[Federal Register Volume 59, Number 213 (Friday, November 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27360]


[[Page Unknown]]

[Federal Register: November 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34914; File No. SR-CBOE-94-21]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating To Exercise 
Price Intervals on Government Security Yield Options

October 28, 1994.

I. Introduction

    On June 30, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CBOE Rule 23.5(a) to 
reduce from $2.50 to $1.00 the fixed interval between strike prices. 
The proposed rule change was published for comment in the Federal 
Register on July 20, 1994.\3\ No comments were received on the proposed 
rule change. This order approves the proposal.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\See Securities Exchange Act Release No. 34366 (July 13, 
1994), 59 FR 37107.
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II. Description of Proposal

    Currently, the CBOE lists government security yield options at 
strike price intervals of $2.50.\4\ The CBOE proposes to amend its 
rules to reduce the interval between exercise prices on such contracts 
from $2.50 to $1.00,\5\ which will establish a minimum spread of $100 
($1.00 times the multiplier of 100) between series. The Exchange 
believes that its proposal will improve the value and utility of 
government security yield options by, among other things, enabling 
investors to construct hedges that correlate closely with interest 
rates and changes in interest rate measures underlying government 
security yield options. According to the CBOE, the $2.50 minimum strike 
price interval is wider than the typical increments of change in 
interest rates, even during periods of high interest rate 
volatility.\6\
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    \4\See CBOE Rule 23.5(a). CBOE Rule 23.5 (Terms of Interest Rate 
Option Contracts) applies to government security yield options. 
Currently, government security yield options are based on the 13-
week T-bill, 5-year T-note, 10-year T-note, and 30-year T-bond.
    \5\See Proposed Amendment to Rule 23.5(a).
    \6\In its filing, the Exchange indicated that during a recent 
highly volatile week, the yield on the 30-year U.S. Treasury bond 
changed by less than 15 basis points (or $150), while strike price 
intervals were necessarily set at the minimum of $250 apart.
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III. Findings and Conclusions

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5) of the Act.\7\ 
Specifically, the Commission believes that reducing from $2.50 to $1.00 
the interval between exercise prices on government security yield 
option contracts will further the public interest by providing 
investors with more flexibility in the trading of such options, and 
allowing investors to establish government security yield option 
positions that are better tailored to meet their investment 
objectives.\8\
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    \7\15 U.S.C. 78f(b)(5) (1988).
    \8\The Exchange maintains that a consequence of the minimum 
strike price interval of $2.50 is to make at- or near-the-money 
positions unavailable, thereby limiting the ability of investors to 
construct tight hedges or to use combination orders such as 
straddles effectively.
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    The Commission also believes that the CBOE's proposal sets a 
reasonable balance between the Exchange's need to accommodate the needs 
of investors and the need to avoid the excessive proliferation of 
options series. In this regard, we note the specialized nature of the 
trading of government security yield options. For example, the CBOE 
indicates that the current relationship between yield changes in 
securities underlying government security yield options and the 
applicable $2.50 strike price interval requirement allows for instances 
where significant market yield movement would not result in the trading 
of government security yield options through existing strikes, thus 
preventing the availability of additional ``at-the-money'' strikes, 
which are necessary for the effective implementation of certain hedging 
trading strategies.\9\ The Commission accordingly believes that a $1.00 
strike price interval will allow for at-the-money strikes to be more 
readily available, without causing an excessive proliferation of 
strikes in such options.\10\
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    \9\See supra note 6.
    \10\Moreover, it should be noted that CBOE Rule 23.5, 
Interpretation and Policy .01 provides an outer limit with respect 
to the number of strike prices for new options series. This limit is 
eight strike prices under normal circumstances, and up to twelve 
strike prices when unusual market conditions exist.
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    Finally, the Options Price Reporting Authority (``OPRA'') has 
stated that the additional traffic that will be generated by changing 
the strike price interval for government security yield options to 
$1.00 is within OPRA's capacity.\11\
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    \11\See letter from Joseph P. Corrigan, Executive Director, 
OPRA, to Eileen Smith, Director, Product Development, CBOE, dated 
October 26, 1994.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-CBOE-94-21) is 
approved.
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    \12\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-27360 Filed 11-3-94; 8:45 am]
BILLING CODE 8010-01-M