[Federal Register Volume 61, Number 152 (Tuesday, August 6, 1996)]
[Notices]
[Pages 40867-40869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19938]


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[[Page 40868]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37504; File No. SR-CBOE-96-01]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
2 to Proposed Rule Change by the Chicago Board Options Exchange, Inc., 
To Increase SPX Position and Exercise Limits, To Increase SPX Firm 
Facilitation, Index Hedge, and Money Managers Exemptions, and To Extend 
Broad-Based Index Hedge Exemption To Broker-Dealers

July 31, 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 July 25, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') Amendment No. 2 to the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the self-regulatory organization. The Exchange has requested that 
the proposed rule change be given accelerated approval. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 16 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In light of discussions with the Commission on June 4 and 10, 1996, 
the CBOE proposes Amendment No. 2 to File No. SR-CBOE-96-01,\3\ which 
relates to increasing the S&P 500 index option (``SPX'') position and 
exercise limits, to increasing the SPX firm facilitation, index hedge, 
and money manager exemptions, and to extending the broad-based index 
hedge exemption to broker-dealers.
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    \3\ See Securities Exchange Act Release No. 36738 (January 19, 
1996), 61 FR 2324 (January 25, 1996) (notice of File No. SR-CBOE-96-
01).
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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 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

    In Interpretation .01(c) to CBOE Rule 24.4, language is added to 
include a further clarification of ``at or about the same'' time with 
respect to the time frame in which an options transaction may be hedged 
to qualify for an index hedge exemption. It is expected that the hedge 
will be established concurrent with or immediately following the 
execution of the options transaction, absent good cause.\4\
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    \4\ The CBOE notes that extreme market conditions, the 
implementation of circuit breakers, or the lack of liquidity may 
affect a market participant's ability to establish a hedge within 
the noted time frame.
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    In Interpretation .01(c)(ii) to CBOE Rule 24.4, the reference to 
``exchange-listed products'' is deleted to clarify that only positions 
in exchange-listed index options or index warrants may qualify for the 
index hedge exemption. This deletion addresses the possibility that a 
hybrid or structured product could be used to secure an index hedge 
exemption when, in fact, the structured product does not closely track 
or resemble other indices included in the group of acceptable hedging 
instruments.
    In Interpretation .01(f)(5) to CBOE Rule 24.4, language is added to 
require that neither side of the collar transaction can be in-the-money 
at the time the position is established. This is consistent with the 
Commission's approval of the NASD's definition of a collar transaction 
pursuant to its hedge exemption rule, as well as with the Exchange's 
original intention. In addition, the reference to ``a.m. settled'' is 
replaced to allow for other ``non-p.m. settled'' contracts to be 
considered for the collar exemption.
    In Interpretation .01(f)(6) to CBOE Rule 24.4, the reference to 
``a.m. settled'' contracts is replaced with ``non-p.m. settled'' 
contracts.
    In Interpretation .01(f)(7) to CBOE Rule 24.4, the ``a.m. settled'' 
reference is replaced with ``non-p.m. settled'' contracts and the noted 
collar language in paragraph (5) is added: ``neither side of the short 
call, long put transaction can be in-the-money at the time the position 
is established.''
    In Interpretation .03 to CBOE Rule 24.4, the Exchange believes that 
the SPX reporting requirement should not apply to market-maker accounts 
in that the Exchange's Department of Financial Compliance routinely 
monitors market-maker risk. Therefore, it is not necessary for a 
market-maker to report hedging information to the Exchange because this 
information is available through other means.
    Finally, the Exchange would like to address the Commission's 
concern with respect to the ability of the Exchange to monitor customer 
accounts that maintain large unhedged option positions (i.e., positons 
between the current 45,000 limit and the proposed 100,000 contracts 
limit). As detailed in the filing and in the Exchange's surveillance 
procedures, the monitoring of customer accounts maintaining large SPX 
option positions will be achieved through several avenues. First, as 
contained in the proposed filing (Interpretation .03), accounts 
maintaining positions between 45,000 and 100,000 contracts will be 
required to identify whether such positions are hedged and, if so, 
provide information regarding the hedge. In the event a large unhedged, 
potentially risky position is identified, the Exchange will notify the 
clearing firm and assess the circumstances of the transactions. In 
addition, the Exchange will review with the firm its view of the 
exposure in the account, whether the account is approved and suitable 
for the noted strategies, and whether additional margin has been 
collected. In an extreme situation where an account maintains an 
unhedged SPX option position in excess of 45,000 contracts, the 
Exchange may impose additional margin, if warranted, upon the account 
or impose additional capital charges upon the clearing firm carrying 
the account to the extent of the margin deficiency resulting from the 
higher margin requirement. New Interpretation .04 to CBOE Rule 24.4 
addresses these additional requirements.
    Because the proposals outlined in this Amendment should enhance the 
depth and liquidity of the market for both members and investors in 
general, the Exchange believes this rule change is consistent with and 
furthers the objectives of Section 6(b)(5) of the Act in that it would 
remove impediments to and perfect the mechanism of a free and open 
market in a manner consistent with the protection of investors and the 
public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The self-regulatory organization does not believe that the proposed 
rule change will impose any inappropriate burden on competition.

[[Page 40869]]

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. by order approve the proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. 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 filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to Amendment No. 2 to File No. SR-CBOE-96-01 
and should be submitted by August 27, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19938 Filed 8-5-96; 8:45 am]
BILLING CODE 8010-01-M