
[Federal Register: March 7, 2008 (Volume 73, Number 46)]
[Notices]               
[Page 12481-12483]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr08-131]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57414; File No. SR-BSE-2008-12]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Make Permanent Two Pilot Programs That Increase Position and Exercise 
Limits on Equity Options

March 3, 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 February 29, 2008, the Boston Stock Exchange, Inc. (``Exchange'' or 
``BSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated this proposal as non-controversial under 
Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposed rule change 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)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 the Rules of the Boston Options 
Exchange (``BOX''). The Exchange is proposing to make permanent the 
position and exercise limits that the Exchange is currently applying to 
equity options on a pilot basis. The text of the rule proposal is 
available on the Exchange's Web site (http://www.bostonstock.com), at 
the offices of the Exchange, 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 purpose of the proposed rule change is to make permanent two 
pilot programs that increase position and exercise limits for equity 
options. To permanently establish the two pilot programs, the Exchange 
proposes to amend Section 7 (Position Limits) and

[[Page 12482]]

Section 9 (Exercise Limits) to Chapter III of the BOX Rules. Section 7 
subjects equity options to one of five different position limits 
depending on the trading volume and outstanding shares of the 
underlying security. Section 9 establishes exercise limits for the 
corresponding options at the same levels as the corresponding 
security's position limits.\5\
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    \5\ Section 9 of Chapter III of the BOX Rules states, ``... no 
Options Participant shall exercise, for any account in which it has 
an interest or for the account of any Customer, a long position in 
any options contract where such Options Participant or Customer, 
acting alone or in concert with others, directly or indirectly, has 
or will have: (i) Exercised within any five (5) consecutive business 
days aggregate long positions in any class of options traded on BOX 
in excess of'' the established limits set by the Exchange.
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    The first pilot program, the ``Section 7(a) Pilot Program,'' 
commenced on March 3, 2005, and provides for an increase to the 
standard (or ``non-pilot'') position and exercise limits for equity 
option contracts and for options on the PowerShares QQQ Trust 
(``QQQQ'').\6\
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    \6\ The Section 7(a) Pilot Program was approved by the 
Commission on March 3, 2005. See Securities Exchange Act Release No. 
51317 (March 3, 2005), 70 FR 12254 (March 11, 2005) (SR-BSE-2005-
10). The Section 7(a) Pilot Program has been extended five times for 
six month periods by the Commission, and expires on March 1, 2008. 
See Securities Exchange Act Release Nos. 52264 (August 15, 2005), 70 
FR 48992 (August 22, 2005) (SR-BSE-2005-37); 53347 (February 22, 
2006), 71 FR 10573 (March 1, 2006) (SR-BSE-2006-07); 54388 (August 
30, 2006), 71 FR 52833 (September 7, 2006) (SR-BSE-2006-32); 55260 
(February 8, 2007), 72 FR 7487 (February 15, 2007) (SR-BSE-2007-04); 
and 56268 (August 15, 2007), 72 FR 47092 (August 22, 2007) (SR-BSE-
2007-41). In connection with the March 21, 2007 transfer of 
sponsorship of the Nasdaq-100 Trust, the name of the trust was 
changed to the ``PowerShares QQQ Trust.'' See QQQQ prospectus 
available at http://www.powershares.com/pdf/P-QQQ-PRO-1.pdf.
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    The second pilot program, the ``iShares Russell 2000 Index Fund 
(`IWM') Option Pilot Program,'' commenced on January 23, 2007, and 
increases the position and exercise limits for IWM options from 250,000 
contracts to 500,000 contracts.\7\
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    \7\ The IWM Position Limit Pilot Program doubles the position 
and exercise limits for IWM options under the Section 7(a) Pilot 
Program. See BOX Rules, Chapter III, Section 7, Supplementary 
Material .02. Absent both of these pilot programs, the standard 
position and exercise limits for IWM options are 75,000 option 
contracts. The proposal that established the IWM Option Pilot 
Program was effective upon filing. See Securities Exchange Act 
Release No. 55171 (January 25, 2007), 72 FR 4549 (January 31, 2007) 
(SR-BSE-2007-03). The IWM Option Pilot Program has been extended 
twice by the Commission and expires on March 1, 2008. See Securities 
Exchange Act Release Nos. 56051 (July 12, 2007), 72 FR 39469 (July 
18, 2007) (SR-BSE-2007-30); and 57173 (January 18, 2008), 73 FR 4653 
(January 25, 2008) (SR-BSE-2008-03).
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Violations
    Both pilot programs were in effect during the period of January 1, 
2007 through January 1, 2008. Any violations of the position limits 
established during the pilot period which may have occurred during this 
time were deemed inadvertent--due primarily to miscounting, technical 
problems, or a misinterpretation of position limit calculation 
methodologies. None of these violations were deemed to be a result of 
manipulative activities.
Growth in Options Market
    Since the last position limit increase, there has been an 
exponential increase in the overall volume of exchange traded options. 
Part of this volume is attributable to a corresponding increase in the 
number of overall market participants. This growth in market 
participants has in turn brought about additional depth and increased 
liquidity in exchange traded options.
Manipulation
    Since the last position limit increase, and throughout the duration 
of the two pilot programs, the Exchange has not encountered any 
regulatory issues regarding the applicable position limits, and states 
that there is a lack of evidence of market manipulation schemes, which 
justifies making permanent the Section 7(a) and IWM Option Pilot 
Programs.
    The Exchange believes that position and exercise limits, at the 
non-pilot levels, no longer serve their stated purpose. As the 
anniversary of listed options trading approaches its 35th year, the 
Exchange believes that the existing surveillance procedures and 
reporting requirements at the BSE, and other options exchanges, and at 
the several clearing firms are capable of properly identifying unusual 
and/or illegal trading activity. The Exchange's procedures include 
daily monitoring of market movements via automated surveillance 
techniques to identify unusual activities in both options and their 
underlying securities.
    Accordingly, the Exchange represents that its surveillance 
procedures and reporting procedures, in conjunction with the financial 
requirements and risk management review procedures already in place at 
the clearing firms and the Options Clearing Corporation, will serve to 
adequately address any concerns the Commission may have with respect to 
account(s) engaging in any manipulative schemes or assuming too high a 
level of risk exposure.
Financial Requirements
    The Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns that a member or its customer may try to maintain an 
inordinately large unhedged position in an equity option.
Inability To Compete; Retreat to OTC Market
    The Exchange has no reason to believe that the current trading 
volume in equity options will not continue. Rather, the Exchange 
expects continued options volume growth as opportunities for investors 
to participate in the options markets increase and evolve. The Exchange 
believes that the non-pilot position and exercise limits are 
restrictive, and maintaining those limits will hamper the listed 
options markets from being able to compete fairly and effectively with 
the over-the-counter markets.
No Adverse Consequences From Past Increases
    Equity option position limits have been gradually expanded from 
1,000 contracts in 1973 to the current level of 75,000 contracts for 
the largest and most actively traded equity options. To date, there 
have been no adverse effects on the markets as a result of these past 
increases in the limits for equity option contracts.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\8\ in general, and Section 
6(b)(5) of the Act,\9\ in particular, in that it is designed to promote 
just and equitable principles of trade, to prevent fraudulent and 
manipulative acts, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest in that it will, if 
approved, provide uniform greater position and exercise limits for 
options traded on the options exchanges.
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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 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 has neither solicited nor received comments on the 
proposed rule change.

[[Page 12483]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\11\ The Exchange notes that the proposed rule change 
is based on a similar proposal recently approved by the Commission.\12\ 
The Exchange has asked the Commission to waive the operative delay to 
permit the proposed rule change to become operative prior to the 30th 
day after filing.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of 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 Exchange has fulfilled this requirement.
    \12\ See Securities Exchange Act Release No. 57352 (February 19, 
2008), 73 FR 10076 (February 25, 2008) (order granting accelerated 
approval to SR-CBOE-2008-07).
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    The Section 7(a) Pilot Program and the IWM Option Pilot Program 
were scheduled to expire on March 1, 2008. The Commission believes that 
waiving the 30-day operative delay of the Exchange's proposal is 
consistent with the protection of investors and the public interest 
because it will allow the position and exercise limits to remain at 
consistent levels during the transition from the pilot programs to 
permanent status.\13\ Therefore, the Commission designates the proposal 
to be operative upon filing.
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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 No. SR-BSE-2008-12 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-BSE-2008-12. 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 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-BSE-2008-12 and should be 
submitted on or before March 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4514 Filed 3-6-08; 8:45 am]

BILLING CODE 8011-01-P
