[Federal Register Volume 59, Number 5 (Friday, January 7, 1994)]
[Notices]
[Pages 1041-1043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-313]
[[Page Unknown]]
[Federal Register: January 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33404; File No. SR-CBOE-93-60]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Filing and Order Granting Partial Accelerated Approval of
Proposed Rule Change by the Chicago Board Options Exchange, Inc.,
Relating to an Extension and Request for Permanent Approval of the
Pilot Program Involving Debit Put Spreads in Broad-Based Indexes With
European-Style Exercise
December 30, 1993.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder,\1\ notice is
hereby given that on December 27, 1993, the Chicago Board Options
Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II 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\17 CFR 240.19b-4 (1993).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend Exchange Rule 24.11A, ``Debit Put Spread
Cash Account Transactions,'' to extend through December 31, 1994, a
pilot program allowing approved public customers with qualified
portfolios (``spread exemption customers'') to effect and maintain in
cash accounts debit put spread transactions in broad-based index
options with European-style exercise.\2\ In addition, the CBOE seeks
permanent approval of the pilot program.
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\2\The Commission approved the pilot program on a one-year basis
through November 25, 1992. See Securities Exchange Act Release No.
29992 (November 26, 1991), 56 FR 63526 (order approving File Nos.
SR-Amex-91-14 and SR-CBOE-91-17) (``Debit Put Spread Approval
Order''). Subsequently, both the CBOE and the American Stock
Exchange, Inc. (``Amex'') amended the definition of ``debit put
spread'' to provide that the strike price of the long leg of the
spread must exceed, not equal, the strike price of the short leg.
See Securities Exchange Act Release Nos. 30267 (January 21, 1992),
57 FR 3234 (order approving file No. SR-CBOE-91-50) and 30419
(February 26, 1992), 57 FR 7825 (order approving File No. SR-Amex-
92-07). On June 30, 1993, the Commission approved an extension of
the pilot program through December 31, 1993. See Securities Exchange
Act Release No. 32556 (June 30, 1993), 58 FR 32556 (order approving
File No. SR-CBOE-93-13) (``Pilot Extension Order'').
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The text of the proposed rule change is available at the Office of
the Secretary, 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 self-regulatory organization
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 self-regulatory organization
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
Currently, Sec. 220.8 of Regulation T under the Act precludes
customers from effecting spread transactions in cash accounts.
Specifically, Sec. 220.8(a)(3)(ii) of Regulation T includes in
permissible cash account transactions a creditor's issue, endorsement
or guarantee of a put option for a customer if the creditor obtains
cash in an amount equal to the exercise price of the option or holds in
the account any of the following instruments with a current market
value at least equal to the exercise price of the option and with one
year or less to maturity: U.S. government securities, negotiable bank
certificates of deposit, or bankers acceptances issued by a U.S. bank
and payable in the United States. Because offsetting options positions
fail to satisfy these criteria, spreads are not included in permissible
cash account transactions and therefore must be effected in margin
accounts.
On November 26, 1991, the Commission approved proposals submitted
by the CBOE and the Amex which established one year pilot programs
allowing approved public customers\3\ with qualified portfolios of
stock to effect and maintain in cash accounts debit put spread
transactions in broad-based index options with European-style
exercise.\4\ The Commission approved an extension of the CBOE's pilot
program through December 31, 1993.\5\ The CBOE now proposes to extend
its debit put spread pilot program through December 31, 1994, and, in
addition, the Exchange requests permanent approval of the pilot
program.
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\3\For purposes of its pilot program, a public customer is a
customer whose orders are eligible to be placed on a CBOE limit
order book under Exchange Rule 7.4(a).
\4\See Debit Put Spread Approval Order, supra note 2.
\5\See Pilot Extension Order, supra note 2.
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The pilot program defines a ``debit put spread'' as ``a long put
position coupled with a short put position overlying the same broad-
based index and having an equivalent underlying aggregate index value,
where the short put(s) expires with the long put(s), and the strike
price of the long put(s) exceeds the strike price of the short
put(s).'' Under the terms of the pilot, only public customers approved
by the CBOE are permitted to participate in the pilot program. To
obtain the CBOE's approval, customers are required, among other things,
to hold a qualified stock portfolio or its equivalent that is composed
of net long positions in common stocks in at least four industry groups
and that contains at least twenty stocks, none of which accounts for
more than fifteen percent of the value of the portfolio. A portfolio
must meet these standards at all times, regardless of trading activity
in the stocks. In addition, the debit put spread positions must be
carried in an account with an Exchange member organization and the
qualified portfolio must be maintained with either an Exchange member
organization, another broker-dealer, a bank, or a securities
depository.
In conjunction with the creation of the pilot programs, the
Commission staff also issued no-action letters to the Amex and the CBOE
stating that the staff would not recommend enforcement action against
the Amex and the CBOE due to the operation of the pilot programs,
namely the maintenance of spread positions in a cash account.\6\ The
staff of the Board of Governors of the Federal Reserve System
(``Board'') also informed the Commission staff that Board staff would
not object to the Commission staff's issuance of these no-action
positions in connection with the pilot programs.\7\ As required by the
Debit Put Spread Approval Order, the CBOE submitted a report assessing
the effectiveness of the pilot program.\8\ In addition, as required
under the Pilot Extension Order, the CBOE has submitted a report dated
as of November 10, 1993, assessing the effectiveness of the pilot
program from January 1993 through September 1993.\9\ In its 1993 Pilot
Report, the CBOE states that no participant has operated in violation
of the pilot since its inception. As it concluded in its initial Pilot
Report, the CBOE states that the pilot program has provided an
efficient means for investors who are limited to cash account
transactions to effectively hedge their portfolios against market
declines. The CBOE states that it has neither experienced nor detected
any problems related to the pilot program and, in addition, that no
activity of any participant appeared to violate the requirements of the
pilot program or other Exchange Rules. The Exchange has found no
evidence of market manipulation or other negative impact on market
operations arising from the pilot program.
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\6\See Letter from Howard L. Kramer, Assistant Director,
Division of Market Regulation (``Division''), Commission, to Mary L.
Bender, First Vice President, Division of Regulatory Services, CBOE,
dated November 25, 1991, and Letter from Howard L. Kramer, Assistant
Director, Division, Commission, to James M. McNeil, Assistant Vice
President, Chief Examiner, Amex, dated November 25, 1991.
\7\See Letter from Laura Homer, Securities Credit Officer,
Board, to Howard L. Kramer, Assistant Director, Division,
Commission, dated July 12, 1991.
\8\See Letter from Mary L. Bender, First Vice President,
Division of Regulatory Services, CBOE, to Sharon Lawson, Assistant
Director, Division, Commission, dated October 1, 1992 (``Pilot
Report''). In the Pilot Report, the CBOE stated that the pilot
program has been an efficient means for investors that are limited
to cash account transactions to effectively hedge their portfolios
against declines in the market. The CBOE represented that it had
neither experienced nor detected any problems related to the pilot.
Moreover, the Exchange stated that no activity of any pilot
participant appeared violative of the program's requirements or
other Exchange rules, nor did Exchange studies find evidence of
market manipulation or other negative impact on market operations.
\9\See Letter from Mary L. Bender, CBOE, to Sharon Lawson,
Assistant Director, Division, Commission, dated November 10, 1993
(``1993 Pilot Report'').
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Accordingly, in order to allow the pilot to continue, the CBOE
requests an extension of the pilot program through December 31, 1994,
and permanent approval of the program at the time the Board staff
notifies the Commission that it does not object to such approval.
The CBOE believes that the proposed rule change is consistent with
section 6(b) of the Act, in general, and furthers the objectives of
section 6(b)(5), in particular, in that it is designed to facilitate
transactions in securities and to protect investors and the public
interest by allowing investors to hedge qualified portfolios against
market declines by purchasing and maintaining debit put spread
transactions in cash accounts.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The CBOE 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
The CBOE has requested that the proposed rule change be given
accelerated effectiveness pursuant to section 19(b)(2) of the Act.
The Commission finds that the proposal to extend the pilot program
through December 31, 1994, is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, the requirements of section
6.\10\ Specifically, the Commission believes, as it has previously
concluded,\11\ that this pilot program is designed to benefit qualified
public customers who are prohibited or restricted in their use of
margin accounts by facilitating their purchase of index option debit
put spreads. Specifically, because the purchaser of a debit put spread
uses the call premium to reduce the cost of purchasing the put, index
option put spreads provide investors with an affordable means to hedge
their portfolios against adverse market moves. In addition, to the
extent that the pilot program has increased index options transactions,
the program has benefited all options investors by contributing to the
depth and liquidity of the CBOE's options markets.
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\10\15 U.S.C. 78f(b)(5) (1988).
\11\See Debit Put Spread Approval Order, supra note 3.
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The Commission continues to believe that the economic
characteristics of index option debit put spreads permit an exception
to the application of Regulation T. In a debit put spread, the long put
entitles the spread exemption customer to receive payment when the
index reaches the put option's strike price; because the strike price
of the long put must exceed the strike price of the short put, the
spread exemption customer's right to receive payment under the long put
will offset any obligations he incurs from the sale of the short put.
Because the short position must expire with the long position, the
offset provided by the long put will last for the duration of the
spread exemption customer's obligation as a short put writer. In
addition, there is no risk that the short put will be exercised prior
to the long put because the exemption applies solely to European-style
options, which may be exercised only during a specified period prior to
expiration.
In its 1993 Pilot Report, the CBOE states that no participant has
operated in violation of the pilot since its inception, nor have the
CBOE's surveillance procedures revealed evidence of manipulation or
abuse of knowledge of impending expiration-related program trades for
each expiration Friday during the review period. The 1993 Pilot Report
indicates that the pilot program's 39 participants included
corporations, pension/retirement plans, non-profit organizations,
mutual funds, and individual or family trusts, the majority of which
were prohibited by contractual agreements from using margin accounts.
The debit put spreads of all of the participants were comprised of
Standard & Poor's (``S&P'') 500 Index (``SPX'') options with one to
four months remaining until expiration. During the review period the
total number of spreads effected on a monthly basis under the pilot
program each month ranged from 3,696 to 12,544.
On the basis of the 1993 Pilot Report, the Commission believes that
the debit put spread pilot program has facilitated the needs of
qualified public customers who are limited to cash account transactions
by providing them with an effective means to hedge their portfolios
against adverse market moves. At the same time, the 1993 Pilot Report
indicates that no pilot participant has violated the pilot's
parameters, nor has the Exchange discovered any market manipulation or
abuse in connection with the pilot program. For these reasons, the
Commission believes that the debit put spread pilot program has
provided qualified public customers with additional means to implement
their hedging strategies and, by facilitating index options
transactions, has benefited all options investors by contributing to
the depth and liquidity of the CBOE's options markets.
The Commission requests that the CBOE submit a report on the
continued operation of the pilot by September 30, 1994 in the event
that the pilot program has not been permanently approved by the
Commission prior to that date. The report should contain information
comparable to that provided in the 1993 Pilot Report. Additionally, the
Commission expects the CBOE to notify the Commission promptly of any
problems arising in connection with the pilot program.
The Commission finds good cause for approving the portion of the
CBOE's proposal extending the pilot program through December 31, 1994,
prior to the thirtieth day after the date of publication of notice
thereof in the Federal Register in order to allow the pilot program to
continue. In addition, because the Commission has received no comments
regarding the operation of the pilot program since its implementation,
and because the pilot program has been utilized by a number of
qualified public customers, the Commission believes that granting
accelerated approval of the CBOE's proposal is appropriate and
consistent with sections 19(b)(2) and 6(b)(5) of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submissions 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, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of the filings will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the File
No. SR-CBOE-93-60 and should be submitted by January 28, 1994.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the portion of the proposal (SR-CBOE-93-60), relating to
an extension of the CBOE's debit put spread pilot program until
December 31, 1994, is approved.
\12\15 U.S.C. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-313 Filed 1-6-94; 8:45 am]
BILLING CODE 8010-01-M
