
[Federal Register: November 17, 2009 (Volume 74, Number 220)]
[Notices]               
[Page 59296-59297]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17no09-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60978; File No. SR-CBOE-2009-068]

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

November 10, 2009.
    On September 16, 2009, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') 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's $1 Strike 
Program. The proposed rule change was published for comment in the 
Federal Register on October 7, 2009.\3\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60749 (September 30, 
2009), 74 FR 51632.
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    LEAPS are long-term equity options that expire from 12 to 39 months 
from the time they are listed.\4\ The proposed rule change expands the 
Exchange's $1 Strike Program (``Program'') to permit the exchange to 
list LEAPS with low strike prices \5\ and at $1 strike price intervals. 
Specifically, the Exchange will be able to list LEAPS series having 
strike prices of $1, $2, $3, $4, and $5 in up to 200 option classes on 
individual securities that are in the Exchange's Program or another 
exchange's Program.\6\ CBOE believes that deep out-of-the-money put 
options that could be listed under this proposal are functionally 
similar to credit default swaps and could be a viable, liquid 
alternative to OTC-traded credit default swaps.
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    \4\ See CBOE Rule 5.8.
    \5\ CBOE, along with the other options exchanges, recently 
amended the Options Listing Procedures Plan (``OLPP'') to adopt 
objective, exercise price range limitations applicable to options on 
individual equity securities, ETFs, and trust-issued receipts. See 
Securities Exchange Act Release No. 60531 (August 19, 2009), 74 FR 
43173 (August 26, 2009) (approving Amendment No. 3 to the OLPP). The 
exercise price range limitations of paragraph (3)(g) of the OLPP 
state that the exercise price of each newly listed option on an 
equity security, ETF, or trust-issued receipt shall be fixed at a 
price per unit that is reasonably close to the price of the 
underlying security at or about the time of the series listing. 
Under paragraph (3)(g)(i), if the price of the underlying security 
is less than or equal to $20, the exchange shall not list new option 
series with an exercise price more than 100% above or below the 
price of the underlying security; and if the price of the underlying 
security is greater than $20, the exchange shall not list new option 
series with an exercise price more than 50% above or below the price 
of the underlying security. However, paragraph (3)(g)(ii) of the 
OLPP states that these exercise price range limitations do not apply 
with regard to, among others, option classes participating in the 
Program. Therefore, LEAPS series listed under this proposal would 
not be subject to the exercise price range limitations contained in 
paragraph (3)(g).
    \6\ However, if the Exchange already has listed a LEAPS series 
with a $2.50 strike price, it would be permitted under this proposal 
to list additional series with strike prices of $1, $4, and $5, but 
not series with strike prices of $2 or $3. See CBOE Rule 5.5, 
Interpretation .01(a)(3).
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    The margin requirements set forth in Chapter XII of the Exchange's 
rules and the position and exercise requirements set forth in CBOE 
Rules 4.11 and 4.12 will apply to these new series, and no changes to 
those requirements were proposed.
    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\7\ In particular, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\8\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, 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. The Commission believes that the low-strike LEAPS 
contemplated in this proposal will provide investors with a potentially 
useful investment choice. The proposal will extend to these options the 
benefits of a listed exchange market, which

[[Page 59297]]

include a centralized forum for price discovery, pre- and post-trade 
transparency, standardized contract specifications, and the guarantee 
of the Options Clearing Corporation.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal strikes a reasonable 
balance between the Exchange's desire to offer a wider array of 
products with the need to avoid unnecessary proliferation of options 
series and the corresponding increase in quotes. In approving the 
proposed rule change, the Commission has relied on the Exchange's 
representation that it has the necessary systems capacity to support 
the new options series that will be listed under this proposal. This 
approval order is conditioned on CBOE's adherence to this 
representation. The Commission expects the Exchange to continue to 
monitor for options with little or no open interest and trading 
activity and to act promptly to delist such options. In addition, the 
Commission expects that CBOE will monitor the trading volume associated 
with the additional options series listed as a result of this proposal 
and the effect of these additional series on market fragmentation and 
on the capacity of the Exchange's, the Options Price Reporting 
Authority's, and vendors' automated systems.

Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CBOE-2009-068), be, and 
hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-27504 Filed 11-16-09; 8:45 am]

BILLING CODE 8011-01-P
