[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)
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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
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OEX (Open S&P
Fiscal year interest at futures S&P
year end) options futures
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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