[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27636-27638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38613; File No. SR-CBOE-97-09]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., Relating to an Increase in Position and 
Exercise Limits for Industry Index Options

May 12, 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

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19, 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 and 
II below, which Items have been prepared by the self-regulatory 
organization. The Exchange has requested accelerated approval for the 
proposal. This order approves the CBOE's proposal on an accelerated 
basis and solicits comments from interested persons.
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    \1\ 15 U.S.C. Sec. 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 Exchange is proposing to amend its rules to increase position 
and exercise limits for narrow-based (or industry) index options from 
6,000, 9,000, or 12,000 contracts to 9,000, 12,000, or 15,000 
contract.\3\
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    \3\ Position limits impose a ceiling on the number of option 
contracts which an investor or group of investors acting in concert 
may hold or write in each class of options on the same side of the 
market. (i.e., aggregating long calls and short puts or long puts 
and short calls). Exercise limits prohibit an investor or group of 
investors acting in concert from exercising more than a specified 
number of puts or calls in a particular class within five 
consecutive business days.
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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 Exchange 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 Exchange 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

1. Purpose
    Currently, Exchange Rules 24.4A and 24.5 provide that position and 
exercise limits for narrow-based index options be set at one of three 
levels depending upon the weightings of the component securities in 
such narrow-based index. Accordingly, a narrow-based index option will 
have a 6,000 contract limit if a single component security accounts for 
more than 30% of the index value; a 9,000 contract limit if a single 
component security accounts for more than 20% (but less than 30%) of 
the index value or any five component securities together account for 
more than 50% of the index value; and a 12,000 contract limit for those 
narrow-based indexes that do not fall within any one of the other 
categories.\4\ Because the current stringent position limits create 
difficulties for investors, the Exchange is proposing to increase these 
limits to 9,000, 12,000, and 15,000 contracts, respectively, based on 
existing qualifications for determining the appropriate position limit 
tier set forth in Exchange Rule 24.4A.
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    \4\ The CBOE currently lists options on over 20 narrow-based 
indices. As of January 15, 1997, the CBOE narrow-based indices at 
the 12,000 contract limit include CBOE Mexico Index, CBOE REIT 
Index, CBOE Telecommunications Index, CBOE Latin 15 Index, CBOE 
Technology Index, and CBOE Internet Index. As of January 15, 1997, 
the CBOE narrow-based indices at the 9,000 contract limit include 
S&P Chemical Index, S&P Health Care Index, 
S&P Insurance Index, S&P Retail Index, 
S&P Transportation Index, CBOE Computer Software Index. 
CBOE Environmental Index, CBOE Gaming Index, CBOE Israel Index, CBOE 
Automotive Index, CBOE Oil Index, CBOE Gold Index, GSTI 
TM Hardware Index, GSTI TM Internet Index GSTI 
TM Multimedia Networking Index, GSTI TM 
Semiconductor Index, GSTI TM Services Index, and GSTI 
Software Index. Lastly, as of January 15, 1997, there are no narrow-
based indices on the CBOE at the 6,000 contract limit.
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    The CBOE also notes that the existing levels have been in place 
since 1995.\5\ The Exchange believes that the proposed limits of 9,000, 
12,000, and 15,000 contracts will increase the depth and liquidity of 
the market for narrow-based index options without causing any market 
disruption. In addition, the Exchange will continue to monitor for 
possible manipulation and violations of the position and exercise 
limits through the use of the monitoring systems currently in place, 
and notes that to date it has not found it necessary to open any 
manipulation inquiries notwithstanding prior increases in position and 
exercise limits.
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    \5\ See Securities Exchange Act Release nO. 36439 (October 31, 
1995), 60 FR 56075 (November 6, 1995) (order establishing position 
and exercise limits for narrow-based index options at 6,000, 9,000, 
or 12,000 contracts) (CBOE-95-56).
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2. Statutory Basis
    The Exchange believes that the proposal 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 will allow investors to utilize 
narrow-based index options more fully as part of their investment 
portfolios as well as increase the depth and liquidity of the market, 
thereby removing impediments to and perfecting the mechanism of a free 
and open market and a national market system in a manner consistent 
with the protection of investors and the public interest.

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

    The Exchange 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, 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 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-97-09 and should be 
submitted by June 10, 1997.

 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.
    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
option contracts that a member or customer can hold or exercise. These 
rules are intended to prevent the establishment of large options 
positions that can be used or might create incentives to manipulate or 
disrupt the underlying market so as to benefit the options position. At 
the same time, the Commission has recognized that option position and 
exercise limits

[[Page 27638]]

must not be established at levels that are so low as to discourage 
participation in the options market by institutions and other investors 
with substantial hedging needs or to prevent specialists and market 
makers from adequately meeting their obligations to maintain a fair and 
orderly market.
    In this regard, the CBOE has stated that the current position 
limits discourage market participation by certain large investors and 
the institutions that compete to facilitate their trading. In addition, 
the CBOE notes that the index option trading volume has increased 
significantly since 1995, when the current narrow-based index option 
position limits were established. In light of the increased volume of 
narrow-based index option trading and the needs of investors and market 
makers, the Commission believes that the CBOE's proposal is a 
reasonable effort to accommodate the needs of market participants.
    In addition, the Commission notes that the proposal, while 
increasing the positions limits for narrow-based index options, 
continues to reflect the unique characteristics of each index option 
and maintains the structure of the current three-tiered system. 
Specifically, the lowest proposed limit, 9,000 contracts, will apply to 
narrow-based index options in which a single underlying stock accounts, 
on average, for 30% or more of the index value during the 30-day period 
immediately preceding the Exchange's review of narrow-based index 
options positions limits. A position limit of 12,000 contracts will 
apply if any single underlying stock accounts, on average, for 20% or 
more of the index value or any five underlying stocks together account, 
on average, for more than 50% of the index value, but no single stock 
in the group accounts, on average, for 30% or more of the index value 
during the 30-day period immediately preceding the Exchange's review of 
narrow-based index option position limits. The 15,000 contract limit 
will apply only if the Exchange determines that the conditions 
requiring either the 9,000 contract limit or the 12,000 contract limit 
have not occurred.
    The Commission believes that the proposed increases for the three 
tiers of 25%, 33%, and 50%, for highest to lowest, respectively, appear 
to be appropriate and consistent with the Commission's evolutionary 
approach to position and exercise limits. In this regard, the absence 
of discernible manipulative problems under the current three-tiered 
position and exercise limit system for narrow-based index options leads 
the Commission to conclude that the increases proposed by the Exchange 
are warranted. The Commission recognizes that there are no ideal limits 
in the sense that options positions of any given size can be stated 
conclusively to be free of any manipulative concerns. Based upon the 
absence of discernible manipulation or disruption problems under 
current limits, however, the Commission believes that the proposed 
limits can be safely considered. Accordingly, the Commission believes 
that the CBOE's proposed increases of existing position and exercise 
limits for narrow-based index options is appropriate.\6\
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    \6\ The Commission continues to believe that proposals to 
increase position limits and exercise limits must be justified and 
evaluated separately. After reviewing the proposed exercise limits, 
along with the eligibility criteria for each tier, the Commission 
has concluded that the proposed exercise limit increases for the 
three-tiered framework do not raise manipulation problems or 
increase concerns over market disruption in the underlying 
securities.
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    The Commission notes that the Exchange has had considerable 
experience monitoring the current three-tiered framework in narrow-
based index options. The Commission has not found that differing 
position and exercise limit requirements based on the particular 
options product to have created programming or monitoring problems for 
securities firms, or to have led to significant customer confusion. 
Based on the current experience in handling position and exercise 
limits, the Commission believes that the proposed increase in position 
and exercise limits for narrow-based index options will not cause 
significant problems.
    Finally, the Commission believes that the Exchange's surveillance 
programs are adequate to detect and to deter violations of position and 
exercise limits as well as to detect and deter attempted manipulative 
activity and other trading abuses through the use of such illegal 
positions by market participants.
    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. On October 24, 1996, the Commission 
approved an identical proposal for the Philadelphia Stock Exchange, 
Inc. (``Phlx'').\7\ The Phlx's proposal was subject to the full comment 
period and generated no responses. Similarly, on January 23, 1997, the 
Commission granted accelerated approval to an identical proposal for 
the American Stock Exchange, Inc. (``Amex'').\8\ 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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    \7\ See Securities Exchange Act Release No. 37863 (October 24, 
1996), 61 FR 56599 (November 1, 1996) (order establishing position 
and exercise limits for narrow-based index options at 9,000, 12,000, 
or 15,000 contracts) (Phlx-96-33).
    \8\ See Securities Exchange Act Release No. 38202 (January 23, 
1997), 62 FR 4555 (January 30, 1997) (order establishing position 
and exercise limits for narrow-based index options at 9,000, 12,000, 
or 15,000 contracts) (Amex-96-41).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the 
Act, that the proposed rule change (File No. SR-CBOE-97-09) is hereby 
approved on an accelerated basis.

    \9\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13099 Filed 5-19-97; 8:45 am]
BILLING CODE 8010-01-M