[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Notices]
[Pages 10100-10102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5373]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38332; File No. SR-CBOE-97-07]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by Chicago Board Options 
Exchange, Inc., Relating to Certain Multi-Market Orders Involving Index 
Options

February 24, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 17 CFR 
240.19b-4, notice is hereby given that on February 12, 1997, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. 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 Exchange proposes to amend Rule 6.48 to specify that certain 
duties of CBOE members in effecting options transactions on the CBOE 
that are part of certain stock-option orders on the CBOE involving 
index 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 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 IV below. The CBOE 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 the 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    In 1995, the Exchange filed a rule change proposal with the 
Commission that amended Rule 6.48 and set forth the duties of CBOE 
members executing options orders that constitute a component of a 
``package'' stock-options order. The execution of this type of order 
involves transactions in CBOE's options market and in another market (a 
``multi-market'' order).\1\ Rule 6.48 specifies the sole basis on which 
an options trade that is a component of a multi-market order may be 
canceled by the members that are parties thereto. However, Rule 6.48 
does not currently provide for the cancellation of any stock-option 
order that entails the purchase of sale of index options.
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    \1\ See Securities Exchange Act Release No. 36516 (November 27, 
1995), 60 FR 62114 (December 4, 1995).
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    Multi-market orders in index options play an important role in 
allowing traders to hedge their risks and thus, in providing liquidity 
to customers in their products. Sometimes, multi-market orders 
involving index options might consist of a spread between the CBOE 
option product and another single security traded in another market, 
e.g., S&P 500 index options (SPX) versus a unit investment trust in the 
S&P 500. In those instances where an order involves

[[Page 10101]]

a CBOE index option and an equity index-based security traded in 
another market, where both are based upon the same index,\2\ the 
Exchange believes it is appropriate to deem such an order a stock-
option order, and thus eligible for the order cancellation provision 
contained in paragraph (b) of Rule 6.48. Another common type of multi-
market order often involves the nearly simultaneous trading of a CBOE 
option and a basket of stocks in another market. The CBOE does not 
believe that this type of order should be deemed a stock-option order 
eligible for the cancellation provisions contained in Rule 6.48 because 
a ``basket'' of stocks is not an ``underlying or related security'' as 
required in the definition of stock-option order.\3\ To date, CBOE 
traders in index options have relied on informal trading protocols to 
ensure fairness and equity in connection with the execution and 
cancellation of multi-market orders.
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    \2\ The trust which underlies S&P 500 Depositary Receipts 
(``SPDRs'') is made to replicate the performance of the S&P 500 
index; however, there are a couple of reasons why the value of the 
SPDR trust may deviate slightly from the S&P 500 value. First, the 
trust underlying SPDRs is subject to slight rounding errors because 
the trust must contain whole shares while the S&P 500 index is not 
so limited. Second, the trust underlying SPDRs is required only to 
make adjustments to the components monthly unless the value of the 
component deviates by more than a certain percentage from that 
component's comparable weight in the S&P 500 index.
    \3\See CBOE Rule 1.1(ii).
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    Accordingly, the Exchange is proposing to extend the order 
execution and cancellation provisions contained in Rule 6.48 to stock-
option orders involving an index option and a single security equity 
index-based product traded in another market, where both are based upon 
the same index.\4\ Consequently, the Exchange is proposing the deletion 
of paragraph (b)(ii) of Rule 6.48 which exempts stock-option orders 
involving index options from the two requirements set forth in 
paragraph (b) of Rule 6.48. The first of those requirements is that a 
member announcing such an order to a trading crowd must disclose all 
legs of the order and must identify the specific markets and prices at 
which the non-options leg(s) are to be filed. Second, concurrent with 
the execution of the option leg of any multi-market order, the 
initiating member and each member that is a counterparty to the trade 
must take steps to immediately execute the non-options leg(s) in the 
identified market(s).
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    \4\ Telephone conversation between Tim Thompson, Senior 
Attorney, CBOE, and John Ayanian, Special Counsel, Office of Market 
Supervision, Division of Market Regulation, Commission, on February 
21, 1997.
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    The Exchange believes, as with stock-option orders involving equity 
options, that these provisions will clarify members' expectations about 
the execution of each non-option component of such orders.
    Current Rule 6.48 provides that a party to an options transaction 
that is part of a stock-option order may have the options transaction 
canceled only in the event that market conditions in another market 
prevents the execution of one or more of the non-option legs of the 
order.
    The current proposal only addresses multi-market orders involving 
an index option and a single security equity index-based product traded 
in another market, where both are based upon the same index (e.g., a 
stock-option order involving SPDRs and SPX options). Additionally, Rule 
6.48 is not intended to allow multi-market orders involving index 
options and ``baskets'' of securities to get the benefit of the order 
cancellation provisions of the rule. Stock-option orders are just one 
subset of the types of multi-market orders that are transacted by 
traders in the index crowds. As mentioned above, some multi-market 
orders involve a transaction of an index option coupled with a basket 
of stocks comprising the index. An order for this type of transaction 
does not meet the definition of a stock-option order which is defined 
under CBOE Rule 1.1(ii). The Exchange is currently reviewing the 
protocols used in the execution of these other types of multi-market 
orders to determine if further rule changes would be beneficial in the 
handling of these orders.
(2) Basis
    The Exchange believes that the proposed rule change 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 is designed to deal with the 
special circumstances of multi-market orders involving index options in 
a manner that promotes just and equitable principles of trade, and the 
protection of investors and the public interest.

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

    The proposed rule change will impose no 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
(3) was provided to the Commission for its review at least five days 
prior to the filing date; and (4) does not become operative for 30 days 
from February 12, 1997, the date on which it was filed, the rule change 
has become effective pursuant to Section 19(b)(3)(A) of the Act and 
Rule 19b-4(e)(6) thereunder. In particular, the Commission believes the 
proposal qualifies as a ``noncontroversial filing'' in that the 
proposed standards do not significantly affect the protection of 
investors or the public interest and do not impose any significant 
burden on competition. At any time within 60 days of the filing of the 
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 the 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, 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 in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions

[[Page 10102]]

should refer to File No. SR-CBOE-97-07 and should be submitted by March 
26, 1997.

    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. 97-5373 Filed 3-4-97; 8:45 am]
BILLING CODE 8010-01-M