[Federal Register Volume 64, Number 65 (Tuesday, April 6, 1999)]
[Notices]
[Page 16771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8368]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41215; File No. SR-CBOE-99-04]


Self-Regulatory Organizations; Order Approving 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

March 26, 1999.

I. Introduction

    On January 21, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission'' or ``SEC''), 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 change the permissible range 
of new series of Standard and Poor's 100 Index options (``OEX'') under 
unusual market conditions. Notice of the proposed rule change appeared 
in the Federal Register on February 23, 1999.\3\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 41052 (February 12, 
1999), 64 FR 8893.
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II. Description of the Proposal

    The Exchange proposes to amend CBOE Rule 24.9, Interpretation and 
Policy .01(d), to increase the permissible range of additional series 
that may be listed for OEX options during unusual market conditions. 
Interpretation and Policy .01(d) currently requires that when the 
Exchange introduces trading in a new expiration month, or when 
additional series of options in an existing expiration month are 
opened, the Exchange shall only list series of options with exercise 
prices that are ``reasonably related to the current value of the 
underlying index.'' In the case of OEX options, ``reasonably related to 
the current value of the underlying index'' is defined to be within 
eight percent of the current index value under normal market 
conditions. Under unusual market conditions, ``reasonably related to 
the current value of the underlying index'' is defined to be within ten 
percent of the index value. The Exchange now proposes that, for options 
on OEX, exercise prices within twenty percent of the current index 
value, instead of within ten percent, be deemed ``reasonably related to 
the value of the underlying index'' under unusual market conditions.

III. Discussion

    After careful review, 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.\4\ 
In particular, the Commission believes the proposal is consistent with 
Section 6(b)(5), in that it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.\5\
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    \4\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal should enable the CBOE to 
respond to changing market conditions by listing OEX options series 
that provide market participants with an effective means to manage risk 
and implement their trading strategies. The Commission further believes 
that the discretion to list additional series of OEX options should 
help to ensure the consistent availability of index options series 
tailored to meet the needs of investors during periods of market 
volatility. Additionally, the CBOE's proposal strikes an appropriate 
balance between accommodating the needs of market participants and 
avoiding the excessive proliferation of options series.
    The proposal affects only OEX options and the unusual market 
conditions that would trigger the availability of additional OEX series 
under the proposal occur infrequently. The CBOE represents that unusual 
market conditions occur no more than once a month on average.\6\ To 
help determine whether unusual market conditions exist, the Exchange 
can look to a variety of factors and objective tools, including VIX, a 
volatility indicator.\7\ Moreover, even when the CBOE determines that 
unusual market conditions exist, the Exchange explains that customer 
demand and market maker interest ultimately will determine how many 
additional series will be listed.\8\ This should help to ensure 
adequate liquidity in new series.
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    \6\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to 
Nancy Sanow, Senior Special Counsel, Division of Market Regulation, 
SEC, dated March 3, 1999 (``CBOE Letter'').
    \7\ According to the Exchange, VIX currently is at approximately 
28 to 30, and unusual market conditions may occur if VIX reaches 
approximately 40 or above.
    \8\ See CBOE Letter, supra note 6.
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    In addition to representing that the number of additional series 
resulting from the proposal will not be significant, the CBOE does not 
believe that any additional series will pose a capacity problem. In 
this regard, the Commission notes that the Exchange retains the ability 
to limit new series and remove existing series. In addition, the 
Options Price Reporting Authority (``OPRA'') has represented that 
OPRA's capacity is sufficient to meet the expected demands of the 
additional strike prices.\9\
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    \9\ See CBOE Letter, supra note 6 and Letter from Joe P. 
Corrigan, Executive Director, Options Price Reporting Authority, to 
Stephanie C. Mullins, Attorney, Chicago Board Options Exchange, 
dated February 9, 1999.
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    Accordingly, the Commission believes that the proposal should 
provide the Exchange with flexibility to open additional index options 
series and, at the same time, minimize capacity and continue to 
appropriately limit the number of index options series that may be 
outstanding at any one time. Indeed, the Exchange is not obligated to 
open new series every time the index value changes, and the CBOE should 
only open new series in a manner that is consistent with the 
maintenance of a fair and orderly market.

IV. Conclusion

    For the foregoing reasons, the Commission believes 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, with Section 6(b)(5).\10\
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    \10\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-99-04) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    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. 99-8368 Filed 4-5-99; 8:45 am]
BILLING CODE 8010-01-M