[Federal Register Volume 62, Number 122 (Wednesday, June 25, 1997)]
[Notices]
[Pages 34332-34334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16575]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38743; File No. SR-CBOE-97-23]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change Relating to Option Series Open for Trading

June 17, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 15, 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. On June 16, 1997, CBOE amended 
the filing.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Letter from Stephanie Mullins, Attorney, to Peggy Blake, 
Division of Market Regulation, Commission (June 16, 1997). In File 
No. SR-CBOE-97-23, CBOE proposed deleting language in Rule 5.4 that 
provides the Exchange ``may make application to the SEC'' to delist 
an options class having no open interest, where the underlying 
security no longer complies with CBOE maintenance standards. The 
amendment cancels this proposed deletion.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend CBOE Rules 5.4, 5.5, 5.6 and 5.7 governing 
opening of trading in series of equity options, delisting of option 
series, terms of option contracts and adjustments.\3\
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    \3\ The text of the proposed rule change is attached as Exhibit 
A to File No. SR-CBOE-97-23 and is available at the Office of the 
Secretary, CBOE and at 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 III 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: (1) To amend the 
procedures for opening trading in series of equity options under Rules 
5.5 and 5.6 in order to allow the Exchange the same flexibility in 
adding series as is permitted under other exchanges' rules; (2) to 
amend Rules 5.5 and 5.6 to provide specifically for near-term options 
expiration and relieve the Product Development Committee (``PDC'') of 
its responsibility with respect to opening series of options; and (3) 
to clarify and reorganize Rules 5.4, 5.5, 5.6 and 5.7.
(1) Conform Rules to Those of Other Exchanges
    The Exchange is proposing to combine Rules 5.5 and 5.6 into one 
rule and to delete certain provisions thereunder. The proposal will 
provide the Exchange the same flexibility afforded other exchanges by 
eliminating certain specific provisions which do not appear in other 
options exchanges' rules. Specifically, the Exchange proposes to delete 
Interpretations .02 and .03 to Rule 5.5 Currently, Interpretation .02 
prevents the Exchange from initially opening for trading series with 
three strike prices unless the price of the underlying stock is within 
two percent of a strike price. The proposal would permit the Exchange 
initially to open three strike prices regardless of how close the 
underlying stock price is to the initial strike prices. Interpretation 
.03 restricts the Exchange from adding any new strikes until the 
underlying stock reaches the existing strike price. The proposal would 
allow the Exchange to add new series when the Exchange believes that 
doing so is necessary to maintain an orderly market, to meet customer 
demand, or to adapt to market movement if the exercise price moves 
substantially from the initial exercise prices, which would allow the 
Exchange to add series before the underlying stock reaches an existing 
strike price.
    The Exchange believes the proposal gives the Exchange a more 
flexible standard than the current CBOE rule and conforms the CBOE 
rules to those of other exchanges, specifically the

[[Page 34333]]

Pacific Stock Exchange (``PSE'') Rule 6.4 (a) to (c) and policies 
thereunder.\4\ The Exchange believes the proposal would therefore allow 
it to compete effectively with other exchanges in multiply-listed 
options.
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    \4\ See PSE Rule 6.4, Series of Options Open for Trading, 
addressed in Securities Exchange Act Release No. 21985 (April 25, 
1985), 50 FR 18595 (1985) (order approving File No. SR-PSE-85-9).
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    The Exchange believes that the current rule, combined with a 
sustained bull market, has led to the inability to list certain equity 
option series that are more than nominally out-of-the-money, since even 
under unusual market conditions under the current rule, a call option 
can be only a little more than 5% above a security's underlying price 
when first opened for trading. Although willing to make markets in such 
options, the Exchange has had to deny retail and institutional customer 
requests for opening additional option series in certain instances.
    The Exchange believes the number of additional series that will 
result from the proposed rule change, affecting equity options, will 
not be significant. For this reason, CBOE does not believe that the 
proposed change raises any systems capacity issues. CBOE indicates it 
has the ability, subject to prior notice to its membership and 
customers, to cease trading series that become inactive and have no 
open interest.\5\ Additionally, the Exchange has received a letter from 
the Options Price Reporting Authority (``OPRA'') indicating that the 
anticipated additional traffic generated by this proposal is within 
OPRA's capacity.
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    \5\ CBOE's delisting procedures include the Monthly Series 
Delisting Program and the Requested Strike Price Delisting Program. 
The Monthly Delisting Program, performed on the Thursday prior to 
the week of expiration, selects those option series which are 
outside of the three strike prices surrounding the underlying value, 
have no open interest and do not create a break in contiguous 
series. This process delists approximately 500 option series per 
month. The Requested Strike Price Delisting Program allows a member 
firm to request the listing for trading of an option series which is 
currently unavailable. If in the three business days following 
listing there is not activity in the requested series, it is 
delisted. In addition, on an informal basis, CBOE Market Operations 
staff works with trading crowds to eliminate inactive series that 
are not captured by the regular delisting parameters. Letter from 
Patrick J. Fay, Assistant Vice President, Market Operations, CBOE, 
to Michael Walinskas, Senior Special Counsel, Division of Market 
Regulation, Commission (May 28, 1997).
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(2) Adoption of Near-Term Options Expiration in the Rules
    The Exchange proposes to adopt a specific rule providing for near-
term expiration of equity option series to make CBOE Rules consistent 
with the industry standard.\6\ The practice of the Exchange regarding 
near-term options expiration has been consistent with the industry 
standard since 1989, pursuant to Commission approval; however, current 
Exchange Rules do not reflect this.\7\ By comparison, the NYSE has 
adopted a rule specifically describing near-term expiration. The CBOE 
has modeled the near-term expiration portion of the proposed rule after 
the NYSE's rule.\8\ The Exchange also proposes to relieve the PDC of 
its responsibilities under Rules 5.5 and 5.6 relating to opening option 
series, as the PDC currently delegates these duties to CBOE staff.
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    \6\ Near-term expiration means that the Exchange initially will 
open series in the two nearest months, regardless of the quarterly 
cycle on which that class trades, and in the next two expiration 
months of the quarterly cycle previously designated by the Exchange 
for that specific class. (For example, if the Exchange listed, in 
late April, a new stock option on a January-April-July-October 
quarterly cycle, the Exchange would list the two nearest term months 
(May and June) and the next two expiration months of the cycle (July 
and October). When the May series expires, the Exchange would add 
January series. When the June series expires, the Exchange would add 
August series as the next nearest month, and would not add April).
    \7\ See Securities Exchange Act Release No. 26934 (June 14, 
1989), 54 FR 26283 (June 22, 1989) (order granting permanent 
approval to the options exchanges regarding the near-term options 
expiration pilot program).
    \8\ See NYSE Rule 703.
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(3) Clarification and Reorganization of the Rules
    Current Rules 5.4, 5.5, 5.6 and 5.7, which now contain redundant 
wording and inconsistencies, are being reorganized so that Exchange 
staff, members and customers are clear as to which option series are 
permitted to be opened for trading and under which rules to look for 
guidance. The Exchange is proposing to organize the rules in a clearer 
way so that Rule 5.4 only refers to Option Classes, proposed Rule 5.5 
only refers to Series of Option Contracts Open for Trading, 
encompassing current Rules 5.5 and parts of Rules 5.4 and 5.6. Rule 5.6 
will be deleted and proposed Rule 5.7 will encompass the remaining 
portion of current Rule 5.6.
    The Exchange believes that by conforming CBOE Rules to those of 
other Exchanges and to approved industry practices, and by clarifying 
certain of its rules the proposed rule is consistent with the 
provisions of Section 6(b)(5) of the Act,\9\ in that it will promote 
just and equitable principles of trade, will protect investors and the 
public interest, and will remove impediments to and perfect the 
mechanisms of a free and open market.
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    \9\ 15 U.S.C. 78f(b)(5).
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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.

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. 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 at 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 should refer to File No. SR-CBOE-97-23 and should be 
submitted by July 16, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds CBOE's proposed rule change consistent with 
the requirements of Section 6 of the Act \10\ and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission believes the proposal is consistent with 
Section 6(b)(5) of the Act \11\ because it will promote just and 
equitable principles of trade, will protect investors and the public 
interest, and will remove impediments to and

[[Page 34334]]

perfect the mechanisms of a free and open market.\12\
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    CBOE is proposing to eliminate certain Interpretations from Rule 
5.5 that restrict circumstances under which the Exchange may establish 
strike prices and add new strikes in equity options series open for 
trading. CBOE proposes to amend its rules so that it may initially open 
three strike prices regardless of how close the underlying stock price 
is to the initial strike prices, and to add new series within the 
Exchange believes that doing so is necessary. The Commission believes 
that CBOE's proposals to amend to procedures for opening trading in 
series of equity options will provide additional flexibility in listing 
new series and strikes and will bring CBOE's policies and procedures in 
line with those of the other exchanges. The Commission believes that 
such consistency with the policies and procedures of the other 
exchanges should enhance CBOE's ability to compete in multiply-listed 
options.
    The Commission believes that CBOE has adequately addressed the 
affect of the proposal on its existing systems capacity. CBOE and OPRA 
have carefully reviewed the likely effects of additional listings 
generated by the proposed rule change. Based on their representations, 
the Commission understands that the anticipated additional options 
series listings are within OPRA's capacity. Similarly, under CBOE's 
current delisting procedures, which include the Monthly Series 
Delisting Program and the Requested Strike Price Delisting Program, 
\13\ CBOE regularly delists inactive option series. CBOE also works 
with the trading crowds to eliminate inactive series that are not 
captured by the regular delisting parameters. The Commission believes 
that CBOE's current delisting standards will aid in keeping the number 
of option series to a minimum while providing an optimal range of 
available strike prices.
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    \13\ See supra footnote 5.
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    The Commission believes that CBOE's proposal to adopt a near-term 
options expiration rule is appropriate and consistent with the industry 
standard. CBOE has been following such standards since 1989, and has 
received no complaints regarding the practice. \14\ By adopting a rule 
modeled after NYSE Rule 703, CBOE is merely clarifying its current 
method of sequential expiration and ensuring consistency with existing 
industry standards.
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    \14\ On June 14, 1989, the Commission approved, on a permanent 
basis, a new-term options expiration pilot program proposed by all 
of the options exchanges. See supra note 7.
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    Finally, the Commission believes that the reorganization of Rules 
5.4, 5.5, 5.6, and 5.7 is appropriate because such changes will result 
in clarification to the Exchange, members and customers as to which 
option series are permitted to be opened for trading and under which 
rules to refer for guidance.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission believes it is 
appropriate to approve the proposed rule change on an accelerated basis 
to allow the Exchange to implement more flexible standards for the 
listing of strikes and series. Recent significant price movements of 
certain stocks underlying CBOE-listed options has presented the CBOE 
with instances where there existed demonstrated customer interest to 
list additional option strike prices that currently are violative of 
existing CBOE rules. In a number of these instances, listing of the new 
strikes has been permitted on competing options exchanges. The 
Commission believes it is appropriate to address this regulatory 
disparity without further delay. Good cause for accelerated approval is 
further supported by the Commission's conclusion that CBOE's proposal 
mirrors the rules and procedures of other options exchanges governing 
the opening of trading in series of equity options, and the adoption of 
a near-term options expiration rule. Accordingly, the proposal does not 
raise any novel or unique regulatory issues. For these reasons, the 
Commission believes the proposed rule change is appropriate and 
consistent with Sections 19(b)(2)( and 6(b)(5) of the Act, and 
therefore, is approving the proposed rule change on an accelerated 
basis.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-CBOE-97-23) be, and 
hereby is, approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16575 Filed 6-24-97; 8:45 am]
BILLING CODE 8010-01-M