[Federal Register Volume 66, Number 190 (Monday, October 1, 2001)]
[Notices]
[Pages 49988-49990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24473]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44837; File No. SR-CBOE-2001-54]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to a Six Month Extension of the Pilot 
Program To Eliminate Position and Exercise Limits for OEX, DJX, and SPX 
Index Options and FLEX Options Overlying These Indexes

September 24, 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 September 24, 2001, the Chicago Board Options Exchange, Incorporated 
(``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 19-4(f)(6).\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE seeks a six month extension of the pilot program that 
provides for the elimination of position and exercise limits for S&P 
500 Index (``SPX''), S&P 100 Index (``OEX''), Dow Jones Industrial 
Average (``DJX'') index options as well as for FLEX options overlying 
these indexes. 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
    On January 22, 1999, the Commission approved a two-year pilot 
program (``Pilot Program'') that allowed for the elimination of 
position and exercise limits for options on the SPX, OEX, and DJX as 
well as for FLEX options overlying these indexes.\4\ On January 30, 
2001 and again on May 22, 2001, the Commission extended the Pilot 
Program and additional four months.\5\ The purpose of this proposed 
rule change is

[[Page 49989]]

to request a six-month extension of the Pilot Program until March 22, 
2002 to allow the Commission additional time to consider the Exchange's 
separate application for permanent approval of the Pilot Program.\6\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 40969 (January 22, 
1999), 64 FR 49111 (February 1, 1999) (approving SR-CBOE-99-23) 
(``Approval Order'').
    \5\ See Securities Exchange Act Release No. 43867 (January 22, 
2001), 66 FR 8250 (January 30, 2001) (notice of filing and immediate 
effectiveness of SR-CBOE-2001-01) and Securities Exchange Act 
Release No. 44335 (May 22, 2001) 66 FR 29369 (May 30, 2001) (notice 
of filing and immediate effectiveness of SR-CBOE-2001-26).
    \6\ By separate filing (SR-CBOE-2001-22), CBOE requests 
permanent approval of the Pilot Program.
---------------------------------------------------------------------------

    The Approval Order required the Exchange to submit a report to the 
Commission on the status of the Pilot Program so that the Commission 
could use this information 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.\7\ The CBOE 
submitted the required report to the Commission on December 21, 
2000.\8\ The report indicated that during the review period, CBOE did 
not discover any instances where an account maintained an unusually 
large unhedged position. Data gathered for the report indicated 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, although to 
different degrees. CBOE's analysis did not discover any aberrations 
caused by large unhedged positions during the life of the Pilot 
Program. For this reason, the Exchange believes that its experience 
with the Pilot Program has been positive. Accordingly, CBOE has 
requested that the effectiveness of the Pilot Program be extended six 
months. As part of the extension request, CBOE has represented that it 
will update the Commission on any problems that develop with the Pilot 
Program during the extension, if any, including any compliance issues, 
and whether there are any large unhedged positions that raise 
regulatory concerns.
---------------------------------------------------------------------------

    \7\ In the Approval Order, the Commission stated: ``CBOE will 
provide the Commission with a report detailing the size and 
different types of strategies employed with respect to positions 
established in those classes not subject to position limits. In 
addition, the report will note whether any problems resulted due to 
the no limit approach and any other information that may be useful 
in evaluating the effectiveness of the pilot program. The Commission 
expects that CBOE will take prompt action, including timely 
communication with the Commission and other marketplace self-
regulatory organizations responsible for oversight of trading in 
component stocks, should any unanticipated adverse market effects 
develop.''
    \8\ Letter from Patricia L. Cerny, Director, Office of Trading 
Practices, CBOE, to Elizabeth King, Division of Market Regulation, 
Commission, dated December 21, 2000.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \9\ in general and in particular with 
Section 6(b)(5) \10\ in that it is designed to promote just and 
equitable principles of trade as well as to protect investors and the 
public interest, by allowing for the extension of a Pilot Program that 
has enabled more business to be transacted on the exchanges that might 
otherwise have been transacted in the OTC market without the benefit of 
Exchange transparency and the guarantee of The Options Clearing 
Corporation. The Exchange also believes that the proposed rule change 
is consistent with Section 11A of the Act \11\ in that it will enhance 
competition by allowing the Exchange to compete better with the OTC 
market in options and with entities not subject to position limit 
rules.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

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 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder\13\ because 
the 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) does not become operative 
for 30 days from the date of the filing, or such shorter time that the 
Commission may designate if consistent with the protection of investors 
and the public interest.\14\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). For purposes only of accelerating 
the operative date of this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
    \14\ The Commission has determined to waive the requirement the 
CBOE provide the Commission with written notice of its intent to 
file the proposed rule change at least five business days prior to 
the filing date.
---------------------------------------------------------------------------

    At any time within 60 days 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.
    The Exchange has requested that the rule change be accelerated to 
become operative on September 24, 2001, because such action will allow 
the Exchange to continue the Pilot Program without interruption while 
the Commission determines whether to approve the Pilot Program on a 
permanent basis. The Commission finds that accelerating the operative 
date of the rule change to prevent interruption of the Pilot Program 
while the Commission considers the permanent approval request is 
consistent with the protection of investors and the public interest, 
and thus designates September 24, 2001 as the operative date of the 
filing.\15\
---------------------------------------------------------------------------

    \15\ The Commission reiterates the expectation that the CBOE 
will take prompt action, including timely communication with the 
Commission and other marketplace self-regulatory organizations 
responsible for oversight of trading in component stocks, should any 
unanticipated adverse market effects develop. See note 7, supra.
---------------------------------------------------------------------------

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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to SR-CBOE-2001-54 and should be 
submitted by October 22, 2001.


[[Page 49990]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-24473 Filed 9-28-01; 8:45 am]
BILLING CODE 8010-01-M