[Federal Register Volume 61, Number 74 (Tuesday, April 16, 1996)]
[Notices]
[Pages 16660-16662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9302]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37089; File No. SR-CBOE-96-12]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Chicago Board Options Exchange, Inc., to Change the 
Method for Determining the Exercise Settlement Value of Nasdaq-100 
Options

April 9, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 12, 1996, 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 and 
II below, which Items have been prepared by the self-regulatory 
organization. The Exchange subsequently filed Amendment No. 1 to the 
proposed rule change on April 2, 1996.\3\ The CBOE has requested 
accelerated approval for the proposal. This order approves the CBOE's 
proposal, as amended, on an accelerated basis and solicits comments 
from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See letter from Timothy Thompson, Senior Attorney, CBOE, to 
Matthew S. Morris Attorney, Options and Derivatives Regulation, 
Division of Market Regulation, Commission, dated April 2, 1996 
(``Amendment No. 1''). In Amendment No. 1, the CBOE represented that 
it would issue a regulatory circular to its membership concerning 
the change in settlement methodology for the Nasdaq-100 options. In 
addition, in Amendment No. 1 the CBOE confirmed that: (i) Nasdaq, 
Inc. will provide to the Exchange, on an on-going basis, the 
calculation of the settlement values for Nasdaq-100 options under 
both the old and new settlement methods; and (ii) neither the change 
in the settlement method for Nasdaq-100 options nor the operation of 
a dual settlement methodology will cause any operational problems 
for the Options Clearing Corporation (``OCC'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE is proposing to change the method of determining the 
settlement value of Nasdaq-100 options (``NDX'').\4\ Currently, the NDX 
is an A.M.-settled index option. The Exchange is proposing that the NDX 
be settled by using the weighted average transaction prices of its 
underlying securities during a five-minute period on the last day of 
trading prior to expiration.
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    \4\ The NDX is a capitalization-weighted index composed of the 
stocks of 100 of the largest non-financial issuers whose securities 
are traded on Nasdaq.
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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 CBOE 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 III below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 16661]]

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

1. Purpose

Background

    The purpose of the CBOE's proposal is to change the manner in which 
NDX options are settled to a weighted average method, as described 
below. This settlement method is consistent with the settlement method 
that will be used for Nasdaq-100 futures, which are proposed to be 
traded by the Chicago Mercantile Exchange (``CME'').\5\
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    \5\ See Chicago Mercantile Exchange submission to the Commodity 
Futures Trading Commission, Nos. 96-03 and 96-04, dated January 9, 
1996.
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    According to the CBOE, the change in settlement method will enable 
the Nasdaq-100 futures to be used more efficiently in hedging NDX 
options and vice versa. The Exchange also believes that the use of a 
common settlement method will enhance the advantage an investor will 
receive from maintaining positions in a cross-margining account with 
the OCC. The use of a common settlement method should also avoid 
potential investor confusion.

Current Methodology for Determining Exercise Settlement Values

    Currently, the NDX is an A.M.-settled index option. For such index 
options, the last day of trading is the business day preceding the last 
day of trading in the underlying securities prior to expiration 
(usually a Thursday). The current index value at expiration is 
determined by reference to the reported level of such index as derived 
from first reported sale (opening) prices of the underlying securities 
on the last day of trading in the underlying securities prior to 
expiration (usually a Friday), except that the last reported sale price 
of such a security shall be used in any case where that security does 
not open for trading on that day.

New Methodology for Determining Exercise Settlement Values

    Under the proposal, the last day of trading for Nasdaq-100 options 
will be the business day preceding the last day of trading in the 
underlying securities prior to expiration. The current index value at 
expiration will be determined on the last day of trading in the 
underlying securities prior to expiration. The current index value for 
such purposes shall be determined using the volume weighted prices 
(``VWPs'') of the Nasdaq-100 Index (``Index'') underlying securities.
    The VWP of a stock will be computed from transaction prices in the 
five-minute period (usually 8:30 a.m. to 8:35 a.m., Chicago time) 
beginning with its first transaction price at or after 8:30 a.m., 
Chicago time, as reported by Nasdaq.\6\ The VWP of each stock in the 
index will be calculated as the weighted average of its transaction 
prices during this five-minute period. The weight associated with a 
particular transaction price will be the fraction of the total volume 
of trading during this five-minute period which was executed at this 
transaction price. If the first transaction of a stock occurs after 
2:55 p.m., Chicago time, then its VWP will be computed from transaction 
prices reported before 3:00 p.m., Chicago time. If a stock does not 
trade after 8:30 a.m. and before 3:00 p.m., Chicago time, then its VWP 
will be its closing price from the Previous day.
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    \6\ With the exception of trade reports with .0 modifiers (i.e., 
trades reported in real time at prices outside the current inside 
quotations displayed by Nasdaq), trade reports that do not have 
modifiers attached to them will be used for the computation of VWPs.
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Change Not Retroactive

    To implement this rule change, the CBOE will create a new class of 
Nasdaq-100 Index options which will be listed parallel to outstanding 
series in the existing class. In this regard, no new expiration months 
will be added to the Nasdaq-100 Index options class with the old 
exercise settlement value methodology and this class of options will 
cease to exist after September 1996 expiration. In addition, in order 
to have the surviving options root symbol remain NDX, all existing 
series with the options root symbol NDX will be changed to NDV. The 
CBOE notes that while this represents a change in symbols for NDX 
positions previously opened, the contract, specifications in force at 
the time these contracts were initially listed remain unchanged. 
Finally, position and exercise limits for all standardized Nasdaq-100 
Index options, regardless of settlement method, will be aggregated.
2. Statutory Basis
    The CBOE believes that the proposal 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 will allow NDX options to serve as a better 
hedge for Nasdaq-100 futures and vice versa. In this regard, the CBOE 
believes that the rule change furthers the objectives of Section 
6(b)(5) of the Act in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and to protect 
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 inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments were neither solicited nor received with respect to the 
proposed rule change.

III. 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 changes that are filed with the 
Commission, and all written communications relating to the proposed 
rule changes 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filings also will be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-96-12 and should be 
submitted by May 7, 1996.

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

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, the requirements of 
Section 6(b)(5) thereunder. Specifically, the Commission finds that the 
CBOE's proposal to alter the method for determining the exercise 
settlement value of Nasdaq-100 options will contribute to the 
maintenance of fair and orderly markets by eliminating potential 
disparities between the settlement values of Index options traded on 
the CBOE and the settlement

[[Page 16662]]

values of Index futures traded on the CME. This, in turn, should help 
to ensure that the Index options traded on the CBOE will serve as an 
effective mechanism for hedging investments in Nasdaq-100 futures and 
vice versa.
    As described above, existing options series using the old 
settlement methodology will be phased-out over time. Accordingly, no 
new expiration months will be added to the Nasdaq-100 Index options 
class with the old exercise settlement value methodology and this class 
of options will cease to exist after September 1996 expiration. In 
addition, by issuing a regulatory circular to its membership concerning 
the change in settlement methodology for Nasdaq-100 options, which will 
include a schedule that details when the new series with the new 
settlement methodology will begin trading and when the outstanding 
series with the old settlement methodology will expire, investor 
confusion should be avoided. Lastly, the Commission believes that the 
VWP settlement methodology may reduce the susceptibility of the Index 
to manipulation by diminishing the impact of a single trade on the 
settlement price.
    The Commission finds good cause to approve the proposal, including 
Amendment No. 1, prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. By 
accelerating the effectiveness of the CBOE's rule proposal, thereby 
matching the trading timetable of the Nasdaq-100 futures on the CME, 
the Commission will ensure that market participants will be able to 
utilize similar settlement methodologies for both futures and options. 
In addition, the Commission believes that the proposed settlement 
method does not present any new or novel regulatory issues as the 
Commission has previously approved a settlement method utilizing 
average weighted prices.\7\ Accordingly, the Commission believes that 
it is consistent with Sections 6(b)(5) and 19(b)(2) of the Act to 
approve the proposed rule change, including Amendment No. 1, on an 
accelerated basis.
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    \7\ See Securities Exchange Act Release No. 32120 (April 9, 
1993), 58 FR 19864 (April 16, 1993) (approval order for the 
Financial Times-Stock Exchange 100 Index) (File No. SR-CBOE-92-34).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \8\ of the 
Act, that the proposed rule change (File No. SR-CBOE-96-12), as 
amended, is hereby approved on an accelerated basis.

    \8\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9302 Filed 4-15-96; 8:45 am]
BILLING CODE 8010-01-M