
[Federal Register: October 7, 2009 (Volume 74, Number 193)]
[Notices]               
[Page 51632-51633]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc09-107]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60749; File No. SR-CBOE-2009-068]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change To Amend the 
$1 Strike Program To Allow Low-Strike LEAPS

September 30, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 16, 2009, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend the $1 Strike Program. 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 self-regulatory organization 
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 those 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 parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to expand the $1 Strike 
Program (``Program'') in a limited fashion to allow CBOE to list new 
series in $1 intervals up to $5 in long-term option series (``LEAPS'') 
in up to 200 option classes on individual stocks.\3\ Currently, under 
the Program, CBOE may not list LEAPS at $1 strike price intervals for 
any class selected for the Program. CBOE also is restricted from 
listing any series that would result in strike prices being $0.50 
apart, unless the series are part of the $.50 Strike Program.\4\ (See 
CBOE Rule 5.5.01.)
---------------------------------------------------------------------------

    \3\ Under CBOE Rule 5.8, LEAPS expire from 12-39 months from the 
time they are listed.
    \4\ On September 15, 2009, CBOE filed SR-CBOE-2009-069 for 
immediate effectiveness, which filing establishes a $.50 Strike 
Program.
---------------------------------------------------------------------------

    CBOE believes that this proposal is appropriate and will allow 
investors to establish option positions that are better tailored to 
meet their investment objectives, vis-[agrave]-vis credit risk, using 
deep out-of-the-money put options. Deep out-of-the money put options 
are viewed as a viable, liquid alternative to OTC-traded credit default 
swaps (``CDS''). These options do not possess the negative 
characteristics associated with CDS, namely, lack of transparency, 
insufficient collateral requirements, and inefficient trade processing. 
Moreover, deep out-of-the money put options and CDS are functionally 
similar, as there is a high correlation between low-strike put prices 
and CDS spreads.\5\
---------------------------------------------------------------------------

    \5\ More information is available on this trading strategy at 
CBOE's Web site at http://www.cboe.com/Institutional/DOOM.aspx.
---------------------------------------------------------------------------

    CBOE notes that its proposal is limited in scope, as $1 strikes in 
LEAPS may only be listed up to $5 and in only up to 200 option classes. 
As is currently the case, CBOE would not list series with $1.00 
intervals within $0.50 of an existing $2.50 strike price in the same 
series. As a result, CBOE does not believe that this proposal will 
cause a significant increase in quote traffic.
    Moreover, as the SEC is aware, CBOE has adopted various quote 
mitigation strategies in an effort to lessen the growth rate of 
quotations. When it expanded the Program several months ago, CBOE 
included a delisting policy that would be applicable with regard to 
this proposed expansion.\6\ CBOE and the other options exchanges 
amended the Options Listing Procedures Plan (``OLPP'') in 2008 to 
impose a minimum volume threshold of 1,000 contracts national average 
daily volume per underlying class to qualify for an additional year of 
LEAP series.\7\ Most recently, CBOE, along with the other options 
exchanges, amended the OLPP

[[Page 51633]]

to adopt objective, exercise price range limitations applicable to 
equity option classes, options on ETFs and options on trust issued 
receipts.\8\ CBOE believes that these price range limitations will have 
a meaningful quote mitigation impact. CBOE also notes that it recently 
delisted 216 option classes as part of its mandatory class delisting 
policy.\9\
---------------------------------------------------------------------------

    \6\ The delisting policy includes a provision that states CBOE 
may grant member requests to add strikes and/or maintain strikes in 
series of options classes traded pursuant to the Program that are 
eligible for delisting.
    \7\ See SEC Release No. 34-58630 (September 24, 2008), approving 
Amendment No. 2 to the OLPP.
    \8\ See SEC Release No. 34-60531 (August 19, 2009), approving 
Amendment No. 3 to the OLPP. CBOE's proposal to list $1 strikes in 
LEAPs to $5 would not be subject to the exercise price range 
limitations contained in new paragraph (3)(g)(ii) of the OLPP.
    \9\ See CBOE Information Circular IC09-172.
---------------------------------------------------------------------------

    The margin requirements set forth in Chapter XII of the Exchange's 
rules and the position and exercise requirements set forth in Rule 4.11 
and Rule 4.12 will continue to apply to these new series, and no 
changes are being proposed to those requirements by this rule change.
    With regard to the impact on system capacity, CBOE has analyzed its 
capacity and represents that it and the Options Price Reporting 
Authority have the necessary systems capacity to handle the additional 
traffic associated with the listing and trading of an expanded number 
of series as proposed by this filing.
2. Statutory Basis
    The Exchange believes the rule proposal is consistent with the 
Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations under the Act applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b) of the Act.\10\ 
Specifically, the Exchange believes that the proposed rule change is 
consistent with the Section 6(b)(5) Act \11\ requirements 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. The Exchange 
believes that the listing of the $1 strike price in LEAPS series will 
benefit investors by giving them more flexibility to closely tailor 
their investment decisions.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 self-regulatory organization 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 No. SR-CBOE-2009-068 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-CBOE-2009-068. 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 changes 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 No. SR-CBOE-2009-068 and should be 
submitted on or before October 28, 2009.
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24079 Filed 10-6-09; 8:45 am]

BILLING CODE 8011-01-P
