

[Federal Register: August 30, 2007 (Volume 72, Number 168)]
[Notices]               
[Page 50131-50133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30au07-63]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56317; File No. SR-CBOE-2007-93]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Amend CBOE's Rules Related to Credit Default Basket 
Options

August 24, 2007.
    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 August 21, 2007, 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, II, and III below, which Items have been prepared 
substantially by the Exchange. The Exchange has designated the proposed 
rule change as one constituting a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule under Section 19(b)(3)(A)(i) of the Act 
\3\ and Rule 19b-4(f)(1) 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 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)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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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 pertaining to Credit 
Default Basket Options (``CDBOs'') in order to conform the Exchange's 
Succession Event confirmation process for CDBOs with that currently 
codified for single-name Credit Default Options (``CDOs'').\5\ The text 
of the proposed rule change is available on the Exchange's Web site 
(http://www.cboe.org/legal), at the


[[Page 50132]]

Exchange's principal office, and at the Commission's Public Reference 
Room.
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    \5\ See Securities Exchange Act Release No. 56114 (July 20, 
2007), 72 FR 41367 (July 27, 2007) (SR-CBOE-2007-81).
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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 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 aspects of such 
statements.

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

1. Purpose
    The Exchange has received approval from the Commission to list and 
trade CDOs and CDBOs, which are different types of binary options, 
based on debt securities, that pay a fixed amount in the event a Credit 
Event is confirmed during the life of the option.\6\ Recently the 
Exchange amended CBOE Rule 29.4, Adjustments, in order to set out 
certain parameters that the Exchange intends to use for determining the 
applicable share to be allocated to a Successor Reference Entity if 
there is a CDO contract adjustment due to a Succession Event.\7\ The 
Exchange currently seeks to establish the same parameters for CDBOs.
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    \6\ See Securities Exchange Act Release No. 55871 (June 6, 
2007), 72 FR 32372 (June 12, 2007) (order approving SR-CBOE-2006-84 
to list and trade CDOs); Securities Exchange Act Release No. 56275 
(August 17, 2007) (order approving SR-CBOE-2007-26 to list and trade 
CDBOs).
    \7\ See supra note 5. As to CDOs, a ``Successor Reference 
Entity'' and a ``Succession Event'' are defined in accordance with 
the terms of the Relevant Obligation(s). See CBOE Rule 
29.4(a)(1)(i).
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    CBOE Rule 29.4(b)(1) provides that, if the Exchange confirms a 
Succession Event in a Basket Component, that component may be replaced 
by one or more Basket Components (``Successor Basket Components'') 
consisting of Successor Reference Entity(ies).\8\ Currently, the rule 
does not provide a framework for determining the allocation among 
Successor Basket Component(s). As it applies to CDOs, CBOE Rule 
29.4(a)(1) makes clear that, if the Exchange confirms a Succession 
Event, the allocation among Successor Reference Entities will be based 
on the applicable share of each Successor Reference Entity. In order to 
conform the Exchange's Succession Event confirmation process for CDBOs 
with the process used for CDOs, the Exchange first proposes to amend 
CBOE Rule 29.4(b)(1) to clarify that, if the Exchange confirms a 
Succession Event in a Basket Component, that component will be replaced 
by one or more Basket Components (``Successor Basket Component(s)'') 
that have succeeded the original Basket Component based on the 
applicable share of each Successor Basket Component.\9\
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    \8\ As to CDBOs, a ``Successor Basket Component'' and a 
``Succession Event'' are defined in accordance with the terms of the 
Relevant Obligation(s). See CBOE Rule 29.4(b)(1)(i).
    \9\ The Exchange also proposes to change the word ``may'' to 
``will'' in CBOE Rule 29(b)(1) to provide additional clarity and 
certainty with respect to the Exchange's Succession Event 
confirmation process.
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    Second, the Exchange proposes to specify how the ``applicable 
share'' would be calculated. Consistent with CDOs, the term 
``applicable share'' would be a percentage amount used to determine the 
adjusted cash settlement amount applicable to each Successor Basket 
Component.\10\ As set out in the proposed revisions to CBOE Rule 
29.4(b)(1)(i), in determining the applicable share, the Exchange as a 
general rule would allocate an equal share to each Successor Basket 
Component that has succeeded the original Basket Component as issuer 
and guarantor of (i) at least one Relevant Obligation and (ii) at least 
25% of the principal amount of the original Basket Component's 
outstanding debt obligations other than non-recourse indebtedness. If 
no Successor Basket Component satisfies the ``at least 25%'' 
requirement and the original Basket Component does not survive 
following the Succession Event, an equal share will be allocated to the 
Successor Basket Component(s) that succeeded to the largest percentage 
of the original Basket Component's outstanding debt obligations other 
than non-recourse indebtedness.'' \11\ These proposed ``applicable 
share'' parameters would override any contradictory provision in the 
terms of the Relevant Obligation(s).
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    \10\ Every determination by the Exchange pursuant to CBOE Rule 
29.4 is within the Exchange's sole discretion, is conclusive and 
binding on all holders and sellers, and is not subject to review. 
See CBOE Rule 29.4(e).
    \11\ If no Successor Basket Component satisfies the ``at least 
25%'' requirement and the original Basket Component survives, then 
no Succession Event will be deemed to have occurred and the CDBO 
contract will not be adjusted.
    As provided in CBOE Rule 29.4(b)(1)(ii), in the event of an 
adjustment for succession, the Exchange would specify the Reference 
Obligation, the recovery rate, and the basket weight of each 
Successor Basket Component, and the newly specified weight(s) would 
equal the weight of the predecessor Basket Component replaced by the 
Successor Basket Component(s).
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    As with CDOs, the Exchange believes that setting forth these same 
conforming parameters would clarify how the Exchange intends to 
administer the Succession Event confirmation process, thereby affording 
investors with additional clarity and certainty regarding the impact of 
a Succession Event on an outstanding CDBO contract. The Exchange also 
understands that these parameters would be substantially similar to and 
generally consistent with the practice in the over-the-counter market.
    Finally, the Exchange is also proposing two technical changes to 
CBOE Rule 29.4. Specifically, the Exchange proposes to substitute the 
term ``Reference Entity'' with the term ``Basket Component'' in two 
places in the rule text. With respect to CDBOs, the term ``Reference 
Entity'' and ``Basket Component'' have identical meanings and are 
defined as the issuer or guarantor of one of the Reference Obligations 
that underlies a CDBO.\12\
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    \12\ See CBOE Rules 29.1(f) and (h).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations under the Act applicable to 
national securities exchanges. Specifically, the Exchange believes the 
proposed rule change is consistent with the Section 6(b)(5) \13\ which 
requires that the rules of an exchange be designed to promote just and 
equitable principles of trade, to prevent fraudulent and manipulative 
acts, to remove impediments to and to perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. As indicated above, the 
Exchange believes conforming the Succession Event confirmation process 
for CDBOs with the existing process for CDOs would afford investors 
additional clarity and certainty regarding the impact of a Succession 
Event on an outstanding CDBO contract.
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    \13\ 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.

[[Page 50133]]

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 change constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, it has become 
effective pursuant to Section 19(b)(3)(A)(i) of the Act \14\ and Rule 
19b-4(f)(1) thereunder.\15\ At any time within 60 days of the filing of 
the 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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    \14\ 15 U.S.C. 78s(b)(3)(A)(i).
    \15\ 17 CFR 240.19b-4(f)(1).
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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-2007-93 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-2007-93. 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 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-2007-93 and should be 
submitted on or before September 20, 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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Nancy M. Morris,
Secretary.
 [FR Doc. E7-17163 Filed 8-29-07; 8:45 am]

BILLING CODE 8010-01-P
