[Federal Register Volume 62, Number 79 (Thursday, April 24, 1997)]
[Notices]
[Pages 20046-20048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10617]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38525; File No. SR-CBOE-97-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., to Increase OEX 
Position and Exercise Limits, to Increase OEX Firm Facilitation 
Exemption, and to Increase OEX Index Hedge Exemption

April 18, 1997.
    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 February 26, 1997, 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, II, and III below, which Items have been prepared by the self-
regulatory organization. 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).
    \2\ 17 CFR 240.19b-4.
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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 amend Exchange Rule 24.4 to increase the 
position and exercise limits for options on the Standard & Poor's 
(``S&P'') 100 Stock Index (``OEX''), to increase the OEX firm 
facilitation exemption, and to increase the OEX index hedge exemption.

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

    The CBOE is proposing a number of revisions to Exchange Rule 24.4, 
the position limit rule for broad-based index options. Member firms 
have expressed to the CBOE their need for relief from the current OEX 
position and exercise limits, which have not increased since 1987.\3\ 
At that time, position limits were increased to 25,000 contracts with 
no more than 15,000 contracts in the near term series. For the reasons 
discussed below, the Exchange is now proposing that the OEX position 
limits be raised to 75,000 contracts with no more than 50,000 contracts 
in the near term series.
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    \3\ See Securities Exchange Act Release No. 24556 (June 5, 
1987), 52 FR 22695 (June 15, 1987) (approval order increasing the 
position and exercise limits on the OEX from 15,000 contracts to 
25,000 contracts) (File Nos. SR-CBOE-85-25 and SR-CBOE-87-26).
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    Although OEX volume is less now than it was in 1987, OEX still 
enjoys larger average daily trading volume than any other index option 
and open interest has remained consistently high.\4\ In addition, the 
Exchange believes that a significant reason why volume has declined in 
OEX in the last couple of years is because large customers and member 
firms have been unable to complete large volume transactions in OEX due 
to position limit constraints.
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    \4\ Average Daily Volume During Expiration Week and Open 
Interest on Expiration Friday.

                                                                        
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                Month/Year                   OEX (Volume/open interest) 
------------------------------------------------------------------------
September 1992............................  377,554 contracts/1 million.
September 1993............................  332,467 contracts/1 million.
September 1994............................  423,589 contracts/1.3       
                                             million.                   
March 1995................................  521,891 contracts/1.4       
                                             million.                   
December 1995.............................  301,118 contracts/1.23      
                                             million.                   
July 1996.................................  479,577 contracts/1.08      
                                             million.                   
December 1996.............................  314,949 contracts/1.2       
                                             million.                   
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    Institutions often use index-related derivative products to hedge 
the risks associated with holding diversified equity portfolios. 
Because of position limit concerns, many of these customers and firms 
use financially-equivalent

[[Page 20047]]

index futures products to the competitive disadvantage of the options 
exchanges.\5\ The shift in the volume can be seen by looking at the 
following table (see Table 1). The Exchange believes that the 
restrictive position limits have hampered the ability of customers to 
utilize these options to their potential. The Exchange also believes 
the increase will afford the investing public as well as CBOE members 
and member firms a greater opportunity and more flexibility to use OEX 
options for their hedging needs.
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    \5\ According to the Exchange, due to delta-based position 
limits, customers and institutions are able to offset much larger 
equity positions in the futures markets than they currently are able 
to using index options.

              Table 1.--Average Daily Volume by Fiscal Year             
------------------------------------------------------------------------
                                      OEX (Open       S&P               
            Fiscal year              interest at    futures       S&P   
                                      year end)     options     futures 
------------------------------------------------------------------------
1992...............................     239,408                         
                                       (664,527)      39,036     242,251
1993...............................     260,635                         
                                       (805,661)      51,367     254,386
1994...............................     278,986                         
                                       (817,447)      78,063     311,783
1995...............................     320,619                         
                                       (617,825)      92,890     383,915
1996...............................     222,579                         
                                       (422,220)     111,556     361,892
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    At the same time, the CBOE does not believe that the higher limit 
will increase any potential for market disruption. Even with the 
increase, the at limit position as a percentage of the capitalization 
of the OEX will remain small (see Table 2).

                   Table 2.--Percentage of Capitalization Represented by an At Limit Position                   
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                                                                                               At limit position
   Position limit (number of contracts)     Market value (650    OEX capitalization (as of    as a percentage of
                                               index level)              July 1996)             capitalization  
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15,000....................................       $975,000,000  2.1 trillion.................               0.046
25,000....................................     $1,625,000,000  2.1 trillion.................               0.077
50,000....................................     $3,250,000,000  2.1 trillion.................               0.15 
75,000....................................     $4,875,000,000  2.1 trillion.................               0.23 
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    In addition, the Exchange notes that a number of equity options 
have a position limit of 25,000 contracts but have significantly less 
average trading volume than the OEX.
    As a result of changing the base limit, the OEX firm facilitation 
exemption amount will change as well.\6\ Currently, according to 
Interpretation .06 of Exchange Rule 4.11, the firm facilitation 
exemption for a broad-based index (other than SPX) is two times the 
standard limit. Therefore, the OEX firm facilitation exemption will be 
150,000 contracts if the OEX base limit proposal is approved.
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    \6\ Under the firm facilitation exemption, a member firm may 
apply to the CBOE to receive and maintain for its proprietary 
account an exemption from the applicable standard position limit in 
non-multiply-listed Exchange options for the purpose of 
facilitating, pursuant to the provisions of Exchange Rule 6.74(b), 
(a) orders for its own customer (one that will have the resulting 
position carried with the firm) or (b) orders received from or on 
behalf of a customer for execution only against the member firm's 
proprietary account.
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    The Exchange is also proposing that the OEX index hedge exemption 
be increased from 75,000 contracts to 150,000 contracts. The index 
hedge exemption is in addition to the standard limit and other 
exemptions available under Exchange rules, interpretations, and 
policies. The index hedge exemption is applicable to the unhedged value 
of the qualified portfolio as determined by the calculation set forth 
in Interpretation .01 of Exchange Rule 24.4. The Exchange believes 
that, as with the increase in the base limit, the increase in the index 
hedge exemption will make OEX a more valuable tool for investors to 
hedge their portfolios.\7\
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    \7\ While not proposed in the current filing, the CBOE continues 
to have discussions with member firms as well as the Commission to 
consider a delta-based methodology for calculating all option 
position limits. In addition, the Exchange believes that it is 
necessary and appropriate to explore with the Commission whether 
there remains a continuing need for position limits as an anti-
manipulation tool.
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    Because the increased OEX index option standard limit and OEX 
exemptions will enhance the depth and liquidity of the market for both 
members and investors in general, the Exchange believes that 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.

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.

[[Page 20048]]

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 USC 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 File No. SR-CBOE-97-11 and should be 
submitted by May 15, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10617 Filed 4-23-97; 8:45 am]
BILLING CODE 8010-01-M