[Federal Register Volume 61, Number 180 (Monday, September 16, 1996)]
[Notices]
[Pages 48722-48724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23560]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37659; File No. SR-CBOE-96-40]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., to Change the Method for Determining the 
Exercise Settlement Value of Nasdaq-100 Options

September 6, 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 June 28, 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 September 5, 1996.\3\ The CBOE has requested 
accelerated approval for the proposal, as amended. 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. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Timothy Thompson, CBOE, to Matthew Morris, 
Office of Market Supervision, Division of Market Regulation, 
Commission, dated September 5, 1996 (``Amendment No. 1''). In 
Amendment No. 1, the CBOE amended its proposal in two respects. 
First, the Exchange will issue a regulatory circular to its 
membership in the event that the Nasdaq makes a substantive change 
to the method for determining the settlement value of the Nasdaq-
100. The Exchange will endeavor to issue a regulatory circular at 
least seven days in advance of the effectiveness of the change or as 
soon as practicable after it learns of the change. Second, if the 
Nasdaq makes a change in the settlement methodology, the Exchange 
will consult with the Commission to determine whether such a 
revision is a material change from the current methodology to 
warrant a rule filing pursuant to Sections 19(b)(2) or 19(b)(3) of 
the Act. Because the Exchange does not control the decision to 
change the settlement methodology, however, it is possible that the 
Exchange may not be made aware of a change in the settlement 
methodology until after the Nasdaq has instituted such change. In 
this event, the Exchange will still consult with the Commission 
concerning the need for a possible rule filing.
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I. Self-Regulatory Organizations's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE is proposing to modify its rule concerning the method for 
determining the settlement value of Nasdaq-100 options (``NDX'').\4\ In 
this manner, the CBOE will clarify that the NDX's settlement value is 
determined using the volume-weighted averaging methodology developed by 
the Nasdaq Stock Market, Inc., as modified by the Nasdaq from time to 
time.
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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 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 III below. The self-regulatory 
organization has

[[Page 48723]]

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

1. Purpose
    The purpose of the proposed rule change is to modify the language 
of the rule describing the method of settling NDX options. The 
settlement methodology itself is not changing. The proposed rule would 
describe the settlement methodology as the then current index value as 
calculated by Nasdaq and reported to the CBOE using the volume-weighted 
prices (``VWPs'') of the securities underlying the Nasdaq-100 Index, 
which VWPs shall be calculated according to the then current volume-
weighted averaging methodology developed by Nasdaq.\5\
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    \5\ Nasdaq is the official reporting authority under Exchange 
rules for the Nasdaq-100 Index and sends its settlement value to the 
CBOE.
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    The Exchange's rule currently describes the methodology employed by 
Nasdaq in determining the settlement value for Nasdaq-100 options in a 
general manner.\6\ The rule, however, does not describe, and was not 
intended to describe, every nuance of the settlement methodology used 
by Nasdaq. For example, the rule does not explain that Nasdaq will 
adjust the values for corrections up until the end of the five-minute 
period for the last stock in the Nasdaq-100. Similarly, the rule does 
not explain that trade reports with modifiers that are not reported in 
the last sale prices that are publicly disseminated by Nasdaq will not 
be used in the computation of the volume-weighted average of the 
underlying stock. In fact, Nasdaq has made minor technical changes to 
the valuation methodology since the Exchange filed its rule.\7\ 
Although no changes are presently anticipated, the possibility exists 
that there could be other minor changes in the calculation method in 
the future. Therefore, the Exchange believes that a more general 
description of the settlement methodology will prevent any possible 
confusion that this rule was intended to describe every detail of the 
NDX settlement calculation. Rather, the CBOE rule will simply serve as 
an indication that interested parties should refer to relevant Exchange 
regulatory circulars or Nasdaq for more detail, if required.
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    \6\ The current methodology employed by Nasdaq in determining 
the NDX settlement value can be generally described as follows. 
Nasdaq computes a VWP for each stock underlying the Nasdaq-100 Index 
by looking at transaction prices in the five-minute period (usually 
8:30 to 8:35 a.m., Chicago time) beginning with a stock's first 
transaction price at or after 8:30 a.m., Chicago time, as reported 
by Nasdaq. The VWP of each stock in the Index is calculated as the 
weighted average of its transaction prices during this five-minute 
period. The weight associated with a particular transaction price is 
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 is computed from transaction prices reported before 3:00 
p.m., Chicago time.
    \7\ For example, the Exchange has issued a regulatory circular 
to its membership informing them of a recent technical change made 
by Nasdaq. This circular informed the membership that only trade 
reports which update the last sale on Nasdaq will be included in the 
calculation of the volume-weighted average.
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2. Statutory Basis
    The Exchange believes that because this rule change will prevent 
confusion regarding whether the CBOE rules present the details of the 
methodology used by Nasdaq in determining the settlement value of the 
Nasdaq-100, this rule change is based upon and is in furtherance of 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 self-regulatory organization 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, D.C. 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-96-40 and should 
be submitted by October 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 make the description of the method for determining 
the exercise settlement value of Nasdaq-100 options more general will 
contribute to the maintenance of fair and orderly markets by helping to 
prevent confusion regarding the completeness of the CBOE's description.
    As noted above, the rule change does not change the current 
settlement methodology for the Nasdaq-100. Rather, the change will 
provide the CBOE with a more flexible means through which to implement 
certain minor, non-substantive changes to the settlement methodology 
that Nasdaq may impose.\8\ At the same time, the proposal will ensure 
that the CBOE membership and the investing public are adequately 
informed of any changes in the settlement methodology through the 
issuance of regulatory circulars.\9\
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    \8\ The Commission notes that if the Nasdaq makes a change to 
the settlement methodology, the Exchange will consult with the 
Commission to determine whether this revision is a material change 
from the current methodology to warrant a rule filing pursuant to 
Section 19(b) of the Act or Rule 19b-4 thereunder. The Commission 
also realizes that because the Exchange does not control the 
decision to change the settlement methodology, it is possible that 
the Exchange may not be made aware of a change in the settlement 
methodology until after the Nasdaq has instituted such change. In 
this event, the Exchange will still consult with the Commission 
concerning the need for a possible rule filing.
    \9\ According to the CBOE, the Exchange will endeavor to issue a 
regulatory circular at least seven days in advance of the 
effectiveness of a substantive change to the method of determining 
the settlement value of the Nasdaq-100, or as soon as practicable 
after the Exchange learns of the change.
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    The Commission finds good cause to approve the proposal 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

[[Page 48724]]

proposal, the Commission will enable the new language to become 
effective prior to the next expiration. In addition, the Commission 
believes that the proposed settlement method does not present any new 
or novel regulatory issues as the CBOE's proposal merely restates in a 
more general manner that which the Commission has already approved.\10\ 
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 on an accelerated basis.
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    \10\ See Securities Exchange Act Release No. 37089 (April 9, 
1996), 61 FR 16660 (April 16, 1996) (File No. SR-CBOE-96-12).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \11\ of the 
Act, that the proposed rule change (File No. SR-CBOE-96-40), as 
amended, is hereby approved on an accelerated basis.

    \11\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23560 Filed 9-13-96; 8:45 am]
BILLING CODE 8010-01-M