

[Federal Register: February 1, 2007 (Volume 72, Number 21)]
[Notices]               
[Page 4741-4743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01fe07-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55176; File No. SR-CBOE-2007-08]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to the Establishment 
of a Pilot Program That Increases Position and Exercise Limits for 
Options on the iShares[supreg] Russell 2000[supreg] Index Fund

January 25, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 4742]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 22, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
CBOE. On January 22, 2007, CBOE submitted Amendment No. 1 to the 
proposed rule change. CBOE has filed the proposal pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 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

    CBOE proposes to amend Rule 4.11 to exempt options on the 
iShares[supreg] Russell 2000[supreg] Index Fund (``IWM'') from the 
position and exercise limits provided for under the Rule 4.11 Pilot 
Program and to increase the standard position and exercise limits for 
IWM as part of a six-month pilot (``Rule 4.11 IWM Pilot Program''). The 
text of the proposed rule change is available at CBOE, the Commission's 
Public Reference Room, and http://www.cboe.com.


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

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

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

1. Purpose
    The Exchange proposes to amend Interpretation and Policy .07 to 
Rule 4.11 on a six-month pilot basis to exempt options on IWM from the 
Rule 4.11 Pilot Program. Under the Rule 4.11 Pilot Program, the 
position and exercise limits for IWM would be reduced on January 22, 
2007 from 500,000 to 250,000 contracts. The Exchange now proposes to 
allow position and exercise limits for options on IWM to remain at 
500,000 contracts on a pilot basis, from January 22, 2007 through July 
22, 2007.
    In June 2005, as a result of a 2-for-1 stock split, the position 
limit for IWM options was temporarily increased from 250,000 contracts 
(covering 25,000,000 shares) to 500,000 contracts (covering 50,000,000 
shares). At the time of the split, the furthest IWM option expiration 
date was January 2007. Therefore, the temporary increase of the IWM 
position limit will revert to the pre-split level (as provided for in 
connection with the Rule 4.11 Pilot Program) of 250,000 contracts after 
expiration in January 2007, or on January 22, 2007.\5\
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    \5\ See CBOE Research Circular RS05-380, at 12.
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    The Exchange believes that a position limit of 250,000 contracts is 
too low and may be a deterrent to the successful trading of IWM 
options. Importantly, options on IWM are \1/10\th the size of options 
on the Russell 2000[supreg] Index (``RUT''), which have a position 
limit of 50,000 contracts.\6\ Traders who trade IWM options to hedge 
positions in RUT options are likely to find a position limit of 250,000 
contracts in IWM options too restrictive and insufficient to properly 
hedge. For example, if a trader held 50,000 RUT options and wanted to 
hedge that position with IWM options, the trader would need--at a 
minimum-500,000 IWM options to properly hedge the position. Therefore, 
the Exchange believes that a position limit of 250,000 contracts is too 
low and may adversely affect market participants' ability to provide 
liquidity in this product.
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    \6\ See CBOE Rule 24.4(a); see also Securities Exchange Act 
Release Nos. 45309 (January 18, 2002), 67 FR 3757 (January 25, 2002) 
(SR-CBOE-2001-44) (increase of position and exercise limits to 
300,000 for QQQ options); 47346 (February 11, 2003), 68 FR 8316 
(February 20, 2003) (SR-CBOE-2002-26) (increase of position and 
exercise limits to 300,000 for DIA options); and 51041 (January 14, 
2005), 70 FR 3408 (January 24, 2005) (SR-CBOE-2005-06) (increase of 
position and exercise limits for options on Standard and Poor's 
Depositary Receipts[supreg] from 75,000 to 300,000).
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    Additionally, IWM options have grown to become one of the largest 
options contracts in terms of trading volume. For example, the volume 
in options on IWM set a new single-day record on June 8, 2006, when 
760,803 contracts (120,229 calls and 640,574 puts) traded on that day. 
This record level volume beat the previous single-day high of 727,521 
contracts on May 17, 2006. Further, over the previous six months, the 
average daily CBOE trading volume of IWM options has been 187,190 
contracts and a total of 23,960,382 contracts have traded on the 
Exchange.
    As a result, the Exchange proposes that options on IWM be subject 
to position and exercise limits of 500,000 contracts on a pilot basis 
to run from January 22, 2007 through July 22, 2007.\7\ The Exchange 
believes that increasing position and exercise limits for IWM options 
will lead to a more liquid and more competitive market environment for 
IWM options that will benefit customers interested in this product.
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    \7\ Pursuant to Interpretation and Policy .02 to CBOE Rule 4.12, 
the exercise limit established under Rule 4.12 for IWM options shall 
be equivalent to the position limit prescribed for IWM options in 
Interpretation and Policy .07 under Rule 4.11. The increased 
exercise limits would only be in effect during the pilot period, to 
run from January 22, 2007 through July 22, 2007. See Amendment No. 1 
to the proposed rule change.
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    The Exchange would require that each member or member organization 
that maintains a position on the same side of the market in excess of 
10,000 contracts in the IWM option class, for its own account or for 
the account of a customer report certain information.\8\ This data 
would include, but would not be limited to, the option position, 
whether such position is hedged and if so, a description of the hedge, 
and if applicable, the collateral used to carry the position. Exchange 
market-makers (including DPMs) would continue to be exempt from this 
reporting requirement as market-maker information can be accessed 
through the Exchange's market surveillance systems. In addition, the 
general reporting requirement for customer accounts that maintain a 
position in excess of 200 contracts will remain at this level for IWM 
options.\9\
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    \8\ See CBOE Rule 4.13(b).
    \9\ See CBOE Rule 4.13(a).
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2. Statutory Basis
    CBOE believes that the proposed rule change is consistent with and 
furthers the objectives of Section 6(b)(5) of the Act,\10\ in that it 
is designed 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.
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    \10\ 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.

[[Page 4743]]

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

    Because the forgoing rule change does not: (1) Significantly affect 
the protection of investors or the public interest; (2) impose any 
significant burden on competition; and (3) become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate, it has become effective pursuant to Section 19(b)(3)(A) 
of the Act \11\ and Rule 19b-4(f)(6) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under 19b-4(f)(6) normally may not 
become operative prior to 30 days after the date of filing.\13\ 
However, Rule 19b-4(f)(6)(iii) \14\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because such waiver 
would permit position and exercise limits for options on IWM to remain 
at 500,000 option contracts for a six-month pilot period. For this 
reason, the Commission designates the proposed rule change to be 
effective and operative upon filing with the Commission.\15\
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    \13\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Commission has decided to waive the five-day 
pre-filing notice requirement.
    \14\ Id.
    \15\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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.

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-2007-08 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-2007-08. 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. Copies of the 
filing also will be available for inspection and copying at the 
principal office of 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-2007-08 and should be submitted on or before February 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1580 Filed 1-31-07; 8:45 am]

BILLING CODE 8011-01-P
