[Federal Register: February 13, 2009 (Volume 74, Number 29)]
[Proposed Rules]
[Page 7198-7200]
[DOCID:fr13fe09-11]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2009-0126; Directorate Identifier 2009-CE-003-AD]
RIN 2120-AA64

Airworthiness Directives; Pilatus Aircraft Ltd. Models PC-12 and
PC-12/45 Airplanes

AGENCY: Federal Aviation Administration (FAA), Department of
Transportation (DOT).

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: We propose to adopt a new airworthiness directive (AD) for the
products listed above. This proposed AD results from mandatory
continuing airworthiness information (MCAI) originated by an aviation
authority of another country to identify and correct an unsafe
condition on an aviation product. The MCAI describes the unsafe
condition as:

This Airworthiness Directive (AD) is prompted by some occurrences
where the Deice Pressure Regulator has vented too much hot air into
the forward compartment damaging the oxygen cylinder ON/OFF cable,
the Ram-Air Scoop cable and the Environmental Control System (ECS)
firewall shut-off valve cable.
If incorrectly adjusted, or defective, the Deice Pressure Regulator
can vent hot air into the forward compartment. This situation can
cause overheating and failures of components located inside the
forward compartment, which could result in potential loss of several
functions essential for safe flight.

The proposed AD would require actions that are intended to address the
unsafe condition described in the MCAI.

DATES: We must receive comments on this proposed AD by March 16, 2009.

ADDRESSES: You may send comments by any of the following methods:
     Federal eRulemaking Portal: Go to http://
www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590.
     Hand Delivery: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590, between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal holidays.

Examining the AD Docket

    You may examine the AD docket on the Internet at http://
www.regulations.gov; or in person at the Docket Management Facility
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays. The AD docket contains this proposed AD, the regulatory
evaluation, any comments received, and other information. The street
address for the Docket Office (telephone<PHONE_NUMBER>) is in the
ADDRESSES section. Comments will be available in the AD docket shortly
after receipt.

FOR FURTHER INFORMATION CONTACT: Doug Rudolph, Aerospace Engineer, FAA,
Small Airplane Directorate, 901 Locust, Room 301, Kansas City, Missouri
64016; telephone:<PHONE_NUMBER>; fax:<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposed AD. Send your comments to an address
listed under the ADDRESSES section. Include ``Docket No. FAA-2009-0126;
Directorate Identifier 2009-CE-003-AD'' at the beginning of your
comments. We specifically invite comments on the overall regulatory,
economic, environmental, and energy aspects of this proposed AD. We
will consider all comments received by the closing date and may amend
this proposed AD because of those comments.
    We will post all comments we receive, without change, to http://
www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this proposed AD.

Discussion

    The European Aviation Safety Agency (EASA), which is the Technical
Agent for the Member States of the European Community, has issued AD
No. 2009-0007, dated January 13, 2009, (referred to after this as ``the
MCAI''), to correct an unsafe condition for the specified products. The
MCAI states:

    This Airworthiness Directive (AD) is prompted by some
occurrences where the Deice Pressure Regulator has vented too much
hot air into the forward compartment damaging the oxygen cylinder
ON/OFF cable, the Ram-Air Scoop cable and the Environmental Control
System (ECS) firewall shut-off valve cable.
If incorrectly adjusted, or defective, the Deice Pressure Regulator
can vent hot air into the forward compartment. This situation can
cause overheating and failures of components located inside the
forward compartment, which could result in potential loss of several
functions essential for safe flight.
For the reason described above, this AD mandates the installation of
a flange and scoop in the aircraft skin to vent the hot air from the
Deice Pressure Regulator overboard.

You may obtain further information by examining the MCAI in the AD
docket.

Relevant Service Information

    Pilatus Aircraft Ltd. has issued Pilatus PC12 Service Bulletin No.
30-011, dated July 9, 2008. The actions described in this service
information are intended to correct the unsafe condition identified in
the MCAI.

FAA's Determination and Requirements of the Proposed AD

    This product has been approved by the aviation authority of another
country, and is approved for operation in the United States. Pursuant
to our bilateral agreement with this State of Design Authority, they
have notified us of the unsafe condition described in the MCAI and
service information referenced above. We are proposing this AD because
we evaluated all information and determined the unsafe condition exists
and is likely to exist or develop on other products of the same type
design.

Differences Between This Proposed AD and the MCAI or Service
Information

    We have reviewed the MCAI and related service information and, in
general, agree with their substance. But we might have found it
necessary to use different words from those in the MCAI to ensure the
AD is clear for U.S. operators and is enforceable. In making these
changes, we do not intend to differ substantively from the information
provided in the MCAI and related service information.
    We might also have proposed different actions in this AD from those
in the MCAI in order to follow FAA policies. Any such differences are
highlighted in a NOTE within the proposed AD.

Costs of Compliance

    We estimate that this proposed AD will affect 131 products of U.S.
registry. We also estimate that it would take about 2 work-hours per
product to comply with the basic requirements of this proposed AD. The
average labor rate is $80 per work-hour. Required parts would cost
about $1,000 per product. Where the service information lists required
parts costs that are covered under warranty, we have assumed that there
will be no charge for these costs. As we do not control warranty
coverage for affected parties, some parties may incur costs higher than
estimated here.
    Based on these figures, we estimate the cost of the proposed AD on
U.S. operators to be $20,960, or $160 per product.

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. ``Subtitle VII: Aviation
Programs,'' describes in more detail the scope of the Agency's
authority.
    We are issuing this rulemaking under the authority described in
``Subtitle VII, Part A, Subpart III, Section 44701: General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.

Regulatory Findings

    We determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify this proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979); and
    3. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.
    We prepared a regulatory evaluation of the estimated costs to
comply with this proposed AD and placed it in the AD docket.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

    1. The authority citation for part 39 continues to read as follows:

    Authority: 49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

    2. The FAA amends Sec.  39.13 by adding the following new AD:

Pilatus Aircraft Ltd.: Docket No. FAA-2009-0126; Directorate
Identifier 2009-CE-003-AD.

Comments Due Date

    (a) We must receive comments by March 16, 2009.

Affected ADs

    (b) None.

Applicability

    (c) This AD applies to Models PC-12 and PC-12/45 airplanes,
manufacturer's serial numbers (MSN) 101 through MSN 320,
certificated in any category.

Subject

    (d) Air Transport Association of America (ATA) Code 30: Ice and
Rain Protection.

Reason

    (e) The mandatory continuing airworthiness information (MCAI)
states:

This Airworthiness Directive (AD) is prompted by some occurrences
where the Deice Pressure Regulator has vented too much hot air into
the forward compartment damaging the oxygen cylinder ON/OFF cable,
the Ram-Air Scoop cable and the Environmental Control System (ECS)
firewall shut-off valve cable.
If incorrectly adjusted, or defective, the Deice Pressure Regulator
can vent hot air into the forward compartment. This situation can
cause overheating and failures of components located inside the
forward compartment, which could result in potential loss of several
functions essential for safe flight.
For the reason described above, this AD mandates the installation of
a flange and scoop in the aircraft skin to vent the hot air from the
Deice Pressure Regulator overboard.

Actions and Compliance

    (f) Unless already done, within the next 3 months after the
effective date of this AD, install an overboard vent for the airfoil
deice system pressure regulator (Modification Kit Number
5<IP_ADDRESS>2) following the Accomplishment Instructions in Pilatus
Aircraft Ltd. PC12 Service Bulletin No. 30-011, dated July 9, 2008.

FAA AD Differences

    Note: This AD differs from the MCAI and/or service information
as follows: No differences.

Other FAA AD Provisions

    (g) The following provisions also apply to this AD:
    (1) Alternative Methods of Compliance (AMOCs): The Manager,
Standards Office, FAA, has the authority to approve AMOCs for this
AD, if requested using the procedures found in 14 CFR 39.19. Send
information to ATTN: Doug Rudolph, Aerospace Engineer, FAA, Small
Airplane Directorate, 901 Locust, Room 301, Kansas City, Missouri
64016; telephone:<PHONE_NUMBER>; fax:<PHONE_NUMBER>. Before using
any approved AMOC on any airplane to which the AMOC applies, notify
your appropriate principal inspector (PI) in the FAA Flight
Standards District Office (FSDO), or lacking a PI, your local FSDO.
    (2) Airworthy Product: For any requirement in this AD to obtain
corrective actions from a manufacturer or other source, use these
actions if they are FAA-approved. Corrective actions are considered
FAA-approved if they are approved by the State of Design Authority
(or their delegated agent). You are required to assure the product
is airworthy before it is returned to service.
    (3) Reporting Requirements: For any reporting requirement in
this AD, under the provisions of the Paperwork Reduction Act (44
U.S.C. 3501 et seq.), the Office of Management and Budget (OMB) has
approved the information collection requirements and has assigned
OMB Control Number 2120-0056.

Related Information

    (h) Refer to MCAI European Aviation Safety Agency (EASA) AD No.
2009-0007, dated January 13, 2009; and Pilatus Aircraft Ltd. PC12
Service Bulletin No. 30-011, dated July 9, 2008, for related
information.

    Issued in Kansas City, Missouri, on February 6, 2009.
Kim Smith,
Manager, Small Airplane Directorate, Aircraft Certification Service.
[FR Doc. E9-3111 Filed 2-12-09; 8:45 am]

BILLING CODE 4910-13-P


[Federal Register: February 14, 2007 (Volume 72, Number 30)]
[Notices]
[Page 7091-7099]
[DOCID:fr14fe07-137]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55251; File No. SR-CBOE-2006-84]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change and Amendment
Nos. 1, 2, 3, and 4 Thereto To List and Trade Credit Default Options

February 7, 2007.
    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 October 26, 2006, the Chicago Board Options Exchange,
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and
Exchange Commission (``Commission'') a proposed rule change to list and
trade credit default options (``Credit Default Options''). On December
21, 2006, CBOE filed Amendment No. 1 to the proposed rule change; on
January 16, 2007, CBOE filed Amendment No. 2 to the proposed rule
change; on February 2, 2007, CBOE filed Amendment No. 3, to the
proposed rule change; and on February 7, 2007, CBOE filed Amendment
No.4 to the proposed rule change. The proposed rule change is described
in Items I, II, and III below, which Items have been prepared
substantially by the Exchange. 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.
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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 its rules to provide for the listing
and trading of cash-settled, binary call options based on credit events
in one or more debt securities of an issuer or guarantor. The text of
the proposed rule change is available at (http://www.cboe.org/legal),

CBOE, and the Commission's Public Reference Room.

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 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 aspects of such
statements.

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

1. Purpose
    Amendment No. 4 deleted the text of proposed Rule 29.16 and made
typographical and clarifying corrections to the discussion sections of
the Form 19b-4 and the Exhibit 1 Federal Register notice, and the
product description contained in Exhibit 3 to the Form 19b-4.
    Amendment 3 replaced Amendment 2 it its entirety. The purpose of
Amendment 3 was to: (i) Eliminate the term ``event-style option'' from
the proposed rule text; (ii) amend the definition of a ``Credit Event''
in the proposed rule text to explicitly include references to
restructuring of the Relevant Obligation(s) as an underlying Credit
Event in a Credit Default Option class; (iii) revise the cutoff times
applicable to the occurrence of Credit Events, Redemption Events, and
related confirmation periods; (iv) expand the definition of ``Reference
Entity'' to include guarantors in addition to issuers; and (v) make
conforming changes and clarifications to this ``Purpose'' section, as
well as various typographical corrections to the proposed rule text.
    Amendment 2 replaced Amendment 1 in its entirety. The purpose of
Amendment 2 was to: (i) Modify the proposed margin requirements for
Credit Default Options, (ii) modify the proposed definitions of the
``last trading day'' and the ``expiration date,'' (iii) modify the
proposed definition of the ``Relevant Obligations,'' and (iv) make
various conforming changes and clarifications to this ``Purpose''
section.
    The purpose of Amendment 1, which replaced the original filing in
its entirety, was to revise the rule text and related discussion in
this ``Purpose'' section to make various changes and clarifications.
    The purpose of the proposed rule change is to enable CBOE to list
and trade Credit Default Options. With the introduction of Credit
Default Options, as described more fully below, investors would be able
to trade cash-settled options based on particular credit-related events
that are confirmed to have occurred based on a particular debt security
obligation or related debt security obligations of an issuer. Credit
Default Options should provide investors with hedging and risk-shifting
vehicles that correlate with the creditworthiness of the Reference
Entity and its debt security obligations. Indeed, creditworthiness is
viewed as a key component of the valuation of a debt security.
Investors with substantial investments in debt securities would be able
to use CBOE Credit Default Options to hedge their exposure and risk, or
to supplement income by writing Credit Default Option calls. CBOE
asserts that, as a result, these products would be useful to those with
investments in debt securities, including institutional investors such
as credit market participants and fixed income traders, as well as
individual investors.
    Credit Default Options would be structured as binary call options
\3\ that settle in cash based on confirmation of a Credit Event in a
Reference Entity. A ``Reference Entity'' would be the issuer or
guarantor \4\ of the debt security underlying the Credit Default Option
(referred to as the ``Reference Obligation'').
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    \3\ A ``binary call option'' is an option contract that will pay
the holder of the option contract a fixed amount upon exercise.
    \4\ The Exchange has included ``guarantor'' within the proposed
definition of ``Reference Entity'' in the event a succession occurs
and the original issuer remains a guarantor of the debt security.
Alternatively, the situation may arise in which the Reference Entity
may not be the original issuer, but is a guarantor of the debt
security.
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    A ``Credit Event'' would occur:
    (i) When the Reference Entity has a Failure-to-Pay Default on the
Reference Obligation or any other debt security obligation(s) (the set
of these obligations and the Reference Obligation are referred to as
the ``Relevant Obligations''). A ``Failure-to-Pay Default'' would be
defined in accordance with the terms of the Relevant Obligation(s);
and/or
    (ii) When the Reference Entity has any other Event of Default on
the Relevant Obligation(s). Any applicable ``Event(s) of Default''
would be specified by the Exchange at the time the option class is
initially listed in accordance with the procedures of proposed Rule
29.2 (described below) and, for each such Event(s) of Default
specified, would be defined in accordance with the terms of the
Relevant Obligation(s); and/or
    (iii) When the Reference Entity has a change in the terms of the
Relevant Obligation(s) (a ``Restructuring''). The terms of such a
Restructuring would be specified by the Exchange in accordance with
Rule 29.2 and, if so specified, would be defined in accordance with the
terms of the Relevant Obligation(s).
    To confirm, the particular Credit Events applicable to a Credit
Default Option would be designated by the Exchange on a class-by-class
basis. And, when designating the applicable Credit Events for a given
Credit Default Option class, the Exchange would select from among the
terms in the underlying instruments of the Relevant Obligation(s) of
the particular Reference Entity.
    The Exchange would confirm a Credit Event through at least two
sources, which may include announcements published via newswire
services or information services companies, the names of which would be
announced to the membership via Regulatory Circular, and/or information
contained in any order, decree, or notice of filing, however described,
of or filed with the courts, the Commission, an exchange, or
association, the Options Clearing Corporation (``OCC''), or another
regulatory agency or similar authority. Every determination of a Credit
Event would be within the Exchange's sole discretion and would be
conclusive and binding on all holders and sellers of the Credit Default
Option and not subject to review.
    For a Credit Default Option to be automatically exercised, a Credit
Event would need to have: (i) Occurred between the option's listing
date and 10:59 p.m. (CT) on the option's last trading day which,
subject to certain exceptions, would generally be the third Friday of
the expiration month; and (ii) been confirmed by the Exchange no

later than the option's expiration date which, subject to certain
exceptions, would generally be the fourth business day after the third
Friday of the expiration month. If the Exchange confirms a Credit
Event, the Credit Default Options class would be subject to an
automatic exercise and the holders of long options positions would
receive a fixed cash settlement amount payment equal to $100,000 per
contract. Otherwise, if there is no Credit Event confirmed prior to the
expiration date, the cash settlement amount would be $0. The last
trading day, expiration day, and automatic exercise procedures are
described in more detail below.
    Given the binary nature of the product, a benefit of Credit Default
Options is that the purchaser and writer of the options would know the
expected return at the time the contract is entered. Further, since the
payment is fixed, the risk (return) to the writer (purchaser) would be
limited. CBOE believes that there are several other benefits to be
realized by providing for the trading of Credit Default Options on its
exchange marketplace. Among these benefits are the following: (i) By
trading Credit Default Options in the CBOE's centralized, open-outcry
auction market, with designated members having market-making
responsibilities, investors would be better able to initiate and close
out positions efficiently and at the best available prices; (ii) unlike
the existing over-the-counter (``OTC'') market, CBOE's market would
provide transparency as the result of the real-time dissemination of
best bids and offers and reports of completed transactions in Credit
Default Options; (iii) the role of the OCC as issuer and guarantor of
Credit Default Options would eliminate concern over contra-party
creditworthiness and assure performance upon automatic exercise of
Credit Default Options; and (iv) subjecting Credit Default Options to
CBOE's rules, regulations, and oversight would provide enhanced
investor protection and market surveillance.
    To accommodate the introduction of these new Credit Default
Options, CBOE proposes to adopt new Chapter XXIX to its rules and to
make corresponding amendments to CBOE's initial and maintenance listing
rules and margin rules. An introductory section to Chapter XXIX would
explain that the proposed rules in the Chapter are applicable only to
Credit Default Options. The introductory section would further explain
that the existing rules in Chapters I through XIX, XXIVA, and XXIVB are
also applicable to Credit Default Options and, in some cases, are
supplemented by the proposed rules in the Chapter, except for existing
rules that would be replaced in respect of Credit Default Options in
the Chapter and except where the context otherwise requires. Whenever a
proposed rule in the Chapter supplements or, for purposes of the
Chapter, replaces rules in Chapter I through XIX, XXIVA, and XXIVB,
that fact would be indicated following the rule text. Each of the
proposed rules and amendments to the existing rules are described
below.
a. Definitions (Proposed Rule 29.1)
    New Chapter XXIX would include definitions applicable to Credit
Default Options in proposed Rule 29.1. In particular, the terms
``Credit Default Option,'' ``Credit Event,'' and ``Reference Entity''
are defined as described above. In addition, the term ``cash settlement
amount,'' which is the amount of cash that a holder would receive upon
automatic exercise, if the Exchange has confirmed the occurrence of a
Credit Event in a Reference Entity between the listing date and the
last trading day, is proposed to be a fixed amount of $100,000. The
$100,000 amount is equal to an exercise settlement value of $100
multiplied by the contract multiplier of 1,000. If no Credit Event is
confirmed, the cash settlement amount would be $0. As described in more
detail below, the $100,000 cash settlement amount may be subject to
adjustment if certain adjustment-related events are confirmed to have
occurred.
    Also included within the proposed definitions, the term ``last
trading day'' would be defined as the third Friday of the expiration
month (or, if that day is not a business day, the last trading day
would be the preceding business day); provided, however, if a Credit
Event is confirmed prior to that day, the series would cease trading at
the time of the confirmation of the Credit Event and the last trading
day would be accelerated to the confirmation date. In addition, within
the proposed definitions, the term ``expiration date'' would be defined
as the fourth business day after the third Friday of the expiration
month (or, if that day is not a business day, the expiration date would
be the fourth business day after the preceding business day); provided,
however, if a Credit Event is confirmed by the Exchange to members and
the OCC before the third Friday of the expiration month, the expiration
date would be accelerated to the second business day immediately
following the confirmation date.\5\
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    \5\ The Exchange understands, based on discussions with the OCC,
that the final settlement would occur on the first business day
following the expiration date.
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b. Designation, Withdrawal & Adjustment (Proposed Rules 29.2-29.4;
Revised Rules 5.3 and 5.4)
    Proposed Interpretation and Policy .11 to existing Rule 5.3,
Criteria for Underlying Securities, would be added to provide the
listing criteria for Credit Default Options. Under the proposed
criteria, the Exchange could list and trade a Credit Default Option
that overlies a Reference Obligation of a Reference Entity, provided
that the Reference Entity satisfies the following: (i) the Reference
Entity or the Reference Entity's parent, if the Reference Entity is a
wholly-owned subsidiary, must have at least one class of securities
that is duly registered and is an ``NMS stock'' as defined in Rule 600
of Regulation NMS under the Act; \6\ and (ii) the registered equity
securities issued by the Reference Entity must also satisfy the
requirements for continued options trading on CBOE pursuant to existing
Exchange Rule 5.4.\7\
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    \6\ This criterion is designed to ensure that there is adequate
information publicly available regarding the issuer of a debt
security that serves as a Reference Obligation underlying a Credit
Default Option. The market for debt securities that would serve as
Reference Obligations is largely an OTC market, and many debt
securities, including those among the most actively traded, are not
themselves registered under Section 12 of the Act, 15 U.S.C. 78l.
The issuers of many unregistered debt securities, however, have
equity securities that are duly registered and are ``NMS stocks'' as
defined in Rule 600 of Regulation NMS, 17 CFR 242.600. These issuers
are required to provide periodic reports to the public due to the
equity registration, and the fact that their debt securities are
unregistered does not diminish in practical terms the information
provided by their periodic reports. Thus, the requirements, would
enable a wide array of credit Default Options to be listed while
ensuring sufficient public disclosure of information about any debt
securities that serve as Reference Obligations underlying the
exchange-traded Credit Default Options.
    \7\ The provisions of existing Rule 5.4.01 require that an
equity security underlying an option be itself widely held and
actively traded. The requirement that the securities of an issuer of
a debt security meet the criterion of Rule 5.4.01 provides an
additional assurance that such issuer's securities enjoy widespread
investor interest.
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    Proposed Interpretation and Policy .15 to existing Rule 5.4,
Withdrawal of Approval of Underlying Securities, would similarly
provide that a Credit Default Option initially approved for trading
shall be deemed not to meet the Exchange's requirements for continued
approval, and the Exchange would not open for trading any additional
series of options contracts of the class covering such options and may
prohibit any opening purchases transactions in such series as provided
in existing Rule 5.4, at any time the Exchange determines on the basis
of information made publicly available that any of the listing

requirements identified above are not satisfied.
    Proposed Rule 29.2, Designation of Credit Default Option Contracts,
would supplement existing Rules 5.1, Designation of Securities, 5.3,
5.5, Series of Option Contracts Open for Trading, and 5.8, Long-Term
Equity Option Series (LEAPS [reg]). The text of proposed Rule 29.2
references the applicable listing requirements in proposed Rule 5.3.11
and also provides that each Credit Default Options class would be
designated by reference to the Reference Entity, Reference Obligation,
and the applicable Credit Event(s). The applicable Credit Event(s)
would include a Failure-to-Pay Default and might also include any other
Event of Default or Restructuring, if any, specified by the Exchange.
    After a particular Credit Default Option class has been approved
for listing and trading on the Exchange, the Exchange would from time
to time open for trading series of options on that class. Only Credit
Default Option contracts approved by the Exchange and currently open
for trading on the Exchange would be eligible to be purchased or
written on the Exchange. Prior to the opening of trading in a
particular Credit Default Options series in a given class, the Exchange
would fix the expiration month and year. To the extent possible, CBOE
intends to have Credit Default Options recognized and treated like
existing standardized options. Standardized systems for listing,
trading, transmitting, clearing, and settling options, including
systems used by OCC, would be employed in connection with Credit
Default Options. Credit Default Options would also have a symbology
based on the current system. For example, the ABC Dec-07 Calls would
designate a Credit Default Option on Reference Entity ABC, which option
would expire in December 2007 and would cease trading on the third
Friday of that month (assuming that date is an Exchange business day
and assuming no Credit Event has been determined by the Exchange before
that date).
    A Credit Default Option series would generally be listed up to 123
months ahead of its expiration date and could expire in the months of
March, June, September, or December. The last trading day would be the
close of business on the third Friday of the expiration month. However,
if that day is not a business day, the series would cease trading at
the close of business on the preceding business day. The Exchange
usually would open one to four series for each year up to 10.25 years
from the current expiration. For example, in December 2006, the
Exchange would open the Jun-07 and Dec-07 series, as well as the Dec-
08, Dec-09, Dec-10, and Dec-11 series. Additional series of options on
the same Credit Default Option class could be opened for trading on the
Exchange when the Exchange deems it necessary to maintain an orderly
market or to meet customer demand. The opening of a new series of
Credit Default Options on the Exchange would not affect any other
series of options of the same class previously opened.
    Proposed Rule 29.3, Withdrawal of Approval of Underlying Reference
Entity, would provide that the requirements for continuance of approval
of Credit Default Options would be in accordance with proposed Rule
5.4.15.
    Proposed Rule 29.4, Adjustments, which for purposes of Credit
Default Options would replace existing Rule 5.7, Adjustments, would
contain information about adjustments due to succession or redemption
events in the Reference Entity.
    With respect to adjustments related to a succession, the proposed
rule provides that each Credit Default Option would be replaced by one
or more Credit Default Options derived from Reference Entities that
have succeeded the original Reference Entity as a result of the
Succession Event based on the applicable share of each Successor
Reference Entity. For purposes of the proposed rule, a ``Successor
Reference Entity'' and a ``Succession Event'' would be defined in
accordance with the terms of the Relevant Obligation(s). In respect of
each successor Credit Default Option, the cash settlement amount and
contract multiplier would be based on the applicable share of each
Successor Reference Entity. For example, if there are two Successor
Reference Entities that each has an applicable share of 50%, the cash
settlement for each replacement Credit Default Option would be $50,000
(equal to an exercise settlement value of $100 multiplied by the
revised contract multiplier of 500). All other terms and conditions of
each successor Credit Default Option would be the same as the original
Credit Default Option unless the Exchange determines, in its sole
discretion, that a change is necessary and appropriate for the
protection of investors and the public interest, including but not
limited to the maintenance of fair and orderly markets, consistency of
interpretation and practice, and the efficiency of settlement
procedures.
    With respect to adjustments related to a redemption, the proposed
rule provides that, once the Exchange has confirmed a Redemption Event,
the Credit Default Option contract would cease trading on the
confirmation date. If no Credit Event has been confirmed to have
occurred prior to the effective date of the Redemption, the contract
payout would be $0. If a Credit Event has occurred prior to the
effective date of the Redemption, the cash settlement amount would be
$100,000 per contract (or the applicable adjusted amount). The Credit
Event confirmation period would begin when the Credit Default Option
contact is listed and would extend to 3 p.m. (CT) on the fourth
Exchange business day after the effective date of the Redemption. A
``Redemption Event'' would be defined in accordance with the terms of
the Relevant Obligation(s) and would include the redemption of the
Reference Obligation and of all other Relevant Obligations. However, if
the Reference Obligation is redeemed but other Relevant Obligation(s)
remain, a new Reference Obligation would be specified from among the
remaining Relevant Obligation(s).
    The Exchange would confirm adjustment events based on at least two
sources, which could include announcements published via newswire
services or information services companies, the names of which would be
announced to the membership via Regulatory Circular, and/or information
submitted to or filed with the courts, the Commission, an exchange or
association, the OCC, or another regulatory agency or similar
authority.
    Proposed Rule 29.4 also would provide that every such determination
made pursuant to the proposed rule would be within the Exchange's sole
discretion and be conclusive and binding on all holders and sellers and
not subject to review.
c. Determination of Credit Events, Automatic Exercise, and Settlement
(Proposed Rules 29.9-29.10)
    A Credit Default Option would be subject to automatic exercise upon
the Exchange confirming that a Credit Event has occurred in a Reference
Entity between the listing date and the last trading day. Under
proposed Rule 29.9, the Credit Event confirmation period would begin
when the Credit Default Option contract is listed and would extend to 3
p.m. (CT) on the expiration date.
    The Exchange would confirm a Credit Event based on at least two
sources, which could include announcements published via newswire
services or information services companies, the names of which would be
announced to the membership via Regulatory Circular,

or information submitted to or filed with the courts, the Commission,
an exchange or association, the OCC, or another regulatory agency or
similar authority. Proposed Rule 29.9 would also provide that every
determination made pursuant to the proposed rule would be within the
Exchange's sole discretion and be conclusive and binding on all holders
and sellers and not subject to review.
    Proposed Rule 29.10 would provide that the Exchange shall have no
liability for damages, claims, losses, or expenses caused by any
errors, omissions, or delays in confirming or disseminating notice of
any Credit Event resulting from a negligent act or omission by the
Exchange or any act, condition, or cause beyond the reasonable control
of the Exchange, including, but not limited to, an act of God; fire;
flood; extraordinary weather conditions; war; insurrection; riot;
strike; accident; action of government; communications or power
failure; equipment or software malfunction; or any error, omission, or
delay in the reports of transactions in one or more underlying
securities.
    If the Exchange determines that a Credit Event in the underlying
Reference Entity has occurred prior to 10:59 p.m. (CT) on the last
trading day, the final cash settlement amount would be $100,000 per
contract (or the applicable adjusted amount). Otherwise the final
settlement price would be $0. As indicated above, if a Credit Event has
been confirmed by the Exchange to have occurred prior to the last
trading day, the Credit Default Option would cease trading upon
confirmation of the Credit Event. Once a Credit Event is confirmed, the
Exchange would also provide the OCC with notice of the Credit Event and
notice of the applicable cash settlement value, similar to the
notification procedures that are currently in place for existing index
products trading on the Exchange. The rights and obligations of holders
and sellers of Credit Default Options dealt in on the Exchange shall be
set forth in the By-Laws and Rules of OCC.
d. Position Limits, Reporting Requirements, Exercise Limits, and Other
Restrictions (Proposed Rules 29.5-29.8)
    The Exchange is proposing that the position limits for Credit
Default Option contracts be equal to 5,000 contracts on the same side
of the market. The Exchange believes this amount is sufficiently low
enough to minimize potential risks on firms as Credit Default Options
are first introduced. However, over time and based on the Exchange's
experience in trading Credit Default Options, CBOE anticipates these
limits would be increased. Any such increase would be reflected through
a rule filing submitted pursuant to Section 19(b) of the Act.\8\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    In determining compliance with the Exchange's position limit
requirements, proposed Rule 29.5 would provide that Credit Default
Options shall not be aggregated with option contracts on the same or
similar underlying security. CBOE believes that the ``all-or-none''
nature of Credit Default Options as well as the risk/return profile of
these options provides significant differences to existing standardized
options that render aggregation of such positions unnecessary. In
addition, Credit Default Options shall not be subject to the hedge
exemption to the standard position limits found in existing Rule
4.11.04. Instead, the following qualified hedge exemption strategies
and positions shall be exempt from the established position limits: (i)
A Credit Default Option position ``hedged'' or ``covered'' by an
appropriate amount of cash to meet the cash settlement amount
obligation (e.g., $100,000 for a Credit Default Option with an exercise
settlement value of $100 multiplied by a contract multiplier of 1,000);
and (ii) a Credit Default Option position ``hedged'' or ``covered'' by
an amount of an underlying debt security(ies) that serves as a Relevant
Obligation(s) and/or other securities, instruments, or interests
related to the Reference Entity that is sufficient to meet the cash
settlement amount obligation. For example, a long Credit Default Option
position could be offset by a long position in a debt security of the
Reference Entity that is worth $100,000 per contract (or the applicable
adjusted amount) and a short Credit Default Option position could be
offset by a short position in a debt security of the Reference Entity
that is worth $100,000 per contract (or the applicable adjusted
amount).
    The existing Market-Maker and firm facilitation exemptions to
position limits currently available to members under existing Rules
4.11.05 and 4.11.06, respectively, would also apply. With respect to
the Market-Maker hedge exemption, the Exchange is proposing that the
positions must generally be within 20% of the applicable limits of the
Credit Default Option before an exemption would be granted. With
respect to the firm facilitation exemption, the Exchange is proposing
that the aggregate exemption position could not exceed three times the
standard limit of $5,000 and be applied consistent with the procedures
described in existing Rule 4.11.06.
    Under proposed Rule 29.6, Reports Related to Position Limits and
Liquidation of Positions, the standard equity reporting requirements
described in existing Rule 4.13, Reports Related to Position Limits,
would be applicable to Credit Default Options. As such, in accordance
with Rule 4.13(a), positions in Credit Default Options would be
reported to the Exchange via the Large Option Positions Report when an
account establishes an aggregate same side of the market position of
200 or more Credit Default Options. In computing reportable Credit
Default Options under existing Rule 4.13, Credit Default Options could
not be aggregated with non-Credit Default contracts. In addition,
Credit Default Options on a given class shall not be aggregated with
any other class of Credit Default Options. The applicable position
reporting requirements described in existing Rule 4.13(b) would also
apply, except that the reporting requirement would be triggered for a
Credit Default Option position on behalf of a member's account or for
the account of a customer in excess of 1,000 contracts on the same side
of the market, instead of the normal 10,000 contract trigger amount.
The data to be reported would include, but would not be limited to, the
Credit Default Option positions, whether such positions are hedged, and
documentation as to how such contracts are hedged. The Exchange
believes that the reporting requirements and the surveillance
procedures for hedged positions would enable the Exchange to closely
monitor sizable positions and corresponding hedges.
    Upon determination of a Credit Event, the Credit Default Option
class would cease trading and all outstanding Credit Default Option
contracts would be subject to automatic exercise. As a result and given
the fixed payout nature of these options, there shall be no exercise
limits for Credit Default Options. Proposed Rule 29.7 confirms this.
    Proposed Rule 29.8 provides that Credit Default Options shall also
be subject to existing Rule 4.16, Other Restrictions on Options
Transactions and Exercises, which provides the Exchange's Board with
the power to impose restrictions on transactions or exercises in one or
more series of options of any class dealt in on the Exchange as the
Board in its judgment determines advisable in the interests of
maintaining a fair and orderly market or otherwise deems advisable in
the public

interest or for the protection of investors.\9\
---------------------------------------------------------------------------

    \9\ For example, it is possible that the Exchange would prohibit
exercises in a Credit Default Option if a court, the Commission, or
another regulatory agency having jurisdiction would impose a
restriction which would have the effect of restricting the exercise
of an option.
---------------------------------------------------------------------------

    CBOE believes the proposed safeguards would serve sufficiently to
help monitor open interest in Credit Default Option series and
significantly reduce any risks.
e. Margin Requirements (Amendment to Rules 12.3 and 12.5)
    The Exchange is proposing to supplement its existing Rule 12.3,
Margin Requirements, to include requirements applicable to the initial
and maintenance margin required on any Credit Default Options carried
in a customer's account. The requirements would be as follows: The
initial and maintenance margin required on any Credit Default Option
carried long in a customer's account would be 100% of the current
market value of the Credit Default Option; provided, however, for the
account of a qualified customer, the margin would be 20% of the current
market value of the Credit Default Option. The initial and maintenance
margin required on any Credit Default Option carried short in a
customer's account would be the cash settlement amount, i.e., $100,000
per contract; provided, however, for the account of a qualified
customer, the margin would be the lesser of the current market value
plus 20% of the cash settlement amount defined in proposed Rule 29.1 or
the cash settlement amount.
    The Exchange is also proposing to amend its existing Rule 12.5,
Determination of Value for Margin Purposes, to provide that Credit
Default Options carried for the account of a qualified investor that
are listed or guaranteed by the carrying broker-dealer may be deemed to
have market value for the purposes of the customer margin account
provisions provided in existing Rule 12.3(c). For purposes of these
proposed provisions, the term ``qualified customer'' would be defined a
person or entity that owns and invests on a discretionary basis no less
than $5,000,000 in investments.
    Under the proposal, Credit Default Option margin requirements could
be satisfied by a deposit of cash or marginable securities or by
presentation to the member organization carrying such customer's
account of a letter of credit in a form satisfactory to the Exchange
and issued by a bank. Such a letter of credit would be required to: (i)
Contain the unqualified commitment of the issuer to pay to the member
or participant organization a specified sum of money equal to or
greater than the amount of margin due with respect to such option
position, immediately upon demand at any time prior to the expiration
of such letter of credit; (ii) be irrevocable; and (iii) expire no
earlier than the expiration of such option. Such a letter of credit
would be permitted to serve as margin for more than one Credit Default
Option position written by the customer for whose account the letter of
credit is issued, provided that the margin due with respect to each
such option position does not, in the aggregate, exceed the sum
specified in such letter of credit and provided that such letter
expires no sooner than the most distant expiration date of any of the
options with respect to which it is designed to serve as margin.
    The proposed margin provisions also would provide that a Credit
Default Option carried short in a customer's account be deemed a
covered position, and eligible for the cash account, provided any one
of the following either is held in the account at the time the option
is written or is received into the account promptly thereafter: (i)
Cash or cash equivalents equal to 100% of the cash settlement amount as
defined in Rule 29.1; or (ii) an escrow agreement. Under the proposal,
the escrow agreement must certify that the bank holds for the account
of the customer as security for the agreement: (i) Cash, (ii) cash
equivalents, (iii) one or more qualified equity securities, or (iv) a
combination thereof having an aggregate market value of not less than
100% of the cash settlement amount (e.g., $100,000 in the case of an
unadjusted Credit Default Option) and that the bank would promptly pay
the member organization the cash settlement amount in the event of a
Credit Event.
    The Exchange notes that, in accordance with Rule 12.10, Margin
Required is Minimum, the Exchange would also have the ability to
determine at any time to impose higher margin requirements than those
described above in respect of any Credit Default Option position(s)
when it deems such higher margin requirements appropriate.
    In setting the proposed margin requirements, particularly those
with respect to qualified customers, and the proposed position limit
and reporting requirements described above, the Exchange has been
cognizant of the sophistication and capitalization of the particular
market participants and their need for substantial options transaction
capacity to hedge their substantial investment portfolios, on the one
hand, and the potential for untoward effects on the market and on firms
that might be attributable to excessive Credit Default Option
positions, on the other. The Exchange has also been cognizant of the
existence of the competitive OTC market, in which similar restrictions
do not apply. For these reasons, the Exchange believes that the
requirements set forth in the proposed rules strike a necessary and
appropriate balance and adequately address concerns that a member or
its customer may try to maintain an inordinately large unhedged
position in Credit Default Options.
f. Letter of Guarantee or Authorization (Proposed Rule 29.18)
    Proposed Rule 29.18 would extend the general letter of guarantee
requirement under existing Rule 8.5, Letters of Guarantee, to Market-
Makers with appointments in Credit Default Options, thereby subjecting
such Market-Makers to a focused creditworthiness review by their
clearing members. Similarly, proposed Rule 29.18 would extend the
general letter of authorization requirement under existing Rule 6.72,
Letters of Authorization, to floor brokers that would represent orders
in Credit Default Option contracts.
g. Trading Mechanics for Credit Default Options (Proposed Rules 29.11-
29.17 and 29.19)
    The Exchange intends to trade Credit Default Options similar to the
manner in which it trades equity options on its Hybrid Trading System
(``Hybrid''). The existing Hybrid equity option trading rules would
apply largely unchanged to Credit Default Options, with a few
distinctions noted below. Under the proposed rules, trading in Credit
Default Options would be conducted in the following manner:
     Days and Hours of Business (Proposed Rule 29.11 and
Revised Rule 6.1): Proposed Rule 29.11 would provide that, except under
unusual conditions as may be determined by the Exchange, the hours
during which Credit Default Options transactions could be made on the
Exchange would be from 8:30 a.m. to 3 p.m. (CT). The Exchange is also
proposing to include a cross-reference to proposed Rule 29.11 in
existing Rule 6.1, Days and Hours of Business, to reflect that existing
Rule 6.1 would be supplemented by proposed Rule 29.11.
     Trading Rotations (Proposed Rule 29.12): Trading rotations
would generally be conducted through use of the Hybrid Opening System
(``HOSS''), which is described in existing Rule 6.2B. Normally equity
options open at a

randomly selected time following the opening of the underlying
security. Because Credit Default Options would not have a traditional
underlying security, the opening rotation process would begin at a
randomly selected time within a number of seconds after 8:30 a.m. (CT),
unless unusual circumstances exist.
     Trading Halts and Suspension of Trading (Proposed Rule
29.13): The trading halt procedures contained in existing Rules 6.3 and
6.3B that are applicable to equity options shall also be applicable to
Credit Default Options. In addition, proposed Rule 29.13 provides that
another factor that may be considered by Floor Officials in connection
with the institution of a trading halt under existing Rule 6.3 in
Credit Default Options is that current quotations for the Relevant
Obligation(s) or other securities of the Reference Entity are
unavailable or have become unreliable.
     Premium Bids and Offers & Minimum Increments, Priority and
Allocation (Proposed Rule 29.14): Bids and offers would have to be
expressed in terms of dollars per the contract multiplier unit (e.g., a
bid of ``7'' shall represent a bid of $7,000 for a Credit Default
Option with a contract multiplier of 1,000). In addition, the minimum
price variation (``MPV'') for bids and offers would be $0.05 ($50 per
contract) on both simple orders and multi-part complex orders. All bids
or offers made for Credit Default Option contracts would be deemed to
be for one contract unless a specific number of option contracts is
expressed in the bid or offer. A bid or offer for more than one option
contract would be deemed to be for the amount thereof or a smaller
number of option contracts. The rules of priority and order allocation
procedures set forth in Rule 6.45A, Priority and Allocation of Equity
Option Trades on the CBOE Hybrid System, would apply to Credit Default
Options.
     Nullification and Adjustment of Credit Default Option
Transactions (Proposed Rule 29.15): The provisions in existing Rule
6.25, which pertain to the nullification and adjustment of equity
option transactions, would be generally applicable to Credit Default
Options. However, the conditions for determining an obvious error in a
Credit Default Option would differ. For Credit Default Options, there
would be two categories of errors. The first type of error pertains to
an obvious pricing error, which occurs when the execution price of an
electronic transaction is below or above the theoretical price range
(i.e., $0-$100) for the series by an amount equal to at least 5% per
contract. Trading Officials would adjust such transactions to a price
within 5% of the theoretical price range (i.e., to -$5 or $105), unless
both parties agree to a nullification. The second type of error
pertains to electronic or open outcry transactions arising out of a
verifiable disruption or malfunction in the use or operation of any
Exchange automated quotation, dissemination, execution, or
communication system. Trading Officials would nullify such
transactions, unless both parties agree to an adjustment. All other
provisions of existing Rule 6.25 related to procedures for review, and
obvious error panel and appeals committee reviews, would apply
unchanged.
     Market-Maker Appointments & Obligations (Proposed Rule
29.17): Proposed Rule 29.17 provides that the Market-Maker appointment
process for Credit Default Option classes would be the same as the
appointments for other options, as set out in existing Rules 8.3,
Appointment of Market-Makers; 8.4, Remote Market-Makers, 8.15A; Lead
Market-Makers in Hybrid Classes; and 8.95, Allocation of Securities and
Location of Trading Crowds and DPMs. This proposed rule would further
provide that an appointed Market-Maker could, but would not be
obligated to, enter a response to a request for quotes in an appointed
Credit Default Option class and need not provide continuous quotes or
quote a minimum bid-offer spread. However, when quoting, the Market-
Maker's minimum value size would have to be at least one contract. With
respect to an appointed DPM or LMM, as applicable, there would be
additional obligations to enter opening quotes in accordance with
existing Rule 6.2B, Hybrid Opening System (``HOSS''), in 100% of the
series in the appointed class and to enter a quote in response to any
open-outcry request for quotes on any appointed Credit Default Option
class. The Exchange also could establish permissible price differences
for one or more series of classes of Credit Default Options as
warranted by market conditions. These quoting mechanics would be
similar to the mechanics that exist today for trading Flexible Exchange
Options (``FLEX Options'') on the Exchange.
     FLEX Trading Rules (Proposed Rule 29.19): In addition to
Hybrid, Credit Default Options also would be eligible for trading as
FLEX Options. For proposes of existing Chapter XXIVA and proposed
Chapter XXIVB, which chapters contain the Exchange's rules pertaining
to FLEX Options, references to the term ``FLEX Equity Options'' would
include a Credit Default Option and references to the ``underlying
security'' or ``underlying equity security'' in respect of a Credit
Default Option would mean the Reference Obligation as defined in
proposed Rule 29.1. For purposes of existing Rule 24A.4 and Rule
24B.4,\10\ a FLEX Equity Option that is a Credit Default Option would
be cash-settled and the exercise-by-exception provisions of OCC Rule
805 would not apply.
---------------------------------------------------------------------------

    \10\ Chapter XXIVB and Rule 24B.4 are proposed to be adopted
through a separate rule filing, SR-CBOE-2006-99.
---------------------------------------------------------------------------

    These trading mechanics are designed to create a modified trading
environment that takes into account the relatively small number of
transactions that are likely to occur in this sophisticated, large-size
market, while at the same time providing the Credit Default Options
market with the price improvement and transparency benefits of
competitive Exchange floor bidding, as compared to the OTC market. The
Exchange believes that the resulting market environment would be fair,
efficient, and creditworthy and, as such, would prove to be
particularly suitable to the large sophisticated trades and investors
that now resort to the OTC market to effect these types of options
transactions.
h. Options Disclosure Document
    To accommodate the listing and trading of Credit Default Options,
it is expected that the OCC would amend its By-Laws and Rules to
reflect the different structure of Credit Default Options. In addition,
it is expected that OCC would seek a revision to the Options Disclosure
Document (``ODD'') to incorporate Credit Default Options.
i. Systems Capacity
    CBOE represents that it believes the Exchange and the Options Price
Reporting Authority have the necessary systems capacity to handle the
additional traffic associated with the listing and trading of Credit
Default Options as proposed herein. Further, in light of the above-
described proposed trading, quoting, and product structures, including
that there would be a maximum of one series per quarterly expiration in
a given Credit Default Option class, CBOE does not anticipate that
there would be any additional quote mitigation strategy necessary to
accommodate the trading of Credit Default Options.
j. Applicability of Rule 9b-1 Under the Act
    The Exchange asks the Commission to clarify that Credit Default
Options are standardized options under Rule 9b-1

under the Act.\11\ Subsection (a)(4) of Rule 9b-1 \12\ defines
``standardized options'' as ``options contracts trading on a national
securities exchange, an automated quotations system of a registered
securities association, or a foreign securities exchange which relate
to options classes the terms of which are limited to specific
expiration dates and exercise prices, or such other securities as the
Commission may, by order, designate.'' Credit Default Options are like
existing standardized options trading on CBOE in every respect except
for the exercise price. Credit Default Options: (i) Trade on a national
securities exchange, (ii) have a specific expiration date, (iii) have
fixed terms, (iv) have a specific exercise style,\13\ and (v) would be
issued and cleared by the OCC. All of these are attributes of
``standardized options'' as defined in Rule 9b-1. The one respect with
which Credit Default Options differ from existing standardized options
is in the exercise price.
---------------------------------------------------------------------------

    \11\ 17 CFR 240.9b-1.
    \12\ 17 CFR 240.9b-1(a)(4).
    \13\ Credit Default Options would be automatically exercised at
any time before expiration upon confirmation of a Credit Event. In
this regard, the proposed exercise style of Credit Default Options
is similar to capped-styled options, which are automatically
exercised when the cap price is reached prior to expiration. The
distinction between a Credit Default Option and a capped-styled
option is that at expiration a capped-styled option is exercisable
whereas a Credit Default Option is not (unless a Credit Event
happens to occur and is confirmed at the same time as expiration).
See existing CBOE Rule 1.1(ww) (which provides that, if the cap
price is not reached prior to expiration, a capped-styled option can
be exercised, subject to the provisions of rule 11.1 and to the
Rules of the OCC, only on its expiration date).
---------------------------------------------------------------------------

    ``Exercise price'' is not a defined term in Rule 9b-1. However, the
significance of having a specific exercise price term in a standardized
option is that traditionally it, in conjunction with the specific
exercise style (e.g., American-, European-, or capped-style),
symbolizes the formula for calculating the exercise settlement of the
option that is publicly known and announced, objectively determined,
and unalterable. For example, in the case of a physical delivery
option, the exercise price (which is sometimes called the ``strike
price'') is the price at which the option holder has the right either
to purchase (in the case of a call) or to sell (in the case of a put)
the underlying interest upon exercise.\14\ In the case of a cash-
settled option, the exercise price is the base used for determining the
amount of cash, if any, that the option holder is entitled to receive
upon exercise (referred to as the ``cash settlement amount'').\15\
Traditionally, the cash settlement amount is the amount by which the
exercise settlement value of the underlying interest of a cash-settled
call exceeds the exercise price, or the amount by which the exercise
price of a cash-settled put exceeds the exercise settlement value of
the underlying interest, multiplied by the multiplier for the
option.\16\
---------------------------------------------------------------------------

    \14\ See ODD at 6-7.
    \15\ See id.
    \16\ Currently, instead of a variable amount, the cash
settlement amount may instead be ``capped.'' A capped option will be
automatically exercised prior to expiration if the options market on
which the option is trading determines that the value of the
underlying interest at a specified time on a trading day ``hits the
cap price'' for the option. Capped options may also be exercised,
like European-style options, during a specified period before
expiration. Cash-settled options having a binary cash settlement
amount based upon the price of the underlying security may be
introduced for trading in the future.
---------------------------------------------------------------------------

    Whereas for traditional cash-settled options the cash settlement
amount is determined by reference to the particular price of the
underlying interest, the cash settlement amount for a Credit Default
Option would be a fixed sum of $100,000 payable upon automatic exercise
if a Credit Event in the underlying Relevant Obligation(s) is
confirmed. As with traditional cash-settled options, the calculation of
the cash settlement amount of a Credit Default Option would be
established prior to the commencement of trading according to a formula
that is publicly known and announced, objectively determined, and
unalterable. Thus, as with a traditional cash-settled option, a party
entering into a Credit Default Option would know exactly the terms
under which a Credit Default Option would be automatically exercised
and the option's cash settlement value, which would be an exercise
settlement value of $100 multiplied by the contract multiplier of
1,000. In this regard, the Exchange believes that Credit Default
Options, by their proposed terms, are standardized options within the
meaning of Rule 9b-1.
    If the Commission cannot determine that Credit Default Options are,
by their proposed terms, standardized options, then the Exchange
requests that the Commission use its authority under Rule 9b-1(a)(4) to
otherwise designate options, such as Credit Default Options, as
standardized options. The Commission used this authority in 1993 to
designate ``FLEX Options'' as standardized options.\17\ In making this
designation, the Commission found that, ``[a]part from the flexibility
with respect to strike prices, settlement, expiration dates, and
exercise style, all of the other terms of [FLEX] Options are
standardized.'' The Commission observed that standardized terms include
matters such as ``exercise procedures, contract adjustments, time of
issuance, effect of closing transactions, restrictions on exercise
under OCC rules [and] margin requirements * * * .'' Credit Default
Options share all of these characteristics and, in fact, are more
standardized than FLEX Options in that the exercise settlement
calculation, settlement, expiration dates, and exercise style of a
given class may not vary.
---------------------------------------------------------------------------

    \17\ See Securities Exchange Act Release No. 31910 (February 23,
1993), 58 FR 12056 (March 2, 1993).
---------------------------------------------------------------------------

k. Surveillance Program
    The Exchange represents that it would have in place adequate
surveillance procedures to monitor trading in Credit Default Options
prior to listing and trading such options, thereby helping to ensure
the maintenance of a fair and orderly market for trading in Credit
Default Options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations under the Exchange Act applicable
to national securities exchanges and, in particular, the requirements
of Section 6(b) of the Act.\18\ Specifically, the Exchange believes the
proposed rule change is consistent with the Section 6(b)(5) \19\
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, to remove impediments to and to perfect the
mechanism for a free and open market and a national market system, and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b).
    \19\ 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 would 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

    No written comments were solicited or received on 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<EMAIL_ADDRESS>Please include

File Number SR-CBOE-2006-84 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-2006-84. 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 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 Number
SR-CBOE-2006-84 and should be submitted on or before March 7, 2007.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-2477 Filed 2-13-07; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 77, Number 197 (Thursday, October 11, 2012)]
[Notices]
[Pages 61797-61799]
[FR Doc No: 2012-24980]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67981; File No. SR-EDGX-2012-45]

Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Amendments to the EDGX Exchange, Inc. Fee Schedule

October 4, 2012.
    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 October 1, 2012 the EDGX Exchange, Inc. (the ``Exchange'' or
``EDGX'') 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 prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 its fees and rebates applicable to
Members \3\ of the Exchange pursuant to EDGX Rule 15.1(a) and (c). Text
of the proposed rule change is attached as Exhibit 5 at http://www.directedge.com/Regulation/ExchangeRuleFilings/EDGX.aspx.
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    \3\ As defined in Exchange Rule 1.5(n).
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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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Currently, Footnote 12 to the Exchange's fee schedule states that a
removal rate of $0.0029 per share applies where a Market Participant
Identifier's (``MPID'') add liquidity ratio is equal to or greater than
10%. The add liquidity ratio is defined as ``added'' flags/(``added''
flags + ``removal'' flags) x 100, where added flags are defined as
Flags B, HA, V, Y, MM, RP, 3, or 4 and removal flags are defined as
Flags BB, MT, N, W, PI, PR, or 6. Where a Member does not meet the add
liquidity ratio of at least 10%, then the Exchange will charge the
default removal rate of $0.0030 per share, where ``default'' refers to
the standard rates assessed by the Exchange to Members for orders that
remove liquidity absent Members qualifying for additional volume tiered
pricing.\4\ The Exchange proposes to delete Footnote 12 in its entirety
and any references thereto.
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    \4\ The Exchange notes that Members may qualify for a removal
rate of $0.0029 per share for Flags N, W, 6, BB and PI where they
satisfy the volume tier requirements for the Mega Tier in Footnote
1.
---------------------------------------------------------------------------

    Currently, the Exchange's fee schedule displays a discounted
removal rate of $0.0029 per share as the rate for removing liquidity
and the rate for Flags N, W, 6, BB, and PI subject to the volume
thresholds in Footnotes 1 and 12.\5\ Because the Exchange proposed to
delete Footnote 12 in its entirety, the Exchange proposes to amend the
rates displayed for removing liquidity on the fee schedule to $0.0030
per share, which represents the current default rate. Accordingly, the
Exchange proposes to amend the displayed rate for removing liquidity on
the EDGX fee schedule and the removal rates for Flags N, W, 6, BB, and
PI from $0.0029 per share to $0.0030 per share, and these rates will
continue to remain subject to the volume tier requirements of the Mega
Tier in Footnote 1.
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    \5\ The Exchange notes that the default removal rate remains
$0.0030 per share.
---------------------------------------------------------------------------

    Currently, Footnote 11 on the Exchange's fee schedule states that
for Flags EA or ER, if a Member internalizes more than 4% of their
average daily volume (``ADV'') on EDGX (added, removed, and routed
liquidity) and the Member, at a minimum, meets the criteria for the
Mega Tier rebate of $0.0032 per share as described in Footnote 1, then
the Member receives the applicable rebate in Footnote 1 for adding
liquidity, or is charged the applicable removal rate in Footnote 1 or
12. Because the Exchange proposes to eliminate the discounted removal
rate for achieving the volume tier requirements in Footnote 12 in its
entirety, the Exchanges also proposes to eliminate the discounted
removal rate for achieving the volume tier requirements in Footnote 12
provided for in Footnote 11. Therefore, the Exchange will charge the
default removal rate of $0.0030 per share regardless of the Member's
add liquidity ratio unless that Member qualifies for the discounted
removal rate of $0.0029 per share, as described in the Mega Tier of
Footnote 1, should that Member achieve the volume tier requirements.
    The Exchange proposes to assess a fee of $0.0025 per share in lieu
of the current fee of $0.0023 per share for Members' orders that are
routed or re-routed to the New York Stock Exchange (``NYSE'') and
remove liquidity, yielding Flag D. This proposed change represents a
pass-through of the rate that Direct Edge ECN LLC d/b/a DE Route (``DE
Route''), the Exchange's affiliated routing broker dealer, is charged
for routing orders to NYSE, in response to the pricing changes in
NYSE's filing with the Securities and Exchange Commission (the
``SEC'').\6\
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    \6\ See NYSE's Trader Update at http://www.nyse.com/pdfs/NYSE%20Client%20Notice% 20Fees%2010%201%202012.pdf (discussing
NYSE's fee changes effective October 1, 2012).
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    The Exchange proposes to implement these amendments to its fee
schedule on October 1, 2012.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\7\ in general, and
furthers the objectives of Section 6(b)(4),\8\ in particular, as it is
designed to provide for the equitable allocation of reasonable dues,
fees and other charges among its Members and other persons using its
facilities.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4).
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    The Exchange currently offers Members a discounted removal rate of
$0.0029 per share where their add liquidity ratio is equal to or
greater than 10%, as described in Footnote 12. The Exchange proposes to
eliminate the discounted removal rate for achieving the volume tier
requirements of Footnote 12 in its entirety and any references thereto,
and the Exchange proposes to charge Members the default removal rate of
$0.0030 per share regardless of their add liquidity ratio. The Exchange
believes that its proposal to eliminate the discounted removal rate for
achieving the volume tier requirements of Footnote 12 in its entirety
represents an equitable allocation of reasonable dues, fees and other
charges among its Members and other persons using its facilities
because the Exchange will use the additional $0.0001 per share revenue
generated from removing this volume tier to offset the administrative
and infrastructure costs associated with operating a national
securities exchange. In addition, the Exchange's proposal is reasonable
because it will allow the Exchange to assess a fee for removing
liquidity from EDGX that is competitive with other market centers.\9\
The Exchange also notes that with the removal of this tier, Members
will continue to be subject to the other fees and tiers listed on the
Exchange's fee schedule. Lastly, the Exchange believes that the
proposed amendment is non-discriminatory because it applies uniformly
to all Members.
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    \9\ See NASDAQ OMX Group, Inc., Price List--Trading &
Connectivity, http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#remove. The NASDAQOMX Group Inc.'s
default rate for removing liquidity in Tape A, B and C securities
for all MPIDs is $0.0030 per share. See also BATS BZX Exchange,
Inc., BATS BZX Exchange Fee Schedule (effective September 10, 2012),
http://cdn.batstrading.com/resources/regulation/rule_book/BATS-Exchanges_Fee_Schedules.pdf. BATS BZX Exchange, Inc.'s default
rate for removing liquidity in Tape A, B and C securities for all
MPIDs is $0.0029 per share.
---------------------------------------------------------------------------

    The Exchange currently offers Members a discounted removal rate of
$0.0029 per share, as described in Footnote 11 and subject to the
volume tier requirements in Footnotes 1 and 12, where the Member
internalizes more than 4% of their ADV on EDGX (added, removed, and
routed liquidity) and the Member, at a minimum, meets the criteria for
the Mega Tier rebate of $0.0032 per share in Footnote 1. Because the
Exchange proposed to eliminate the discounted removal rate for
achieving the volume tier requirements of Footnote 12 in its entirety
and any references thereto, the Exchange also proposes to eliminate the
discounted removal rate for achieving the volume tier requirements of
Footnote 12 provided for in Footnote 11. Accordingly, the Exchange
proposes to charge the default removal rate of $0.0030 per share
regardless of a Member's add liquidity ratio unless that Member
qualifies for a discounted removal rate of $0.0029 per share, as
described in Footnote 11 and pursuant to the volume tier requirements
in the Mega Tier in Footnote 1. The Exchange believes that its proposal
to eliminate the discounted removal rate for achieving the volume tier
requirements of Footnote 12, as described in Footnote 11, represents an
equitable allocation of

reasonable dues, fees and other charges among its Members and other
persons using its facilities because the Exchange will use the
additional $0.0001 per share revenue generated from removing this
volume tier to offset the administrative and infrastructure costs
associated with operating a national securities exchange. In addition,
the Exchange's proposal is reasonable because it will allow the
Exchange to assess a fee for removing liquidity from EDGX that is
competitive with other market centers.\10\ The Exchange also notes that
with the removal of this tier, Members will continue to be subject to
the other fees and tiers listed on the Exchange's fee schedule. Lastly,
the Exchange believes that the proposed amendment is non-discriminatory
because it applies uniformly to all Members.
---------------------------------------------------------------------------

    \10\ Id.
---------------------------------------------------------------------------

    The rates associated with routing orders to NYSE through DE Route
on the Exchange's fee schedule are pass-through rates from DE Route to
the Exchange and represent an equitable allocation of reasonable dues,
fees, and other charges among Members of the Exchange and other persons
using its facilities because the Exchange does not levy additional fees
or offer additional rebates for orders that it routes to NYSE through
DE Route. The Exchange notes that routing through DE Route is
voluntary. Currently, for orders yielding Flag D, NYSE charges DE Route
a fee of $0.0023 per share, which, in turn, is passed through to the
Exchange. The Exchange, in turn, charges its Members a fee of $0.0023
per share as a pass-through. In NYSE's pricing changes for October 1,
2012, NYSE increased the rate it charges its customers, such as DE
Route, from $0.0023 per share to a charge of $0.0025 per share for
orders that are routed or re-routed to NYSE and remove liquidity.
Therefore, the Exchange believes that the proposed change for Flag D
from a fee of $0.0023 per share to a fee of $0.0025 per share is
equitable and reasonable because it accounts for the pricing changes on
NYSE. In addition, the proposal allows the Exchange to continue to
charge its Members a pass-through rate for orders that are routed or
re-routed to NYSE and remove liquidity using DE Route. Lastly, the
Exchange also believes that the proposed amendment is non-
discriminatory because it applies uniformly to all Members.
    The Exchange also notes that it operates in a highly-competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive. The proposed rule change reflects a competitive pricing
structure designed to incent market participants to direct their order
flow to the Exchange. The Exchange believes that the proposed rates are
equitable and non-discriminatory in that they apply uniformly to all
Members. The Exchange believes the fees and credits remain competitive
with those charged by other venues and therefore continue to be
reasonable and equitably allocated to Members.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not 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 has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(2) \12\ thereunder. At
any time within 60 days of the filing of such proposed rule change, the
Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 19b-4(f)(2).
---------------------------------------------------------------------------

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 email to<EMAIL_ADDRESS>Please
include File Number SR-EDGX-2012-45 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 Number SR-EDGX-2012-45. This file
number should be included on the subject line if email 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 Web site viewing and
printing 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-EDGX-2012-45 and should be
submitted on or before November 1, 2012.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-24980 Filed 10-10-12; 8:45 am]
BILLING CODE 8011-01-P