[Federal Register Volume 64, Number 35 (Tuesday, February 23, 1999)]
[Notices]
[Pages 8893-8894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4429]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41052; File No. SR-CBOE-99-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to New 
Series of Options Based on the Standard and Poor's 100 Index.

February 12, 1999.
    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 January 21, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 24.9 to change the permissible 
range of new series of Standard & Poor's 100 Index options (``OEX'') 
under unusual market conditions. 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 these 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

    The purpose of the proposed rule change is to increase from ten 
percent (10%) to twenty percent (20%) the percentage level away from 
the current index value under which additional series may be listed on 
options on OEX under unusual market conditions. Under existing 
Interpretation and Policy .01 of CBOE Rule 24.9, when the Exchange 
introduces trading in a new expiration month, or when additional series 
of options in an existing expiration month are opened, CBOE may list 
series of options that are ``reasonably related to the current value of 
the underlying index.'' Under normal market conditions, ``reasonably 
related'' is defined to be within eight percent (8%) of the current 
index value. Under unusual market conditions (such as at times of 
increased volatility), ``reasonably related'' is defined to be within 
ten percent (10%) of the current index value.
    For example, if a new expiration month is introduced in an OEX 
option during normal market conditions, and the value of the Standard & 
Poor's 100 Index is 478, the lowest put option strike available for 
trading would be the 400 strike. In unusual market conditions, the 
Exchange would be permitted to list a 430 strike price option. Over the 
life of the option contract, the Exchange would be permitted to list 
additional series only as the value of the underlying index moved 
substantially from the 478 level.
    Recently, the Exchange has discovered that it has been limited in 
listing additional option contracts in incidences of increased market 
volatility. The adverse consequence of this is exemplified in at least 
two ways: (1) the number of OEX put options eligible for trading 
through the Exchange's retail automatic execution system (``RAES'') is 
limited; and (2) retail customers have fewer low-priced OEX put options 
contracts to trade. Each of these negative consequences is discussed in 
detail below.
Fewer OEX Series on RAES
    The guidelines followed by the Index Floor Procedure Committee 
(``IFPC'') in designating series of OEX options as eligible for trading 
on RAES provide that all contracts may be so designated, provided that 
the option in any designated series is priced below $10. For example, 
at the opening of trading on September 1, 1998, the morning after the 
significant market volatility of August 31, 1998, there were only three 
RAES-eligible put option contracts, all in the September contract 
month. No put option series in the October contract month were RAES-
eligible. In this case, the value of the underling index was 
approximately 477 and the lowest put option contract available had a 
430 strike price. With the volatility of the market on that day, at 
approximately the opening of trading, the prices of the

[[Page 8894]]

three September put option contracts that were RAES-eligible (the 430, 
440 and 450 contracts) ranged from five dollars ($5.00) to nine dollars 
($9.00). The price of the least expensive October put option contract 
(with a 430 strike price) was approximately fourteen dollars and fifty 
cents ($14.50). In these circumstances, the Exchange found it was 
unable to provide an adequate number of OEX put option contracts for 
automatic execution to satisfy the demand of its firms and retail 
customers. In general, and especially in times of heightened market 
volatility, retail customers overwhelmingly prefer to have their option 
orders executed as quickly as possible at the published market quotes.
Lower-Priced OEX series Available for Customers
    The Exchange is aware that historically, OEX order flow from retail 
customers is concentrated in lower-priced options, generally those 
under ten dollars ($10). When the number of available lower-priced 
options series decreases, so does retail customer order flow. Under the 
current index levels, in light of the significant increases in market 
volatility and the existing restriction under CBOE Rule 24.9, 
Interpretation and Policy .01, there are few low-priced OEX put option 
series available. For instance, in the aforementioned example, for the 
September contract month, no put option contract was available for 
under five dollars ($5), and the least expensive October put option 
contract was priced at more than fourteen dollars ($14). The effect of 
this limitation is to preclude investors from participating in the OEX 
put option market, except at higher than desired price levels. Smaller 
dollar value investors therefore lose the opportunity to enter into 
protective option strategies at a time when they may find it especially 
necessary to do so.
    In response to these concerns, CBOE is proposing to change the 
percentage level under which additional series may be listed under 
unusual market conditions. The Exchange proposes to increase the 
percentage level for unusual market conditions from ten percent (10%) 
to twenty percent (20%). Under the unusual market conditions present on 
August 31, 1998, had the Exchange been able to list option contracts 
within twenty percent (20%) of the underlying index value, there would 
have been a sufficient number of series eligible for RAES and 
appropriately priced for retail customers. The theoretical option 
pricing model used by the Exchange's Research Department estimates that 
had the twenty percent (20%) limit been in effect, the lowest priced 
September put option contract available would have been the 390 with an 
estimated price of $0.625 (5/8). The estimated price of the 
corresponding October contract would have been four dollars ($4.00).
    The number of additional series that will result from this proposed 
rule change, which affects only OEX options, will not be significant. 
For this reason, CBOE does not believe that the proposed rule change 
raises any capacity issues. The Exchange routinely monitors inactive 
option contracts and removes from listing those that do not have open 
interest and have little chance of trading.
    By responding to the historically high volatility of the market in 
a manner that addresses the needs of its valued customers, the Exchange 
believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act, and Section 6(b)(5) of that Act in 
particular, 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.

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. 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 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, including whether the proposed rule 
change is consistent with the Act. 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 in the 
Commission's Public Reference Room. 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-99-04 and should 
be submitted by March 16, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4429 Filed 2-22-99; 8:45 am]
BILLING CODE 8010-01-M