
[Federal Register: March 12, 2008 (Volume 73, Number 49)]
[Notices]               
[Page 13265-13267]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12mr08-121]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57436; File No. SR-CBOE-2008-18]

 
 Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Related to Delayed Start Option Series\TM\

March 5, 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 25, 2008, 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 CBOE. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) 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)(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 its rules pertaining to Delayed 
Start Option Series\TM\ (``DSOs'') in order to: (i) Change the exercise 
price increment parameters from the current maximum of one-eighth 
(0.125) to one (1.00); and (ii) provide that the applicable market 
model parameters (e.g., trading platform, eligible categories of 
Market-Maker participants, allocation algorithms and other trading 
parameters) for the DSOs of a given index options class may be 
determined separate from the market model parameters applicable to the 
non-DSOs of the same index options class, and that the applicable DSO 
parameters may differ before and after the strike setting date. 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'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, CBOE 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. CBOE 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 recently received approval to list and trade a new 
type of security index option product called DSOs.\5\ DSOs are 
identical to other options series that currently trade except that, 
instead of specifying a specific index value number for the exercise 
price, the exercise price is specified in terms of a specific method 
for fixing such a number. This method provides that the strike price is 
fixed based on the closing value of the underlying index on a 
predetermined date prior to their expiration (the ``strike setting 
date''). The particular strike setting date and method for fixing the 
exercise price is specified prior to the time the DSO is initially 
opened for trading. In addition, the particular expiration date is also 
specified prior to the time the DSO is initially opened for trading.
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    \5\ See Securities Exchange Act Release No. 56855 (November 28, 
2007), 72 FR 68610 (December 5, 2007) (SR-CBOE-2006-90).
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    Before the initiation of trading in DSOs, the Exchange wishes to 
make certain changes to Rule 24.9(d) that will accommodate the 
integration of DSOs into the Exchange's various market models and 
systems. First, the Exchange is proposing to change the exercise price 
increment parameters from the current maximum of one-eighth (0.125) to 
one (1.00) (amounts greater than or equal to 0.50 would round up). By 
way of background, on the strike setting date, the DSO is assigned an 
at-the-money, in-the-money or out-of-the-money strike price. Under the 
current rules, a DSO's exercise price is fixed based on the closing 
value of the underlying index on the strike setting date and rounded to 
the nearest 0.125 value or such smaller value as the Exchange may 
designate at the time the DSO is listed, provided that

[[Page 13266]]

the value cannot be smaller than 0.01.\6\ For example, using a one-
eighth interval, if the particular index underlying a DSO closes at 
1004.12 on the strike setting date, an at-the-money DSO would be 
assigned a strike price of 1004.125.\7\ In order to accommodate current 
system limitations relating to the rounding of strike prices for DSOs, 
the Exchange is proposing to revise the exercise price parameter from a 
maximum increment of 0.125 to 1.00. Under this revision, the DSO in the 
example above would be assigned a strike price of 1004.00. The Exchange 
is currently working on system changes that would accommodate a smaller 
strike price increment, and the Exchange intends to move to smaller 
increments once those changes are complete. As indicated in the current 
rule text, should the system functionality permit it in the future, the 
Exchange may determine to round a DSO to a value smaller that 1.00, 
provided that in all cases the increment would be designated at the 
time a DSO is listed and would not change thereafter, and that it would 
not be any smaller than 0.01.\8\
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    \6\ Because of system limitations related to the rounding of 
strike prices for DSOs, the Exchange had previously planned to round 
DSO exercise prices to the nearest 0.125. However, should the system 
functionality permit it in the future, the Exchange built the 
flexibility into its rules to be able to determine to round DSO 
exercise prices to a smaller value provided that the particular 
increment would be designated at the time the DSO is listed and that 
it would not be any smaller than 0.01. See Rule 24.9(d)(2)(ii).
    \7\ In-the-money and out-of-the-money DSOs trade in the exact 
same manner as at-the-money DSOs with the exception that the strike 
price would be set to a predetermined level either in-or out-of-the-
money on strike setting date (e.g., 5% in-the-money, 5% out-of-the-
money). For example, hypothetically, if the Exchange determines to 
list a 5% out-of-the-money DSO on the XYZ index and XYZ closes at 
1000 on the strike setting date, the strike price would be 
established at 1050.
    \8\ See note 6, supra.
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    Second, the Exchange is proposing to adopt a provision regarding 
the applicable market model (e.g., trading platform, eligible Market-
Maker participants, allocation algorithms and other trading parameters) 
for DSOs. Under the existing rules, the particular market model 
parameters are generally determined on a class-by-class basis and, once 
established, CBOE also has the authority to make changes to the 
applicable market model parameters for a given class.\9\ The proposed 
provision would provide that the Exchange may separately determine the 
appropriate market model (and changes thereto) for DSOs. This will 
provide the Exchange with more flexibility to formulate market models 
particular to the DSOs overlying a given index. Under this provision, 
the Exchange would be able to determine to use trading platforms (e.g., 
the CBOE Hybrid Trading System, Hybrid 2.0 Platform and Hybrid 3.0 
Platform), eligible categories of Market-Maker participants (e.g., 
Designated Primary Market-Makers (``DPMs''), Lead Market-Makers 
(``LMMs''), Market-Makers and Remote Market-Makers (``RMMs'')), 
allocation algorithms (e.g., UMA, price-time, or pro-rata priority with 
public customer, participation entitlement and market turner overlays) 
and other trading parameters for the DSOs of a given index options 
class that differ from the non-DSOs of the same class, and that differ 
for the periods before and after the DSO strike setting date. As 
indicated above, CBOE currently has the authority to change market 
model parameters now for standardized options.
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    \9\ See, e.g., Rules 6.2B, 6.13, 6.13A, 6.14, 6.45B, 6.53C, 
6.74, 6.74A and 8.14.
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    For example, hypothetically, the non-DSOs of an options class 
overlying the XYZ index might trade on the Hybrid 3.0 Platform with an 
LMM market model. For the DSOs overlying the same XYZ index, the 
Exchange might determine to use the Hybrid Trading Platform with an LMM 
market model for the period from the initial listing to the strike 
setting date and then use the Hybrid 3.0 Platform with an LMM market 
model for the period from the strike setting date to expiration.\10\
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    \10\ Thus, an LMM might be appointed to the XYZ DSOs from the 
initial listing to the strike setting date and another LMM appointed 
to the XYZ DSOs from the strike setting date to expiration. 
Alternatively, a DPM might be appointed to the XYZ DSOs during 
either period. These configurations would differ from the existing 
rules, which generally provide for the appointment of a DPM on a 
class basis or the appointment of an LMM(s) for a particular zone 
within a class on a monthly basis. See, e.g., Rules 8.14, 8.15A and 
8.83.
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    To the extent the Exchange would determine to trade the DSOs of a 
given index option class on a trading platform that differs from the 
other series of that class, the Exchange is also proposing that a 
Market-Maker participant with an appointment in the overall index class 
may (but would not be required to) seek an appointment to those DSOs. 
Using the example above, a Market-Maker with an appointment in the XYZ 
index options may (but would not be required to) seek an appointment 
for the XYZ DSOs for the period from initial listing to the strike 
setting date.\11\ To the extent that a Market-Maker participant does 
seek an appointment to trade DSOs on a trading platform that differs 
from the other series of a class, there would be no additional seat 
``appointment cost'' applicable to that DSO appointment under Rules 8.3 
and 8.4.\12\ Lastly, the applicable continuous electronic quoting 
obligations would apply to only those series that the Market-Maker 
participant is able to quote electronically.\13\ Using the same 
example, the Market-Maker would be required to provide continuous 
electronic quotes for 60% of the DSOs allocated to it in accordance 
with Rule 8.7 while those DSOs trade on the Hybrid Trading Platform.
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    \11\ In this particular scenario, a market-making appointment in 
the DSOs would be optional. The Exchange believes it is reasonable 
to not require a Market-Maker participant's appointment (and related 
market-making obligations) in an index class to apply to the related 
DSOs to the extent the DSOs are traded on a different platform.
    \12\ A seat appointment cost applies to each options class 
traded on the Exchange. The applicable costs can vary based on, 
among other things, whether the class is traded on the Hybrid 
Trading System, Hybrid 2.0 Platform or Hybrid 3.0 Platform. See 
Rules 8.3(c) and 8.4(d).
    \13\ For options trading on the Hybrid Trading System, Market-
Makers and DPMs or LMMs, as applicable, are able to quote 
electronically. For options trading on the Hybrid 2.0 Platform, 
Market-Makers, RMMs and DPMs, e-DPMs or LMMs, as applicable, are 
able to quote electronically. For options trading on the Hybrid 3.0 
Platform, only a single DPM or LMM, as applicable, is able to quote 
electronically. See, e.g., Rules 1.1(aaa) and 8.14.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder and, in particular, 
the requirements of Section 6(b) of the Act.\14\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \15\ requirements 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 for a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 result in 
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.

[[Page 13267]]

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

    Because the foregoing proposed rule change 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, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(f)(6) thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires that a self-regulatory organization submit to the 
Commission 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 Commission notes that the Exchange has satisfied the 
five-day pre-filing notice requirement.
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    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.

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-2008-18 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-2008-18. 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-2008-18 and should be 
submitted on or before April 2, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4837 Filed 3-11-08; 8:45 am]

BILLING CODE 8011-01-P
