[Federal Register Volume 61, Number 26 (Wednesday, February 7, 1996)]
[Notices]
[Pages 4691-4692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2617]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36797; File No. SR-CBOE-96-03]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to the Exercise of American-Style Options

January 31, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
19, 1996, 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, 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.

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

    The CBOE proposes to issue a regulatory circular to its membership 
which clarifies the application of the rules and procedures of the 
Options Clearing Corporation (``OCC'') to the exercise of American-
style options.
    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.

[[Page 4692]]


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

    The purpose of the proposed regulatory circular is to make it clear 
that the holder of an American-style option is able to exercise the 
option at any time up to the exercise cut-off time on any trading day 
other than the final trading day, even if the holder has sold the 
option in a closing sale transaction during that trading day. According 
to the CBOE, this result follows from OCC's sequencing procedures for 
processing daily activity on every day other than the final trading 
day.\1\

    \1\ For purpose of the proposed regulatory circular, the final 
trading day is the expiration date of options that trade on their 
expiration date or the last trading day prior to the expiration date 
for all other options.
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    Specifically, on every day other than the final trading day, OCC's 
sequencing procedures provide that opening purchase transactions, 
opening sales transactions, and closing purchase transactions effected 
on that day are processed before exercises, and exercises are processed 
before that day's closing sales transactions. As a result, to the 
extent there is no violation of the CBOE's and OCC's exercise limits, 
an investor may exercise an option series on any day other than the 
final trading day to the full extent of the sum of: (1) All the long 
positions in his account at the opening of that day, plus (2)(a) (in 
the case of a firm or customer) all positions resulting from the 
investor's opening purchase transactions on that day without deduction 
for that day's closing sales transactions, or (b) (in the case of a 
market maker) all positions resulting from the market maker's purchase 
transactions that day without deduction for the market maker's sales 
transactions effected that day.\2\ If the number of contracts sold by 
an investor in closing sales transactions exceeds the number of long 
positions remaining in the account after the exercises are processed, 
OCC treats the excess as having been sold in opening sales transactions 
and the contracts are subject to being assigned exercises. However, a 
brokerage firm or clearing member may have procedures which would 
prevent an investor from effecting an exercise that would result in 
changing a closing sales transaction into an opening sales transaction.

    \2\ Market makers are not required to mark their transactions as 
opening or closing transactions. Customer transactions must be 
marked as opening or closing transactions.
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    The CBOE's proposed regulatory circular provides several examples 
illustrating how the OCC's procedures apply to both customers and 
market makers. In addition, the proposed regulatory circular notes that 
OCC's sequencing procedures for processing activity on the final 
trading day provide for the processing of all purchase and sales 
transactions before exercises and assignments are processed. As a 
result, on the final trading day an investor may not exercise more than 
the investor's long positions remaining after netting any short 
position the investor may have at the opening that day and all options 
contracts the investor sells that day.
    According to the CBOE, the OCC procedures described in the proposed 
regulatory circular are not new. Nonetheless, the Exchange believes it 
is important for all members to have the same understanding of these 
procedures and how they affect exercises. By making Exchange members 
and their customers better informed as to the procedures that apply to 
the exercise of American-style options, the CBOE believes that the 
publication of the proposed regulatory circular will serve to further 
the purposes of Section 6(b) of the Act, in general, and of Section 
6(b)(5), in particular, by promoting just and equitable principles of 
trade and protecting investors and the public interest.

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

    The CBOE does not believe that issuances of the proposed regulatory 
circular 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 regulatory circular.

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

    The proposed rule change constitutes a stated policy, practice or 
interpretation with respect to the administration of an existing CBOE 
rule. Accordingly, the proposal has become effective pursuant to 
Section 19(b)(3)(A) of the Act and subparagraph (e) of Rule 19b-4 
thereunder. At any time within 60 days of the filing of such 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. 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 at 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 the file 
number in the caption above and should be submitted by February 28, 
1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\

    \3\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2617 Filed 2-6-96; 8:45 am]
BILLING CODE 8010-01-M