[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Notices]
[Pages 68327-68330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-34060]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39480; File No. SR-CBOE-97-36]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval to Proposed Rule Change and
Notice of Filing and Order Granting Accelerated Approval of Amendment
No. 1 to Proposed Rule Change Revising the Exchange Rules Governing the
Halting and Resumption of Trading in Index Options
December 22, 1997.
I. Introduction
On July 25, 1997, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to revise the Exchange rules
governing the halting and resumption of trading in index options on the
Exchange.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 38962 (Aug. 22, 1997), 62 FR 45890 (Aug. 29,
1997). No comments were received on the proposal. The Exchange filed
Amendment No. 1 to the proposed rule change with the Commission on
September 15, 1997.\3\ This order approves the proposed rule change
including, on an accelerated basis, Amendment No. 1.
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\3\ Amendment No. 1 amends Exchange Rule 24.13, ``Trading
Rotations,'' Interpretation .03, and eliminates the 50% fixed test
as a factor in the determination whether an opening rotation in an
index option class may be delayed. See Letter from Paul E. Dengel,
Schiff Hardin & Waite, to Michael Walinskas, Senior Special Counsel,
Division of Market Regulation, Commission, dated September 10, 1997.
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II. Description of the Proposal
The Exchange seeks to amend Exchange Rule 24.7, ``Trading Halts or
Suspensions,'' to eliminate certain fixed percentage tests that
presently apply to the decision to halt trading in index options as
well as the decision to resume trading after such a halt. The proposed
rule change also makes certain conforming changes to related Exchange
rules.\4\
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\4\ The Commission notes that this proposed rule change does not
address or impact the Exchange's circuit breaker trading halt rule
and policy. However, the proposal makes a conforming change to
Exchange Rule 24.7(c) that amends certain language cross referencing
the Exchange's circuit breaker trading halt rule, Exchange Rule
6.3B, ``Trading Halts Due to Extraordinary Market Volatility.''
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A. Trading Halts
Currently, under Exchange Rule 24.7(a)(i), one of the enumerated
factors that the designated Exchange officials may consider in deciding
whether to halt trading in an index option is whether trading has been
halted or suspended in underlying stocks whose weighted value presents
``20% or more of the index value.'' The Exchange has expressed concern
that by including a fixed percentage test among those factors that
``may be considered,'' the present rule may imply that it would be
improper for the designated Exchange officials to consider trading
interruptions in underlying stocks whose weighted value represents less
than 20% of the index value.
The Exchange believes this interpretations conflicts with the
purpose of Exchange Rule 24.7, which grants designated Exchange
officials the discretion to halt index option trading whenever they
``conclude in their judgment that such action is appropriate in the
interests of a fair and orderly market and to protect investors.''
Because Exchange Rule 24.7(a)(i)-(iv) sets forth a non-exclusive list
of factors that Exchange officials may consider in exercising that
discretion, the Exchange contends it would be inappropriate to forbid
those officials from considering trading disruptions in underlying
stocks that fall below a predetermined level. Accordingly, the proposed
rule change would clarify that Exchange officials, in evaluating
whether to halt trading in index options, are not limited to situations
in which 20% of the underlying stocks have halted, but rather may
consider ``the extent to which'' trading is not occurring in the
underlying stocks.
In addition, the proposed rule change would provide Exchange
officials with the flexibility to consider not only whether trading in
underlying stocks has been ``halted or suspended,'' but also whether
such trading is ``not occurring.'' The term ``halted or suspended''
indicates that Exchange authorities have taken formal action to
discontinue trading in stock. However, in deciding whether to continue
trading a derivative instrument like an index
[[Page 68328]]
option, Exchange officials should be able to consider the full extent
to which underlying stocks are not trading, whether trading is not
occurring because of formal exchange action, systemic problems, market
emergencies, or other cause. The proposed rule change would clarify
that in determining whether to halt index option trading, Exchange
officials may consider the extent to which ``trading is not occurring''
in the underlying stocks, without limiting that consideration to formal
halts or suspensions.
The Exchange also believes that Exchange Rule 24.7 may imply that
the Exchange is required to calculate, on an ongoing basis, the extent
to which stocks underlying a subject index are trading. The Exchange
contends that such calculations would be difficult to perform on a real
time basis for those indexes comprised of a large number of stocks
(e.g., the Russell 2000, which consists of 2000 stocks), or those
indexes for which data on trading halts is not readily available (e.g.,
NDX, an index based on over-the-counter stocks). The removal of the
fixed percentage tests from Exchange Rule 24.7 is expected to rectify
any misperception regarding the Exchange's duty to maintain and
calculate trading information for stocks underlying an index on which
options are traded.
B. Resumption Of Trading After Trading Halts
The proposed rule change would eliminate the provision in Exchange
Rule 24.7(b) that makes trading in a fixed percentage of stocks
underlying an index a prerequisite to the resumption of index options
trading after a trading halt. Currently, trading may resume when the
designated Exchange officials determine either (i) that the conditions
that led to the halt no longer are present; or (ii) that the interests
of a fair and orderly market are served by a resumption of trading.
However, Exchange Rule 24.7(b) provides that in no event may trading
resume until the Exchange has determined that trading is occurring in
underlying stocks whose weighted value presents more than 50% of the
index value.
The Exchange has represented that it would continue its practice of
assessing the extent to which underlying stocks are trading in deciding
whether to resume trading after an index options trading halt. However,
the Exchange believes it is inappropriate to delay the resumption of
trading until the level of trading in stocks underlying an index has
reached a predetermined, fixed level, particularly since it often may
be difficult to make a precise determination of trading activity for
indexes with a large number of constituent stocks.
Accordingly, the proposed rule change would eliminate the 50% fixed
test and instead would specify that one of the factors that Exchange
officials may consider in determining whether the ``interests of a fair
and orderly market are served by a resumption of trading'' is ``the
extent to which trading is occurring in stocks underlying the index.''
According to the Exchange, the proposed rule change would enable the
Exchange to resume trading as soon as conditions warrant, without
interposing an artificial barrier that might result from a fixed
percentage test. The Exchange believes the proposed rule change
continues to provide Exchange officials with the opportunity to give
appropriate weight to the extent to which underlying stocks are
trading.
In addition, the proposed rule change would clarify that index
options trading may resume only upon a determination by the designated
Exchange officials that such a resumption is in the interests of a fair
and orderly market. The present form of Exchange Rule 24.7(b) allows
trading to resume (subject to the 50% requirement) when the designated
Exchange officials determine either (i) that the conditions that led to
the halt no longer are present; or (ii) that a resumption of trading
would serve the interests of a fair and orderly market. Read literally,
Exchange Rule 24.7(b) would permit trading to resume if the conditions
that led to the halt no longer are present, even if a resumption of
trading would be contrary to the interests of a fair and orderly
market. Such an interpretation would conflict with the Exchange's
practice and run counter to the Act. Accordingly, the proposed rule
change would state that: (1) index options trading may resume only if
the designated Exchange officials determine that such a resumption
would be in the interests of a fair and orderly market,\5\ and (2) the
fact that the conditions leading to the halt no longer are present is
one of several factors which Exchange officials may consider in
determining whether the interests of a fair and orderly market would be
served by a resumption of trading.
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\5\ A similar change has been made to Exchange Rule 6.3(b),
``Trading Halts,'' which generally governs the resumption of trading
after a trading halt in an equity option class. As a result, trading
in an equity option class that has been the subject of a halt may
resume only upon a determination by two Floor Officials that such a
resumption is in the interests of a fair and orderly market. See
Securities Exchange Act Release No. 39292 (Nov. 3, 1997), 62 FR
60738 (Nov. 12, 1997).
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The proposed rule change also conforms the cross reference to
Exchange Rule 6.3B that appears in Exchange Rule 24.7(c) to the current
language of the referenced rule. Exchange Rule 6.3B sets forth the
Exchange's circuit breaker trading halt policy, the text of which was
recently amended.\6\
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\6\ See Securities Exchange Act Release No. 38221 (Jan. 31,
1997), 62 FR 5871 (Feb. 7, 1997).
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Finally, the proposed rule change would add Interpretation .02 to
Exchange Rule 24.7 to address the manner in which trading is to resume
after a trading halt. This topic is not directly addressed under
current Exchange Rule 24.7, although the last sentence of existing
Exchange Rule 24.7(b) contemplates that a rotation will be used.
Proposed Interpretation .02 would adopt the identical procedure that
now governs the resumption of trading after a circuit breaker halt. The
procedure is set forth in Interpretation .02 to Exchange Rule 6.3B and
provides that trading will resume by a rotation after a trading halt
unless the designated Exchange officials conclude that a different
method of reopening is appropriate under the circumstances. The
officials may determine, among other things, not to employ a rotation,
to use an abbreviated rotation, or otherwise to vary the manner of the
rotation. The Exchange seeks to adopt proposed Interpretation .02 so
that comparable rules govern the resumption of trading after circuit
breaker halts as well as halts effected for other reasons.
III. Discussion
For the reasons discussed below, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange, and with the requirements of Section 6(b).\7\ In
particular, the Commission believes the proposed rule change is
consistent with the Section 6(b)(5) requirements that the rules of an
exchange be 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, in general, to protect
investors and the public interest.
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\7\ 15 U.S.C. Sec. 78f(b).
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While the current language of Exchange Rule 24.7(a) states that the
20% fixed test is one of several factors that may be considered in
determining whether to halt index options trading, the Exchange has
expressed concern that the test may be interpreted as having a
mandatory rather than
[[Page 68329]]
permissive application.\8\ The Commission finds that the Exchange is
justified in its efforts to clarify Exchange policy regarding the
halting of index options trading. Market participants should possess a
clear understanding of the rules and procedures which the Exchange is
bound to observe when considering the halting of trading in index
options.
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\8\ Uncertainty regarding the nature of the 20% fixed test dates
back to 1988 when the Commission approved a proposed rule change
that modified Exchange Rule 24.7. The Commission allowed the
Exchange to revise its trading halt policy so that the 20% benchmark
would no longer be the primary test but, instead, one of the facts
to be considered when deciding whether to halt trading in index
options. Although the Commission permitted the Exchange to
reconfigure Exchange Rule 24.7 to make the 20% fixed test
permissive, rather than mandatory, the Commission said it ``believes
the proposed amendment does not reflect a change in CBOE's trading
halt policy.'' See Securities Exchange Act Release No. 26198 (Oct.
19, 1988), 53 FR 41637 (Oct. 24, 1988).
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The Exchange currently may halt trading in index options classes
when the designated Exchange officials have determined that ``such
action is appropriate in the interests of a fair and orderly market and
to protect investors.'' The 20% fixed test represents one of several
non-exhaustive factors that may be considered by Exchange officials
when determining whether to halt trading pursuant to Exchange Rule
24.7. It provides Exchange officials and market participants notice
that it may be appropriate to effect a trading halt in index options
trading whenever a number of component securities underlying a
substantial value of the index are not trading. The proposed rule
change continues to provide such notice, albeit without a specific
numerical guideline.
Accordingly, the Commission believes it is appropriate for the
Exchange to replace the 20% fixed test with language indicating that
Exchange officials may consider the extent to which ``trading is not
occurring'' in stocks underlying an index when deciding whether to halt
index options trading. The revised language properly reflects that in
determining whether to halt index options trading pursuant to Exchange
Rule 24.7, Exchange officials may consider all types of events that
disrupt trading including, for example, formal halts or suspensions,
systemic problems, market emergencies, or natural disasters.
The Commission also believes it is reasonable for the Exchange to
remove the mandatory 50% fixed test from Exchange Rule 24.7(b) and
include ``the extent to which trading is occurring in stocks underlying
the index'' as a factor to be considered when deciding whether to
resume index options trading. The Exchange believes that the
determination whether trading should resume after a halt can be made
without regard to fixed thresholds by evaluating whether key stocks
have reopened, and by examining the speed with which stocks in general
are reopening. The Commission recognizes that adherence to a mandatory,
fixed percentage test prevents the Exchange from relying primarily on
such indicators. As a result, the Exchange could remain closed to
market participants longer than desirable. The revised language permits
Exchange officials to use their expert judgment in determining whether
to resume trading from a halt. Exchange Rule 24.7 will continue to
require Exchange officials to consider the extent to which trading is
occurring in the stocks underlying the index, but absent the strict 50%
fixed test.
Although the Commission recognizes the Exchange's need for flexible
trading halt rules, it expects the Exchange to apply revised Exchange
Rule 24.7 in a manner which ensures that trading is occurring in a
substantial number of stocks underlying an index before trading in
index options is allowed to resume. As the Commission has previously
noted, ``[i]t is questionable whether fair markets can be maintained in
derivative index products when many of the index's component securities
are not trading'' \9\ The Commission is concerned that unless a
substantial number of stocks underlying an index are trading, the
related index options may be mispriced and fail to accurately reflect
the current market value of all underlying stocks. While it would be
counterproductive for the Commission to define ``substantial'' in
numerical terms, or discuss what constitutes an acceptable level of
trading in stocks underlying an index, the Commission nonetheless
expects the Exchange to maintain fair markets in its index option
products.
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\9\ The October 1987 Market Break: A Report by the Division of
Market Regulation, February, 1988, at 8-22.
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The Commission further believes it is reasonable for the Exchange
to establish procedures governing the resumption of trading in index
options after a trading halt. Although the current text of Exchange
Rule 24.7(b) contemplates the use of a rotation in such circumstances,
the Commission recognizes the need for definite procedures,
particularly because confusion may still linger from the event that
precipitated the trading halt. Furthermore, by adopting the identical
procedure that currently governs the resumption of trading following a
circuit breaker halt, the Exchange's policies and rules will be
consistent with respect to the resumption of trading after halts.
The Commission finds good cause for approving proposed Amendment
No. 1 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Commission notes
that Amendment No. 1 makes a conforming change to Exchange Rule 24.13,
``Trading Rotations,'' Interpretation .03, that is consistent with the
Exchange's decision to eliminate fixed percentage thresholds from the
determination whether index options trading should be halted or
resumed. In place of a 50% fixed test, Amendment No. 1 substitutes
``the extent to which trading is not occurring'' as a factor in
deciding whether to delay an opening rotation in index options. The
Commission believes that Amendment No. 1 helps establish uniformity
among the Exchange's rules and procedures relating to halts and delays
in index options trading. Accordingly, the Commission believes it is
consistent with Section 6(b)(5) of the Act \10\ to approve Amendment
No. 1 to the proposed rule change on an accelerated basis.
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\10\ 15 U.S.C. Sec. 78f(b)(5).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
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 submissions, 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 persons, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. Sec. 552, will
be available for inspection and copying in 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 Exchange. All submissions should refer
to File No. SR-CBOE-97-36 and should be submitted by January 21, 1998.
[[Page 68330]]
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-CBOE-97-36), as amended, is
approved.
\11\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-34060 Filed 12-30-97; 8:45 am]
BILLING CODE 8010-01-M