[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Notices]
[Pages 10100-10102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5373]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38332; File No. SR-CBOE-97-07]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by Chicago Board Options
Exchange, Inc., Relating to Certain Multi-Market Orders Involving Index
Options
February 24, 1997.
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, 17 CFR
240.19b-4, notice is hereby given that on February 12, 1997, the
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed
with the Securities and Exchange 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 6.48 to specify that certain
duties of CBOE members in effecting options transactions on the CBOE
that are part of certain stock-option orders on the CBOE involving
index options. 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 these 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 the
Statutory Basis for, the Proposed Rule Change
(1) Purpose
In 1995, the Exchange filed a rule change proposal with the
Commission that amended Rule 6.48 and set forth the duties of CBOE
members executing options orders that constitute a component of a
``package'' stock-options order. The execution of this type of order
involves transactions in CBOE's options market and in another market (a
``multi-market'' order).\1\ Rule 6.48 specifies the sole basis on which
an options trade that is a component of a multi-market order may be
canceled by the members that are parties thereto. However, Rule 6.48
does not currently provide for the cancellation of any stock-option
order that entails the purchase of sale of index options.
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\1\ See Securities Exchange Act Release No. 36516 (November 27,
1995), 60 FR 62114 (December 4, 1995).
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Multi-market orders in index options play an important role in
allowing traders to hedge their risks and thus, in providing liquidity
to customers in their products. Sometimes, multi-market orders
involving index options might consist of a spread between the CBOE
option product and another single security traded in another market,
e.g., S&P 500 index options (SPX) versus a unit investment trust in the
S&P 500. In those instances where an order involves
[[Page 10101]]
a CBOE index option and an equity index-based security traded in
another market, where both are based upon the same index,\2\ the
Exchange believes it is appropriate to deem such an order a stock-
option order, and thus eligible for the order cancellation provision
contained in paragraph (b) of Rule 6.48. Another common type of multi-
market order often involves the nearly simultaneous trading of a CBOE
option and a basket of stocks in another market. The CBOE does not
believe that this type of order should be deemed a stock-option order
eligible for the cancellation provisions contained in Rule 6.48 because
a ``basket'' of stocks is not an ``underlying or related security'' as
required in the definition of stock-option order.\3\ To date, CBOE
traders in index options have relied on informal trading protocols to
ensure fairness and equity in connection with the execution and
cancellation of multi-market orders.
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\2\ The trust which underlies S&P 500 Depositary Receipts
(``SPDRs'') is made to replicate the performance of the S&P 500
index; however, there are a couple of reasons why the value of the
SPDR trust may deviate slightly from the S&P 500 value. First, the
trust underlying SPDRs is subject to slight rounding errors because
the trust must contain whole shares while the S&P 500 index is not
so limited. Second, the trust underlying SPDRs is required only to
make adjustments to the components monthly unless the value of the
component deviates by more than a certain percentage from that
component's comparable weight in the S&P 500 index.
\3\See CBOE Rule 1.1(ii).
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Accordingly, the Exchange is proposing to extend the order
execution and cancellation provisions contained in Rule 6.48 to stock-
option orders involving an index option and a single security equity
index-based product traded in another market, where both are based upon
the same index.\4\ Consequently, the Exchange is proposing the deletion
of paragraph (b)(ii) of Rule 6.48 which exempts stock-option orders
involving index options from the two requirements set forth in
paragraph (b) of Rule 6.48. The first of those requirements is that a
member announcing such an order to a trading crowd must disclose all
legs of the order and must identify the specific markets and prices at
which the non-options leg(s) are to be filed. Second, concurrent with
the execution of the option leg of any multi-market order, the
initiating member and each member that is a counterparty to the trade
must take steps to immediately execute the non-options leg(s) in the
identified market(s).
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\4\ Telephone conversation between Tim Thompson, Senior
Attorney, CBOE, and John Ayanian, Special Counsel, Office of Market
Supervision, Division of Market Regulation, Commission, on February
21, 1997.
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The Exchange believes, as with stock-option orders involving equity
options, that these provisions will clarify members' expectations about
the execution of each non-option component of such orders.
Current Rule 6.48 provides that a party to an options transaction
that is part of a stock-option order may have the options transaction
canceled only in the event that market conditions in another market
prevents the execution of one or more of the non-option legs of the
order.
The current proposal only addresses multi-market orders involving
an index option and a single security equity index-based product traded
in another market, where both are based upon the same index (e.g., a
stock-option order involving SPDRs and SPX options). Additionally, Rule
6.48 is not intended to allow multi-market orders involving index
options and ``baskets'' of securities to get the benefit of the order
cancellation provisions of the rule. Stock-option orders are just one
subset of the types of multi-market orders that are transacted by
traders in the index crowds. As mentioned above, some multi-market
orders involve a transaction of an index option coupled with a basket
of stocks comprising the index. An order for this type of transaction
does not meet the definition of a stock-option order which is defined
under CBOE Rule 1.1(ii). The Exchange is currently reviewing the
protocols used in the execution of these other types of multi-market
orders to determine if further rule changes would be beneficial in the
handling of these orders.
(2) Basis
The Exchange 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 deal with the
special circumstances of multi-market orders involving index options in
a manner that promotes just and equitable principles of trade, and the
protection of investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change will impose no 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
Because the foregoing proposed rule change: (1) does not
significantly affect the protection of investors or the public
interest; (2) does not impose any significant burden on competition;
(3) was provided to the Commission for its review at least five days
prior to the filing date; and (4) does not become operative for 30 days
from February 12, 1997, the date on which it was filed, the rule change
has become effective pursuant to Section 19(b)(3)(A) of the Act and
Rule 19b-4(e)(6) thereunder. In particular, the Commission believes the
proposal qualifies as a ``noncontroversial filing'' in that the
proposed standards do not significantly affect the protection of
investors or the public interest and do not impose any significant
burden on competition. At any time within 60 days of the filing of the
proposed rule change, the Commission may summarily abrogate such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in the furtherance of the purposes 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, 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 in 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
[[Page 10102]]
should refer to File No. SR-CBOE-97-07 and should be submitted by March
26, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5373 Filed 3-4-97; 8:45 am]
BILLING CODE 8010-01-M
