a 5 Presently, the longest term for an option series expiration is thirty-nine months from the listing date. See Rule 5.8(a) and proposed Rule 24.9(d)(2). E:\FR\FM\17SEN1.SGM 17SEN1 52946 Federal Register / Vol. 72, No. 179 / Monday, September 17, 2007 / Notices jlentini on PROD1PC65 with NOTICES one-month at-the-money call option could change without a corresponding change in the implied volatility of a three-month at-the-money call option. This has implications for the usefulness of DSOs in hedging the risk of changes in implied volatility. To illustrate, if an investor has a long position in three-month, non-DSO, atthe-money options and wishes to hedge against changes in implied volatility, a DSO with one month between the strike setting date and the expiration date would not always provide a useful hedge. A DSO with three months between the strike setting and expiration dates, would primarily be sensitive to changes in the implied volatility of a three-month option, however, which allows the investor to more precisely achieve the desired hedge. Establishment of Strike Price. On the strike setting date, the DSO is assigned an at-the-money, in-the-money or outof-the-money strike price. A DSO’s exercise price will be fixed based on the closing value of the underlying index on the strike setting date, rounded to the nearest one-eighth (.125) value, or such smaller value as the Exchange may designate at the time the DSO is listed, provided that the value cannot be smaller than 0.01.6 For example, using a one-eighth interval, if the SPX closes at 1004.12 on the strike setting date, the DSO would be assigned a strike price of 1004.125. After the strike setting date, the DSO will trade the same as other options until expiration. As discussed above, at-the-money options generally have the greatest sensitivity to changes in implied volatility. DSOs will be useful to manage volatility risk because, prior to the strike setting date, the DSO’s price will be most sensitive to changes in implied volatility. Because these DSOs are always ‘‘at-the-money’’ prior to the strike setting date, changes in the index level will have less impact on an at-the-money DSO’s price. The Exchange also plans to list in- or out-of-the money DSOs. These types of DSOs would trade in the exact same manner as at-the-money DSOs, except that the strike price would be set to a predetermined level either in- or out-ofthe-money on the strike setting date (e.g., 5% in-the-money, 5% out-of-themoney). For example, if the Exchange 6 Because of system limitations, the Exchange currently plans to round DSO exercise prices to the nearest .125. However, should the system functionality permit it in the future, the Exchange wants the flexibility to be able to determine to round DSO exercise prices to a smaller value, provided that the particular increment would be designated at the time the DSO is listed and that it would not be any smaller than 0.01. VerDate Aug<31>2005 17:00 Sep 14, 2007 Jkt 211001 determines to list a 5% out-of-themoney DSO on the S&P 500 Index (‘‘SPX’’) and the SPX closes at 1000 on the strike setting date, the strike price would be established at 1050. The amount by which the strike price of an in- or out-of-the money DSO series will be set in- or out-of-the-money on the strike setting date will be announced prior to the inception of trading of that particular series and will not change thereafter. There are two purposes for listing strike prices that are in- or out-of-themoney. First, DSOs may be useful to investment managers who follow covered call writing programs. These managers typically sell out-of-themoney call options. Therefore, out-ofthe-money DSOs would be of more interest to them. Second, implied volatility and changes in implied volatility vary by strike price. Therefore, market participants may desire the ability to trade the volatility exposure of an index option that is not at-the-money because it may better match these participants’ volatility exposure. Exercise Style. All DSOs will feature European-exercise style until the strike setting date (i.e., the option contract cannot be exercised during this period). After the strike setting date, the DSO will be subject to the exercise style (e.g., American or European) of the particular index option class. Most index options, including the SPX, DJX, XEO, and NDX,7 already feature European-style exercise. OEX options feature Americanstyle exercise.8 Accordingly, on the strike setting date, DSOs on the OEX will be subject to an American-style exercise. This is reflected in newly proposed Rule 24.9(d)(1). The period during which exercise is restricted will depend upon the particular DSO’s strike setting date, expiration date and expiration style. For instance, if a DSO that is subject to an American-style exercise is issued with a nine-month expiration and a strike setting date fixed at three-months prior to expiration, the period of non-exercise will be six months.9 7 The following are the correlating underlying indexes for each listed option class: (1) Standard and Poor’s 100 Stock Index (‘‘XEO’’) (Europeanstyle exercise); (2) Standard and Poor’s 500 Stock Index (‘‘SPX’’); (3) Nasdaq 100 Stock Index (‘‘NDX’’); and (4) Dow Jones Industrial Average Index (‘‘DJX’’). 8 CBOE lists both European- and American-style exercise options on the Standard & Poor’s 100 Stock Index. European-style index options trade under the symbol XEO while American-style options trade under the symbol OEX. Except as noted otherwise, references in this filing to ‘‘OEX’’ include the XEO series. 9 Similarly, a DSO that is subject to Europeanstyle exercise with a nine-month expiration and a strike setting date fixed at three months prior to PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 Trading Increments, Margin, and Trading Symbols. The Exchange proposes to list DSO puts to correspond with each DSO call in a particular index option class. As with all other options, the premium quotation would be stated in decimals, and one point would equal $100. The minimum tick for options trading below $3.00 would be 0.05 ($5.00) and for all other series, 0.10 ($10.00). DSOs in any particular index option class will be treated the same as any other options on the same index for the purpose of determining customer margin.10 Therefore, a buyer of DSOs would have to pay the premium in full, while a seller will have to put up the entire premium, plus 15% of the underlying value for a broad-based index option, or the premium plus 20% for a narrow-based or micro narrowbased index option. Thus, for example, since an at-the-money DSO will always be at-the-money prior to the strike setting date, customer margin for the short will always be the premium plus 15% (20%) of the underlying value. Following the strike setting date, customer margin may be less than 15% (20%) of the underlying value based on the amount the option is out-of-themoney at that time. Prior to the strike setting date, margin on any DSO will be based on the thencurrent level of the underlying index. For example, a DSO whose strike price will be set to be at-the-money will be margined as an at-the-money option in the same index option class prior to the strike setting date, because prior to the strike setting date the DSO’s price will be directly related to the price of an atthe-money option. Prior to the strike setting date, in- and out-of-the-money DSOs will be margined the same as any other in- and out-of-the-money options in the same index option class. Prior to the strike setting date, DSOs will be distinguished from existing options by a unique root symbol and a special strike price code designating an at-the-money, in-the-money or out-ofthe-money option. The Exchange presently intends to trade the DSO series under separate symbols from expiration would have a nine-month period of nonexercisability. The strike setting interval would be made and publicly announced prior to inception of trading of that particular DSO series. No changes to any terms of existing DSO series will be made once the series trades (with the exception of the establishment of the exercise price). 10 See Rule 12.3. However, the Exchange does not initially plan to permit spread margining between DSO and non-DSO options for the time period between the initial listing of a DSO and its strike setting date. The Exchange intends to consider what spread margin would be appropriate and address the subject under a separate rule filing. E:\FR\FM\17SEN1.SGM 17SEN1 Federal Register / Vol. 72, No. 179 / Monday, September 17, 2007 / Notices jlentini on PROD1PC65 with NOTICES other option series on the same index option class. The Exchange notes that this is identical to how options on the SPX traded when the Exchange began listing both a.m.- and p.m.-settled SPX option series.11 The exact exercise price, and a unique DSO strike price code, will be fixed on the strike setting date pursuant to the method established at the time the option series was originally opened for trading. The strike price code will specify the exact strike price of the particular DSO option series (rounded to the nearest eighth or smaller increment, if applicable). Position and Exercise Limits. Positions in any DSO will be subject to the same rules governing position and exercise limits upon other options in the same index option class and, for the purposes of determining position limits, DSO positions will be aggregated with positions in other series of the same option class.12 Similarly, members and member organizations trading in DSOs will continue to be subject to the same reporting requirements and margin and clearing firm requirements as provided under Interpretation and Policy .03 and .04 to Rule 24.4. Pricing of a DSO. Similar to other index options, the pricing of an at-themoney DSO reflects the price of the underlying index, implied volatility, interest rates, time to expiration, and strike price. Variations of the same pricing formulas apply to the pricing of in- and out-of-the money DSOs. Pricing formulas, which have been available for over a decade, reflect this methodology. In fact, the relevant pricing formulas that we anticipate market participants will use to assist in their trading generally are derived from the original Black-Scholes pricing formula to account for the time between the start of the contract and when the strike price is set.13 Therefore, the price for a DSO will generally approximate the concurrent price for a similar option, with one significant deviation: Whereas other options are priced based on current levels of implied volatility, a DSO is priced using an expectation of implied 11 See Securities Exchange Act Release No. 30944 (July 21, 1992), 57 FR 33376 (July 28, 1992) (order approving SR–CBOE–92–09). 12 See CBOE Rules 4.11, 4.12, 24.4, 24.4A, and 24.4B. In addition, the Exchange is proposing to clarify in Rule 24.4B, Position Limits for Options on Micro Narrow-Based Indexes as Defined Under Rule 24.2(d), that position in Short Term Option Series and Quarterly Options, together with DSO positions, shall be aggregated with positions in options contracts in the same class. 13 A derivation of the formula for valuing similar contracts appeared in RISK, February 1991. See Rubinstein, Mark, ‘‘Pay Now, Choose Later,’’ RISK, February 1991. VerDate Aug<31>2005 17:00 Sep 14, 2007 Jkt 211001 volatility levels at the time the strike price is set, which is generally derived from the current level of implied volatility. The dependence of a particular DSO’s price on expected implied volatility is what makes a DSO useful to market participants that are interested in volatility trading. Customer Suitability. Although DSOs may be suitable for all types of investors, the Exchange is adopting a rule that limits the trading of DSOs to investors with prior options trading experience. Also, prior to the commencement of trading of DSOs, the Exchange will make available on its Web site all information necessary to inform members and customers of the addition of new DSO series to a particular option class. This information will highlight the differences in exercise methodology of DSOs, identify the new symbols for the DSO series, indicate the investor restrictions, identify the initial expiration months and strike prices available for trading, and reference the particular CBOE Rules that govern DSO trading. The Exchange also will make available on its Web site the DSO product specifications, trading characteristics, and any other information that will describe the operation of DSO products. Applicability of Rule 9b–1. The Exchange asks the Commission to clarify that DSOs are standardized options under Rule 9b–1 of the Act. Subsection (a)(4) of Rule 9b–1 defines ‘‘standardized options’’ as ‘‘options contracts trading on a national securities exchange, an automated quotations system of a registered securities association, or a foreign securities exchange which relate to options classes the terms of which are limited to specific expiration dates and exercise prices, or such other securities as the Commission may, by order, designate.’’ DSOs are like existing options trading on CBOE in every respect except for the determination of the exercise price. DSOs (1) trade on a national securities exchange, (2) have a specific exercise date, (3) have fixed terms, (4) have specific exercise style, and (5) will be issued and cleared by OCC. All of these are attributes of ‘‘standardized options’’ as defined in Rule 9b–1. The one respect with which DSOs differ from existing options is that the existing options have a fixed exercise price at the commencement of trading while DSOs have a formula set at the commencement of trading for fixing the exercise price. A DSO has a specific exercise price because the exercise price is established at the commencement of trading according to a formula that is publicly known and announced, PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 52947 objectively determined, and unalterable. A party entering into a DSO knows exactly the option’s exercise price formula, which is the value of the underlying index as of the close on the strike setting date. Furthermore, the DSO is a single option contract. To illustrate, a DSO listed with six months to expiration and three months until the strike setting date is simply a single option contract with six months to expiration, for which the strike price is allowed to float for the first three months. There is no contract settlement on the strike setting date. As a result, a market participant with a short position in a DSO series is not obligated to make delivery of any underlying security or cash on the strike setting date. The strike setting date is only relevant to the contract as the date on which the pre-determined formula is applied to determine the strike price of the existing DSO series. If the Commission cannot determine that DSOs are, by their terms, standardized options, then the Exchange requests that the Commission use its authority under Rule 9b–1(a)(4) to otherwise designate DSOs as standardized options. The Commission used this authority in 1993 to designate ‘‘Flex Options’’ as standardized options.14 In making this designation, the Commission found that, ‘‘[a]part from the flexibility with respect to strike prices, settlement, expiration dates, and exercise style, all of the other terms of Flex Options are standardized.’’ The Commission observed that standardized terms include matters such as ‘‘exercise procedures, contract adjustments, time of issuance, effect of closing transactions, restrictions on exercise under OCC rules [and] margin requirements * * *.’’ The Commission also emphasized that Flex Options could be written in a way that would make them fully fungible with other options issued by OCC that fell within the framework of Rule 9b–1. DSOs share all of these characteristics and, in fact, are more standardized than Flex Options in that strike price, settlement, expiration dates, and exercise style are fixed by the Exchange for each DSO series.15 The strike price is simply 14 See Securities Exchange Act Release No. 31910 (February 23, 1993), 58 FR 12056 (March 2, 1993). 15 The Commission has consistently cited the criteria outlined above when making Rule 9b–1 standardization determinations. See, e.g., Securities Exchange Act Release Nos. 39549 (January 14, 1998), 63 FR 3601 (January 23, 1998) (Phlx Flexible Exchange Traded Equity and Index Options); 37336 (June 19, 1996), 61 FR 33558 (June 27, 1996) (Amex Flexible Exchange Options on Specified Equity Securities); 36841 (February 14, 1996), 61 FR 6666 (February 21, 1996) (CBOE and PCX Flexible E:\FR\FM\17SEN1.SGM Continued 17SEN1 52948 Federal Register / Vol. 72, No. 179 / Monday, September 17, 2007 / Notices specified by the Exchange in terms of a pre-established formula for fixing a set strike price on a pre-determined date. No changes to any terms of existing DSO series will be made once the series begins trading. Advantages of Exchange Trading vs. OTC Market. It is the Exchange’s understanding that products similar to DSOs currently trade in the OTC market. Most options pricing software available commercially and through derivatives Web sites include a pricing model for DSOs. The Exchange believes that exchange-listed DSOs will have three important advantages over the contracts that are traded in the OTC market. First, as a result of greater standardization of contract terms and the support of a DPM, the trading crowd, or a CBOE Lead Market Maker (‘‘LMM’’), Exchange-listed contracts could develop substantial liquidity. Second, counter-party credit risk is mitigated by the fact that the contracts are issued and guaranteed by OCC. Finally, the price discovery and dissemination provided by the CBOE and its members will lead to more transparent markets. CBOE’s ability to offer DSOs would aid it in competing with the OTC market and at the same time expand the universe of listed products available to interested market participants. The Exchange represents that it will have surveillance procedures that are adequate to monitor trading activity in DSOs. In this respect, the Exchange intends to monitor trading activity in DSOs like any other option series listed in that same index option class. 2. Statutory Basis jlentini on PROD1PC65 with NOTICES The Exchange believes that the introduction of the new DSO series provides investors with a valuable hedging tool that will be traded on a listed exchange. For these reasons, the Exchange believes that the proposed rule change is consistent with section 6 of the Act 16 in general and, in particular, with section 6(b)(5) 17 in that it is designed to promote just and equitable principles of trade as well as to protect investors and the public interest. Exchange Traded Equity and Index Options); and 34203 (June 13, 1994), 59 FR 31658 (June 20, 1004) (CBOE Foreign Currency Flex Options, which incorporates by reference the findings of Securities Exchange Act Release No. 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993)). 16 15 U.S.C. 78(f). 17 15 U.S.C. 78(f)(b)(5). VerDate Aug<31>2005 17:00 Sep 14, 2007 Jkt 211001 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 that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) As the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to which CBOE consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference 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 the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2006–90 and should be submitted on or before October 9, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.18 Jill M. Peterson, Assistant Secretary. [FR Doc. E7–18216 Filed 9–14–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION Release No. 34–56380; File No. SR–CBOE– 2007–105] Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2006–90 on the subject line. Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend its Rules Pertaining to the Contract Multiplier for Credit Default Options 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–2006–90. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 7, 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 filed the proposal as a ‘‘non-controversial’’ proposed rule PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 September 10, 2007. 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\17SEN1.SGM 17SEN1

Agencies

[Federal Register Volume 72, Number 179 (Monday, September 17, 2007)]
[Notices]
[Pages 52944-52948]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-18216]


=======================================================================
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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56378; File No. SR-CBOE-2006-90]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment 
No. 1 Thereto to Trade Delayed Start Option Series

September 10, 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 November

[[Page 52945]]

7, 2006, 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 substantially prepared by CBOE. On 
September 5, 2007, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the original filing in its 
entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to introduce for trading a new type of 
option, called Delayed Start Option Series\TM\ (``DSO''). CBOE proposes 
to be able to list a DSO\TM\ on any security index option that is 
already approved for trading on the Exchange. The text of the proposed 
rule change is available on the Exchange's Web site (https://
www.cboe.com), at the Office of the Secretary, CBOE and at the 
Commission.

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

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

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

1. Purpose
    The Exchange currently lists and trades standardized options. 
Options are standardized in that at the inception of trading, the terms 
of the option contracts are typically uniform and fixed, such as the 
expiration date, the exercise style (American or European), strike 
price, settlement feature (cash vs. physical), etc.\4\ The Exchange 
proposes to introduce for trading a new type of security index option 
product called Delayed Start Option Series (``DSOs''). DSOs will 
possess all of the characteristics of existing index options with one 
variation: At the commencement of trading of a particular DSO, and 
until a predetermined date (the ``strike setting date''), there will be 
no set exercise price. Instead, prior to the opening of the particular 
DSO series, a pre-established methodology will be applied to determine 
the strike price of the DSO. In addition, prior to the opening of the 
particular DSO series, the Exchange will fix the expiration date of the 
DSO and the date on which the exercise price will be established (the 
strike setting date). The methodology, as well as the purpose of DSOs, 
is described in greater detail below.
---------------------------------------------------------------------------

    \4\ Cf. Flex Options, which allow parties to designate certain 
terms of the transaction.
---------------------------------------------------------------------------

    Volatility. The DSO is designed primarily to allow customers to 
manage risk associated with the volatility of a particular security 
index. Volatility is one of the most important determinants of an 
option's price, because any change in the volatility of a security will 
consequently change the price of a standard index option contract. 
Consequently, any time an investor takes a position in a standard index 
option contract, that investor will necessarily be exposed to the 
volatility of the level (or calculated value) of the underlying 
security or security index.
    The effect of a change in volatility on the price of an option 
contract is quantified by what is referred to as an option's vega (or 
volatility exposure). Vega is derived from the formula used to price 
options and is itself dependent on factors that contribute to an 
option's price. The two major determinants of an index option's vega 
are the relationship between an option's strike price and the level of 
the underlying index and the amount of time left until the option 
matures.
    DSOs have been designed to address the dependence of an index 
option's vega on the relationship between the option's strike price and 
the underlying index level. Generally, an at-the-money option has the 
highest vega because an at-the-money option has the greatest 
uncertainty as to whether it will expire in- or out-of-the-money. DSOs 
will be useful tools to manage volatility risk because prior to the 
strike setting date, the DSO's price will be most sensitive to changes 
in implied volatility, and changes in the index level will have less 
impact on a DSO's price. The introduction of DSOs will provide members 
and investors with an exchange-traded product to assist them in 
managing the risks associated with changes in volatility. CBOE believes 
that providing a standardized contract with transparent markets and the 
guarantee of a clearinghouse (i.e., The Options Clearing Corporation 
(``OCC'')) will benefit investors.
    Product Description. DSOs will be identical to other options series 
that currently trade except that instead of specifying a specific index 
value number for the exercise price, the exercise price will be 
specified in terms of a specific method for fixing such a number. This 
method will provide that the strike price is fixed based on the closing 
value of the underlying index on a predetermined strike setting date 
prior to expiration. The particular strike setting date will be 
specified at the time the DSO is initially opened for trading and will 
be no sooner than one month, and no later than twelve months, after the 
series' opening. The particular expiration date will also be specified 
at the time the DSO is initially opened for trading and will be no 
later than what is currently permitted under CBOE rules.\5\
---------------------------------------------------------------------------

    \5\ Presently, the longest term for an option series expiration 
is thirty-nine months from the listing date. See Rule 5.8(a) and 
proposed Rule 24.9(d)(2).
---------------------------------------------------------------------------

    Initially, CBOE will establish the strike setting dates for all 
series of DSOs at three months prior to the option's expiration date. 
Each DSO series that is issued as such will trade without an exercise 
price until three months prior to expiration, at which point the 
option's exercise price will be fixed based on the underlying index's 
closing price. After the strike setting date, and up until the 
expiration date, the DSO will trade the same as any other option in the 
same index class.
    The Exchange may determine to issue series of DSOs with more or 
less time than three months between the strike setting date and 
expiration date. As indicated above, the particular strike setting date 
and the expiration date, and thus the corresponding length of the 
interval between the strike setting date and expiration, will be set 
prior to issuance of each particular series. No changes to any terms of 
existing DSO series will be made once the series commences trading.
    There are two primary reasons for varying the length of time 
between the strike setting date and expiration. First, the volatility 
implied by an option's price varies mainly with strike price and time 
to expiration. The volatility implied by an option with four months to 
expiration can be different than that implied by an option with three 
months to expiration. Second, not only does the implied volatility vary 
with strike price and time to expiration but changes in the level of 
implied volatility also vary with strike price and time to expiration. 
For example, the implied volatility of a

[[Page 52946]]

one-month at-the-money call option could change without a corresponding 
change in the implied volatility of a three-month at-the-money call 
option. This has implications for the usefulness of DSOs in hedging the 
risk of changes in implied volatility.
    To illustrate, if an investor has a long position in three-month, 
non-DSO, at-the-money options and wishes to hedge against changes in 
implied volatility, a DSO with one month between the strike setting 
date and the expiration date would not always provide a useful hedge. A 
DSO with three months between the strike setting and expiration dates, 
would primarily be sensitive to changes in the implied volatility of a 
three-month option, however, which allows the investor to more 
precisely achieve the desired hedge.
    Establishment of Strike Price. On the strike setting date, the DSO 
is assigned an at-the-money, in-the-money or out-of-the-money strike 
price. A DSO's exercise price will be fixed based on the closing value 
of the underlying index on the strike setting date, rounded to the 
nearest one-eighth (.125) value, or such smaller value as the Exchange 
may designate at the time the DSO is listed, provided that the value 
cannot be smaller than 0.01.\6\ For example, using a one-eighth 
interval, if the SPX closes at 1004.12 on the strike setting date, the 
DSO would be assigned a strike price of 1004.125. After the strike 
setting date, the DSO will trade the same as other options until 
expiration. As discussed above, at-the-money options generally have the 
greatest sensitivity to changes in implied volatility. DSOs will be 
useful to manage volatility risk because, prior to the strike setting 
date, the DSO's price will be most sensitive to changes in implied 
volatility. Because these DSOs are always ``at-the-money'' prior to the 
strike setting date, changes in the index level will have less impact 
on an at-the-money DSO's price.
---------------------------------------------------------------------------

    \6\ Because of system limitations, the Exchange currently plans 
to round DSO exercise prices to the nearest .125. However, should 
the system functionality permit it in the future, the Exchange wants 
the flexibility to be able to determine to round DSO exercise prices 
to a smaller value, provided that the particular increment would be 
designated at the time the DSO is listed and that it would not be 
any smaller than 0.01.
---------------------------------------------------------------------------

    The Exchange also plans to list in- or out-of-the money DSOs. These 
types of DSOs would trade in the exact same manner as at-the-money 
DSOs, except that the strike price would be set to a predetermined 
level either in- or out-of-the-money on the strike setting date (e.g., 
5% in-the-money, 5% out-of-the-money). For example, if the Exchange 
determines to list a 5% out-of-the-money DSO on the S&P 500[supreg] 
Index (``SPX'') and the SPX closes at 1000 on the strike setting date, 
the strike price would be established at 1050. The amount by which the 
strike price of an in- or out-of-the money DSO series will be set in- 
or out-of-the-money on the strike setting date will be announced prior 
to the inception of trading of that particular series and will not 
change thereafter.
    There are two purposes for listing strike prices that are in- or 
out-of-the-money. First, DSOs may be useful to investment managers who 
follow covered call writing programs. These managers typically sell 
out-of-the-money call options. Therefore, out-of-the-money DSOs would 
be of more interest to them. Second, implied volatility and changes in 
implied volatility vary by strike price. Therefore, market participants 
may desire the ability to trade the volatility exposure of an index 
option that is not at-the-money because it may better match these 
participants' volatility exposure.
    Exercise Style. All DSOs will feature European-exercise style until 
the strike setting date (i.e., the option contract cannot be exercised 
during this period). After the strike setting date, the DSO will be 
subject to the exercise style (e.g., American or European) of the 
particular index option class. Most index options, including the SPX, 
DJX, XEO, and NDX,\7\ already feature European-style exercise. OEX 
options feature American-style exercise.\8\ Accordingly, on the strike 
setting date, DSOs on the OEX will be subject to an American-style 
exercise. This is reflected in newly proposed Rule 24.9(d)(1). The 
period during which exercise is restricted will depend upon the 
particular DSO's strike setting date, expiration date and expiration 
style. For instance, if a DSO that is subject to an American-style 
exercise is issued with a nine-month expiration and a strike setting 
date fixed at three-months prior to expiration, the period of non-
exercise will be six months.\9\
---------------------------------------------------------------------------

    \7\ The following are the correlating underlying indexes for 
each listed option class: (1) Standard and Poor's 100 Stock Index 
(``XEO'') (European-style exercise); (2) Standard and Poor's 500 
Stock Index (``SPX''); (3) Nasdaq 100 Stock Index (``NDX''); and (4) 
Dow Jones Industrial Average Index (``DJX'').
    \8\ CBOE lists both European- and American-style exercise 
options on the Standard & Poor's 100 Stock Index. European-style 
index options trade under the symbol XEO while American-style 
options trade under the symbol OEX. Except as noted otherwise, 
references in this filing to ``OEX'' include the XEO series.
    \9\ Similarly, a DSO that is subject to European-style exercise 
with a nine-month expiration and a strike setting date fixed at 
three months prior to expiration would have a nine-month period of 
non-exercisability. The strike setting interval would be made and 
publicly announced prior to inception of trading of that particular 
DSO series. No changes to any terms of existing DSO series will be 
made once the series trades (with the exception of the establishment 
of the exercise price).
---------------------------------------------------------------------------

    Trading Increments, Margin, and Trading Symbols. The Exchange 
proposes to list DSO puts to correspond with each DSO call in a 
particular index option class. As with all other options, the premium 
quotation would be stated in decimals, and one point would equal $100. 
The minimum tick for options trading below $3.00 would be 0.05 ($5.00) 
and for all other series, 0.10 ($10.00).
    DSOs in any particular index option class will be treated the same 
as any other options on the same index for the purpose of determining 
customer margin.\10\ Therefore, a buyer of DSOs would have to pay the 
premium in full, while a seller will have to put up the entire premium, 
plus 15% of the underlying value for a broad-based index option, or the 
premium plus 20% for a narrow-based or micro narrow-based index option. 
Thus, for example, since an at-the-money DSO will always be at-the-
money prior to the strike setting date, customer margin for the short 
will always be the premium plus 15% (20%) of the underlying value. 
Following the strike setting date, customer margin may be less than 15% 
(20%) of the underlying value based on the amount the option is out-of-
the-money at that time.
---------------------------------------------------------------------------

    \10\ See Rule 12.3. However, the Exchange does not initially 
plan to permit spread margining between DSO and non-DSO options for 
the time period between the initial listing of a DSO and its strike 
setting date. The Exchange intends to consider what spread margin 
would be appropriate and address the subject under a separate rule 
filing.
---------------------------------------------------------------------------

    Prior to the strike setting date, margin on any DSO will be based 
on the then-current level of the underlying index. For example, a DSO 
whose strike price will be set to be at-the-money will be margined as 
an at-the-money option in the same index option class prior to the 
strike setting date, because prior to the strike setting date the DSO's 
price will be directly related to the price of an at-the-money option. 
Prior to the strike setting date, in- and out-of-the-money DSOs will be 
margined the same as any other in- and out-of-the-money options in the 
same index option class.
    Prior to the strike setting date, DSOs will be distinguished from 
existing options by a unique root symbol and a special strike price 
code designating an at-the-money, in-the-money or out-of-the-money 
option. The Exchange presently intends to trade the DSO series under 
separate symbols from

[[Page 52947]]

other option series on the same index option class. The Exchange notes 
that this is identical to how options on the SPX traded when the 
Exchange began listing both a.m.- and p.m.-settled SPX option 
series.\11\ The exact exercise price, and a unique DSO strike price 
code, will be fixed on the strike setting date pursuant to the method 
established at the time the option series was originally opened for 
trading. The strike price code will specify the exact strike price of 
the particular DSO option series (rounded to the nearest eighth or 
smaller increment, if applicable).
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (order approving SR-CBOE-92-09).
---------------------------------------------------------------------------

    Position and Exercise Limits. Positions in any DSO will be subject 
to the same rules governing position and exercise limits upon other 
options in the same index option class and, for the purposes of 
determining position limits, DSO positions will be aggregated with 
positions in other series of the same option class.\12\ Similarly, 
members and member organizations trading in DSOs will continue to be 
subject to the same reporting requirements and margin and clearing firm 
requirements as provided under Interpretation and Policy .03 and .04 to 
Rule 24.4.
---------------------------------------------------------------------------

    \12\ See CBOE Rules 4.11, 4.12, 24.4, 24.4A, and 24.4B. In 
addition, the Exchange is proposing to clarify in Rule 24.4B, 
Position Limits for Options on Micro Narrow-Based Indexes as Defined 
Under Rule 24.2(d), that position in Short Term Option Series and 
Quarterly Options, together with DSO positions, shall be aggregated 
with positions in options contracts in the same class.
---------------------------------------------------------------------------

    Pricing of a DSO. Similar to other index options, the pricing of an 
at-the-money DSO reflects the price of the underlying index, implied 
volatility, interest rates, time to expiration, and strike price. 
Variations of the same pricing formulas apply to the pricing of in- and 
out-of-the money DSOs. Pricing formulas, which have been available for 
over a decade, reflect this methodology. In fact, the relevant pricing 
formulas that we anticipate market participants will use to assist in 
their trading generally are derived from the original Black-Scholes 
pricing formula to account for the time between the start of the 
contract and when the strike price is set.\13\
---------------------------------------------------------------------------

    \13\ A derivation of the formula for valuing similar contracts 
appeared in RISK, February 1991. See Rubinstein, Mark, ``Pay Now, 
Choose Later,'' RISK, February 1991.
---------------------------------------------------------------------------

    Therefore, the price for a DSO will generally approximate the 
concurrent price for a similar option, with one significant deviation: 
Whereas other options are priced based on current levels of implied 
volatility, a DSO is priced using an expectation of implied volatility 
levels at the time the strike price is set, which is generally derived 
from the current level of implied volatility. The dependence of a 
particular DSO's price on expected implied volatility is what makes a 
DSO useful to market participants that are interested in volatility 
trading.
    Customer Suitability. Although DSOs may be suitable for all types 
of investors, the Exchange is adopting a rule that limits the trading 
of DSOs to investors with prior options trading experience. Also, prior 
to the commencement of trading of DSOs, the Exchange will make 
available on its Web site all information necessary to inform members 
and customers of the addition of new DSO series to a particular option 
class. This information will highlight the differences in exercise 
methodology of DSOs, identify the new symbols for the DSO series, 
indicate the investor restrictions, identify the initial expiration 
months and strike prices available for trading, and reference the 
particular CBOE Rules that govern DSO trading. The Exchange also will 
make available on its Web site the DSO product specifications, trading 
characteristics, and any other information that will describe the 
operation of DSO products.
    Applicability of Rule 9b-1. The Exchange asks the Commission to 
clarify that DSOs are standardized options under Rule 9b-1 of the Act. 
Subsection (a)(4) of Rule 9b-1 defines ``standardized options'' as 
``options contracts trading on a national securities exchange, an 
automated quotations system of a registered securities association, or 
a foreign securities exchange which relate to options classes the terms 
of which are limited to specific expiration dates and exercise prices, 
or such other securities as the Commission may, by order, designate.'' 
DSOs are like existing options trading on CBOE in every respect except 
for the determination of the exercise price. DSOs (1) trade on a 
national securities exchange, (2) have a specific exercise date, (3) 
have fixed terms, (4) have specific exercise style, and (5) will be 
issued and cleared by OCC. All of these are attributes of 
``standardized options'' as defined in Rule 9b-1. The one respect with 
which DSOs differ from existing options is that the existing options 
have a fixed exercise price at the commencement of trading while DSOs 
have a formula set at the commencement of trading for fixing the 
exercise price. A DSO has a specific exercise price because the 
exercise price is established at the commencement of trading according 
to a formula that is publicly known and announced, objectively 
determined, and unalterable. A party entering into a DSO knows exactly 
the option's exercise price formula, which is the value of the 
underlying index as of the close on the strike setting date.
    Furthermore, the DSO is a single option contract. To illustrate, a 
DSO listed with six months to expiration and three months until the 
strike setting date is simply a single option contract with six months 
to expiration, for which the strike price is allowed to float for the 
first three months. There is no contract settlement on the strike 
setting date. As a result, a market participant with a short position 
in a DSO series is not obligated to make delivery of any underlying 
security or cash on the strike setting date. The strike setting date is 
only relevant to the contract as the date on which the pre-determined 
formula is applied to determine the strike price of the existing DSO 
series.
    If the Commission cannot determine that DSOs are, by their terms, 
standardized options, then the Exchange requests that the Commission 
use its authority under Rule 9b-1(a)(4) to otherwise designate DSOs as 
standardized options. The Commission used this authority in 1993 to 
designate ``Flex Options'' as standardized options.\14\ In making this 
designation, the Commission found that, ``[a]part from the flexibility 
with respect to strike prices, settlement, expiration dates, and 
exercise style, all of the other terms of Flex Options are 
standardized.'' The Commission observed that standardized terms include 
matters such as ``exercise procedures, contract adjustments, time of 
issuance, effect of closing transactions, restrictions on exercise 
under OCC rules [and] margin requirements * * *.'' The Commission also 
emphasized that Flex Options could be written in a way that would make 
them fully fungible with other options issued by OCC that fell within 
the framework of Rule 9b-1. DSOs share all of these characteristics 
and, in fact, are more standardized than Flex Options in that strike 
price, settlement, expiration dates, and exercise style are fixed by 
the Exchange for each DSO series.\15\ The strike price is simply

[[Page 52948]]

specified by the Exchange in terms of a pre-established formula for 
fixing a set strike price on a pre-determined date. No changes to any 
terms of existing DSO series will be made once the series begins 
trading.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993).
    \15\ The Commission has consistently cited the criteria outlined 
above when making Rule 9b-1 standardization determinations. See, 
e.g., Securities Exchange Act Release Nos. 39549 (January 14, 1998), 
63 FR 3601 (January 23, 1998) (Phlx Flexible Exchange Traded Equity 
and Index Options); 37336 (June 19, 1996), 61 FR 33558 (June 27, 
1996) (Amex Flexible Exchange Options on Specified Equity 
Securities); 36841 (February 14, 1996), 61 FR 6666 (February 21, 
1996) (CBOE and PCX Flexible Exchange Traded Equity and Index 
Options); and 34203 (June 13, 1994), 59 FR 31658 (June 20, 1004) 
(CBOE Foreign Currency Flex Options, which incorporates by reference 
the findings of Securities Exchange Act Release No. 31920 (February 
24, 1993), 58 FR 12280 (March 3, 1993)).
---------------------------------------------------------------------------

    Advantages of Exchange Trading vs. OTC Market. It is the Exchange's 
understanding that products similar to DSOs currently trade in the OTC 
market. Most options pricing software available commercially and 
through derivatives Web sites include a pricing model for DSOs. The 
Exchange believes that exchange-listed DSOs will have three important 
advantages over the contracts that are traded in the OTC market. First, 
as a result of greater standardization of contract terms and the 
support of a DPM, the trading crowd, or a CBOE Lead Market Maker 
(``LMM''), Exchange-listed contracts could develop substantial 
liquidity. Second, counter-party credit risk is mitigated by the fact 
that the contracts are issued and guaranteed by OCC. Finally, the price 
discovery and dissemination provided by the CBOE and its members will 
lead to more transparent markets. CBOE's ability to offer DSOs would 
aid it in competing with the OTC market and at the same time expand the 
universe of listed products available to interested market 
participants.
    The Exchange represents that it will have surveillance procedures 
that are adequate to monitor trading activity in DSOs. In this respect, 
the Exchange intends to monitor trading activity in DSOs like any other 
option series listed in that same index option class.
2. Statutory Basis
    The Exchange believes that the introduction of the new DSO series 
provides investors with a valuable hedging tool that will be traded on 
a listed exchange. For these reasons, the Exchange believes that the 
proposed rule change is consistent with section 6 of the Act \16\ in 
general and, in particular, with section 6(b)(5) \17\ in that it is 
designed to promote just and equitable principles of trade as well as 
to protect investors and the public interest.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78(f).
    \17\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------

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 that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which CBOE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2006-90 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-2006-90. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference 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 the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2006-90 and should be 
submitted on or before October 9, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E7-18216 Filed 9-14-07; 8:45 am]
BILLING CODE 8010-01-P
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