[Federal Register Volume 60, Number 184 (Friday, September 22, 1995)]
[Notices]
[Pages 49305-49307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23558]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36242; File No. SR-CBOE-95-22]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to Members' Compliance with Position 
and Exercise Limits for Non-CBOE Listed Options

September 18, 1995.
    On April 20, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 Rules 4.11, 
``Position Limits,'' and 4.12. ``Exercise Limits,'' to require CBOE 
members who trade non-CBOE listed option contracts and who are not 
members of the exchange where the options are traded to comply with the 
option position and exercise limits set by the exchange where the 
transactions are effected.\3\

    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\Position limits impose a ceiling on the number of option 
contracts in each class on the same side of the market (i.e., 
aggregating long calls and short puts or long puts and short calls) 
that can be held or written by an investor or group of investors 
acting in concern. Exercise limits prohibit an investor or group of 
investors acting in concert from exercising more than a specified 
number of puts or calls in a particular class within five 
consecutive business days.
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    Notice of the proposed rule change appeared in the Federal Register 
on May 31, 1995.\4\ No comments were received on the proposed rule 
change.\5\

    \4\See Securities Exchange Act Release No. 35759 (May 24, 1995), 
60 FR 28432.
    \5\The CBOE amended its proposal to indicate that the CBOE will 
also apply the position limit exemptions, interpretations, and 
policies of the exchange where the transactions are effected. See 
Letter from Margaret G. Abrams, Attorney, CBOE, to Yvonne 
Fraticelli, Attorney, Division of Market Regulation (``Division''), 
Commission, dated September 6, 1995 (``Amendment No. 1'').
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    The CBOE proposes to amend Exchange Rules 4.11 and 4.12 to require 
CBOE members who trade non-CBOE listed option contracts and who are not 
members of the exchange where the options are traded to comply with the 
option position and exercise limits set by the exchange where the 
transactions are affected.\6\ According to the CBOE, the proposal is 
designed to eliminate a 

[[Page 49306]]
jurisdictional loophole whereby a CBOE member who exceeds position or 
exercise limits on another options exchange in an option class not 
listed on the CBOE and who is not a member of the other exchange falls 
outside of both the CBOE's and the other options exchange's 
jurisdiction for position and exercise limit purposes.\7\

    \6\The proposal applies to transactions in index options as well 
as equity options. Telephone conversation between Margaret G. 
Abrams, Attorney, CBOE, and Yvonne Fraticelli, Attorney, Options 
Branch, Division, Commission, on September 14, 1995.
    \7\The Commission notes that, generally, the options exchanges 
have adopted uniform options position and exercise limits.
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    Specifically, although CBOE Rules 4.11 and 4.12 prohibit excessive 
positions or exercises in CBOE listed option contracts, they do not 
currently prohibit a CBOE member from exceeding applicable limits set 
by another exchange for non-CBOE listed option contracts. If the CBOE 
member is not a member of the other exchange which lists the option 
contracts, then the other exchange cannot enforce its position and 
exercise requirements against the CBOE member.
    The proposed amendments will extend CBOE Rules 4.11 and 4.12 to 
apply to option contracts dealt in on any exchange (rather than only to 
option contracts dealt in on the CBOE) by requiring a CBOE member who 
is effecting transactions in non-CBOE listed option contracts on 
another exchange, of which he or she is not a member, to comply with 
the position and exercise limits set by the exchange on which the 
transaction is effected.\8\ Thus, a CBOE member's customer transactions 
in non-Exchange listed options will be brought within the CBOE's 
jurisdiction for position and exercise limit purposes when the exchange 
on which the excessive transactions are effected does not have member 
jurisdiction over the CBOE member.

    \8\The CBOE will also apply the position limit exemptions, 
interpretations, and policies of the exchange where the transactions 
are effected. See Amendment No. 1, supra note 5.
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    In addition, the CBOE proposes to amend the text of CBOE Rule 4.12 
to replace references to the Exchange's previous equity option position 
limits with reference to the Exchange's current equity option position 
limits, which were excluded inadvertently from the text of CBOE Rule 
4.12 when the equity option position limits were increased in December 
1993.\9\

    \9\See Securities Exchange Act Release No. 33283 (December 3, 
1993), 58 FR 65204 (December 13, 1993) (order approving File No. SR-
CBOE-93-43).
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    Finally, the CBOE proposes to amend CBOE Rules 4.11 and 4.12 to 
indicate that the Exchange's position and exercise limits are now 
established by the staff of the CBOE, rather than by the CBOE's Board 
of Directors (``Board'').\10\

    \10\The Commission notes that any proposal to revise the 
Exchange's position and exercise limits must be filed with, and 
approved by, the Commission pursuant to Section 19(b)(2) under the 
Act.
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    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that it is designed to remove 
impediments to a free and open market and to protect investors and the 
public interest.
    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)\11\ in that it is 
designated to prevent fraudulent and manipulative acts and practices 
and to protect investors and the public interest. Specifically, the 
CBOE has noted that Exchange Rules 4.11 and 4.12 do not currently 
prohibit CBOE members from exceeding the position and exercise limits 
set by another exchange for non-CBOE listed option contracts. Thus, if 
the CBOE member is not a member of the exchange which lists the 
options, then neither the CBOE or the exchange that lists the options 
is able to enforce its position and exercise limits against the CBOE 
member. The proposal eliminates this loophole and strengthens the 
Exchange's rules by requiring a CBOE member who trades non-CBOE listed 
option contracts on another exchange, and who is not a member of that 
exchange, to comply with the option position and exercise limits set by 
the exchange where the transactions are effected.\12\

    \11\15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
    \12\Under the proposal, the CBOE will also apply the exemptions, 
interpretations, and policies of the exchange where the options 
transactions are effected. See Amendment No. 1, supra note 5.
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    As the Commission has noted in the past,\13\ options position and 
exercise limits are intended to prevent the establishment of large 
options positions that can be used or might create incentives to 
manipulate or disrupt the underlying market so as to benefit the 
options position. In particular, position and exercise limits are 
designated to minimize the potential for mini-manipulations\14\ and for 
corners or squeezes of the underlying market. They also impose a 
ceiling on the maximum position an investor with inside corporate or 
market information can establish through the use of options. In 
addition, they serve to reduce the possibility for disruption of the 
options market itself, especially in illiquid options classes. The 
proposal extends the benefits of the position and exercise limit rules 
to include all exchange-traded options transactions entered into by 
CBOE members by bringing a CBOE member's customer transactions in non-
CBOE exchange listed options within the CBOE's jurisdiction for 
position and exercise limits purposes. The Commission also notes that 
violations under CBOE Rules 4.11 and 4.12 for transactions that do not 
comply with the position and exercise limits of another exchange will 
be subject to the same fines or disciplinary action for position and 
exercise limit violations as those applicable to CBOE options.\15\

    \13\See, e.g., Securities Exchange Act Release No. 33283 
(December 3, 1993), 58 FR 65204 (December 13, 1993) (order approving 
File No. SR-CBOE-93-43).
    \14\Mini-manipulation is an attempt to influence, over a 
relatively small range, the price movement in a stock to benefit a 
previously established derivatives position.
    \15\See CBOE Rule 17.50, ``Imposition of Fines for Minor Rule 
Violations.'' Violations of the Exchange's exercise limit rules are 
subject to disciplinary action under Chapter 17, ``Discipline,'' of 
the CBOE's rules.
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    The Commission believes that the proposal to amend the text of CBOE 
Rule 4.12 to reflect the current position limits for equity options, 
which were not included in the text of CBOE Rule 4.12 when the equity 
option position limits were increased in 1993, should benefit market 
participants by ensuring the accuracy of CBOE Rule 4.12. The text of 
CBOE Rule 4.12, as amended, will reflect the Exchange's current equity 
option position and exercise limits.
    The Commission also believes that it is reasonable for the Exchange 
to amend CBOE Rules 4.11 and 4.12 to indicate that the Exchange's 
position and exercise limits are now established by the staff of the 
CBOE, rather than by the CBOE's Board. In this regard, as noted above, 
any proposal to increase the Exchange's position and exercise limits 
must be approved by the Commission.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposal on an accelerated basis. Amendment No. 1 to the proposal 
strengthens and clarifies the CBOE's proposal by indicating that the 
CBOE will apply the position limit exemptions, interpretations, and 
policies of the exchange where the transactions are effected. 
Accordingly, the Commission believes it is appropriate and consistent 
with Sections 6(b)(5) and 19(b) (2) of the Act to approve Amendment No. 
1 to the proposal on an accelerated basis. 

[[Page 49307]]


IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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 at the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, D.C. 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 the file 
number in the caption above and should be submitted October 13, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the amended proposed rule change (File No. SR-CBOE-95-22) 
is approved.

    \16\15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\.

    \17\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23558 Filed 9-21-95; 8:45 am]
BILLING CODE 8010-01-M