Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to FLEX Options Expirations, 76075-76078 [E8-29556]

Download as PDF Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Notices Partner will send a report to each person who was a Fund Investor at any time during the fiscal year then ended, setting forth such tax information as shall be necessary for the preparation by the Fund Investor of his federal and state income tax returns and a report of the investment activities of the Fund during such year. 6. Each Fund will maintain and preserve, for the life of each such Fund and at least six years thereafter, such accounts, books, and other documents as constitute the record forming the basis for the financial statements and annual reports of such Fund to be provided to its Fund Investors, and agree that all such records will be subject to examination by the Commission and its staff. All such records will be maintained in an easily accessible place for at least the first two years. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Florence E. Harmon, Acting Secretary. [FR Doc. E8–29560 Filed 12–12–08; 8:45 am] under the Commission’s interactive data voluntary program without being required to submit other financial information. Item 4: The Commission will consider whether to adopt amendments that would define terms related to annuity contracts under the Securities Act of 1933, and whether to adopt amendments related to periodic reporting requirements under the Securities Exchange Act of 1934. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551–5400. Dated: December 10, 2008. Florence E. Harmon, Acting Secretary. [FR Doc. E8–29683 Filed 12–12–08; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–59060; File No. SR–CBOE– 2008–115] SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Related to FLEX Options Expirations pwalker on PROD1PC71 with NOTICES Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94–409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, December 17, 2008 at 10 a.m., in the Auditorium, Room L–002. The subject matter of the Open Meeting will be: Item 1: The Commission will consider whether to approve the 2009 budget of the Public Company Accounting Oversight Board and will consider the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002. Item 2: The Commission will consider whether to adopt amendments to provide for companies’ financial statement information to be filed with the Commission in interactive data format, according to a specified phasein schedule. Item 3: The Commission will consider whether to adopt amendments to provide for mutual fund risk/return summary information to be filed with the Commission in interactive data format. The Commission will also consider whether to adopt amendments to permit investment companies to submit portfolio holdings information VerDate Aug<31>2005 20:00 Dec 12, 2008 Jkt 217001 proposed rule change is available on the Exchange’s Web site (http:// www.cboe.org/Legal), CBOE, and at the Commission. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change, and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION BILLING CODE 8011–01–P Sunshine Act Meeting 76075 December 5, 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 November 19, 2008, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules regarding permissible expiration dates for Flexible Exchange Options (‘‘FLEX Options’’).3 The text of the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 FLEX Options provide investors with the ability to customize basic option features including size, expiration date, exercise style, and certain exercise prices. FLEX Options can be FLEX Index Options 2 17 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 The purpose of the filing is to modify the permissible expiration dates for FLEX Options. These options are governed by Exchange Chapters XXIVA and XXIVB. Under current CBOE Rules 24A.4 and 24B.4, FLEX Options may not expire on any business day that falls on, or within two business days of, a third Friday-of-the-month expiration day for any Non-FLEX Option (an ‘‘Expiration Friday’’).4 However, subject to certain aggregation requirements for cash settled options, the current FLEX Rules do permit the expiration of FLEX Options on the same day that Non-FLEX or FLEX Equity Options. FLEX Index Options are index options that are subject to the FLEX rules in Chapters XXIVA or XXIVB of the CBOE Rules. FLEX Index Options Series may be approved and open for trading on any index that has been approved for Non-FLEX Options trading or for warrant trading on the Exchange. FLEX Equity Options are options on specified equity securities that are subject to the FLEX rules in Chapters XXIVA or XXIVB of the CBOE Rules. FLEX Equity Options may be on underlying securities that have been approved by the Exchange in accordance with CBOE Rule 5.3, which includes but is not limited to stock options and exchange-traded fund options. In addition, other products are permitted to be traded pursuant to the FLEX trading procedures. For example, credit options are eligible for trading as FLEX Options pursuant to the FLEX rules in Chapters XXIVA and XXIVB. See CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and (c)(1), 24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.19. 4 For example, under the current rule, a FLEX option could expire on the Tuesday before Expiration Friday, but could not expire on the Wednesday or Thursday before Expiration Friday. Similarly, a FLEX option could expire on the Wednesday after Expiration Friday, but could not expire on the Monday or Tuesday after Expiration Friday. This restriction is hereinafter referred to as the ‘‘three business day’’ expiration restriction. E:\FR\FM\15DEN1.SGM 15DEN1 76076 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Notices pwalker on PROD1PC71 with NOTICES quarterly index options (‘‘QIX’’) and Non-FLEX Weeklys Options expire.5 The Exchange is now proposing to eliminate the expiration date restriction so that FLEX Options may expire on any business day. Although the expiration date restrictions would be eliminated, the Exchange notes that certain position limit and reporting requirements will continue to apply. FLEX Index Options overlying all industry indexes, all micro narrow-based indexes, and certain broad-based indexes remain subject to position limits under CBOE Rules 24A.7 and 24B.7. FLEX Index Options on certain other broad-based indexes (specifically the BXM, DJX, NDX, OEX, RUT, SPX, VIX, VXD, VXN, XEO, CBOE S&P 500 Three-Month Realized Variance and S&P 500 Three-Month Realized Volatility), and FLEX Equity Options are not subject to position limits but remain subject to reporting requirements under CBOE Rules 24A.7 and 24B.7. Additionally, all FLEX options remain subject to the position reporting requirements of CBOE Rule 4.13(a).6 Moreover, the Exchange and member organizations each have the authority, pursuant to CBOE Rule 12.10, 5 Rules 24A.7(d) and 24B.7(d) provide that: (1) Commencing at the close of trading two business days prior to the last trading day of the calendar quarter, positions in P.M. Settled FLEX Index Options (i.e., 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 Options on the same index with the same expiration (‘‘comparable QIX options’’) and shall be subject to the position limits set forth in Rule 24.4, 24.4A or 24.4B, as applicable. (2) 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 (i.e., FLEX Index Options or Credit Default Options) shall be aggregated with positions in Short Term Option Series on the same underlying (e.g., same underlying index as a FLEX Index Option) with the same means for determining exercise settlement value (e.g., opening or closing prices of the underlying index) and same expiration (‘‘comparable Weekly options’’) and shall be subject to the position limits set forth in Rule 24.4, 24.4A, 24.4B or 29.5, as applicable. 6 CBOE Rule 4.13(a) provides that ‘‘[i]n a manner and form prescribed by the Exchange, each member shall report to the Exchange, the name, address, and social security or tax identification number of any customer who, acting alone, or in concert with others, on the previous business day maintained aggregate long or short positions on the same side of the market of 200 or more contracts of any single class of option contracts dealt in on the Exchange. The report shall indicate for each such class of options, the number of option contracts comprising each such position and, in the case of short positions, whether covered or uncovered.’’ For purposes of this Rule, the term ‘‘customer’’ in respect of any member includes ‘‘the member, any general or special partner of the member, any officer or director of the member, or any participant, as such, in any joint, group or syndicate account with the member or with any partner, officer or director thereof.’’ CBOE Rule 4.13(d). VerDate Aug<31>2005 20:00 Dec 12, 2008 Jkt 217001 to impose additional margin as deemed advisable. Beyond the above-described position limit and reporting requirements, for FLEX Options that expire on Expiration Friday, the proposed rule change includes an aggregation requirement under CBOE Rules 24A.7 and 24B.7 for position limit purposes. Specifically, for as long as the options positions remain open, positions in FLEX Options that expire on Expiration Friday shall be aggregated with positions in Non-FLEX Options on the same underlying (e.g., the same underlying security in the case of a FLEX Equity Option and the same underlying index in the case of a FLEX Index Option) (referred to as ‘‘comparable Non-FLEX Options’’). Such FLEX Options and comparable Non-FLEX Options would be subject to the position limits that are applicable to the Non-FLEX Options.7 The aggregation requirement would apply to both cash and physically settled options. In addition, in the case of FLEX Index Options only, the proposed rule change provides that FLEX Index Options expiring on or within two business days of an Expiration Friday may not have an exercise settlement value on the expiration date determined by reference to the closing price of the index.8 These limitations on exercise settlement value calculations are intended to serve as a safeguard against potential adverse effects that might be associated with triple witching.9 Once approved, the 7 Thus, as soon as a FLEX Option position that expires on Expiration Friday is opened and as long as that position remains open, it would be subject to the position limit aggregation requirement at the position limits that are applicable to Non-FLEX Options. By comparison, the position limit aggregation requirement for FLEX Index Options that expire on the same date as Non-FLEX QIX or Weekly Options only applies as of the close of trading two business days prior to the last trading day of the calendar quarter or week, as applicable. See note 5, supra; see also CBOE Rules 4.11, Position Limits (which contains position limits for Non-FLEX Equity Options); 24.4, Position Limits for Broad-Based Index Options; 24.4A, Position Limits for Industry Index Options; 24.4B, Position Limits for Options on Micro Narrow-Based Indexes as Defined Under Rule 24.2(d); and 29.5, Position Limits (which contains position limits for Credit Options). 8 A closing exercise settlement value (also referred to as a ‘‘p.m. settlement’’) is determined by reference to the reported level of the index as derived from the closing prices of the component securities. See CBOE Rules 24A.4(b)(2) and 24B.4(b)(2). 9 The expiration of the contracts for stock index futures, stock index options, and stock options all expire on the same days occurring on the third Friday of March, June, September, and December (which is referred to as ‘‘triple witching’’). The Exchange’s proposed limitations on p.m. settlements would apply during triple witching expirations, as well as on all other Expiration Fridays. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 Exchange intends to evaluate the continued need for maintaining this safeguard and may consider proposing changes through a separate rule change filing. In conjunction with the elimination of the expiration date restriction, the proposed rule change also states that, provided the options on an underlying security or index are otherwise eligible for FLEX trading, FLEX Options will be permitted in puts and calls that do not have the same exercise style, same expiration date and same exercise price as Non-FLEX Options that are already available for trading on the same underlying security or index. The proposed rule change also provides that FLEX Options will be permitted before (but not after) the options are listed for trading as Non-FLEX Options. Once and if an option series is listed for trading as a Non-FLEX Option series, (i) all existing open positions established under the FLEX trading procedures shall be fully fungible with transactions in the respective Non-FLEX Option series, and (ii) any further trading in the series would be as Non-FLEX options subject to the Non-FLEX trading procedures and rules. For example, a FLEX Trader could establish a FLEX Option position in a European-style, am-settled SPX 1650 Call option series with an expiration of Aug 16, 2013 (which would be an Expiration Friday). In such an instance, once and if the Non-FLEX, Europeanstyle, am-settled SPX 1650 Call option series that expires on August 16, 2013 is listed for trading, the established FLEX Option position would be fully fungible with transactions in the NonFLEX Option series. Any further trading in the series would be as Non-FLEX Options subject to the Non-FLEX trading procedures. CBOE believes that expanding the eligible dates for FLEX expirations is important and necessary to the Exchange’s efforts to create a product and market that provides members and investors interested in FLEX-type options with an improved but comparable alternative to the over-thecounter (‘‘OTC’’) market in customized options, which can take on contract characteristics similar to FLEX Options but are not subject to the same restrictions (such as the three business day expiration restriction or the p.m. settlement restriction). By expanding the eligible expiration dates for FLEX Options, market participants will now have greater flexibility in determining whether to execute their customized options in an exchange environment or in the OTC market. CBOE believes market participants benefit from being E:\FR\FM\15DEN1.SGM 15DEN1 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Notices pwalker on PROD1PC71 with NOTICES able to trade these customized options in an exchange environment in several ways, including, but not limited to the following: (1) Enhanced efficiency in initiating and closing out positions; (2) increased market transparency; and (3) heightened contra-party creditworthiness due to the role of The Options Clearing Corporation (‘‘OCC’’) as issuer and guarantor of FLEX Options. CBOE also believes this change is consistent and more competitive with the existing practice for trading flexstyle options on futures exchanges.10 CBOE notes that when the FLEX Option rules were initially proposed and approved almost sixteen years ago, the Exchange was uncertain what market impacts, if any, excessive FLEX positions would have on the market or on firms.11 To minimize the risk of adverse market effects, at the time the FLEX rules were first introduced the Exchange put in place certain position limit boundaries (which have been modified over time) and the requirement that the FLEX expiration date be no closer than three business days from any Non-FLEX Option Expiration Friday. However, in light of the Exchange’s experience in trading FLEX Options to date, specifically with respect to the diversity in FLEX Option trading, the relatively small percentage FLEX Options trading compared to overall trading on the Exchange, and the lack of market disruptions or problems caused by or on existing FLEX Option 10 For example, expiration dates for Chicago Mercantile Exchange (‘‘CME’’) flex options may be specified for any exchange business day up to and including the day of determination of the final settlement price of the underlying futures contract. In addition, CME flex options are permitted in puts and calls that do not have the same underlying futures contract, same strike price, same exercise style, and same expiration date as standard listed options that are already available for trading. Trading in standard options under certain flexible trading procedures is permitted prior to the listing of such standard options. Once and if the standard options are listed, all existing open positions established under the flexible trading procedures are fully fungible with transactions in the standard option series, and any further trading in the series is as standard options subject to the standard option trading procedures. See, e.g., CME Rules 351A.31A and 357A.31A, and CME Equity Futures and Options 2007 Information Guide at pages 46–47, located at http://www.cme.com/files/ EquityIndexManual.pdf. 11 See Securities Exchange Act Release Nos. 31361 (October 27, 1992) 57 FR 52655 (November 4, 1992)(SR-CBOE–92–17) (notice of filing of proposed rule change relating to Flexible Exchange Options) and 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) (Order approving SR-CBOE– 92–17). At the time of the proposal, the Exchange also anticipated that there would be limited secondary trading in any FLEX Option series having a particular expiration date due to the diversity inherent in FLEX Options and that FLEX expiration concentrations should be rare. These observations appear to be accurate for the trading in FLEX Options to date. VerDate Aug<31>2005 20:00 Dec 12, 2008 Jkt 217001 expirations, CBOE no longer believes that the three business day expiration restriction is necessary to insulate NonFLEX expirations from the potential adverse market impacts of FLEX expirations.12 To the contrary, CBOE believes that the restriction actually places the Exchange at a competitive disadvantage to its OTC and futures counter-parts in the market for customized options, and unnecessarily limits market participants’ ability to trade in an exchange environment that offers the added benefits of transparency, price discovery, liquidity, and financial stability. Although the expiration date restrictions would be eliminated, the Exchange notes that the above-described position limit and reporting requirements will continue to apply. Moreover, the Exchange and member organizations each have the authority, pursuant to CBOE Rule 12.10, to impose additional margin as deemed advisable. CBOE believes these existing safeguards serve sufficiently to help monitor open interest in FLEX Option series and significantly reduce any risk of adverse market effects that might occur as a result of large FLEX exercises in FLEX Option series that expire near NonFLEX expirations. Beyond this, however, CBOE is also proposing to impose the above-described aggregation requirement for FLEX Options that have the same expiration as comparable NonFLEX Options at the position limit amounts that are applicable to the NonFLEX Options, and the above-described limitations on FLEX Index Option p.m. settlements. Further, it is anticipated that there would continue to be limited secondary trading in any FLEX Option series having a particular expiration date due to the diversity inherent in FLEX Options and that FLEX expiration concentrations should be rare. In proposing this change to the eligible FLEX expiration dates, CBOE is cognizant of the need for market participants to have substantial options transaction capacity and flexibility to hedge their substantial investment portfolios, on the one hand, and the potential for adverse effects on the market or on firms that might be 12 In further support of its proposal, the Exchange also notes that it is not aware of any market disruptions or problems caused by customized options in the OTC or futures markets that expire on or near Expiration Friday. Moreover, to the extent there may be a risk of adverse market effects attributable to options that would otherwise be traded in a non-transparent fashion in the OTC market, CBOE believes that such risk would be lessened by making these customized options eligible for trading in an exchange environment because of the added transparency, price discovery, liquidity, and financial stability available. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 76077 attributable to excessive FLEX positions which expire near or at the expiration date for Non-FLEX Options, on the other hand. CBOE is also cognizant of the OTC market, in which no position limit, expiration date and p.m. settlement restrictions apply. In light of these considerations,13 CBOE believes this change is appropriate and reasonable and that it will provide market participants with additional flexibility to determine expiration dates and choice of venue that best comport with investors’ particular needs. Finally, the Exchange has confirmed with the OCC that OCC can configure its systems to support the expiration of FLEX Options on any business day. 2. Statutory Basis By expanding permissible expiration dates for FLEX Options, the Exchange believes the proposed rule change is consistent with Section 6(b) of the Act 14 in general and furthers the objectives of Section 6(b)(5) of the Act 15 in particular in that it should promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. The proposed rule change would provide members and investors with additional opportunities to trade customized options in an exchange environment, and investors would benefit as a result. 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. 13 Besides the fact that OTC customized options are not subject to a restriction on expiration date and p.m. settlement, the Exchange notes that FLEX Options can be designated as American-style (which can be exercised at any time up to the day before expiration) or European- or EuropeanCapped-style (which can be exercised only at expiration). Though it is possible for FLEX Options that are American-styled to be exercised any time, including during the three business day expiration restriction period, there have been no market disruptions or problems caused by the early exercise of American-style FLEX options at or near Non-FLEX expirations. In addition, it is not uncommon for similar products across markets to have the same expiration dates. For example, the contracts for stock index futures, stock index options, and stock options all expire on the same triple witching days occurring on the third Friday of March, June, September, and December. 14 15 U.S.C. 78f(b). 15 15 U.S.C. 78f(b)(5). E:\FR\FM\15DEN1.SGM 15DEN1 76078 Federal Register / Vol. 73, No. 241 / Monday, December 15, 2008 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments pwalker on PROD1PC71 with NOTICES • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2008–115 on the subject line. 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-CBOE–2008–115 and should be submitted on or before January 5, 2009. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Florence E. Harmon, Acting Secretary. [FR Doc. E8–29556 Filed 12–12–08; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–59053; File No. SR–ISE– 2008–90] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change Relating to Alternative Primary Market Makers December 4, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the Paper Comments ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on November • Send paper comments in triplicate 21, 2008, the International Securities to Secretary, Securities and Exchange Exchange, LLC (the ‘‘Exchange’’ or the Commission, 100 F Street, NE., ‘‘ISE’’) filed with the Securities and Washington, DC 20549–1090. Exchange Commission the proposed All submissions should refer to File rule change as described in Items I, II, Number SR–CBOE–2008–115. This file and III below, which items have been number should be included on the prepared by the self-regulatory subject line if e-mail is used. To help the organization. The Commission is Commission process and review your publishing this notice to solicit comments more efficiently, please use comments on the proposed rule change only one method. The Commission will from interested persons. post all comments on the Commission’s I. Self-Regulatory Organization’s Internet Web site (http://www.sec.gov/ Statement of the Terms of Substance of rules/sro.shtml). Copies of the the Proposed Rule Change submission, all subsequent amendments, all written statements The ISE proposes to amend Rule 802 with respect to the proposed rule to provide for an Alternative Primary change that are filed with the Market Maker. The text of the proposed Commission, and all written communications relating to the 16 17 CFR 200.30–3(a)(12). 1 U.S.C. 78s(b)(1). proposed rule change between the 2 17 CFR 240.19b–4. Commission and any person, other than VerDate Aug<31>2005 20:00 Dec 12, 2008 Jkt 217001 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 rule change is as follows, with additions italicized: Rule 802. Appointment of Market Makers (a) No change. (b) (1) The Board or designated committee will allocate equity options classes into groupings (‘‘Groups’’ of options) and will make appointments to those Groups rather than individual classes, except as provided in paragraph (f) and Supplementary Material .02 below. Absent an exemption by the Exchange, an appointment of a market maker shall be limited to the options classes trading in no more than one Group for each Membership held by the market maker. (2) No change. (c)–(f) No change. Supplementary Material to Rule 802 .01 No change. .02 A Member that is approved to act in the capacity of a Competitive Market Maker with respect to one or more CMM Rights may voluntarily be appointed to act as an ‘‘Alternative Primary Market Maker,’’ so long as the Exchange has determined that such Member has the appropriate systems and procedures in place to undertake the responsibilities of a Primary Market Maker. (a) The Exchange may appoint an Alternative Primary Market Maker to an options class only in the event that no Primary Market Makers or Second Market Primary Market Makers seek allocation of the security. (b) If no Primary Market Makers or Second Market Primary Market Makers seek allocation of an options class, all eligible Competitive Market Makers will be given notice and an opportunity to seek allocation of the security as an Alternative Primary Market Maker. Such allocations will be made by the Allocation Committee according to the guidelines contained in Rule 802. (c) An Alternative Primary Market Maker shall have all of the responsibilities and privileges of a Primary Market Maker under the Rules with respect to all appointed options classes. (d) Options classes allocated to Alternative Primary Market Makers may be traded in the Second Market as provided in Chapter 9 of the Rules. With respect to options classes traded in the First Market, such classes will not be allocated to a particular Group under Rule 802(b)(1), and all Competitive Market Makers shall be eligible for appointment to such classes. (e) If an Alternative Primary Market Maker ceases trading of an options E:\FR\FM\15DEN1.SGM 15DEN1

Agencies

[Federal Register Volume 73, Number 241 (Monday, December 15, 2008)]
[Notices]
[Pages 76075-76078]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-29556]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59060; File No. SR-CBOE-2008-115]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Related to 
FLEX Options Expirations

December 5, 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 November 19, 2008, Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding permissible 
expiration dates for Flexible Exchange Options (``FLEX Options'').\3\ 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.org/Legal), CBOE, and at the Commission.
---------------------------------------------------------------------------

    \3\ FLEX Options provide investors with the ability to customize 
basic option features including size, expiration date, exercise 
style, and certain exercise prices. FLEX Options can be FLEX Index 
Options or FLEX Equity Options. FLEX Index Options are index options 
that are subject to the FLEX rules in Chapters XXIVA or XXIVB of the 
CBOE Rules. FLEX Index Options Series may be approved and open for 
trading on any index that has been approved for Non-FLEX Options 
trading or for warrant trading on the Exchange. FLEX Equity Options 
are options on specified equity securities that are subject to the 
FLEX rules in Chapters XXIVA or XXIVB of the CBOE Rules. FLEX Equity 
Options may be on underlying securities that have been approved by 
the Exchange in accordance with CBOE Rule 5.3, which includes but is 
not limited to stock options and exchange-traded fund options. In 
addition, other products are permitted to be traded pursuant to the 
FLEX trading procedures. For example, credit options are eligible 
for trading as FLEX Options pursuant to the FLEX rules in Chapters 
XXIVA and XXIVB. See CBOE Rules 24A.1(e) and (f), 24A.4(b)(1) and 
(c)(1), 24B.1(f) and (g), 24B.4(b)(1) and (c)(1), and 28.19.
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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 IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the filing is to modify the permissible expiration 
dates for FLEX Options. These options are governed by Exchange Chapters 
XXIVA and XXIVB. Under current CBOE Rules 24A.4 and 24B.4, FLEX Options 
may not expire on any business day that falls on, or within two 
business days of, a third Friday-of-the-month expiration day for any 
Non-FLEX Option (an ``Expiration Friday'').\4\ However, subject to 
certain aggregation requirements for cash settled options, the current 
FLEX Rules do permit the expiration of FLEX Options on the same day 
that Non-FLEX

[[Page 76076]]

quarterly index options (``QIX'') and Non-FLEX Weeklys Options 
expire.\5\
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    \4\ For example, under the current rule, a FLEX option could 
expire on the Tuesday before Expiration Friday, but could not expire 
on the Wednesday or Thursday before Expiration Friday. Similarly, a 
FLEX option could expire on the Wednesday after Expiration Friday, 
but could not expire on the Monday or Tuesday after Expiration 
Friday. This restriction is hereinafter referred to as the ``three 
business day'' expiration restriction.
    \5\ Rules 24A.7(d) and 24B.7(d) provide that:
    (1) Commencing at the close of trading two business days prior 
to the last trading day of the calendar quarter, positions in P.M. 
Settled FLEX Index Options (i.e., 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 Options on the 
same index with the same expiration (``comparable QIX options'') and 
shall be subject to the position limits set forth in Rule 24.4, 
24.4A or 24.4B, as applicable.
    (2) 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 (i.e., FLEX Index Options or Credit Default 
Options) shall be aggregated with positions in Short Term Option 
Series on the same underlying (e.g., same underlying index as a FLEX 
Index Option) with the same means for determining exercise 
settlement value (e.g., opening or closing prices of the underlying 
index) and same expiration (``comparable Weekly options'') 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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    The Exchange is now proposing to eliminate the expiration date 
restriction so that FLEX Options may expire on any business day. 
Although the expiration date restrictions would be eliminated, the 
Exchange notes that certain position limit and reporting requirements 
will continue to apply. FLEX Index Options overlying all industry 
indexes, all micro narrow-based indexes, and certain broad-based 
indexes remain subject to position limits under CBOE Rules 24A.7 and 
24B.7. FLEX Index Options on certain other broad-based indexes 
(specifically the BXM, DJX, NDX, OEX, RUT, SPX, VIX, VXD, VXN, XEO, 
CBOE S&P 500 Three-Month Realized Variance and S&P 500 Three-Month 
Realized Volatility), and FLEX Equity Options are not subject to 
position limits but remain subject to reporting requirements under CBOE 
Rules 24A.7 and 24B.7. Additionally, all FLEX options remain subject to 
the position reporting requirements of CBOE Rule 4.13(a).\6\ Moreover, 
the Exchange and member organizations each have the authority, pursuant 
to CBOE Rule 12.10, to impose additional margin as deemed advisable.
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    \6\ CBOE Rule 4.13(a) provides that ``[i]n a manner and form 
prescribed by the Exchange, each member shall report to the 
Exchange, the name, address, and social security or tax 
identification number of any customer who, acting alone, or in 
concert with others, on the previous business day maintained 
aggregate long or short positions on the same side of the market of 
200 or more contracts of any single class of option contracts dealt 
in on the Exchange. The report shall indicate for each such class of 
options, the number of option contracts comprising each such 
position and, in the case of short positions, whether covered or 
uncovered.'' For purposes of this Rule, the term ``customer'' in 
respect of any member includes ``the member, any general or special 
partner of the member, any officer or director of the member, or any 
participant, as such, in any joint, group or syndicate account with 
the member or with any partner, officer or director thereof.'' CBOE 
Rule 4.13(d).
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    Beyond the above-described position limit and reporting 
requirements, for FLEX Options that expire on Expiration Friday, the 
proposed rule change includes an aggregation requirement under CBOE 
Rules 24A.7 and 24B.7 for position limit purposes. Specifically, for as 
long as the options positions remain open, positions in FLEX Options 
that expire on Expiration Friday shall be aggregated with positions in 
Non-FLEX Options on the same underlying (e.g., the same underlying 
security in the case of a FLEX Equity Option and the same underlying 
index in the case of a FLEX Index Option) (referred to as ``comparable 
Non-FLEX Options''). Such FLEX Options and comparable Non-FLEX Options 
would be subject to the position limits that are applicable to the Non-
FLEX Options.\7\ The aggregation requirement would apply to both cash 
and physically settled options.
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    \7\ Thus, as soon as a FLEX Option position that expires on 
Expiration Friday is opened and as long as that position remains 
open, it would be subject to the position limit aggregation 
requirement at the position limits that are applicable to Non-FLEX 
Options. By comparison, the position limit aggregation requirement 
for FLEX Index Options that expire on the same date as Non-FLEX QIX 
or Weekly Options only applies as of the close of trading two 
business days prior to the last trading day of the calendar quarter 
or week, as applicable. See note 5, supra; see also CBOE Rules 4.11, 
Position Limits (which contains position limits for Non-FLEX Equity 
Options); 24.4, Position Limits for Broad-Based Index Options; 
24.4A, Position Limits for Industry Index Options; 24.4B, Position 
Limits for Options on Micro Narrow-Based Indexes as Defined Under 
Rule 24.2(d); and 29.5, Position Limits (which contains position 
limits for Credit Options).
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    In addition, in the case of FLEX Index Options only, the proposed 
rule change provides that FLEX Index Options expiring on or within two 
business days of an Expiration Friday may not have an exercise 
settlement value on the expiration date determined by reference to the 
closing price of the index.\8\ These limitations on exercise settlement 
value calculations are intended to serve as a safeguard against 
potential adverse effects that might be associated with triple 
witching.\9\ Once approved, the Exchange intends to evaluate the 
continued need for maintaining this safeguard and may consider 
proposing changes through a separate rule change filing.
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    \8\ A closing exercise settlement value (also referred to as a 
``p.m. settlement'') is determined by reference to the reported 
level of the index as derived from the closing prices of the 
component securities. See CBOE Rules 24A.4(b)(2) and 24B.4(b)(2).
    \9\ The expiration of the contracts for stock index futures, 
stock index options, and stock options all expire on the same days 
occurring on the third Friday of March, June, September, and 
December (which is referred to as ``triple witching''). The 
Exchange's proposed limitations on p.m. settlements would apply 
during triple witching expirations, as well as on all other 
Expiration Fridays.
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    In conjunction with the elimination of the expiration date 
restriction, the proposed rule change also states that, provided the 
options on an underlying security or index are otherwise eligible for 
FLEX trading, FLEX Options will be permitted in puts and calls that do 
not have the same exercise style, same expiration date and same 
exercise price as Non-FLEX Options that are already available for 
trading on the same underlying security or index. The proposed rule 
change also provides that FLEX Options will be permitted before (but 
not after) the options are listed for trading as Non-FLEX Options. Once 
and if an option series is listed for trading as a Non-FLEX Option 
series, (i) all existing open positions established under the FLEX 
trading procedures shall be fully fungible with transactions in the 
respective Non-FLEX Option series, and (ii) any further trading in the 
series would be as Non-FLEX options subject to the Non-FLEX trading 
procedures and rules.
    For example, a FLEX Trader could establish a FLEX Option position 
in a European-style, am-settled SPX 1650 Call option series with an 
expiration of Aug 16, 2013 (which would be an Expiration Friday). In 
such an instance, once and if the Non-FLEX, European-style, am-settled 
SPX 1650 Call option series that expires on August 16, 2013 is listed 
for trading, the established FLEX Option position would be fully 
fungible with transactions in the Non-FLEX Option series. Any further 
trading in the series would be as Non-FLEX Options subject to the Non-
FLEX trading procedures.
    CBOE believes that expanding the eligible dates for FLEX 
expirations is important and necessary to the Exchange's efforts to 
create a product and market that provides members and investors 
interested in FLEX-type options with an improved but comparable 
alternative to the over-the-counter (``OTC'') market in customized 
options, which can take on contract characteristics similar to FLEX 
Options but are not subject to the same restrictions (such as the three 
business day expiration restriction or the p.m. settlement 
restriction). By expanding the eligible expiration dates for FLEX 
Options, market participants will now have greater flexibility in 
determining whether to execute their customized options in an exchange 
environment or in the OTC market. CBOE believes market participants 
benefit from being

[[Page 76077]]

able to trade these customized options in an exchange environment in 
several ways, including, but not limited to the following: (1) Enhanced 
efficiency in initiating and closing out positions; (2) increased 
market transparency; and (3) heightened contra-party creditworthiness 
due to the role of The Options Clearing Corporation (``OCC'') as issuer 
and guarantor of FLEX Options. CBOE also believes this change is 
consistent and more competitive with the existing practice for trading 
flex-style options on futures exchanges.\10\
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    \10\ For example, expiration dates for Chicago Mercantile 
Exchange (``CME'') flex options may be specified for any exchange 
business day up to and including the day of determination of the 
final settlement price of the underlying futures contract. In 
addition, CME flex options are permitted in puts and calls that do 
not have the same underlying futures contract, same strike price, 
same exercise style, and same expiration date as standard listed 
options that are already available for trading. Trading in standard 
options under certain flexible trading procedures is permitted prior 
to the listing of such standard options. Once and if the standard 
options are listed, all existing open positions established under 
the flexible trading procedures are fully fungible with transactions 
in the standard option series, and any further trading in the series 
is as standard options subject to the standard option trading 
procedures. See, e.g., CME Rules 351A.31A and 357A.31A, and CME 
Equity Futures and Options 2007 Information Guide at pages 46-47, 
located at http://www.cme.com/files/EquityIndexManual.pdf.
---------------------------------------------------------------------------

    CBOE notes that when the FLEX Option rules were initially proposed 
and approved almost sixteen years ago, the Exchange was uncertain what 
market impacts, if any, excessive FLEX positions would have on the 
market or on firms.\11\ To minimize the risk of adverse market effects, 
at the time the FLEX rules were first introduced the Exchange put in 
place certain position limit boundaries (which have been modified over 
time) and the requirement that the FLEX expiration date be no closer 
than three business days from any Non-FLEX Option Expiration Friday. 
However, in light of the Exchange's experience in trading FLEX Options 
to date, specifically with respect to the diversity in FLEX Option 
trading, the relatively small percentage FLEX Options trading compared 
to overall trading on the Exchange, and the lack of market disruptions 
or problems caused by or on existing FLEX Option expirations, CBOE no 
longer believes that the three business day expiration restriction is 
necessary to insulate Non-FLEX expirations from the potential adverse 
market impacts of FLEX expirations.\12\ To the contrary, CBOE believes 
that the restriction actually places the Exchange at a competitive 
disadvantage to its OTC and futures counter-parts in the market for 
customized options, and unnecessarily limits market participants' 
ability to trade in an exchange environment that offers the added 
benefits of transparency, price discovery, liquidity, and financial 
stability.
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    \11\ See Securities Exchange Act Release Nos. 31361 (October 27, 
1992) 57 FR 52655 (November 4, 1992)(SR-CBOE-92-17) (notice of 
filing of proposed rule change relating to Flexible Exchange 
Options) and 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) 
(Order approving SR-CBOE-92-17). At the time of the proposal, the 
Exchange also anticipated that there would be limited secondary 
trading in any FLEX Option series having a particular expiration 
date due to the diversity inherent in FLEX Options and that FLEX 
expiration concentrations should be rare. These observations appear 
to be accurate for the trading in FLEX Options to date.
    \12\ In further support of its proposal, the Exchange also notes 
that it is not aware of any market disruptions or problems caused by 
customized options in the OTC or futures markets that expire on or 
near Expiration Friday. Moreover, to the extent there may be a risk 
of adverse market effects attributable to options that would 
otherwise be traded in a non-transparent fashion in the OTC market, 
CBOE believes that such risk would be lessened by making these 
customized options eligible for trading in an exchange environment 
because of the added transparency, price discovery, liquidity, and 
financial stability available.
---------------------------------------------------------------------------

    Although the expiration date restrictions would be eliminated, the 
Exchange notes that the above-described position limit and reporting 
requirements will continue to apply. Moreover, the Exchange and member 
organizations each have the authority, pursuant to CBOE Rule 12.10, to 
impose additional margin as deemed advisable. CBOE believes these 
existing safeguards serve sufficiently to help monitor open interest in 
FLEX Option series and significantly reduce any risk of adverse market 
effects that might occur as a result of large FLEX exercises in FLEX 
Option series that expire near Non-FLEX expirations. Beyond this, 
however, CBOE is also proposing to impose the above-described 
aggregation requirement for FLEX Options that have the same expiration 
as comparable Non-FLEX Options at the position limit amounts that are 
applicable to the Non-FLEX Options, and the above-described limitations 
on FLEX Index Option p.m. settlements. Further, it is anticipated that 
there would continue to be limited secondary trading in any FLEX Option 
series having a particular expiration date due to the diversity 
inherent in FLEX Options and that FLEX expiration concentrations should 
be rare.
    In proposing this change to the eligible FLEX expiration dates, 
CBOE is cognizant of the need for market participants to have 
substantial options transaction capacity and flexibility to hedge their 
substantial investment portfolios, on the one hand, and the potential 
for adverse effects on the market or on firms that might be 
attributable to excessive FLEX positions which expire near or at the 
expiration date for Non-FLEX Options, on the other hand. CBOE is also 
cognizant of the OTC market, in which no position limit, expiration 
date and p.m. settlement restrictions apply. In light of these 
considerations,\13\ CBOE believes this change is appropriate and 
reasonable and that it will provide market participants with additional 
flexibility to determine expiration dates and choice of venue that best 
comport with investors' particular needs.
---------------------------------------------------------------------------

    \13\ Besides the fact that OTC customized options are not 
subject to a restriction on expiration date and p.m. settlement, the 
Exchange notes that FLEX Options can be designated as American-style 
(which can be exercised at any time up to the day before expiration) 
or European- or European-Capped-style (which can be exercised only 
at expiration). Though it is possible for FLEX Options that are 
American-styled to be exercised any time, including during the three 
business day expiration restriction period, there have been no 
market disruptions or problems caused by the early exercise of 
American-style FLEX options at or near Non-FLEX expirations. In 
addition, it is not uncommon for similar products across markets to 
have the same expiration dates. For example, the contracts for stock 
index futures, stock index options, and stock options all expire on 
the same triple witching days occurring on the third Friday of 
March, June, September, and December.
---------------------------------------------------------------------------

    Finally, the Exchange has confirmed with the OCC that OCC can 
configure its systems to support the expiration of FLEX Options on any 
business day.
2. Statutory Basis
    By expanding permissible expiration dates for FLEX Options, the 
Exchange believes the proposed rule change is consistent with Section 
6(b) of the Act \14\ in general and furthers the objectives of Section 
6(b)(5) of the Act \15\ in particular in that it should promote just 
and equitable principles of trade, serve to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and protect investors and the public interest. The proposed 
rule change would provide members and investors with additional 
opportunities to trade customized options in an exchange environment, 
and investors would benefit as a result.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 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.

[[Page 76078]]

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2008-115 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2008-115. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements 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 Number SR-CBOE-2008-115 and should be 
submitted on or before January 5, 2009.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).


Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-29556 Filed 12-12-08; 8:45 am]
BILLING CODE 8011-01-P