[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Notices]
[Pages 58080-58081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28851]



[[Page 58080]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40584; File No. SR-CBOE-98-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Chicago Board Options Exchange, Inc. Relating to Exercise 
Price Intervals for FLEX Equity Options

October 21, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 23, 1998, 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 CBOE. 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).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to delete Interpretation .01 of CBOE Rule 
24A.4(c)(2).\2\ This interpretation limits exercise price intervals and 
exercise prices for FLEX Equity call options to those that apply to 
Non-FLEX Equity call options.
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    \2\ This Interpretation was approved by the Commission in 1996. 
Securities Exchange Act Release No. 37726 (September 25, 1996), 61 
FR 51474 (October 2, 1996).
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    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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 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 those statements may be examined at the places specified in 
Item IV 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

1. Purpose
    The purpose of the proposed rule change is to delete Interpretation 
.01 under CBOE Rule 24A.4(c)(2). This interpretation limits the 
exercise price intervals and exercise prices available for FLEX Equity 
call options to those intervals and prices that are available for Non-
FLEX Equity call options pursuant to Interpretation and Policy .01 
under CBOE Rule 5.5. This policy was intended to eliminate uncertainty 
concerning what constitutes a ``qualified'' covered call for certain 
purposes under the Internal Revenue Code pending clarification of this 
tax issue.
    Currently, under Section 1092(c)(4)(B) of the Internal Revenue 
Code, certain covered short positions in call options qualify for 
advantageous tax treatment if the options are not in the money by more 
than a specified amount at the time they are written. One measure used 
to determine whether a call option is qualified is whether its exercise 
of ``strike'' price is no lower than the ``lowest qualified benchmark 
price,'' which is generally the highest strike price available for 
trading that is less than the current price of the underlying stock. 
Since the exercise prices of FLEX \3\ Equity Options are not subject to 
the same intervals that apply to Non-FLEX Equity Options, this has 
raised the question whether the existence of a series of FLEX Equity 
Options with a strike price of, say, 58 when the price of the 
underlying stock is 59 would disqualify a Non-FLEX call option with a 
strike price of 55, which would otherwise be the highest strike price 
available that is less than the price of the stock.
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    \3\ Department of the Treasury, Internal Revenue Service REG-
104641-97, 63 FR 34616 (June 25, 1998).
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    The Internal Revenue Service (``IRS'') has reviewed this issue and 
has a proposed regulation that would not require that strike prices 
established by equity options with flexible terms be taken into account 
in determining whether standard term equity options are too deep in the 
money to receive qualified covered call treatment.\3\ The public 
comment period for the proposed rule change closed on September 23, 
1998 \4\ and the Exchange expects final regulations on this topic to be 
adopted some time after that date. The Exchange intends for the 
deletion of Interpretation .01 to coincide with the effective date of 
final regulations by the Internal Revenue Service. The effect of the 
IRS proposed rulemaking and the Exchange's proposed withdrawal of the 
limitation of the exercise price of Equity FLEX call options is that 
certain taxpayers, particularly institutional and other large 
investors, can engage in transactions in Equity FLEX call options with 
a wider range of exercise prices (as was originally intended) without 
affecting the applicability of Section 1092 of the Internal Revenue 
Code for qualified covered call options involving equity options with 
standard terms.
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    \4\ The IRS is holding a hearing on November 4, 1998 on the 
proposed rulemaking.
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2. Statutory Basis
    The proposed rule change, by eliminating a restriction on Equity 
FLEX call options which has restricted their usefulness as a risk 
managing mechanism, will remove impediments to and perfect the 
mechanism of a free and open market in FLEX Equity Options, and thus is 
consistent with the objectives of Section 6(b)(5) of the Act.\5\
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    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The 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. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of 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 such 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, including whether the filing is 
consistent with the Act. Persons making

[[Page 58081]]

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 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the 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-
98-39 and should be submitted by November 19, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28851 Filed 10-28-98; 8:45 am]
BILLING CODE 8010-01-M