[Federal Register Volume 62, Number 51 (Monday, March 17, 1997)]
[Notices]
[Pages 12669-12671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6562]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38375; File No. SR-CBOE-97-14]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Transfer of the Options Business of the New York Stock Exchange to the
Chicago Board Options Exchange
March 7, 1997.
Pursuant to section 19(b)(1) of the Securities Exchange Act of
1934,\1\ notice is hereby given that on March 3, 1997, the Chicago
Board Options Exchange, Incorporated (``CBOE'' and ``Exchange'') filed
with the Securities and Exchange Commission (``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.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend its Constitution and Rules in order to
authorize the issuance of options trading permits (``Permits'') in
connection with the proposed transfer of the options business of the
New York Stock Exchange, Inc. (``NYSE'') to CBOE. CBOE also proposes to
define the rights and obligations associated with Permits, and to
provide for the trading of options on the NYSE Composite Index.\2\
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\2\ The text of the proposed rule change is available at the
Office of the Secretary, CBOE and in the Public Reference Room of
the Commission.
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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, 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
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is to authorize the
issuance of 75 ``Options Trading Permits'' (``Permits'') in connection
with the proposed transfer of the NYSE's options business to CBOE, and
to define the rights and obligations associated with such Permits.\3\
In addition, the proposed rule change amends CBOE rules as necessary to
provide for the trading on CBOE of options on the NYSE Composite Index.
The 75 Permits are proposed to be issued pursuant to the terms of an
agreement between CBOE and NYSE. The agreement represents the
culmination of a process initiated by NYSE in the summer of 1996 when
it announced that it intended to discontinue its options business. At
that time, NYSE invited interested parties wishing to continue NYSE's
options business to bid for its acquisition by offering trading rights
and other benefits to NYSE members, including payment for the ``going
business'' value of the business to be acquired. Based on its bid in
response to NYSE's invitation, NYSE determined to enter into exclusive
negotiations with CBOE. A definitive agreement between CBOE and NYSE
(``Agreement'') was executed as of February 5, 1997.\4\
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\3\ On March 3, the NYSE filed with the Commission a proposed
rule change, SR-NYSE-97-05, regarding the transfer of the NYSE
options business to the CBOE.
\4\ A copy of the Agreement is attached as Exhibit B to this
filing and is available for review at the Office of the Secretary of
CBOE, and in the Public Reference Room of the Commission.
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The Agreement contemplates that trading in NYSE Options will
commence on the CBOE trading floor on April 28, 1997 (``Effective
Date''), subject to the fulfillment of specified conditions and the
approval of this proposed rule change and the parallel filing by
NYSE.\5\ The Agreement provides that CBOE will pay $5,000,000 as the
purchase price for the business to be transferred, of which $1,200,000
will be retained by NYSE to cover its costs associated with the
termination of its options activities and as payment for a ten-year
license granted to CBOE to enable it to trade options on the NYSE
Composite Index, and $3,800,000 net of a tax reserve will be
distributed pro rata to all NYSE members. Details of the cash
distribution to NYSE members are described in Item 3 of the parallel
proposed rule change filed by NYSE.
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\5\ ``NYSE Options'' are defined as those classes of options
that were trade on NYSE immediately prior to the Effective Date and
not then also traded on CBOE, and those classes of options on at
least 14 additional underlying stocks which CBOE has agreed to
designate as NYSE Options during each of the seven years following
the Effective Date.
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The Agreement also provides that CBOE will issue up to a total of
75 Permits to those NYSE specialist and non-specialist firms and sole
proprietors who operated pursuant to options trading rights on NYSE on
December 5, 1996, and who agree to transfer their options activities to
CBOE. In the case of an NYSE specialist, the specialist firm may select
any qualified person to act as its nominee on CBOE. In the case of a
non-specialist, the individual acting pursuant to an options trading
badge on NYSE on December 5, 1996, must personally relocate to Chicago
in order to receive a Permit. If less than 75 Permits are issued to
NYSE specialists and non-specialists, the Agreement provides that the
difference between 75 Permits and the number of Permits so issued will
be deposited in a lease pool to be leased to qualified persons who wish
to trade NYSE Options on CBOE. The proceeds from the lease of these
Permits will be paid to certain designated persons who help options
trading rights on NYSE, as described below.
The issuance of 75 Permits is proposed to be authorized pursuant to
a new Section 2(e) to the Exchange's
[[Page 12670]]
Constitution. That section provides that all Permits expire on the
seventh anniversary of the date when trading begins on the floor of
CBOE in NYSE Options. It also specifies that Permit holders shall have
none of the rights of members except as specified in the Rules of the
Exchange.
The rights and obligations of holders of Permits are set forth in
proposed new Exchange Rule 3.27, which incorporates by reference many
of the other rules of the Exchange pertaining to the rights and
obligations of Exchange members generally. Subparagraph (a)(1) of Rule
3.27 reflects the terms of the Agreement by providing that NYSE non-
specialist firms and sole proprietors who were engaged in business on
the options floor of NYSE immediately prior to the Effective Date are
entitled to the same number of Permits as the number of options floor
badges they held on NYSE on December 5, 1996, but that each individual
who held an NYSE options floor badge and acted as a non-specialist must
personally relocate to Chicago in order to be entitled to a Permit in
respect of that badge. Subparagraph (a)(2) provides that each
specialist firm engaged in business on the options floor of NYSE is
likewise entitled to the same number of Permits as the number of
options floor badges they held on NYSE, and that, subject to the rules
of CBOE, each such firm may designate any qualified person to be the
firm's nominee on CBOE.
Subparagraph (a)(3) of Rule 3.27 describes the terms of the lease
pool pursuant to which any of the 75 Permits not issued to NYSE members
active on the NYSE options floor, or any so issued but subsequently
surrendered, will be leased by CBOE through an auction or other
competitive process. The lease proceeds would ordinarily be paid to
those person identified by NYSE as having used or leased NYSE options
trading rights on December 5, 1996, or holders of options trading
rights that, while not so used or leased, were formally separated from
their NYSE memberships on that date, or transferees of such persons.
Subparagraph (a)(4) of Rule 3.27 provides that if a Permit issued
to a NYSE options badge holder is not used during the first year
following the Effective Date, the Permit shall be surrendered and shall
be added to the lease pool described above, unless the inactivity of
the Permit has been consented to by CBOE.
Subparagraph (a)(5) of Rule 3.27 provides that Permits issued to
NYSE options badge holders pursuant to subparagraphs (a) (1) and (2)
are not transferable for one year following the Effective Date, except
as consented to by the Exchange in the event of death, hardship or
certain successions in ownership. Following this one year period,
Permits are freely transferable in accordance with Exchange rules
governing the transfer of memberships generally.
Paragraph (b) of Rule 3.27 describes the trading rights to which
the holder of a Permit is entitled. In general, these include the right
to be admitted to the separate CBOE trading facility devoted
exclusively to the trading of NYSE Options, as defined in the Rule,\6\
and to engage in the activities of a Market-Maker, Designated Primary
Market-Maker (``DPM'') and/or Floor Broker in respect of those options,
subject to the applicable rules of the Exchange. In addition, the
holder of a Permit is entitled to trade by order as principal those
classes of options traded on CBOE's regular trading floor that were
dually traded on both CBOE and NYSE immediately prior to the Effective
Date. Permit holders are also entitled to trade by order as principal
all other classes of options traded on CBOE's regular trading floor,
provided that such trades during any calendar quarter (as measured by
contract volume) do not exceed twenty percent of the sum of the Permit
holder's total in person principal trades in NYSE Options and the
Permit holder's principal trades by order in options that were dually
traded on both CBOE and NYSE immediately prior to the Effective Date.
Finally, a Permit holder is entitled to be admitted to the regular
options trading floor in order to respond to the call of a Board Broker
or Order Book Official for additional market-makers pursuant to
Exchange Rule 7.5.
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\6\ Supra note 6.
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Paragraph (c) of Rule 3.27 provides that each NYSE specialist firm
to which a Permit is issued will be appointed as the DPM in the same
classes of NYSE Options as those for which it was designated as a
specialist on NYSE, subject to qualifying to act as such pursuant to
CBOE rules. Paragraph (c) also provides that the DPMs for the
additional classes of NYSE Options designated each year shall be chosen
from among Permit holders. Subject to the rules of the Exchange,
specialist firms appointed as DPMs in NYSE Options shall be entitled to
continue to act as such during the term of the Permits, and thereafter
it they become regular members of the Exchange.
Paragraph (d) of Rule 3.27, together with Section 2(e) of the
Exchange Constitution, provides that Permit holders shall have the same
rights and obligations of members, except that they shall have no right
to petition or vote or to be counted as part of a quorum at meetings of
members, they shall have no interest in the assets or property of the
Exchange, they shall not share in any distribution by the Exchange,
they shall not participate in the Exchange's member death benefit
program, and they shall not have the right to transact business with
the public in any securities dealt in on the Exchange other than NYSE
Options. Holders of Permits may serve on any committee of the Exchange
to which they are appointed, and are deemed to be appointed market-
makers in all classes of NYSE Options pursuant to Exchange Rule 8.3.
Paragraph (d) also provides that membership application fees shall
be waived in connection with the approval of Permit holders or their
nominees in connection with the original issuance of a Permit but not
the subsequent transfer or lease of a Permit, and shall also be waived
in connection with the approval of the initial holder or its nominee as
a regular member of the Exchange or as the nominee of a regular member.
Membership or nominee applications made by Permit holders or their
nominees who are not subject to a statutory disqualification and are
not the subjects of a self-regulatory organization investigation that
may involve their fitness for membership shall be deemed effective for
a temporary period of six months, so as not to interrupt their Exchange
activities while their applications are being processed.
It is also proposed to amend certain of the rules in Chapters XXIV
and XXIVA of the Rules of the Exchange, which govern the trading of
index options and FLEX options, respectively, in order to provide for
the listing and trading of options on the NYSE Composite Index.
(Hereafter, such index is referred to as the ``Index'' and such options
as ``NYA Options''.) The Index is a capitalization-weighted index
comprising all of the over 2,500 common stocks listed on NYSE. The
Index is expressed in relation to the base period market value which
has been adjusted for capitalization changes over time. The base value
of the Index was set at 50 on December 31, 1965. NYSE will continue to
act as the reporting authority for the Index, and CBOE will trade NYA
Options pursuant to a license granted by NYSE.
As traded on NYSE and as proposed to be traded on CBOE, NYA Options
are European-style, A.M.-settled index options, strike prices for which
are introduced at $2.50 or $5.00 intervals for strike prices below $200
or at or
[[Page 12671]]
above $200, respectively. The Index Multiplier for NYA Options is $100.
CBOE proposes to apply to NYA Options the same 45,000 contract position
and exercise limits (no more than 25,000 contracts expiring in the
nearest expiration month) and the same hedge exemption that currently
apply to such options under NYSE rules. In addition to regular index
options, CBOE proposes to provide for trading in Quarterly Index
Expiration options (``QIX'' options), long-term and reduced-vale long-
term options (``LEAPs'' and ``reduced-value LEAPs'') and A.M.-settled
FLEX Options on the Index pursuant to the same rules and procedures
that currently govern trading on CBOE in these types of options.
In addition, the proposed rule change includes a few corrections to
the table of position limits set forth in Rule 24.4 in order to add
references to classes of index options that were inadvertently omitted
from the table when it was last revised, and a few clarifications to
the language of Rule 24A.4(b) concerning the specification of the
exercise settlement values for FLEX Index Options. No substantive
changes will result from these corrections and clarifications.
CBOE believes that it has adequate facilities and resources to
provide for the trading, surveillance and data dissemination called for
by the transfer of the NYSE options business to its market. In this
connection, CBOE intends to construct a new trading facility dedicated
solely to NYSE Options, which will be configured and equipped in the
same manner as its existing trading floor. The surveillance and
regulatory responsibilities resulting from the transfer of the NYSE
options business to CBOE are not expected to add significantly to
CBOE's existing regulatory workload, and CBOE believes it has adequate
resources to assume these added responsibilities. CBOE intends to add
one additional output line to the OPRA processor for purposes of
transmitting market information pertaining to NYSE Options. This will
not increase the total input to OPRA because two lines from NYSE to the
OPRA processor will be terminated at the time of the transfer to CBOE.
CBOE believes that the purposed rule change is consistent with and
in furtherance of the provisions of Section 6(b)(5) of the Securities
Exchange Act of 1934 because, by permitting those NYSE members who have
been engaged in options activities on NYSE to continue to conduct an
options business in CBOE's regulated exchange marketplace, the proposed
rule change 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
CBOE does not believe that the proposed rule change will impose any
burden on competition. Instead, by providing a framework within which
all of the members of NYSE who have been active in NYSE's options
business may continue to conduct that business on CBOE, the proposed
rule change is intended to strengthen the ability of those members to
compete with other markets that may also wish to trade the options
formerly traded on NYSE. In this regard, CBOE understands that early in
1996, NYSE determined to continue its options business regardless of
whether it would be able to transfer that business to CBOE or to any
other market. NYSE's effort to transfer its options business to another
market was made largely in order to provide a home for those of its
options members who wished to continue in the options business, as
evidenced by NYSE's emphasis on trading rights for its members in its
request for bids for the acquisition of its options business.
The terms governing the transfer of NYSE's options business to CBOE
impose no restrictions on the ability of NYSE to resume options trading
at any time, except that if NYSE were to resume trading options within
one year following the Effective Date, it would have to pay CBOE
$500,000 to offset a small portion of CBOE's costs associated with the
transfer. Nor are any restrictions imposed on NYSE members that would
limit their ability to trade options on NYSE if that exchange were to
resume its options trading program. CBOE notes that any other
securities market is also free at any time to trade any or all of the
options formerly traded on NYSE, other than NYA Options, which will be
exclusively licensed to CBOE.
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 thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety 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 such 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. 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 will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-97-14 and should be
submitted by April 7, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6562 Filed 3-14-97; 8:45 am]
BILLING CODE 8010-01-M