Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, Requesting Permanent Approval of Two Pilot Programs That Increase Position and Exercise Limits, 10076-10080 [E8-3432]
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10076
Federal Register / Vol. 73, No. 37 / Monday, February 25, 2008 / Notices
instructions relating to the exercise or
nonexercise of a noncash-settled equity
option. The Exchange believes that
increasing the fine levels specified with
respect to both individual members and
member organizations and lengthening
the surveillance period from a 12-month
period to a rolling 24-month period will
serve as an effective deterrent to such
violative conduct.6
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.7 In particular, the
Commission believes that the proposal
is consistent with Section 6(b)(5) of the
Act,8 which requires that the rules of an
exchange be designed to promote just
and equitable principles of trade, to
facilitate transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission further
believes that the Exchange’s proposal to
increase the fine levels imposed on
individuals and member organizations
who fail to submit Advice Cancel or
exercise instructions in a timely manner
is consistent with Sections 6(b)(1) and
6(b)(6) of the Act,9 which require that
the rules of an exchange enforce
compliance with, and provide
appropriate discipline for, violations of
Commission and Exchange rules. In
addition, the Commission finds that the
proposal is consistent with the public
interest, the protection of investors, or
otherwise in furtherance of the purposes
of the Act, as required by Rule 19d–
1(c)(2) under the Act,10 which governs
minor rule violation plans. The
Commission believes that the proposed
rule change should strengthen the
Exchange’s ability to carry out its
oversight and enforcement
responsibilities as an SRO in cases
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6 In
addition, as a member of the Intermarket
Surveillance Group, the Exchange, as well as
certain other self-regulatory organizations (‘‘SROs’’),
executed and filed on October 29, 2007 with the
Commission, a final version of an Agreement
pursuant to Section 17(d) of the Act (the ‘‘17d–2
Agreement’’). As set forth in the 17d–2 Agreement,
the SROs have agreed that their respective rules
concerning the filing of Expiring Exercise
Declarations, also referred to as Contrary Exercise
Advices, are common rules. As a result, the
proposal to amend the MRVP will result in further
consistency in sanctions among the SROs that are
signatories to the 17d–2 Agreement concerning
Contrary Exercise Advice violations.
7 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
8 15 U.S.C. 78f(b)(5).
9 15 U.S.C. 78f(b)(1) and 78f(b)(6).
10 17 CFR 240.19d–1(c)(2).
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14:34 Feb 22, 2008
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where full disciplinary proceedings are
unsuitable in view of the minor nature
of the particular violation.
In approving this proposed rule
change, the Commission in no way
minimizes the importance of
compliance with the Exchange’s rules
and all other rules subject to the
imposition of fines under the MRVP.
The Commission believes that the
violation of any SRO rules, as well as
Commission rules, is a serious matter.
However, the MRVP provides a
reasonable means of addressing rule
violations that do not rise to the level of
requiring formal disciplinary
proceedings, while providing greater
flexibility in handling certain violations.
The Commission expects that the
Exchange would continue to conduct
surveillance with due diligence and
make a determination based on its
findings, on a case-by-case basis,
whether a fine of more or less than the
recommended amount is appropriate for
a violation under the MRVP or whether
a violation requires formal disciplinary
action.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 11 and Rule
19d–1(c)(2) under the Act,12 that the
proposed rule change (SR–BSE–2007–
54), as modified by Amendment No. 2,
e, and hereby is, approved and declared
effective.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–3444 Filed 2–22–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57352; File No. SR–CBOE–
2008–07]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Order Granting Accelerated Approval
of Proposed Rule Change, as Modified
by Amendment No. 1, Requesting
Permanent Approval of Two Pilot
Programs That Increase Position and
Exercise Limits
February 19, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
11 15
U.S.C. 78s(b)(2).
CFR 240.19d–1(c)(2).
13 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(44).
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
6, 2008, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by the Exchange.
The Exchange filed Amendment No. 1
to the proposed rule change on February
13, 2008. This order provides notice of
the proposed rule change as modified by
Amendment No. 1 and approves the
proposed rule change as amended on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange requests permanent
approval of two pilot programs that
increase position and exercise limits for
equity options. The Exchange proposes
to amend Rule 4.11, Position Limits, and
Rule 4.12, Exercise Limits, to
permanently establish the increased
limits of the two pilot programs. The
text of the proposed rule change is
available at CBOE, the Commission’s
Public Reference Room, and https://
www.cboe.org/legal.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to request permanent approval
of two pilot programs that increase
position and exercise limits for equity
options. The Exchange proposes to
amend Rule 4.11, Position Limits, and
Rule 4.12, Exercise Limits, to
permanently establish the increased
limits of the two pilot programs. Rule
4.11 subjects equity options to one of
12 17
PO 00000
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1 15
2 17
E:\FR\FM\25FEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19–4.
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Federal Register / Vol. 73, No. 37 / Monday, February 25, 2008 / Notices
five different position limits depending
on the trading volume and outstanding
shares of the underlying security. Rule
4.12 establishes exercise limits for
equity options at the same levels as the
applicable position limits.3
The first pilot program, the ‘‘Rule 4.11
Pilot Program,’’ commenced on
February 23, 2005, and provides for an
increase to the standard (or ‘‘non-pilot’’)
position and exercise limits for equity
option contracts and for options on the
PowerShares QQQ Trust (‘‘QQQQ’’).4
Specifically, the Rule 4.11 Pilot Program
increases the applicable position and
exercise limits for equity options and
QQQQ options as follows:
Standard equity option contract limit
Pilot Program equity option contract limit
13,500
22,500
31,500
60,000
75,000
25,000
50,000
75,000
200,000
250,000
Standard QQQQ option contract limit
Pilot Program QQQQ option contract limit
5 300,000
900,000
Violations; (ii) accounts near 10% of
pilots’ position limits; (iii) account
positions and pilots’ limits vs. standard
limits; and (iv) exemptions granted.
The 5 second pilot program, the
‘‘iShares Russell 2000 Index Fund
(‘IWM’) Option Pilot Program,’’
commenced on January 22, 2007, and
increases the position and exercise
limits for IWM options from 250,000
contracts to 500,000 contracts.6
(i) Violations
a. Standard Position and Exercise Limits
The standard position limits were last
increased nine years ago, on December
31, 1998.7 Since that time, there has
been a steady increase in the number of
accounts that: (a) Approach the position
limit; (b) exceed the position limits; and
(c) are granted an exemption to the
applicable position limit. To illustrate
CBOE’s position on this matter, CBOE’s
Division of Market Regulation
conducted a review of four incident
categories involving position limits: (i)
During the period of January 1, 2007
through January 1, 2008, when both
pilot programs were in effect, the
Exchange opened a total of 19 reviews
regarding equity option position and
exercise limits at the pilot levels, which
led to findings of 7 violations. To the
best of the staff’s knowledge, all of these
violations were deemed inadvertent—
due primarily to miscounting, technical
problems, or a misinterpretation of
position limit calculation
methodologies. None of these violations
were deemed to be a result of
manipulative activities.
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25,000 ................................................................................................
50,000 ................................................................................................
75,000 ................................................................................................
250,000 ..............................................................................................
300,000 ..............................................................................................
500,000 ..............................................................................................
3 Rule 4.12 states, ‘‘no member shall exercise, for
any account in which it has an interest or for the
account of any customer, a long position in any
option contract where such member or customer,
acting alone or in concert with others, directly or
indirectly, * * * has or will have exercised within
any five consecutive business days aggregate long
positions in any class of options dealth in on the
Exchange in excess’’ of the established limits set by
the Exchange.
4 The Rule 4.11 Pilot Program was approved by
the Commission on February 23, 2005. See
Securities Exchange Act Release No. 51244
(February 23, 2005), 70 FR 10010 (March 1, 2005)
(order approving SR–CBOE–2003–30, as amended)
(‘‘Pilot Program Order’’). The Rule 4.11 Pilot
Program has been extended 5 times for 6 month
periods by the Commission, and expires on March
1, 2008. See Securities Exchange Act Release No.
52262 (August 15, 2005), 70 FR 48995 (August 22,
2005) (SR–CBOE–2005–61), Securities Exchange
Act Release No. 53348 (February 22, 2006), 71 FR
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18:00 Feb 22, 2008
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0
0
1
6
1
0
10574 (March 1, 2006) (SR–CBOE–2006–11),
Securities Exchange Act Release No. 54336 (August
18, 2006), 71 FR 50952 (August 28, 2006) (SR–
CBOE–2006–69), Securities Exchange Act Release
No. 55266 (February 9, 2007), 72 FR 7698 (February
16, 2007) (SR–CBOE–2007–12), and Securities
Exchange Act Release No. 56266 (August 15, 2007),
72 FR 47094 (August 22, 2007) (SR–CBOE–2007–
97).
In connection with the March 21, 2007 transfer
of sponsorship of the Nasdaq-100 Trust, the name
of the trust was changed to the ‘‘PowerShares QQQ
Trust.’’ See QQQQ prospectus available at https://
www.powershares.com/pdf/P-QQQ-PRO-1.pdf.
5 The standard position and exercise limits for
QQQQ options are 300,000 contracts. See Securities
Exchange Act Release No. 45309 (January 18, 2002),
67 FR 3757 (January 25, 2002) (SR–CBOE–2001–44).
The standard position and exercise limits for
options on DIA and SPY are also 300,000 contracts.
See Securities Exchange Act Releases Nos. 47346
(February 11, 2003), 68 FR 8316 (February 20, 2003)
PO 00000
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The Exchange utilizes a heightened
surveillance technique to identify
different types of accounts that are
within 10% of the pilot position limit
tiers. As of December 20, 2007,
Exchange staff identified 36 accounts
that were within 10% of the pilot
position limit tiers. As illustrated below,
the majority of the accounts were firm/
market-maker accounts involving the
250,000 contract pilot position limit
tier. The Exchange believes that
members and large customers (e.g.,
mutual funds, hedge funds, and pension
funds) are utilizing the higher limits in
their portfolios and transactions with
the confidence that they will not exceed
the limits.
Firm/marketmaker 10%
LOPR 8 10%
Pilot position limit tier
(ii) Accounts Near 10% of Pilots’
Position Limits
LOPR 10% in
concert
0
0
0
10
7
1
LOPR/aggregated
open interest 10% 9
0
0
0
0
1
0
1
0
0
4
1
0
(SR–CBOE–2002–26), 51041 (January 14, 2005), 70
FR 3408 (January 24, 2005) (SR–CBOE–2005–06).
6 The IWM Option Pilot Program doubles the
position and exercise limits for IWM options under
the Rule 4.11 Pilot Program. Absent both of these
pilot programs, the standard position and exercise
limit for IWM options is 75,000 option contracts.
The proposal that established the IWM Option
Pilot Program was designated by the Commission to
be effective and operative upon filing. See
Securities Exchange Act Release No. 55176 (January
25, 2007), 72 FR 4741 (February 1, 2007) (SR–
CBOE–2007–08). The IWM Option Pilot Program
has been extended twice by the Commission and
expires on March 1, 2008. See Securities Exchange
Act Release No. 55926 (June 20, 2007), 72 FR 35275
(June 27, 2007) (SR–CBOE–2007–61); Securities
Exchange Act Release No. 57141, 73 FR 3496
(January 18, 2008) (SR–CBOE–2007–147).
7 See Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(SR–CBOE–98–25).
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Firm/marketmaker 10%
LOPR 8 10%
Pilot position limit tier
LOPR 10% in
concert
LOPR/aggregated
open interest 10% 9
900,000 ..............................................................................................
0
3
0
0
Total Accts ..................................................................................
8
21
1
6
(iii) Account Positions and Pilots’
Limits vs. Standard Limits
Exchange staff examined
approximately 160 member/firm
accounts and approximately 754
customer accounts, as of December
2007, and compared the current contract
quantities to: (a) the Rule 4.11 and IWM
Option Pilot Programs’ position limits;
and (b) the standard equity position
limits. Without the increased position
limits provided for by the Rule 4.11 and
IWM Option Pilot Programs, virtually
all of the customer accounts would be
in violation of the standard position
limits. The same, however, cannot be
said of the member/firm accounts, as
those accounts may utilize exemptions
not available to customers. As a result,
a significant amount of customers
would be disadvantaged if the pilot
programs’ position limits levels are not
made permanent.
(iv) Exemptions
Exchange staff examined position
limit exemptions to the pilot position
limit tiers as of December 20, 2007, and
observed that among the various options
exchanges, 53 exemptions to positions
limits under the pilot position limit tiers
were granted in equity option classes,
the majority of which occurred in the
250,000 and 300,000 pilot tier levels.10
In addition, seven exemptions to the
position limit pilot tier of 500,000
contracts were granted in the IWM
options class, which has a standard
position limit of 75,000 contracts.
b. Growth in Options Market
Since the last position limit increase,
there has been an exponential increase
in the overall volume of exchange
traded options. The below chart
demonstrates the growth in options
trading industry-wide between 1999 and
2007.
8 Large
Options Position Report (‘‘LOPR’’).
LOPR/Aggregated Open Interest 10% report
aggregates positions of affiliated accounts (i.e.,
those that clear in the customer range with those
that clear in the firm proprietary and/or marketmaker range), and reflects same side of the market
positions that are within 10% of the applicable
pilot position limit tiers.
10 As to the 53 exemptions, the majority were
granted prior to December 2007 and subsequently
renewed.
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9 The
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18:00 Feb 22, 2008
Jkt 214001
Annual industry options
trading volume
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
...................
...................
...................
...................
...................
...................
...................
...................
...................
508,000,000 contracts.
727,000,000 contracts.
782,000,000 contracts.
780,000,000 contracts.
908,000,000 contracts.
1,182,000,000 contracts.
1,504,000,000 contracts.
2,028,000,000 contracts.
2,863,000,000 contracts.
Part of this volume is attributable to
a corresponding increase in the number
of overall market participants. This
growth in market participants has in
turn brought about additional depth and
increased liquidity in exchange traded
options.
c. Manipulation
Since the last position limit increase,
and throughout the duration of the two
pilot programs, the Exchange has not
encountered any regulatory issues
regarding the applicable position limits,
and states there is a lack of evidence of
market manipulation schemes, which
justifies the proposed permanent
approval of the Rule 4.11 and IWM
Option Pilot Programs.
The Exchange believes that position
and exercise limits, at the non-pilot
levels, no longer serve their stated
purpose. The Commission has
previously stated:
Since the inception of standardized
options trading, the options exchanges have
had rules imposing limits on the aggregate
number of options contracts that a member
or customer could hold or exercise. These
rules are intended to prevent the
establishment of options positions that can
be used or might create incentives to
manipulate or disrupt the underlying market
so as to benefit the options position. In
particular, position and exercise limits are
designed to minimize the potential for minimanipulations and for corners or squeezes of
the underlying market. In addition, such
limits serve to reduce the possibility for
disruption of the options market itself,
especially in illiquid options classes.11
As the anniversary of listed options
trading approaches its 35th year, the
Exchange believes that the existing
surveillance procedures and reporting
requirements at CBOE, at other options
exchanges, and at the several clearing
11 See Securities Exchange Act Release No. 39489
(December 24, 1997), 63 FR 276 (January 5, 1998)
(SR–CBOE–97–11).
PO 00000
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firms are capable of properly identifying
unusual and/or illegal trading activity.
In addition, routine oversight
inspections of CBOE’s regulatory
programs by the Commission have not
uncovered any material inconsistencies
or shortcomings in the manner in which
the Exchange’s market surveillance is
conducted relating to position and
exercise limits. These procedures
include daily monitoring of market
movements via automated surveillance
techniques to identify unusual activities
in both options and underlying stocks
and Exchange Traded Funds (‘‘ETFs’’).
Furthermore, large stock holdings
must be disclosed to the Commission by
way of Schedules 13D and 13G. Options
positions are part of any reportable
positions, and thus cannot be legally
hidden. The Exchange also requires that
member organizations file reports with
the Exchange for any customer who
holds aggregate long or short positions
on the same side of the market of 200
or more option contracts of any single
class for the previous day.12 In addition,
the Exchange requires that firms and
market-makers report their positions,
and the Exchange has access, via The
Options Clearing Corporation (‘‘OCC’’),
to daily data with respect to these
options positions. Finally, in granting
firms’ requests for exemptions or
disaggregation within firm positions,
CBOE and the other options markets
require enhanced reporting-either
directly to the granting exchange or
through LOPR, as applicable. In sum,
these reporting requirements will
continue to serve as an important part
of the Exchange’s surveillance efforts.
Accordingly, the Exchange represents
that its surveillance procedures (which
have been significantly enhanced since
the last position limit increase) and
reporting procedures, in conjunction
with the financial requirements and risk
management review procedures already
in place at the clearing firms and the
OCC, will serve to adequately address
any concerns the Commission may have
with respect to account(s) engaging in
any manipulative schemes or assuming
too high a level of risk exposure.
d. Financial Requirements
The Exchange believes that the
current financial requirements imposed
12 See
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Rule 4.13(a).
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by the Exchange and by the Commission
adequately address concerns that a
member or its customer may try to
maintain an inordinately large
unhedged position in an equity option.
Current margin and risk-based haircut
methodologies serve to limit the size of
positions maintained by one account by
increasing margin and/or capital that a
member must maintain for a large
position held by itself or by its
customer. The Exchange also notes that
it has the authority under Rule 12.3(h)
and Rule 12.10 to impose higher margin
requirements upon a member or
member organization when the
Exchange determines that higher
requirements are required. Also, the
Commission’s net capital rule imposes a
capital charge on members to the extent
any margin deficiency results from the
higher margin requirement.13
e. Inability To Compete; Retreat to OTC
Market
The Exchange has no reason to
believe that the current trading volume
in equity options will not continue.
Rather, the Exchange expects continued
options volume growth as opportunities
for investors to participate in the
options markets increase and evolve.
The Exchange believes that the nonpilot position and exercise limits are
restrictive, and returning to those limits
will hamper fair and effective
competition between the listed options
markets and the over-the-counter
(‘‘OTC’’) markets. In fact, the
Commission highlighted competition
with the OTC markets as a reason for
increasing the standard position and
exercise limits in 1998.14 Specifically,
the Commission stated:
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The increase in position and exercise
limits for standardized equity options should
allow the Exchanges to better compete with
the growing OTC market in customized
equity options, thereby encouraging fair
competition among brokers and exchange
markets.15
In addition, the Exchange believes
that without permanently establishing
the position and exercise limits set forth
in the pilot programs, large customers,
such as mutual funds, hedge funds and
pension funds, will find the standard
equity position limits an impediment to
their business and investment
objectives. As such, market participants
may find the less-transparent OTC
markets a more attractive alternative to
achieve their investment and hedging
13 See
17 CFR 240.15c3–1.
Securities Exchange Act Release No. 40875
(December 31, 1998), 64 FR 1842 (January 12, 1999)
(SR–CBOE–98–25).
15 Id.
14 See
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14:34 Feb 22, 2008
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objectives, leading to a retreat from the
listed options markets, where trades are
subject to reporting requirements and
daily surveillance.
f. No Adverse Consequences From Past
Increases
Equity option position limits have
been gradually expanded from 1,000
contracts in 1973 to the current level of
75,000 contracts for the largest and most
actively traded equity options. To date,
there have been no adverse affects on
the markets as a result of these past
increases in the limits for equity option
contracts.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the requirements provided under
Section 6(b)(5) of the Act,16 which state
in part that the rules of an exchange
must be designed to promote just and
equitable principles of trade, to prevent
fraudulent and manipulative acts, and,
in general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange neither solicited nor
received comments on the proposal.
III. 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
Number SR–CBOE–2008–07 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.
16 15
PO 00000
U.S.C. 78f(b)(5).
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10079
All submissions should refer to File
Number SR-CBOE–2008–07. 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 offices 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–CBOE–2008–07 and should
be submitted on or before March 17,
2008.
IV. Commission’s Findings and Order
Granting Accelerated Approval of the
Proposed Rule Change
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.17 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 18 in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission believes that the
proposal to permanently establish the
increased position and exercise limits of
the Rule 4.11 Pilot Program and the
17 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
18 15 U.S.C. 78f(b)(5).
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10080
Federal Register / Vol. 73, No. 37 / Monday, February 25, 2008 / Notices
IWM Option Pilot Program is consistent
with the Act. As the Commission
previously has noted, rules regarding
position and exercise limits are
intended to prevent the establishment of
options positions that can be used or
might create incentives to manipulate or
disrupt the underlying market so as to
benefit the options position. In
particular, position and exercise limits
are designed to minimize the potential
for mini-manipulations and for corners
or squeezes of the underlying market. In
addition, such limits serve to reduce the
possibility for disruption of the options
market itself, especially in illiquid
options classes.19
The Exchange has represented that,
over the recent history of steadily
increasing position and exercise limits,
it has detected no adverse consequences
and has received no complaints relating
to their position and exercise limits or
the Rule 4.11 and IWM Option Pilot
Programs. According to the Exchange, it
has not encountered any regulatory
issues regarding the position limits
subject to the two pilot programs or any
instances of manipulation. Moreover,
the Exchange pointed to the very
significant increase in the overall
volume of exchange-traded options
since 1999. This growth in trading
volume and number of market
participants has brought additional
depth and increased liquidity in
exchange-traded options and thereby
has lessened concerns about the
potential for disruptions in the options
markets that may occur through
increased position and exercise limits.
The Commission expects the
Exchange to continue to monitor for
violations of the position and exercise
limits with the purpose of discovering
and sanctioning fraudulent or
manipulative acts and practices, and to
reassess the position and exercise limits,
if and when appropriate, in light of its
findings. Finally, the Commission notes
that in approving the proposed rule
change, it has relied upon the
Exchange’s representation that its
surveillance procedures and reporting
requirements, discussed above, will
continue to monitor for manipulative
schemes or too high a level of risk
exposure.
In light of the foregoing, the
Commission believes that the current
position and exercise limits under the
two pilot programs represent an
appropriate balance between the
Exchange’s desire to accommodate
market participants by offering higher
position and exercise limits, particularly
in light of the marked increase in the
volume of exchange-traded options in
recent years, and the need to provide
checks on potential market
manipulation, imprudent assumption of
risk (e.g., entering into large unhedged
positions), and other potential trading
abuses.
The Commission finds good cause for
approving the proposed rule change
before the 30th day after the date of
publication of notice of filing in the
Federal Register. The Commission notes
that the Rule 4.11 Pilot Program and the
IWM Option Pilot Program both expire
on March 1, 2008. The Commission
believes accelerated approval of the
proposed rule change is appropriate in
order to maintain uninterrupted
position and exercise limit levels.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,20 that the
proposed rule change (SR–CBOE–2008–
07), as modified by Amendment No. 1,
be, and it hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–3432 Filed 2–22–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57347; File No. SR–
NASDAQ–2007–100]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change to
Nasdaq Rule 7033 To Modify the Fees
Charged for the Mutual Fund Quotation
Service and To Correct Certain Errors
in the Rule Manual
February 19, 2008.
On December 19, 2007, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’) 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 to modify the fees charged for
the Mutual Fund Quotation Service and
to correct certain errors in the rule
manual. The proposed rule change was
published for comment in the Federal
20 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.
21 17
19 See Securities Exchange Act Release No. 39489,
supra note 11.
VerDate Aug<31>2005
14:34 Feb 22, 2008
Jkt 214001
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
Register on January 14, 2008.3 The
Commission received no comments
regarding the proposal.
The Commission has carefully
reviewed the proposed rule change and
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange 4 and, in particular,
Section 6(b)(4) of the Act,5 which
requires that Nasdaq’s rules provide for
the equitable allocation of reasonable
dues, fees, and other charges among its
members and issuers and other persons
using its facilities. Nasdaq proposes to
amend Rule 7033 to include subsection
(e), which provides for the assessment
of a monthly fee on distributors of the
Mutual Fund Quotation Service. When
Nasdaq began operating as a national
securities exchange in 2006, it adopted
as its own rules numerous rules of the
National Association of Securities
Dealers, Inc. (‘‘NASD’’). Due to the
omission of this subsection from the
NASD manual, however, Nasdaq failed
to include this subsection in its manual.
The Commission believes that it is
appropriate for Nasdaq to amend Rule
7033 to include subsection (e), as this
corrects an omission in Nasdaq’s rules.
Nasdaq requested that the change be
approved retroactive to August 1, 2006,
the date Nasdaq began operating as an
exchange. Nasdaq also proposes to
modify the fees for the News Media and
Supplemental Lists to reflect the
similarity of effort in providing these
services, effective retroactively to
January 1, 2008. The Commission
believes that it is reasonable to modify
the prices charged for the News Media
and Supplemental Lists to reflect the
increased services provided by Nasdaq
in connection with the Supplemental
List, and a uniformity of effort in
providing both services.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NASDAQ–
2007–100) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–3430 Filed 2–22–08; 8:45 am]
BILLING CODE 8011–01–P
3 See Securities Exchange Act Release No. 57105
(January 4, 2008), 73 FR 2296.
4 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
5 15 U.S.C. 78f(b)(4).
6 17 CFR 200.30–3(a)(12).
E:\FR\FM\25FEN1.SGM
25FEN1
]]>Agencies
[Federal Register Volume 73, Number 37 (Monday, February 25, 2008)]
[Notices]
[Pages 10076-10080]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-3432]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57352; File No. SR-CBOE-2008-07]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
of Proposed Rule Change, as Modified by Amendment No. 1, Requesting
Permanent Approval of Two Pilot Programs That Increase Position and
Exercise Limits
February 19, 2008.
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 February 6, 2008, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
the Exchange. The Exchange filed Amendment No. 1 to the proposed rule
change on February 13, 2008. This order provides notice of the proposed
rule change as modified by Amendment No. 1 and approves the proposed
rule change as amended on an accelerated basis.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange requests permanent approval of two pilot programs that
increase position and exercise limits for equity options. The Exchange
proposes to amend Rule 4.11, Position Limits, and Rule 4.12, Exercise
Limits, to permanently establish the increased limits of the two pilot
programs. The text of the proposed rule change is available at CBOE,
the Commission's Public Reference Room, and https://www.cboe.org/legal.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19-4.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to request permanent
approval of two pilot programs that increase position and exercise
limits for equity options. The Exchange proposes to amend Rule 4.11,
Position Limits, and Rule 4.12, Exercise Limits, to permanently
establish the increased limits of the two pilot programs. Rule 4.11
subjects equity options to one of
[[Page 10077]]
five different position limits depending on the trading volume and
outstanding shares of the underlying security. Rule 4.12 establishes
exercise limits for equity options at the same levels as the applicable
position limits.\3\
---------------------------------------------------------------------------
\3\ Rule 4.12 states, ``no member shall exercise, for any
account in which it has an interest or for the account of any
customer, a long position in any option contract where such member
or customer, acting alone or in concert with others, directly or
indirectly, * * * has or will have exercised within any five
consecutive business days aggregate long positions in any class of
options dealth in on the Exchange in excess'' of the established
limits set by the Exchange.
---------------------------------------------------------------------------
The first pilot program, the ``Rule 4.11 Pilot Program,'' commenced
on February 23, 2005, and provides for an increase to the standard (or
``non-pilot'') position and exercise limits for equity option contracts
and for options on the PowerShares QQQ Trust (``QQQQ'').\4\
Specifically, the Rule 4.11 Pilot Program increases the applicable
position and exercise limits for equity options and QQQQ options as
follows:
---------------------------------------------------------------------------
\4\ The Rule 4.11 Pilot Program was approved by the Commission
on February 23, 2005. See Securities Exchange Act Release No. 51244
(February 23, 2005), 70 FR 10010 (March 1, 2005) (order approving
SR-CBOE-2003-30, as amended) (``Pilot Program Order''). The Rule
4.11 Pilot Program has been extended 5 times for 6 month periods by
the Commission, and expires on March 1, 2008. See Securities
Exchange Act Release No. 52262 (August 15, 2005), 70 FR 48995
(August 22, 2005) (SR-CBOE-2005-61), Securities Exchange Act Release
No. 53348 (February 22, 2006), 71 FR 10574 (March 1, 2006) (SR-CBOE-
2006-11), Securities Exchange Act Release No. 54336 (August 18,
2006), 71 FR 50952 (August 28, 2006) (SR-CBOE-2006-69), Securities
Exchange Act Release No. 55266 (February 9, 2007), 72 FR 7698
(February 16, 2007) (SR-CBOE-2007-12), and Securities Exchange Act
Release No. 56266 (August 15, 2007), 72 FR 47094 (August 22, 2007)
(SR-CBOE-2007-97).
In connection with the March 21, 2007 transfer of sponsorship of
the Nasdaq-100 Trust, the name of the trust was changed to the
``PowerShares QQQ Trust.'' See QQQQ prospectus available at https://
www.powershares.com/pdf/P-QQQ-PRO-1.pdf.
------------------------------------------------------------------------
Standard equity option contract Pilot Program equity option
limit contract limit
------------------------------------------------------------------------
13,500 25,000
22,500 50,000
31,500 75,000
60,000 200,000
75,000 250,000
------------------------------------------------------------------------
Standard QQQQ option contract limit Pilot Program QQQQ option contract
limit
------------------------------------------------------------------------
\5\ 300,000 900,000
------------------------------------------------------------------------
The \5\ second pilot program, the ``iShares Russell 2000 Index Fund
(`IWM') Option Pilot Program,'' commenced on January 22, 2007, and
increases the position and exercise limits for IWM options from 250,000
contracts to 500,000 contracts.\6\
---------------------------------------------------------------------------
\5\ The standard position and exercise limits for QQQQ options
are 300,000 contracts. See Securities Exchange Act Release No. 45309
(January 18, 2002), 67 FR 3757 (January 25, 2002) (SR-CBOE-2001-44).
The standard position and exercise limits for options on DIA and SPY
are also 300,000 contracts. See Securities Exchange Act Releases
Nos. 47346 (February 11, 2003), 68 FR 8316 (February 20, 2003) (SR-
CBOE-2002-26), 51041 (January 14, 2005), 70 FR 3408 (January 24,
2005) (SR-CBOE-2005-06).
\6\ The IWM Option Pilot Program doubles the position and
exercise limits for IWM options under the Rule 4.11 Pilot Program.
Absent both of these pilot programs, the standard position and
exercise limit for IWM options is 75,000 option contracts.
The proposal that established the IWM Option Pilot Program was
designated by the Commission to be effective and operative upon
filing. See Securities Exchange Act Release No. 55176 (January 25,
2007), 72 FR 4741 (February 1, 2007) (SR-CBOE-2007-08). The IWM
Option Pilot Program has been extended twice by the Commission and
expires on March 1, 2008. See Securities Exchange Act Release No.
55926 (June 20, 2007), 72 FR 35275 (June 27, 2007) (SR-CBOE-2007-
61); Securities Exchange Act Release No. 57141, 73 FR 3496 (January
18, 2008) (SR-CBOE-2007-147).
---------------------------------------------------------------------------
a. Standard Position and Exercise Limits
The standard position limits were last increased nine years ago, on
December 31, 1998.\7\ Since that time, there has been a steady increase
in the number of accounts that: (a) Approach the position limit; (b)
exceed the position limits; and (c) are granted an exemption to the
applicable position limit. To illustrate CBOE's position on this
matter, CBOE's Division of Market Regulation conducted a review of four
incident categories involving position limits: (i) Violations; (ii)
accounts near 10% of pilots' position limits; (iii) account positions
and pilots' limits vs. standard limits; and (iv) exemptions granted.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25).
---------------------------------------------------------------------------
(i) Violations
During the period of January 1, 2007 through January 1, 2008, when
both pilot programs were in effect, the Exchange opened a total of 19
reviews regarding equity option position and exercise limits at the
pilot levels, which led to findings of 7 violations. To the best of the
staff's knowledge, all of these violations were deemed inadvertent--due
primarily to miscounting, technical problems, or a misinterpretation of
position limit calculation methodologies. None of these violations were
deemed to be a result of manipulative activities.
(ii) Accounts Near 10% of Pilots' Position Limits
The Exchange utilizes a heightened surveillance technique to
identify different types of accounts that are within 10% of the pilot
position limit tiers. As of December 20, 2007, Exchange staff
identified 36 accounts that were within 10% of the pilot position limit
tiers. As illustrated below, the majority of the accounts were firm/
market-maker accounts involving the 250,000 contract pilot position
limit tier. The Exchange believes that members and large customers
(e.g., mutual funds, hedge funds, and pension funds) are utilizing the
higher limits in their portfolios and transactions with the confidence
that they will not exceed the limits.
----------------------------------------------------------------------------------------------------------------
LOPR/aggregated
Pilot position limit tier LOPR \8\ 10% Firm/market- LOPR 10% in open interest 10%
maker 10% concert \9\
----------------------------------------------------------------------------------------------------------------
25,000................................... 0 0 0 1
50,000................................... 0 0 0 0
75,000................................... 1 0 0 0
250,000.................................. 6 10 0 4
300,000.................................. 1 7 1 1
500,000.................................. 0 1 0 0
[[Page 10078]]
900,000.................................. 0 3 0 0
----------------------------------------------------------------------
Total Accts.......................... 8 21 1 6
----------------------------------------------------------------------------------------------------------------
(iii) Account Positions and Pilots' Limits vs. Standard Limits
Exchange staff examined approximately 160 member/firm accounts and
approximately 754 customer accounts, as of December 2007, and compared
the current contract quantities to: (a) the Rule 4.11 and IWM Option
Pilot Programs' position limits; and (b) the standard equity position
limits. Without the increased position limits provided for by the Rule
4.11 and IWM Option Pilot Programs, virtually all of the customer
accounts would be in violation of the standard position limits. The
same, however, cannot be said of the member/firm accounts, as those
accounts may utilize exemptions not available to customers. As a
result, a significant amount of customers would be disadvantaged if the
pilot programs' position limits levels are not made permanent.
---------------------------------------------------------------------------
\8\ Large Options Position Report (``LOPR'').
\9\ The LOPR/Aggregated Open Interest 10% report aggregates
positions of affiliated accounts (i.e., those that clear in the
customer range with those that clear in the firm proprietary and/or
market-maker range), and reflects same side of the market positions
that are within 10% of the applicable pilot position limit tiers.
---------------------------------------------------------------------------
(iv) Exemptions
Exchange staff examined position limit exemptions to the pilot
position limit tiers as of December 20, 2007, and observed that among
the various options exchanges, 53 exemptions to positions limits under
the pilot position limit tiers were granted in equity option classes,
the majority of which occurred in the 250,000 and 300,000 pilot tier
levels.\10\ In addition, seven exemptions to the position limit pilot
tier of 500,000 contracts were granted in the IWM options class, which
has a standard position limit of 75,000 contracts.
---------------------------------------------------------------------------
\10\ As to the 53 exemptions, the majority were granted prior to
December 2007 and subsequently renewed.
---------------------------------------------------------------------------
b. Growth in Options Market
Since the last position limit increase, there has been an
exponential increase in the overall volume of exchange traded options.
The below chart demonstrates the growth in options trading industry-
wide between 1999 and 2007.
------------------------------------------------------------------------
Annual industry options trading
Year volume
------------------------------------------------------------------------
1999.............................. 508,000,000 contracts.
2000.............................. 727,000,000 contracts.
2001.............................. 782,000,000 contracts.
2002.............................. 780,000,000 contracts.
2003.............................. 908,000,000 contracts.
2004.............................. 1,182,000,000 contracts.
2005.............................. 1,504,000,000 contracts.
2006.............................. 2,028,000,000 contracts.
2007.............................. 2,863,000,000 contracts.
------------------------------------------------------------------------
Part of this volume is attributable to a corresponding increase in
the number of overall market participants. This growth in market
participants has in turn brought about additional depth and increased
liquidity in exchange traded options.
c. Manipulation
Since the last position limit increase, and throughout the duration
of the two pilot programs, the Exchange has not encountered any
regulatory issues regarding the applicable position limits, and states
there is a lack of evidence of market manipulation schemes, which
justifies the proposed permanent approval of the Rule 4.11 and IWM
Option Pilot Programs.
The Exchange believes that position and exercise limits, at the
non-pilot levels, no longer serve their stated purpose. The Commission
has previously stated:
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.
These rules are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate
or disrupt the underlying market so as to benefit the options
position. In particular, position and exercise limits are designed
to minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market. In addition, such limits serve to
reduce the possibility for disruption of the options market itself,
especially in illiquid options classes.\11\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-97-11).
As the anniversary of listed options trading approaches its 35th
year, the Exchange believes that the existing surveillance procedures
and reporting requirements at CBOE, at other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of CBOE's regulatory programs by the Commission have not
uncovered any material inconsistencies or shortcomings in the manner in
which the Exchange's market surveillance is conducted relating to
position and exercise limits. These procedures include daily monitoring
of market movements via automated surveillance techniques to identify
unusual activities in both options and underlying stocks and Exchange
Traded Funds (``ETFs'').
Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D and 13G. Options positions are part
of any reportable positions, and thus cannot be legally hidden. The
Exchange also requires that member organizations file reports with the
Exchange for any customer who holds aggregate long or short positions
on the same side of the market of 200 or more option contracts of any
single class for the previous day.\12\ In addition, the Exchange
requires that firms and market-makers report their positions, and the
Exchange has access, via The Options Clearing Corporation (``OCC''), to
daily data with respect to these options positions. Finally, in
granting firms' requests for exemptions or disaggregation within firm
positions, CBOE and the other options markets require enhanced
reporting-either directly to the granting exchange or through LOPR, as
applicable. In sum, these reporting requirements will continue to serve
as an important part of the Exchange's surveillance efforts.
---------------------------------------------------------------------------
\12\ See Rule 4.13(a).
---------------------------------------------------------------------------
Accordingly, the Exchange represents that its surveillance
procedures (which have been significantly enhanced since the last
position limit increase) and reporting procedures, in conjunction with
the financial requirements and risk management review procedures
already in place at the clearing firms and the OCC, will serve to
adequately address any concerns the Commission may have with respect to
account(s) engaging in any manipulative schemes or assuming too high a
level of risk exposure.
d. Financial Requirements
The Exchange believes that the current financial requirements
imposed
[[Page 10079]]
by the Exchange and by the Commission adequately address concerns that
a member or its customer may try to maintain an inordinately large
unhedged position in an equity option. Current margin and risk-based
haircut methodologies serve to limit the size of positions maintained
by one account by increasing margin and/or capital that a member must
maintain for a large position held by itself or by its customer. The
Exchange also notes that it has the authority under Rule 12.3(h) and
Rule 12.10 to impose higher margin requirements upon a member or member
organization when the Exchange determines that higher requirements are
required. Also, the Commission's net capital rule imposes a capital
charge on members to the extent any margin deficiency results from the
higher margin requirement.\13\
---------------------------------------------------------------------------
\13\ See 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
e. Inability To Compete; Retreat to OTC Market
The Exchange has no reason to believe that the current trading
volume in equity options will not continue. Rather, the Exchange
expects continued options volume growth as opportunities for investors
to participate in the options markets increase and evolve. The Exchange
believes that the non-pilot position and exercise limits are
restrictive, and returning to those limits will hamper fair and
effective competition between the listed options markets and the over-
the-counter (``OTC'') markets. In fact, the Commission highlighted
competition with the OTC markets as a reason for increasing the
standard position and exercise limits in 1998.\14\ Specifically, the
Commission stated:
---------------------------------------------------------------------------
\14\ See Securities Exchange Act Release No. 40875 (December 31,
1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25).
The increase in position and exercise limits for standardized
equity options should allow the Exchanges to better compete with the
growing OTC market in customized equity options, thereby encouraging
fair competition among brokers and exchange markets.\15\
---------------------------------------------------------------------------
\15\ Id.
In addition, the Exchange believes that without permanently
establishing the position and exercise limits set forth in the pilot
programs, large customers, such as mutual funds, hedge funds and
pension funds, will find the standard equity position limits an
impediment to their business and investment objectives. As such, market
participants may find the less-transparent OTC markets a more
attractive alternative to achieve their investment and hedging
objectives, leading to a retreat from the listed options markets, where
trades are subject to reporting requirements and daily surveillance.
f. No Adverse Consequences From Past Increases
Equity option position limits have been gradually expanded from
1,000 contracts in 1973 to the current level of 75,000 contracts for
the largest and most actively traded equity options. To date, there
have been no adverse affects on the markets as a result of these past
increases in the limits for equity option contracts.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements provided under Section 6(b)(5) of the Act,\16\
which state in part that the rules of an exchange must be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange neither solicited nor received comments on the
proposal.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CBOE-2008-07 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-2008-07. 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 offices 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-CBOE-2008-07 and should be
submitted on or before March 17, 2008.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\17\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \18\ in that
it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\17\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes that the proposal to permanently establish
the increased position and exercise limits of the Rule 4.11 Pilot
Program and the
[[Page 10080]]
IWM Option Pilot Program is consistent with the Act. As the Commission
previously has noted, rules regarding position and exercise limits are
intended to prevent the establishment of options positions that can be
used or might create incentives to manipulate or disrupt the underlying
market so as to benefit the options position. In particular, position
and exercise limits are designed to minimize the potential for mini-
manipulations and for corners or squeezes of the underlying market. In
addition, such limits serve to reduce the possibility for disruption of
the options market itself, especially in illiquid options classes.\19\
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 39489, supra note
11.
---------------------------------------------------------------------------
The Exchange has represented that, over the recent history of
steadily increasing position and exercise limits, it has detected no
adverse consequences and has received no complaints relating to their
position and exercise limits or the Rule 4.11 and IWM Option Pilot
Programs. According to the Exchange, it has not encountered any
regulatory issues regarding the position limits subject to the two
pilot programs or any instances of manipulation. Moreover, the Exchange
pointed to the very significant increase in the overall volume of
exchange-traded options since 1999. This growth in trading volume and
number of market participants has brought additional depth and
increased liquidity in exchange-traded options and thereby has lessened
concerns about the potential for disruptions in the options markets
that may occur through increased position and exercise limits.
The Commission expects the Exchange to continue to monitor for
violations of the position and exercise limits with the purpose of
discovering and sanctioning fraudulent or manipulative acts and
practices, and to reassess the position and exercise limits, if and
when appropriate, in light of its findings. Finally, the Commission
notes that in approving the proposed rule change, it has relied upon
the Exchange's representation that its surveillance procedures and
reporting requirements, discussed above, will continue to monitor for
manipulative schemes or too high a level of risk exposure.
In light of the foregoing, the Commission believes that the current
position and exercise limits under the two pilot programs represent an
appropriate balance between the Exchange's desire to accommodate market
participants by offering higher position and exercise limits,
particularly in light of the marked increase in the volume of exchange-
traded options in recent years, and the need to provide checks on
potential market manipulation, imprudent assumption of risk (e.g.,
entering into large unhedged positions), and other potential trading
abuses.
The Commission finds good cause for approving the proposed rule
change before the 30th day after the date of publication of notice of
filing in the Federal Register. The Commission notes that the Rule 4.11
Pilot Program and the IWM Option Pilot Program both expire on March 1,
2008. The Commission believes accelerated approval of the proposed rule
change is appropriate in order to maintain uninterrupted position and
exercise limit levels.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-CBOE-2008-07), as modified
by Amendment No. 1, be, and it hereby is, approved on an accelerated
basis.
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\20\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3432 Filed 2-22-08; 8:45 am]
BILLING CODE 8011-01-P
