03-1347. Self-Regulatory Organizations; Order Approving 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 ...

January 15, 2003.

I. Introduction

On October 11, 2002, 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 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 proposed rule change was published for comment in the Federal Register on December 16, 2002.^[3] No comments were received on the proposed rule change. This order approves the proposed rule change.

II. Description of the Proposal

The Exchange proposes to amend Interpretation .01(b)(2) to CBOE Rule 5.3 to provide that, for securities that underlie options traded on the Exchange (“underlying security”) that are deemed Covered Securities, as defined under section 18(b)(1)(A) of the Securities Act of 1933 (“1933 Act”),^[4] 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 to the Options Clearing Corporation for listing and trading. For Underlying Securities that are not Covered Securities, the Exchange states that the current $7.50 price per share requirement would continue to apply. The market price of such underlying security would be measured by the closing price reported in the primary market in which the underlying security is traded. Finally, the Exchange proposes to amend Interpretation and Policy .05(d)(ii) to CBOE Rule 5.3 to 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.

III. 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.^[5] In particular, the Commission believes that the proposed rule change is consistent with section 6(b)(5) of the Act,^[6] which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade; facilitate transactions in securities, and protect investors and the public interest.

The Commission notes that although this proposal amends the closing market price for an underlying security which is deemed a Covered Security, as well as the time period for which it must trade at that price prior to it being listed on the Exchange, the CBOE has represented that it will continue to maintain its initial listing standards.^[7] Therefore, an underlying security that is deemed a Covered Security must also meet CBOE's additional listing requirements prior to CBOE bringing up a new series of options to trade, 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.^[8] Accordingly, the Commission finds that the proposed rule change to require a closing market price of at least $3.00 per share for the five previous consecutive business days for underlying securities that are deemed Covered Securities, coupled with its additional listing requirements, will enable CBOE to list options on companies that are financially sound. Nonetheless, the Commission expects the Exchange to continue to delist inactive options classes, regardless of the market price of the underlying security, through its existing quarterly delisting program.^[9]

Lastly, the Commission notes that each options exchange may currently 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.^[10]

For these reasons, the Commission finds that the proposed rule change to provide that the closing market price of the underlying security must be at least $3.00 per share for the five previous consecutive business days for underlying securities that are deemed Covered Securities, is consistent with section 6(b)(5) of the Act.^[11]

IV. 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,^[12] that the proposed rule change (SR-CBOE-2002-62) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[13]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See Securities Exchange Act Release No. 46957 (December 6, 2002), 67 FR 77106.

4.  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. * * *” 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).

5.  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).

6.  15 U.S.C. 78f(b)(5).

7.  Telephone conversation between James Flynn, Attorney, CBOE, and Christopher Solgan, Attorney, Division of Market Regulation (“Division”), Commission, on January 14, 2002. See also Securities Exchange Act Release No. 46957, supra note 3.

8.  See CBOE Rule 5.3.

9.  CBOE states that it maintains an active delisting program which requires the quarterly review of multiply listed option classes that do not trade more than 20 contracts per day on the Exchange. Telephone conversation between James Flynn, Attorney, CBOE, and Florence Harmon, Senior Special Counsel, Division, Commission, on January 14, 2002. See also Securities Exchange Act Release No. 46957, n. 7, supra note 3.

10.  See Interpretation and Policy .02 to CBOE Rule 5.4; Commentary .02 to American Stock Exchange LLC Rule 916; Commentary .01 to Pacific Exchange, Inc. Rule 3.7(b); Commentary .02 to Philadelphia Stock Exchange, Inc. Rule 1010; and International Securities Exchange, Inc. Rule 503(c).

11.  15 U.S.C. 78f(b)(5).

12.  15 U.S.C. 78s(b)(2).

13.  17 CFR 200.30-3(a)(12).