Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Amendment Nos. 2 and 3 to Proposed Rule Change Relating to FLEX Options Trading and Order Granting Accelerated Approval to Proposed Rule Change as Amended, 65776-65784 [E7-22779]
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Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Notices
proposal raises no new issues of
regulatory concern. Waiving the
operative delay will allow the proposal
to become effective simultaneously with
Amex’s proposal to establish ABCs,
which we are approving separately
today. 15 Therefore, the Commission has
determined to waive the 30-day delay
and allow the proposed rule change to
become operative immediately. 16
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–Amex–2006–67 on the subject
line.
Paper Comments
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• 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–Amex–2007–122. 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 Commissions
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
(November 18, 2005), 70 FR 71344 (November 28,
2005) (order approving SR–CBOE–2005–46).
15 See Securities Exchange Act Release No. 56804
(November 16, 2007) (order approving SR–Amex–
2006–107).
16 For purposes only of waiving the operative
delay of this proposal, the Commission notes that
it has considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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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 Exchange. 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–Amex–2007–122 and
should be submitted on or before
December 14, 2007.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–22840 Filed 11–21–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56792; File No. SR–CBOE–
2006–99]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Amendment
Nos. 2 and 3 to Proposed Rule Change
Relating to FLEX Options Trading and
Order Granting Accelerated Approval
to Proposed Rule Change as Amended
November 15, 2007.
I. Introduction
On November 27, 2006, the Chicago
Board Options Exchange, Incorporated
(‘‘Exchange’’ or ‘‘CBOE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
providing for the trading of Flexible
Exchange (‘‘FLEX’’) Options on a new
electronic platform, and to make certain
corresponding revisions to its existing
open-outcry FLEX rules. On August 17,
2007, CBOE filed Amendment No. 1 to
the proposed rule change. On August
30, 2007, the proposed rule change, as
17 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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amended, was published for comment
in the Federal Register.3 No comments
were received on the proposal. On
November 7, 2007 and November 15,
2007, CBOE filed Amendment Nos. 2
and 3, respectively, to the proposed rule
change.4 This notice and order solicits
comments from interested persons on
Amendment Nos. 2 and 3 and grants
accelerated approval to the proposed
rule change, as amended.
II. Description of Proposal
FLEX Options provide investors with
the ability to customize basic option
features including size, expiration date,
exercise style, and certain exercise
prices. Currently, Exchange members
may trade FLEX Options in open outcry.
Markets are created when a member
submits a request for quotes (‘‘RFQ’’) to
the crowd. This system is referred to
herein as the ‘‘FLEX RFQ System.’’ The
Exchange has proposed an alternate
framework for trading FLEX Options
using a ‘‘hybrid’’ platform, which will
incorporate both open outcry and
electronic trading functionality (referred
to herein as the ‘‘FLEX Hybrid Trading
System’’ or the ‘‘System’’). Some key
features of the new FLEX Hybrid
Trading System are the following:
• Method of Operation: Transactions
can take place through either an openoutcry RFQ process similar to the
existing FLEX RFQ System or a new,
Internet- and API-based electronic
trading platform. Currently, the FLEX
RFQ System does not provide for a
book, and quotes and orders expire at
the conclusion of the RFQ process. By
contrast, the new System may allow
FLEX Orders to be entered and trade via
an electronic book (the ‘‘Book’’). The
Exchange would determine on a classby-class basis whether to make a Book
available.5
• Access: CBOE members seeking to
use the new System must apply to and
be approved by the Exchange. Approved
members are collectively referred to as
‘‘FLEX Traders.’’ In addition, nonmembers that meet certain conditions
may be offered ‘‘sponsored access’’ to
the new System.
• Market-Maker Participation: As
with the existing FLEX rules, there are
two types of FLEX Market-Makers:
FLEX Appointed Market-Makers and
FLEX Qualified Market-Makers. The
responsibilities and obligations of FLEX
Market-Makers on the new System, and
changes to the corresponding rules of
3 Securities Exchange Act Release No. 56311
(August 23, 2007), 72 FR 50133.
4 See infra Section II(D).
5 See Rule 24B.5(b)(1).
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the existing FLEX RFQ System, are
discussed further below.
Detailed Summary of Proposed Rule
Change
A. Proposed FLEX Hybrid Trading
System Rules (Chapter XXIVB)
The rules governing the existing FLEX
RFQ System are contained, and will
continue to be maintained, in Chapter
XXIVA of the Exchange rules. The
proposed rules governing the new FLEX
Hybrid Trading System are found in
proposed Chapter XXIVB. The Exchange
currently intends to maintain and
operate both systems and will determine
which system to use on a class-by-class
basis. These determinations will be
announced to the membership via
regulatory circular. This rule further
explains that Chapters I through XIX
and XXIV of the Exchange rules apply
to the new System, except as otherwise
indicated. If the rules in Chapter XXIVB
are inconsistent with other Exchange
rules, the rules in Chapter XXIVB take
precedence in relation to the trading of
FLEX Options on the new System.
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1. Definitions (Proposed Rule 24B.1)
Proposed Rule 24B.1, Definitions,
corresponds with existing Rule 24A.1
but contains several new definitions
necessary to accommodate the new
System. For example, the term ‘‘FLEX
Hybrid Trading System’’ means the
Exchange’s trading platform that allows
FLEX Traders to submit RFQs, FLEX
Quotes, and FLEX Orders. A ‘‘FLEX
Quote’’ is a bid or offer entered by a
FLEX Market-Maker or an order to
purchase or sell entered by a FLEX
Trader, in either case in response to an
RFQ. A ‘‘FLEX Order’’ is a bid or offer
entered by a FLEX Market-Maker or an
order to purchase or sell entered by a
FLEX Trader, in either case into the
Book.
Proposed Rule 24B.1 also defines
several terms relating to the RFQ
process. The ‘‘Submitting Member’’ is
the FLEX Trader who initiates the RFQ
or who enters a FLEX Order into the
Book. The ‘‘RFQ Response Period’’ is
the period during which FLEX Traders
may provide FLEX Quotes in response
to an RFQ. The ‘‘RFQ Reaction Period’’
is the period during which the
Submitting Member determines whether
to accept or reject the RFQ Market.6 The
‘‘RFQ Market’’ consists of the FLEX
Quotes entered in response to an RFQ
and FLEX Orders resting in the Book.
An ‘‘RFQ Order’’ is an order to buy or
an order to sell entered by the
6 See proposed Rule 24B.1(u) (as modified by
Amendment No. 3).
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Submitting Member during the RFQ
Reaction Period.
Proposed Rule 24B.1 also identifies
certain trade conditions that can be
placed on an RFQ Order or FLEX Order,
such as fill-or-kill, all-or-none,
minimum fill, ‘‘lots of,’’ and hedge.
FLEX Orders except for fill-or-kill
orders would be designated by the
System as day orders and, if
unexecuted, would be canceled at the
close of each trade day. An RFQ may
include a hedge or ‘‘Intent to Cross’’
trade condition, discussed more fully
below. Hedge and Intent to Cross trade
conditions will be disclosed on the
System.
2. Terms of FLEX Options (Proposed
Rule 24B.4)
Proposed Rule 24B.4, Terms of FLEX
Options, is similar to existing Rule
24A.4. Both rules set forth the variable
terms of FLEX Options (such as the
underlying security or index, put or call
type, exercise style, expiration date, and
exercise price). Other terms are not
variable and are the same as those that
apply to Non-FLEX Options. Both rules
set forth the information required from
a member who initiates an RFQ, such as
the type and form of quote sought, any
trade conditions, and the length of the
RFQ Response Period.7
Proposed Rule 24B.4 lists additional
contract and transaction specifications
for RFQs, FLEX Quotes, FLEX Orders,
and RFQ Orders. These specifications
pertain in part to maximum expiration
terms and second to minimum value
size requirements. The maximum
expiration terms are the same as in the
existing FLEX rules.8 The minimum
value size specifications are
substantially similar to those in Rule
24A.4, though additional language has
been added to clarify the minimum
value size requirements for FLEX Orders
entered in the Book. There are
additional special terms for FLEX Index
Options 9 and FLEX Equity Options,10
which correspond to provisions in
existing Rule 24A.4.
3. FLEX Trading Procedures and
Principles (Proposed Rule 24B.5)
On the new System, there will be no
trading rotations in FLEX Options,
either at the open or the close.11 Instead,
trading will result from RFQs submitted
through the System or in open outcry,
or from transactions on the Book.
(a) Electronic RFQ Process
Upon receipt of an RFQ in proper
form, the System will cause the terms
and specifications of the RFQ to be
communicated to all FLEX Traders. Any
FLEX Trader, including the Submitting
Member, may then enter a FLEX Quote
during the RFQ Response Period. Any
FLEX Quote or FLEX Order may be
entered, modified, or withdrawn at any
point during the RFQ Response
Period.12 The System will dynamically
calculate and disseminate to all FLEX
Traders the RFQ Market.13
Following the RFQ Response Period,
the Submitting Member may trade
against the RFQ Market during the RFQ
Reaction Period. The length of this
period will be established by the
appropriate Procedure Committee on a
class-by-class basis and will not be more
than five minutes.14 Failure of the
Submitting Member to trade against the
RFQ Market before expiration of the
RFQ Reaction Period would equate to a
rejection. During the RFQ Reaction
Period: (1) FLEX Traders can continue
to enter, modify, or withdraw FLEX
Quotes and FLEX Orders; (2) FLEX
Orders that are entered or modified
during the RFQ Response and Reaction
Periods will be treated the same as
FLEX Quotes for purposes of the
priority allocation; and (3) the System
will dynamically calculate and
disseminate to all FLEX Traders the
RFQ Market given the current FLEX
Quotes and resting FLEX Orders.15
The Submitting Member may decline
to trade against the RFQ Market by
canceling the RFQ or letting it expire. If
the Submitting Member chooses to trade
but has not indicated an Intent to Cross,
11 See
7 The
length of the RFQ Response Period is
defined by the Submitting Member but must fall
within the time ranges established by the
appropriate Procedure Committee on a class-byclass basis. The period cannot be less than three
seconds. See proposed Rule 24B.4(a)(3)(iii).
8 For FLEX Equity Options, the maximum term is
generally three years, although the Submitting
Member may request up to five years. For FLEX
Index Options, the maximum term is generally five
years, although a Submitting Member may request
up to ten years. See existing Rule 24A.4(a)(4);
proposed Rule 24B.4(a)(5).
9 See proposed Rule 24B.4(b).
10 See proposed Rule 24B.4(c). For example,
settlement of a FLEX Equity Option shall be by
physical delivery of the underlying security.
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65777
proposed Rule 24B.3.
a FLEX Appointed Market-Maker
must meet certain FLEX Quote maintenance
obligations. See proposed Rule 24B.5(a)(1)(ii)(B).
13 See proposed Rule 24B.5(a)(1)(ii)(C) (as
modified by Amendment No. 2).
14 The Exchange originally proposed to cap the
RFQ Reaction Period at 30 seconds. In Amendment
No. 2, the Exchange proposed to increase the
maximum period to five minutes ‘‘to address
feedback received from members and potential
users that the RFQ Reaction Period should be
lengthened to provide Submitting Members with
additional time to assess an RFQ Market, determine
whether to accept or reject it, and process a
response accordingly.’’
15 See proposed Rule 24B.5(a)(1)(iii)(B)(II) (as
modified by Amendment No. 2).
12 However,
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he or she may enter an RFQ Order to
trade with one side of the RFQ Market
(but not both). The Submitting
Member’s RFQ Order will be eligible to
trade with FLEX Quotes and FLEX
Orders at a single price that will leave
bids and offers which cannot trade with
each other (the ‘‘BBO clearing price’’).
In determining the priority of FLEX
Quotes and FLEX Orders, the System
gives priority to those priced better than
the BBO clearing price, then to FLEX
Quotes and FLEX Orders at the BBO
clearing price. Priority among FLEX
Quotes and FLEX Orders at the BBO
clearing price is as follows: (1) any
FLEX Quotes that are subject to a FLEX
Appointed Market-Maker participation
entitlement; (2) FLEX Orders resting in
the Book, based on the Book priority
algorithm; (3) FLEX Quotes for the
account of public customers and nonmember broker-dealers based on time
priority; and (4) all other FLEX Quotes
based on time priority.
If the RFQ Market is locked or
crossed, priority among FLEX Quotes
and FLEX Orders at the BBO clearing
price and on the same side as the RFQ
Order is as follows: (1) FLEX Orders in
the Book, based on the Book priority
algorithm; (2) if applicable, an RFQ
Order for the account of a public
customer or non-member broker-dealer,
then any FLEX Quote that is subject to
a FLEX Appointed Market-Maker
participation entitlement; (3) FLEX
Quotes for the account of public
customers and non-member brokerdealers, based on time priority; (4) if
applicable, an RFQ Order for the
account of a member, then any FLEX
Quote that is subject to a FLEX
Appointed Market-Maker participation
entitlement; and (5) all other FLEX
Quotes, based on time priority. The
System will enter any remaining
balance of the incoming RFQ Order in
the Book (if available), unless the
Submitting Member has indicated that
the balance of the RFQ Order is to be
automatically canceled if it is not
traded.
If the Submitting Member has
indicated an ‘‘Intent to Cross’’ in its
RFQ request, the Submitting Member
may receive a crossing participation
entitlement if one has been established
in that class by the appropriate
Procedure Committee, and if the RFQ
Order entered by the Submitting
Member during the RFQ Reaction
Period matches or improves the BBO
clearing price. The RFQ Order will be
eligible to trade with FLEX Quotes and
FLEX Orders at the BBO clearing price
giving priority to the FLEX Quotes and
FLEX Orders priced better than the BBO
clearing price, then to FLEX Quotes and
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FLEX Orders at the BBO clearing price.
Priority among multiple FLEX Quotes
and FLEX Orders at the BBO clearing
price is as follows: (1) FLEX Orders in
the Book, based on the Book priority
algorithm; (2) FLEX Quotes for the
account of public customers and nonmember broker-dealers, based on time
priority; (3) the crossing participation
entitlement; (4) any FLEX Quotes that
are subject to a FLEX Appointed
Market-Maker participation
entitlement; 16 and (5) then all other
FLEX Quotes, based on time priority.
If a Book is available in that class, the
System would enter any remaining
balance of the incoming RFQ Order in
the Book and treat it the same as other
FLEX Orders. If there is no Book
available, the System will expose any
remaining balance of the incoming RFQ
Order so other FLEX Traders can trade
against it. After the remaining balance of
the RFQ Order has been exposed for at
least the Crossing Exposure Period,17
the Submitting Member may enter a
contra-side order to trade all or any
portion of the remaining balance.18
If the Submitting Member rejects the
RFQ Market or to the extent the RFQ
Market size exceeds the Submitting
Member’s size, the System
automatically would execute any
remaining FLEX Quotes and FLEX
Orders that are marketable against each
other at the BBO clearing price. Then,
if a Book is available, any remaining
balance of any FLEX Quote would be
automatically entered into the Book
unless the FLEX Trader who entered it
had indicated that the FLEX Quote is to
be automatically canceled if not traded.
If no Book is available, any remaining
balance of the FLEX Quotes will be
automatically canceled at the
conclusion of the RFQ Reaction
Period.19
(b) Open-Outcry RFQ Process
To initiate a FLEX transaction using
the open-outcry RFQ process under
proposed Rule 24B.5, a Submitting
Member would submit an RFQ to a
FLEX Official. The Submitting Member
would then immediately announce the
16 The crossing participation entitlement and the
FLEX Appointed Market-Maker entitlement
together may not exceed a certain percentage of the
original order. See proposed Rule 24B.5(d)(2)(i)(A)–
(B).
17 The length of this Crossing Exposure Period
shall be determined by the appropriate Procedure
Committee on a class-by-class basis and shall not
be less than three seconds. See proposed Rule
24B.5(a)(1)(iii)(D)(IV).
18 The Submitting Member must, however, enter
a contra-side order when necessary to satisfy
applicable minimum value size requirements. See
id.
19 See proposed Rule 24B.5(a)(1)(F).
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terms and specifications of the RFQ to
the crowd. FLEX Traders present in the
crowd may respond orally with FLEX
Quotes during the RFQ Response
Period. A FLEX Trader could enter,
modify, or withdraw its FLEX Quote at
any point during the RFQ Response
Period. At the expiration of the RFQ
Response Period, the Submitting
Member would identify the BBO
(considering responsive FLEX Quotes
and, if applicable, FLEX Orders resting
in the Book) and announce the BBO to
the crowd.
If the Submitting Member does not
indicate an Intent to Cross or act as
principal with respect to any part of the
trade, the Submitting Member may
submit an agency RFQ Order to trade
against the RFQ Market. If the
Submitting Member rejects the BBO or
is given a BBO for less than the entire
size requested, the FLEX Traders in the
crowd other than the Submitting
Member would have an opportunity to
match or improve the BBO during a
BBO Improvement Interval. At the
expiration of any BBO Improvement
Interval, the Submitting Member must
promptly accept or reject the BBO.
If the Submitting Member indicates an
Intent to Cross or act as principal with
respect to any part of the trade,
acceptance of the displayed BBO would
be automatically delayed until the
expiration of the BBO Improvement
Interval. Prior to the BBO Improvement
Interval, the Submitting Member must
announce to the crowd the price at
which it expects to trade. In these
circumstances, the Submitting Member
may participate with all other FLEX
Traders present in the crowd in
attempting to improve or match the BBO
during the BBO Improvement Interval.
At the expiration of the BBO
Improvement Interval, the Submitting
Member could trade against the BBO or
reject it.
If the Submitting Member rejects the
BBO after an RFQ Response Period or
BBO Improvement Interval, or the BBO
size exceeds the FLEX transaction size
indicated in the RFQ, FLEX Traders
present in the crowd could accept the
unfilled balance of the BBO. Such
acceptance must occur by public outcry
immediately following the Submitting
Member’s rejection of the BBO or any
BBO Improvement Interval, or the
Submitting Member’s trade that does
not exhaust the full size of the BBO.
The highest bid (lowest offer) would
have priority. Among bids (offers) at the
same price, priority generally is as
follows: (1) The crossing participation
entitlement, if the Submitting Member
has indicated an Intent to Cross and an
entitlement is available in that class; (2)
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any FLEX Quote subject to a FLEX
Appointed Market-Maker participation
entitlement; (3) all other FLEX Quotes,
in the sequence in which they are
entered; 20 and (4) FLEX Orders resting
in the Book, based on the Book priority
algorithm. However, if a member is
relying on the ‘‘G’’ exception to section
11(a) of the Act,21 the member’s bid
(offer) must yield to any bid (offer) at
the same price on the Book and all other
bids (offers) that have priority over the
Book. If a Submitting Member is
asserting a crossing participation
entitlement on behalf of a proprietary
account of a member relying on the ‘‘G’’
exception and a FLEX Appointed
Market-Maker is also asserting a
participation entitlement, the
Submitting Member’s crossing
participation entitlement combined
with any guaranteed participation for
FLEX Appointed Market-Makers shall
not exceed 40% of the original order.
The proposed open-outcry RFQ
process is similar to the existing
process, with a few distinctions. Under
the new System, the Submitting
Member is responsible for announcing
the terms and specifications of the RFQ
to the crowd, receiving responsive FLEX
Quotes, and at the conclusion of the
RFQ Response Period announcing the
BBO to the crowd. Under the existing
process, the FLEX Post Official
communicates the RFQ to the crowd
over facilities maintained by the
Exchange, responsive FLEX Quotes may
be entered at the post, and the BBO is
visibly displayed at the post and over
the network.22 The proposed priority
algorithm takes into consideration the
Book, which does not exist currently,
and provides that two bids submitted in
open outcry at the same time and same
price will be apportioned equally, as
compared to the existing practice of
affording priority to FLEX Appointed or
Qualified Market-Makers.23
(c) The FLEX Book and FLEX Orders
The Exchange may determine to make
a FLEX Book available on a class-byclass basis. If a Book has been enabled,
a Submitting Member may enter a FLEX
Order if it satisfies the applicable
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20 If
two or more best bids (offers) are submitted
in open outcry at the same time and same price or
if the Submitting Member cannot reasonably
determine the sequence in which they were made,
priority would be apportioned equally among those
open-outcry bids (offers). See proposed Rule
24B.5(a)(2)(v)(A)(III) (as modified by Amendment
No. 2).
21 15 U.S.C. 78k(a)(1)(G).
22 Compare proposed Rules 24B.5(a)(2)(i)(B),
(ii)(A), and (ii)(B) to existing Rule 24A.5(a)(ii), (b)(i),
and (b)(iii).
23 Compare proposed Rules 24B.5(a)(2)(v) and (d)
to existing Rules 24A.5(e) and (f).
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16:16 Nov 21, 2007
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minimum value size requirements and
the FLEX Order is in compliance with
section 11(a) of the Act. A FLEX Order
submitted on behalf of the proprietary
account of a member relying on the ‘‘G’’
exception to Section 11(a) may be
entered only to hit the Book and may
not rest in the Book.24
FLEX Orders in the Book are ranked
and matched based on price/time
priority. However, if a FLEX Appointed
Market-Maker is quoting at the best bid
(offer) and a FLEX Appointed MarketMaker participation entitlement has
been established, then priority at the
same price is as follows: (1) Any FLEX
Orders for the account of public
customer ranked ahead of the FLEX
Appointed Market-Maker; (2) any FLEX
Orders subject to a FLEX Appointed
Market-Maker entitlement; and (3) all
other FLEX Orders, based on time
priority.25
A Submitting Member may not
execute as principal against a FLEX
Order on the Book that it represents as
agent unless: (1) The Submitting
Member has been bidding or offering for
at least the Crossing Exposure Period
before receiving the agency FLEX Order
that is executable against such bid or
offer; 26 or (2) the agency FLEX Order is
first subject to an RFQ and the agency
FLEX Order (or any remaining balance
not executed during the RFQ Reaction
Period) is exposed on the System for at
least the Crossing Exposure Period.27 A
Submitting Member may not execute a
solicited order against a FLEX Order
that the Submitting Member is
representing as agent unless the agency
FLEX Order is first subject to any RFQ
and the agency FLEX Order (or any
remaining balance not executed during
the RFQ Reaction Period) is exposed on
the System for at least the Crossing
Exposure Period.28 The Crossing
Exposure Period referenced in the above
provisions will be established by the
appropriate Procedure Committee on a
class-by-class basis and will not be less
than three seconds.29
(d) Creation of Binding Contracts
Proposed Rule 24B.5(c) provides that
acceptance of any bid or offer creates a
binding contract under Rule 6.48. This
provision is the same as in existing Rule
24A.5(d) and applies to both RFQ and
Book transactions.
24 See
proposed Rule 24B.5(b)(2)(ii).
proposed Rule 24B.5(b)(2)(iii).
26 See proposed Rule 24B.5(b)(3)(i)(B).
27 See proposed Rule 24B.5(b)(3)(i)(A) (as
modified by Amendment No. 2).
38 See proposed Rule 24B.5(b)(3)(ii) (as modified
by Amendment No. 2).
26 See proposed Rule 24B.5(b)(3)(iii) (added by
Amendment No. 2).
25 See
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(e) Guarantees
For FLEX Equity Options, the
Exchange’s appropriate Procedure
Committee may determine on a class-byclass basis to establish a crossing
participation entitlement for
facilitations and/or solicitations with
respect to open-outcry and/or electronic
trades. The entitlement percentage may
not exceed 40% of the original order.30
If the Submitting Member matches or
improves the BBO or BBO clearing
price, as applicable, the Submitting
Member would have priority to execute
the contra-side of the order up to the
crossing participation entitlement
percentage. The appropriate Procedure
Committee similarly may determine on
a class-by-class basis to establish a
crossing participation entitlement for
FLEX Index Options, which may not
exceed 40% of the trade. With respect
to FLEX Index Options, if the
Submitting Member matches or
improves the BBO or BBO clearing
price, as applicable, the Submitting
Member would have priority to execute
the contra-side of the order up to the
largest of: (1) The crossing entitlement
percentage; (2) a proportional share of
the trade; (3) $1 million underlying
equivalent value; or (4) the remaining
underlying equivalent value on a
closing transactions valued at less than
$1 million.31
In the past, the establishment of FLEX
Appointed Market-Maker entitlements
were the subject of separate rule
filings.32 In lieu of submitting separate
rule filings, the Exchange has now
proposed to include specific parameters
within the rule text, similar to its rules
respecting crossing participation
entitlements and market-maker
participation entitlements for Non-FLEX
Options.33 Henceforth, the appropriate
Procedure Committee may establish a
participation entitlement for FLEX
Appointed Market-Makers on a class-byclass basis with respect to open-outcry
RFQs, electronic RFQs, and/or Book
transactions. Any such entitlement
shall: (1) Be divided equally by the
number of FLEX Appointed MarketMakers quoting at the BBO or BBO
30 See
proposed Rule 24B.5(d)(2)(i)(A).
proposed Rule 24B.5(d)(2)(i)(B). In the
FLEX RFQ System rules, the crossing participation
entitlement for transactions in FLEX Index Options
is currently 20%, and there are similar provisions
for FLEX Index Options that could permit an
entitlement of greater than 40% in certain cases.
See existing Rule 24A.5(e)(iii)(B).
32 See Rule 24A.5(e)(iv); Securities Exchange Act
Release No. 45934 (May 15, 2002), 67 FR 36276
(May 23, 2002) (SR–CBOE–2002–09).
33 See, e.g., Rule 8.87, Participation Entitlement of
DPMs and e-DPMs (providing for a DPM/e-DPM
participation entitlement after all public customer
orders are satisfied).
31 See
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clearing price, as applicable; (2)
collectively be no more than: (a) 50% of
the remaining order when one other
FLEX Market-Maker is quoting at the
same price, (b) 40% when two other
FLEX Market-Makers are quoting at the
same price, and (c) 30% when three or
more FLEX Market-Makers are quoting
at the same price; and (3) when
combined with any Submitting
Member’s crossing participation
entitlement, shall not exceed 40% of the
size of the original order.34
Pronouncements regarding the
applicable participation entitlements
must be announced to the membership
via regulatory circular.
(f) Solicited Orders
A Submitting Member trading in open
outcry may not cross an order that he or
she is holding with an order that he or
she solicited from a FLEX Market-Maker
who is then in the trading crowd, except
in accordance with CBOE Rule 6.55,
Multiple Representation Prohibited. A
Submitting Member utilizing the
electronic System may not cross an
order that he or she is holding with: (1)
a solicited order for a FLEX MarketMaker’s individual or joint account; or
(2) a solicited order initiated by the
FLEX Market-Maker for an account in
which the FLEX Market-Maker has an
interest, unless the FLEX Market-Maker
refrains from participating on the same
trade.35
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(g) FLEX Standard Minimum Increments
The applicable increments for FLEX
Index Options will be identical to the
increments in the existing FLEX rules,
which permit decimal bids and offers in
the designated currency that meet or
exceed certain minimum parameters.36
For example, the minimum increment
in U.S. dollars is $0.01 (or such other
minimum as the appropriate Procedure
Committee may set from time to time to
ensure fair and orderly markets). The
applicable increments for FLEX Equity
Options will be determined by the
appropriate Procedure Committee on a
class-by-class basis, but may not be
smaller than $0.01. This represents a
change from the existing FLEX rules,
under which the trading increments
applicable to FLEX Equity Options are
the same as those applicable to NonFLEX Equity Options (i.e., $0.10 for
simple bids and offers in series quoted
at or above $3 a contract, $0.05 for
simple bids and offers in series quoted
proposed Rule 24B.5(d)(2)(ii).
proposed Rule 24B.5(d)(2)(i)(C).
36 See existing Rule 24A.5(g) (which is proposed
to be renumbered as Rule 24A.5(f)); proposed Rule
24B.5(e).
below $3 a contract, and $0.01 for series
quoted in the penny pilot program 37).
4. FLEX Market-Maker Appointments
and Obligations (Proposed Rule 24B.9)
Under the rules for the new System,
the Exchange will appoint two or more
FLEX Qualified Market-Makers to each
FLEX Index Option class and settlement
currency, and two or more FLEX
Qualified Market-Makers to each FLEX
Equity Option class. In making such
appointments and in taking other action
with respect to FLEX Qualified MarketMakers, the Exchange shall take into
account the factors enumerated in, and
shall refer to the requirements of,
existing CBOE Rule 8.3, Appointment of
Market-Makers. As a condition to
receiving and maintaining a FLEX
Qualified Market-Maker appointment in
a FLEX Index Option (FLEX Equity
Option), the FLEX Qualified MarketMaker must maintain an appointment in
one or more Non-FLEX Index Option
classes (Non-FLEX Equity Option
classes). The Non-FLEX Option class
need not include the FLEX Option
class’s underlying index or security.
Notwithstanding the above, the
appropriate Market Performance
Committee may determine to solicit
applications and appoint: (1) One or
more FLEX Appointed Market-Makers
in addition to appointing FLEX
Qualified Market-Makers to such
classes; or (2) two or more FLEX
Appointed Market-Makers in lieu of
appointed FLEX Qualified MarketMakers. Thus, under this revised
structure applicable to both platforms, a
FLEX Option class could be structured
as a FLEX Qualified Market-Maker-only
crowd with at least two participants, a
mixed FLEX Qualified/Appointed
Market-Maker crowd with at least three
participants, or a FLEX Appointed
Market-Maker-only crowd with at least
two participants.
A FLEX Appointed Market-Maker
must provide a FLEX Quote in response
to any open-outcry RFQ in a class of
FLEX Options to which it is appointed
and trades in open outcry.38 In addition,
a FLEX Appointed Market-Maker must
provide FLEX Quotes in response to a
designated percentage of electronic
RFQs, such percentage to be determined
by the appropriate Procedure Committee
and not less than 80%.39 Although a
FLEX Qualified Market-Maker need not
enter a FLEX Quote in response to an
RFQ in a class of FLEX Options to
which it is appointed,40 the FLEX
34 See
35 See
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CBOE Rule 6.42.
proposed Rule 24B.9(c)(i).
39 See proposed Rule 24B.4(a)(5)(iv).
40 See proposed Rule 24B.9(c).
Qualified Market-Maker (like the FLEX
Appointed Market-Maker) must submit
a FLEX Quote if called upon by a FLEX
Official, including when no FLEX
Quotes are submitted in response to a
specific RFQ.41
5. FLEX Officials (Proposed Rule
24B.14)
Existing FLEX Rule 24A.12 provides
that a FLEX Post Official is responsible
for: (1) Reviewing the conformity of
RFQs and FLEX Quotes to the terms and
specifications contained in Rule 24A.4;
(2) posting RFQs for dissemination; (3)
determining the BBO; (4) ensuring that
contracts are executed in conformance
with the priority principles set forth in
Rule 24A.5(e); (5) calling for Indicative
FLEX Quotes in accordance with the
requirements of Rule 24A.12(c); and (6)
calling upon FLEX Qualified MarketMakers to provide FLEX Quotes in
specific classes of FLEX Equity Options
as provided in Rule 24A.9(c).42
Proposed Rule 24B.14, FLEX Official,
corresponds with existing Rule 24A.12
and describes the functions of a FLEX
Official for the new System. The FLEX
Official would continue to be
responsible for reviewing the
conformity of open-outcry RFQs to the
applicable terms and specifications in
proposed Rule 24B.4. However, because
open-outcry FLEX Quotes will now be
provided to the Submitting Member, the
FLEX Official is no longer responsible
for reviewing them for conformity to the
applicable terms and specifications or
for determining the BBO. In addition, a
FLEX Official may nullify a FLEX
transaction, whether electronic or openoutcry, if he or she determines that it
does not conform to the terms of
proposed Rules 24B.4 or 24B.5. As
noted above, a FLEX Official may call
upon FLEX Market-Makers, whether
Qualified or Appointed to a given class,
to provide FLEX Quotes in certain
circumstances, as provided in proposed
Rule 24B.9.
A FLEX Official may be an employee
of the Exchange or an independent
contractor. The Exchange may designate
other qualified employees or
independent contractors to assist the
FLEX Official as the need arises.43
6. Position and Exercise Limits
Proposed Rules 24B.7, Position Limits
and Reporting Requirements, and 24B.8,
Exercise Limits, are modeled after
existing Rules 24A.7 and 24A.8.
However, the Exchange is proposing to
make certain revisions to existing Rules
37 See
38 See
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41 See
proposed Rule 24B.9(d).
existing Rule 24A.12(b).
43 See proposed Rule 24B.14(a).
42 See
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24A.7 and 24A.8, and to include the
same language in proposed Rules 24B.7
and 24B.8, relating to the applicable
position and exercise limits for FLEX
Index Options and the aggregation of
certain FLEX and non-FLEX positions.
The Exchange has proposed changes to
Rule 24A.7 to conform the language of
that rule to reflect changes that were
recently approved by the Commission in
a separate proposed rule change.44
In addition, the proposal would
amend Rule 24A.7 to establish new
position limits for certain industrybased FLEX Index Option classes:
1. No more than four times the
applicable position limits established
pursuant to Rule 24.4A for FLEX
Options on: (a) The Dow Jones
Transportation Average or the Dow
Jones Utility Average; or (b) an industrybased index that is not a ‘‘narrow-based
security index,’’ as defined under
Section 3(a)(55)(B) of the Act.45
2. For all other industry-based FLEX
Index Option classes, no more than one
times the applicable number of NonFLEX Index Option contracts (whether
long or short) of the put class and the
call class on the same side of the
market, as determined on the basis of
the position limits established pursuant
to Rule 24.4A, Position Limits for
Industry Index Options.
The proposal also would amend Rule
24A.7 to provide that position limits for
a micro narrow-based FLEX Index
Option class shall not exceed one times
the applicable number of Non-FLEX
Index Option contracts (whether long or
short) of the put class and the call class
on the same side of the market, as
determined on the basis of the position
limits established pursuant to Rule
24.4B, Position Limits for Options on
Micro Narrow-Based Indexes As Defined
Under Rule 24.2(d). Finally, new
language to Rule 24A.7 would provide
that, except as otherwise provided, the
position limit for a broad-based FLEX
Index Option class may not exceed
200,000 contracts on the same side of
the market. Proposed Rule 24B.7
replicates amended Rule 24A.7 in the
rules applying to the new System.
Both rules would contain new
language requiring that positions in
FLEX Options must be aggregated with
positions in Non-FLEX Options in
certain circumstances:
• QIX Options: Commencing at the
close of trading two business days prior
to the last trading day of the calendar,
positions in FLEX Index Options having
44 See Securities Exchange Act Release No. 56350
(September 4 2007), 72 FR 51878 (September 11,
2007) (SR–CBOE–2007–79).
45 15 U.S.C. 78c(a)(55)(B).
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an exercise settlement value determined
by the level of the index at the close of
trading on the last trading day before
expiration shall be aggregated with
positions in Quarterly Index (QIX)
Options on the same index with the
same expiration and shall be subject to
the position limits set forth in Rule 24.4,
24.4A, or 24.4B, as applicable.
• Weekly Options: Commencing at
the close of trading two business days
prior to the last trading day of the week,
positions in FLEX Options that are cashsettled 46 shall be aggregated with
positions in Short Term Option Series
on the same underlying index with the
same means for determining exercise
settlement value (e.g., opening or
closing prices of the underlying index)
with the same expiration and shall be
subject to the position limits set forth in
Rule 24.4, 24.4A, 24.4B or 29.5, as
applicable.
Proposed Rule 24B.8 replicates
existing Rule 24A.8 regarding exercise
limits. Both rules generally provide that
the exercise limit for a FLEX Index
Option is equivalent to the position
limit. Both rules also set forth certain
minimum value size requirements for
exercises of FLEX Equity Options and
FLEX Index Options.
In an earlier proposed rule change,
CBOE represented that, when it files a
proposed rule change to list and trade
a new Non-FLEX Index Option, it also
would propose to list and trade the
FLEX Index Options in the same filing
and include proposed position and
exercise limits.47 Because the maximum
FLEX Index Option position and
exercise limits will now be explicitly set
out in Rules 24A.7, 24A.8, 24B.7, and
24B.8, the Exchange seeks to eliminate
this earlier commitment.
7. Financial Requirements
Under the proposal, a FLEX Index
Market-Maker may not effect a FLEX
Index Option transaction unless it has
demonstrated to the satisfaction of the
Exchange that the net liquidating equity
maintained in the FLEX Appointed
Market-Maker’s individual or joint
accounts with any one clearing member
in which transactions in FLEX Index
Options will be conducted is at least
$100,000.48 In addition, a FLEX Index
46 FLEX Index Options and FLEX Credit Default
Options are cash settled. FLEX Equity Options are
settled by physical delivery. See existing Rules
24A.4(b)(4) and (c)(3) and 29.19; see also proposed
Rules 24B.4(b)(4) and (c)(3).
47 See Securities Exchange Act Release No. 43108
(August 2, 2000), 65 FR 48770 (August 9, 2000)
(SR–CBOE–00–26) (immediately effective proposal
providing for the listing and trading of FLEX
Options on all indices that underlie Non-FLEX
Options listed and traded by the Exchange).
48 See proposed Rule 24B.11.
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Appointed Market-Maker is required to
maintain at least $1 million net
liquidating equity and/or $1 million net
capital, as applicable.49 A FLEX Index
Appointed Market-Maker or its clearing
member must immediately inform the
Exchange whenever the FLEX Index
Appointed Market-Maker fails to be in
compliance with any of the above
requirements. FLEX Market-Makers and
floor brokers must file letters of
guarantee accepting financial
responsibility for all FLEX transactions
they make.50 These provisions parallel
existing Rules 24A.13, 24A.14, and
24A.15 that apply to the FLEX RFQ
System.
8. Other Rules for New System
Other rules in proposed Chapter
XXIVB are the same as, or closely
modeled after, the existing rules of the
FLEX RFQ System. Proposed Rules
24B.2, Hours of Trading; 24B.3, Trading
Rotations; 24B.10, Related Securities;
24B.15, Nonavailability of RAES; and
24B.16, Inapplicability of Split Price
and Accommodation Liquidation Rules,
are identical to Rules 24A.2, 24A.3,
24A.11, 24A.16, and 24A.17,
respectively. Proposed Rules 24B.6,
Discretionary Transactions, and 24B.13,
Letter of Guarantee or Authorization are
virtually identical to Rules 24A.6 and
24A.15, respectively, except for nonsubstantive grammatical changes.
Proposed Rules 24B.11, FLEX Index
Appointed Market-Maker Account
Equity, and 24B.12, FLEX Index
Appointed Market-Maker Financial
Requirements, are virtually identical to
Rules 24A.13 and 24A.14, respectively,
except that revisions are being made to
clarify that these rules apply only to
FLEX Appointed Market-Makers in
FLEX Index Options.51
49 See
proposed Rule 24B.12.
proposed Rule 24B.13.
51 The special account equity and financial
requirements under existing Rules 24A.13 and
24A.14 apply only to FLEX Appointed MarketMakers, who currently are appointed only to FLEX
Index Option classes and currently are subject to
certain heightened minimum value size
requirements under Rule 24A.4(a)(4)(iv). Given the
proposed changes to the FLEX Market-Maker
appointments discussed above, which would allow
for the appointment of a FLEX Equity Appointed
Market-Maker, proposed Rules 24B.11 and 24B.12
make clear that these special account equity and
financial requirements would apply only to FLEX
Appointed Market-Makers in FLEX Index Options
(who would continue to be subject to the
heightened minimum value size requirements
under proposed Rule 24B.4(a)(5)(iv)) and not FLEX
Appointed Market-Makers in FLEX Equity Options
(who would not be subject to heightened minimum
value size requirements). The Exchange has
proposed corresponding changes to existing Rules
24A.13 and 24A.14.
50 See
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B. Changes to Existing FLEX Rules
The Exchange is proposing various
changes to the existing FLEX rules to
conform them to the corresponding new
System rules. In addition, the term
‘‘Indicative FLEX Quote’’ in Rule 24A.1
and a related reference in Rule 24A.12
are being deleted. Indicative FLEX
Quotes are non-binding indications of
the market that were periodically
supplied by FLEX Market-Makers and
displayed on the FLEX communication
network. This functionality is no longer
utilized, so these references in Rules
24A.1 and 24A.12 are being deleted.
The Exchange is also proposing to
increase the crossing participation
entitlement percentage available on the
FLEX RFQ System. Currently, the
Submitting Member may obtain a
crossing participation entitlement of
25% of the incoming order for a FLEX
Equity Option or 20% of the incoming
order for a FLEX Index Option.52 Under
the proposal, the appropriate Procedure
Committee could determine on a classby-class basis whether to establish a
crossing participation entitlement for
facilitations and/or solicitations and the
applicable crossing participation
entitlement percentage, which may not
exceed 40% of the incoming order.53
These revisions would make the
crossing participation entitlements
equivalent on the FLEX RFQ System
and the FLEX Hybrid Trading System.
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C. Other Changes to CBOE Rules
The Exchange is proposing to allow
sponsored access to the new System.
Under proposed Rule 6.20A, a CBOE
member (‘‘Sponsoring Member’’) may
provide a non-member (‘‘Sponsored
User’’) with electronic access to the
System. The proposed rule outlines the
requirements that Sponsored Users and
Sponsoring Members are required to
meet prior to engaging in a sponsorship
arrangement. A Sponsored User may be
a person, such as an institutional
investor, who has entered into a
sponsorship arrangement with a
Sponsoring Member for purposes of
entering orders on the System. This
would include entering and responding
to electronic RFQs and entering FLEX
Orders into the Book. A Sponsored User
may utilize the System only if
authorized in advance by one or more
Sponsoring Members in accordance
with the provisions of proposed Rule
6.20A.
52 See
Rule 24A.5(e)(iii)(A)–(B). Other existing
provisions could allow the Submitting Member to
receive in excess of 20% of an incoming order for
a FLEX Index Option. See Rule 24A.5(e)(iii)(B).
53 See proposed Rule 24A.5(e)(iii)(A)–(B).
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D. Amendment Nos. 2 and 3
In Amendment No. 2, the Exchange
made the following changes to the
proposal:
• In proposed Rule 24B.5(a)(1),
modifying the procedures that apply
during the electronic RFQ Reaction
Period to: (i) Permit FLEX Quotes and
FLEX Orders to be entered, modified, or
canceled during the RFQ Reaction
Period; (ii) increase the maximum RFQ
Reaction Period from the proposed 30
seconds to five minutes; (iii) provide
that, if the Submitting Member enters a
FLEX Quote during the RFQ Reaction
Period, the Submitting Member must be
bidding (offering) for at least the
Crossing Exposure Period prior to
entering an RFQ Order; and (iv) provide
that the RFQ Market is dynamically
updated during both the RFQ Response
and RFQ Reaction Periods;
• Also in proposed Rule 24B.5(a)(2),
modifying the open-outcry priority
provisions to clarify the Exchange’s
original intent that, after the application
of any participation entitlements, all
other FLEX Quotes submitted in
response to an open-outcry RFQ have
priority based on the sequence in which
those FLEX Quotes are made in open
outcry and, to the extent two or more
best bid (offer) FLEX Quotes are
submitted in open outcry at the same
time and same price (or the Submitting
Member cannot reasonably determine
the sequence), priority will be
apportioned equally;
• In proposed Rule 24B.5(b),
modifying the Book crossing provisions
to clarify the Exchange’s original intent
that an agency FLEX Order must first be
subject to an RFQ and the agency FLEX
Order (or any remaining balance not
executed during the RFQ Reaction
Period) must also be exposed on the
System for at least the Crossing
Exposure Period prior to entering a
contra-side principal or solicitation
order that is executable against the
agency FLEX Order. Previously, the
proposed rule text had simply indicated
that the agency FLEX Order must first
be subject to an RFQ;
• Updating the text of Rules 24A.7
and 24A.8, as well as proposed Rules
24B.7 and 24B.8, to reflect unrelated
changes that have been approved in a
separate rule filing 54 and to make
certain non-substantive corrections;
• Inserting corresponding changes to
the discussion sections of the Form
19b–4 and the Exhibit 1 Federal
Register notice to reflect the abovenoted changes;
54 See Securities Exchange Act Release No. 56350
(September 4, 2007), 72 FR 51878 (September 11,
2007) (SR–CBOE–2007–79).
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• Providing information regarding its
plans respecting dissemination of FLEX
data via the Options Price Reporting
Authority (‘‘OPRA’’). Specifically, with
respect to price reporting, the Exchange
currently plans to continue
disseminating via OPRA information
regarding executed FLEX transactions.
However, the Exchange currently does
not plan to disseminate via OPRA
information respecting pending
electronic and open-outcry RFQs or
information on resting orders in the
Book; and
• Submitting as part of Exhibit 5 the
text of the Sponsored User Agreement
form that the Exchange proposes to use
in connection with proposed Rule
6.20A.
In Amendment No. 3, the Exchange
made the following changes to the
proposal:
• Revising the text of Rule 24B.1(u),
RFQ Reaction Period, to reflect that
during this time a Submitting Member
determines whether to accept or reject
the RFQ Market, which consists of both
FLEX Quotes and FLEX Orders; and
• Correcting the text of proposed Rule
24B.5(a)(2)(iii) that was submitted as
part of Amendment No. 2.
III. Discussion
After careful consideration, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.55 In particular, the
Commission finds that the proposal is
consistent with section 6(b)(5) of the
Act,56 which requires that the rules of
an exchange be designed, among other
things, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market,
and, in general, to protect investors and
the public interest. The Commission
also finds that the proposal is consistent
with section 11A(a)(1)(C) of the Act,57
which sets forth Congress’s findings that
it is in the public interest and
appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure, among
other things, economically efficient
execution of securities transactions; fair
competition among brokers and dealers,
among exchange markets, and between
exchange markets and markets other
than exchange markets; and the
55 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
56 15 U.S.C. 78f(b)(5).
57 15 U.S.C. 78k–1(a)(1)(C).
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practicability of brokers executing
investors’ orders in the best market. The
Commission generally believes that an
exchange furthers these principles when
developing products and trading
functionality that compete with the
over-the-counter markets. This order
approves the amended proposal in its
entirety, although only certain aspects
of the proposed rule change are
discussed below.
A. Execution Algorithm and Priority and
Allocation Rules
1. Electronic Trading
The Commission believes that the
priority and allocation rules for
electronic trading on the new System
are reasonable and consistent with the
Act. These rules generally provide for
allocation pursuant to price/time
priority, with some allowance for
market-maker and crossing participation
guarantees. The proposed guarantees
appear reasonably designed to balance
incentives for providing liquidity in the
FLEX market (in the case of the marketmaker entitlement) and for bringing
trades to the Exchange (in the case of
the crossing participation entitlement)
with incentives for all other market
participants to quote competitively.
The Commission also believes that the
priority and allocation rules for
electronic FLEX trading are consistent
with section 11(a) of the Act.58 The
Commission believes, however, that
neither a Submitting Member who
trades against an electronic RFQ Market
nor any other FLEX Trader who itself
submits an RFQ Quote electronically
qualifies for the ‘‘effect-versus-execute’’
exception to section 11(a).59
Nevertheless, the Commission believes
that other exceptions may apply. FLEX
Market-Makers qualify for the marketmaker exception. With respect to nonmarket-maker members, the new System
appears reasonably designed to cause
RFQ Quotes constituting the RFQ
Market and the RFQ Order that trades
against the RFQ Market to yield to nonmember interest, consistent with the
‘‘G’’ exception.60
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2. Open-Outcry Trading on New System
The Commission believes that the
priority and allocation rules for openoutcry trading on the new System are
reasonable and consistent with the Act.
58 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a
member of a national securities exchange from
effecting transactions on that exchange for its own
account, the account of an associated person, or an
account over which it or its associated person
exercises discretion unless an exception applies.
59 17 CFR 240.11a2–2(T).
60 See 15 U.S.C. 78k(a)(1)(G) (setting forth all
requirements for the ‘‘G’’ exception).
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These provisions are generally modeled
on the priority and allocation rules of
the existing FLEX RFQ System, which
were previously found by the
Commission to be consistent with the
Act.61 There is one significant
difference, however, the addition of an
electronic Book. Generally, an order
resting on the Book will be filled only
after all FLEX Quotes submitted in open
outcry, even if the order was booked
before the RFQ began and any oral
responses to the RFQ were submitted.62
The Commission generally believes that
displayed limit orders of public
customers must be able to compete
freely and openly for executions on an
equitable basis. However, with a highly
customized product such as FLEX
Options, there are likely to be few
booked orders. Therefore, solely with
respect to the FLEX Hybrid Trading
System, the Commission believes at the
present time that it is appropriate to
approve CBOE’s proposal to allow FLEX
Quotes submitted in response to an
open-outcry RFQ to have priority over
same priced bids (offers) on the Book.63
The Commission also notes that an
open-outcry FLEX Quote must yield to
the Book and all other bids (offers) that
have priority over the Book if the
member entering the FLEX Quote is
relying on the ‘‘G’’ exception to Section
11(a) of the Act.64
3. Orders on the Book
If the Exchange enables an electronic
Book in a FLEX Option class, any
transaction involving a booked order
must comply with section 11(a) of the
Act. If a FLEX Trader cannot avail itself
of any other exception, it must rely on
the ‘‘G’’ exception, which requires,
among other things, that a member order
yield to a non-member order at the same
price, even if the member order has time
priority. The new System has not been
programmed to cause a member order
on the Book to yield to a later-arriving
non-member order at the same price,
although proposed Rule 24B.5(b)(2)(ii)
prohibits a member order that is relying
on the ‘‘G’’ exemption from resting on
the Book. The Commission believes that
a member may rely on the ‘‘G’’
exception if it sends an order to the
Book and then cancels it immediately if
it is not executed in full.
61 See Securities Exchange Act Release No. 31920
(February 24, 1993), 58 FR 12280 (March 3, 1993)
SR–CBOE–92–17).
62 See proposed Rule 24B.5(a)(2)(v)(A).
63 If circumstances change and the FLEX Book
becomes frequently used, the Commission may
revisit this issue.
64 See proposed Rule 24B.5(a)(2)(v)(B).
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
65783
4. Changes to Allocation Rules of FLEX
RFQ System
CBOE has proposed certain changes to
its allocation rules under the existing
FLEX RFQ System. Under the proposal,
a FLEX Appointed Market-Maker will
have priority over a FLEX Qualified
Market-Maker when the two submit
orders at the same time and same price.
The Commission believes that this is
consistent with the Act in light of the
greater quoting obligations of the FLEX
Appointed Market-Maker. CBOE also is
proposing to increase the percentages of
an incoming order that can be reserved
for a crossing guarantee or FLEX
Appointed Market-Maker participation
entitlement.65 These percentages appear
reasonably designed to balance
incentives for providing liquidity with
incentives for all other market
participants to quote competitively.
5. Best Execution
The proposed rules do not explicitly
require an RFQ Trader to trade against
an RFQ Market. The Commission
reminds RFQ Traders that the duty of
best execution requires them to assess
the quality of competing markets to
ensure that a customer order is directed
to the market providing the most
advantageous terms for the customer. If
a Submitting Member declines to trade
a customer order against an RFQ Market
and subsequently facilitates the
customer order at a price inferior to the
RFQ Market, there would be a
presumption that the Submitting
Member did not fulfill its best execution
obligation.
B. Market-Maker Benefits and
Obligations
The Commission believes that the
balance of benefits and obligations of
FLEX Market-Makers under the rules for
the new System is consistent with the
Act. A FLEX Appointed Market-Maker
must provide a FLEX Quote in response
to any open-outcry RFQ in a class of
FLEX Options to which it is appointed
and trading in open outcry.66 In
addition, the FLEX Appointed MarketMaker must provide FLEX Quotes in
response to a designated percentage of
electronic RFQs, such percentage to be
determined by the appropriate
Procedure Committee and not less than
80%.67 Although a FLEX Qualified
Market-Maker need not enter a FLEX
Quote in response to an RFQ in its
assigned class,68 the FLEX Qualified
65 See
proposed Rule 24A.5(e)(iii)–(iv).
proposed Rule 24B.9(c)(i).
67 See proposed Rule 24B.4(a)(5)(iv).
68 See proposed Rule 24B.9(c).
66 See
E:\FR\FM\23NON1.SGM
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65784
Federal Register / Vol. 72, No. 225 / Friday, November 23, 2007 / Notices
Market-Maker (like the FLEX Appointed
Market-Maker) must submit a FLEX
Quote if called upon by a FLEX Official,
including when no FLEX Quotes are
submitted in response to a specific
RFQ.69 FLEX Appointed Market-Makers
may be awarded a participation
entitlement, noted above. Both FLEX
Market-Makers qualify for the marketmaker exception to section 11(a) of the
Act.
C. Position and Exercise Limits
The Commission believes that the
proposed position and exercise limits in
FLEX Options are reasonable and
consistent with the Act. They appear
reasonably designed to prevent a
member from establishing an imprudent
position in FLEX Options. Moreover,
the Commission believes that these
rules are reasonably designed to prevent
a FLEX Trader from using FLEX Options
to evade the position limits applicable
to comparable Non-FLEX Options. In
view of the explicit standards for
position and exercise limits set forth in
Rules 24A.7, 24A.8, 24B.7, and 24B.8,
the Commission believes it is reasonable
to relieve the Exchange of the obligation
to propose new position and exercise
limits for FLEX Options whenever it
lists and trades a comparable non-FLEX
product.
D. Sponsored Access
The Commission believes that the
proposed sponsored access provisions
are reasonable and consistent with the
Act. The Commission notes that these
provisions are substantially similar to
those of another exchange, which
previously were approved by the
Commission.70 The Exchange has
proposed to offer sponsored access only
to the new FLEX Hybrid Trading
System, not to open-outcry FLEX
trading or to other Exchange trading
facilities. If the Exchange in the future
would seek to offer sponsored access to
its other trading facilities, it would have
to file a proposed rule change pursuant
to section 19(b) of the Act.
mstockstill on PROD1PC66 with NOTICES
E. Acceleration
The Commission finds good cause for
approving the proposal, as modified by
Amendment Nos. 2 and 3, prior to the
thirtieth day after the date of
publication of notice of the amended
proposal in the Federal Register.
Amendment Nos. 2 and 3 made only
69 See
proposed Rule 24B.9(d).
NYSE Arca Equities Rule 7.29; Securities
Exchange Act Release No. 44983 (October 25, 2001),
66 FR 55225 (November 1, 2001) (SR–PCX–00–25)
(approving proposal to establish Archipelago
Exchange as the equities trading facility of the
Pacific Exchange).
70 See
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16:16 Nov 21, 2007
Jkt 214001
minor changes to the overall proposal,
which was subject to a notice-andcomment period. Because no comments
were received, the Commission believes
that good cause exists to grant
accelerated approval and thereby allow
the Exchange to implement the proposal
without further delay.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment Nos.
2 and 3, including whether it is
consistent with the Act. Comments may
be submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2006–99 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–2006–99. 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 Exchange. 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
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
Number SR–CBOE–2006–99 and should
be submitted on or before December 14,
2007.
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,71 that the
proposed rule change (SR–CBOE–2006–
99), as amended, is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.72
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–22779 Filed 11–21–07; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–56801; File No. SR-CBOE–
2007–125]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Proposed Rule Change and
Amendment No. 2 Thereto Relating to
the $1 Strike Pilot Program
November 16, 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 October
31, 2007, 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 the Exchange.
On November 14, 2007, the Exchange
filed Amendment No. 1 to the proposed
rule change. The Exchange subsequently
withdrew Amendment No. 1 and filed
Amendment No. 2 to the proposed rule
change on November 15, 2007. 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
CBOE proposes to amend its rules
relating to the $1 Strike Pilot Program
(‘‘Pilot Program’’). 3 The text of the
71 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b-4.
3 The Commission approved the Pilot Program on
June 5, 2003. See Securities Exchange Act Release
No. 47991 (June 5, 2003), 68 FR 35243 (June 12,
2003) (SR–CBOE–2001–60). The Pilot Program has
been subsequently extended through June 5, 2008.
72 17
E:\FR\FM\23NON1.SGM
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]]>Agencies
[Federal Register Volume 72, Number 225 (Friday, November 23, 2007)]
[Notices]
[Pages 65776-65784]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-22779]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56792; File No. SR-CBOE-2006-99]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Amendment Nos. 2 and 3 to Proposed Rule Change
Relating to FLEX Options Trading and Order Granting Accelerated
Approval to Proposed Rule Change as Amended
November 15, 2007.
I. Introduction
On November 27, 2006, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change providing for the trading of
Flexible Exchange (``FLEX'') Options on a new electronic platform, and
to make certain corresponding revisions to its existing open-outcry
FLEX rules. On August 17, 2007, CBOE filed Amendment No. 1 to the
proposed rule change. On August 30, 2007, the proposed rule change, as
amended, was published for comment in the Federal Register.\3\ No
comments were received on the proposal. On November 7, 2007 and
November 15, 2007, CBOE filed Amendment Nos. 2 and 3, respectively, to
the proposed rule change.\4\ This notice and order solicits comments
from interested persons on Amendment Nos. 2 and 3 and grants
accelerated approval to the proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 56311 (August 23, 2007),
72 FR 50133.
\4\ See infra Section II(D).
---------------------------------------------------------------------------
II. Description of Proposal
FLEX Options provide investors with the ability to customize basic
option features including size, expiration date, exercise style, and
certain exercise prices. Currently, Exchange members may trade FLEX
Options in open outcry. Markets are created when a member submits a
request for quotes (``RFQ'') to the crowd. This system is referred to
herein as the ``FLEX RFQ System.'' The Exchange has proposed an
alternate framework for trading FLEX Options using a ``hybrid''
platform, which will incorporate both open outcry and electronic
trading functionality (referred to herein as the ``FLEX Hybrid Trading
System'' or the ``System''). Some key features of the new FLEX Hybrid
Trading System are the following:
Method of Operation: Transactions can take place through
either an open-outcry RFQ process similar to the existing FLEX RFQ
System or a new, Internet- and API-based electronic trading platform.
Currently, the FLEX RFQ System does not provide for a book, and quotes
and orders expire at the conclusion of the RFQ process. By contrast,
the new System may allow FLEX Orders to be entered and trade via an
electronic book (the ``Book''). The Exchange would determine on a
class-by-class basis whether to make a Book available.\5\
---------------------------------------------------------------------------
\5\ See Rule 24B.5(b)(1).
---------------------------------------------------------------------------
Access: CBOE members seeking to use the new System must
apply to and be approved by the Exchange. Approved members are
collectively referred to as ``FLEX Traders.'' In addition, non-members
that meet certain conditions may be offered ``sponsored access'' to the
new System.
Market-Maker Participation: As with the existing FLEX
rules, there are two types of FLEX Market-Makers: FLEX Appointed
Market-Makers and FLEX Qualified Market-Makers. The responsibilities
and obligations of FLEX Market-Makers on the new System, and changes to
the corresponding rules of
[[Page 65777]]
the existing FLEX RFQ System, are discussed further below.
Detailed Summary of Proposed Rule Change
A. Proposed FLEX Hybrid Trading System Rules (Chapter XXIVB)
The rules governing the existing FLEX RFQ System are contained, and
will continue to be maintained, in Chapter XXIVA of the Exchange rules.
The proposed rules governing the new FLEX Hybrid Trading System are
found in proposed Chapter XXIVB. The Exchange currently intends to
maintain and operate both systems and will determine which system to
use on a class-by-class basis. These determinations will be announced
to the membership via regulatory circular. This rule further explains
that Chapters I through XIX and XXIV of the Exchange rules apply to the
new System, except as otherwise indicated. If the rules in Chapter
XXIVB are inconsistent with other Exchange rules, the rules in Chapter
XXIVB take precedence in relation to the trading of FLEX Options on the
new System.
1. Definitions (Proposed Rule 24B.1)
Proposed Rule 24B.1, Definitions, corresponds with existing Rule
24A.1 but contains several new definitions necessary to accommodate the
new System. For example, the term ``FLEX Hybrid Trading System'' means
the Exchange's trading platform that allows FLEX Traders to submit
RFQs, FLEX Quotes, and FLEX Orders. A ``FLEX Quote'' is a bid or offer
entered by a FLEX Market-Maker or an order to purchase or sell entered
by a FLEX Trader, in either case in response to an RFQ. A ``FLEX
Order'' is a bid or offer entered by a FLEX Market-Maker or an order to
purchase or sell entered by a FLEX Trader, in either case into the
Book.
Proposed Rule 24B.1 also defines several terms relating to the RFQ
process. The ``Submitting Member'' is the FLEX Trader who initiates the
RFQ or who enters a FLEX Order into the Book. The ``RFQ Response
Period'' is the period during which FLEX Traders may provide FLEX
Quotes in response to an RFQ. The ``RFQ Reaction Period'' is the period
during which the Submitting Member determines whether to accept or
reject the RFQ Market.\6\ The ``RFQ Market'' consists of the FLEX
Quotes entered in response to an RFQ and FLEX Orders resting in the
Book. An ``RFQ Order'' is an order to buy or an order to sell entered
by the Submitting Member during the RFQ Reaction Period.
---------------------------------------------------------------------------
\6\ See proposed Rule 24B.1(u) (as modified by Amendment No. 3).
---------------------------------------------------------------------------
Proposed Rule 24B.1 also identifies certain trade conditions that
can be placed on an RFQ Order or FLEX Order, such as fill-or-kill, all-
or-none, minimum fill, ``lots of,'' and hedge. FLEX Orders except for
fill-or-kill orders would be designated by the System as day orders
and, if unexecuted, would be canceled at the close of each trade day.
An RFQ may include a hedge or ``Intent to Cross'' trade condition,
discussed more fully below. Hedge and Intent to Cross trade conditions
will be disclosed on the System.
2. Terms of FLEX Options (Proposed Rule 24B.4)
Proposed Rule 24B.4, Terms of FLEX Options, is similar to existing
Rule 24A.4. Both rules set forth the variable terms of FLEX Options
(such as the underlying security or index, put or call type, exercise
style, expiration date, and exercise price). Other terms are not
variable and are the same as those that apply to Non-FLEX Options. Both
rules set forth the information required from a member who initiates an
RFQ, such as the type and form of quote sought, any trade conditions,
and the length of the RFQ Response Period.\7\
---------------------------------------------------------------------------
\7\ The length of the RFQ Response Period is defined by the
Submitting Member but must fall within the time ranges established
by the appropriate Procedure Committee on a class-by-class basis.
The period cannot be less than three seconds. See proposed Rule
24B.4(a)(3)(iii).
---------------------------------------------------------------------------
Proposed Rule 24B.4 lists additional contract and transaction
specifications for RFQs, FLEX Quotes, FLEX Orders, and RFQ Orders.
These specifications pertain in part to maximum expiration terms and
second to minimum value size requirements. The maximum expiration terms
are the same as in the existing FLEX rules.\8\ The minimum value size
specifications are substantially similar to those in Rule 24A.4, though
additional language has been added to clarify the minimum value size
requirements for FLEX Orders entered in the Book. There are additional
special terms for FLEX Index Options \9\ and FLEX Equity Options,\10\
which correspond to provisions in existing Rule 24A.4.
---------------------------------------------------------------------------
\8\ For FLEX Equity Options, the maximum term is generally three
years, although the Submitting Member may request up to five years.
For FLEX Index Options, the maximum term is generally five years,
although a Submitting Member may request up to ten years. See
existing Rule 24A.4(a)(4); proposed Rule 24B.4(a)(5).
\9\ See proposed Rule 24B.4(b).
\10\ See proposed Rule 24B.4(c). For example, settlement of a
FLEX Equity Option shall be by physical delivery of the underlying
security.
---------------------------------------------------------------------------
3. FLEX Trading Procedures and Principles (Proposed Rule 24B.5)
On the new System, there will be no trading rotations in FLEX
Options, either at the open or the close.\11\ Instead, trading will
result from RFQs submitted through the System or in open outcry, or
from transactions on the Book.
---------------------------------------------------------------------------
\11\ See proposed Rule 24B.3.
---------------------------------------------------------------------------
(a) Electronic RFQ Process
Upon receipt of an RFQ in proper form, the System will cause the
terms and specifications of the RFQ to be communicated to all FLEX
Traders. Any FLEX Trader, including the Submitting Member, may then
enter a FLEX Quote during the RFQ Response Period. Any FLEX Quote or
FLEX Order may be entered, modified, or withdrawn at any point during
the RFQ Response Period.\12\ The System will dynamically calculate and
disseminate to all FLEX Traders the RFQ Market.\13\
---------------------------------------------------------------------------
\12\ However, a FLEX Appointed Market-Maker must meet certain
FLEX Quote maintenance obligations. See proposed Rule
24B.5(a)(1)(ii)(B).
\13\ See proposed Rule 24B.5(a)(1)(ii)(C) (as modified by
Amendment No. 2).
---------------------------------------------------------------------------
Following the RFQ Response Period, the Submitting Member may trade
against the RFQ Market during the RFQ Reaction Period. The length of
this period will be established by the appropriate Procedure Committee
on a class-by-class basis and will not be more than five minutes.\14\
Failure of the Submitting Member to trade against the RFQ Market before
expiration of the RFQ Reaction Period would equate to a rejection.
During the RFQ Reaction Period: (1) FLEX Traders can continue to enter,
modify, or withdraw FLEX Quotes and FLEX Orders; (2) FLEX Orders that
are entered or modified during the RFQ Response and Reaction Periods
will be treated the same as FLEX Quotes for purposes of the priority
allocation; and (3) the System will dynamically calculate and
disseminate to all FLEX Traders the RFQ Market given the current FLEX
Quotes and resting FLEX Orders.\15\
---------------------------------------------------------------------------
\14\ The Exchange originally proposed to cap the RFQ Reaction
Period at 30 seconds. In Amendment No. 2, the Exchange proposed to
increase the maximum period to five minutes ``to address feedback
received from members and potential users that the RFQ Reaction
Period should be lengthened to provide Submitting Members with
additional time to assess an RFQ Market, determine whether to accept
or reject it, and process a response accordingly.''
\15\ See proposed Rule 24B.5(a)(1)(iii)(B)(II) (as modified by
Amendment No. 2).
---------------------------------------------------------------------------
The Submitting Member may decline to trade against the RFQ Market
by canceling the RFQ or letting it expire. If the Submitting Member
chooses to trade but has not indicated an Intent to Cross,
[[Page 65778]]
he or she may enter an RFQ Order to trade with one side of the RFQ
Market (but not both). The Submitting Member's RFQ Order will be
eligible to trade with FLEX Quotes and FLEX Orders at a single price
that will leave bids and offers which cannot trade with each other (the
``BBO clearing price''). In determining the priority of FLEX Quotes and
FLEX Orders, the System gives priority to those priced better than the
BBO clearing price, then to FLEX Quotes and FLEX Orders at the BBO
clearing price. Priority among FLEX Quotes and FLEX Orders at the BBO
clearing price is as follows: (1) any FLEX Quotes that are subject to a
FLEX Appointed Market-Maker participation entitlement; (2) FLEX Orders
resting in the Book, based on the Book priority algorithm; (3) FLEX
Quotes for the account of public customers and non-member broker-
dealers based on time priority; and (4) all other FLEX Quotes based on
time priority.
If the RFQ Market is locked or crossed, priority among FLEX Quotes
and FLEX Orders at the BBO clearing price and on the same side as the
RFQ Order is as follows: (1) FLEX Orders in the Book, based on the Book
priority algorithm; (2) if applicable, an RFQ Order for the account of
a public customer or non-member broker-dealer, then any FLEX Quote that
is subject to a FLEX Appointed Market-Maker participation entitlement;
(3) FLEX Quotes for the account of public customers and non-member
broker-dealers, based on time priority; (4) if applicable, an RFQ Order
for the account of a member, then any FLEX Quote that is subject to a
FLEX Appointed Market-Maker participation entitlement; and (5) all
other FLEX Quotes, based on time priority. The System will enter any
remaining balance of the incoming RFQ Order in the Book (if available),
unless the Submitting Member has indicated that the balance of the RFQ
Order is to be automatically canceled if it is not traded.
If the Submitting Member has indicated an ``Intent to Cross'' in
its RFQ request, the Submitting Member may receive a crossing
participation entitlement if one has been established in that class by
the appropriate Procedure Committee, and if the RFQ Order entered by
the Submitting Member during the RFQ Reaction Period matches or
improves the BBO clearing price. The RFQ Order will be eligible to
trade with FLEX Quotes and FLEX Orders at the BBO clearing price giving
priority to the FLEX Quotes and FLEX Orders priced better than the BBO
clearing price, then to FLEX Quotes and FLEX Orders at the BBO clearing
price. Priority among multiple FLEX Quotes and FLEX Orders at the BBO
clearing price is as follows: (1) FLEX Orders in the Book, based on the
Book priority algorithm; (2) FLEX Quotes for the account of public
customers and non-member broker-dealers, based on time priority; (3)
the crossing participation entitlement; (4) any FLEX Quotes that are
subject to a FLEX Appointed Market-Maker participation entitlement;
\16\ and (5) then all other FLEX Quotes, based on time priority.
---------------------------------------------------------------------------
\16\ The crossing participation entitlement and the FLEX
Appointed Market-Maker entitlement together may not exceed a certain
percentage of the original order. See proposed Rule
24B.5(d)(2)(i)(A)-(B).
---------------------------------------------------------------------------
If a Book is available in that class, the System would enter any
remaining balance of the incoming RFQ Order in the Book and treat it
the same as other FLEX Orders. If there is no Book available, the
System will expose any remaining balance of the incoming RFQ Order so
other FLEX Traders can trade against it. After the remaining balance of
the RFQ Order has been exposed for at least the Crossing Exposure
Period,\17\ the Submitting Member may enter a contra-side order to
trade all or any portion of the remaining balance.\18\
---------------------------------------------------------------------------
\17\ The length of this Crossing Exposure Period shall be
determined by the appropriate Procedure Committee on a class-by-
class basis and shall not be less than three seconds. See proposed
Rule 24B.5(a)(1)(iii)(D)(IV).
\18\ The Submitting Member must, however, enter a contra-side
order when necessary to satisfy applicable minimum value size
requirements. See id.
---------------------------------------------------------------------------
If the Submitting Member rejects the RFQ Market or to the extent
the RFQ Market size exceeds the Submitting Member's size, the System
automatically would execute any remaining FLEX Quotes and FLEX Orders
that are marketable against each other at the BBO clearing price. Then,
if a Book is available, any remaining balance of any FLEX Quote would
be automatically entered into the Book unless the FLEX Trader who
entered it had indicated that the FLEX Quote is to be automatically
canceled if not traded. If no Book is available, any remaining balance
of the FLEX Quotes will be automatically canceled at the conclusion of
the RFQ Reaction Period.\19\
---------------------------------------------------------------------------
\19\ See proposed Rule 24B.5(a)(1)(F).
---------------------------------------------------------------------------
(b) Open-Outcry RFQ Process
To initiate a FLEX transaction using the open-outcry RFQ process
under proposed Rule 24B.5, a Submitting Member would submit an RFQ to a
FLEX Official. The Submitting Member would then immediately announce
the terms and specifications of the RFQ to the crowd. FLEX Traders
present in the crowd may respond orally with FLEX Quotes during the RFQ
Response Period. A FLEX Trader could enter, modify, or withdraw its
FLEX Quote at any point during the RFQ Response Period. At the
expiration of the RFQ Response Period, the Submitting Member would
identify the BBO (considering responsive FLEX Quotes and, if
applicable, FLEX Orders resting in the Book) and announce the BBO to
the crowd.
If the Submitting Member does not indicate an Intent to Cross or
act as principal with respect to any part of the trade, the Submitting
Member may submit an agency RFQ Order to trade against the RFQ Market.
If the Submitting Member rejects the BBO or is given a BBO for less
than the entire size requested, the FLEX Traders in the crowd other
than the Submitting Member would have an opportunity to match or
improve the BBO during a BBO Improvement Interval. At the expiration of
any BBO Improvement Interval, the Submitting Member must promptly
accept or reject the BBO.
If the Submitting Member indicates an Intent to Cross or act as
principal with respect to any part of the trade, acceptance of the
displayed BBO would be automatically delayed until the expiration of
the BBO Improvement Interval. Prior to the BBO Improvement Interval,
the Submitting Member must announce to the crowd the price at which it
expects to trade. In these circumstances, the Submitting Member may
participate with all other FLEX Traders present in the crowd in
attempting to improve or match the BBO during the BBO Improvement
Interval. At the expiration of the BBO Improvement Interval, the
Submitting Member could trade against the BBO or reject it.
If the Submitting Member rejects the BBO after an RFQ Response
Period or BBO Improvement Interval, or the BBO size exceeds the FLEX
transaction size indicated in the RFQ, FLEX Traders present in the
crowd could accept the unfilled balance of the BBO. Such acceptance
must occur by public outcry immediately following the Submitting
Member's rejection of the BBO or any BBO Improvement Interval, or the
Submitting Member's trade that does not exhaust the full size of the
BBO.
The highest bid (lowest offer) would have priority. Among bids
(offers) at the same price, priority generally is as follows: (1) The
crossing participation entitlement, if the Submitting Member has
indicated an Intent to Cross and an entitlement is available in that
class; (2)
[[Page 65779]]
any FLEX Quote subject to a FLEX Appointed Market-Maker participation
entitlement; (3) all other FLEX Quotes, in the sequence in which they
are entered; \20\ and (4) FLEX Orders resting in the Book, based on the
Book priority algorithm. However, if a member is relying on the ``G''
exception to section 11(a) of the Act,\21\ the member's bid (offer)
must yield to any bid (offer) at the same price on the Book and all
other bids (offers) that have priority over the Book. If a Submitting
Member is asserting a crossing participation entitlement on behalf of a
proprietary account of a member relying on the ``G'' exception and a
FLEX Appointed Market-Maker is also asserting a participation
entitlement, the Submitting Member's crossing participation entitlement
combined with any guaranteed participation for FLEX Appointed Market-
Makers shall not exceed 40% of the original order.
---------------------------------------------------------------------------
\20\ If two or more best bids (offers) are submitted in open
outcry at the same time and same price or if the Submitting Member
cannot reasonably determine the sequence in which they were made,
priority would be apportioned equally among those open-outcry bids
(offers). See proposed Rule 24B.5(a)(2)(v)(A)(III) (as modified by
Amendment No. 2).
\21\ 15 U.S.C. 78k(a)(1)(G).
---------------------------------------------------------------------------
The proposed open-outcry RFQ process is similar to the existing
process, with a few distinctions. Under the new System, the Submitting
Member is responsible for announcing the terms and specifications of
the RFQ to the crowd, receiving responsive FLEX Quotes, and at the
conclusion of the RFQ Response Period announcing the BBO to the crowd.
Under the existing process, the FLEX Post Official communicates the RFQ
to the crowd over facilities maintained by the Exchange, responsive
FLEX Quotes may be entered at the post, and the BBO is visibly
displayed at the post and over the network.\22\ The proposed priority
algorithm takes into consideration the Book, which does not exist
currently, and provides that two bids submitted in open outcry at the
same time and same price will be apportioned equally, as compared to
the existing practice of affording priority to FLEX Appointed or
Qualified Market-Makers.\23\
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\22\ Compare proposed Rules 24B.5(a)(2)(i)(B), (ii)(A), and
(ii)(B) to existing Rule 24A.5(a)(ii), (b)(i), and (b)(iii).
\23\ Compare proposed Rules 24B.5(a)(2)(v) and (d) to existing
Rules 24A.5(e) and (f).
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(c) The FLEX Book and FLEX Orders
The Exchange may determine to make a FLEX Book available on a
class-by-class basis. If a Book has been enabled, a Submitting Member
may enter a FLEX Order if it satisfies the applicable minimum value
size requirements and the FLEX Order is in compliance with section
11(a) of the Act. A FLEX Order submitted on behalf of the proprietary
account of a member relying on the ``G'' exception to Section 11(a) may
be entered only to hit the Book and may not rest in the Book.\24\
---------------------------------------------------------------------------
\24\ See proposed Rule 24B.5(b)(2)(ii).
---------------------------------------------------------------------------
FLEX Orders in the Book are ranked and matched based on price/time
priority. However, if a FLEX Appointed Market-Maker is quoting at the
best bid (offer) and a FLEX Appointed Market-Maker participation
entitlement has been established, then priority at the same price is as
follows: (1) Any FLEX Orders for the account of public customer ranked
ahead of the FLEX Appointed Market-Maker; (2) any FLEX Orders subject
to a FLEX Appointed Market-Maker entitlement; and (3) all other FLEX
Orders, based on time priority.\25\
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\25\ See proposed Rule 24B.5(b)(2)(iii).
---------------------------------------------------------------------------
A Submitting Member may not execute as principal against a FLEX
Order on the Book that it represents as agent unless: (1) The
Submitting Member has been bidding or offering for at least the
Crossing Exposure Period before receiving the agency FLEX Order that is
executable against such bid or offer; \26\ or (2) the agency FLEX Order
is first subject to an RFQ and the agency FLEX Order (or any remaining
balance not executed during the RFQ Reaction Period) is exposed on the
System for at least the Crossing Exposure Period.\27\ A Submitting
Member may not execute a solicited order against a FLEX Order that the
Submitting Member is representing as agent unless the agency FLEX Order
is first subject to any RFQ and the agency FLEX Order (or any remaining
balance not executed during the RFQ Reaction Period) is exposed on the
System for at least the Crossing Exposure Period.\28\ The Crossing
Exposure Period referenced in the above provisions will be established
by the appropriate Procedure Committee on a class-by-class basis and
will not be less than three seconds.\29\
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\26\ See proposed Rule 24B.5(b)(3)(i)(B).
\27\ See proposed Rule 24B.5(b)(3)(i)(A) (as modified by
Amendment No. 2).
\38\ See proposed Rule 24B.5(b)(3)(ii) (as modified by Amendment
No. 2).
\26\ See proposed Rule 24B.5(b)(3)(iii) (added by Amendment No.
2).
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(d) Creation of Binding Contracts
Proposed Rule 24B.5(c) provides that acceptance of any bid or offer
creates a binding contract under Rule 6.48. This provision is the same
as in existing Rule 24A.5(d) and applies to both RFQ and Book
transactions.
(e) Guarantees
For FLEX Equity Options, the Exchange's appropriate Procedure
Committee may determine on a class-by-class basis to establish a
crossing participation entitlement for facilitations and/or
solicitations with respect to open-outcry and/or electronic trades. The
entitlement percentage may not exceed 40% of the original order.\30\ If
the Submitting Member matches or improves the BBO or BBO clearing
price, as applicable, the Submitting Member would have priority to
execute the contra-side of the order up to the crossing participation
entitlement percentage. The appropriate Procedure Committee similarly
may determine on a class-by-class basis to establish a crossing
participation entitlement for FLEX Index Options, which may not exceed
40% of the trade. With respect to FLEX Index Options, if the Submitting
Member matches or improves the BBO or BBO clearing price, as
applicable, the Submitting Member would have priority to execute the
contra-side of the order up to the largest of: (1) The crossing
entitlement percentage; (2) a proportional share of the trade; (3) $1
million underlying equivalent value; or (4) the remaining underlying
equivalent value on a closing transactions valued at less than $1
million.\31\
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\30\ See proposed Rule 24B.5(d)(2)(i)(A).
\31\ See proposed Rule 24B.5(d)(2)(i)(B). In the FLEX RFQ System
rules, the crossing participation entitlement for transactions in
FLEX Index Options is currently 20%, and there are similar
provisions for FLEX Index Options that could permit an entitlement
of greater than 40% in certain cases. See existing Rule
24A.5(e)(iii)(B).
---------------------------------------------------------------------------
In the past, the establishment of FLEX Appointed Market-Maker
entitlements were the subject of separate rule filings.\32\ In lieu of
submitting separate rule filings, the Exchange has now proposed to
include specific parameters within the rule text, similar to its rules
respecting crossing participation entitlements and market-maker
participation entitlements for Non-FLEX Options.\33\ Henceforth, the
appropriate Procedure Committee may establish a participation
entitlement for FLEX Appointed Market-Makers on a class-by-class basis
with respect to open-outcry RFQs, electronic RFQs, and/or Book
transactions. Any such entitlement shall: (1) Be divided equally by the
number of FLEX Appointed Market-Makers quoting at the BBO or BBO
[[Page 65780]]
clearing price, as applicable; (2) collectively be no more than: (a)
50% of the remaining order when one other FLEX Market-Maker is quoting
at the same price, (b) 40% when two other FLEX Market-Makers are
quoting at the same price, and (c) 30% when three or more FLEX Market-
Makers are quoting at the same price; and (3) when combined with any
Submitting Member's crossing participation entitlement, shall not
exceed 40% of the size of the original order.\34\ Pronouncements
regarding the applicable participation entitlements must be announced
to the membership via regulatory circular.
---------------------------------------------------------------------------
\32\ See Rule 24A.5(e)(iv); Securities Exchange Act Release No.
45934 (May 15, 2002), 67 FR 36276 (May 23, 2002) (SR-CBOE-2002-09).
\33\ See, e.g., Rule 8.87, Participation Entitlement of DPMs and
e-DPMs (providing for a DPM/e-DPM participation entitlement after
all public customer orders are satisfied).
\34\ See proposed Rule 24B.5(d)(2)(ii).
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(f) Solicited Orders
A Submitting Member trading in open outcry may not cross an order
that he or she is holding with an order that he or she solicited from a
FLEX Market-Maker who is then in the trading crowd, except in
accordance with CBOE Rule 6.55, Multiple Representation Prohibited. A
Submitting Member utilizing the electronic System may not cross an
order that he or she is holding with: (1) a solicited order for a FLEX
Market-Maker's individual or joint account; or (2) a solicited order
initiated by the FLEX Market-Maker for an account in which the FLEX
Market-Maker has an interest, unless the FLEX Market-Maker refrains
from participating on the same trade.\35\
---------------------------------------------------------------------------
\35\ See proposed Rule 24B.5(d)(2)(i)(C).
---------------------------------------------------------------------------
(g) FLEX Standard Minimum Increments
The applicable increments for FLEX Index Options will be identical
to the increments in the existing FLEX rules, which permit decimal bids
and offers in the designated currency that meet or exceed certain
minimum parameters.\36\ For example, the minimum increment in U.S.
dollars is $0.01 (or such other minimum as the appropriate Procedure
Committee may set from time to time to ensure fair and orderly
markets). The applicable increments for FLEX Equity Options will be
determined by the appropriate Procedure Committee on a class-by-class
basis, but may not be smaller than $0.01. This represents a change from
the existing FLEX rules, under which the trading increments applicable
to FLEX Equity Options are the same as those applicable to Non-FLEX
Equity Options (i.e., $0.10 for simple bids and offers in series quoted
at or above $3 a contract, $0.05 for simple bids and offers in series
quoted below $3 a contract, and $0.01 for series quoted in the penny
pilot program \37\).
---------------------------------------------------------------------------
\36\ See existing Rule 24A.5(g) (which is proposed to be
renumbered as Rule 24A.5(f)); proposed Rule 24B.5(e).
\37\ See CBOE Rule 6.42.
---------------------------------------------------------------------------
4. FLEX Market-Maker Appointments and Obligations (Proposed Rule 24B.9)
Under the rules for the new System, the Exchange will appoint two
or more FLEX Qualified Market-Makers to each FLEX Index Option class
and settlement currency, and two or more FLEX Qualified Market-Makers
to each FLEX Equity Option class. In making such appointments and in
taking other action with respect to FLEX Qualified Market-Makers, the
Exchange shall take into account the factors enumerated in, and shall
refer to the requirements of, existing CBOE Rule 8.3, Appointment of
Market-Makers. As a condition to receiving and maintaining a FLEX
Qualified Market-Maker appointment in a FLEX Index Option (FLEX Equity
Option), the FLEX Qualified Market-Maker must maintain an appointment
in one or more Non-FLEX Index Option classes (Non-FLEX Equity Option
classes). The Non-FLEX Option class need not include the FLEX Option
class's underlying index or security.
Notwithstanding the above, the appropriate Market Performance
Committee may determine to solicit applications and appoint: (1) One or
more FLEX Appointed Market-Makers in addition to appointing FLEX
Qualified Market-Makers to such classes; or (2) two or more FLEX
Appointed Market-Makers in lieu of appointed FLEX Qualified Market-
Makers. Thus, under this revised structure applicable to both
platforms, a FLEX Option class could be structured as a FLEX Qualified
Market-Maker-only crowd with at least two participants, a mixed FLEX
Qualified/Appointed Market-Maker crowd with at least three
participants, or a FLEX Appointed Market-Maker-only crowd with at least
two participants.
A FLEX Appointed Market-Maker must provide a FLEX Quote in response
to any open-outcry RFQ in a class of FLEX Options to which it is
appointed and trades in open outcry.\38\ In addition, a FLEX Appointed
Market-Maker must provide FLEX Quotes in response to a designated
percentage of electronic RFQs, such percentage to be determined by the
appropriate Procedure Committee and not less than 80%.\39\ Although a
FLEX Qualified Market-Maker need not enter a FLEX Quote in response to
an RFQ in a class of FLEX Options to which it is appointed,\40\ the
FLEX Qualified Market-Maker (like the FLEX Appointed Market-Maker) must
submit a FLEX Quote if called upon by a FLEX Official, including when
no FLEX Quotes are submitted in response to a specific RFQ.\41\
---------------------------------------------------------------------------
\38\ See proposed Rule 24B.9(c)(i).
\39\ See proposed Rule 24B.4(a)(5)(iv).
\40\ See proposed Rule 24B.9(c).
\41\ See proposed Rule 24B.9(d).
---------------------------------------------------------------------------
5. FLEX Officials (Proposed Rule 24B.14)
Existing FLEX Rule 24A.12 provides that a FLEX Post Official is
responsible for: (1) Reviewing the conformity of RFQs and FLEX Quotes
to the terms and specifications contained in Rule 24A.4; (2) posting
RFQs for dissemination; (3) determining the BBO; (4) ensuring that
contracts are executed in conformance with the priority principles set
forth in Rule 24A.5(e); (5) calling for Indicative FLEX Quotes in
accordance with the requirements of Rule 24A.12(c); and (6) calling
upon FLEX Qualified Market-Makers to provide FLEX Quotes in specific
classes of FLEX Equity Options as provided in Rule 24A.9(c).\42\
---------------------------------------------------------------------------
\42\ See existing Rule 24A.12(b).
---------------------------------------------------------------------------
Proposed Rule 24B.14, FLEX Official, corresponds with existing Rule
24A.12 and describes the functions of a FLEX Official for the new
System. The FLEX Official would continue to be responsible for
reviewing the conformity of open-outcry RFQs to the applicable terms
and specifications in proposed Rule 24B.4. However, because open-outcry
FLEX Quotes will now be provided to the Submitting Member, the FLEX
Official is no longer responsible for reviewing them for conformity to
the applicable terms and specifications or for determining the BBO. In
addition, a FLEX Official may nullify a FLEX transaction, whether
electronic or open-outcry, if he or she determines that it does not
conform to the terms of proposed Rules 24B.4 or 24B.5. As noted above,
a FLEX Official may call upon FLEX Market-Makers, whether Qualified or
Appointed to a given class, to provide FLEX Quotes in certain
circumstances, as provided in proposed Rule 24B.9.
A FLEX Official may be an employee of the Exchange or an
independent contractor. The Exchange may designate other qualified
employees or independent contractors to assist the FLEX Official as the
need arises.\43\
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\43\ See proposed Rule 24B.14(a).
---------------------------------------------------------------------------
6. Position and Exercise Limits
Proposed Rules 24B.7, Position Limits and Reporting Requirements,
and 24B.8, Exercise Limits, are modeled after existing Rules 24A.7 and
24A.8. However, the Exchange is proposing to make certain revisions to
existing Rules
[[Page 65781]]
24A.7 and 24A.8, and to include the same language in proposed Rules
24B.7 and 24B.8, relating to the applicable position and exercise
limits for FLEX Index Options and the aggregation of certain FLEX and
non-FLEX positions. The Exchange has proposed changes to Rule 24A.7 to
conform the language of that rule to reflect changes that were recently
approved by the Commission in a separate proposed rule change.\44\
---------------------------------------------------------------------------
\44\ See Securities Exchange Act Release No. 56350 (September 4
2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-79).
---------------------------------------------------------------------------
In addition, the proposal would amend Rule 24A.7 to establish new
position limits for certain industry-based FLEX Index Option classes:
1. No more than four times the applicable position limits
established pursuant to Rule 24.4A for FLEX Options on: (a) The Dow
Jones Transportation Average or the Dow Jones Utility Average; or (b)
an industry-based index that is not a ``narrow-based security index,''
as defined under Section 3(a)(55)(B) of the Act.\45\
---------------------------------------------------------------------------
\45\ 15 U.S.C. 78c(a)(55)(B).
---------------------------------------------------------------------------
2. For all other industry-based FLEX Index Option classes, no more
than one times the applicable number of Non-FLEX Index Option contracts
(whether long or short) of the put class and the call class on the same
side of the market, as determined on the basis of the position limits
established pursuant to Rule 24.4A, Position Limits for Industry Index
Options.
The proposal also would amend Rule 24A.7 to provide that position
limits for a micro narrow-based FLEX Index Option class shall not
exceed one times the applicable number of Non-FLEX Index Option
contracts (whether long or short) of the put class and the call class
on the same side of the market, as determined on the basis of the
position limits established pursuant to Rule 24.4B, Position Limits for
Options on Micro Narrow-Based Indexes As Defined Under Rule 24.2(d).
Finally, new language to Rule 24A.7 would provide that, except as
otherwise provided, the position limit for a broad-based FLEX Index
Option class may not exceed 200,000 contracts on the same side of the
market. Proposed Rule 24B.7 replicates amended Rule 24A.7 in the rules
applying to the new System.
Both rules would contain new language requiring that positions in
FLEX Options must be aggregated with positions in Non-FLEX Options in
certain circumstances:
QIX Options: Commencing at the close of trading two
business days prior to the last trading day of the calendar, positions
in FLEX Index Options having an exercise settlement value determined by
the level of the index at the close of trading on the last trading day
before expiration shall be aggregated with positions in Quarterly Index
(QIX) Options on the same index with the same expiration and shall be
subject to the position limits set forth in Rule 24.4, 24.4A, or 24.4B,
as applicable.
Weekly Options: Commencing at the close of trading two
business days prior to the last trading day of the week, positions in
FLEX Options that are cash-settled \46\ shall be aggregated with
positions in Short Term Option Series on the same underlying index with
the same means for determining exercise settlement value (e.g., opening
or closing prices of the underlying index) with the same expiration and
shall be subject to the position limits set forth in Rule 24.4, 24.4A,
24.4B or 29.5, as applicable.
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\46\ FLEX Index Options and FLEX Credit Default Options are cash
settled. FLEX Equity Options are settled by physical delivery. See
existing Rules 24A.4(b)(4) and (c)(3) and 29.19; see also proposed
Rules 24B.4(b)(4) and (c)(3).
---------------------------------------------------------------------------
Proposed Rule 24B.8 replicates existing Rule 24A.8 regarding
exercise limits. Both rules generally provide that the exercise limit
for a FLEX Index Option is equivalent to the position limit. Both rules
also set forth certain minimum value size requirements for exercises of
FLEX Equity Options and FLEX Index Options.
In an earlier proposed rule change, CBOE represented that, when it
files a proposed rule change to list and trade a new Non-FLEX Index
Option, it also would propose to list and trade the FLEX Index Options
in the same filing and include proposed position and exercise
limits.\47\ Because the maximum FLEX Index Option position and exercise
limits will now be explicitly set out in Rules 24A.7, 24A.8, 24B.7, and
24B.8, the Exchange seeks to eliminate this earlier commitment.
---------------------------------------------------------------------------
\47\ See Securities Exchange Act Release No. 43108 (August 2,
2000), 65 FR 48770 (August 9, 2000) (SR-CBOE-00-26) (immediately
effective proposal providing for the listing and trading of FLEX
Options on all indices that underlie Non-FLEX Options listed and
traded by the Exchange).
---------------------------------------------------------------------------
7. Financial Requirements
Under the proposal, a FLEX Index Market-Maker may not effect a FLEX
Index Option transaction unless it has demonstrated to the satisfaction
of the Exchange that the net liquidating equity maintained in the FLEX
Appointed Market-Maker's individual or joint accounts with any one
clearing member in which transactions in FLEX Index Options will be
conducted is at least $100,000.\48\ In addition, a FLEX Index Appointed
Market-Maker is required to maintain at least $1 million net
liquidating equity and/or $1 million net capital, as applicable.\49\ A
FLEX Index Appointed Market-Maker or its clearing member must
immediately inform the Exchange whenever the FLEX Index Appointed
Market-Maker fails to be in compliance with any of the above
requirements. FLEX Market-Makers and floor brokers must file letters of
guarantee accepting financial responsibility for all FLEX transactions
they make.\50\ These provisions parallel existing Rules 24A.13, 24A.14,
and 24A.15 that apply to the FLEX RFQ System.
---------------------------------------------------------------------------
\48\ See proposed Rule 24B.11.
\49\ See proposed Rule 24B.12.
\50\ See proposed Rule 24B.13.
---------------------------------------------------------------------------
8. Other Rules for New System
Other rules in proposed Chapter XXIVB are the same as, or closely
modeled after, the existing rules of the FLEX RFQ System. Proposed
Rules 24B.2, Hours of Trading; 24B.3, Trading Rotations; 24B.10,
Related Securities; 24B.15, Nonavailability of RAES; and 24B.16,
Inapplicability of Split Price and Accommodation Liquidation Rules, are
identical to Rules 24A.2, 24A.3, 24A.11, 24A.16, and 24A.17,
respectively. Proposed Rules 24B.6, Discretionary Transactions, and
24B.13, Letter of Guarantee or Authorization are virtually identical to
Rules 24A.6 and 24A.15, respectively, except for non-substantive
grammatical changes. Proposed Rules 24B.11, FLEX Index Appointed
Market-Maker Account Equity, and 24B.12, FLEX Index Appointed Market-
Maker Financial Requirements, are virtually identical to Rules 24A.13
and 24A.14, respectively, except that revisions are being made to
clarify that these rules apply only to FLEX Appointed Market-Makers in
FLEX Index Options.\51\
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\51\ The special account equity and financial requirements under
existing Rules 24A.13 and 24A.14 apply only to FLEX Appointed
Market-Makers, who currently are appointed only to FLEX Index Option
classes and currently are subject to certain heightened minimum
value size requirements under Rule 24A.4(a)(4)(iv). Given the
proposed changes to the FLEX Market-Maker appointments discussed
above, which would allow for the appointment of a FLEX Equity
Appointed Market-Maker, proposed Rules 24B.11 and 24B.12 make clear
that these special account equity and financial requirements would
apply only to FLEX Appointed Market-Makers in FLEX Index Options
(who would continue to be subject to the heightened minimum value
size requirements under proposed Rule 24B.4(a)(5)(iv)) and not FLEX
Appointed Market-Makers in FLEX Equity Options (who would not be
subject to heightened minimum value size requirements). The Exchange
has proposed corresponding changes to existing Rules 24A.13 and
24A.14.
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[[Page 65782]]
B. Changes to Existing FLEX Rules
The Exchange is proposing various changes to the existing FLEX
rules to conform them to the corresponding new System rules. In
addition, the term ``Indicative FLEX Quote'' in Rule 24A.1 and a
related reference in Rule 24A.12 are being deleted. Indicative FLEX
Quotes are non-binding indications of the market that were periodically
supplied by FLEX Market-Makers and displayed on the FLEX communication
network. This functionality is no longer utilized, so these references
in Rules 24A.1 and 24A.12 are being deleted.
The Exchange is also proposing to increase the crossing
participation entitlement percentage available on the FLEX RFQ System.
Currently, the Submitting Member may obtain a crossing participation
entitlement of 25% of the incoming order for a FLEX Equity Option or
20% of the incoming order for a FLEX Index Option.\52\ Under the
proposal, the appropriate Procedure Committee could determine on a
class-by-class basis whether to establish a crossing participation
entitlement for facilitations and/or solicitations and the applicable
crossing participation entitlement percentage, which may not exceed 40%
of the incoming order.\53\ These revisions would make the crossing
participation entitlements equivalent on the FLEX RFQ System and the
FLEX Hybrid Trading System.
---------------------------------------------------------------------------
\52\ See Rule 24A.5(e)(iii)(A)-(B). Other existing provisions
could allow the Submitting Member to receive in excess of 20% of an
incoming order for a FLEX Index Option. See Rule 24A.5(e)(iii)(B).
\53\ See proposed Rule 24A.5(e)(iii)(A)-(B).
---------------------------------------------------------------------------
C. Other Changes to CBOE Rules
The Exchange is proposing to allow sponsored access to the new
System. Under proposed Rule 6.20A, a CBOE member (``Sponsoring
Member'') may provide a non-member (``Sponsored User'') with electronic
access to the System. The proposed rule outlines the requirements that
Sponsored Users and Sponsoring Members are required to meet prior to
engaging in a sponsorship arrangement. A Sponsored User may be a
person, such as an institutional investor, who has entered into a
sponsorship arrangement with a Sponsoring Member for purposes of
entering orders on the System. This would include entering and
responding to electronic RFQs and entering FLEX Orders into the Book. A
Sponsored User may utilize the System only if authorized in advance by
one or more Sponsoring Members in accordance with the provisions of
proposed Rule 6.20A.
D. Amendment Nos. 2 and 3
In Amendment No. 2, the Exchange made the following changes to the
proposal:
In proposed Rule 24B.5(a)(1), modifying the procedures
that apply during the electronic RFQ Reaction Period to: (i) Permit
FLEX Quotes and FLEX Orders to be entered, modified, or canceled during
the RFQ Reaction Period; (ii) increase the maximum RFQ Reaction Period
from the proposed 30 seconds to five minutes; (iii) provide that, if
the Submitting Member enters a FLEX Quote during the RFQ Reaction
Period, the Submitting Member must be bidding (offering) for at least
the Crossing Exposure Period prior to entering an RFQ Order; and (iv)
provide that the RFQ Market is dynamically updated during both the RFQ
Response and RFQ Reaction Periods;
Also in proposed Rule 24B.5(a)(2), modifying the open-
outcry priority provisions to clarify the Exchange's original intent
that, after the application of any participation entitlements, all
other FLEX Quotes submitted in response to an open-outcry RFQ have
priority based on the sequence in which those FLEX Quotes are made in
open outcry and, to the extent two or more best bid (offer) FLEX Quotes
are submitted in open outcry at the same time and same price (or the
Submitting Member cannot reasonably determine the sequence), priority
will be apportioned equally;
In proposed Rule 24B.5(b), modifying the Book crossing
provisions to clarify the Exchange's original intent that an agency
FLEX Order must first be subject to an RFQ and the agency FLEX Order
(or any remaining balance not executed during the RFQ Reaction Period)
must also be exposed on the System for at least the Crossing Exposure
Period prior to entering a contra-side principal or solicitation order
that is executable against the agency FLEX Order. Previously, the
proposed rule text had simply indicated that the agency FLEX Order must
first be subject to an RFQ;
Updating the text of Rules 24A.7 and 24A.8, as well as
proposed Rules 24B.7 and 24B.8, to reflect unrelated changes that have
been approved in a separate rule filing \54\ and to make certain non-
substantive corrections;
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\54\ See Securities Exchange Act Release No. 56350 (September 4,
2007), 72 FR 51878 (September 11, 2007) (SR-CBOE-2007-79).
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Inserting corresponding changes to the discussion sections
of the Form 19b-4 and the Exhibit 1 Federal Register notice to reflect
the above-noted changes;
Providing information regarding its plans respecting
dissemination of FLEX data via the Options Price Reporting Authority
(``OPRA''). Specifically, with respect to price reporting, the Exchange
currently plans to continue disseminating via OPRA information
regarding executed FLEX transactions. However, the Exchange currently
does not plan to disseminate via OPRA information respecting pending
electronic and open-outcry RFQs or information on resting orders in the
Book; and
Submitting as part of Exhibit 5 the text of the Sponsored
User Agreement form that the Exchange proposes to use in connection
with proposed Rule 6.20A.
In Amendment No. 3, the Exchange made the following changes to the
proposal:
Revising the text of Rule 24B.1(u), RFQ Reaction Period,
to reflect that during this time a Submitting Member determines whether
to accept or reject the RFQ Market, which consists of both FLEX Quotes
and FLEX Orders; and
Correcting the text of proposed Rule 24B.5(a)(2)(iii) that
was submitted as part of Amendment No. 2.
III. Discussion
After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\55\ In particular, the Commission finds that the
proposal is consistent with section 6(b)(5) of the Act,\56\ which
requires that the rules of an exchange be designed, among other things,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market,
and, in general, to protect investors and the public interest. The
Commission also finds that the proposal is consistent with section
11A(a)(1)(C) of the Act,\57\ which sets forth Congress's findings that
it is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure,
among other things, economically efficient execution of securities
transactions; fair competition among brokers and dealers, among
exchange markets, and between exchange markets and markets other than
exchange markets; and the
[[Page 65783]]
practicability of brokers executing investors' orders in the best
market. The Commission generally believes that an exchange furthers
these principles when developing products and trading functionality
that compete with the over-the-counter markets. This order approves the
amended proposal in its entirety, although only certain aspects of the
proposed rule change are discussed below.
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\55\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\56\ 15 U.S.C. 78f(b)(5).
\57\ 15 U.S.C. 78k-1(a)(1)(C).
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A. Execution Algorithm and Priority and Allocation Rules
1. Electronic Trading
The Commission believes that the priority and allocation rules for
electronic trading on the new System are reasonable and consistent with
the Act. These rules generally provide for allocation pursuant to
price/time priority, with some allowance for market-maker and crossing
participation guarantees. The proposed guarantees appear reasonably
designed to balance incentives for providing liquidity in the FLEX
market (in the case of the market-maker entitlement) and for bringing
trades to the Exchange (in the case of the crossing participation
entitlement) with incentives for all other market participants to quote
competitively.
The Commission also believes that the priority and allocation rules
for electronic FLEX trading are consistent with section 11(a) of the
Act.\58\ The Commission believes, however, that neither a Submitting
Member who trades against an electronic RFQ Market nor any other FLEX
Trader who itself submits an RFQ Quote electronically qualifies for the
``effect-versus-execute'' exception to section 11(a).\59\ Nevertheless,
the Commission believes that other exceptions may apply. FLEX Market-
Makers qualify for the market-maker exception. With respect to non-
market-maker members, the new System appears reasonably designed to
cause RFQ Quotes constituting the RFQ Market and the RFQ Order that
trades against the RFQ Market to yield to non-member interest,
consistent with the ``G'' exception.\60\
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\58\ 15 U.S.C. 78k(a). Section 11(a)(1) prohibits a member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person,
or an account over which it or its associated person exercises
discretion unless an exception applies.
\59\ 17 CFR 240.11a2-2(T).
\60\ See 15 U.S.C. 78k(a)(1)(G) (setting forth all requirements
for the ``G'' exception).
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2. Open-Outcry Trading on New System
The Commission believes that the priority and allocation rules for
open-outcry trading on the new System are reasonable and consistent
with the Act. These provisions are generally modeled on the priority
and allocation rules of the existing FLEX RFQ System, which were
previously found by the Commission to be consistent with the Act.\61\
There is one significant difference, however, the addition of an
electronic Book. Generally, an order resting on the Book will be filled
only after all FLEX Quotes submitted in open outcry, even if the order
was booked before the RFQ began and any oral responses to the RFQ were
submitted.\62\ The Commission generally believes that displayed limit
orders of public customers must be able to compete freely and openly
for executions on an equitable basis. However, with a highly customized
product such as FLEX Options, there are likely to be few booked orders.
Therefore, solely with respect to the FLEX Hybrid Trading System, the
Commission believes at the present time that it is appropriate to
approve CBOE's proposal to allow FLEX Quotes submitted in response to
an open-outcry RFQ to have priority over same priced bids (offers) on
the Book.\63\ The Commission also notes that an open-outcry FLEX Quote
must yield to the Book and all other bids (offers) that have priority
over the Book if the member entering the FLEX Quote is relying on the
``G'' exception to Section 11(a) of the Act.\64\
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\61\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993) SR-CBOE-92-17).
\62\ See proposed Rule 24B.5(a)(2)(v)(A).
\63\ If circumstances change and the FLEX Book becomes
frequently used, the Commission may revisit this issue.
\64\ See proposed Rule 24B.5(a)(2)(v)(B).
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3. Orders on the Book
If the Exchange enables an electronic Book in a FLEX Option class,
any transaction involving a booked order must comply with section 11(a)
of the Act. If a FLEX Trader cannot avail itself of any other
exception, it must rely on the ``G'' exception, which requires, among
other things, that a member order yield to a non-member order at the
same price, even if the member order has time priority. The new System
has not been programmed to cause a member order on the Book to yield to
a later-arriving non-member order at the same price, although proposed
Rule 24B.5(b)(2)(ii) prohibits a member order that is relying on the
``G'' exemption from resting on the Book. The Commission believes that
a member may rely on the ``G'' exception if it sends an order to the
Book and then cancels it immediately if it is not executed in full.
4. Changes to Allocation Rules of FLEX RFQ System
CBOE has proposed certain changes to its allocation rules under the
existing FLEX RFQ System. Under the proposal, a FLEX Appointed Market-
Maker will have priority over a FLEX Qualified Market-Maker when the
two submit orders at the same time and same price. The Commission
believes that this is consistent with the Act in light of the greater
quoting obligations of the FLEX Appointed Market-Maker. CBOE also is
proposing to increase the percentages of an incoming order that can be
reserved for a crossing guarantee or FLEX Appointed Market-Maker
participation entitlement.\65\ These percentages appear reasonably
designed to balance incentives for providing liquidity with incentives
for all other market participants to quote competitively.
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\65\ See proposed Rule 24A.5(e)(iii)-(iv).
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5. Best Execution
The proposed rules do not explicitly require an RFQ Trader to trade
against an RFQ Market. The Commission reminds RFQ Traders that the duty
of best execution requires them to assess the quality of competing
markets to ensure that a customer order is directed to the market
providing the most advantageous terms for the customer. If a Submitting
Member declines to trade a customer order against an RFQ Market and
subsequently facilitates the customer order at a price inferior to the
RFQ Market, there would be a presumption that the Submitting Member did
not fulfill its best execution obligation.
B. Market-Maker Benefits and Obligations
The Commission believes that the balance of benefits and
obligations of FLEX Market-Makers under the rules for the new System is
consistent with the Act. A FLEX Appointed Market-Maker must provide a
FLEX Quote in response to any open-outcry RFQ in a class of FLEX
Options to which it is appointed and trading in open outcry.\66\ In
addition, the FLEX Appointed Market-Maker must provide FLEX Quotes in
response to a designated percentage of electronic RFQs, such percentage
to be determined by the appropriate Procedure Committee and not less
than 80%.\67\ Although a FLEX Qualified Market-Maker need not enter a
FLEX Quote in response to an RFQ in its assigned class,\68\ the FLEX
Qualified
[[Page 65784]]
Market-Maker (like the FLEX Appointed Market-Maker) must submit a FLEX
Quote if called upon by a FLEX Official, including when no FLEX Quotes
are submitted in response to a specific RFQ.\69\ FLEX Appointed Market-
Makers may be awarded a participation entitlement, noted above. Both
FLEX Market-Makers qualify for the market-maker exception to section
11(a) of the Act.
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\66\ See proposed Rule 24B.9(c)(i).
\67\ See proposed Rule 24B.4(a)(5)(iv).
\68\ See proposed Rule 24B.9(c).
\69\ See proposed Rule 24B.9(d).
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C. Position and Exercise Limits
The Commission believes that the proposed position and exercise
limits in FLEX Options are reasonable and consistent with the Act. They
appear reasonably designed to prevent a member from establishing an
imprudent position in FLEX Options. Moreover, the Commission believes
that these rules are reasonably designed to prevent a FLEX Trader from
using FLEX Options to evade the position limits applicable to
comparable Non-FLEX Options. In view of the explicit standards for
position and exercise limits set forth in Rules 24A.7, 24A.8, 24B.7,
and 24B.8, the Commission believes it is reasonable to relieve the
Exchange of the obligation to propose new position and exercise limits
for FLEX Options whenever it lists and trades a comparable non-FLEX
product.
D. Sponsored Access
The Commission believes that the proposed sponsored access
provisions are reasonable and consistent with the Act. The Commission
notes that these provisions are substantially similar to those of
another exchange, which previously were approved by the Commission.\70\
The Exchange has proposed to offer sponsored access only to the new
FLEX Hybrid Trading System, not to open-outcry FLEX trading or to other
Exchange trading facilities. If the Exchange in the future would seek
to offer sponsored access to its other trading facilities, it would
have to file a proposed rule change pursuant to section 19(b) of the
Act.
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\70\ See NYSE Arca Equities Rule 7.29; Securities Exchange Act
Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(SR-PCX-00-25) (approving proposal to establish Archipelago Exchange
as the equities trading facility of the Pacific Exchange).
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E. Acceleration
The Commission finds good cause for approving the proposal, as
modified by Amendment Nos. 2 and 3, prior to the thirtieth day after
the date of publication of notice of the amended proposal in the
Federal Register. Amendment Nos. 2 and 3 made only minor changes to the
overall proposal, which was subject to a notice-an
