[Federal Register Volume 67, Number 241 (Monday, December 16, 2002)]
[Notices]
[Pages 77106-77108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46957; File No. SR-CBOE-2002-62]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Proposing to Amend 
Interpretation .01(b)(2) and .05(d)(ii) to CBOE Rule 5.3 Which 
Establish the Pricing Criteria for Securities that Underlie Options 
Traded on the Exchange

December 6, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''), \1\ and Rule 19b-4 thereunder, \2\ 
notice is hereby given that on October 11, 2002, 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 Exchange. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Interpretation .01(b)(2) and .05(d)(ii) to 
CBOE Rule 5.3, which establish the pricing criteria for securities that 
underlie options traded on the Exchange. The text of the proposed rule 
change follows. Additions are in italics. Deleted text is in 
[brackets].
* * * * *

Chapter V--Securities Dealt In

* * * * *

Criteria for Underlying Securities

Rule 5.3

    (a) Underlying securities in respect of which put or call option 
contracts are approved for listing and trading on the Exchange must 
meet the following criteria:
    (1) The security must be duly registered and
    (i) Listed on a national securities exchange; or
    (ii) Traded through the facilities of a national securities 
association and reported as a ``national market system'' (``NMS'') 
security as set forth in Rule 11Aa3-1 under the Securities Exchange Act 
of 1934; and
    (2) The security shall be characterized by a substantial number of 
outstanding shares which are widely held and actively traded.
    (b) In addition, the Board of Directors shall from time to time 
establish guidelines to be considered by the Exchange in evaluating 
potential underlying securities for Exchange option transactions. There 
are, however, many relevant factors which must be considered in 
arriving at such a determination. The fact that a particular security 
may meet the guidelines established by the Board does not necessarily 
mean that it will be approved as an underlying security. Further, in 
exceptional circumstances an underlying security may be approved by the 
Exchange even though it does not meet all of the guidelines. The 
Exchange may also give consideration to maintaining diversity among 
various industries and issuers in selecting underlying securities.
. . . Interpretations and Policies:
    .01 The Board of Directors has established guidelines to be 
considered by the Exchange in evaluating potential underlying 
securities for Exchange option transactions. Absent exceptional 
circumstances with respect to Paragraphs (a)(1) or (2), or (b)(1) or 
(2) listed below, at the time the Exchange selects an underlying 
security for Exchange option transactions, the following guidelines 
with respect to the issuer shall be met.
    (a) Guidelines applicable to the issuer of the security are:
    (1) There are a minimum of 7,000,000 shares of the underlying 
security which are owned by persons other than those required to report 
their stock holdings under Section 16(a) of the Securities Exchange Act 
of 1934.
    (2) There are a minimum of 2,000 holders of the underlying 
security.
    (3) The issuer is in compliance with any applicable requirements of 
the Securities Exchange Act of 1934.
    (b) Guidelines applicable to the market for the security are:
    (1) Trading volume (in all markets in which the underlying security 
is traded) has been at least 2,400,000 shares in the preceding twelve 
months.
    (2) (A) If the underlying security is a ``covered security'' as 
defined under Section 18(b)(1)(A) of the Securities Act of 1933, the 
market price per share of the underlying security has been at least 
$3.00 for the previous five consecutive business days preceding the 
date on which the Exchange submits a certificate to the Options 
Clearing Corporation for listing and trading. For purposes of this 
Interpretation .01(b)(2)(A), the market price of such underlying 
security is measured by the closing price reported in the primary 
market in which the underlying security is traded.
    (B) If the underlying security is not a ``covered security'', 
[T]the market price per share of the underlying security has been at 
least $7.50 for the majority of business days during the three calendar 
months preceding the date of selection, as measured by the lowest 
closing price reported in any market in which the underlying security 
traded on each of the subject days.
.02-.04 No Change.
.05(a)-(c) No Change.
    (d) In the case of a Restructuring transaction that satisfies 
either or both of the conditions of subparagraphs (a)(1) or (a)(2) 
above in which shares of a Restructure Security are sold in a public 
offering or pursuant to a rights distribution:
    (i) The Exchange may assume the satisfaction of one or both of the 
requirements of paragraphs (a)(1) and

[[Page 77107]]

(a)(2) of Interpretation and Policy .01 above on the date the 
Restructure Security is selected for options trading only if: (A) The 
applicable conditions set forth in clause (i) of paragraph (c) above 
are met with respect to whichever of these requirements is assumed to 
be satisfied, or (B) the condition set forth in clause (ii) of 
paragraph (c) above is met, in either case subject to the limitations 
stated in said paragraph (c).
    (ii) The Exchange may certify that the market price of the 
Restructure Security satisfies the requirement of paragraph (b)(2) of 
Interpretation and Policy .01 above by relying on the market price 
history of the Original Security prior to the ex-date for the 
Restructuring Transaction in the manner described in paragraph (a) 
above, but only if the Restructure Security has traded ``regular way'' 
on an exchange or automatic quotation system for at least five trading 
days immediately preceding the date of selection, and at the close of 
trading on each trading day preceding the date of selection, as well as 
at the opening of trading on the date of selection the market price of 
the Restructure Security was at least $7.50, or, if the Restructure 
Security is a Covered Security, as defined in paragraph (b)(2) of 
Interpretation and Policy .01 above, the market price of the 
Restructure Security was at least $3.00.
    (iii) No Change.
.06-.09 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 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 Exchange proposes to amend its pricing requirement for 
securities that underlie options traded on the Exchange (``underlying 
security''). Currently, Interpretation .01(b)(2) to CBOE Rule 5.3 
requires that the market price per share of any underlying security 
must be at least $7.50 for the majority of business days during the 
three calendar months preceding the date of selection of an option 
class, as measured by the lowest closing price reported in any market 
in which the underlying security traded on each of the subject days.
    The Exchange now proposes to amend Interpretation .01(b)(2) to CBOE 
Rule 5.3 to provide that, for underlying securities that are deemed 
Covered Securities, as defined under section 18(b)(1)(A) of the 
Securities Act of 1933 (``1933 Act''),\3\ the closing market price of 
the underlying security must be at least $3.00 per share for the five 
previous consecutive business days prior to the date on which CBOE 
submits an option class certification. For Underlying Securities that 
are not Covered Securities, the Exchange states that the current $7.50 
price per share requirement would continue to apply.
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    \3\ Section 18(b)(1)(A) of the 1933 Act provides that, ``[a] 
security is a covered security if such security is--listed, or 
authorized for listing, on the New York Stock Exchange or the 
American Stock Exchange, or listed, or authorized for listing, on 
the National Market System of the Nasdaq Stock Market (or any 
successor to such entities) * * *'' 15 U.S.C. 77r(b)(1)(A). The term 
Covered Security, for the operation of proposed amendments to 
Interpretation .01(b)(2) to CBOE Rule 5.3 herein, would not include 
those securities defined under section 18(b)(1)(B) of the 1933 Act. 
15 U.S.C. 77r(b)(1)(B).
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    When the $7.50 price requirement was first implemented, the listed 
options market was in its infancy. Now more than twenty-eight years 
after the CBOE first started trading listed options, the Exchange 
states the listed options market is a mature market with sophisticated 
investors. The Exchange does not believe that this particular criteria 
serves to accomplish its presumed intended purpose, i.e., to prevent 
the proliferation of option classes on overlying securities that lack 
liquidity needed to maintain fair and orderly markets. The Exchange 
states that it now seeks to move away from what it believes is a 
paternalistic approach to listing standards and allow the desires of 
its customers and the workings of the marketplace to determine the 
securities on which the Exchange will list options.
    In determining to list any number of new option classes, the 
Exchange must ensure that its own systems and those of the Options 
Price Reporting Authority (``OPRA'') have the capacity to handle the 
potential increased capacity requirements. Also, due to recent trends 
in the securities markets, there has been a marked increase in the 
number of underlying securities that, but for the pricing standard, 
would otherwise qualify for options listing on the Exchange. The 
Exchange states that changing the pricing standard to the proposed 
$3.00 market price per share requirement would allow the Exchange to 
evaluate whether to list options on a greater number of classes without 
compromising investor protection.
    The Exchange does not propose to amend any of the other criteria in 
CBOE Rule 5.3, including the requirements that: there must be a minimum 
of 7,000,000 shares of the underlying security owned by public 
investors; there must be a minimum of 2,000 holders of the underlying 
security; and, that there must be a trading volume of at least 
2,400,000 shares in the preceding twelve months. Additionally, by 
requiring the Underlying Security to be listed on the New York Stock 
Exchange, Inc., American Stock Exchange LLC (``Amex''), or Nasdaq 
National Market System (``Nasdaq''),\4\ the Exchange states that this 
would ensure that the underlying security meets the highest listing 
standards in the securities industry. However, if the underlying 
security does not qualify as a Covered Security, the $7.50 market price 
per share standard still will apply.
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    \4\ See 15 U.S.C. 77r(b)(1)(A).
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    The Exchange believes that the proposed $3.00 market price per 
share standard is also consistent with the guideline price in CBOE's 
Delisting Criteria Rule,\5\ which is used to determine whether an 
underlying security previously approved for Exchange options 
transactions no longer meets the requirements for the continuance of 
approval. Interpretations and Policies .01(d) and .02 to CBOE Rule 5.4 
sets a $3 market price per share as the threshold for determining 
whether the Exchange may continue listing and trading options on an 
underlying security that was previously approved for options trading 
under CBOE Rule 5.3. As long as a $3.00 standard is recognized as an 
acceptable pricing standard for options trading, albeit as a standard 
for continued listing, the Exchange believes that the proposed $3.00 
should be the threshold standard for initial listing standards as well.
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    \5\ See Interpretation .01 to CBOE Rule 5.4.
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    The Exchange also proposes, as a safeguard against price 
manipulation, that the underlying security have a closing market price 
of at least $3.00 per share for the previous five consecutive business 
days preceding the date on which the Exchange submits a certificate to 
the Options Clearing Corporation for listing and trading. The market 
price of such underlying security

[[Page 77108]]

would be measured by the closing price reported in the primary market 
in which the underlying security is traded. The Exchange believes that 
a ``look back'' period of five consecutive days would provide a 
sufficient measure of protection from any attempts to manipulate the 
market price of the underlying security.
    The Exchange also believes that the proposed rule change would 
encourage the delisting of inactive option classes, particularly those 
classes in which the market price of the underlying security is below 
$7.50. Currently, a Designated Primary Market Maker (``DPM'') on the 
Exchange to whom an option class has been allocated may be reluctant to 
delist an inactive option class if the market price of the underlying 
security is below $7.50 because once delisted, the Exchange's current 
initial listing criteria must be met to re-list the option class, 
including the requirement that the market price per share of the 
underlying security be at least $7.50 for the majority of business days 
during the preceding three months. The Exchange also notes that the 
Commission recently granted CBOE approval to list additional series on 
an option class even though the market price of the underlying security 
is below $3, provided that at least one other options exchange trades 
the series to be added, and at the time the other options exchange 
added that series, it met the requirements to add new series, including 
the $3 price requirement.\6\
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    \6\ See Securities Exchange Act Release No. 46501 (September 16, 
2002), 67 FR 59585 (September 23, 2002) (SR-CBOE-2002-52). The 
Exchange represents that these rules are consistent with similar 
rules regarding listing and maintenance standards of the Amex, 
International Securities Exchange, Inc., Pacific Exchange, Inc., and 
the Philadelphia Stock Exchange, Inc.
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    The proposed $3 price standard and the five-day look-back period 
would provide a reliable test for stability and, at the same time, 
presents a more reasonable time period for qualifying the price of an 
underlying security. The Exchange further believes that this proposed 
abbreviated qualification period, in combination with CBOE's existing 
quarterly delisting program,\7\ would contribute to reducing 
unnecessary quote traffic.
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    \7\ CBOE states that it maintains an active delisting program 
which requires the quarterly delisting of multiply listed option 
classes that do not trade more than 20 contracts per day on the 
Exchange.
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    Finally, for the purposes of consistency within CBOE Rules, the 
Exchange proposes to amend Interpretation and Policy .05(d)(ii) to CBOE 
Rule 5.3. Currently, Interpretation .05(d)(ii) to CBOE Rule 5.3 
provides a method to certify that the market price of a Restructure 
Security satisfies the pricing requirement of Interpretation and Policy 
.01(b)(2) to CBOE Rule 5.3 and specifically references the $7.50 market 
price per share. In order to make Interpretation .05(d)(ii) to CBOE 
Rule 5.3 consistent with the pricing standard change to Interpretation 
.01(b)(2) to CBOE Rule 5.3, the amended rule would reflect that the 
market price standard for Restructure Securities also shall be reduced 
from $7.50 to $3.00 as long as the Restructure Security is a Covered 
Security.
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 that the proposed rule change is consistent 
with section 6(b) of the Act \8\ in general and furthers the objectives 
of section 6(b)(5) \9\ in particular in that it will promote just and 
equitable principles of trade; facilitate transactions in securities, 
to 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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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    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 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-2002-62 and 
should be submitted by January 6, 2003.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31550 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P