

[Federal Register: February 13, 2008 (Volume 73, Number 30)]
[Notices]               
[Page 8383-8384]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe08-149]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57286; File No. SR-CBOE-2007-122]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of a Proposed Rule Change as 
Modified by Amendment No. 1 Thereto Amending Its Obvious Error Rule for 
Options on Indices, ETFs, and HOLDRS

February 7, 2008.
    On October 31, 2007, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE Rule 24.16 (``Rule 
24.16'' or ``Rule''), which is the Exchange's rule applicable to the 
nullification and adjustment of transactions in index options, options 
on exchange-traded funds (``ETFs''), and options on HOLding Company 
Depository ReceiptS (``HOLDRS''), to change the manner in which the 
Rule applies the obvious price error provision to transactions 
occurring as part of the Hybrid Opening System (``HOSS'') process. On 
December 14, 2007, the CBOE submitted Amendment No. 1 to the proposed 
rule change. The proposed rule change, as amended, was published for 
comment in the Federal Register on December 28, 2007.\3\ The Commission 
received no comment letters on the proposal. This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 57005 (December 20, 
2007), 72 FR 73919.
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    Currently, Rule 24.16 provides that an obvious price error will be 
deemed to have occurred when the execution price of a buy (sell) 
transaction is above (below) the fair market value of the option by at 
least the prescribed minimum error amount, as set forth in the Rule. 
For purposes of transactions occurring on HOSS, ``fair market value'' 
is currently defined as the midpoint of the first quote after the 
transaction(s) in question that does not reflect the erroneous 
transaction(s). The Exchange proposes to revise the definition of fair 
market value to provide additional conditions that would apply during 
regular HOSS rotations and during HOSS rotations in index options 
series that are being used to calculate the final settlement price of 
volatility indexes on the final settlement day. According to CBOE, the 
additional conditions are intended to reasonably factor the amount of 
available liquidity into the fair market value calculation during these 
rotations.
    With respect to regular HOSS rotations, the Exchange proposes to 
add a condition that the option contract quantity subject to 
nullification or adjustment cannot exceed the size of the first quote 
after the transaction(s) in question that does not reflect the 
erroneous transaction(s). Any nullification or adjustment would occur 
on a pro rata basis and would take into account the overall size of the 
HOSS opening trade.
    With respect to HOSS rotations in index options series that are 
used to calculate the final settlement price of a volatility index on 
the final settlement day, the Exchange proposes to add a condition that 
the first quote after the transaction(s) in question that does not 
reflect the erroneous transaction(s) must be for at least the overall 
size of the HOSS opening trade. If the size of the quote is less than 
the overall size of the HOSS opening trade, then the obvious price 
error provision shall not apply.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the

[[Page 8384]]

rules and regulations thereunder applicable to a national securities 
exchange \4\ and, in particular, the requirements of section 6(b) of 
the Act \5\ and the rules and regulations thereunder. Specifically, the 
Commission finds that the proposal is consistent with section 6(b)(5) 
of the Act,\6\ in that the proposal is designed to promote just and 
equitable principles of trade, remove impediments and perfect the 
mechanisms of a free and open market, and to protect investors and the 
public interest.
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    \4\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission considers that in most circumstances trades that are 
executed between parties should be honored. On rare occasions, the 
price of the executed trade indicates an ``obvious error'' may exist, 
suggesting that it is unrealistic to expect that the parties to the 
trade had come to a meeting of the minds regarding the terms of the 
transaction. In the Commission's view, the determination of whether an 
``obvious error'' has occurred and the process for reviewing such a 
determination should be based on specific and objective criteria and 
subject to specific and objective procedures.
    The Commission believes that the Exchange's proposal to revise Rule 
24.16 by modifying the manner in which the Rule applies its obvious 
price error provision to transactions in index options, options on 
ETFs, and options on HOLDRS that occur as part of the HOSS process 
during regular opening rotations and during opening rotations on the 
final settlement day for volatility indexes is appropriate. The 
proposal provides for an objective standard because in each of the 
foregoing situations, the fair market value calculation must take into 
account the size of the quote.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-CBOE-2007-122), as amended, 
is hereby approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-2613 Filed 2-12-08; 8:45 am]

BILLING CODE 8011-01-P
