

[Federal Register: August 9, 2007 (Volume 72, Number 153)]
[Notices]               
[Page 44894-44897]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09au07-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56191; File No. SR-CBOE-2007-79]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Eliminate Position and Exercise Limits for Options on 
the Russell 2000 Index, and To Specify That Reduced-Value Options on 
Broad-Based Security Indexes for Which Full-Value Options Have No 
Position and Exercise Limits Similarly Have No Position and Exercise 
Limits

August 2, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\1and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 17, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by CBOE. On August 2, 2007, the Exchange filed Amendment No. 1 
to the proposed rule change.\3\ 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\ In Amendment No. 1, the Exchange made minor corrections to 
the rule text and purpose section of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to eliminate position and exercise limits for 
options on the Russell 2000 Index (``RUT''), a broad-based securities 
index that is multiply-listed and heavily traded. The Exchange also 
proposes to amend CBOE Rules 24.4(a) and 24.5 to specify that reduced-
value options on broad-based security indexes for which full-value 
options have no position and exercise limits similarly have no position 
and exercise limits. In addition, the Exchange proposes to make 
technical changes to Rules 24.4, 24.5, and 24A.7. The text of the 
proposed rule change is available on CBOE's Web site (http://www.cboe.org/legal
), at CBOE, and at the Commission's Public Reference 

Room.

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 Exchange proposes to eliminate position and exercise limits for 
options on RUT, a broad-based securities index that is multiply-listed 
and heavily traded.\4\ The Exchange also proposes to amend Rules 
24.4(a) and 24.5 to specify that reduced-value options on broad-based 
security indexes for which full-value options have no position and 
exercise limits similarly have no position and exercise limits. In 
addition, the Exchange proposes to make technical changes to Rules 
24.4, 24.5, and 24A.7 to specify that there are no position and 
exercise limits for European-Style Exercise S&P 100 Index options 
(``XEO'') and to add ``XEO'' to the position reporting and margin 
rules.
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    \4\ The current position and exercise limits for RUT options are 
50,000 contracts, with no more than 30,000 of such contracts in a 
series in the nearest expiration month, were established almost 15 
years ago when the Commission approved the rule change that provided 
for the listing and trading of RUT options and have since remained 
unchanged. See Securities Exchange Act Release No. 31382 (October 
30, 1992), 57 FR 52802 (November 5, 1992) (SR-CBOE-1992-02). See 
also Rule 24.4, Position Limits for Broad-Based Index Options, and 
Rule 24.5, Exercise Limits, (providing that exercise limits for 
index option contracts are equivalent to prescribed position 
limits).
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Eliminate Position and Exercise Limits for RUT Options

    The Exchange believes that the circumstances and considerations 
relied

[[Page 44895]]

upon by the Commission in approving the elimination of position and 
exercise limits for other heavily traded broad-based index options 
(e.g., options on the S&P 500 Index (``SPX''), the S&P 100 Index 
(``OEX''), the Dow Jones Industrial Average Index (``DJX''), and the 
Nasdaq-100 Index (``NDX'')) equally apply to the current proposal 
relating to RUT position and exercise limits.\5\
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    \5\ See Securities Exchange Act Release Nos. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (order 
granting permanent approval to the elimination of position and 
exercise limits on SPX, OEX and DJX options); and 52650 (October 21, 
2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-2005-41) (order 
approving the elimination of position and exercise limits on NDX 
options). The Exchange also notes that there are no position and 
exercise limits for volatility index options based on the SPX, DJX 
and NDX.
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    In approving the elimination of position limits for SPX, OEX, DJX, 
and NDX options, the Commission considered the enormous capitalization 
of each of these indexes and the deep and liquid markets for the 
securities underlying each index significantly reduced concerns of 
market manipulation or disruption in the underlying markets. The 
Commission also noted the active trading volume for options on the 
respective indexes. CBOE believes that RUT shares these factors in 
common with the SPX, OEX, DJX, and NDX. As of the date of this rule 
filing, the approximate market capitalizations of the SPX, OEX, DJX, 
and NDX were $13.95 trillion, $8.06 trillion, $4.4 trillion and $2.36 
trillion, respectively, the average daily trading volumes (``ADVs'') 
for all underlying components of the indexes were 1.27 billion, 540 
million, 240 million, and 400 million shares, respectively, and the ADV 
for options on the indexes were 610,000 contracts, 60,000 contracts, 
34,000 contracts, and 58,000 contracts respectively.\6\ CBOE believes 
that RUT has very comparable characteristics. The market capitalization 
for RUT is $1.73 trillion dollars, the ADV for the underlying 
securities is 535 million shares, and the ADV for the option is 79,000 
contracts.
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    \6\ ADVs are calculated over the previous three months of 
trading.
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    In approving the elimination of position and exercise limits for 
SPX, OEX, DJX, and NDX options, the Commission also noted that the 
financial requirements imposed by both the Exchange and the Commission 
serve to address any concerns that a CBOE member or its customer(s) may 
try to maintain an inordinately large unhedged position in the indexes. 
These identical financial requirements would also apply to RUT options. 
Under CBOE rules, the Exchange has the authority to impose additional 
margin and/or assess capital charges and is further able to monitor 
accounts to determine when such action is warranted.\7\
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    \7\ See Interpretation and Policy .04 to Rule 24.4 and also Rule 
15c3-1 under the Act.
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    Finally, the Commission relied heavily on the Exchange's ability to 
provide surveillance and reporting safeguards to detect and deter 
trading abuses arising from the elimination of position and exercise 
limits in options on these indexes. The Exchange represents that it 
monitors trading in RUT options in much the same manner as trading in 
SPX, OEX, DJX, and NDX options and that the current CBOE surveillance 
procedures are more than adequate to continue monitoring RUT options. 
In addition, the Exchange intends to impose a reporting requirement on 
CBOE members (other than CBOE market-makers) or member organizations 
that trade RUT options. This reporting requirement, which is currently 
imposed on members who trade SPX, OEX, and NDX options, would require 
members or member organization who maintain in excess of 100,000 RUT 
contracts on the same side of the market, for their own accounts or for 
the account of customers, to report information as to whether the 
positions are hedged and provide documentation as to how such contracts 
are hedged, in a manner and form required by the Exchange's Department 
of Market Regulation.\8\ The Exchange also may specify other reporting 
requirements, as well as the limit at which the reporting requirement 
may be triggered.\9\
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    \8\ See Interpretation and Policy .03 to Rule 24.4. The 
reporting requirements for DJX options are triggered at 1 million 
contracts.
    \9\ Id.
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    In the interest of consistency, the Exchange also proposes to amend 
Exchange Rules relating to the trading of FLEX broad-based index 
options to reflect that there shall be no exercise or position limits 
on RUT options and to adopt the 100,000 contract reporting requirements 
for FLEX RUT options.\10\
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    \10\ See Rules 24A.7 and 24A.8. These rules are the subject of a 
pending rule filing, SR-CBOE-2006-99 (proposal to adopt rules 
related to FLEX Hybrid Trading System). Given the potential timing 
of the effectiveness of these two filings, the Exchange notes that 
an amendment may need to be submitted in order to reconcile the text 
of the two proposals.
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    In order to reflect the above-referenced proposed changes, the 
Exchange proposes to specify ``RUT'' in the text of Rules 24.4, 
Position and Limits for Broad-Based Index Options, and 24.5, Exercise 
Limits, as an option class on a broad-based index for which there are 
no position and exercise limits. Similarly, the Exchange proposes 
deleting the listing of ``Russell 2000'' from the chart contained in 
Rule 24.4(a). In addition, the Exchange proposes adding ``RUT'' to the 
text of Interpretation and Policy .03 to Rule 24.4, Reporting 
Requirements, and to the text of Interpretation and Policy .04 to Rule 
24.4, Margin and Clearing Firm Requirements. Finally, the Exchange 
proposes adding ``RUT'' to the text of Rule 24A.7, Position Limits for 
FLEX narrow-Based Index Options; Reporting Requirements for Flex Broad-
Based Index Options and Flex Equity Options.
    The Exchange believes that eliminating position and exercise limits 
for RUT options and FLEX options is consistent with CBOE rules relating 
to similar broad-based indexes and also allows CBOE members and their 
customers greater hedging and investment opportunities.
No Position and Exercise Limits for Reduced-Value Options on Broad-
Based Indexes for Which There Are No Position and Exercise Limits for 
Full-Value Options
    The Exchange lists and trades several reduced-value options on 
broad-based indexes for which the Exchange also lists and trades full-
value options (e.g., Mini-SPX Index (``XSP'') options, Mini-Russell 
2000 Index (``RMN'') options and Mini-Nasdaq-100 Index (``MNX'') 
options). When the Exchange received approval to list and trade 
reduced-value options on broad-based indexes, the proscribed position 
and exercise limits were equivalent to the reduced-value contract 
factor (e.g., 10) multiplied by the applicable position and exercise 
limits for the full-value option on the same broad-based index.\11\ For 
example, the position and exercise limits for RMN options (1/10th RUT 
value) are 500,000 contracts, which is equal to the applicable factor 
(10) multiplied by the position limit for RUT options (50,000). In 
other words, the Exchange's existing rules applicable to position and 
exercise limits for full-value broad-based index options are used to 
calculate the position and exercise limits for reduced-value 
options.\12\
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    \11\ See Securities Exchange Act Release Nos. 32893 (September 
14, 1993), 58 FR 49070 (September 21, 1993) (order approving SR-
CBOE-1993-12 to list and trade XSP options); 43000 (July 10, 2000), 
65 FR 42409 (July 30, 2000) (order approving SR-CBOE-2000-15 to list 
and trade MNX options); and 51220 (February 17, 2005), 70 FR 9398 
(February 25, 2005) (order approving SR-CBOE-2004-89 to list and 
trade RMN options and other reduced-value options on the Russell 
2000 Index).
    \12\ See Rule 24.4(d) (``Positions in reduced-value index 
options shall be aggregated with positions in full-value indices. 
For example, if an index is reduced by one-tenth, ten (10) reduced-
value contracts shall equal one contract. If an index is reduced by 
one-fifth, five (5) reduced-value contracts shall equal one 
contract.'').

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[[Page 44896]]

    Conversely, when the Exchange's rules specifically state that 
certain full-value broad-based index options have no position and 
exercise limits, the same equally applies to reduced-value options on 
those same broad-based indexes.\13\ In order to codify this provision, 
the Exchange proposes to amend Rules 24.4, Position Limits for Broad-
Based Index Options, and 24.5, Exercise Limits, by adding the 
parenthetical phrase, ``including reduced-value option contracts'' 
prior to the identification of those full-value broad-based index 
options for which there are no position and exercise limits.
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    \13\ See e.g., Securities Exchange Act Release No. 50759 
(November 30, 2004), 69 FR 70728 (December 7, 2004) (SR-CBOE-2004-
74) (immediately effective proposal to list, among other things, 
reduced-value options on the XEO for which there are no position and 
exercise limits because XEO has no position and exercise limits).
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    To reflect that there are no position limits for reduced-value 
options on the Russell 2000 Index and the Nasdaq-100 Index, the 
Exchange proposes deleting the listing of ``Nasdaq 100 Index (1/10th) 
(MNX),'' and ``Russell 2000 Index (1/10th)'' from the chart contained 
in Rule 24.4(a). Similarly, the Exchange proposes deleting the listing 
of ``Nasdaq 100 Stock Index (1/10th value (MNX),'' ``Russell 2000 Index 
(1/10th),'' and ``Russell 2000 Index (1/5th)'' from the chart contained 
in Interpretation and Policy .01(e) to Rule 24.4.\14\
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    \14\ The Exchange inadvertently neglected to request the 
Commission's approval to delete the text listing MNX options in 
these rules when the Exchange eliminated position and exercise 
limits for NDX options. See Securities Exchange Act Release No. 
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (order 
approving elimination of position and exercise limits for NDX 
options).
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    In addition, because position and exercise limits for reduced-value 
options are aggregated with full-value options for purposes of 
determining compliance with position and exercise limits, the Exchange 
proposes amending Interpretation and Policy .03 to Rule 24.4 and Rule 
24A.7 to reflect that such aggregation will apply when calculating 
reporting requirements.\15\ Specifically, the Exchange proposes to add 
the sentence, ``[i]n calculating the applicable contract-reporting 
amount, reduced-value contracts will be aggregated with full-value 
contracts and counted by the amount by which they equal a full-value 
contract (e.g., 10 XSP options equal 1 SPX full-value contract).''
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    \15\ See also Rule 24.4(d).
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Technical XEO Option Changes
    Lastly, the Exchange proposes to make technical changes to Rules 
24.4 and 24.5 to specify that there are no position and exercise limits 
for XEO options.\16\ The Exchange proposes to reflect this by adding 
``XEO'' to the text of Rules 24.4 and 24.5. In addition, the Exchange 
proposes to add ``XEO'' to the text of Interpretation and Policy .03 to 
Rule 24.4, Reporting Requirement, and the text of Interpretation and 
Policy .04 to Rule 24.4, Margin and Clearing Firm Requirements. 
Finally, the Exchange proposes to add ``XEO'' to the text of Rule 
24A.7, Position Limits for FLEX narrow-Based Index Options; Reporting 
Requirements for Flex Broad-Based Index Options and Flex Equity 
Options.
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    \16\ See Securities Exchange Act Release No. 44994 (October 26, 
2001), 66 FR 55722 (November 2, 2001) (order approving SR-CBOE-2001-
22 and granting permanent approval to the elimination of position 
and exercise limits on SPX, OEX, and DJX options). The only 
difference between OEX and XEO options is the manner in which the 
respective contracts are exercised (i.e., American-style versus 
European-style).
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2. Statutory Basis
    Because this rule proposal will place position and exercise limits 
for RUT options that are multiply-listed and heavily-traded on an equal 
basis with other similar and heavily-traded broad-based index options 
and because it will make the Exchange's rules more explicit with 
respect to position and exercise limits and other reporting and margin 
requirements, the Exchange believes the rule proposal is consistent 
with the Act and the rules and regulations under the Act applicable to 
a national securities exchange and, in particular, the requirements of 
section 6(b) of the Act.\17\ Specifically, the Exchange believes that 
the proposed rule change is consistent with the section 6(b)(5) Act 
\18\ requirements that the rules of an exchange 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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 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

    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-2007-79 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-2007-79. 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

[[Page 44897]]

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, 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 
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-2007-79 and should be submitted on or before August 24, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-15544 Filed 8-8-07; 8:45 am]

BILLING CODE 8010-01-P
