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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Incorporated To Amend Its Rules Relating to the Limitation of Liability for Index Licensors

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Start Preamble April 24, 2002.

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 April 19, 2002, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The CBOE proposes to amend its rules to make clear that its disclaimer provisions for index licensors apply to any licensor that grants the Exchange a license to use an index or portfolio in connection with the trading of options on exchange-traded funds (“ETFs”).

Below is the text of the proposed rule change. Proposed new language is italicized.

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Chicago Board Options Exchange, Incorporated Rules

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Rule 6.15 Limitation on the Liability of Index Licensors for Options on Units

(a) The term “index licensor” as used in this rule refers to any entity that grants the Exchange a license to use one or more indexes or portfolios in connection with the trading of options on Units (as defined in Interpretation .06 to Rule 5.3).

(b) No index licensor with respect to any index pertaining to Units underlying an option traded on the Exchange makes any warranty, express or implied, as to the results to be obtained by any person or entity from the use of such index, any opening, intra-day or closing value therefor, or any data included therein or relating thereto, in connection with the trading of any option contract on Units based thereon or for any other purpose. The index licensor shall obtain information for inclusion in, or for use in the calculation of, such index from sources it believes to be reliable, but the index licensor does not guarantee the accuracy or completeness of such index, any opening, intra-day or closing value therefor, or any data included therein or related thereto. The index licensor hereby disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any such index, any opening, intra-day or closing value therefor, any data included therein or relating thereto, or any option contract on Units based thereon. The index licensor shall have no liability for any damages, claims, losses (including any indirect or consequential losses), expenses or delays, whether direct or indirect, foreseen or unforeseen, suffered by any person arising out of any circumstance or occurrence relating to the person's use of such index, any opening, intra-day or closing value therefor, any data included therein or relating thereto, or any option contract on Units based thereon, or arising out of any errors or delays in calculating or disseminating such index.

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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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose

The CBOE proposes to add a new CBOE Rule 6.15 to CBOE's rules to state liability disclaimers expressly for the benefit of any index owner that grants the Exchange a license to use an index or portfolio in connection with the trading of options on ETFs. ETFs may be traded on CBOE pursuant to listing standards in CBOE Rule 5.3, Interpretation and Policy .06.

CBOE Rule 24.14 currently states liability disclaimers for the benefit of “reporting authorities” with respect to indexes underlying options traded on the Exchange. Proposed new CBOE Rule 6.15 is substantively identical to CBOE Rule 24.14, except that it uses the term “index licensor” in place of the term “reporting authority.” [3]

Like index options, options on ETFs are based on indexes and, indeed, index options and options on ETFs may be based on the same underlying indexes. CBOE believes that the protections afforded to an index licensor in connection with trading options on an index should also apply to an index licensor in connection with trading options on ETFs.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act [4] in general and furthers the objectives of Section 6(b)(5) of the Act [5] in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. The Exchange believes that the proposed rule change would eliminate an apparent discrepancy in its rules between the provisions applicable to index options and those applicable to options on ETFs. The Exchange also believes that the proposed rule change would eliminate an impediment to the listing and trading of options on ETFs.

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.

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 with respect to the proposed rule change.

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

Because the proposed rule change (1) does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act [6] and Rule 19b-4(f)(6) thereunder.[7]

A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative prior to 30 days after the date of filing. However, pursuant to Rule 19b-4(f)(6)(iii),[8] the Commission may designate a shorter time if such action is consistent with the protection of investors and public interest. The Exchange requests that the Commission waive the 30-day operative date and seeks to have the proposed rule change become operative as of April 19, 2002, in order to immediately afford protection for index licensors from liability. In addition, under Rule 19b-4(f)(6)(iii), the Exchange is required to provide the Commission with written notice of its intent to file the proposed rule change at least five business days Start Printed Page 21787prior to the filing date or such shorter time as designated by the Commission.[9]

The Commission, consistent with the protection of investors and the public interest, has waived the thirty-day operative date requirements for this proposed rule change, and has determined to designate the proposed rule change operative as of April 19, 2002.[10] At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate 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.

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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 will also be available for inspection and copying at the principal office of the CBOE. All submissions should refer to File No. SR-CBOE-2002-19 and should be submitted by May 22, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[11]

Margaret H. McFarland,

Deputy Secretary.

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Footnotes

3.  The term “reporting authority” is defined in CBOE Rule 24.1(h) as, with respect to a particular index, “the institution or reporting service designated by the Exchange as the official source for calculating the level of the index from the reported prices of the underlying securities that are the basis of the index and reporting such level.” In practice, the Exchange designates the owner/licensor of an index as the reporting authority for that index, and the owner/licensor therefore receives the benefit of the disclaimers in CBOE Rule 24.14. The CBOE believes that the concept of a “reporting authority” is not relevant for options on an ETF, because The Options Clearing Corporation does not directly use the values of the underlying index for purposes of settlement and margin calculations. Instead, the values of the ETF itself are used for these purposes. Proposed CBOE Rule 6.15 therefore uses the term “index licensor” in place of the term “reporting authority” used in CBOE Rule 24.14.

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8.  17 CFR 240.19b-4(f)(6)(iii).

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9.  The CBOE provided the Commission with notice of intent to file at least five days prior to filing the proposed rule change.

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10.  For the purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rules impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 02-10715 Filed 4-30-02; 8:45 am]

BILLING CODE 8010-01-P