[Federal Register Volume 65, Number 50 (Tuesday, March 14, 2000)]
[Notices]
[Pages 13799-13801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42500; File No. SR-CBOE-99-44]


Self-Regulatory Organiztions; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. To Revised the Limits on New Series of Index Options

March 7, 2000.
    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 August 18, 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 
Exchange. On November 22, 1999, the CBOE submitted to the Commission 
amendment No. 1 to the proposed rule change.\3\ 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).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 revised the proposal to include OEX index 
options as well as non-OEX index options. Amendment No. 1 also 
proposes to permit the Exchange to introduce new series of index 
options whose strike prices are more than 30% away from the current 
index value, provided that demonstrated customer interest exists.See 
Letter from Christopher R. Hill, attorney, CBOE, to Nancy Sanow, 
Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, dated November 16, 1999 (``Amendment No. 
1'' ).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE seeks to revise Interpretations .01 and .05 of Exchange 
Rule 24.9, ``Terms of Index Option Contracts'' to revise the limits on 
new series of index options. Under the proposal, the requirement that 
new series of index options must be ``reasonably related to the current 
index value of the underlying index'' would be interpreted to permit 
the Exchange to introduce new series of index options if their strike 
prices are within 30% of the current index value. In addition, the 
proposal would permit the CBOE to introduce new series of index options

[[Page 13800]]

whose strike prices are more than 30% away from the current index 
value, so long as demonstrated customer interest existed for those new 
series. The text of the proposed rule change is available at the Office 
of the Secretary, the 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

1. Purpose
    Interpretation .05 of CBOE Rule 24.9 currently allows the Exchange 
to open for trading additional series of the same class of index 
options, other than options based on the S&P 100 Index (``OEX''), when 
the current index value of the underlying index moves substantially 
from the exercise price of those index options previously opened for 
trading on the Exchange. Under the Exchange's rules, the exercise price 
of each new series of index of index options must be ``reasonably 
related to the current index value of the udnerlying index to which the 
options relate at or about the time the series of options is first 
opened for trading on the Exchange.''
    For all index options, except for long term index options 
(``LEAPS'') and OEX index options, Interpretation .05 presently defines 
``reasonably related'' to be`` (a) The lesser of 50 points of the 
current index value or 15% of the current index value; and (b) where 
demonstrated customer interest exists, the lesser of 100 points of the 
current index value or 30% of the current index value. For LEAPS, 
``reasonably related'' is defined to be 25% of the current index value. 
For OEX options, which are governed by Interpretation.01 of Rule 24.9, 
``reasonably related'' is defined to be 8% of the current index value, 
or 20% if unusual market conditions exist.
    When the current limits on new series of index options were 
approved by the Commission, 100 index points generally represented 
about 30% of the index value for most indexes underlying Exchange-
traded options. The exchange has represented that 100 index points 
currently represents about 7-8% of the current index value for many 
indexes underlying Exchange-traded options, and only about 4% for the 
NASDAQ 100 index.
    In the order that first approved Interpretation .05 of CBOE Rule 
24.9,\4\ the Commission noted that the provision would:

    [E]nable the CBOE to respond to changing market conditions and 
list index options series that provide market participants with an 
effective means to transfer risk and implement their trading 
strategies. The Commission believes that the discretion to list 
additional series index options will help to ensure the consistent 
availability of index options series tailored to meet the needs of 
investors during periods of market volatility.
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    \4\ See Securities Exchange Act Release No. 31683 (Dee. 31, 
1992), 58 FR 3307 (Jan. 8, 1993).

    The CBOE believes that the current form of Exchange Rule 24.9 does 
not allow it to respond to changed market conditions or provide market 
participants with effective risk management strategies in rapidly 
rising markets. Moreover, the Exchange believes that CBOE Rule 24.9 
limits the Exchange's ability to list strike prices that are reasonable 
and realistic in light of today's market values, and that it further 
prevents the Exchange from listing strike prices that would be 
attractive to customers.
    To address these limitations, the Exchange proposes to amend 
Interpretations .01 and .05 of CBOE Rule 24.9 to define ``reasonably 
related'' to mean 30% of the current index value for all index 
options.\5\ In addition, the proposal would permit the CBOE to 
introduce new series of index options whose strike prices are more than 
30% away from the current index value, as long as demonstrated customer 
interest existed for those new series.
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    \5\ The Exchange's proposal would therefore eliminate the 
distinction between OEX index options, LEAPs, and non-OEX index 
options for purposes CBOE Rule 24.9 and limits on new series. The 
Exchange believes that the distinction between these types of index 
options does not serve any regulatory purpose because all new series 
of index options have the same capacity implications irrespective of 
their underlying index. See Amendment No. 1, supra note 3.
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    The CBOE believes that the proposal will benefit CBOE members and 
their customers. Specifically, the CBOE believes that the proposal will 
enhance the Exchange's flexibility by permitting the Exchange to 
introduce new series of index options as warranted by market 
conditions, and by eliminating an outdated formula that is tied to a 
fixed number of index points. In addition, changing the limits from a 
fixed number of index points to a percentage of the current index value 
will help to ensure that future market levels do not impede the 
Exchange from listing new strike prices that are in demand because of 
price changes. The CBOE believes that the revised limits will enable 
the Exchange to better respond to the trading needs of its members and 
their customers.
    Additionally, in 1996, the Commission approved changes to 
Interpretation .01 of CBOE Rule 24.9 to revise the limits on new series 
of OEX index options. The revision changed the limits from flat numbers 
(in that case, the number of strike prices) to percentages of the 
current index value.\6\ At that time, the Commission determined that 
the increased level of the OEX index made it appropriate to transition 
from flat numbers to percentage parameters.
    The Exchange represents that the new series of index options that 
will result from this proposed rule change are within the Exchange's 
and OPRA's capacity.\7\ The Exchange has indicated that it routinely 
monitors inactive option contracts and removes from listing those index 
option series that do not have open interest and have little chance of 
trading.
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    \6\ See Securities Exchange Act Release No. 37815 (Oct. 11, 
1996), 61 FR 54693 (Oct. 21, 1996).
    \7\ The Exchange has represented that it will obtain and submit 
a letter from the Options Price Reporting Authority (``OPRA'') 
confirming that the new strike prices expected to be generated by 
the proposal are within the capacity of OPRA. See Amendment No. 1 
supra note 3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the act,\8\ in general, and with 
Section 6(b)(5) of the Act, in particular,\9\ in that it will promote 
just and equitable principles of trade, protect investors and the 
public interest, and remove impediments to and perfect the mechanisms 
of a free and open market. The Exchange further believes that the 
proposal will allow the Exchange to list strike prices in response to 
the historically high market prices in a manner that addresses the 
needs of its valued customers.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 13801]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
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 Exchange consents, the Commission will:
    A. By order approve the proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interests persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. 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. 552, will be available for inspection 
and copying at the Commission's Public Reference Section, 450 Fifth 
Street, NW, Washington, DC 20549-0609. 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-99-44 and 
should be submitted by April 4, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,
Secretary.
[FR Doc. 00-6204 Filed 3-13-00; 8:45 am]
BILLING CODE 8010-01-M