[Federal Register Volume 59, Number 95 (Wednesday, May 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12038]


[[Page Unknown]]

[Federal Register: May 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34051; File No. SR-CBOE-94-06]

 

Self-Regulatory Organizations; Filing of Proposed Rule Change by 
the Chicago Board Options Exchange, Inc. Relating to Exercise 
Instruction Processing

May 12, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 16, 1994, the 
Chicago Board Options Exchange, Inc. (``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 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend Rule 11.1 relating to option exercise 
notice processing to clarify certain provisions of the Rule, to treat 
separately certain of the exercise processing requirements applicable 
to noncash-settled equity options, as compared with cash-settled index 
options, and to add certain requirements applicable to exercise notice 
procedures and policies.
    The text of the proposal is available at the Office of the 
Secretary, CBOE and at the Commission.

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

    In its filing with the Commission, the 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 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to clarify the 
requirements in Exchange Rule 11.1 applicable to exercise decisions and 
instructions for all classes of options and to make certain 
distinctions between exercise requirements applicable only to noncash-
settled equity options and those applicable to cash-settled options. 
The rule change also is intended to tighten CBOE members' 
responsibilities in respect of exercise decisions and the processing of 
exercise instructions, by incorporating certain new exercise notice 
procedures and policies.
    The proposed rule change includes a number of amendments designed 
to clarify the cut-off times and special procedures applicable under 
the Exchange's rules to various classes of options traded on the CBOE 
and to accommodate business day expirations and automatic exercise 
procedures more fully. Paragraph (b) of Rule 11.1 thus has been amended 
to clarify that the 4:30 p.m. exercise cut-off time on the day prior to 
expiration applies only to noncash-settled options,\2\ and a new 
Interpretation .06, discussed below, has been added to establish 
procedures applicable to the exercise of expiring noncash-settled 
equity option contracts that would otherwise not be exercised (or the 
nonexercise of options that would otherwise be exercised) by automatic 
operation of The Options Clearing Corporation (``OCC'') Rules. 
Similarly, Interpretation .03, as amended, is made clearly applicable 
only to cash-settled index options, and the special exercise procedures 
and 3:20 p.m. cut-off time set forth in that Interpretation have been 
clarified to apply to exercises of cash-settled index options only on 
certain specified days. At the same time, Interpretation .04, which 
sets forth an anachronistic 5:30 p.m. cut-off time, is being deleted.
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    \2\Paragraph (b) has also been amended to limit its scope to 
noncash-settled options only. Provisions in paragraph (b) that apply 
to all classes of options are being moved to a new paragraph (c).
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    The proposed rule change also includes provisions that are designed 
to promote fairness in exercise processing and tightened compliance 
with the exercise notice processing requirements. Toward this end, the 
Exchange proposes to remove the second sentence of current 
Interpretation .02 from that Interpretation, revise it slightly, and 
move it to a new paragraph (d).\3\ This new paragraph would provide 
that members and member organizations may not prepare, time stamp, or 
submit an exercise instruction prior to the purchase of the exercised 
contracts if the member, or member organization, knows or has reason to 
know that the exercised contracts had not been purchased prior to 
exercise.
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    \3\The first sentence in Interpretation .02, which concerns 
preparation of a memorandum respecting exercise instructions, is now 
duplicative of the requirements set forth in Interpretation .01 and 
new paragraph (c). The rule change therefore deletes all of 
Interpretation .02.
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    In addition to new paragraph (d), the Exchange proposes to add new 
Interpretation .07 to provide that an exercise instruction in respect 
of an expiring option cannot be submitted or prepared after the 
exercise cut-off time on the basis of material information released 
after the cut-off time. By making this prohibition explicit in the 
rules, the Exchange will be better able to discipline members in the 
event that exercise action is taken, impermissibly, after the cut-off 
time based on late-breaking news.
    The Exchange proposes, further, to establish remedies, including 
disgorgement of profits, in new Interpretation .06, for use by the 
Exchange in the event of a failure to observe the exercise procedures 
applicable to expiring noncash-settled equity options. This corresponds 
to the provision in current Interpretation .03 respecting failure to 
observe the exercise procedures applicable to cash-settled options.
    Finally, the Exchange's proposal incorporates new procedures for 
the nonexercise (or the exercise) of expiring noncash-settled equity 
options that would otherwise be automatically exercised (or 
automatically not-exercised) by operation of OCC Rule 805. Under the 
proposal, whenever an Exchange member decides to vary the results they 
would obtain under OCC's automatic exercise procedures, Exchange 
members must submit a ``Contrary Exercise Advice'' prior to 4:30 p.m. 
either to their clearing member or to a place to be designated by the 
Exchange. To eliminate a ``Contrary Exercise Advice,'' members must 
submit an ``Advice Cancel'' prior to 4:30 p.m. These procedures would 
mirror the procedures currently applicable under Exchange 
Interpretation .03 in respect of cash-settled index options.
    The Exchange anticipates that this new submission requirement will 
improve the CBOE's audit trail. Under CBOE's current rules for noncash-
settled equity options, Exchange members merely record, time stamp, and 
retain a copy of exercise notices. Under the proposal, however, the 
Exchange either will receive Contrary Exercise Advice and Advice Cancel 
forms directly from the member (or the applicable clearing firm on the 
member's behalf) or will have access to clearing members' submissions 
to OCC's Clearing Management and Control System (``C/MACS'').
    The proposed change in submission procedures is part of a 
coordinated effort among the options exchanges and OCC to revise the 
exercise processing requirements for noncash-settled equity options, 
and is intended to assist option holders and broker-dealers in 
adjusting to the new procedures efficiently. To facilitate compliance, 
the Exchange will recognize a Contrary Exercise Advice submitted to 
another options exchange for any option listed on both the CBOE and 
that other exchange.
    The proposed rule change is consistent with Section 6 of the Act in 
general, and with Section 6 (b)(5) in particular, in that it is 
designed to promote just and equitable principals of trade, to prevent 
fraudulent and manipulative acts and practices, to foster cooperation 
and coordination with persons engaged in regulating, clearing, and 
settling securities transactions, and to protect investors and the 
public interest. The new exercise cut-off procedure, in particular, 
should improve the Exchange's ability to oversee exercise activity and 
identify late submissions.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    CBOE 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-CBOE-94-06 and should be submitted by June 8, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-12038 Filed 5-17-94; 8:45 am]
BILLING CODE 8010-01-M