[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Notices]
[Pages 29370-29377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13811]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41435; File No. SR-CBOE-99-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
Option Exercise Procedures \1\

May 21, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that 
on January 20, 1999, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or the ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. The proposal was amended on May 11, 1999.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ The CBOE amended the title of this filing in Amendment No. 
1. See infra note 4.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ In Amendment No. 1, the Exchange made typographical 
corrections to, clarified the purpose of, and expanded the scope of 
the proposed rule change. (``Amendment No. 1''). See Letter from 
Arthur B. Reinstein, Counsel, CBOE, to Hong-anh Tran, Attorney, 
Division of Market Regulation (``Division''), Commission, dated May 
10, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    CBOE proposes to amend Exchange Rules 4.16 and 11.1 to permit the 
exercise of American-style, cash-settled index options following a 
trading halt that occurs at or after 3:00 p.m. Such exercises will be 
permitted at or after 3:00 p.m. through 3:20 p.m. (CT), the normal 
deadline for exercising such options. The Exchange is also proposing to 
amend its Regulatory Circular concerning the Exchange's procedures and 
requirements regarding the exercise of American-style, cash-settled 
index options (``Exercise Regulatory Circular'') \5\ to reflect these 
changes and to reflect changes to CBOE Rules 4.16 and 11.1 that were 
recently approved by the Commission. Additionally, the Exchange is 
proposing to permit CBOE's President or his designee to extend the 
applicable deadline for the delivery of Exchange-required exercise 
notifications, for either an American-style, cash-settled index options 
or a non-cash settled equity options, if unusual circumstances are 
present.\6\ Attached as Exhibit A to this Notice is the text of the 
proposed rule. Proposed new language is italicized; proposed deletions 
are in [brackets].
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    \5\ See Securities Exchange Act Release No. 40334 (August 18, 
1998), 63 FR 45275 (August 25, 1998) File No. SR-CBOE-98-34.
    \6\ See Amendment No. 1, supra note 4.
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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, the self-regulatory organization 
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 self-regulatory organization 
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
American-style, Cash-Settled Index Options
    The CBOE proposes to modify its rules governing the exercise of 
American-style, cash-settled index during certain trading halts. 
Currently, the Exchange trades only one type of American-style, cash-
settled index option contract, Standard & Poor's 100 index options 
(``OEX index options'').\7\ Index options generally are traded on the 
Exchange from 8:30 a.m. to 3:15 p.m. (CT).\8\ CBOE Rule 11.1 governs 
the exercise of options contracts, including index option contracts. 
CBOE Rule 11.1 provides that CBOE members shall follow the procedures 
of the Options Clearing Corporation (``OCC'') as well as those of the 
exchange when exercising option contracts. Options generally may be 
exercised at any time during the trading day, and proposed CBOE Rule 
11.1.03 requires members intending to exercise American-style, cash-
settled index option contracts to deliver an ``exercise advice'' to a 
place designated by the Exchange no later than five minutes after the 
close of trading on that

[[Page 29371]]

day.\9\ However, under CBOE Rule 11.1.05 (which is now proposed to be 
moved to CBOE Rule 11.1.03(h)), and CBOE Rule 4.16(b),\10\ exercises of 
cash-settled index options are prohibited during any time when trading 
in such options is delayed, halted or suspended, unless otherwise 
determined by the President of the Exchange or his designee.\11\ Thus, 
although exercises of OEX index options may occur until 3:20 p.m. (CT) 
in the absence of a trading halt, no exercises of OEX index options 
currently are permitted when a trading halt in such options is in 
effect.
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    \7\ Although OEX index options are the only standardized 
American-style, cash-settled index options currently traded on the 
Exchange, the revised Rules also would apply to exercises of 
American-style, cash-settled FLEX Index Option contracts. All other 
CBOE index options are European-style, with exercise permitted only 
upon their expiration.
    \8\ CBOE Rule 24.6, Days and Hours of Business.
    \9\ See Amendment No. 1, supra note 4.
    \10\ Id.
    \11\ Notwithstanding this prohibition, the exercise of a cash-
settled index option may be processed and given effect in accordance 
with and subject to the rules of the OCC while trading in an option 
is delayed, halted, or suspended if it can be documented that the 
decision to exercise the option was made during allowable time 
frames prior to the delay, halt or suspension. CBOE Rule 11.1.05 
(which is now proposed to be moved to proposed CBOE Rule 
11.1.03(h)(i)), Exercise of Option Contracts.
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    The current rules governing the exercise of index options were 
developed with recognition of the distinction between holders of long 
and holders of short positions in index options. The Exchange has long 
noted that one of the distinctive characteristics of a cash-settled 
option is that its exercise is functionally equivalent to trading out 
of the long position, and, conversely, the assignment of a short index 
option eliminates the position as if it had been closed through a 
purchase transaction. Absent any restrictions upon exercise, holders of 
long positions would be able to exercise their options after the close 
of trading and during trading halts. Because holders of short positions 
are unable to trade out of their positions when trading has been closed 
or halted, they would be at a disadvantage to holders of long 
positions. To minimize the effect this disparity might have on holders 
of short positions in the event of a trading halt immediately prior to 
expiration of an option, the Exchange amended CBOE Rule 4.16(a) in 1983 
to permit the Exchange's Board of Directors to restrict exercises of 
index options other than on the last trading day before expiration 
Friday.\12\ Exercises of expiring index options cannot be restricted in 
any way on expiration Friday.
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    \12\ CBOE Rule 4.16(a), Other Restrictions on Options 
Transactions and Exercises; See also, Securities Exchange Act 
Release No. 19590 (March 10, 1983), 48 FR 11196 (March 16, 1983) 
(File No. SR-CBOE-83-6); and see Amendment No. 1, supra note 4.
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    Since 1991 the Exchange has permitted the exercise of index options 
for a ``five minute window'' subsequent to the close of trading on the 
Exchange.\13\ The rule permitting the exercise of cash-settled index 
options up to 3:20 p.m. (CT) allows market participants to make 
investment decisions based on the evaluation of their final positions 
after having completed trading for the day. In addition, by allowing 
traders and market makers to concentrate on their trading activities, 
rather than submitting exercise advice prior to the close of the 
market, and to determine whether or not their hedging orders on other 
markets were executed, as well as to their exercise their index option 
positions on the Exchange if necessary to avoid remaining unhedged 
overnight, the five-minute window benefits options investors generally 
by fostering higher quality markets. Moreover, the additional five-
minute exercise period provides market participants with additional 
time to evaluate the closing prices of the securities that comprise an 
index and to determine whether or not to exercise their positions.\14\ 
Thus, in light of these benefits, the Exchange adopted the five-minute 
window permitting exercises after the close of trading on the Exchange 
notwithstanding that investors holding short positions in index options 
would not have the same opportunity to unwind their positions during 
this period as would holders of long positions. In doing so, the 
Exchange deemed the benefits to the overall OEX index market from the 
five-minute exercise period to exceed any potential harm that might 
result to short holders as a result of the disparity in trading 
opportunities.
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    \13\ See Securities Exchange Act Release No. 29860 (October 25, 
1991), 56 FR 56264 (November 1, 1991) (File No. SR-CBOE-91-28).
    \14\ Id.
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    The Exchange has now reconsidered its policy with respect to the 
exercise of American-style, cash-settled index options and proposes to 
eliminate the current ban on exercises with respect to trading halts in 
such options that occur at or after 3:00 p.m. (CT). As mentioned, the 
trading markets for the equity securities underlying index options 
generally are closed for trading by 3:00 p.m. (CT), thereby 
establishing the closing value of a given index. By this time, OEX 
market participants are already watching the market for opportunities 
to exercise their options. Many participants in the OEX index options 
market use the closing value of the index to make trading and hedging 
decisions (including transactions in the related futures market) 
contingent upon exercise of an OEX index option position or the 
expected assignment of a short position. Given this, the Exchange 
believes that the occurrence of trading halt at or after 3:00 p.m. (CT) 
should not fundamentally alter the ability of these market participants 
to exercise their index options.\15\ While permitting the exercise of 
index options during trading halts that occur at or after 3:00 p.m. 
(CT) increases the disparity in trading opportunities between holders 
of short and long positions in OEX index options, the Exchange believes 
that any increase in disparity is incremental over the situation that 
exists today by virtue of the five-minute exercise window after the 
close of the Exchange, and would be exceeded by the additional benefits 
that would be afforded to the OEX market under the proposed Rule.\16\
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    \15\ While the implementing the standard five-minute exercise 
window after a trading halt has been announced would provide floor 
traders with sufficient opportunity to exercise, such a small window 
may not provide other market participants with a sufficient 
opportunity to do so and would add to the increased operational 
burdens of member firms resulting from the trading halt itself.
    \16\ The Exchange generally will continue to prohibit American-
style, cash-settled index option exercises during any trading halt 
which occurs before 3:00 p.m. (CT), as the length of time required 
to provide sufficient notice and opportunity equally to all market 
participants during an intraday trading halt would unfairly expand 
the opportunity for holders of long index option positions to 
exercise when short option holders are prohibited from trading.
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    The Exchange also believes that a uniform policy of permitting 
exercises of OEX index options after the close of the Exchange will 
reduce the potential for confusion among its members and customers, 
especially during late trading halts. In doing so, such a policy would 
further the efficient operation of the Exchange during such periods. To 
the extent that a closing rotation were held after a late trading halt, 
the Exchange proposes that exercises of American-style, cash-settled 
index options would continue to be permitted during the rotation and 
for a five-minute period thereafter, as is currently the case.
    The Exchange also proposes to amend CBOE Rules 4.16(b) and CBOE 
Rule 11.1.03, and proposes to reflect these corresponding changes in 
the Exercise Regulatory Circular to make clear that in the case of an 
American-style, cash-settled FLEX Index Option, the references in CBOE 
Rule 4.16(b), CBOE Rule 11.1.03, and the Exercise Regulatory Circular 
to a trading delay, halt, suspension, resumption, closing rotation, or 
modified trading hours will mean the occurrence of the applicable 
condition in the standardized option on the index underlying the FLEX 
Index Option (rather than the occurrence of

[[Page 29372]]

the applicable condition in the FLEX Index Option itself).\17\ The 
Exchange states that this is consistent with how the Exchange has 
historically applied the exercise provisions that are applicable in the 
above market conditions to American-style, cash-settled FLEX Index 
Options, and the Exchange proposes herein to codify the Exchange's 
prior exercise practices as they apply to American-style, cash-settled 
FLEX Index Options.\18\
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    \17\ See Amendment No. 1, supra note 4.
    \18\ Id.
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    Thus, for example, if there is a trading halt that occurs before 
3:00 p.m. in the standardized Standard & Poor's 500 Index (SPX) options 
(which are European-style options), exercises of American-style, cash-
settled SPX FLEX options will be prohibited during the trading 
halt.\19\ However, based on the proposal, if there is a trading halt in 
the standardized SPX options that occurs at or after 3:00 p.m., 
exercises of American-style, cash-settled SPX FLEX options may occur 
through 3:20 p.m.\20\ Additionally, based on the proposal, if there is 
a closing rotation in the standardized SPX options, exercises of 
American-style, cash-settled SPX FLEX options may occur during the 
closing rotation and for five minutes after the end of the closing 
rotation.\21\ If there were no provision which provided for the 
foregoing, the holder of an American-style, cash-settled SPX FLEX 
option would have no ability to exercise the option during a closing 
rotation because CBOE Rule 24A.3 does not permit closing rotations to 
be conducted in FLEX options.\22\ The purpose of the provisions 
discussed above is to avoid this differential treatment and to treat 
all American-style, cash-settled index options in the same manner with 
regard to exercise restrictions.\23\
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    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
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    Additionally, with the exception of some nonsubstantive wording 
changes, the Exchange is proposing to move the text of CBOE Rule 
11.1.05 to proposed CBOE Rule 11.1.03(h) for ease of reference for 
Exchange members since CBOE Rule 11.1.05 relates to the exercise of 
American-style, cash-settled index options and the provisions of Rule 
11.1 that specifically relate to the exercise of American-style, cash-
settled index options are set forth in Rule 11.1.03.\24\ The Exchange 
is also proposing to amend the Exercise Regulatory Circular to reflect 
recently adopted changes to CBOE Rule 4.16(b) and CBOE Rule 11.1.05 
(which is now proposed to be moved to proposed CBOE Rule 
11.1.03(h)),\25\ which permit the President of the Exchange (or his 
designee) to allow the exercise of American-style, cash-settled index 
options during any trading delay, halt or suspension.\26\ As noted in 
the Exercise Regulatory Circular, the Exchange anticipates that, in 
general, such a determination would be based on extraordinary 
circumstances.\27\
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    \24\ Id.
    \25\ Id.
    \26\ See Securities Exchange Act Release No. 40951 (January 15, 
1999), 64 FR 4482 (January 28, 1999) (File No. CBOE-98-33).
    \27\ See Amendment No. 1, supra note 4.
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    The Exchange also proposes to narrow the evidence that may be 
submitted to the Exchange by a member to document that a decision to 
exercise an American-style, cash-settled option was made prior to a 
trading delay, halt or suspension. Exchange members are excepted from 
the general prohibition on exercising such index options during trading 
halts, delays, or suspensions provided they can document that the 
decision to exercise was made prior to the trading halt, delay, or 
suspension.\28\ The Exchange believes that it would be preferable to 
rely on and encourage the most objective evidence available as to the 
timing of an exercise determination. Therefore, the Exchange proposes 
to no longer, ordinarily, accept internal exercise memoranda prepared 
by CBOE members as evidence of timely exercises. The Exchange will, 
however, continue to accept ``exercise advices'' transmitted via C/MAS 
or a member's copy of an exercise advice previously submitted to the 
Exchange as evidence that an exercise determination was made prior to a 
subsequent trading delay, halt, or suspension.\29\
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    \28\ Id.
    \29\ See Exercise Regulatory Circular, Section 11.
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    Further, the Exchange proposes to permit CBOE's President or his 
designee to extend the applicable deadline for the delivery of 
``exercise advice'' and ``advice cancel'' notifications pursuant to 
CBOE Rule 11.1.03(c) for American-style, cash-settled index options if 
unusual circumstances are present.\30\ The exercise deadline for 
standardized American-style, cash-settled index options is normally 
3:20 p.m. (CT) and is in effect on every trading day except that the 
deadline is not in effect on expiration Friday for expiring 
contracts.\31\ On occasion, there may be situations in which the 
regular 3:20 p.m. (CT) deadline for CBOE members to notify the Exchange 
of exercise decisions concerning and American-style, cash-settled index 
option may not allow market participants a sufficient amount of time in 
which to make and process those exercise decisions due to the presence 
of unusual circumstances.\32\ For example, there have been rare 
occasions in which the reporting authority for an index has been late 
in reporting the closing index value for the index.\33\ Consequently, 
market participants have found it difficult on those occasions to make 
and process exercise decisions before the 3:20 p.m. (CT) deadline.\34\ 
This amendment proposes to permit the President or his designee to 
extend the applicable deadline for the delivery of ``exercise advice'' 
and ``advice cancel'' notifications pursuant to CBOE Rule 11.1.03(c) 
for American-style, cash-settled index options in unusual situations 
like the foregoing.\35\
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    \30\ See Amendment No. 1, supra note 4.
    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
    \35\ Id.
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Noncash-Settled Equity Options

    The exercise cutoff time for noncash-settled options is 4:30 p.m. 
(CT) and is in effect on expiration Friday for expiring contracts. The 
cutoff time is only applicable with respect to expiring contracts on 
expiration Friday because at other times an option holder who makes a 
late decision to either exercise or not to exercise an option will 
always end up holding either the option or the underlying stock, the 
value of which will be similarly effected by any material late 
news.\36\
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    \36\ Id.
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    For reasons comparable to the reasons for proposing to grant the 
President or his designee the authority to extend the exercise deadline 
for American-style, cash-settled index options, this amendment also 
proposes, under CBOE Rule 11.1(b) and CBOE Rule 11.1.06, to grant 
similar authority to the President or his designee to extend the 4:30 
p.m. (CT) exercise cutoff time for a noncash-settled equity option if 
unusual circumstances are present (in which case, the Exchange proposes 
that the deadline for the delivery of an exercise instruction, 
``contrary exercise advice,'' and ``advice cancel'' pursuant to CBOE 
Rule 11.1.06 will be the revised exercise cutoff time designated by the 
President or his designee).\37\ For example, there have been rare 
occasions in which the closing rotation in an equity option has ended 
shortly before 4:30 p.m. (CT).\38\ A late-ending closing rotation 
delays a

[[Page 29373]]

market participant's ability to take the actions necessary to make and 
process an exercise decision. For example, in order to make and process 
an exercise decision, a market participant may need to obtain 
confirmations of trades executed that day, review the participant's 
positions in the applicable option and the underlying stock, review the 
closing price of the option and underlying stock, and/or prepare 
exercise instruction, ``contrary exercise advice,'' and ``advice 
cancel'' forms. This amendment proposes to permit the President or his 
designee to extend the exercise cutoff time in unusual situations like 
the foregoing in order to allow market participants sufficient time in 
which to make and process exercise decisions.\39\
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    \37\ Id.
    \38\ Id.
    \39\ Id.
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American-Style, Cash-Settled Index Options and Noncash-Settled Equity 
Options
    Under the Exchange's current rules, there is a time window 
following the close of trading during which long option holders are 
permitted to exercise their option positions while at the same time 
short option holders do not have the ability to trade out of their 
positions. Accordingly, one of the inherent differences between holding 
a long or short option position is that there is a disparity between 
the ability of long and short option holders to take market action 
following the close of trading.\40\ The purpose of the Exchange's 
exercise deadline for American-style, cash-settled index options and 
the exercise cutoff time for noncash-settled equity options is to 
restrict this disparity to a limited time period following the close of 
trading in those situations in which long option holders have the 
ability to take action through the exercise or non-exercise of an 
option that can affect their position in the market.\41\ Although 
permitting the President or his designee to extend the applicable 
exercise deadline or cutoff time in unusual circumstances would 
marginally increase this existing disparity, the Exchange believes any 
potential detriment that may result from the foregoing would be far 
exceeded by the benefit to the marketplace as a whole that is derived 
from allowing the President or his designee to permit market 
participants sufficient time in which to make and process exercise 
decisions.\42\ The Exchange also notes that the President or his 
designee will only exercise this authority in unusual circumstances and 
thus extensions in the applicable exercise deadline or cutoff time will 
not occur often.\43\
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    \40\ Id.
    \41\ Id.
    \42\ Id.
    \43\ Id.
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    Similarly, in exercising the authority to extend the exercise 
deadline for an American-style, cash-settled index option or the 
exercise cut-off time for a noncash-settled equity option in unusual 
circumstances, the Exchange states that the President or his designee 
would in no event extend the applicable exercise deadline or cut-off 
time beyond the exercise cut-off time required by the Options Clearing 
Corporation (``OCC'').\44\ Chapter VIII of OCC's Rules generally sets 
forth the applicable OCC exercise cut-off-times.\45\
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    \44\ Id.
    \45\ See OCC, Chapter VIII, (Exercise and Assignment).
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2. Statutory Basis
    The proposed rule change will benefit the market for American-
style, cash-settled index options (including OEX options) by permitting 
market participants to utilize the closing value of such indexes to 
make trading and hedging decisions (including transactions in the 
related futures market) contingent upon the ability to exercise a long 
index option position or the expected assignment of a short index 
option position. The proposed rule change will also benefit market 
participants by permitting the President or his designee to extend the 
applicable deadline for the delivery of Exchange-required exercise 
notifications, for either American-style, cash-settled index options or 
noncash-settled equity options, to allow market participants sufficient 
time to make and process exercise decisions in the event that unusual 
circumstances are present which make it difficult to make and process 
exercise decisions during the regular time frame for doing so.\46\ 
Additionally, the proposed rule changes will clarify, refine, and 
enhance the Exchange's rules relating to the exercise of option 
contracts.\47\
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    \46\ See Amendment No. 1, supra note 4.
    \47\ Id.
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    Accordingly, the exchange believes that the proposed rule change is 
consistent with Section 6 of the Act, and in particular, with Section 
6(b)(5),\48\ in that it is designed to, among other things, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information regarding the exercise 
of outstanding option contracts, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest.\49\
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    \48\ 5 U.S.C. 78f(b)(5).
    \49\ See Amendment No. 1 supra note 4.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The exchange 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 funds 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-
0069. 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549-0609. Copies of such filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to the File No. SR-CBOE-99-03

[[Page 29374]]

and should be submitted by June 22, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

EXHIBIT A

    (Proposed new language of the Rules of the Exchange as currently in 
effect is italicized; proposed deletions are in [brackets].)

Chicago Board Options Exchange, Incorporated Rules

* * * * *

CHAPTER IV--Business Conduct

Other Restrictions on Options Transactions and Exercises
RULE 4.16
    (a) Unchanged.
    (b) [With the exception of the last business day prior to 
expiration, exercises of cash-settled index options shall be prohibited 
during any time when trading in such options is delayed, halted, or 
suspended, unless otherwise determined by the President or his 
designee. Notwithstanding such a prohibition, the exercise of a cash-
settled index option may be processed and given effect in accordance 
with and subject to the rules of the Clearing Corporation while trading 
in the option is delayed, halted, or suspended if it can be documented 
that the decision to exercise the option was made during allowable time 
frames prior to the delay, halt, or suspension.] Exercises of American-
style, cash-settled index options shall be prohibited during any time 
when trading in such options is delayed, halted, or suspended, subject 
to the following exceptions:
    (i) The exercise of an American-style, cash-settled index option 
may be processed and given effect in accordance with and subject to the 
rules of the Clearing Corporation while trading in the option is 
delayed, halted, or suspended if it can be documented, in a form 
prescribed by the Exchange, that the decision to exercise the option 
was made during allowable time frames prior to the delay, halt, or 
suspension.*
    (ii) Exercises of expiring American-style, cash-settled index 
options shall not be prohibited on the last business day prior to their 
expiration.*
    (iii) Exercises of American-style, cash-settled index options shall 
not be prohibited during a trading halt that occurs at or after 3:00 
p.m. (CT). In the event of such a trading halt, exercises may occur 
through 3:20 p.m. (CT). In addition, if trading resumes following such 
a trading halt (such as by closing rotation), exercises may occur 
during the resumption of trading and for five (5) minutes after the 
close of the resumption of trading. The provisions of this subparagraph 
(b)(iii) are subject to the authority of the Board to impose 
restrictions on transactions and exercises pursuant to paragraph (a) of 
this Rule.
    (iv) The President or his designee may determine to permit the 
exercise of American-style, cash-settled index options while trading in 
such options is delayed, halted, or suspended.*

In the case of an American-style, cash-settled FLEX Index Option, the 
references in this paragraph (b) to a trading delay, halt, suspension, 
resumption, or closing rotation shall mean the occurrence of the 
applicable condition in the standardized option on the index underlying 
the FLEX Index Option (rather than the occurrence of the applicable 
condition in the FLEX Index Option itself).

. . . Interpretations and Policies:

.01  Unchanged.
.02  Unchanged.

    * With the exception of some wording changes, these provisions 
are currently generally set forth in Rule 4.16(b) and are not newly 
proposed provisions.
* * * * *

CHAPTER XI--Exercises and Deliveries

Exercise of Option Contracts
RULE 11.1
    (a) Unchanged.
    (b) The exercise cutoff time for all noncash-settled options shall 
be 4:30 p.m. (CT) on the business day immediately prior to the 
expiration date. This is the latest time at which an exercise 
instruction for expiring noncash-settled positions may be (1) Prepared 
by a Clearing Member for its proprietary positions, (2) submitted to a 
Clearing Member by a member (including, but not limited to, a Market 
Maker or Floor Broker), or (3) accepted by a Clearing Member from or on 
behalf of a customer. The President or his designee may determine to 
extend the 4:30 p.m. (CT) exercise cutoff time for a noncash-settled 
options if unusual circumstances are present. Notwithstanding the 
foregoing, members may prepare, submit or accept exercise instructions 
for noncash-settled options after the applicable exercise cutoff time 
but prior to expiration (i) In order to remedy mistakes or errors made 
in good faith, (ii) to take appropriate action as the result of a 
failure to reconcile unmatched Exchange transactions, or (iii) where 
exceptional circumstances relating to a customer's or member's ability 
to communicate exercise instructions to a Clearing Member (or a 
Clearing Member's ability to receive exercise instructions) prior to 
such cutoff time warrant such action.
    (c)-(d) Unchanged.

. . . Interpretations and Policies:

.01-.02  Unchanged.
.03  Clearing Members must follow the procedures of the Clearing 
Corporation when exercising American-style, cash-settled index option 
contracts issued or to be issued in any account at the Clearing 
Corporation. Members must also follow the procedures set forth below 
with respect to American-style, cash-settled index options:
    (a) For all contracts exercised by the member or by any customer of 
the member, an ``exercise advice'' must be delivered by the member in 
such form or manner prescribed by the Exchange to a place designated by 
the Exchange no later than 3:20 p.m. (CT), or if trading hours are 
extended or modified in the applicable option class, no later than five 
(5) minutes after the close of trading on that day.
    (b) Subsequent to the delivery of an ``exercise advice'', should 
the member or a customer of the member determine not to exercise all or 
part of the advised contracts, the member must also deliver an ``advice 
cancel'' in such form or manner prescribed by the Exchange to a place 
designated by the Exchange no later than 3:20 p.m. (CT), or if trading 
hours are extended or modified in the applicable option class, no later 
than five (5) minutes after the close of trading on that day.
    (c) The President or his designee may determine to extend the 
applicable deadline for the delivery of ``exercise advice'' and 
``advice cancel'' notifications pursuant to this Interpretation .03 if 
unusual circumstances are present.
    (d)[(c)] No member may prepare, time stamp or submit an ``exercise 
advice'' prior to the purchase of the contracts to be exercised if the 
member knew or had reason to know that the contracts had not yet been 
purchased.
    (e)[(d)] The failure of any member to follow the procedures in this 
Interpretation .03 may be referred to the Business Conduct Committee 
and result in the assessment of a

[[Page 29375]]

fine, which may include but is not limited to disgorgement of potential 
economic gain obtained or loss avoided by the subject exercise, as 
determined by the Committee.
    (f)[(e)] Preparing or submitting an ``exercise advice'' or ``advice 
cancel'' after the applicable deadline on the basis of material 
information released after such deadline, in addition to constituting a 
violation of this Rule, is activity inconsistent with just and 
equitable principles of trade.
    (g)[(f)] The procedures set forth in subparagraphs (a)-(b) of this 
Interpretation .03 do not apply (i) on the business day prior to 
expiration in series expiring on a day other than a business day or 
(ii) on the expiration day in series expiring on a business day.
    (h)[(g)] Exercises of American-style, cash-settled index options 
(and the submissions of corresponding ``exercise advice'' and ``advice 
cancel'' forms) shall be prohibited during any time when trading in 
such options is delayed, halted, or suspended, subject to the following 
exceptions:*
    (i) The exercise of an American-style, cash-settled index option 
may be processed and given effect in accordance with and subject to the 
rules of the Clearing Corporation while trading in the option is 
delayed, halted, or suspended if it can be documented, in a form 
prescribed by the Exchange, that the decision to exercise the option 
was made during allowable time frames prior to the delay, halt, 
suspension. Acceptable documentation shall ordinarily be limited to an 
``exercise advice'' previously transmitted via C/MACS or a member's 
copy of an ``exercise advice'' previously submitted to the Exchange.*
    (ii) Exercises of expiring American-style, cash-settled index 
options shall not be prohibited on the last business day prior to their 
expiration.*
    (iii) Exercises of American-style, cash-settled index options shall 
not be prohibited during a trading halt that occurs at or after 3:00 
p.m. (CT). In the event of such a trading halt, exercises may occur 
through 3:20 p.m. (CT). In addition, if trading resumes following 
[such] a trading halt (such as by closing rotation), exercises may 
occur during the resumption of trading for five (5) minutes after the 
close of the resumption of trading. The provisions of this subparagraph 
(iii) are subject to the authority of the Board to impose restrictions 
on transactions and exercises pursuant to Rule 4.16(a).
    (iv) The President or his designee may determine to permit the 
exercise of American-style, cash-settled index options while trading in 
such options is delayed, halted, or suspended.*

In the case of an American-style, cash-settled FLEX Index Option, the 
references in this paragraph (h) to a trading delay, halt, suspension, 
resumption, or closing rotation shall mean the occurrence of the 
applicable condition in the standardized option on the index underlying 
the FLEX Index Option (rather than the occurrence of the applicable 
condition in the FLEX Index Option itself).
.04  Unchanged.
.05  [With the exception of the last business day prior to expiration, 
exercises of cash-settled index options (and the submission of 
corresponding ``exercise advice'' and ``advice cancel'' forms) shall be 
prohibited in accordance with Rule 4.16(b) during any time when trading 
in such options is delayed, halted or suspended, unless otherwise 
determined by the President or his designee. Notwithstanding such a 
prohibition, the exercise of a cash-settled index option may be 
processed and given effect in accordance with and subject to the rules 
of the Clearing Corporation while trading in the option is delayed, 
halted, or suspended if it can be documented that the decision to 
exercise the option was made during allowable time frames prior to the 
delay, halt, or suspension.] Deleted effective, 1999(99-).
.06  Clearing Members must follow the procedures of the Clearing 
Corporation when exercising expiring noncash-settled equity option 
contracts. Members must also follow the procedures set forth below with 
respect to the exercise of noncash-settled equity option contracts 
which would otherwise not be exercised, or the nonexercise of such 
contracts which otherwise would be exercised, by operation of the 
exercise by exception provisions of Clearing Corporation Rule 805:
    (a) For all contracts so exercised or not exercised by the member 
or by any customer of the member, as ``contrary exercise advice'' must 
be delivered by the member in such form or manner prescribed by the 
Exchange to a place designated by the Exchange no later than 4:30 p.m. 
(CT).
    (b) Subsequent to the delivery of a ``contrary exercise advice'', 
should the member or a customer of the member determine to act other 
than as reflected on the original advice form, the member must also 
deliver an ``advice cancel'' in such form or manner prescribed by the 
Exchange to a place designated by the Exchange no later than 4:30 p.m. 
(CT).
    (c) The procedures set forth in subparagraphs (A)-(B) of this 
Interpretation .06 shall not apply with respect to any option class 
that is not subject to the exercise by exception provisions of Clearing 
Corporation Rule 805 (``Non Ex-by-Ex Option Class''). Instead, for all 
option contracts in a Non Ex-by-Ex Option Class that are exercised by 
the member or by a customer of the member, each exercise instruction 
that is prepared, submitted or accepted by the member with respect to 
such contracts must also be delivered by the member in such form or 
manner prescribed by the Exchange to a place designated by the Exchange 
no later than 4:30 p.m. (CT).
    (d) The President or his designee may determine pursuant to Rule 
11.1(b) to extend the 4:30 p.m. (CT) exercise cutoff time for a 
noncash-settled equity option if unusual circumstances are present. In 
the event of such an extension, the deadline for the delivery of an 
exercise instruction, ``contrary exercise advice'' and ``advice 
cancel'' pursuant to this Interpretation .06 shall be the revised 
exercise cutoff time designated by the President or his designee 
pursuant to Rule 11.1(b).
    (e) [d] The member shall be excused from compliance with the 
procedures set forth in subparagraphs (a)-(c) of this Interpretation 
.06 in the event that one of the exceptions set forth in clause (i), 
(ii) or (iii) of Rule 11.1(b) is applicable and the member complies 
with the requirements of Interpretation .01 of this Rule.
    (f) [(e)] The failure of any member to follow the procedures in 
this Interpretation .06 may be referred to the Business Conduct 
Committee and result in the assessment of a fine, which may include but 
is not limited to disgorgement of potential economic gain obtained or 
loss avoided by the subject exercise, as

[[Page 29376]]

determined by the Committee.
    (g)[(f)] Preparing or submitting an exercise instruction, 
``contrary exercise advice'' or ``advice cancel'' after the applicable 
deadline [4:30 p.m. (CT)] on the basis of material information released 
after such deadline [time], in addition to constituting a violation of 
this Rule, is activity inconsistent with just and equitable principles 
of trade.
.07  Unchanged.

    * With the exception of some wording changes, these provisions 
are proposed to be moved from Rule 11.1.05 and are not newly 
proposed provisions.
* * * * *
Regulatory Circular RG [98-90] 99-

DATE: [August 24] ____, [1998] 1999

TO: Members and Member Organizations

FROM: Regulatory Services Division

RE: S&P 100 Index and American-Style FLEX Index Option Exercise 
Procedures

    This memorandum describes [is being issued to remind members and 
member organizations of the] exercise procedures and requirements of 
Exchange Rules 11.1 and 24.18 as they pertain to the exercise of 
Standard & Poor's 100 Stock Index option contracts, American-Style FLEX 
Index Option contracts, and any other American-style cash-settled index 
option contracts.
    1. Members who prepare their own exercise instruction memoranda 
must prepare and time stamp such memoranda upon making the decision to 
exercise.
    2. Clearing firms must prepare and time stamp an exercise 
instruction memorandum upon receipt of instructions to exercise from a 
customer or market-maker or upon making the decision to exercise on 
behalf of a proprietary account.
    3. An ``exercise advice'' must be submitted to the Exchange no 
later than 3:20 p.m. (CT) for all American-style, cash-settled index 
option contracts exercised. However, ``exercise advices'' are not 
required to be submitted to the Exchange (i) on the business day prior 
to expiration with respect to expiring non-FLEX American-style, cash-
settled index option contracts, (ii) on the day of expiration with 
respect to expiring FLEX American-style cash-settled index option 
contracts that expire on a business day, or (iii) on the business days 
prior to expiration with respect to expiring FLEX American-style, cash-
settled index option contracts that expire on a day other than a 
business day.
    4. An ``exercise advice'' must be clearly and accurately completed 
prior to submission. Staff will not remove an ``exercise advice'' for 
any alteration once it has been deposited in a drop-off box.
    5. Clearing firms may enter exercises for any market-maker, 
customer, or proprietary account on OCC's Clearing Management and 
Control System 
(C/MACS) in lieu of physically delivering an ``exercise advice'' to the 
Exchange trading floor. Such entries must be made no later than 3:20 
p.m. (CT) and serve as both an exercise instruction to OCC and an 
``exercise advice'' to the Exchange.
    6. Members acting on their own behalf or on behalf of a customer 
may only submit an ``exercise advice'' and exercise instruction for the 
``net long position'' open in any series of American-style index 
options for the account at the time the advice or instruction is 
submitted. For a complete explanation of this requirement, members 
should refer to Exchange Rule 24.18 and to Exchange Regulatory Circular 
RG96-94.
    7. If a member decides not to exercise all or part of the amount 
indicated on an ``exercise advice'' previously submitted to the 
Exchange, he or she must submit another ``exercise advice'' to the 
Exchange, with the cancel box checked, no later than 3:20 p.m. (CT). 
(``Exercise advice cancellations'' do not cancel exercise instruction 
memoranda already submitted to the clearing firm).
    8. The ``exercise advice'' drop-off boxes are located on the 
Exchange's trading floor adjacent to the OEX trading crowd. The drop-
off boxes are removed at 3:20:59 p.m. (CT). Submitting an ``exercise 
advice'' or ``exercise advice cancellation'' after this time is a 
violation of Exchange Rule 11.1, and doing so on the basis of material 
information released after this time, in addition to violating Rule 
11.1, may constitute activity inconsistent with just and equitable 
principles of trade. If a member inadvertently fails to submit an 
``exercise advice'' or ``exercise advice cancellation'' before the 
applicable deadline, the member should still consider submitting the 
advice or cancellation to the Exchange's Department of Market 
Regulation as soon as possible after the deadline (even though a 
violation of Rule 11.1 will still exist) in order to help to establish 
the time at which the exercise decision was made.
    9. The joint account participant who makes the decision to exercise 
on behalf of the joint account must indicate both the joint account 
acronym and his or her individual acronym on both the exercise 
instruction memorandum and the ``exercise advice''.
    10. The submission an of ``exercise advice'' to the Exchange does 
not initiate an exercise at OCC; members must also submit an exercise 
instruction memorandum to their clearing firm.
    11. In the event that any of the following market conditions are 
declared, the below provisions will apply (including C/MACS entries):

[Delayed Opening other than on the Last Business Day Prior to 
Expiration: The ``exercise advice'' drop-off boxes will not be placed 
in the designated areas until trading commences. Exercises may not be 
effected, nor will ``exercise advices'' be accepted until trading 
commences.]

    Delayed Opening or Trading Halt [other than on the Last Business 
Day Prior to Expiration]: Exercises of American-style, cash-settled 
index options (and the submission of corresponding ``exercise advice'' 
and ``advice cancel'' forms) shall be prohibited during any time when 
trading in such options is delayed, halted, or suspended, subject to 
the following exceptions:
    (i) The exercise of an American-style, cash-settled index option 
may be processed and given effect in accordance with and subject to the 
rules of the Clearing Corporation while trading in the option is 
delayed, halted, or suspended if it can be documented, in a form 
prescribed by the Exchange, that the decision to exercise the option 
was made during allowable time frames prior to the delay, halt, or 
suspension. Acceptable documentation shall ordinarily be limited to an 
``exercise advice'' previously transmitted to via C/MACS or a member's 
copy of an ``exercise advice'' previously submitted to the Exchange.*
    (ii) Exercises of expiring American-style, cash-settled index 
options shall not be prohibited on the last business day prior to their 
expiration.*
    (iii) Exercises of American-style, cash-settled index options shall 
not be prohibited during a trading halt that occurs at or after 3:00 
p.m. (CT). In the event of such a trading halt, exercises may occur 
through 3:20 p.m. (CT). In addition, if trading resumes following such 
a trading halt (such as by closing rotation), exercises may occur 
during the resumption of trading and for five (5) minutes after the 
close of the resumption of trading. The provisions of this subparagraph 
(iii) are subject to the authority of the Board to impose restrictions 
on transactions and exercises pursuant to Rule 4.16(a).
    (iv) The President or his designee may determine to permit the 
exercise of American-style, cash-settled index

[[Page 29377]]

options while trading in such options is delayed, halted, or 
suspended.*
    In general, such a determination would be based on extraordinary 
circumstances.
    To the extent that exercises of American-style, cash-settled index 
options are not permitted due to a delayed opening, the ``exercise 
advice'' drop-off boxes will not be placed in the designated areas 
until trading commences. Exercises may not be effected, nor will 
``exercise advices'' be accepted until trading commences. Exercises may 
not be effected, nor will ``exercise advices'' be accepted until 
trading commences.
    To the extent that exercises of Amercian-style, cash-settled index 
options are not permitted due to a trading halt, the ``exercise 
advice'' drop-off boxes will be immediately removed from the designated 
areas upon the declaration of the trading halt and will be returned to 
the designated areas upon the resumption of trading. [Exercises may not 
be effected, nor will ``exercises advices'' be accepted during a 
trading halt.] These restrictions shall remain in place until trading 
resumes.
    [Notwithstanding both of the above, an exercise may be processed 
and given effect in accordance with and subject to OCC rules if it can 
be documented that the decision to exercise was made during allowable 
time frames prior to the delayed opening or trading halt. Acceptable 
documentation shall ordinarily be limited to an ``exercise advice'' 
previously transmitted via 
C/MACS, an internal exercise memorandum previously prepared and time-
stamped by a member, or a member's copy of an ``exercise advice'' 
previously submitted to the Exchange.]
    [Modified Trading Hours: The ``exercise advice'' drop-off boxes 
will be removed five minutes after the designated closing time in the 
event that trading hours are modified. Exercises may not be effected, 
nor will ``exercise advises'' be accepted after such time.]**
    Closing Rotation: The ``exercise advice'' drop-off boxes will 
remain at the designated areas and ``exercise advices'' will be 
accepted until five minutes after the completion of the closing 
rotation.
    Modified Trading Hours: If trading hours are extended or modified, 
the exercise deadline will be five minutes after the close of trading 
on that day instead of 3:20 p.m. (CT). The ``exercise advice'' drop-off 
boxes will be removed after the modified exercise deadline, and 
exercises may not be effected, nor will ``exercise advices'' be 
accepted, after such time.
    FLEX Index Options: In the case of an American-style, cash-settled 
FLEX Index Option, the references in this Paragraph 11 to a trading 
delay, halt, suspension, resumption, closing rotation, or modified 
trading hours shall mean the occurrence of the applicable condition in 
the standardized option on the index underlying the FLEX Index Option 
(rather than the occurrence of the applicable condition in the FLEX 
Index Option itself).
    12. The President or his designee may determine to extend the 
applicable deadline for the delivery of ``exercise advice'' and 
``advice cancel'' notifications if unusual circumstances are present.
    Any questions pertaining to index option exercises can be addressed 
to Karen Charleston at (312) 786-7724 or Pat Cerny at (312) 786-7722.

(Regulatory Circulars RG89-13, RG92-02, RG94-61, [and] RG96-95, and RG 
98-90 Revised)

    * With the exception of some wording changes, these provisions 
are currently generally set forth in Rule 4.16(b) and Rule 11.1.05 
(which is now proposed to be moved to proposed Rule 11.1.03(h)) and 
are not newly proposed provisions, except that acceptable 
documentation under Section 11(i) of the Exercise Regulatory 
Circular is proposed to no longer include internal exercise 
memoranda.
    ** The provision regarding modified trading hours is proposed to 
be moved to after the provision regarding closing rotations and to 
be reworded without changing its substance.

[FR Doc. 99-13811 Filed 5-28-99; 8:45 am]
BILLING CODE 8010-01-M