[Federal Register: April 20, 2007 (Volume 72, Number 76)]
[Notices]
[Page 19993-19997]
[DOCID:fr20ap07-127]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55630; File No. SR-CBOE-2007-21]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
of a Proposed Rule Change, as Modified by Amendment No. 1, To List for
Trading Options on Commodity Pool Units

April 13, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on February 22, 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 and II below, which Items have been substantially
prepared by the Exchange. On March 26, 2007, CBOE filed Amendment No. 1
to the proposed rule change.\3\ This order provides notice of the
proposed rule change as modified by Amendment No. 1 and approves the
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes 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

    The Exchange proposes to amend CBOE Rules 4.18 Interpretation and
Policy .01, 5.3 Interpretation and Policy .06, 5.4 Interpretation and
Policy .08, 8.9, and 15.1 Interpretation and Policy .04 to permit the
listing and trading of options on securities issued by Trust Issued
Receipts (``TIRs''), partnership units (``Partnership Units''), and
other entities whose value is based on underlying commodity interests
(referred to collectively herein as ``Commodity Pool Units'').
    The text of the proposed rule change is available at the CBOE, the
Commission's Public Reference Room, and http://www.cboe.com.

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 CBOE included statements
concerning the purpose of and basis for the proposed rule change. The
text of these

statements may be examined at the places specified in Item III below.
The CBOE 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 CBOE states that the proposed rule change is based on a
proposal by the American Stock Exchange LLC (``Amex'').\4\
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    \4\ See Securities Exchange Act Release No. 55547 (March 28,
2007), 72 FR 16388 (April 4, 2007) (SR-Amex-2006-110) (approving
listing criteria covering options on securities issued by entities
holding commodity derivatives). CBOE's proposed rule text includes a
definition of ``Partnership Units'' that parallels the definition in
Amex's rules. See Interpretation and Policy .10 to CBOE Rule 5.4.
CBOE notes that, although the proposed definition of ``Partnership
Units'' includes a broad universe of securities, including those of
entities that invest in physical commodities. The current filing,
like the Amex proposal, proposes to list and trade options only on
Commodity Pool Units that invest in a combination of commodity
derivative products, and not in physical commodities.
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    The purpose of this proposed rule change is to enable the listing
and trading on the Exchange of options on Commodity Pool Units that
trade, directly or indirectly, in commodity futures products. Commodity
Pool Units may hold or trade in one or more types of investments that
may include any combination of securities, commodity futures contracts,
options on commodity futures contracts, swaps and forward contracts.
The shares of the Commodity Pool Units are securities registered with
the Commission and the offer and sale of those shares are subject to
the Commission's regulatory oversight. The investments held, directly
or indirectly, within the Commodity Pool Units are subject to the
Commodity Exchange Act (``CEA'') due to their status as a ``commodity
pool.'' \5\ Therefore, the trading of the assets and/or investment
(e.g., futures and options on futures) held within the Commodity Pool
Units is regulated by the Commodity Futures Trading Commission
(``CFTC'').\6\
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    \5\ The term ``[commodity] pool means any investment trust,
syndicate or similar form of enterprise operated for the purpose of
trading commodity interests.'' 17 CFR 4.10(d)(1). A commodity
interest is ``(1) Any contract for the purchase or sale of a
commodity for future delivery; and (2) Any contract, agreement or
transaction subject to Commission regulation under Section 4c or 19
of the [Commodity Exchange] Act.'' 17 CFR 4.10(a).
    \6\ The manager or operator of a ``commodity pool'' is required
to register, unless applicable exclusions apply, as a commodity pool
operator (``CPO'') and as a commodity trading advisor (``CTA'') with
the CFTC and become a member of the National Futures Association
(``NFA'').
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    Currently, CBOE Rule 5.3 Interpretation and Policy .06 provides
that securities deemed appropriate for options trading shall include
shares or other securities (``Units'') that are principally traded on a
national securities exchange or through the facilities of a national
securities association and reported as a NMS security, and that (i)
Represent interests in registered investment companies (or series
thereof) organized as open-end management investment companies, unit
investment trusts or similar entities that hold portfolios of
securities comprising or otherwise based on or representing investments
in indexes or portfolios of securities (or that hold securities in one
or more other registered investment companies that themselves hold such
portfolios of securities); or (ii) represent interests in a trust that
holds a specified non-U.S. currency deposited with the trust when
aggregated in some specified minimum number may be surrendered to the
trust by the beneficial owner to receive the specified non-U.S.
currency and pays the beneficial owner to receive the specified non-
U.S. currency and pays the beneficial owner interest and other
distributions on deposited non-U.S. currency, if any, declared and paid
by the trust.
    The Exchange proposes to amend Interpretation and Policy .06 to its
Rule 5.3 to expand the type of options to include the listing and
trading of options based on Commodity Pool Units that may hold or
invest, directly or indirectly, in commodity futures products,
including, but not limited to, commodity futures contracts, options on
commodity futures contracts, swaps and forward contracts. As part of
this revision to Rule 5.3 Interpretation and Policy .06, the Exchange
proposes to add paragraph (ii)(F) requiring for Commodity Pool Units
that a comprehensive surveillance sharing agreement be in place with
the marketplace or marketplaces with last sale reporting that
represent(s) the highest volume in such commodity futures contracts
and/or options on commodity futures contracts on the specified
commodities or non-U.S. currency, which are utilized by the national
securities exchange where the underlying Commodity Pool Units are
listed and traded.
    As set forth in the proposed amendment to Interpretation and Policy
.06 to CBOE Rule 5.3, Commodity Pool Units must be traded on a national
securities exchange or through the facilities of a national securities
association and must be an ``NMS stock'' as defined under Rule 600 of
Regulation NMS. In addition, Commodity Pool Units must meet either (i)
the criteria and guidelines under CBOE Rule 5.3 and Interpretation and
Policy .01; or (ii) be available for creation or redemption each
business day from or through the issuing trust, investment company,
commodity pool or other issuer in cash or in kind at a price related to
net asset value. In addition, the issuing trust, investment company,
commodity pools or other issuer is obligated to issue Units in a
specified aggregate number even if some or all of the investment assets
required to be deposited have not been received by the issuing trust,
investment company, commodity pool or other issuer, subject to the
condition that the person obligated to deposit the investment assets
has undertaken to deliver the investment assets as soon as possible and
such undertaking is secured by the delivery and maintenance of
collateral consisting of cash or cash equivalents satisfactory to the
issuer of Units which underlie the option as described in the Units'
prospectus.
    Under the applicable continued listing criteria in Interpretation
and Policy .08 to CBOE Rule 5.4, the Exchange shall not open for
trading any additional series of option contracts on Units that were
initially approved for options trading pursuant to Interpretation and
Policy .06 to Rule 5.3 if such Units either (i) Cease to be an ``NMS
stock'' as provided in paragraph (f) of Interpretation and Policy .01
of Rule 5.4 (an ``NMS stock'' is defined in Rule 600 of Regulation NMS
of the Act); or (ii) are halted from trading in their primary market.
    In addition, the Exchange shall consider the suspension of opening
transactions in any series of options of the class covering Units in
the following circumstances: (1) Following the initial twelve-month
period beginning upon the commencement of trading in the Units on a
national securities exchange or through the facilities of a national
securities association and are defined as an ``NMS stock'' under Rule
600 of Regulation NMS, there are fewer than 50 record and/or beneficial
holders of such Units for 30 or more consecutive trading days; or (2)
the value of the index or portfolio of securities, non-U.S. currency,
or portfolio of commodities including commodity futures contracts,
options on commodity futures contracts, swaps, forward contracts and/or
options on physical commodities on which the Units are based is no
longer calculated or available. In addition, the Exchange is proposing
to amend Rule 5.4 Interpretation and Policy .08, by adding

new paragraph (d), which provides the Exchange with the ability to
determine that it will not open additional series of options on Units
if such events occur or conditions exist that in the opinion of the
Exchange make further dealing in such options on the Exchange
inadvisable. The Exchange notes that this proposed paragraph is based
on a parallel provision in Commentary .07(4) to Amex Rule 916.
    The Exchange is also proposing to amend Interpretation and Policy
.01 to its Rule 4.18 to require members to establish, maintain and
enforce written policies and procedures to prevent the misuse of
material, nonpublic information it might have or receive in a related
security, option or derivative or in the applicable related commodity,
commodity futures or options on commodity futures or any other related
commodity derivatives.
    The Exchange is further proposing to amend CBOE Rule 8.9 to require
that Market-Makers for options in Commodity Pool Units file with the
Exchange upon request a list identifying all accounts for, among other
things, physical commodities, physical commodity options, commodity
futures contracts, options on commodity futures contracts, any other
derivatives based on such commodity in which the Market-Maker may have
directly or indirectly engaged in trading activities or over which he
exercises investment discretion.\7\ In addition, the proposed revision
to Rule 8.9 further requires that no Market-Maker shall engage in
trading in, among other things, physical commodities, physical
commodity options, commodity futures contracts, options on commodity
futures contracts, any other derivatives based on such commodity in an
account which has not been reported in a manner prescribed by the
Exchange.\8\
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    \7\ The Exchange is proposing to add the phrase ``for options
on'' in two places in the first sentence of CBOE Rule 8.9(a) to
clarify that Rule 8.9(a) governs Market-Makers in options on Units
(versus Market-Markets in the Unit underlying the option).
    \8\ The Exchange is proposing to add the phrase ``trading in''
to the last sentence of CBOE Rule 8.9(a) to clarify the conduct
governed by the rule.
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    In addition, the Exchange proposes to amend Interpretation and
Policy .04 to CBOE Rule 15.1 to require Market-Makers to make available
to the Exchange such books and records or other information pertaining
to transactions in the applicable physical commodity, physical
commodity options, commodity futures contracts, options on commodity
futures contracts, or any other derivatives on such commodity, as may
be requested by the Exchange.
    The Exchange represents that it has an adequate surveillance
program in place for options based on Commodity Pool Units. The
Exchange may obtain trading information via the Intermarket
Surveillance Group (``ISG'') from other exchanges who are members or
affiliates of the ISG and has entered into numerous comprehensive
surveillance-sharing agreements with various commodity futures
exchanges worldwide. Prior to listing and trading options on Commodity
Pool Units, the Exchange represents that it would either have the
ability to obtain specific trading information via ISG or through a
comprehensive surveillance sharing agreement with the primary exchange
or exchanges where the particular commodity futures and/or options on
commodity futures are traded.
    The addition of Commodity Pool Units would not have any effect on
the rules pertaining to position and exercise limits.\9\ The Exchange
also represents that the margin requirements for options on Commodity
Pools Units would be evaluated for each product the Exchange
anticipates listing. Any new margin rules deemed necessary will be
filed separately with the Commission.
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    \9\ See CBOE Rules 4.11 and 4.12.
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    This proposal is necessary to enable the Exchange to list and trade
options on an expanding range of Commodity Pool Units that the
Commission has approved for trading, including the DB Commodity Index
Tracking Fund (the ``DBC Fund''), the United States Oil Fund, L.P. (the
``Oil Fund'') and the PowerCommodity Pool ETFs DB G10 Currency Harvest
Fund (the ``DBV Fund'').\10\
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    \10\ See Securities Exchange Act Release Nos. 53105 (January 11,
2006), 71 FR 3129 (January 19, 2006) (approving the listing and
trading of the DB Commodity Index Tracking Fund); 53582 (March 31,
2006), 71 FR 17510 (April 6, 2006) (approving the listing and
trading of Units of the United States Oil Fund, L.P.); and 54450
(September 14, 2006), 71 FR 51245 (September 21, 2006) (approving
the listing and trading of the PowerShares DB G10 Currency Harvest
Fund).
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    The DBC Fund is a Commodity TIR \11\ and tracks the performance of
the Deutsche Bank Liquid Commodity IndexTM--Excess Return
while the Oil Fund is a Partnership Unit and tracks the spot price of
West Texas Intermediate light, sweet crude oil delivered to Cushing,
Oklahoma.
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    \11\ The offering of DBC Fund shares is registered with the
Commission under the Securities Act of 1933 and its most recent Form
10-Q was filed with the Commission on November 14, 2006.
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    The DBC Fund is a ``feeder fund'' that invests substantially all of
its assets in the DB Commodity Index Tracking Master Fund, and the
Master Fund in turn maintains a portfolio of exchange-traded futures on
aluminum, gold, corn, wheat, heating oil and light, sweet crude oil.
The Index is derived from the prices of those futures contracts. The
Master Fund's portfolio is managed on an ongoing basis by DB Commodity
Services LLC, a registered CPO and CTA, so that the value of the
portfolio closely tracks the value of the Index over time.
    The DBV Fund is also a Commodity TIR \12\ and a ``feeder fund''
that invests substantially all of its assets in the PowerCommodity Pool
ETFs DB G10 Currency Harvest Master Fund, and the Master Fund in turn
maintains a portfolio of exchange-traded futures on foreign currencies
that comprise the G-10 countries. The Index is derived from the prices
of those futures contracts. The Master Fund's portfolio is managed on
an ongoing basis by DB Commodity Services LLC, a registered CPO and
CTA, so that the value of the portfolio closely tracks the value of the
Index over time.
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    \12\ The offering of DBV Fund shares is registered with the
Commission under the Securities Act of 1933 and its most recent Form
10-Q was filed with the Commission on November 14, 2006.
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    Unlike the DBC and DBV Funds, the Oil Fund \13\ does not invest
through a master-feeder structure but rather trades directly in futures
on crude and heating oil, natural gas, gasoline and other petroleum-
based fuels, options on such futures contracts, forward contracts on
oil and other over-the-counter derivatives based on the price of oil,
other petroleum-based fuels, the futures contracts described above, and
the indexes based on any of the foregoing. The Oil Fund's portfolio is
managed by Victoria Bay Asset Management LLC with the aim of tracking
the West Texas Intermediate light, sweet crude oil futures contract
listed and traded on the New York Mercantile Exchange (``NYMEX'').
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    \13\ The offering of Oil Fund shares is registered with the
Commission under the Securities Act of 1933 and its most recent Form
S-1 was filed with the Commission on January 19, 2007.
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    The Exchange believes that it is reasonable to expect that other
types of Commodity Pool Units will be introduced for trading in the
near future. The proposed amendment to the Exchange's listing criteria
for options on Commodity TIRs and Partnership Units is necessary to
ensure that the Exchange will be able to list options on Commodity Pool
Units that have been recently launched as well as any other similar
Commodity Pool Units that may be listed and traded in the future.

2. Statutory Basis
    The Exchange believes that, with the commencement of trading of
Commodity Pool Units on the Exchange, amending its rules to accommodate
the listing and trading of options on publicly traded shares of other
securities that hold and/or manage portfolios or baskets of commodity
futures contracts, options on commodity futures contracts, swaps,
forward contracts, options on physical commodities, options on non-U.S.
currency, and/or securities will benefit investors by providing them
with the same valuable risk management tool that is currently available
with respect to other publicly traded Units (or Exchange Traded Funds)
whose investment assets consist of securities. Accordingly, the
Exchange believes that the proposed rule change is consistent with the
requirements of Section 6(b) of the Act \14\ in general, and furthers
the objectives of Section 6(b)(5),\15\ of the Act in particular, in
that it would remove impediments to and perfect the mechanism of a free
and open market in a manner consistent with the protection of investors
and the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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 that is 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 states that no written comments were solicited or
received with respect to the proposed rule change.

III. 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_ADDRESS>Please include

File Number SR-CBOE-2007-21 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-2007-21. 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. Copies of the filing
also will be available for inspection and copying at the principal
office of the 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 Number
SR-CBOE-2007-21 and should be submitted on or before May 11, 2007.

IV. Commission Findings and Accelerated Approval

    After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange \16\ and, in particular, the requirements of Section 6 of the
Act.\17\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\18\ which
requires, among other things, that the rules of a national securities
exchange be designed to 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.
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    \16\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(5).
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Surveillance

    The Commission notes that Exchange has represented that it has an
adequate surveillance program in place for options based on Commodity
Pool Units. The Exchange may obtain trading information via the ISG
from other exchanges who are members or affiliates of the ISG and has
entered into numerous comprehensive surveillance sharing agreements
with various commodity futures exchanges worldwide. Prior to listing
and trading options on Commodity Pool Units, the Exchange represented
that it will either have the ability to obtain specific trading
information via ISG or through a comprehensive surveillance sharing
agreement with the exchange or exchanges where the particular commodity
futures and/or options on commodity futures are traded. In addition,
the Exchange represented that the addition of Commodity Pool Unit
options will not have any effect on the rules pertaining to position
and exercise limits \19\ or margin.
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    \19\ See CBOE Rules 4.11 and 4.12.
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Listing and Trading of Options on Commodity Pool Units

    The Commission notes that, pursuant to the proposed rule change, a
Commodity Pool Unit will be subject to the provisions of CBOE Rules 5.3
and 5.4, and the Interpretation and Policy thereto, as applicable.
These provisions include requirements regarding initial and continued
listing standards, the creation/redemption process for Commodity Pool
Units, and trading halts. All Commodity Pool Units must be traded
through a national securities exchange or through the facilities of a
national securities association, and must be ``NMS stock'' as defined
under Rule 600 of Regulation NMS.\20\
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    \20\ 17 CFR 242.600(b)(47).
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    The Commission believes that this proposal is necessary to enable
the Exchange to list and trade options on an expanding range of
Commodity Pool Units currently approved for trading and that it is
reasonable to expect other types of Commodity Pool Units to be
introduced for trading in the future. This proposal would help ensure
that the Exchange will be able to list options on Commodity Pool Units
that have been recently launched as well as any other similar Commodity
Pool Units that may be listed and traded in the future \21\ thereby
offering investors greater option choices.
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    \21\ 17 CFR 240.19b-4(e).

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    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\22\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the thirtieth day after the date of
publication of notice in the Federal Register. The Commission notes
that the proposal is consistent with the Exchange's listing and trading
standards in CBOE Rules 5.3 and 5.4, and the Commission has recently
approved a similar proposal, after publishing it for a full comment
period and receiving no comments.\23\ Therefore, the Commission does
not believe that the proposed rule change, as amended, raises novel
regulatory issues. Consequently, the Commission believes that it is
appropriate to permit investors to benefit from the flexibility
afforded by trading these products without delay.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ See Securities Exchange Act Release No. 55547 (March 28,
2007), 72 FR 16388 (April 4, 2007) (SR-Amex-2006-110).
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    Accordingly, the Commission finds that there is good cause,
consistent with Section 6(b)(5) of the Act,\24\ to approve the
proposal, as amended, on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-CBOE-2007-21), as modified
by Amendment No. 1, be, and is hereby approved on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-7494 Filed 4-19-07; 8:45 am]

BILLING CODE 8010-01-P