[Federal Register Volume 66, Number 162 (Tuesday, August 21, 2001)]
[Notices]
[Pages 43937-43939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20975]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44693; File No. SR-CBOE-2001-29]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to Changes to the Exchange's Delisting Criteria

August 13, 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 May 29, 2001, 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 CBOE. 
On August 3, 2001, 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, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Patrick Sexton, Assistant General Counsel, 
CBOE, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated August 1, 2001 (``Amendment No. 1''). 
In Amendment No. 1, the CBOE made technical corrections to the rule 
text, clarified when the CBOE can open additional series of options 
contracts covering an underlying security, and described how the 
CBOE intends to measure the market price of the underlying security 
in the context of the instant proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposed to change CBOE Rule 5.4, which governs the 
withdrawal of approval for securities underlying options traded on the 
Exchange (``Delisting Criteria Rule'' or ``CBOE Rule 5.4'').
    The text of the proposed rule change, as amended, appears below. 
New text is in italics; deletions are in brackets.
* * * * *

Chicago Board Options Exchange, Inc. Rules

* * * * *

Chapter V--Securities Dealt In

* * * * *

Withdrawal of Approval of Underlying Securities

Rule 5.4

    Whenever the Exchange determines that an underlying security 
previously approved for Exchange option transactions does not meet 
the then current requirements for continuance of such approval or 
for any other reason no longer approved, the Exchange will not open 
for trading any additional series of options of the class covering 
that underlying security and therefore may prohibit any opening 
purchase transactions in series of options of that class previously 
opened, to the extent it deems such action necessary or appropriate; 
provided, however, that where exceptional circumstances have caused 
an underlying security not to comply with the Exchange's current 
approval maintenance requirements, regarding number of publicly held 
shares or publicly held principal amount, number of shareholders, 
trading volume or market price the Exchange, in the interest of 
maintaining a fair and orderly market or for the protection of 
investors, may determine to continue to open additional series of 
option contracts of the class covering the underlying security. When 
all option contracts in respect to any underlying security that is 
no longer approved have expired, the Exchange may make application 
to the Securities and Exchange Commission to strike from trading and 
listing all such option contracts.

. . . Interpretations and Policies

    .01  The Board of Directors has established guidelines to be 
considered by the Exchange in determining whether an underlying 
security previously approved for Exchange option transactions no 
longer meets its requirements for the continuance of such approval. 
Absent exceptional circumstances, with respect to Paragraphs (a), 
(b), or (c) listed below, an underlying security will not be deemed 
to meet the Exchange's requirements for continued approval whenever 
any of the following occur:
    (a) There are fewer than 6,300,000 shares of the underlying 
security held by persons other than those who are required to report 
their security holdings under Section 16(a) of the Securities 
Exchange Act of 1934.
    (b) There are fewer than 1,600 holders of the underlying 
security.
    (c) The trading volume (in all markets in which the underlying 
security is traded) was less than 1,800,000 shares in the preceding 
twelve months.
    (d) The market price per share of the underlying security closed 
below [$5] $3 on the previous trading day [on a majority of the 
business days during the preceding six calendar months] as measured 
by the highest closing price reported in any market in which the 
underlying security traded.
    (e) The issuer has failed to make timely reports as required by 
applicable requirements of the Securities Exchange Act of 1934, and 
such failure has not been corrected within 30 days after the date 
the report was due to be filed.
    (f) The issue, in the case of an underlying security that is 
principally traded on a national securities exchange, is delisted 
from trading on that exchange and neither meets NMS criteria nor is 
traded through the facilities of a national securities association, 
or the issue, in the case of an underlying security that is 
principally traded through the facilities of a national securities 
association, is no longer designated as an NMS security.
    (g) If an underlying security is approved for options listing 
and trading under the provisions of Interpretation and Policy .05 of 
Rule 5.3, the trading volume and price history of the Original 
Security (as therein defined) prior to but not after the 
commencement of trading in the Restructure Security (as therein 
defined), including ``when-issued'' trading, may be taken into 
account in determining whether the trading volume and market price 
requirements of paragraphs (c) and (d) of this Interpretation and 
Policy .01[, as well as the trading volume and market price 
requirements of Interpretation and Policy .04 of this Rule 5.4,] are 
satisfied, provided, however, that in the case of a Restructure 
Security approved for options listing and trading under paragraph 
(d) of Interpretation and Policy .05 of Rule 5.3, such trading 
volume requirements must be satisfied based on the trading volume 
history of the Restructure Security.
    .02  In connection with Paragraph (d) of Interpretation and 
Policy .01 above, the Exchange shall not open for trading any 
additional series of option contracts of the class covering an 
underlying security at any time when the market price per share of 
such underlying security is less than [$5]3[as measured by the 
highest closing price reported in any market in which the underlying 
security trades. Further, no series of options contracts will be 
opened with a strike price of less than $5.00 per share]. Subject to 
Paragraph (d) of Interpretation and Policy .01 above, the Exchange 
may open for trading additional series of option contracts of a 
class covering an underlying security when the market price per 
share of such underlying security is at or above $3 at the time such 
additional series are authorized for trading. For purposes of this 
Interpretation .02, the market price of such underlying security is 
measured by (i) for intra-day series additions, the last reported 
trade in any market at the time the Exchange determines to add these 
additional series intra-day, and (ii) for next-day and expiration 
series additions, the closing price reported in any market in which 
the security is traded on the last trading day before the series are 
added.
    .03  No change.
    [.04  Notwithstanding paragraph (d) to Interpretation .01 and 
Interpretation .02, the Exchange may continue to open for trading 
additional series of options contracts of a class covering an 
underlying security, provided.
    (a) The aggregate market value of the underlying security equals 
or exceeds $50 million;
    (b) Customer open interest (reflected on a two-sided basis) 
equals or exceeds 4,000 contracts for all expiration months;

[[Page 43938]]

    (c) Trading volume in the underlying security (in all markets in 
which the underlying security is trading) has been at least 
2,400,000 shares in the preceding twelve months; and
    (d) The Market price per share of the underlying security closed 
at $3 or above on a majority of the business days during the 
preceding six calendar months, as measured by the highest closing 
price reported in any market in which the underlying security 
traded, and further provided the market price per share of the 
underlying security is at least $3 at the time such additional 
series are authorized for trading. During the next consecutive six 
calendar month period, to satisfy this Interpretation .04, the price 
of the underlying security as referenced in this paragraph .04(d) 
shall be $4.]
    .04  [Reserved]
    .05-.10  No change.
* * * * *

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, as 
amended, and discussed any comments if 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 section 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, Proposed Rule Change

1. Purpose
    The Exchange's Delisting Criteria Rule currently provides that the 
Exchange may not list additional series on an option class if the 
underlying security has not closed above $5 for the majority of 
business days during the preceding six calendar months as measured by 
the highest closing price reported in any market in which the 
underlying security traded (``$5 guideline'')\4\ The Delisting Criteria 
Rule provides limited exceptions to the $5 guideline such that series 
may be added even when the underlying security did not satisfy the $5 
guideline if the underlying security met either a separate $3 guideline 
and a separate $4 guideline.
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    \4\ Other factors also must be met for the Exchange to add 
additional series in a class as described in Interpretation .01 to 
CBOE Rule 5.4.
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    Change in Guideline Price. The Exchange is proposing to amend its 
Delisting Criteria Rule in a few respects. First, the Exchange is 
amending the Delisting Criteria Rule by changing the guideline price 
(set forth in Interpretation .01 to CBOE Rule 5.4) used to determine 
whether an underlying security previously approved for Exchange options 
transactions no longer meets the requirements for the continuance of 
approval. The Exchange is changing the guideline price used to make 
this determination from $5 to $3.\5\ In addition, the Exchange is 
eliminating the requirement for the Exchange to determine the guideline 
price by looking at whether the security closed above that price for a 
majority of the business days during the preceding six calendar months. 
Instead, the Exchange proposes to determine whether the underlying 
security closed above that price (i.e., now proposed to be $3) on the 
previous trading day. The Exchange is not otherwise proposing to amend 
the other criteria used to determine whether a class of options meets 
the requirements for the continuance of approval (such as, the number 
of shares that must be held by non-insiders, number of holders, and 
trading volume).
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    \5\ If the underlying security does not meet the guideline price 
then the Exchange will not open additional series of options of that 
class and may take other actions such as prohibiting opening 
purchase transactions in series of options of that class previously 
opened.
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    Intra-Day Additions of Series. The Exchange is amending 
Interpretation .02 to CBOE Rule 5.4 by reducing from $5 to $3 the price 
above which the underlying security must be traded before the Exchange 
may add additional series of options intra-day. This means if the 
Exchange is adding a series intra-day, the underlying security must 
have closed above $3 the previous day (in order to meet the requirement 
of Interpretation .01(d) to CBOE Rule 5.4) and must be at $3 or above 
at the time the new series is added (in order to meet the requirement 
of Interpretation .02 to CBOE Rule 5.4).
    Elimination of Interpretation .04 to CBOE Rule 5.4. The Exchange 
also is proposing to eliminate Interpretation .04 of the Delisting 
Criteria Rule. Interpretation .04 to CBOE Rule 5.4 sets forth 
guidelines for adding classes notwithstanding that the price of the 
underlying security does not meet the $5 guideline currently set forth 
in Interpretation .01 to CBOE Rule 5.4. Notwithstanding the $5 
guideline, the interpretation currently provides that that the Exchange 
may add series if: (I) the closing price of the underlying security was 
over $3 for a majority of the days during the six calendar month period 
preceding the addition, and (2) the closing price of the underlying 
security must be $4 for a majority of the days during a subsequent six 
calendar month period. Because the Exchange is proposing to change the 
initial guideline from $5 to $3, Interpretation .04 to CBOE Rule 5.4 is 
no longer needed.
    Reasons for Change to Delisting Criteria. When many of the 
delisting criteria were first implemented, the listed options market 
was in its infancy. Now more than twenty-seven years after the CBOE 
first started trading listed options, the listed options market is a 
mature market with sophisticated investors. The Exchange does not 
believe that the $5 guideline is necessary to accomplish its presumed 
intended purpose; i.e., to prevent the proliferation of option classes 
on underlying securities that lack liquidity needed to maintain fair 
and orderly markets. The Exchange believes that it should allow the 
desires of the Exchange's customers and the workings of the marketplace 
to determine the securities on which the Exchange will list options.\6\ 
The Exchange's own business considerations should ensure that the 
Exchange does not list inappropriate classes of options. In determining 
to list any number of new option series under the proposed less 
restrictive standard, the Exchange must ensure that its own systems and 
those of the Options Price Reporting Authority can handle any increased 
capacity requirements.
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    \6\ Of course, the rule still provides that the security 
underlying the option must be listed on a national securities 
exchange or NASDAQ.
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    Problems in Interpreting or Enforcing Current Standards. The 
Exchange has noted that the options exchanges, which have all adopted 
very similar delisting criteria, have frequently listed option series 
that are not permitted to be listed pursuant to these criteria. The 
Exchange believes this is at least partially due to the fact that the 
current listing criteria are subject to inconsistent interpretations by 
the different exchanges. These impermissible listings may have a number 
of negative consequences. Specifically, the Exchange believes that the 
violating exchange gains a competitive advantage over the competing 
exchanges who have not taken the same interpretation of the rules. 
Although the non-listing exchange may enlist the assistance of staff of 
the Commission to ensure that the listing exchange does not gain an 
unfair advantage, the Exchange has learned that this process cannot be 
completed quickly enough to prevent harm to the Exchange or its 
members. Typically, the Commission staff requires the violating 
exchange to begin the process of delisting the class by

[[Page 43939]]

allowing closing only transactions. Nonetheless, the listing exchange 
still will typically list the improper series for a substantial period 
of time (often until expiration) because there likely will be open 
interest in that series. The listing exchange(s), in these 
circumstances, will be the only exchange(s) that is able to close out 
the open positions because it is the only exchange(s) where the series 
is listed. The Exchange has noted circumstances in the recent past 
where its trading crowds have lost member firm order flow, not only for 
the series which were improperly added by the listing exchange, but 
also for the entire class. The refusal of an exchange to violate its 
own rules to add improperly a series can have lasting effects as an 
order flow firm may reward those exchanges that were willing to list 
the series that its customers were interested in trading.
2. Statutory Basis
    The Exchange believes that the current proposal will allow the 
Exchange to provide investors with those options that are most useful 
and demanded by them without sacrificing any investor protection. As 
such, the Exchange believes the proposed rule change, as amended, is 
consistent with section 6(b) Act,\7\ in general, and furthers the 
objectives of section 6(b)(5),\8\ in particular, because it will 
promote just and equitable principles of trade, facilitate transactions 
in securities, remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and protect 
investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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, as 
amended, 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.

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 such proposed rule change; or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested 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 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, as amended, 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 filings will also be available for inspection and 
copying at the principal office of the CBOE. All submissions should 
refer to File No. SR-CBOE-2001-29 and should be submitted by September 
11, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-20975 Filed 8-20-01; 8:45 am]
BILLING CODE 8010-01-M