[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Notices]
[Pages 58080-58081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28851]
[[Page 58080]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40584; File No. SR-CBOE-98-39]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Chicago Board Options Exchange, Inc. Relating to Exercise
Price Intervals for FLEX Equity Options
October 21, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 23, 1998, 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, II, and III below, which
Items have been prepared by the CBOE. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to delete Interpretation .01 of CBOE Rule
24A.4(c)(2).\2\ This interpretation limits exercise price intervals and
exercise prices for FLEX Equity call options to those that apply to
Non-FLEX Equity call options.
---------------------------------------------------------------------------
\2\ This Interpretation was approved by the Commission in 1996.
Securities Exchange Act Release No. 37726 (September 25, 1996), 61
FR 51474 (October 2, 1996).
---------------------------------------------------------------------------
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 CBOE 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 those statements may be examined at the places specified in
Item IV below. The CBOE 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 purpose of the proposed rule change is to delete Interpretation
.01 under CBOE Rule 24A.4(c)(2). This interpretation limits the
exercise price intervals and exercise prices available for FLEX Equity
call options to those intervals and prices that are available for Non-
FLEX Equity call options pursuant to Interpretation and Policy .01
under CBOE Rule 5.5. This policy was intended to eliminate uncertainty
concerning what constitutes a ``qualified'' covered call for certain
purposes under the Internal Revenue Code pending clarification of this
tax issue.
Currently, under Section 1092(c)(4)(B) of the Internal Revenue
Code, certain covered short positions in call options qualify for
advantageous tax treatment if the options are not in the money by more
than a specified amount at the time they are written. One measure used
to determine whether a call option is qualified is whether its exercise
of ``strike'' price is no lower than the ``lowest qualified benchmark
price,'' which is generally the highest strike price available for
trading that is less than the current price of the underlying stock.
Since the exercise prices of FLEX \3\ Equity Options are not subject to
the same intervals that apply to Non-FLEX Equity Options, this has
raised the question whether the existence of a series of FLEX Equity
Options with a strike price of, say, 58 when the price of the
underlying stock is 59 would disqualify a Non-FLEX call option with a
strike price of 55, which would otherwise be the highest strike price
available that is less than the price of the stock.
---------------------------------------------------------------------------
\3\ Department of the Treasury, Internal Revenue Service REG-
104641-97, 63 FR 34616 (June 25, 1998).
---------------------------------------------------------------------------
The Internal Revenue Service (``IRS'') has reviewed this issue and
has a proposed regulation that would not require that strike prices
established by equity options with flexible terms be taken into account
in determining whether standard term equity options are too deep in the
money to receive qualified covered call treatment.\3\ The public
comment period for the proposed rule change closed on September 23,
1998 \4\ and the Exchange expects final regulations on this topic to be
adopted some time after that date. The Exchange intends for the
deletion of Interpretation .01 to coincide with the effective date of
final regulations by the Internal Revenue Service. The effect of the
IRS proposed rulemaking and the Exchange's proposed withdrawal of the
limitation of the exercise price of Equity FLEX call options is that
certain taxpayers, particularly institutional and other large
investors, can engage in transactions in Equity FLEX call options with
a wider range of exercise prices (as was originally intended) without
affecting the applicability of Section 1092 of the Internal Revenue
Code for qualified covered call options involving equity options with
standard terms.
---------------------------------------------------------------------------
\4\ The IRS is holding a hearing on November 4, 1998 on the
proposed rulemaking.
---------------------------------------------------------------------------
2. Statutory Basis
The proposed rule change, by eliminating a restriction on Equity
FLEX call options which has restricted their usefulness as a risk
managing mechanism, will remove impediments to and perfect the
mechanism of a free and open market in FLEX Equity Options, and thus is
consistent with the objectives of Section 6(b)(5) of the Act.\5\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
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 self-regulatory organization consents, the Commission will:
(A) by order approve such 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 filing is
consistent with the Act. Persons making
[[Page 58081]]
written submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 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 in the Commission's Public Reference Room. Copies of the 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-
98-39 and should be submitted by November 19, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
---------------------------------------------------------------------------
\6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28851 Filed 10-28-98; 8:45 am]
BILLING CODE 8010-01-M
