[Federal Register Volume 59, Number 201 (Wednesday, October 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25887]
[[Page Unknown]]
[Federal Register: October 19, 1994]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34829; File No. SR-CBOE-93-04]
October 12, 1994.
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving and Notice of Filing and Order Granting
Accelerated Approval to Amendment Nos. 1, 2, 3, and 4 to Proposed Rule
Change Relating to the Listing and Trading of Capped Index Options With
Quarterly Expiration (``Q-CAPS'') Based on the Standard & Poor's 100
and 500 Stock Indexes
I. Introduction
On January 19, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of
the Securities Exchange Act of 1934 (``Act'',)\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide for the listing and
trading of Quarterly Index Expiration, Capped Style Options (``Q-
CAPS'') based on the Standard & Poor's (``S&P'') 100 and 500 Stock
Indexes. On May 18, 1994, the CBOE filed Amendment No. 1 (``Amendment
No. 1'') to the proposal to provide for certain standards to be used
with respect to the aggregation of FLEX options and Q-CAPS for purposes
of FLEX option position limits.\3\ On May 27, 1994, the CBOE filed
Amendment No. 2 (``Amendment No. 2'') to clarify that Q-CAPS will be
subject to the same rules that govern capped-style options
(``CAPS'').\4\ On September 16, 1994, the CBOE filed Amendment No. 3
(``Amendment No. 3'') to clarify aggregation concerns with respect to
options overlying the same index. On September 28, 1994, the CBOE filed
Amendment No. 4 (``Amendment No. 4'') to incorporate the substance of
Amendment Nos. 1, 2 and 3 into the CBOE Rule book.\5\ This order
approves the CBOE's proposal, as amended.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1991).
\3\See Letter from Eileen Smith, Director, Product Development,
CBOE, to Bradley S. Ritter, Staff Attorney, Division of Market
Regulation, SEC, dated May 18, 1994.
\4\See Letter from Eileen Smith, Director, Product Development,
CBOE, to Steve Youhn, Staff Attorney, Division of Market Regulation,
SEC, dated May 27, 1994.
\5\See letter from Michael Meyer, Schiff Hardin & Waite, to
Michael Walinskas, Derivative Products Regulation, dated September
28, 1994.
---------------------------------------------------------------------------
Notice of the proposed rule change was published for comment and
appeared in the Federal Register on March 24, 1993.\6\ No comments were
received on the proposal.
---------------------------------------------------------------------------
\6\See Securities Exchange Act Release No. 32002 (March 16,
1993), 58 FR 15086.
---------------------------------------------------------------------------
II. Description of the Proposal
A. CAPS and QIX Options
A capped-style option is an option that will be automatically
exercised prior to expiration if the exercise settlement value\7\ for
the option on any trading day equals or exceeds (in the case of calls)
or equals or is less than (in the case of puts), the cap price for the
option.\8\ CAPS based on the S&P 100 index (``OEX''), S&P 500 index
(``SPX'') and the Russell 2000 index are currently listed for trading
on the CBOE. Quarterly Index Expiration (``QIX'') options generally
have the same contract terms as regular options, except that they
expire on the first business day of the month following the end of a
calendar quarter.\9\ QIXs based on the SPX and OEX indexes are
currently listed for trading on the CBOE.
---------------------------------------------------------------------------
\7\The exercise settlement value for OEX and SPX capped options
is the value of the OEX and SPX, respectively, determined for each
trading day as of the close of trading, unless another time of day
is specified by the CBOE.
\8\See Securities Exchange Act Release No. 29865 (November 1,
1991), 56 FR 56255 (order approving SPX and OEX CAPS on the CBOE)
for a more complete description of CAPS.
\9\See Securities Exchange Act Release No. 31800 (February 1,
1993), 58 FR 7274 for a more detailed description of QIX options.
---------------------------------------------------------------------------
B. Q-CAPS
A Q-CAP is an option possessing the same attributes as a capped-
style index option contract that expires on the first business day of
the month following the end of a calendar quarter. Q-CAPS will be
subject to the same rules that presently govern the trading of existing
CAPS, including, as more fully discussed below, position limits,
exercise limits,\10\ the setting of cap price intervals\11\ and margin
requirements.\12\
---------------------------------------------------------------------------
\10\See Amendment No. 3 and CBOE Rule 24.5, Interpretation .02.
\11\See CBOE Rule 24.9, Interpretation .03.
\12\See Amendment No. 3 and CBOE Rule 24.11.
---------------------------------------------------------------------------
Under the proposal, Interpretation .03 to CBOE Rule 24.9 would be
amended to provide for the listing of up to eight near-term quarterly
expirations for Q-CAPS on the S&P 100 and 500 indexes.\13\ New at-the-
money series of Q-CAPS will be brought up every three months and/or
after significant market movements.\14\ Q-CAPS will feature European-
style exercise and will have their exercise settlement value based upon
the closing prices of applicable index component stocks on the last
business day of the quarter.
---------------------------------------------------------------------------
\13\Any proposal to list or trade Q-CAPS with more than twelve
months to expiration would be filed with the Commission for its
review under Section 19(b)(2) of the Act. See Amendment No. 2.
\14\Id.
---------------------------------------------------------------------------
For purposes of the Exchange's position limit framework, the CBOE
proposes that Q-CAPS will be subject to the same position limits as
standard CAPS. Accordingly, (1) Q-CAPS will be aggregated with and
treated identically to A.M. Settled, European-style option contracts on
the S&P 500 Index, including CAPS and QIX options on the S&P 500, for
all position limit purposes, including being subject to the 25,000
contract index arbitrage limit;\15\ (2) Q-CAPS on the S&P 100 Index
will be treated like all other OEX options, including CAPS and QIX
options, for all position limit purposes, except for the requirement
that limits the number of contracts in the series of any broad-based
index option with the nearest expiration (``telescoping
requirement'').\16\ Additionally, aggregate P.M. Settled FLEX options
based on the same index (i.e., OEX or SPX), with the same expiration
date as QIXs and Q-CAPS will be aggregated.\17\ Q-CAPS will also be
subject to the same hedge exemptions applicable to QIXs and CAPS.\18\
---------------------------------------------------------------------------
\15\See Amendment No. 3.
\16\See Amendment No. 3 and CBOE Rule 24.4(c).
\17\See CBOE Rule 24A.7(c) and Amendment No. 1.
\18\See CBOE Rule 24.4, Interpretations .01, .02 and .03.
---------------------------------------------------------------------------
III. Discussion
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, and, in
particular, the requirements of Section 6(b)(5),\19\ and, therefore,
approves the Exchange's proposal and grants accelerated approval of the
amendments thereto. In particular, the Commission believes that Q-CAPS
will provide additional choice and flexibility to investors in their
use of derivatives and provide a tailored quarterly portfolio hedge
that may be more suitable to their investment needs by allowing them to
participate in the options markets at predetermined maximum gains or
losses, on a quarterly basis. The Commission believes it is reasonable
for the Exchange to set a cap interval of 30 in that the cap price is
placed sufficiently far from the exercise price so that the Q-CAPS will
not be exercised automatically on a frequent basis.\20\
---------------------------------------------------------------------------
\19\15 U.S.C. 78f(b)(5) (1982).
\20\In addition, both the CBOE and the Options Price Reporting
Authority (``OPRA'') have represented that they have the necessary
systems capacity to support those new series of index options that
would result from the introduction of Q-CAPS. Telephone conversation
between Eileen Smith, Director, Product Development, CBOE, and
Stephen M. Youhn, Derivative Products Regulation, SEC, on September
20, 1994; and Memorandum from Joe Corrigan, Executive Director,
OPRA, to Eileen Smith, CBOE, dated September 20, 1994.
---------------------------------------------------------------------------
The Commission also believes the CBOE's proposal to ``bring up''
new at-the-money series of Q-CAPS every three months and/or after
significant market movements is consistent with the Act because it will
not result in a significant proliferation of options series. Finally,
the Commission notes that Q-CAPS will be subject to the same margin
requirements as CAPS. Due to the economic similarities of the two
products and because the Commission has previously approved the margin
rules applicable to CAPS, no new or unique regulatory concerns are
raised by extending this margin treatment to Q-CAPS.
The Commission also notes that Q-CAPS will be subject to the same
position and exercise limit requirements that currently apply to CAPS.
In particular, Q-CAPS on the SPX will be aggregated with SPX CAPS, SPX
QIX options, and all other A.M. Settled SPX contracts, subject to a
45,000 contract limit under Rule 24.4(b), with a 25,000 contract limit
for index arbitrage.\21\ Q-CAPS on the OEX, under Rule 24.4(c), will be
aggregated with OEX CAPS, OEX QIX options, and all other A.M. Settled
OEX contracts, subject to a 25,000 contract limitation, however, with
no telescoping requirement. The Commission also finds that, consistent
with the treatment of CAPS, it is appropriate to exclude Q-CAPS from
exercise limit requirements because holders have no control over when
their positions will be exercised, except on the last business day
before expiration of the options.
---------------------------------------------------------------------------
\21\Specifically, CBOE Rule 24.4(b) states that no more than
25,000 contracts may be used for the purpose of taking advantage of
any differential in price between the S&P 500 Index and the
securities underlying the S&P 500. See also Amendment No. 3.
---------------------------------------------------------------------------
The Commission notes that Q-CAPS will have their exercise
settlement value based upon the closing prices of component stocks on
the last business day of the quarter. Although the Commission continues
to believe that basing the settlement of index products on opening, as
opposed to closing, prices on Expiration Fridays helps alleviate stock
market volatility,\22\ these concerns are reduced in the case of Q-
CAPS, since expiration of these stock index options will not correspond
to the normal expiration of stock index option, stock index futures and
options on stock index futures.\23\
---------------------------------------------------------------------------
\22\See Securities Exchange Act Release No. 31330 (October 16,
1992), 57 FR 48408.
\23\In particular, Q-CAPS will never expire on an ``Expiration
Friday'' or any other ``Expiration Fridays'' in March, June,
September and December, thereby diminishing any impact that Q-CAPS
could have on the market. Accordingly, the Commission preliminarily
believes that Q-CAPS will not compromise the protection of investors
or have an adverse market effect.
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendment Nos. 1, 2,
3, and 4 to the proposed rule change prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. Amendment No. 1 addresses aggregation concerns with respect
to P.M. Settled FLEX options by amending CBOE Rule 24A-7 to require
aggregation of positions in P.M. Settled FLEX options with positions in
Q-CAPS and QIXs based on the same index with the same expiration date.
This amendment helps to prevent any resulting increase in position
limits relating to P.M. Settled FLEX options and should help prevent an
investor from using FLEX options for the purpose of avoiding the
position limits applicable to QIXs and Q-CAPS.
Amendment No. 2 states that Q-CAPS will be subject to the same
rules that currently govern CAPS regarding position and exercise limits
and margin requirements. Additionally, the amendment provides that the
listing of Q-CAPS with expirations greater than 12 months will require
the filing of a rule proposal with the Commission, and approval of such
filing pursuant to Section 19(b)(2) of the Act. The Commission believes
that Amendment No. 2 helps to clarify the rules and procedures
applicable to the listing and trading Q-CAPS and contains only minor
variations from the original proposal.
Amendment No. 3 explains that Q-CAPS, CAPS, QIXs and standard
options positions on the S&P 100 and 500, respectively, will be
aggregated for determining position limit compliance. The Commission
believes this amendment clarifies existing CBOE Rule 24.4 and helps to
ensure that Q-CAPS comply with the existing position limit framework.
Amendment No. 4 incorporates the substance of Amendment Nos. 1, 2
and 3 into the CBOE's Rule book. Accordingly, the Commission does not
believe the amendment raises any new or unique regulatory concerns.
Therefore the Commission believes it is consistent with Section
6(b)(5) and 19(b)(2) of the Act to approve Amendment Nos. 1, 2, 3, and
4 to the CBOE's proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 1, 2, 3 and 4 to the Exchange's
proposal. Persons making written submissions should file six copies
thereof with the Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. 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 Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the CBOE. All submissions should refer to
File No. SR-CBOE-93-04 and should be submitted by November 9, 1994.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-CBOE 93-04) is approved, as
amended.
\24\15 U.S.C. 78s(b)(2) (1982).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------
\25\17 CFR 200.30-3(a)(12) (1991).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25887 Filed 10-18-94; 8:45 am]
BILLING CODE 8010-01-M
