

[Federal Register: August 10, 2006 (Volume 71, Number 154)]
[Notices]               
[Page 45866-45868]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10au06-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54275; File No. SR-CBOE-2006-61]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to the Modified ROS Opening Procedure Cut-Off 
Times

August 4, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 27, 2006, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Exchange has designated the proposed rule change as constituting a 
non-controversial rule change under Rule 19b-4(f)(6) under the Act,\3\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify certain cut-off times applicable to 
its modified Rapid Opening System (``ROS'') opening procedure for the 
calculation of settlement prices of volatility indexes. Proposed new 
language is italicized; proposed deletions are in brackets:
* * * * *

Rule 6.2A. Rapid Opening System

    This rule has no applicability to series trading on the CBOE Hybrid 
Opening System. Such series will be governed by Rule 6.2B.
    (a)--(c) No change.
    * * * Interpretation and Policies:
    .01-.02 No change.
    .03 Modified ROS Opening Procedure For Calculation of Settlement 
Prices of Volatility Indexes.
    All provisions set forth in Rule 6.2A and the accompanying 
interpretations and policies shall remain in effect unless superseded 
or modified by this Rule 6.2A.03. To facilitate the calculation of a 
settlement price for futures and options contracts on volatility 
indexes, the Exchange shall utilize a modified ROS opening procedure 
for any index option series with respect to which a volatility index is 
calculated (including any index option series opened under Rule 
6.2A.01). This modified ROS opening procedure will be utilized only on 
the final settlement date of the options and futures contracts on the 
applicable volatility index in each expiration month.
    The following provisions shall be applicable when the modified ROS 
opening procedure set forth in this Rule 6.2A.03 is in effect for an 
index option with respect to which a volatility index is calculated:
    (i)-(iv) No change.
    (v) All index option orders for participation in the modified ROS 
opening procedure that are related to positions in, or a trading 
strategy involving, volatility index options or futures, and any change 
to or cancellation of any such order:
    (A) must be received prior to 8 a.m. (CT), and
    (B) may not be cancelled or changed after 8 a.m. (CT), unless the 
order is not executed in the modified ROS opening procedure and the 
cancellation or change is submitted after the modified ROS opening 
procedure is concluded (provided that any such order may be changed or 
cancelled after 8:00 a.m. (CT) and prior to [8:25 a.m. (CT)] applicable 
cut-off time established in accordance with paragraph (vi) in order to 
correct a legitimate error, in which case the member submitting the 
change or cancellation shall prepare and maintain a memorandum setting 
forth the circumstances that resulted in the change or cancellation and 
shall file a copy of the memorandum with the Exchange no later than the 
next business day in a form and manner prescribed by the Exchange).
    In general, the Exchange shall consider index option orders to be 
related to positions in, or a trading strategy involving, volatility 
index options or futures for purposes of this Rule 6.2A.03(v) if the 
orders possess the following three characteristics:
    (i)-(iii) No change.
    Whether index option orders are related to positions in, or a 
trading strategy involving, volatility index options or futures for 
purposes of this Rule 6.2A.03(v) depends upon specific facts and 
circumstances. Order types other than those provided above may also be 
deemed by the Exchange to fall within this category of orders if the 
Exchange determines that to be the case based upon the applicable facts 
and circumstances.
    The provisions of this Rule 6.2A.03(v) may be suspended by two 
Floor Officials in the event of unusual market conditions.
    (vi) All other index option orders for participation in the 
modified ROS opening procedure, and any change to or cancellation of 
any such order, must be received prior to [8:25 a.m. (CT)] the 
applicable cut-off time in order to participate at the ROS opening 
price for the applicable index option series. The applicable cut-off 
time for the affected index option series will be established by the 
appropriate Procedure Committee on a class-by-class basis, provided the 
cut-off time will be no earlier than 8:25 a.m. (CT) and no later than 
8:30 a.m. (CT). All pronouncements regarding changes to the applicable 
cut-off time will be announced to the membership via Regulatory 
Circular that is issued at least one day prior to implementation.
    (vii)--(ix) No change.
* * * * *

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

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

[[Page 45867]]

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

1. Purpose
    The modified ROS opening procedure facilitates the trading of 
options and futures on volatility indexes intended to be traded on CBOE 
or on CBOE Futures Exchange, LLC (``CFE'') by modifying certain of the 
rules that govern ROS for index option series whose prices are used to 
derive the volatility indexes on which options and futures are traded. 
The modified opening procedure is only utilized on the settlement days 
of options and futures contracts on the applicable volatility indexes 
in each expiration month.
    In relevant part, the modified ROS opening procedure allows all 
orders (including public customer, broker-dealer, Exchange market-maker 
and away market-maker and specialist orders), other than contingency 
orders, to be eligible to be placed on the electronic book for those 
option contract months whose prices are used to derive the volatility 
indexes on which options and futures are traded, for the purpose of 
permitting those orders to participate in the ROS opening price 
calculation for the applicable index option series. The procedure also 
provides that, if the ROS system is implemented in an option contract 
for which Lead Market-Makers (``LMMs'') have been appointed, the LMMs 
will collectively set the AutoQuote values that will be used by ROS.
    The procedure specifies certain cut-off times respecting the 
receipt of orders for participation in the opening. Currently, CBOE 
Rule 6.2A.03(v) provides that index option orders that are related to 
positions in, or a trading strategy involving, volatility index options 
or futures, and any change to or cancellation of any such order 
(``strategy orders''), must be received prior to 8:00 a.m. (all times 
noted herein are Central Time).\4\ CBOE Rule 6.2A.03(vi) provides that 
all other index option orders, and any change to or cancellation of any 
such order (``non-strategy orders''), must be received prior to 8:25 
a.m. These cut-off times have been revised over time based on the 
Exchange's experience in applying the procedure.\5\
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    \4\ Certain exceptions to the 8:00 a.m. cut-off time apply with 
respect to strategy orders. For instance, under the current 
procedure, a strategy order may not be cancelled or changed after 
8:00 a.m., unless the order is not executed in the modified ROS 
opening procedure and the cancellation or change is submitted after 
the modified ROS opening procedure is concluded (provided that any 
such order may be changed or cancelled after 8:00 a.m. and prior to 
8:25 a.m. in order to correct a legitimate error, in which case the 
member submitting the change or cancellation shall prepare and 
maintain a memorandum setting for the circumstances that resulted in 
the change or cancellation and shall file a copy of the memorandum 
with the Exchange no later than the next business day in a form and 
manner prescribed by the Exchange). CBOE Rule 6.2A.03(v)(B). The 
cut-off requirements may be suspended by two Floor Officials in the 
event of unusual market conditions. CBOE Rule 6.2A.03(v).
    \5\ See Securities Exchange Act Release Nos. 49468 (March 24, 
2004), 69 FR 17000 (March 31, 2004) (SR-CBOE2004-11) (order 
approving the modified ROS opening procedure on a pilot basis which 
initially established the cut-off time for all orders at 8:25 a.m.); 
49798 (June 3, 2004), 69 FR 32644 (June 10, 2004) (SR-CBOE-2004-23) 
(order permanently approving the modified ROS opening procedure 
pilot program); 49798A (July 6, 2004), 69 FR 41868 (July 12, 2004) 
(correction to approval order); 49679 (May 11, 2004), 69 FR 27957 
(May 17, 2004) (SR-CBOE-2004-27) (notice of filing and immediately 
effectiveness which revised the cut-off time for all orders to 8:28 
a.m.); and 52367 (August 31, 2005), 70 FR 53401 (September 8, 2005) 
(SR-CBOE-2004-86) (order approving an amendment to the permanent 
program that, in relevant part, revised the cut-off time to its 
current form, which is 8:00 a.m. for strategy orders and 8:25 a.m. 
for non-strategy orders).
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    The instant rule change amends the language in the rule text 
respecting the 8:25 a.m. cut-off time for non-strategy orders by 
eliminating the specific time and instead providing that the cut-off 
time may be established by the appropriate Exchange procedure committee 
on a class-by-class basis,\6\ provided the established cut-off time 
cannot be set earlier than 8:25 a.m. or later than 8:30 a.m. The 
amended rule text also provides that pronouncements regarding changes 
to the established cut-off time will be announced to the membership via 
Regulatory Circular that is issued at least one day prior to 
implementation. Finally, the Exchange is proposing a cross-reference 
change to the rule text so that the applicable cut-off time for 
changing or canceling strategy orders to correct legitimate errors 
corresponds with the cut-off time for entering, changing or canceling 
non-strategy orders.\7\
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    \6\ The modified ROS opening procedure is currently in use only 
with respect to S&P 500 Composite Stock Price Index (SPX) options 
whose prices are used to derive the settlement value of futures on 
the CBOE Volatility Index traded on CFE. However, if the ROS system 
is implemented in an index option class, the Rule provides for the 
modified procedure to be used to facilitate the calculation of a 
settlement price for futures and options contracts on volatility 
indexes for any index option series with respect to which a 
volatility index is calculated. Because the modified procedure may 
be used for different index option classes, the proposed rule change 
seeks to provide the Exchange with the flexibility to establish the 
applicable cut-off time on a class-by-class basis.
    \7\ See CBOE Rule 6.2A.03(v)(B).
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    According to the Exchange, amending the modified ROS opening 
procedure in this manner will give the Exchange additional flexibility 
to establish a cut-off time that, on the one hand, provides market 
participants with a reasonable amount of time to monitor potential 
changes in the market that may occur up until the cut-off time and to 
respond to those changes through the placement of orders, 
cancellations, or changes to orders previously placed on the electronic 
book, and, on the other hand, provides LMMs with a reasonable amount of 
time to review order imbalances on the electronic book and collectively 
set AutoQuote values that will be used by ROS in calculating the 
opening prices for the option series. Incorporating this flexibility 
into the rule text will also provide the Exchange with the means to 
more efficiently establish and implement modifications to the cut-off 
time within the defined interval, and will therefore serve to foster 
fair and orderly markets. For these reasons, the Exchange believes that 
building this flexibility into the procedure is reasonable and 
appropriate, and will improve the operation of the modified ROS opening 
procedure.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder and, in particular, 
the requirements of section 6(b) of the Act.\8\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and

[[Page 45868]]

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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing rule does not (i) significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days after the date of the filing or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, it has become effective pursuant to section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    CBOE has requested a waiver of the 30-day operative delay. The 
Commission believes, consistent with the protection of investors and 
the public interest, that such waiver will permit CBOE to implement the 
proposed rule change for the August 16, 2006 settlement date and to 
provide advance notice of this change to members prior to that date. 
For these reasons, the Commission designates the proposal to be 
effective and operative upon filing with the Commission.\12\ At any 
time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \12\ For purposes of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-CBOE-2006-61 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2006-61. 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 section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2006-61 and should be 
submitted on or before August 31, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-13022 Filed 8-9-06; 8:45 am]

BILLING CODE 8010-01-P
