[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19261-19262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9116]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44156; File No. SR-CBOE-00-14]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 Thereto by the Chicago Board Options Exchange, 
Incorporated to Increase Position and Exercise Limits for Nasdaq 100 
Index Options, Expand the Index Hedge Exemption, and Eliminate the 
Near-Term Position Limit Restriction

April 6, 2001.

I. Introduction

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, on April 10, 2000, the 
Chicago Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposal to increase position and exercise limits for Nasdaq 100 Index 
(full value) options (``NDX'') and Nasdaq 100 Index (1/10th) options 
(``MNX''),\3\ expand the index hedge exemption for NDX and MNX options, 
and eliminate the near-term position limit restriction. The proposed 
rule change was published for comment in the Federal Register on 
October 24, 2000.\4\ On February 12, 2001, CBOE submitted Amendment No. 
1 to the proposal.\5\ The Commission received no comments on the 
proposal. This order and notice approves CBOE's proposal, solicits 
comment from interested persons on Amendment No. 1 thereto, and 
approves Amendment No. 1 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange recently listed and traded options (MNX 
options) based on a value of 1/10th the current value of NDX options 
and made related changes to position and exercise limits for that 
option class. See Securities Exchange Act Release No. 43000 (June 
30, 2000), 65 FR 42409 (July 10, 2000).
    \4\ Securities Exchange Act Release No. 43456 (October 17, 
2000), 65 FR 63657.
    \5\ See Letter from Timothy Thompson, Assistant General Counsel, 
CBOE, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission (February 9, 2001). In Amendment No. 1, CBOE: 
(1) Revised the tables in the proposed rule text to account for 
changes that CBOE made to the tables following the Commission's 
approval of SR-CBOE-00-15 on June 30, 2000; (2) clarified that 
positions in NDX and MNX options must be aggregated pursuant to CBOE 
Rule 24.4(d) to determine compliance with the position limits; and 
(3) provided additional reasons for the Commission to approve the 
proposed rule change.
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II. Description of the Proposal

    The Exchange proposed to amend CBOE Rule 24.4 by: (1) Increasing 
the position limit in NDX options from 25,000 contracts to 75,000 
contracts; (2) increasing the position limit in MNX options from 
250,000 contracts to 750,000 contracts; (3) increasing the position 
limit of the index hedge exemption in NDX options from 75,000 contracts 
to 150,000 contracts; (4) increasing the position limit of the index 
hedge exemption in MNX options from 500,000 contracts to 1,500,000 
contracts; and (5) eliminating the 15,000 contract near-term limit for 
NDX options. CBOE has stated that exercise limits will continue to 
correspond to position limits, so that investors may exercise the 
number of contracts set forth as the position limit during any period 
of five consecutive business days.
    CBOE has made several arguments in support of its request. First, 
CBOE maintains that the expanded position and exercise limits will give 
market participants greater flexibility in deciding their portfolios 
without increasing the risk of market manipulation or disruption. CBOE 
believes that the pool of securities that comprise the Nasdaq 100 Index 
is so large that manipulation of the index or its overlying options 
(such as NDX and MNX) would be extremely unlikely, even with the 
expanded position limits. In addition, CBOE believes that the expanded 
limits are necessary to help its options market to compete against the 
futures markets. CBOE has stated that futures positions that are deemed 
bona fide hedging transactions are exempt from position limit rules 
under the Commodity Exchange Act and its implementing regulations.\6\ 
Thus, institutions may offset much larger equity positions using index 
futures products than by using index options. Therefore, CBOE concludes 
that increasing the position limits for its index options will help 
maintain competitive equality with the future markets. Finally, CBOE 
has noted that the Commission has approved similar proposals to 
increase or remove position and exercise limits in the past.\7\
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    \6\ See 7 U.S.C. 6a(3); 17 CFR 1.3(z) and 1.47.
    \7\ See e.g., Securities Exchange Act Release No. 40875 
(December 31, 1998), 64 FR 1842 (January 12, 1999) (approving 
increase in position and exercise limits for standardized equity 
options on CBOE, Amex, PCX, and Phlx). See also Securities Exchange 
Act Release No. 40969 (January 22, 1999), 64 FR 49111 (February 1, 
1999) (approving two-year CBOE pilot program to eliminate position 
and exercise limits for OEX, SPX, and DJX index options and for FLEX 
options overlying those indexes); Securities Exchange Act Release 
No. 43867 (January 22, 2001), 66 FR 8250 (January 30, 2001) 
(extending CBOE pilot program for an additional four months).
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act.\8\ In particular, the Commission 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\9\ which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to facilitate transactions in securities, and to protect investors and 
the public interest.
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    \8\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
option contracts that a member or customer may hold or exercise. These 
rules are intended to prevent the establishment of options positions 
that are sufficiently large as to create incentives to manipulate or 
disrupt the underlying market in a manner that would benefit the 
options position. At the same time, the Commission has recognized that 
position and exercise limits for options must not be established at 
levels that are so low as to discourage participation in the options 
market by institutions and other investors with substantial hedging 
needs, or to prevent specialists and other market-makers from 
adequately meeting their obligations to maintain fair and orderly 
markets.
    The Commission finds that CBOE's proposal to raise the position and 
exercise limits for NDX and MNX options is consistent with the Act. As 
noted above, the Commission has approved similar proposals in the 
past.\10\ The Commission also finds that CBOE's proposal to raise the 
hedge exemption for NDX and MNX option position limits is consistent 
with the Act. An increase in these limits will permit more effective 
hedging of large stock portfolios and may increase the depth and 
liquidity of the market for NDX and MNX options. At the same time, the 
Commission does not believe that raising the position, exercise, or 
hedge exemption limits for these options will substantially increase 
the likelihood of manipulation of the market for these options or their 
underlying securities. The Nasdaq 100 Index consists of 100 securities 
that collectively have a very large market capitalization, which 
greatly reduces the

[[Page 19262]]

potential for manipulation of the index or its overlying options (such 
as NDX and MNX). Furthermore, the Commission previously has stated its 
belief that CBOE's surveillance programs are ``adequate to detect and 
deter violations of position and exercise limits, as well as to detect 
and deter attempted manipulation and other trading abuses through the 
use of * * * illegal positions by market participants.'' \11\
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    \10\ See supra note 7.
    \11\ Securities Exchange Act Release No. 43052 (July 18, 2000), 
65 FR 45805, 45808 (July 25, 2000) (approving increase in position 
and exercise limits for narrow-based index options on CBOE).
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    The Commission also finds that elimination of the front-month 
limitation for NDA options is consistent with the Act.\12\ As the 
Exchange has noted, a front-month limitation was established for 
American-style broad-based index options as a measure to lessen market 
volatility experienced at the close of trading on expiration when 
stock/index programs were unwound. CBOE has argued that this rationale 
is not relevant for the NDX option, which is a European-style contract 
with a settlement value based on a volume weighting of opening stock 
prices as reported within the first five minutes of trading.\13\ 
Eliminating the front-month position and exercise limits for NDX 
options may bring additional depth and liquidity, in terms of both 
volume and open interest, to the NDX without significantly increasing 
concerns regarding inter-market manipulation or disruption of the index 
options or the underlying component securities.
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    \12\ Currently, the Exchange does not impose near-term limits on 
MNX options.
    \13\ Moreover, CBOE has stated that its surveillance procedures 
during the week of expiration of NDX options include communication 
with NASD Regulation to determine whether there are any concerns 
regarding potential manipulation in the securities which comprise 
the NDX.
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposal prior to the thirtieth day after the date of public notice 
in the Federal Register, pursuant to Section 19(b)(2) of the Act.\14\ 
The original filing has been published in the Federal Register, and no 
comments were received. The only material changes to the rule text 
provided in Amendment No. 1 are increases in the position and hedge 
exemption limits for MNX options that will make these limits ten times 
the equivalent limits for NDX options. Currently, CBOE Rule 24.4(d) 
states that MNX options must be aggregated with NDX options at a ratio 
of ten-to-one to determine compliance with the position limits. 
Approving Amendment No. 1 on an accelerated basis will give force to 
the intent of the existing rule and help eliminate confusion in the 
application of position limits for NDX and MNX options.
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    \14\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-00-14) is approved and 
that Amendment No. 1 thereto is approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9116 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M