[Federal Register Volume 60, Number 214 (Monday, November 6, 1995)]
[Notices]
[Pages 56075-56077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27424]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36439; File No. SR-CBOE-95-56]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., Relating to Modifications of the Position 
and Exercise Limits for Narrow-Based Index Options

October 31, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 10, 1995, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is approving this proposal on an accelerated basis.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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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 CBOE Rules 24.4A, ``Position Limits for 
Industry Index Options,'' and 24.5, ``Exercise Limits,'' to increase 
the position and exercise limits \2\ for narrow-based (or industry) 
index options from the current levels of 5,500, 7,500, or 10,500 
contracts \3\ to 6,000, 9,000, or 12,000 contracts. The Commission 
recently approved an identical proposal by the Philadelphia Stock 
Exchange, Inc. (``PHLX'').\4\

    \2\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market (i.e., aggregating long calls and short puts or long puts and 
short calls). 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.
    \3\ Under CBOE Rule 24.4A, the current position limits for 
industry index options are as follows: (1) 5,500 contracts if the 
CBOE determines in its semi-annual review that any single underlying 
stock accounted, on average, for 20% or more of the index value or 
that any five underlying stocks together accounted, on average, for 
more than 30% or more of the index value during the 30-day period 
immediately preceding the review; (2) 7,500 contracts if the 
Exchange determines in its semi-annual review that any single 
underlying stock accounted, on average, for more than 20% of the 
index value or that any five underlying stocks accounted, on 
average, for more than 50% of the index value, but that no single 
stock in the group accounted, on average, for 30% or more of the 
index value during the 30-day period immediately preceding the 
review; or (3) 10,500 contracts if the CBOE determines that the 
conditions requiring the establishment of a lower limit have not 
occurred.
    \4\ See Securities Exchange Act Release No. 36194 (September 6, 
1995), 60 FR 47637 (September 13, 1995) (order approving File No. 
SR-PHLX-95-16) (``PHLX Approval Order'').
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    The text of the proposed rule change 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 CBOE proposes to amend CBOE Rules 24.4A and 24.5 to increase 
the position and exercise limits for narrow-based (or industry) index 
options from the current levels of 5,500, 7,500, or 10,500 contracts to 
6,000, 9,000, or 12,000 contracts. The CBOE notes that the Commission 
recently approved an identical proposal by the PHLX.\5\

    \5\ Id.
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    Currently, CBOE Rule 24.4A establishes 5,500, 7,500, and 10,500 
contract levels as position limits for industry index options. The CBOE 
proposes to increase these limits to 6,000, 9,000, and 12,000 
contracts, respectively. If the Commission approves the proposed 
increase in position limits for industry index options, the exercise 
limits set forth in CBOE Rule 24.5 for industry index options will 
increase correspondingly since they reference CBOE Rule 24.4A.
    The CBOE trades options on the following narrow-based indexes, with 
limits as shown:

(1) S&P Banking Index--10,500 contracts;
(2) S&P Chemical Index--5,500 contracts;
(3) S&P Health Care Index--7,500 contracts;
(4) S&P Insurance Index--7,500 contracts;
(5) S&P Retail Index--5,500 contracts;
(6) S&P Transportation Index--7,500 contracts;
(7) CBOE Software Index--7,500 contracts;
(8) CBOE Environmental Index--7,500 contracts;
(9) CBOE Gaming Index--7,500 contracts;
(10) CBOE Global Telecommunications Index--10,500 contracts;
(11) CBOE Israel Index--7,500 contracts;
(12) CBOE Mexico Index--10,500 contracts;
(13) CBOE REIT Index--10,500 contracts;
(14) CBOE Telecommunications Index--10,500 contracts;
(15) CBOE Biotech Index--10,500 contracts;
(16) CBOE Latin 15 Index--10,500 contracts;
(17) CBOE High Technology Index--10,500 contracts.

    The CBOE notes that the current levels have been in place since 
1993.\6\ The CBOE believes that the proposed limits of 6,000, 9,000, 
and 12,000 contracts will increase the depth and liquidity of the 
market for industry index options without causing any market 
disruption. The Exchange represents that it will continue to surveil 
for manipulation. In addition, the Exchange states that it has not 
opened any manipulation inquiries to date as a result of any increase 
in position and exercise limits.

    \6\ 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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    The Exchange believes that the proposal to increase narrow-based 
index option position limits is consistent with Section 6 of the Act, 
in general, and, in particular, with Section 6(b)(5), in that it will 
allow investors to utilize industry index options more fully as part of 
their investment portfolios, provide uniform limits among the exchanges 
listing such options and increase the depth and 

[[Page 56076]]
liquidity of the market, thereby removing impediments to and perfecting 
the mechanism of a free and open market and a national market system in 
a manner consistent with the protection of investors and the public 
interest.

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

    The 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The CBOE has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. As 
noted above, the Commission has previously approved an identical 
proposal submitted by the PHLX.\7\

    \7\ See PHLX Approval Order, supra note 4.
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    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).\8\ Specifically, the 
Commission finds that the proposed position and exercise limits for 
narrow-based index options should accommodate the needs of investors 
and market participants and should increase the potential depth and 
liquidity of the options market as well as the underlying cash market 
without significantly increasing concerns regarding intermarket 
manipulations or disruptions of the market for the options or the 
underlying securities.

    \8\ 15 U.S.C. 78f(b) (1988 & Supp. V 1993).
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    As noted above, the Commission believes that although the position 
and exercise limits for options must be sufficient to protect the 
options and related markets from disruptions by manipulation, the 
limits must not be established at levels that are so low as to 
discourage participation in the options market by institutions and 
other investors with substantial hedging needs or to prevent market 
makers from adequately meeting their obligations to maintain a fair and 
orderly market. In this regard, the CBOE has stated that it believes 
that the proposal will increase the depth and liquidity of the market 
for industry index options without causing any market disruption. In 
addition, the CBOE represents that it will continue to conduct 
surveillance for manipulation, and that the Exchange has not opened any 
manipulation inquiries to date as a result of an increase in position 
and exercise limits.
    The Commission notes that the proposal, while increasing the 
applicable position limits for narrow-based index options, continues to 
reflect the unique characteristics of each index option and maintains 
the structure of the current three-tiered system. Specifically, the 
lowest proposed limit, 6,000 contracts, will apply to narrow-based 
index options in which a single underlying stock accounts for 30% or 
more of the index value during the 30-day period immediately preceding 
the Exchange's semi-annual review of industry index option positions 
limits. A position limit of 9,000 contracts will apply if any single 
underlying stock accounts, on average, for 20% or more of the index 
value or any five underlying stocks account, on average for more than 
50% of the index value, but no single stock in the group accounts, on 
average, for 30% or more of the index value during the 30-day period 
immediately preceding the Exchange's semi-annual review of industry 
index option position limits. The 12,000-contract limit will apply only 
if the Exchange determines that the conditions requiring either the 
6,000-contract limit or the 9,000-contract limit have not occurred. 
Accordingly, the proposal allows the Exchange to avoid placing 
unnecessary restraints on those narrow-based index options where the 
manipulative potential is the least and the need for increased 
positions, both by traders and institutional investors, may be the 
greatest.
    The Commission believes that the proposed increases for the three 
tiers of 9%, 20%, and 15%, for lowest to highest, respectively, appear 
to be appropriate and consistent with the Commission's evolutionary 
approach to position and exercise limits. In this regard, the absence 
of discernible manipulative problems under the current three-tiered 
position and exercise limit system for narrow-based index options leads 
the Commission to conclude that the modest increases proposed by the 
Exchange are warranted. The Commission recognizes that there are no 
ideal limits in the sense that options positions of any given size can 
be stated conclusively to be free of any manipulative concerns. 
However, based upon the absence of discernible manipulation or 
disruption problems under current limits, the Commission believes that 
the proposed limits can be safely considered. Accordingly, the 
Commission believes that the liberalization of existing position and 
exercise limits for narrow-based index options is now appropriate.\9\

    \9\ The Commission continues to believe that proposals to 
increase position limits and exercise limits must be justified and 
evaluated separately. After reviewing the proposed exercise limits, 
along with the eligibility criteria for each tier, the Commission 
has concluded that the proposed exercise limit increases for the 
three-tiered framework do not raise manipulation problems or 
increase concerns over market disruption in the underlying 
securities.
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    The Commission notes that the Exchange has had considerable 
experience monitoring the current three-tiered framework in narrow-
based stock index options. The Commission has not found that differing 
position and exercise limit requirements based on the particular 
options product to have created programming or monitoring problems for 
securities firms, or to have led to significant customer confusion. 
Based on the current experience in handling position and exercise 
limits, the Commission believes that the proposed increase in position 
and exercise limits for narrow-based index options will not cause 
significant problems.
    Finally, the CBOE has indicated that it will continue to conduct 
surveillance for manipulation. The Commission believes that the 
Exchange's surveillance programs are adequate to detect and deter 
violations of position and exercise limits as well as to detect and 
deter attempted manipulative activity and other trading abuses through 
the use of such illegal positions by market participants.
    For the foregoing reasons, the Commission finds that the proposal 
to increase the position and exercise limits for narrow-based index 
options to 6,000, 9,000, or 12,000 contracts, depending on the 
percentage stock concentrations within the index, is consistent with 
the requirements of the Act and the rules and regulations thereunder.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. As noted above, the 
Commission has previously approved an identical proposal submitted by 
the PHLX.\10\ The PHLX's proposal was published for the full notice and 
comment period and the Commission received no comments on the PHLX's 
proposal. The CBOE's proposal raises no new regulatory issues. 
Accordingly, the Commission 

[[Page 56077]]
believes it is consistent with Sections 6(b)(5) and 19(b)(2) of the Act 
to approve the proposed rule change on an accelerated basis.

    \10\ See PHLX Approval Order, supra note 4.
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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, 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 by November 27, 
1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-95-56) is approved.

    \11\ 15 U.S.C. Sec.  78f(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27424 Filed 11-3-95; 8:45 am]
BILLING CODE 8010-01-M