[Federal Register Volume 66, Number 140 (Friday, July 20, 2001)]
[Notices]
[Pages 38046-38049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44556; File No. SR-CBOE-2001-39]


Self-Regulatory Oganizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc. Relating to the Addition of European-Style Exercise 
Option Series on the OEX

July 16, 2001.
    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 July 10, 2001, 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, II, 
and III below, which Items have been prepared by the CBOE. The proposed 
rule changes has been filed by the CBOE as a ``non-controversial'' rule 
change under Rule 19b-4(f)(6) under the Act.\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\ 17 CFR 240.19b-4(f)(6)
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to: (1) Introduce for trading new series of 
European-style exercise options on the Standard & Poor's 100 Stock 
Index (``OEX''); and (2) include the new European-style options in a 
pilot program (``Pilot Program'') that eliminates position and exercise 
limits for OEX and other index options.\4\
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    \4\ On January 22, 1999, the Commission approved a two-year 
Pilot Program that eliminated position and exercise limits for 
options on the S&P 500 Index (``SPX''), OEX, and Dow Jones 
Industrial Average (``DJX'') as well as for FLEX options overlying 
those indexes. See Securities Exchange Act Release No. 40969 
(January 22, 1999), 64 FR 49111 (Feb. 1, 1999) (approving SR-CBOE-
98-23) (``Approval Order''). By order dated January 30, 2001, the 
Commission extended the Pilot Program until May 22, 2001. See 
Securities Exchange Act Release No. 43867 (Jan. 22, 2001), 66 FR 
8250 (Jan. 30, 2001) (approving SR-CBOE-01-01). By order dated May 
22, 2001, the Commission extended the Pilot Program until September 
22, 2001. See Securities Exchange Act Release No. 44335 (May 22, 
2001), 66 FR 29369 (May 30, 2001) (approving SR-CBOE-2001-26). The 
Exchange has a requested permanent approval of the Pilot Progrram. 
See File No. SR-CBOE-2001-22. The Commission has not acted on File 
No. SR-CBOE-2001-22.

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[[Page 38047]]

    The text of the proposed rule change is available at 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 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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange currently lists for trading American-style options on 
the OEX.\5\ ``American-style'' exercuse allows investors to exercise 
their positions on any given business day prior to expiration.\6\ This 
creates what is known as early exercise or assignment risk. 
Specifically, when an OEX option is exercised prior to expiration, that 
option is``assigned'' to an option writer. Thus, writers of OEX options 
are subject to the risk each day that same or all of their option may 
be exiercised. A writer that receives an assignment can have his 
trading strategy affected in a negative manner.
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    \5\ The OEX is a broad-based, capitaliztion-weighted index taht 
is cash-settled.
    \6\ The amount of cash received upon exercise depends on the 
closing value of the index in comparison to the strike price of the 
option.
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    The Exchange believes that the risk of early exercise and 
assignment could be driving current users away from the OEX as well as 
deterring potential new users, both of which could have a negative 
effect on liquidity. Member firms have indicated to the Exchange the 
desire to trade OEX option series that do not subject them to early 
exercise and assignment risk. Accordingly, the Exchange proposes to 
introduce series of OEX options with European-style exercise.\7\
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    \7\ European-style option can be exercised only during a 
specified time period prior to expiration.
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    The same index will underlie both the ``new'' and existing series 
of OEX options. Contract specifications for the ``new'' series will be 
identical to the existing series with the exception of the exercise 
style. Thus, the ``new'' series also will be cash-settled and feature 
P.M.-settlement. The Exchange presently intends to trade the ``new'' 
European-style series of OEX options in the existing OEX pit under a 
separate symbol, XEO.\8\ The Exchange notes that this is identical to 
the way that options on the SPX traded when the Exchange listed both 
A.M. and P.M.-settled SPX option series.\9\
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    \8\ The existing American-style series will continue to trade 
under the existing OEX symbols.
    \9\ See Exchange Act Release 30944 (July 21, 1992), 57 FR 33376 
(July 28, 1992) (order approving SR-CBOE-92-09) (``1992 Order'').
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    As Noted above the American-style OEX series currently are not 
subject to position limits.\10\ The Exchange hereby proposes to include 
European-style OEX series within the scope of that Pilot Program. 
Accordingly, both the American- and European-style series of the OEX 
will not be subject to position limits.
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    \10\ See supra note 4.
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    The CBOE believes it is reasonable to allow the European-style OEX 
series also to trade without position limits because they represent 
additional series of an existing product that the Commission has 
approved previously for non-position limit trading. The CBOE believes 
that waiving position limits for all OEX series, American- and 
European-style alike, will help to ensure that investors can continue 
to hedge SPX positions with OEX positions (and vice versa). The CBOE 
notes that, given the high correlation between the two indexes, many 
traders hedge positions in one index with positions in the other. The 
CBOE believes that subjecting European-style OEX series to position 
limits while allowing SPX to trade without position limits could limit 
severely the utility of this trading strategy.
    The Exchange notes that it currently has the surveillance 
capabilities to detect any trading aberrations involving large 
positions in SPX and American-style OEX.\11\ The Exchange states that 
upon introduction of European-style OEX series, these surveillance 
procedures will be expanded to monitor trading activity in the 
European-style series. Finally, the Exchanges notes that all of the 
representations it made in the Approval Order with respect to OEX 
options will apply to European-style OEX series as well.
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    \11\ The Approval Order required the Exchange to submit a report 
to the Commission on the status of the Pilot Program to allow the 
Commission to evaluate any consequences of the program and to 
determine whether to approve the elimination of position and 
exercise limits for these products on a permanent basis. The CBOE 
submitted the required report to the Commission on December 21, 
2000. The report indicated that during the review period, the CBOE 
did not discover any instances where an account maintained an 
unusually large unhedged position. In fact, the data from the report 
found that only 12 accounts established positions in excess of 10% 
of the standard limit applicable to each index at the time the Pilot 
Program was approved. These positions were all in SPX and most were 
established by firms and market makers. All of the accounts were 
hedged. The CBOE's analysis did not discover any aberrations caused 
by large unhedged positions during the life of the Pilot Program.
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    The Exchange notes the Pilot Program altered the reporting 
thresholds applicable to OEX, DJX, and SPX options.\12\ Specifically, 
the Pilot Program increased to 100,000 contracts the reporting 
threshold for positions in OEX options. The Exchange intends to require 
European-style OEX series be subject to the same reporting requirement. 
Moreover, the Exchange proposes that positions in the American- and 
European-style OEX series be aggregated for purposes of complying with 
this requirement. Accordingly, any combination of 100,000 contracts 
involving OEX American-style and OEX European-style series must be 
reported to the Exchange pursuant to CBOE Rule 24.4.03. The Exchange 
also notes that CBOE Rule 24.4.04, which authorizes the imposition of 
additional margin in OEX positions, will apply to all OEX series, 
whether European- or American-style.
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    \12\ Reporting thresholds are the contract levels at which 
members are required to report information regarding customer 
positions to the Exchange.
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    Prior to commencement of trading of the ``new'' series, the 
Exchange will distribute to members an informational circular apprising 
them of the addition of the European-style OEX series. This circular 
will highlight the difference in exercise methodology between the 
series, identify the new symbols for the European-style series, and 
identify the initial expiration months and strike prices available for 
trading.\13\ This circular also will indicate that, for purposes of the 
reporting requirement of CBOE Rule 24.4.03, positions in both series of 
OEX will be aggregated. The Exchange's public relations department will 
issue press releases to the media as a means to inform investors of the

[[Page 38048]]

additional investment choices now available with the addition of the 
European-style OEX series. Finally, the Exchange will publicize on its 
website the introduction of the new European-style OEX series. The 
Exchange notes that these procedures, with the exception of the website 
publication, are similar to the procedures used when the Exchange 
listed both A.M.- and P.M.-settled SPX Index options in 1992.\14\
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    \13\ This information circular will clarify that the American-
style OEX series will retain the existing OEX symbols while the 
European-style series will trade under the XEO symbol.
    \14\ See 1992 Order, supra note 9.
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2. Statutory Basis
    The addition of European-style OEX series will create an investment 
option that eliminates the risk of early exercise and assignment, which 
the CBOE believes will appeal to many institutions, professional 
traders, and investors. The Exchange believes that the introduction of 
new European-style exercise series will attract order flow back to the 
index floor. Moreover, the retention, and simultaneous trading, of 
American-style OEX options will allow investors to determine which 
product is most appropriate for them, thus enabling them to tailor more 
precisely their investment strategy. For these reasons, the Exchange 
believes that the proposed rule change is consistent with section 6 of 
the Act \15\ in general, and furthers the objectives of section 6(b)(5) 
of the Act \16\ in particular, because it is designed to promote just 
and equitable principles of trade as well as to protect investors and 
the public interest.
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    \15\ 15 U.S.C. 78f.
    \16\ 16 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.

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 change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) the CBOE provided the Commission with written notice of its 
intent to file the proposed rule change at least five business days 
prior to the filing date, the proposed rule change has become effective 
pursuant to section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(6) 
thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing.\18\ 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest.\19\ The CBOE has requested that the 
Commission designate such shorter time period and accelerate the 
operative date of the proposal to July 20, 2001, so that the Exchange 
may begin trading the new European-style series of OEX options after 
the July expiration.
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    \18\ See 17 CFR 240.19b-4(f)(6)(iii).
    \19\ Id.
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    The CBOE states that introducing the new series of European-style 
OEX options on the first day after expiration Friday will allow 
investors to establish postions on the first day of the monthly cycle. 
The CBOE also believes that the proposal does not raise new, novel, or 
complex regulatory issues. In addition, the CBOE notes that the 
Commission previously approved OEX options for trading and European-
style index options for trading, and that the proposal permits the 
trading of new European-style options series on the OEX.
    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative on July 20, 2001, to allow investors to establish positions 
in the new series of Euroopean-style OEX options on the first day of 
the monthly cycle.\20\ The Commission believes that the new series of 
European-style OEX options will provide investors with an additional 
investment choice and may help to increase liquidity in OEX options.
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    \20\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposal's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that the proposal to include European-style 
OEX options in the position and exercise limit Pilot Program will 
provide consistent treatment of American-style and European-style OEX 
options for position and exercise limit purposes. In addition, the 
Commission believes that the aggregation of positions in American-style 
and European-style OEX options for purposes of the 100,000-contract 
reporting threshold is consistent with the purpose of the reporting 
threshold and will help to ensure the continued effectiveness of the 
reporting threshold.
    The Commission notes that prior to the commencement of trading of 
the new European-style OEX series, the CBOE will distribute to members 
an information circular advising them of the addition of the new 
series. The information circular will note the difference in exercise 
style, identify the new symbols for the European-style OEX series, 
identify the initial expiration months and strike prices available for 
trading, and indicate that positions in American-style OEX options will 
be aggregated for purposes of the 100,000-contract OEX reporting 
threshold provided in the Pilot Program.
    For all of the reasons set forth above, the Commission finds that 
it is consistent with the protection of investors and the public 
interest for the proposal to become operative on July 20, 2001. At any 
time within 60 day of the filing of such proposed rule change, 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 
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, NW., Washington, DC 20549-0609. 
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 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-2001-39 and 
should be submitted by August 10, 2001.


[[Page 38049]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-18170 Filed 7-19-01; 8:45 am]
BILLING CODE 8010-01-M