[Federal Register Volume 59, Number 213 (Friday, November 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27360]
[[Page Unknown]]
[Federal Register: November 4, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34914; File No. SR-CBOE-94-21]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating To Exercise
Price Intervals on Government Security Yield Options
October 28, 1994.
I. Introduction
On June 30, 1994, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to 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 CBOE Rule 23.5(a) to
reduce from $2.50 to $1.00 the fixed interval between strike prices.
The proposed rule change was published for comment in the Federal
Register on July 20, 1994.\3\ No comments were received on the proposed
rule change. This order approves the proposal.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\See Securities Exchange Act Release No. 34366 (July 13,
1994), 59 FR 37107.
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II. Description of Proposal
Currently, the CBOE lists government security yield options at
strike price intervals of $2.50.\4\ The CBOE proposes to amend its
rules to reduce the interval between exercise prices on such contracts
from $2.50 to $1.00,\5\ which will establish a minimum spread of $100
($1.00 times the multiplier of 100) between series. The Exchange
believes that its proposal will improve the value and utility of
government security yield options by, among other things, enabling
investors to construct hedges that correlate closely with interest
rates and changes in interest rate measures underlying government
security yield options. According to the CBOE, the $2.50 minimum strike
price interval is wider than the typical increments of change in
interest rates, even during periods of high interest rate
volatility.\6\
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\4\See CBOE Rule 23.5(a). CBOE Rule 23.5 (Terms of Interest Rate
Option Contracts) applies to government security yield options.
Currently, government security yield options are based on the 13-
week T-bill, 5-year T-note, 10-year T-note, and 30-year T-bond.
\5\See Proposed Amendment to Rule 23.5(a).
\6\In its filing, the Exchange indicated that during a recent
highly volatile week, the yield on the 30-year U.S. Treasury bond
changed by less than 15 basis points (or $150), while strike price
intervals were necessarily set at the minimum of $250 apart.
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III. Findings and Conclusions
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) of the Act.\7\
Specifically, the Commission believes that reducing from $2.50 to $1.00
the interval between exercise prices on government security yield
option contracts will further the public interest by providing
investors with more flexibility in the trading of such options, and
allowing investors to establish government security yield option
positions that are better tailored to meet their investment
objectives.\8\
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\7\15 U.S.C. 78f(b)(5) (1988).
\8\The Exchange maintains that a consequence of the minimum
strike price interval of $2.50 is to make at- or near-the-money
positions unavailable, thereby limiting the ability of investors to
construct tight hedges or to use combination orders such as
straddles effectively.
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The Commission also believes that the CBOE's proposal sets a
reasonable balance between the Exchange's need to accommodate the needs
of investors and the need to avoid the excessive proliferation of
options series. In this regard, we note the specialized nature of the
trading of government security yield options. For example, the CBOE
indicates that the current relationship between yield changes in
securities underlying government security yield options and the
applicable $2.50 strike price interval requirement allows for instances
where significant market yield movement would not result in the trading
of government security yield options through existing strikes, thus
preventing the availability of additional ``at-the-money'' strikes,
which are necessary for the effective implementation of certain hedging
trading strategies.\9\ The Commission accordingly believes that a $1.00
strike price interval will allow for at-the-money strikes to be more
readily available, without causing an excessive proliferation of
strikes in such options.\10\
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\9\See supra note 6.
\10\Moreover, it should be noted that CBOE Rule 23.5,
Interpretation and Policy .01 provides an outer limit with respect
to the number of strike prices for new options series. This limit is
eight strike prices under normal circumstances, and up to twelve
strike prices when unusual market conditions exist.
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Finally, the Options Price Reporting Authority (``OPRA'') has
stated that the additional traffic that will be generated by changing
the strike price interval for government security yield options to
$1.00 is within OPRA's capacity.\11\
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\11\See letter from Joseph P. Corrigan, Executive Director,
OPRA, to Eileen Smith, Director, Product Development, CBOE, dated
October 26, 1994.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-CBOE-94-21) is
approved.
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\12\15 U.S.C. 78s(b)(2) (1988).
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. 94-27360 Filed 11-3-94; 8:45 am]
BILLING CODE 8010-01-M
