[Federal Register Volume 68, Number 113 (Thursday, June 12, 2003)]
[Notices]
[Pages 35243-35244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14829]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47991; File No. SR-CBOE-2001-60]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendments No. 1, 2, 3, 4, 5, 6, 7, and 8 by the Chicago 
Board Options Exchange, Inc. To Initiate a Pilot Program That Allows 
the Listing of Strike Prices at One-Point Intervals for Certain Stocks 
Trading Under $20

June 5, 2003.

I. Introduction

    On December 12, 2001, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to initiate a one-year pilot 
program that will allow the Exchange to list options on selected stocks 
trading below $20 at one-point intervals (``$1 Strike Pilot Program'' 
or ``Pilot Program''). The Exchange filed Amendments No. 1, 2, 3, 4, 5, 
6, 7, and 8 to the proposed rule change on March 13, 2002,\3\ June 21, 
2002,\4\ December 6, 2002,\5\ March 7, 2003,\6\ March 25, 2003,\7\ 
April 16, 2003,\8\ April 24, 2003,\9\ and April 25, 2003,\10\ 
respectively. The proposed rule change, as amended, was published for 
comment in the Federal Register on May 5, 2003.\11\ The Commission 
received one comment letter on the proposed rule change.\12\ This order 
approves the proposed rule change, as amended, through June 5, 2004.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Steve Youhn, Attorney, CBOE, to Deborah 
Flynn, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated March 12, 2002 (``Amendment No. 
1'').
    \4\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Elizabeth King, Associate Director, Division, Commission, 
dated June 20, 2002 (``Amendment No. 2'').
    \5\ See letter from Steve Youhn, Attorney, Legal Division, CBOE, 
to Deborah Flynn, Assistant Director, Division, Commission, dated 
December 5, 2002 (``Amendment No. 3'').
    \6\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated March 6, 2003 (``Amendment No. 4'').
    \7\ On March 25, 2003, the Exchange filed Amendment No. 5, which 
supercedes the original filing and Amendments No. 1, 2, 3, and 4 in 
their entirety.
    \8\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated April 15, 2003 (``Amendment No. 6'').
    \9\ See letter from James M. Flynn, Attorney II, Legal Division, 
CBOE, to Deborah Flynn, Assistant Director, Division, Commission, 
dated April 22, 2003 (``Amendment No. 7'').
    \10\ See letter from James M. Flynn, Attorney II, Legal 
Division, CBOE, to Deborah Flynn, Assistant Director, Division, 
Commission, dated April 25, 2003 (``Amendment No. 8'').
    \11\ See Securities Exchange Act Release No. 47753 (April 29, 
2003), 68 FR 23784.
    \12\ See letter from Steven Dillinger, Cornerstone Partners, LP, 
to Margaret H. McFarland, Deputy Secretary, Commission, dated May 
26, 2003 (``Cornerstone Letter'').
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II. Description of the Proposal

    CBOE proposes to amend CBOE Rule 5.5, Interpretation and Policy .01 
to implement the $1 Strike Pilot Program. The Pilot Program will 
operate for a one-year period beginning June 5, 2003, and ending on 
June 5, 2004. The Pilot Program will allow CBOE to list options on 
selected stocks trading below $20 at one-point intervals, provided that 
the strike prices are $20 or less, but not less than $3. For an option 
to be eligible for inclusion in the Pilot Program, the underlying stock 
must close below $20 in its primary market on the previous business 
day. CBOE may select up to five individual stocks to be included in its 
Pilot Program. In addition, CBOE may list $1 strike prices in any 
equity option included in the $1 strike pilot program of any other 
options exchange. CBOE will only list $1 strike prices that fall within 
a $5 range of the underlying stock price. CBOE will not list long-term 
options series (``LEAPS'') at $1 strike price intervals, nor will CBOE 
list $1 strike prices at levels that ``bracket'' existing $2.50 
intervals (e.g., $7 and $8 strikes around a $7.50 strike). As the $2.50 
intervals are phased-out, the Exchange will introduce the $1 prices 
that bracket the phased-out prices.
    CBOE Rule 5.5, Interpretation and Policy .03 will govern the 
addition of expiration months for $1 strike series. Upon expiration of 
the near-term month, CBOE may list an additional expiration month 
provided that the underlying stock closes below $20 on its primary 
market on expiration Friday. If the underlying stock closes at or above 
$20 on expiration Friday, CBOE will not list an additional month for a 
$1 strike series until the stock again closes below $20.
    At any time, CBOE may cease listing $1 strike prices on existing 
series by submitting a cessation notice to the Options Clearing 
Corporation (``OCC''). As discussed above, if the underlying stock 
closes at or above $20 on expiration Friday, CBOE will not list any 
additional months with $1 strike prices until the stock subsequently 
closes below $20. If the underlying stock does not subsequently close 
below $20, thereby precluding the listing of

[[Page 35244]]

additional strike prices and months, the existing $1 series will 
eventually expire. When the near-term month is the only series 
available for trading, the Exchange may submit a cessation notice to 
OCC. Upon submission of the notice, the underlying stock will no longer 
count towards the five stocks that CBOE may select for its Pilot 
Program. Once the Exchange submits the cessation notice, it will not 
list any additional month for trading with strikes below $20 unless the 
underlying again closes below $20, and then, only if the CBOE has not 
already selected a replacement stock.
    According to CBOE, the Options Price Reporting Authority (``OPRA'') 
has the capacity to accommodate the increase in the number of series 
that would be added pursuant to the Pilot Program. In addition, CBOE 
notes that it listed approximately 109,000 series in December 2000 and 
approximately 100,000 series in September 2001. The CBOE believes that 
the increase in the number of series resulting from the Pilot Program 
will be substantially lower than the 9,000 series decrease the CBOE 
experienced.

III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change, which supports the proposal.\13\ Specifically, the commenter 
believes that the CBOE's proposal would provide equity investors with 
the flexibility necessary to hedge their risk as efficiently as 
possible.
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    \13\ See Cornerstone Letter, supra note 12.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission believes that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. Specifically, 
the Commission believes that the proposed listing of one point strike 
price intervals in selected equity options on a pilot basis should 
provide investors with more flexibility in the trading of equity 
options overlying stocks trading at less than $20, thereby furthering 
the public interest by allowing investors to establish equity options 
positions that are better tailored to meet their investment objectives. 
The Commission also believes that the Exchange's limited Pilot Program 
strikes a reasonable balance between the Exchange's desire to 
accommodate market participants by offering a wide array of investment 
opportunities and the need to avoid unnecessary proliferation of 
options series. The Commission expects the Exchange to monitor the 
applicable equity options activity closely to detect any proliferation 
of illiquid options series resulting from the narrower strike price 
intervals and to act promptly to remedy this situation should it occur. 
In addition, the Commission requests that CBOE monitor the trading 
volume associated with the additional options series listed as a result 
of the Pilot Program and the effect of these additional series on 
market fragmentation and on the capacity of the Exchange's, OPRA's, and 
vendors' automated systems.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    As noted above, the Commission is approving the CBOE's proposal on 
a one-year pilot basis. In the event that CBOE proposes to extend the 
Pilot Program beyond June 5, 2004, expand the number of options 
eligible for inclusion in the Pilot Program, or seek permanent approval 
of the Pilot Program, it should submit a Pilot Program report to the 
Commission along with the filing of such proposal.\16\ The report must 
cover the entire time the Pilot Program was in effect, and must 
include: (1) Data and written analysis on the open interest and trading 
volume for options (at all strike price intervals) selected for the 
Pilot Program; (2) delisted options series (for all strike price 
intervals) for all options selected for the Pilot Program; (3) an 
assessment of the appropriateness of $1 strike price intervals for the 
options the CBOE selected for the Pilot Program; (4) an assessment of 
the impact of the Pilot Program on the capacity of the CBOE's, OPRA's, 
and vendors' automated systems; (5) any capacity problems or other 
problems that arose during the operation of the Pilot Program and how 
the CBOE addressed them; (6) any complaints that the CBOE received 
during the operation of the Pilot Program and how the CBOE addressed 
them; and (7) any additional information that would help to assess the 
operation of the Pilot Program.
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    \16\ The Commission expects the CBOE to submit a proposed rule 
change at least 60 days before the expiration of the Pilot Program 
in the event the CBOE wishes to extend, expand, or seek permanent 
approval of the Pilot Program.
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CBOE-2001-60) is approved, 
on a pilot basis, through June 5, 2004.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-14829 Filed 6-11-03; 8:45 am]
BILLING CODE 8010-01-P