[Federal Register Volume 65, Number 132 (Monday, July 10, 2000)]
[Notices]
[Pages 42409-42411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17332]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43000; File No. SR-CBOE-00-15]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
Chicago Board Options Exchange, Inc. Relating to a Reduction in the 
Value of the Nasdaq 100 Stock Index

June 30, 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 June 30, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the CBOE. On June 30, 2000, 
the CBOE submitted 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\ On June 30, 2000, the CBOE submitted a letter from Timothy 
Thompson, Assistant General Counsel, CBOE, to Joe Corcoran, 
Attorney, Division of Market Regulation, Commission, amending the 
proposal (``Amendment No. 1''). In Amendment No. 1 the CBOE 
requested that the Commission review the proposal under Rule 19b-
4(f)(6). The CBOE also expressed its intent to list and trade 
options on the Nasdaq 100 Index at one-tenth its value, even though 
it initially sought approval to list options on the Nasdaq 100 Index 
based upon a reduced index level equal to one-tenth and/or one-
fortieth of the Nasdaq 100 Index. Moreover, the CBOE clarified that 
it will also continue to trade the full value Nasdaq 100 Index 
options. The Commission notes that filings submitted under Section 
19(b)(3)(A) of the Act must be complete upon filing. Because CBOE 
amended this proposal to file it under Section 19(b)(3)(A) of the 
Act, the date of the amendment is deemed the date of the filing of 
the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to trade options on the Nasdaq 100 Index based on 
reduced-value level equal to one-tenth of its present value by 
multiplying the divisor used in calculating the Index by a factor of 
10. In seeking approval to trade options based upon one-tenth of the 
value of the Nasdaq 100 Index, the Exchange represents that it is 
planning to list options on the reduced value Nasdaq 100 Index value at 
the same time it continues to list and trade options on the full value 
of the Nasdaq 100 Index. In connection with this change, the Exchange 
proposes to multiply by a factor of 10 the position and exercise limits 
for the one-tenth level index. When the Exchange trades full value and 
reduced value Nasdaq 100 options at the same time, the Exchange will 
require that the positions in the full value and reduced value 
contracts be aggregated for the purpose of determining compliance with 
the position and exercise limits. In addition, the Exchange proposes to 
amend Exchange Rule 24.9, Interpretation .01 to provide that the 
reduced-value Nasdaq 100 options will have a strike price interval of 
no less than $2.50. The text of the proposed rule change is available 
at the CBOE and at the Commission's Public Reference Room.

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 Exchange 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 Exchange 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
    The CBOE began trading Nasdaq 100 Index (``NDX'') options in 
February 1994.\4\ NDX options are European-style, cash-settled options 
on the Nasdaq-100 Index. The Nasdaq-100 Index is a modified 
capitalization-weighted index of 100 of the largest non-financial 
securities traded on the Nasdaq Stock Market. In recent years, on the 
strength of a sustained bull market, the value of the NDX has tripled 
since the mid-1998, such that the value of the Index stood at 4,034.17 
as of April 4, 2000. As a result of the significant increase in the 
value of the underlying index, the premium for NDX options has also 
increased. The CBOE believes that this has caused NDX options to trade 
at a level that may be uncomfortably high for retail investors.
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    \4\ See Securities Exchange Act Release No. 33428 (January 5, 
1994), 59 FR 1576 (January 11, 1994).
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    As a result, Nasdaq (the reporting authority for the Index) has 
approved CBOE's request to trade options based on a reduced index level 
equal to one-tenth of the Nasdaq-100 Index. In seeking approval to 
trade options based upon one-tenth of the value of the Nasdaq 100 
Index, the Exchange represents that it is planning to list options on 
the reduced value Nasdaq 100 Index value at the same time it continues 
to list and trade options on the full value of the Nasdaq 100 Index. In 
addition, the trading symbol for options on the reduced-value Nasdaq 
100 Index will no longer be NDX.
    In addition to the strike price being reduced by one-tenth, the 
CBOE proposes to increase the position and exercise for the reduced 
value Nasdaq 100 Index by a factor of 10.\5\ The CBOE believes that 
this increase in the position and exercise limits is justified because 
the reduction contract size would result in each contract overlying 
only one-tenth of the value of a current Nasdaq 100 Index contract. 
Consequently, the revised position and exercise limits would be 
equivalent to the current levels in terms of the value of the Index, 
which the option positions would overlie. Further, when a person trades 
full value and reduced value Nasdaq 100 options at the same time, the 
Exchange will require that the positions in the full value and reduced 
value contracts be aggregated for the purpose of determining compliance 
with the position and exercise limits.
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    \5\ The Exchange has separately filed for an increase in the 
position and exercise limits for NDX in SR-CBOE-00-14.
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    According to the Exchange, position limits were intended to prevent 
a particular customer or firm from manipulating the value of an index 
by limiting the notional value of an index that any particular person 
or firm could control. The proposed nominal increase (by ten times in 
the case of one-tenth value options) does not change the notional value 
that any particular

[[Page 42410]]

person or firm may control. Based on the current contract notional 
value of approximately $400,000 and the 25,000 contract position limit, 
and  particular person or firm could control a portfolio valued roughly 
at $10 billion. By reducing the contract size by a factor of 10 of 
$40,000 while increasing the position limit to 250,000 contracts would 
have no effect on the value of the portfolio that could be controlled 
by a particular person or firm. In addition, the 100 stocks comprising 
the Nasdaq 100 Index are among the largest and most liquid stocks 
listed on the Nasdaq National Market System, and are frequently among 
the daily most active securities. Like other broad-based indexes, the 
Nasdaq 100 is sufficiently diversified and liquid so as to minimize the 
possibility of manipulation. Moreover, given that technology has grown 
to become a major component of the U.S. economy and investment 
portfolios, the Exchange believes that a position limit increase, if it 
were proposing one, for options on the Nasdaq 100 Index is justified 
and consistent with the limits applied to other broad-based products.
    The Exchange currently intends to begin trading the reduced value 
contracts beginning on July 10, 2000. It is possible that the exchange 
will delay the introduction of the reduced value contracts until some 
later time depending on whether any business or operational issues 
arise. In any event, the Exchange will provide adequate advance notice 
to its member firms so that they may be prepared for the introduction 
of the reduced value contracts and so that they may in turn provide 
adequate notice to their customers. The Exchange has a strong interest 
in publicizing the introduction of the reduced value contracts and will 
take a number of measures to inform the firms and potential customers 
including publication of a regulatory circular, marketing brochures and 
notification through the Exchange's web site.
    The Exchange expects that the proposed change will attract 
additional customer business in Nasdaq 100 Index options in those 
series in which retail customers are most interested in trading. For 
example, an April 4040 (at the money) call option series currently 
trades at approximately $20,500 per contract. With the index split, the 
same option series (once adjusted), with all else remaining equal, 
would trade at approximately $2,050 per contract. The Exchange believes 
that the proposed change will permit some investors to trade these 
options who have otherwise been priced out of the market due to the 
recent market surge. The Exchange believes that NDX options provide an 
important opportunity for investors to hedge and speculate upon the 
market risk associated with the stocks comprising this broad-based and 
widely followed index. By reducing the value of the index, such 
investors will be able to utilize this trading vehicle while extending 
a smaller outlay of capital. This should attract additional investors, 
and, in turn, create a more active and liquid trading environment.
    The Exchange believes that reducing the value of the index does not 
raise manipulation concerns and will not cause adverse market impact, 
because the Exchange will continue to employ the same surveillance 
procedures and has proposed an orderly procedure to achieve the index 
split, including adequate prior notice to market participants.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) \6\ of the Act, in 
that it is designed to perfect the mechanisms of a free and open market 
and to protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule: (1) Does not significantly 
affect the protection of investors or the public interest; (2) does not 
impose any significant burden on competition; and (3) does not become 
operative for 30 days or such shorter time as the Commission may 
designate, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \7\ and subparagraph (f)(6) of Rule 19b-
4 thereunder.\8\ Although Rule 19b-4(f)(6) requires that an Exchange 
submit a notice of its intent to file at least five business days prior 
to the filing date, the Commission waived this requirement at the 
CBOE's request.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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    The Commission also notes that under Rule 19b-4(f)(6)(iii), the 
proposal does not become operative for 30 days after date of its 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
The CBOE requests a waiver of this 30-day period to begin trading the 
reduced-value options on July 10, 2000. The CBOE believes that 
acceleration of the operative date of the proposed rule is appropriate 
because it will allow the Exchange to offer investors a more affordable 
alternative to hedge their exposure to the Nasdaq 100 Index. According 
to the Exchange, the Nasdaq 100 Index has been especially volatile in 
the last few weeks and the acceleration of the proposed change will 
allow the Exchange to offer this more affordable hedging alternative to 
a time when it is most needed. In addition, the Exchange notes that the 
American Stock Exchange has a rule (Commentary .03 to Amex Rule 901C) 
that allows it to split an index without first submitting a filing. For 
the reasons discussed above, the Commission finds that the waiver of 
the 30-day period is consistent with the protection of investors and 
the public interest.\9\
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    \9\ The Commission notes that this proposal is similar to 
another CBOE proposal that the Commission approved in 1993. In the 
1993 proposal, the CBOE proposed to trade options on the S&P 500 
Index (``SPX'') based on reduced-value level equal to one-tenth of 
its then-present value. In the order approving the proposal, the 
Commission determined that potential manipulation concerns were 
minimized by the fact that positions in the reduced value SPX 
options and full value SPX options would be aggregated for position 
and exercise limit purposes. See Release No. 34-32893 (September 14, 
1993), 58 FR 49070 (September 21, 1993) (File No. SR-CBOE-93-12).
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    At any time within 60 days of the filing of the proposed rule 
change, as amended, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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 submission, all subsequent amendments, all written

[[Page 42411]]

statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to File No. SR-CBOE-00-15 and should 
be submitted by July 31, 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).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-17332 Filed 7-7-00; 8:45 am]
BILLING CODE 8010-01-M