
[Federal Register: September 12, 2008 (Volume 73, Number 178)]
[Notices]               
[Page 53060-53062]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12se08-109]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58460; File No. SR-CBOE-2008-90]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Related to 
Trades in Restricted Classes

September 4, 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 29, 2008, the Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. 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.

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[[Page 53061]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 6.25, Nullification and 
Adjustment of Equity Options Transactions, and Rule 24.16, 
Nullification and Adjustment of Transactions in Index Options, Options 
on ETFs and Options on HOLDRS. The Exchange is proposing to amend the 
rules to permit the nullification of opening transactions that do not 
satisfy the requirements of Rule 5.4, Withdrawal of Approval of 
Underlying Securities. The Exchange is also proposing to amend Rule 5.4 
to make clear that its restrictions on opening transactions, which 
apply to previously opened options series of a class that no longer 
meets the then current requirements for trading, apply to both opening 
purchase transactions and opening sell transactions. Currently the rule 
text only references opening purchase transactions. The text of the 
proposed rule change is available on the Exchange's Web site (http://
www.cboe.org/Legal), at the Office of the Secretary, CBOE 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 is proposing to amend its obvious error rules to 
permit the nullification of opening transactions in ``restricted 
series'' that do not satisfy the requirements of Rule 5.4.\3\ 
Currently, when the Exchange makes a determination that trading in a 
series is restricted pursuant to Rule 5.4, the Exchange notifies the 
membership of that determination through issuance of a regulatory 
circular. In addition, the Exchange's systems are programmed to 
automatically restrict the entry of electronic opening transactions. 
However, opening orders entered in open outcry are not systemically 
prevented and, in addition, opening market-maker activity is still 
permitted both electronically and in open outcry. As a result, it is 
possible that an opening transaction that does not satisfy the 
requirements of Rule 5.4 may occur inadvertently.
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    \3\ In relevant part, Rule 5.4 provides that, whenever the 
Exchange determines that an underlying security previously approved 
for Exchange option transactions does not meet the then current 
requirements for continuance of such approval or for any other 
reason should no longer be approved, the Exchange will not open for 
trading any additional series of options of the class covering that 
underlying security and therefore two floor officials, in 
consultation with a designated senior executive officer of the 
Exchange, may prohibit any opening purchase transactions in series 
of options of that class previously opened (except that (i) opening 
transactions by Market-Makers executed to accommodate closing 
transactions of other market participants and (ii) opening 
transactions by CBOE member organizations to facilitate the closing 
transactions of public customers executed as crosses pursuant to and 
in accordance with paragraph (b) or (d) of Rule 6.74, Crossing 
Orders, may be permitted), to the extent it deems such action 
necessary or appropriate (such series are referred to herein and in 
the proposed new text in Rules 6.25 and 24.16 as ``restricted 
series''); provided, however, that where exceptional circumstances 
have caused an underlying security not to comply with the Exchange's 
current approval maintenance requirements, regarding number of 
publicly held shares or publicly held principal amount, number of 
shareholders, trading volume or market price the Exchange, in the 
interest of maintaining a fair and orderly market or for the 
protection of investors, may determine to continue to open 
additional series of option contracts of the class covering that 
underlying security.
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    In order to address these scenarios, the Exchange is proposing to 
permit the nullification of opening transactions in a Rule 5.4 
restricted series provided notification is received by designated 
personnel in the Exchange's control room from any member or person 
associated with a member that believes it participated in such 
transaction within the timeframes prescribed in Rules 6.25(b)(1) and 
24.16(b)(1). In addition, absent unusual circumstances, designated 
personnel in the control room (either on their own motion or upon 
request of a member) would initiate action within sixty (60) minutes of 
such a transaction. Such actions would be reviewed and determinations 
rendered by the senior official in the control room. The Exchange 
believes it is reasonable and appropriate for the senior official to 
render these decisions given the simple and objective nature of this 
particular type of proposed obvious error, which involves opening 
transactions in a series in which the Exchange has restricted opening 
trading activity pursuant to Rule 5.4.\4\ The Exchange also notes that 
any determinations rendered by the senior official would be subject to 
the same review procedures as determinations rendered by Trading 
Officials.
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    \4\ The senior official in the control room has authority to 
render other determinations elsewhere in our rules. For example, if 
the Hybrid Trading System has not opened a series of a class because 
there is no quote present that complies with the legal width 
requirements or the opening price is not within an acceptable range, 
the senior official in the control room may authorize the opening of 
the affected series where necessary to ensure a fair and orderly 
market. See paragraph (f) of Rule 6.2B, Hybrid Opening System 
(``HOSS'').
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    In connection with this rule change, the Exchange is proposing to 
clarify that an obvious error rule action may be initiated by a member 
through contacting either a Trading Official or designated personnel in 
the control room.\5\ Currently the rule simply references Trading 
Officials, which includes several of the Exchange staff in our control 
room. Thus, for administrative convenience, we wish to clarify that 
simply contacting Trading Officials or designated personnel in the 
control room is sufficient to initiate action. Once either a Trading 
Official or a control room designee is contacted, all reviews and 
determinations shall continue to be rendered by the Trading Officials 
except that, as proposed herein, actions to nullify an opening trade in 
a restricted series shall be reviewed and determinations rendered by 
the senior official in the control room.
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    \5\ We note that the procedures of other markets currently allow 
for the initiation of an obvious error review by contacting 
designated personnel in their respective control rooms. See, e.g., 
International Securities Exchange (``ISE'') Rule 720, Obvious and 
Catastrophic Errors (which provides that ISE members who believe 
they participated in a transaction that was an obvious error must 
notify designated personnel in ISE's market control center to 
initiate a review).
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    Lastly, the Exchange is proposing to clarify in the text of Rule 
5.4 that the restrictions on opening transactions contained in the 
rule, as well as the related exceptions, apply to both opening 
purchases and opening sales in restricted series. Currently, the rule 
text indicates that the restrictions are applicable only to opening 
purchase transactions; however, it is the Exchange's intention that the 
restriction, and related exceptions, should also apply to opening 
sales. Proposed changes to the rule text make this clear.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the Act \6\ and the rules and regulations thereunder and, in 
particular, the requirements of section 6(b) of the Act.\7\ 
Specifically, the Exchange believes the

[[Page 53062]]

proposed rule change is consistent with the section 6(b)(5) \8\ 
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. The proposed 
rule change would help the Exchange more efficiently address scenarios 
where an opening transaction that does not satisfy the requirements of 
Rule 5.4 may occur inadvertently.
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    \6\ 15 U.S.C. 78f(b)(1).
    \7\ 15 U.S.C. 78f(b).
    \8\ 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 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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 the Exchange 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-2008-90 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2008-90. 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-2008-90 and should be 
submitted on or before September 29, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-21164 Filed 9-11-08; 8:45 am]

BILLING CODE 8010-01-P
