[Federal Register Volume 73, Number 18 (Monday, January 28, 2008)]
[Notices]
[Pages 4927-4929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-1373]
[[Page 4927]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57170; File No. SR-CBOE-2007-96]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change and Amendment
No. 1 Thereto To Amend the Quarterly Option Series Pilot Program To
Permit the Listing of Additional Series
January 18, 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 7, 2007, 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 the Exchange. On January 17, 2008, the Exchange filed
Amendment No. 1 to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment 1 replaced the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend Rule 5.5(e) (Quarterly Option Series Pilot
Program) to permit the Exchange to list strike prices for Quarterly
Option Series (``QOS'') in exchange traded fund (``ETF'') options that
fall within a percentage range (30%) above and below the price of the
underlying ETF. Additionally, upon demonstrated customer interest, the
Exchange would also be permitted to open additional strike prices of
Quarterly Option Series in ETF options that are more than 30% above or
below the current price of the ETF. Market-Makers trading for their own
account would not be considered when determining customer interest
under this provision. In addition to the initial listed series, the
proposal would permit the Exchange to list up to sixty (60) additional
series per expiration month for each QOS in ETF options. Further, the
proposal includes a delisting program to be undertaken by the Exchange
in connection with QOS in ETFs. 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.
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 proposes to amend Rule 5.5(e) (Quarterly Option Series
Pilot Program) to permit the Exchange to list strike prices for QOS in
ETF options that fall within a percentage range (30%) above and below
the price of the underlying ETF. Additionally, upon demonstrated
customer interest, the Exchange would also be permitted to open
additional strike prices of Quarterly Option Series in ETF options that
are more than 30% above or below the current price of the underlying
ETF. Market-Makers trading for their own account would not be
considered when determining customer interest under this provision. In
addition to the initial listed series, the proposal would permit the
Exchange to list up to sixty (60) additional series per expiration
month for each QOS in ETF options.
Background
On July 7, 2006, the Exchange filed with the Commission a pilot
program proposal to permit the listing and trading of QOS in options on
indexes or options on ETFs that satisfy the applicable listing criteria
under CBOE rules.\4\ QOS trade based on calendar quarters that end in
March, June, September and December. The Exchange lists QOS that expire
at the end of the next consecutive four calendar quarters, as well as
the fourth quarter of the next calendar year. For example, if the
Exchange were trading QOS in iShares Russell 2000 Index Fund (``IWM'')
in the month of April 2008, it would list series that expire at the end
of the second quarter 2008 (June), third quarter 2008 (September),
fourth quarter 2008 (December), first quarter 2009 (March), and fourth
quarter 2009 (December).
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\4\ See Securities Exchange Act Release No. 54123 (July 11,
2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-20065-65) (``Pilot
Program Approval Order''). Under the pilot program, the Exchange may
list QOS in up to five currently listed option classes that are
either options on ETFs or indexes. The Exchange is also permitted to
list QOS in any options class that is selected by other securities
exchanges that employ a similar pilot program under their respective
rules.
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Currently, the Exchange list QOS in five ETF options: (1) Nasdaq-
100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust,
Series 1 (``DIA''); (4) Standard and Poor's Depositary Receipts/SPDRs
(``SPY''); and (5) Energy Select SPDR (``XLE''). The average daily
trading volume and total volume for QOS in IWM options significantly
exceeds the volumes for QOS in other ETF options that are listed and
traded on the Exchange. The chart below provides trading volume figures
for the third quarter in 2007, demonstrating that QOS in IWM options
are by far the most popular and heavily traded QOS on the Exchange.
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July 2007 August 2007 September 2007
QOS -----------------------------------------------------------------------------------------------
DV Total vol. ADV Total vol. ADV Total vol.
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IWM..................................................... 61,383 1,289,047 76,857 1,767,704 78,706 1,495,408
QQQQ.................................................... 6,355 133,459 7,413 170,488 8,201 155,819
SPY..................................................... 4,525 95,024 10,490 241,261 15,274 290,212
DIA..................................................... 2,488 52,251 3,199 73,574 2,553 48,512
XLE..................................................... 291 6,105 729 16,758 1,176 22,348
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[[Page 4928]]
Recently, the Exchange has received requests from market
participants to add additional strike prices for QOS in IWM options
that would be outside of the price range for setting strikes as
provided for under Rule 5.5(e)(3) (hereinafter ``+/-$5 range'').\5\
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\5\ Rule 5.5(e)(3) provides that the Exchange shall list strike
prices for a QOS that are within $5 from the closing price of the
underlying on the preceding day.
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Investors and other market participants have advised the Exchange
that they are buying and selling QOS in IWM options to trade
volatility. In order to adequately replicate the desired volatility
exposure, these market participants need to trade several IWM option
series, many having strike prices that fall outside of the +/-$5 range
currently allowed under the QOS rules.
In addition, other participants have advised the Exchange that
their investment strategies involve trading options tied to a
particular option ``delta,'' \6\ rather than a particular level of the
underlying security or index. At issue is the fact that delta depends
on both the relative difference between the level of the underlying
security or index and the option strike price, and time to expiration.
For example, with IWM trading at $85 per share, the strike price
corresponding to a ``25-delta'' IWM call (i.e., a call option with a
delta of 25) with one month to expiration would be 89. However, the
strike price corresponding to a ``25-delta'' IWM call with 3 months to
expiration would be 93, and the strike price of a ``25-delta'' call
with 1 year to expiration would be 106. In short, CBOE has been advised
that the +/-$5 range for QOS in IWM options is insufficient to satisfy
customer demand.
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\6\ ``Delta'' is a measure of how an option price will change in
response to a $1 price change in the underlying security or index.
For example, an ABC option with a delta of ``50'' can be expected to
change by $0.50 in response to a $1 change in the price of ABC.
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Proposed Rule Changes
In order to meet customer demand, the Exchange proposes to amend
Rule 5.5(e), which governs the Quarterly Option Series Pilot Program.
Specifically, the Exchange proposes to revise Rule 5.5(e) to allow the
Exchange to open additional strike prices of QOS in ETF options that
are within thirty percent (30%) above or below the closing price of the
underlying ETF (or ``Units'' as defined in Rule 5.3.06) on the
preceding business day. The Exchange would also be permitted to open
additional strike prices of QOS in ETF options that are more than 30%
above or below the current price of the underlying ETF, provided that
demonstrated customer interest exists for such series, as expressed by
institutional, corporate or individual customers or their brokers.
Market-Makers trading for their own account would not be considered
when determining customer interest under this proposed provision. The
Exchange would be permitted to list up to sixty (60) additional series
per expiration month for each QOS in ETF options.
The Exchange is also proposing to add new paragraph (6) to Rule
5.5, which would set forth a delisting policy. Specifically, with
respect to QOS in ETF options, the Exchange would, on a monthly basis,
review series that are outside a range of five (5) strikes above and
five (5) strikes below the current price of the underlying ETF, and
delist series with no open interest in both the put and the call series
having a strike price: (i) Higher than the highest strike price with
open interest in the put and/or call series for a given expiration
month; or (ii) lower than the lowest strike price with open interest in
the put and/or call series for a given expiration month.
To illustrate how the proposed delisting program would work, assume
that IWM closed at $70 on the day the Exchange conducts the monthly
review of QOS in ETF options. Series having strike prices above $75 and
below $65 would be reviewed by the Exchange for possible delisting.
Assume that the Exchange lists the following QOS in IWM options that
expire in June 2008:
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Calls--Jun 08 exp Puts--Jun 08 exp
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Strike Open interest? Strike Open interest?
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62.................................. No...................... 62..................... No.
63.................................. No...................... 63..................... Yes.
64.................................. Yes..................... 64..................... Yes.
* * * * * * *
76.................................. Yes..................... 76..................... Yes.
77.................................. Yes..................... 77..................... Yes.
78.................................. Yes..................... 78..................... Yes.
79.................................. Yes..................... 79..................... Yes.
80.................................. Yes..................... 80..................... Yes.
81.................................. Yes..................... 81..................... Yes.
82.................................. Yes..................... 82..................... Yes.
83.................................. No...................... 83..................... No.
84.................................. No...................... 84..................... No.
85.................................. No...................... 85..................... Yes.
86.................................. Yes..................... 86..................... No.
87.................................. Yes..................... 87..................... Yes.
88.................................. Yes..................... 88..................... Yes.
89.................................. Yes..................... 89..................... No.
90.................................. Yes..................... 90..................... No.
91.................................. No...................... 91..................... No.
92.................................. No...................... 92..................... No.
93.................................. No...................... 93..................... No.
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The Exchange would delist the series highlighted in grey above: $62,
$91, $92, and $93. The Exchange would not delist the $83 and $84 series
because there are series having open interest with strike prices higher
than these two series. In addition, the Exchange would not delist the
$63 call series because there is open interest in the $63 put series.
[[Page 4929]]
Notwithstanding the proposed delisting policy, customer requests to
add strikes and/or maintain strikes in QOS in ETF options in series
eligible for delisting shall be granted.
Further, in connection with the proposed delisting policy, if the
Exchange identifies series for delisting, the Exchange shall notify
other options exchanges with similar delisting policies regarding
eligible series for listing, and shall work with such other exchanges
to develop a uniform list of series to be delisted, so as to ensure
uniform series delisting of multiply listed QOS in ETF options.
It is expected that the proposed delisting policy for QOS in ETF
options would be adopted by other options exchanges that have adopted
the QOS Pilot Program.
The Exchange represents that it has the necessary systems capacity
to support new options series that will result from this proposal.
Further, as proposed, the Exchange notes that this rule change would
become part of the pilot program and, going forward, would be
considered by the Commission when the Exchange seeks to renew or make
permanent the pilot program in the future.\7\
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\7\ To the extent the Commission views the proposed rule change
as an expansion of the pilot program, thus triggering the
requirement under the terms of the Pilot Program Approval Order that
the Exchange submit a pilot program report, the Exchange notes that
it submitted a report on June 26, 2007, in connection with its
filing to extend the pilot program through July 10, 2008. See
Securities Exchange Act Release No. 56035 (July 10, 2007), 72 FR
38851 (July 16, 2007) (SR-CBOE-2007-70).
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2. Statutory Basis
Because the additional new series can be added without presenting
capacity problems and because the Exchange has proposed a delisting
policy with respect to QOS in ETF options, the Exchange believes the
rule proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of section 6(b) of the Act.\8\
Specifically, the Exchange believes that the proposed rule change is
consistent with the requirements under section 6(b)(5) of the Act \9\
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
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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 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.
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 CBOE 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 [email protected]. Please include
File Number SR-CBOE-2007-96 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-2007-96. 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-2007-96 and should be
submitted on or before February 19, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-1373 Filed 1-25-08; 8:45 am]
BILLING CODE 8011-01-P