[Federal Register Volume 65, Number 80 (Tuesday, April 25, 2000)]
[Notices]
[Pages 24238-24242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10262]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42693; File No. SR-CBOE-99-03]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Option 
Exercise Procedures

April 17, 2000.
    On January 20, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder.\2\ In its filing, CBOE 
proposes to amend Exchange Rules 4.16 and 11.1 relating to option 
exercise procedures for noncash-settled equity options and American-
style, cash-settled index options, as well as to reflect in an Exercise 
Regulatory Circular the proposed changes to American-style, cash-
settled index options, and a change approved in a prior Commission 
Order relating to those options.\3\ On May 10, 1999, the Exchange 
submitted to the Commission Amendment No. 1 to the proposed rule 
change.\4\ The proposed rule change and Amendment No. 1 were published 
for comment in the Federal Register on June 1, 1999.\5\ The Commission 
received no comments on the proposal. This Order approves the proposed 
rule change as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange's Exercise Regulatory Circular sets forth 
procedures and requirements regarding the exercise of American-
style, cash-settled index options. In 1998, the CBOE filed with the 
Commission the Exercise Regulatory Circular, See Securities Exchange 
Act Release No. 40334 (August 18, 1998), 63 FR 45275 (August 25, 
1998) (File No. CBOE-98-34).
    \4\ See Letter from Arthur B. Reinstein, Counsel, CBOE, to Hong-
anh Tran, Attorney, Division of Market Regulation (``Division''), 
SEC, dated May 10, 1999 (``Amendment No. 1'').
    \5\ Securities Exchange Act Release No. 41435 (May 21, 1999), 64 
FR 29370 (June 1, 1999) (File No. SR-CBOE-99-03).
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I. Description of the Proposal

A. Exercise Procedures for American-Style, Cash-Settled Index Options 
After Certain Trading Halts and During a Trading Resumption That May 
Follow Such Trading Halts

    The CBOE proposes to modify its rules governing the exercise of 
American-style, cash-settled index options during certain trading 
halts. In addition, if trading resumes following a trading halt (such 
as by closing rotation), the Exchange proposes to permit exercises to 
occur during the resumption of trading and for five minutes after the 
close of the resumption of trading. In particular, the Exchange 
proposes to modify CBOE Rules 11.1 and 4.16 to permit the exercise of 
American-style, cash-settled index options during a trading halt that 
occurs at or after 3:00 p.m. (Central Time).\6\ A number of index 
options are traded on the Exchange from 8:30 a.m. To 3:15 p.m. (CT),\7\ 
whereas the markets for the equity securities underlying those index 
options generally close for trading by 3:00 p.m. (CT). CBOE Rule 11.1 
governs the exercise of option contracts, including index option 
contracts, and provides that Exchange members will follow the 
procedures of the Options Clearing Corporation (``OCC''), as well as 
those of the Exchange, when exercising option contracts. CBOE Rule 4.16 
governs other restrictions on options transactions and exercises. Under 
CBOE Rule 11.1.05 \8\ and CBOE Rule 4.16(b), exercises of cash-settled 
index options are prohibited whenever trading in such options is 
delayed, halted or suspended, unless otherwise determined by the 
Exchange's President or his designee.\9\ 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 option eliminates

[[Page 24239]]

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 unwind their positions by exercising their options through 
the OCC during trading halts and after the close of trading. Because 
holders of short positions are precluded from unwinding their positions 
through trading (i.e., sell their options) when trading on the CBOE is 
closed or halted, they would be at a disadvantage to holders of long 
positions. These rules were developed to reduce the advantage arising 
for those in long positions over those in short positions during 
trading halts (on any days other than on the last trading day before 
expiration Friday).\10\
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    \6\ Currently, the Exchange trades only one type of standardized 
American-style, cash-settled index option contract, Standard & 
Poor's 100 index options (``OEX index options'').
    \7\ CBOE Rule 24.6, Days and Hours of Business.
    \8\ The Exchange is proposing to move the text of CBOE Rule 
11.1.05, which relates to the exercise of American-style, cash-
settled index options, to proposed CBOE Rule 11.1.03(h) for ease of 
reference for Exchange members.
    \9\ The Exchange is also proposing to reflect the Commission's 
1999 approved rule changes to CBOE Rule 11.1.05 and CBOE Rule 
4.16(b) in an Exercise Regulatory Circular. In 1999, the Commission 
approved rule amendments to CBOE Rule 11.1.05 and CBOE Rule 4.16(b), 
which state that with the exception of the last business day prior 
to expiration, exercises of cash-settled index options will be 
prohibited during any time when trading in such options is delayed, 
halted, or suspended, unless otherwise determined by the Exchange's 
President or his designee. The 1999 rule amendments also stated 
that, 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. The Commission 
approved these rule amendments in 1999, but the Exchange did not 
propose, at that time, to reflect those rule amendments in an 
Exercise Regulatory Circular. See Securities Exchange Act Release 
No. 40951 (January 15, 1999), 64 FR 4482 (January 28, 1999) (File 
No. SR-CBOE-98-33).
    \10\ Exercises of expiring American-style, cash-settled index 
options cannot be restricted in any way on the last business day 
prior to their expiration. See CBOE Rules 4.16 and 11.1.
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    Since 1991, the Exchange has permitted holders of long index 
options an additional five minutes subsequent to the close of trading 
on the CBOE to make their exercise decisions (i.e., generally up to 
3:20 p.m. (CT)).\11\ The Exchange believed that the five-minute 
exercise window benefitted options investors generally by fostering 
higher quality markets. In particular, permitting the exercise of 
American-style, 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. 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. The Exchange adopted the five-minute 
exercise window notwithstanding that investors holding short positions 
in index options would not have the same opportunity to trade (i.e., to 
unwind their options positions) during this period as would holders of 
long index positions, who would be able to exercise through the OCC 
during the same period. In doing so, the Exchange believes that the 
benefits to the overall American-style, cash-settled index market from 
the five-minute exercise period exceed any potential harm that might 
result to holders of short index options.
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    \11\ See CBOE Rule 11.1.03. See Securities Exchange Act Release 
No. 29860 (October 25, 1991), 56 FR 56254 (November 1, 1991) (File 
No. SR-CBOE-91-28).
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    The Exchange now proposes to amend the Exchange Rules 4.16 and 11.1 
relating to exercise restrictions for American-style, cash-settled 
index options and to permit holders of long index options to exercise 
through the OCC during trading halts occurring at our after 3:00 p.m. 
(CT). As mentioned, the trading markets for the equity securities 
underlying those index options generally are closed for trading by 3:00 
p.m. (CT), and their closing values are generally established by this 
time. Market participants will seek to exercise their index options by 
this time. Many participations in the index options market utilize the 
closing value of the index to make trading and hedging decisions 
(including transactions in the related futures market) contingent upon 
exercise of an index option position or expected assignment of a short 
position. Given this, the Exchange believes that the occurrence of a 
trading halt at or after 3:00 p.m. (CT) should not fundamentally alter 
the ability of holders of long index options to exercise their 
options.\12\ While permitting the exercise of American-style, cash-
settled index options during trading halts that occur at or after 3:00 
p.m. (CT) increases the difference in treatment between holders of 
short and long positions in American-style, cash-settled index options, 
the Exchange believes that any increase in the difference of treatment 
is incremental given that the Exchange currently allows holders of long 
index options positions an additional five minutes after the close of 
the Exchange to make their exercise decisions. The Exchange represents 
that the additional benefits that would be afforded to the index market 
under the proposed rule amendments outweighs the additional differences 
in treatment between holders of long and short index options positions.
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    \12\ While implementing the standard five minutes 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 an would add to the increased operational 
burdens of member firms resulting from the trading halt itself.
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    Furthermore, the Exchange proposes that if trading resumes 
following a trading halt (such as by closing rotation), the Exchange 
would continue to permit holders of long index options in American-
style, cash-settled index options to make their exercise decisions 
during the resumption of trading and for a five-minute period after the 
close of the resumption of trading. The Exchange represents that 
permitting the additional five-minute exercise period after the close 
of the resumption of trading is consistent with what the Exchange 
currently permits as the additional exercise period after the daily 
close of trading on the Exchange.\13\
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    \13\ See proposed CBOE Rule 4.16(b)(iii) and proposed CBOE Rule 
11.1(h)(iii).
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    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., as the length of time required to provide 
sufficient notice and opportunity equally to all market participants 
during an intra-day trading halt would unfairly expand the opportunity 
for holders of long index option positions to exercise when short 
option holders are prohibited from trading.

B. Exercise Procedures for American-style, Cash-settled Flex Index 
Options

    The Exchange proposes to amend CBOE Rules 4.16(b) and CBOE Rule 
11.1.03 to treat both standardized and FLEX American-style, cash-
settled index options in the same manner with respect to exercise 
restrictions.\14\ In particular, the Exchange proposes to amend the 
language in proposed CBOE Rules 4.16(b) and 11.1.03 to state that if a 
trading delay, halt, suspension, resumption, closing rotation, or 
modified trading hours occurs in a standardized index option (either 
American-style or European-style), then the Exchange will treat the 
related American-style, cash-settled FLEX Index Option (if any) for 
purposes of exercise procedures as if that same condition had occurred 
in the American-style, cash-settled FELX Index Option. The Exchange 
would then apply the same exercise procedures to the related American-
style, cash-settled FLEX Index Option as established for the 
standardized index option following the market condition. Although the 
market condition will be deemed to have taken place in the related 
American-style, cash-settled FLEX Index Option for the purpose of 
triggering the same exercise procedures relating to that market 
condition, the market condition may or may not have actually occurred 
with respect to the American-style, cash-settled FLEX Index Option.\15\
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    \14\ The Exchange also proposes to reflect these rule amendments 
in an Exercise Regulatory Circular.
    \15\ Pursuant to a telephone conversation between Arthur B. 
Reinstein, Counsel, CBOE, and Hong-anh Tran, Attorney, Division, 
SEC, dated August 30, 1999.
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    Thus, for example, if there is a trading halt that occurs before 
3:00 p.m. (CT) in standardized Standard & Poor's 500 Index (SPX) 
options (which are European-style options and which can be exercised 
only at expiration),

[[Page 24240]]

exercises of American-style, cash-settled SPX FLEX options would be 
prohibited during the trading halt. Similarly, if there is a trading 
halt in the standardized SPX options that occurs at or after 3:00 p.m. 
(CT), the Exchange would deem that a trading halt has also occurred in 
the related American-style, cash-settled SPX FLEX options, and would 
allow exercises of American-style, cash-settled SPX FLEX options to 
occur through 3:20 p.m. (CT). Additionally, if there was a closing 
rotation in the standardized SPX options, the Exchange would deem that 
a closing rotation has occurred in the related American-style, cash-
settled SPX FLEX options for the purpose of triggering the exercise 
procedures relating to that condition, and would allow exercises of 
American-style, cash-settled SPX FLEX options to occur during the 
closing rotation for standardized SPX options and for five minutes 
thereafter.\16\
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    \16\ The Exchange represents that the rule amendments would not 
actually cause a closing rotation to occur in the American-style, 
cash-settled SPX FLEX options. Pursuant to a telephone conversation 
between Arthur B. Reinstein, Counsel, CBOE, and Hong-anh Tran, 
Attorney, Division, SEC, dated August 30, 1999.
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    The Exchange represents that the proposed amendment 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. Hence, the Exchange proposes to codify 
the Exchange's prior exercise practices as they apply to American-
style, cash-settled FLEX Index Options.\17\
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    \17\ The Exchange presently sets forth in the same Exercise 
Regulatory Circular the exercise procedures relating to standardized 
and FLEX, American-style, cash-settled index options.
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C. Extension of Exercise Notification Deadline and Cut-off-Time

    The Exchange proposes to amend the second provision of proposed 
CBOE Rule 11.1.06(d) to grant the CBOE President or his designee the 
authority to extend the exercise notification deadline for noncash-
settled equity options under unusual circumstances. The Exchange also 
proposes to amend CBOE Rule 11.1(b) and the first provision within 
proposed CBOE Rule 11.1.06(d) to grant the President of CBOE or his 
designee the authority to extend the 4:30 p.m., exercise cutoff time 
for noncash-settled equity options under unusual circumstances.\18\ In 
such case, the deadline for the delivery of an exercise instruction, 
``contrary exercise advice,'' and ``advice cancel'' based on proposed 
CBOE Rule 11.1.06(d) would be the revised exercise cutoff time 
designated by the President or his designee. For example, on rare 
occasions, the closing rotation in an equity option has ended shortly 
before 4:30 p.m. (CT) (i.e., the normal exercise cutoff time for these 
options). The exchange believes that a late-ending closing rotation 
delays a market participant in taking the actions necessary to make and 
process an exercise decision. This proposal would permit the President 
or his designee to extend the exercise notification deadline and the 
exercise cutoff time so that market participants can have adequate time 
to make informed exercise decisions and to process them under unusual 
situations.
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    \18\ The exercise cutoff time for noncash-settled equity options 
is 4:30 p.m. (CT) and is in effect on expiration Friday for expiring 
contracts. Members must not exercise through the OCC past this 
exercise cutoff time unless one of the three exceptions in CBOE Rule 
11.1 applies. Members who violate this rule are subject to 
disciplinary action, including summary fines under CBOE Rule 
17.50(g)(8).
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    The Exchange also 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.\19\ CBOE Rule 11.1.03 currently 
requires members to notify the Exchange by 3:20 p.m. (CT) (or if 
trading hours are extended or modified in the applicable option class, 
no later than five minutes after the close of trading on that day) of 
their exercise decisions with respect to American-style, cash-settled 
index options and sets forth procedures for providing such 
notification. The Exchange represents that under certain unusual 
circumstances, market participants have had difficulty meeting the 3:20 
p.m. (CT) notification deadline. For example, on rare occasions, the 
reporting authority for an index has been late in reporting the closing 
value for the index. Consequently, market participants have found it 
difficult on those occasions to make and process exercise decisions 
before the 3:20 p.m. (CT) deadline. This amendment proposes to amend 
CBOE Rule 11.1.03(c) to permit the President of CBOE or his designee to 
extend the applicable deadline for the delivery to the Exchange of 
``exercise advice'' and ``advice cancel'' notifications for American-
style, cash-settled index options under unusual situations.
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    \19\ The Exchange has a rule relating to the deadline for the 
delivery of exercise notifications for American-style, cash-settled 
index options, but no similar rule relating to the exercise cutoff 
time for these options. See CBOE Rule 11.1.03.
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    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, as discussed above, 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. The 
purpose of the Exchange's exercise deadline for American-style, cash-
settled index options and non-cash-settled equity options, as well as 
the exercise cutoff time for non-cash 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. Although 
permitting the President of CBOE or his designee the authority to 
extend the applicable exercise deadline or cut-off time in unusual 
circumstances would marginally increase this existing disparity, the 
Exchange believes that any potential detriment that may result from the 
implementation of the foregoing rule would be far exceeded by the 
benefit to the marketplace as a whole that is derived from allowing the 
President of CBOE or his designee to permit market participants 
sufficient time to make informed exercise decisions and to process 
their exercise decisions under unusual circumstances.
    The Exchange further notes that the President or his designee will 
only exercise this authority in unusual circumstances and thus that 
extensions in the applicable exercise deadline or cut-off time will not 
occur often. The Exchange represents that the President or his designee 
would in no event extend the applicable exercise deadline or cutoff 
time beyond the exercise cutoff time required by the OCC.\20\
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    \20\ The OCC has separate rules regarding the cutoff time by 
which exercise notices must be delivered to the OCC by the clearing 
members. See OCC Chapter VIII, (Exercise and Assignment).
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D. Documentation Evidencing Timely Exercise Determinations Made Prior 
to a Trading Delay, Halt or Suspension

    As discussed above, Exchange members are expected from the general 
prohibition on exercising American-style, cash-settled index options 
during trading halts, delays, or suspensions

[[Page 24241]]

provided they can document that the decision to exercise was made prior 
to the trading halt, delay, or suspension. Currently, the Exchange 
accepts as evidence of timely exercises internal exercise memoranda 
prepared by CBOE members, a copy of ``exercise advices'' transmitted 
electronically to OCC via OCC's Clearing Management and Control System 
(C/MAS), or a member's ``exercise advice'' previously submitted to the 
Exchange.
    The Exchange now believes that it would be preferable to rely on, 
and encourage the most objective evidence available as to, the timing 
of an exercise decision. For this reason, the Exchange proposes to no 
longer ordinarily accept internal exercise memoranda prepared by CBOE 
members. The Exchange will 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 of timely exercise 
decisions made prior to a trading delay, or suspension.\21\
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    \21\ See Exercise Regulatory Circular, Section 11.
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II. Discussion

    After careful consideration, the Commission has determined to 
approve the Exchange's proposal, finding that it is consistent with 
Section 6(b)(5) of the Act.\22\ Section 6(b)(5) provides that the rules 
of an exchange be designed to 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 mechanisms of a free and open 
market, to promote just and equitable principles of trade, and to 
protect investors and the public interest.\23\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ In approving the proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation 15 
U.S.C. 78c(f).
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A. Exercise Procedures for American-Style, Cash-Settled Options After 
Certain Trading Halts and During a Trading Resumption That May Follow 
Such Trading Halt

    First, the Commission believes that the proposal relating to the 
ability of market participants to exercise American-style, cash-settled 
index options during a trading halt occurring at or after 3:00 p.m. 
(CT) is appropriate based on the reasons set forth below.
    The Commission believes that the occurrence of a trading halt at or 
after 3:00 p.m. (CT) should not fundamentally alter the ability of 
holders of long index options to exercise through the OCC. As discussed 
above, the trading markets for the equity securities underlying index 
options generally are closed for trading by 3:00 p.m. (CT), thereby 
establishing the value of a given index. By this time, market 
participants are already watching the market for opportunities to 
exercise their index options. Many participants in the 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 index option position or the expected 
assignment of a short position. Thus, the Exchange believes that the 
occurrence of a trading halt at or after 3:00 p.m. (CT) should not 
fundamentally alter the ability of holders of long index options to 
exercise their options.
    Because the Exchange currently allows its members an additional 
five minutes after the close of trading for the holders of long index 
options to make their exercise decisions, the Commission believes that 
the implementation of the above rule amendment would only marginally 
increase the exercise time period for holders of long index options to 
exercise through the OCC. The Commission believes that permitting 
holders of long positions in an American-style, cash-settled index, 
option to submit their exercise decisions during a trading halt 
occurring at or after 3:00 p.m. (CT) would remove the impediments to, 
and perfect the mechanism of, a free and open market during such a 
halt.
    The Commission also believes that the proposed amendment to permit 
exercise of standardized American-style, cash-settled index options 
during a trading resumption (such as a closing rotation) following a 
trading halt occurring at or after 3:00 p.m. (CT), and for a five 
minute period thereafter, is appropriate because it will promote just 
and equitable principles of trade. First, the Commission believes that 
the proposed amendment will reduce potential confusion among CBOE 
members and customers during a trading resumption that may follow a 
trading halt occurring at or after 3:00 p.m. (CT). Second, the Exchange 
presently permits an additional five-minute window after the close of 
options trading on the Exchange for market participants to make 
exercise decisions. The Commission believes that the proposed 
amendment, which will also permit the additional five-minute window 
after the close of a trading resumption following a late trading halt, 
will maintain consistency among the rules of the Exchange, and will 
promote just and equitable principles of trade.

B. Options Exercise Procedures for American-Style, Cash-Settled Flex 
Index Options

    The Commission also believes that the proposed amendment to treat 
all American-style, cash-settled index options (standardized and FLEX) 
in the same manner with regard to exercise procedures is reasonable 
because it promotes just and equitable principles of trade. In 
particular, CBOE's Exercise Regulatory Circular, which the Exchange 
filed with the Commission in 1998,\24\ currently sets forth the 
policies regarding exercise procedures and requirements for all 
American-style, cash-settled index options. The Exchange has always 
treated all American-style, cash-settled index options in the same 
manner with respect to exercise procedures. However, certain rules 
relating to FLEX options would make it impossible for all American-
style, cash-settled index options to be treated the same for exercise 
procedure purposes. For example, the CBOE cannot apply to American-
style, cash-settled FLEX Index Options its proposed rule regarding 
exercise procedures during a closing rotation and for five minutes 
thereafter such rotation because CBOE Rule 24A.3 currently does not 
permit opening or closing rotations to be conducted in FLEX options. 
Accordingly, the CBOE is proposed to change CBOE Rules 4.16(b) and 
11.1.03 \25\ to deem, for purposes of the exercise procedures, a 
trading delay, halt, suspension, resumption, closing rotation, or 
modified trading hours to take place in the American-style, cash-
settled FLEX Index Options, anytime the same condition occurs in the 
related American-style, cash-settled standardized index option (either 
American-style or European-style). The Commission believes that the 
proposal is appropriate and necessary to ensure that equal treatment of 
two similar options products.
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    \24\ See Securities Exchange Act Release No. 40334 (August 18, 
1998), 63 FR 45275 (August 25, 1998) (SR-CBOE-98-34).
    \25\ The Commission also notes that the Exchange is moving the 
text of CBOE Rule 11.1.05 (which related to the procedures for 
exercise of American-style, case-settled index options) to proposed 
CBOE Rule 11.1.03(h). CBOE Rule 11.1.03 sets forth the exercise 
procedures and requirements of American-style, cash-settled index 
options. The Commission believes that these changes do not 
substantially alter the meaning of, and will make it easy for 
Exchange members to refer to these rules because all the provisions 
relating to the exercise procedures for American-style, cash-settled 
index options will be set forth under the same rule.

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[[Page 24242]]

C. Extension of Exercise Notification Deadline and Exercise Cutoff

    The Commission notes that the purpose of the Exchange's exercise 
notification deadline \26\ for American-style, cash-settled index 
options, and noncash-settled equity options, as well as the exercise 
cutoff time for noncash-settled equity options is to limit the 
differences in the ability of long options holders as compared to short 
options holders to offset their positions through exercise following 
the close of trading. The Commission recognizes that permitting the 
President or his designee to extend the applicable exercise deadline or 
cut-off time in unusual circumstances will marginally increase this 
existing disparity. The Commission, however, believes that any 
potential detriment that may result from increasing the disparity 
between long and short options holders will be exceeded by the benefit 
of allowing the President or his designees to give market participants 
additional time in which to make and process exercise decisions under 
unusual circumstances.
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    \26\ See Securities Exchange Act Release No. 40334 (August 18, 
1998), 63 FR 45275 (August 25, 1998) (SR-CBOE-98-34).
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    Furthermore, the Commission believes that the proposed rule change 
will promote efficient exercise procedures for both equity and index 
options by permitting market participants the opportunity to make 
informed decisions before exercising their options under unusual 
circumstances. For example, it would be an unusual circumstance if the 
reporting authority was late in reporting the closing value of an 
American-style, cash-settled index option, or if there were not enough 
time to process an exercise decision for a noncash-settled equity 
option due to a late closing rotation that ended just before the normal 
deadline for submitting the exercise notice to the Exchange. These 
provisions will also promote just and equitable principles of trade 
because public customers or Exchange members should not have to make 
exercise decisions based on incomplete information about the index 
value (in the case of index options) and should have time to process 
their exercise decisions (in the case of equity options). The 
Commission also notes that the Exchange represents that its President 
or his designee will only exercise this authority in unusual 
circumstances, and that extensions in the applicable exercise deadline 
or cutoff time will not occur often. The Exchange further represents 
that the Exchange's President or his designee will in no event extend 
the applicable exercise deadline or cut-off time beyond the time 
required by the OCC for submission of exercise instructions by its 
clearing members.

 D. Documentation Evidencing Timely Exercise Determinations Made Prior 
to a Trading Delay, Halt, or Suspension

    Finally, the Commission believes that it is reasonable for the 
Exchange to no longer ordinarily accept internal exercise memoranda 
prepared by CBOE members as evidence of timely exercise determinations 
of American-style, cash-settled (standardized, or FLEX) index options 
made prior to a trading delay, halt, or suspension. The Commission 
believes that by allowing only objective evidence to indicate timely 
exercise determinations, the proposal promotes the ability of the 
Exchange to verify the authenticity of the exercise documents.

III. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-CBOE-99-03) is approved, as 
amended.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \27\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-10262 Filed 4-24-00; 8:45 am]
BILLING CODE 8010-01-M