
[Federal Register: January 28, 2008 (Volume 73, Number 18)]
[Notices]               
[Page 4927-4929]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja08-122]                         


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57170; File No. SR-CBOE-2007-96]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Amend the Quarterly Option Series Pilot Program To 
Permit the Listing of Additional Series

January 18, 2008.
    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 7, 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 the Exchange. On January 17, 2008, 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\ Amendment 1 replaced the original filing in its entirety.
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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 5.5(e) (Quarterly Option Series Pilot 
Program) to permit the Exchange to list strike prices for Quarterly 
Option Series (``QOS'') in exchange traded fund (``ETF'') options that 
fall within a percentage range (30%) above and below the price of the 
underlying ETF. Additionally, upon demonstrated customer interest, the 
Exchange would also be permitted to open additional strike prices of 
Quarterly Option Series in ETF options that are more than 30% above or 
below the current price of the ETF. Market-Makers trading for their own 
account would not be considered when determining customer interest 
under this provision. In addition to the initial listed series, the 
proposal would permit the Exchange to list up to sixty (60) additional 
series per expiration month for each QOS in ETF options. Further, the 
proposal includes a delisting program to be undertaken by the Exchange 
in connection with QOS in ETFs. The text of the rule proposal is 
available on the Exchange's Web site (http://www.cboe.org/legal), at 
the Exchange's Office of the Secretary 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 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 amend Rule 5.5(e) (Quarterly Option Series 
Pilot Program) to permit the Exchange to list strike prices for QOS in 
ETF options that fall within a percentage range (30%) above and below 
the price of the underlying ETF. Additionally, upon demonstrated 
customer interest, the Exchange would also be permitted to open 
additional strike prices of Quarterly Option Series in ETF options that 
are more than 30% above or below the current price of the underlying 
ETF. Market-Makers trading for their own account would not be 
considered when determining customer interest under this provision. In 
addition to the initial listed series, the proposal would permit the 
Exchange to list up to sixty (60) additional series per expiration 
month for each QOS in ETF options.
Background
    On July 7, 2006, the Exchange filed with the Commission a pilot 
program proposal to permit the listing and trading of QOS in options on 
indexes or options on ETFs that satisfy the applicable listing criteria 
under CBOE rules.\4\ QOS trade based on calendar quarters that end in 
March, June, September and December. The Exchange lists QOS that expire 
at the end of the next consecutive four calendar quarters, as well as 
the fourth quarter of the next calendar year. For example, if the 
Exchange were trading QOS in iShares Russell 2000 Index Fund (``IWM'') 
in the month of April 2008, it would list series that expire at the end 
of the second quarter 2008 (June), third quarter 2008 (September), 
fourth quarter 2008 (December), first quarter 2009 (March), and fourth 
quarter 2009 (December).
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    \4\ See Securities Exchange Act Release No. 54123 (July 11, 
2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-20065-65) (``Pilot 
Program Approval Order''). Under the pilot program, the Exchange may 
list QOS in up to five currently listed option classes that are 
either options on ETFs or indexes. The Exchange is also permitted to 
list QOS in any options class that is selected by other securities 
exchanges that employ a similar pilot program under their respective 
rules.
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    Currently, the Exchange list QOS in five ETF options: (1) Nasdaq-
100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust, 
Series 1 (``DIA''); (4) Standard and Poor's Depositary Receipts/SPDRs 
(``SPY''); and (5) Energy Select SPDR (``XLE''). The average daily 
trading volume and total volume for QOS in IWM options significantly 
exceeds the volumes for QOS in other ETF options that are listed and 
traded on the Exchange. The chart below provides trading volume figures 
for the third quarter in 2007, demonstrating that QOS in IWM options 
are by far the most popular and heavily traded QOS on the Exchange.

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                                                                     July 2007                      August 2007                   September 2007
                           QOS                           -----------------------------------------------------------------------------------------------
                                                                DV          Total vol.          ADV         Total vol.          ADV         Total vol.
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IWM.....................................................          61,383       1,289,047          76,857       1,767,704          78,706       1,495,408
QQQQ....................................................           6,355         133,459           7,413         170,488           8,201         155,819
SPY.....................................................           4,525          95,024          10,490         241,261          15,274         290,212
DIA.....................................................           2,488          52,251           3,199          73,574           2,553          48,512
XLE.....................................................             291           6,105             729          16,758           1,176          22,348
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[[Page 4928]]

    Recently, the Exchange has received requests from market 
participants to add additional strike prices for QOS in IWM options 
that would be outside of the price range for setting strikes as 
provided for under Rule 5.5(e)(3) (hereinafter ``+/-$5 range'').\5\
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    \5\ Rule 5.5(e)(3) provides that the Exchange shall list strike 
prices for a QOS that are within $5 from the closing price of the 
underlying on the preceding day.
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    Investors and other market participants have advised the Exchange 
that they are buying and selling QOS in IWM options to trade 
volatility. In order to adequately replicate the desired volatility 
exposure, these market participants need to trade several IWM option 
series, many having strike prices that fall outside of the +/-$5 range 
currently allowed under the QOS rules.
    In addition, other participants have advised the Exchange that 
their investment strategies involve trading options tied to a 
particular option ``delta,'' \6\ rather than a particular level of the 
underlying security or index. At issue is the fact that delta depends 
on both the relative difference between the level of the underlying 
security or index and the option strike price, and time to expiration. 
For example, with IWM trading at $85 per share, the strike price 
corresponding to a ``25-delta'' IWM call (i.e., a call option with a 
delta of 25) with one month to expiration would be 89. However, the 
strike price corresponding to a ``25-delta'' IWM call with 3 months to 
expiration would be 93, and the strike price of a ``25-delta'' call 
with 1 year to expiration would be 106. In short, CBOE has been advised 
that the +/-$5 range for QOS in IWM options is insufficient to satisfy 
customer demand.
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    \6\ ``Delta'' is a measure of how an option price will change in 
response to a $1 price change in the underlying security or index. 
For example, an ABC option with a delta of ``50'' can be expected to 
change by $0.50 in response to a $1 change in the price of ABC.
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Proposed Rule Changes
    In order to meet customer demand, the Exchange proposes to amend 
Rule 5.5(e), which governs the Quarterly Option Series Pilot Program. 
Specifically, the Exchange proposes to revise Rule 5.5(e) to allow the 
Exchange to open additional strike prices of QOS in ETF options that 
are within thirty percent (30%) above or below the closing price of the 
underlying ETF (or ``Units'' as defined in Rule 5.3.06) on the 
preceding business day. The Exchange would also be permitted to open 
additional strike prices of QOS in ETF options that are more than 30% 
above or below the current price of the underlying ETF, provided that 
demonstrated customer interest exists for such series, as expressed by 
institutional, corporate or individual customers or their brokers. 
Market-Makers trading for their own account would not be considered 
when determining customer interest under this proposed provision. The 
Exchange would be permitted to list up to sixty (60) additional series 
per expiration month for each QOS in ETF options.
    The Exchange is also proposing to add new paragraph (6) to Rule 
5.5, which would set forth a delisting policy. Specifically, with 
respect to QOS in ETF options, the Exchange would, on a monthly basis, 
review series that are outside a range of five (5) strikes above and 
five (5) strikes below the current price of the underlying ETF, and 
delist series with no open interest in both the put and the call series 
having a strike price: (i) Higher than the highest strike price with 
open interest in the put and/or call series for a given expiration 
month; or (ii) lower than the lowest strike price with open interest in 
the put and/or call series for a given expiration month.
    To illustrate how the proposed delisting program would work, assume 
that IWM closed at $70 on the day the Exchange conducts the monthly 
review of QOS in ETF options. Series having strike prices above $75 and 
below $65 would be reviewed by the Exchange for possible delisting. 
Assume that the Exchange lists the following QOS in IWM options that 
expire in June 2008:

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                       Calls--Jun 08 exp                                        Puts--Jun 08 exp
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               Strike                      Open interest?                Strike               Open interest?
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62..................................  No......................  62.....................  No.
63..................................  No......................  63.....................  Yes.
64..................................  Yes.....................  64.....................  Yes.

                                                  * * * * * * *
76..................................  Yes.....................  76.....................  Yes.
77..................................  Yes.....................  77.....................  Yes.
78..................................  Yes.....................  78.....................  Yes.
79..................................  Yes.....................  79.....................  Yes.
80..................................  Yes.....................  80.....................  Yes.
81..................................  Yes.....................  81.....................  Yes.
82..................................  Yes.....................  82.....................  Yes.
83..................................  No......................  83.....................  No.
84..................................  No......................  84.....................  No.
85..................................  No......................  85.....................  Yes.
86..................................  Yes.....................  86.....................  No.
87..................................  Yes.....................  87.....................  Yes.
88..................................  Yes.....................  88.....................  Yes.
89..................................  Yes.....................  89.....................  No.
90..................................  Yes.....................  90.....................  No.
91..................................  No......................  91.....................  No.
92..................................  No......................  92.....................  No.
93..................................  No......................  93.....................  No.
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The Exchange would delist the series highlighted in grey above: $62, 
$91, $92, and $93. The Exchange would not delist the $83 and $84 series 
because there are series having open interest with strike prices higher 
than these two series. In addition, the Exchange would not delist the 
$63 call series because there is open interest in the $63 put series.

[[Page 4929]]

    Notwithstanding the proposed delisting policy, customer requests to 
add strikes and/or maintain strikes in QOS in ETF options in series 
eligible for delisting shall be granted.
    Further, in connection with the proposed delisting policy, if the 
Exchange identifies series for delisting, the Exchange shall notify 
other options exchanges with similar delisting policies regarding 
eligible series for listing, and shall work with such other exchanges 
to develop a uniform list of series to be delisted, so as to ensure 
uniform series delisting of multiply listed QOS in ETF options.
    It is expected that the proposed delisting policy for QOS in ETF 
options would be adopted by other options exchanges that have adopted 
the QOS Pilot Program.
    The Exchange represents that it has the necessary systems capacity 
to support new options series that will result from this proposal. 
Further, as proposed, the Exchange notes that this rule change would 
become part of the pilot program and, going forward, would be 
considered by the Commission when the Exchange seeks to renew or make 
permanent the pilot program in the future.\7\
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    \7\ To the extent the Commission views the proposed rule change 
as an expansion of the pilot program, thus triggering the 
requirement under the terms of the Pilot Program Approval Order that 
the Exchange submit a pilot program report, the Exchange notes that 
it submitted a report on June 26, 2007, in connection with its 
filing to extend the pilot program through July 10, 2008. See 
Securities Exchange Act Release No. 56035 (July 10, 2007), 72 FR 
38851 (July 16, 2007) (SR-CBOE-2007-70).
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2. Statutory Basis
    Because the additional new series can be added without presenting 
capacity problems and because the Exchange has proposed a delisting 
policy with respect to QOS in ETF options, the Exchange believes the 
rule proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, the requirements of section 6(b) of the Act.\8\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the requirements under section 6(b)(5) of the Act \9\ 
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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    \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

    The Exchange 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 CBOE 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-2007-96 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-2007-96. 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 the filing also will be available for 
inspection and copying at the principal office of the Exchange. 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-2007-96 and should be 
submitted on or before February 19, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-1373 Filed 1-25-08; 8:45 am]

BILLING CODE 8011-01-P
