

[Federal Register: September 17, 2007 (Volume 72, Number 179)]
[Notices]               
[Page 52948-52950]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17se07-114]                         

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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-56380; File No. SR-CBOE-2007-105]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Amend its Rules Pertaining to the Contract Multiplier 
for Credit Default Options

September 10, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 7, 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 filed the proposal as a 
``non-controversial'' proposed rule

[[Page 52949]]

change 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.\5\ 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).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ CBOE gave the Commission written notice of its intent to 
file the proposed rule change on August 30, 2007.
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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 the 
applicable contract multiplier for Credit Default Options (``CDOs''). 
The text of the proposed rule change is available on the Exchange's Web 
site (http://www.cboe.org/Legal), at the Exchange's principal office, 

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 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 recently received approval to list and trade CDOs,\6\ 
which are binary call options based on Credit Events \7\ in one or more 
debt securities of an issuer or guarantor. If the Exchange confirms a 
Credit Event, a CDO would be subject to automatic exercise and a fixed 
cash settlement amount payment of $100,000 per contract. The $100,000 
is equal to a fixed exercise settlement value of $100 multiplied by a 
fixed contract multiplier of 1,000.
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    \6\ See Securities Exchange Act Release No. 55871 (June 6, 
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84).
    \7\ A ``Credit Event'' occurs when an issuer or guarantor has a 
Failure-to-Pay Default on, any other Event of Default on, and/or a 
Restructuring of the Relevant Obligation(s). Failure-to-Pay 
Defaults, Events of Default, and Restructurings are defined in 
accordance with the terms of the Relevant Obligation(s) and are 
subject to certain minimum threshold amounts provided in Rule 
29.1(c). The ``Relevant Obligations'' are the debt security 
obligation(s) of the issuer or guarantor that underlie a CDO. See 
Rules 29.1(c).
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    The purpose of this rule change is to modify the rule provisions 
pertaining to CDO contract multipliers to permit the Exchange to vary 
the particular contract multiplier term on a class-by-class basis 
within a range of 1 to 1,000.\8\ The exercise settlement value would 
remain fixed at $100. Thus, a given CDO class could have a cash 
settlement amount ranging from $100 per contract (equal to an exercise 
settlement value of $100 multiplied by a contract multiplier of 1) to 
$100,000 per contract (equal to an exercise settlement value of $100 
multiplied by a contract multiplier of 1,000). Based on feedback from 
members and potential investors, the Exchange believes it is essential 
to have the ability to introduce CDOs where the contract payout is less 
than $100,000 in order to attract liquidity and to better service 
customer demands and needs.
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    \8\ See proposed change to Rule 29.1(a) and corresponding change 
to Rule 29.9(e).
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    In calculating the applicable position limits and reporting 
requirements, the Exchange is proposing that any ``reduced-value'' CDOs 
(i.e., CDOs that have a cash settlement amount that is less than 
$100,000 per contract) would be aggregated with any equivalent full-
value CDOs and counted by the amount by which they equal a full-value 
CDO contract.\9\ For example, the Exchange might determine to list 
reduced-value CDOs based on a Failure-to-Pay Default of the Relevant 
Obligations of Issuer ABC using a contract multiplier of 100, in which 
case the reduced-value CDO would be subject to a $10,000 per contract 
payout upon confirmation of a Failure-to-Pay Default ($100 multiplied 
by 100, which is \1/10\th the value of a full-value CDO). The 
applicable position limits and reporting requirements would be 
equivalent to the reduced-value contract factor multiplied by the 
applicable position limits for a full-value option on the same broad-
based index. Using the example above, the position limits for the 
reduced-value CDOs (\1/10\th full-value) would be 50,000 contracts, 
which is equal to the applicable reduced-value factor (10) multiplied 
by the applicable position limit for a full-value CDO class (5,000 
contracts).\10\ Likewise, the hedge reporting requirements would be 
10,000 contracts, which is equal to the applicable factor (10) 
multiplied by the applicable reporting level for a full-value CDO class 
(1,000 contracts).
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    \9\ See proposed changes to Rules 29.5(a) and 29.6.
    \10\ As indicated above, positions in reduced-value CDOs would 
be aggregated with positions in equivalent full-value CDOs for 
purposes of calculating position limit and reporting requirements. 
For example, if a CDO is reduced by one-tenth, ten reduced-value CDO 
contracts would equal one full-value contract. If a CDO is reduced 
by one-fifth, five reduced-value CDO contracts would equal one full-
value CDO contract.
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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) of the 
Act,\11\ 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.
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    \11\ 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 from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest, provided that the self-regulatory organization 
has given the Commission written notice of its intent to file 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 proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such proposed rule 
change, the

[[Page 52950]]

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-2007-105 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-2007-105. 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 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-2007-105 and should be 
submitted on or before October 9, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E7-18217 Filed 9-14-07; 8:45 am]

BILLING CODE 8010-01-P
