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Federal Register / Vol. 72, No.

160 / Monday, August 20, 2007 / Notices 46523

SECURITIES AND EXCHANGE FRO will pay a fixed sum at expiration of at least $5 at the time additional
COMMISSION regardless of the magnitude of the series are listed for trading.9 An ETF
difference between the option’s exercise underlying an FRO would have to meet
[Release No. 34–56251; File No. SR–Amex–
2004–27]
price and the settlement price. Amex these five additional criteria along with
proposes to list Finish HighSM (‘‘Finish the requirements of Amex Rule 916,
Self-Regulatory Organizations; High’’) FROs, which will return $100 except for the minimum market
American Stock Exchange LLC; Notice per contract if the settlement price of capitalization requirement.10
of Filing of Amendment No. 4 to a the underlying security is above the
C. Role of OCC
Proposed Rule Change and Order strike price at expiration, and Finish
Granting Accelerated Approval to a LowSM (‘‘Finish Low’’) FROs, which The OCC plans to file a proposal to
Proposed Rule Change, as Modified by will return $100 per contract if the issue, clear, and settle FROs. According
Amendment Nos. 2, 3, and 4 Thereto, settlement price of the underlying to Amex, the OCC also plans to file a
Relating to the Listing and Trading of security is below the strike price at proposal to revise the Options
Fixed Return Options expiration.5 Any in-the-money FRO will Disclosure Document (‘‘ODD’’) required
be exercised automatically at under Rule 9b–1 of the Act 11 to
August 14, 2007. expiration.6 incorporate FROs.
I. Introduction B. Listing Standards D. Volume Weighted Average Price
On April 29, 2004, the American Settlement
The initial listing criteria for FROs
Stock Exchange LLC (‘‘Amex’’ or require that an individual stock To reduce concerns regarding
‘‘Exchange’’) filed with the Securities underlying an FRO meet the criteria for potential price manipulation at
and Exchange Commission underlying securities in Amex Rule 915, expiration due to the ‘‘all-or-nothing’’
(‘‘Commission’’), pursuant to Section ‘‘Criteria for Underlying Securities,’’ return provided by an FRO, Amex
19(b)(1) of the Securities Exchange Act and, in addition, have: (1) Minimum proposes to settle FROs using an all-day
of 1934 (‘‘Act’’) 1 and Rule 19b–4 market capitalization of at least $40 volume weighted average price
thereunder,2 a proposed rule change to billion; (2) minimum trading volume, in (‘‘VWAP’’) based on trading in the
list and trade Fixed Return Options all markets in which the security trades, underlying security on the last trading
(‘‘FROs’’). Amex filed Amendment Nos. of at least one billion shares in the day prior to expiration.12 To calculate
1, 2, 3, and 4 to the proposal on preceding 12 months; (3) minimum the VWAP, Amex will use composite
September 26, 2006, April 19, 2007, average daily trading volume of four prices during regular trading hours as
May 23, 2007, and August 14, 2007, million shares; (4) minimum average reported by industry price vendors.13 If
respectively.3 The proposed rule daily trading value of at least $200 the security underlying an FRO does not
change, as modified by Amendment million during the previous six months; trade or is unavailable during regular
Nos. 2 and 3, was published for and (5) a minimum market price per trading hours at expiration, the
comment in the Federal Register on share of at least $10, as measured by the settlement price may be fixed pursuant
June 7, 2007.4 The Commission received closing price reported in the primary to the OCC’s rules on a basis that the
no comment letters regarding the listed market in which the security is OCC believes is appropriate under the
proposed rule change, as modified by traded, over the previous five circumstances, including using the last
Amendment Nos. 2 and 3. This order consecutive business days preceding the sale price during regular trading hours
provides notice and solicits comments date on which Amex submits a on the most recent trading day for
from interested persons regarding certificate to the Options Clearing which a last sale price is available.14
Amendment No. 4 and approves the Corporation (‘‘OCC’’) for listing and Amex will publish and disseminate
proposed rule change, as amended, on the current value of the VWAP
trading.7 An ETF underlying an FRO
an accelerated basis. calculation for FROs at least every 15
would have to meet these five
seconds throughout the last trading day
II. Description of the Proposal additional criteria along with the
prior to expiration. Amex will
requirements of Amex Rule 915, except
A. FROs Generally disseminate the VWAP settlement price
for the minimum market capitalization
Amex proposes to list and trade cash- as the official settlement price for FROs
requirement.8
settled, European-style FROs on The continued listing criteria for and will make it publicly available
individual stocks and exchange-traded FROs require that an individual stock 9 See Amex Rule 916FRO, Commentary .01.
funds (‘‘ETFs’’) that satisfy specified underlying an FRO satisfy the 10 See Amex Rule 916FRO, Commentary .03.
listing criteria. FROs are binary options requirements of Amex Rule 916, 11 17 CFR 240.9b–1.
and, as such, differ from the options ‘‘Withdrawal of Approval of Underlying 12 See Amex Rule 910FRO(a). The VWAP for an

currently traded on U.S. options Securities,’’ and, in addition, have: (1) underlying security is the sum of the dollar value
exchanges by providing a discontinuous Minimum market capitalization of at of reported trades (price multiplied by the number
of shares traded), divided by the total number of
or non-linear payout. An in-the-money least $30 billion; (2) minimum trading shares traded during the entire last day of trading
volume, in all markets trading the prior to expiration. See Amex Rule 900FRO(b)(4).
1 15 U.S.C. 78s(b)(1). security, of at least one billion shares in 13 See Amex Rule 910FRO(a). Composite prices
2 17 CFR 240.19b–4. the preceding 12 months; (3) minimum are prices reported to the consolidated tape from
3 Amendment No. 2 replaced the original filing any participating exchange or market. Amex notes
average daily trading volume of four
and Amendment No. 1 in their entirety. that the OCC currently uses composite pricing in
Amendment No. 3 revised the rule text relating to million shares; (4) minimum average connection with the settlement of expiring equity
margin requirements. Amendment No. 4 corrected daily trading value of at least $125 options. The composite closing price is the last
minor errors in the text of the proposed rules, million during the last six months; and reported sale price from any eligible trade source
provided representations concerning surveillance (i.e., primary listing market or participating regional
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(5) an underlying market price per share


procedures and systems capacity, clarified the use market). It is not an average price. See Securities
of composite prices in calculating the volume Exchange Act Release No. 49045 (January 8, 2004),
5 See Amex Rule 900FRO(b)(2) and (3).
weighted average price (‘‘VWAP’’), and clarified the 69 FR 2377 (January 15, 2004) (notice of filing and
6 See Amex Rule 980FRO.
proposed position reporting requirements. immediate effectiveness of File No. SR–OCC–2003–
4 See Securities Exchange Act Release No. 55843 7 See Amex Rule 915FRO, Commentary .01. 01).
(June 1, 2007), 72 FR 31636. 8 See Amex Rule 915FRO, Commentary .02. 14 See Amex Rule 910FRO(a), Commentary .01.

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46524 Federal Register / Vol. 72, No. 160 / Monday, August 20, 2007 / Notices

through various market data vendors No margin is required for an FRO 903, ‘‘Series of Options Open for
and on the Amex Web site at http:// position carried short against an existing Trading,’’ and the related commentaries
www.amex.com. long position in the same FRO, or when for FROs. Securities underlying options
the writer’s obligation is secured by a classes included in the $1 strike price
E. Position and Exercise Limits
specific deposit or escrow deposit pilot program 27 and the 21⁄2-point strike
The position limits for FROs will be meeting the entire $100 obligation price program 28 may underlie FROs,
25,000 contracts on the same side of the under the FRO.22 provided that they meet the listing
market, and positions in FROs will not standards for FROs.
be aggregated with positions in other G. Bid-Ask Differentials and Minimum Amex represents that symbols will be
options on the same underlying stock or Price Variations created for FROs that represent the
ETF for purposes of determining A specialist or registered trader is underlying security, the fact that the
compliance with the position limits.15 expected to quote with no more than option is an FRO rather than a
Amex is not proposing exercise limits $0.25 between the bid and the offer for traditional put or call, the expiration
for FROs because FROs will be each FRO contract, except during the date, strike price, and the exchange(s)
exercised automatically at expiration if last trading day prior to expiration, trading the FRO.
the settlement price of the underlying when the maximum width may be
security is greater than the strike price III. Discussion
$0.50.23 In addition, when the bid/ask
of a Finish High FRO or less than the differential in the underlying security is The Commission finds that the
strike price of a Finish Low FRO.16 greater than $0.25, or $0.50 on the last proposed rule change, as amended, is
FROs will not be subject to any trading day prior to expiration, the consistent with the requirements of the
qualified hedge exemptions from permissible quote width for an in-the- Act and the rules and regulations
position limits. money FRO series may be identical to thereunder applicable to a national
Positions in FROs must be reported to the quote width in the underlying securities exchange.29 Specifically, the
Amex when an account establishes an security.24 Commission finds that the proposal is
aggregate position on the same side of Amex Rule 952, ‘‘Minimum Price consistent with Section 6(b)(5) of the
the market of 200 or more contracts,17 Variations,’’ generally provides that the Act,30 which requires, among other
and the provisions of Amex Rule 906, minimum price variation (‘‘MPV’’) for things, that the rules of a national
‘‘Reporting of Options Positions,’’ will an option is: (i) $0.05 for options quoted securities exchange be designed to
apply to FROs.18 Amex Rule 906(b) under $3 a contract; and (ii) $0.10 for prevent fraudulent and manipulative
requires that a member, other than an options quoted at $3 a contract or acts and practices, to promote just and
Amex market maker, that maintains an greater. For the options classes included equitable principles of trade, to remove
FRO position in excess of 10,000 in the Penny Quoting Pilot Program, the impediments to and perfect the
contracts on the same side of the MPV is: (i) $0.01 for options quoted mechanism of a free and open market
market, for its own account or the under $3 a contract; and (ii) $0.05 for and a national market system, and, in
account of its customer, report certain options quoted at $3 a contract or general, to protect investors and the
information to Amex, including whether greater.25 The MPV for FROs in classes public interest. The Commission
the position is hedged, a description of not included in the Penny Quoting Pilot believes that FROs will provide
the hedge, and, if applicable, a Program will be $0.05, and $0.01 for investors with a potentially useful
description of the collateral. Amex classes in the Penny Quoting Pilot investment choice. The proposal will
believes that the reporting requirements Program. extend to certain binary options the
under Amex Rule 906 and the Amex will apply to FROs the existing benefits of a listed exchange market,
surveillance procedures for hedged industry convention of multiplying an which include: A centralized forum for
positions will enable Amex to closely option’s quoted price by $100 to price discovery; pre- and post-trade
monitor sizable FRO positions and determine its premium. For example, for transparency; standardized contract
corresponding hedges.19 an FRO that is quoted at $0.50, an specifications; and the guarantee of the
investor would pay $50.00 ($0.50 × OCC.
F. Margin The Commission believes that the
The minimum margin on any FRO 100).
proposal is reasonably designed to
carried short in a customer’s account is H. Other Considerations address potential manipulation
the difference between $100 and the Amex Rule 903, ‘‘Series of Options concerns associated with FROs’ non-
proceeds from the sale of the FRO, Open for Trading,’’ will apply to linear return. The initial and continuing
which must remain in the customer’s FROs.26 Pursuant to Amex Rule 903, listing standards for FROs should
account.20 A customer account with a Amex generally opens up to four ensure that only highly capitalized,
long position in an FRO must initially actively traded stocks and ETFs are
expiration months for an options class
deposit and maintain margin equal to at eligible to underlie FROs, and the
when it initially lists the class for
least 100% of the purchase price of the settlement price for FROs is based on an
trading. Amex will use the same
FRO.21 all-day VWAP during the last trading
expiration cycle for FROs as it uses for
traditional options. day prior to expiration. These elements
15 See Amex Rule 904FRO(a) and (b).
Similarly, Amex will use the strike should reduce the potential for
16 See Amex Rule 980FRO.
price intervals provided in Amex Rule manipulating the stock or ETF
17 See Amex Rule 906FRO.
18 See Amex Rule 906FRO.
underlying an FRO to benefit an FRO
19 Amex notes that hedge information for member 22 See Amex Rule 462(d)(10)(F). position.
23 See Amex Rule 958FRO.
firm and customer accounts with 200 or more
27 See Amex Rule 903, Commentary .06.
contracts are reported electronically via the Large 24 See Amex Rule 958FRO.
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Options Position Report. In addition, Amex notes 25 See Securities Exchange Act Release No. 55162 28 See Amex Rule 903, Commentary .07.
that specialist and registered options trader account (January 24, 2007), 72 FR 5738 (February 1, 2007). 29 In approving this proposed rule change, the
information is reported to Amex by the member’s In addition, options on the Power Shares QQQ Commission has considered the proposed rule’s
clearing firm. Trust trade at an MPV of $0.01 for all options impact on efficiency, competition, and capital
20 See Amex Rule 462(d)(10)(D). premiums. formation. See 15 U.S.C. 78c(f).
21 See Amex Rule 462(d)(10)(B). 26 See Amex Rule 903FRO. 30 15 U.S.C. 78f(b)(5).

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Federal Register / Vol. 72, No. 160 / Monday, August 20, 2007 / Notices 46525

The Commission believes that the those that may be withheld from the SECURITIES AND EXCHANGE
proposed position limits and margin public in accordance with the COMMISSION
rules for FROs are reasonable and provisions of 5 U.S.C. 552, will be
consistent with the Act. The proposed available for inspection and copying in [Release No. 34–56245; File No. SR–CBOE–
position limit of 25,000 contracts in any the Commission’s Public Reference 2006–104]
FRO class appears to reasonably balance Room, 100 F Street, NE., Washington,
the promotion of a free and open market DC 20549, on official business days Self-Regulatory Organizations;
for these securities with minimization of between the hours of 10 a.m. and 3 p.m. Chicago Board Options Exchange,
incentives for market manipulation. The Copies of such filing also will be Incorporated; Notice of Filing of a
proposed margin rules appear available for inspection and copying at Proposed Rule Change and
reasonably designed to deter a member the principal office of Amex. All Amendment No. 1 Thereto To Codify
or its customer from assuming an comments received will be posted the Hybrid Price Check Parameter
imprudent position in FROs.
In support of this proposal, Amex without change; the Commission does August 14, 2007.
made the following representations: not edit personal identifying
information from submissions. You Pursuant to section 19(b)(1) of the
• Amex has in place an adequate
should submit only information that Securities Exchange Act of 1934
surveillance program to monitor trading
you wish to make available publicly. All (‘‘Act’’)1 and Rule 19b–4 thereunder,2
in FROs and intends to largely apply its
submissions should refer to File notice is hereby given that on December
existing surveillance program for
Number SR–Amex–2004–27 and should 7, 2006, the Chicago Board Options
options to the trading of FROs; and
Exchange, Incorporated (‘‘CBOE’’ or
• Amex has the necessary systems be submitted on or before September 10,
‘‘Exchange’’) filed with the Securities
capacity to support the new options 2007.
and Exchange Commission
series that would result from the
V. Accelerated Approval (‘‘Commission’’) the proposed rule
introduction of FROs.
This approval order is based on change as described in Items I, II, and
The Commission finds good cause for III below, which Items have been
Amex’s representations. approving the proposed rule change, as substantially prepared by the Exchange.
IV. Solicitation of Comments amended, prior to the thirtieth day after On August 1, 2007, the Exchange filed
Interested persons are invited to the date of publication of notice of filing Amendment No. 1 to the proposed rule
submit written data, views, and of Amendment No. 4 in the Federal change. The Commission is publishing
arguments concerning Amendment No. Register. In Amendment No. 4, Amex this notice to solicit comments on the
4, including whether Amendment No. 4 provided representations regarding proposed rule change, as amended, from
is consistent with the Act. Comments surveillance and systems capacity and interested persons.
may be submitted by any of the corrected minor errors in the text of the
I. Self-Regulatory Organization’s
following methods: proposed rules. In addition,
Statement of the Terms of Substance of
Amendment No. 4 clarified the use of
Electronic Comments the Proposed Rule Change
composite prices in calculating the all-
• Use the Commission’s Internet day VWAP that will be used to establish The Exchange proposes to amend
comment form (http://www.sec.gov/ the settlement price for FROs, and Rule 6.13, CBOE Hybrid System’s
rules/sro.shtml); or clarified that positions of 10,000 Automatic Execution Feature, in order
• Send an e-mail to rule- contracts, rather than 25,000 contracts, to codify an automated system feature
comments@sec.gov. Please include File will be subject to certain reporting that prevents executions at potentially
Number SR–Amex–2004–27 on the requirements. The Commission believes erroneous prices.
subject line. that Amendment No. 4 clarifies and The text of the proposed rule change
Paper Comments strengthens the proposal and raises no is available on the Exchange’s Web site
• Send paper comments in triplicate new regulatory issues. Accordingly, the (http://www.cboe.com), at the
to Nancy M. Morris, Secretary, Commission finds good cause for Exchange’s principal office, and at the
Securities and Exchange Commission, approving the proposal, as amended, on Commission’s Public Reference Room.
100 F Street, NE., Washington, DC an accelerated basis, pursuant to Section
19(b)(2) of the Act. II. Self-Regulatory Organization’s
20549–1090. Statement of the Purpose of, and
All submissions should refer to File VI. Conclusion Statutory Basis for, the Proposed Rule
Number SR–Amex–2004–27. This file Change
number should be included on the It is therefore ordered, pursuant to
subject line if e-mail is used. To help the Section 19(b)(2) of the Act,31 that the In its filing with the Commission, the
Commission process and review your proposed rule change (SR–Amex–2004– Exchange included statements
comments more efficiently, please use 27), as amended, is approved, on an concerning the purpose of, and basis for,
only one method. The Commission will accelerated basis. the proposed rule change and discussed
post all comments on the Commission’s For the Commission, by the Division of
any comments it received on the
Internet Web site (http://www.sec.gov/ Market Regulation, pursuant to delegated proposed rule change. The text of these
rules/sro.shtml). Copies of the authority.32 statements may be examined at the
submission, all subsequent places specified in Item IV below. The
Florence E. Harmon,
amendments, all written statements Exchange has prepared summaries, set
with respect to the proposed rule Deputy Secretary. forth in sections A, B, and C below, of
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change that are filed with the [FR Doc. E7–16330 Filed 8–17–07; 8:45 am] the most significant aspects of such
Commission, and all written BILLING CODE 8010–01–P statements.
communications relating to the
proposed rule change between the 31 15 U.S.C. 78s(b)(2). 1 15 U.S.C. 78s(b)(1).
Commission and any person, other than 32 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.

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