[Federal Register Volume 60, Number 78 (Monday, April 24, 1995)]
[Notices]
[Page 20132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9978]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35617; File No. SR-CBOE-95-02]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to the
Listing of Long-Term Index Options Series (``LEAPS'') With a Duration
of up to Sixty Months Until Expiration
April 17, 1995.
On January 19, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change to permit the listing of long-
term index options series (``LEAPS'') with a duration of up to sixty
months (five years) until expiration. Notice of the proposal appeared
in the Federal Register on February 1, 1995.\3\ No comment letters were
received on the proposed rule change. This order approves the CBOE
proposal.
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See Securities Exchange Act Release No. 35278 (January 25,
1995), 60 FR 6324.
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The purpose of the proposed rule change is to permit the Exchange
to list index LEAPS with a duration of up to sixty months (five
years).\4\ Presently, the Exchange has authority pursuant to CBOE Rule
24.9(b) to list index LEAPS that expire from twelve to thirty-six
months from the time they are listed. The Exchange represents that
there has been increasing member firm and customer interest in longer
term instruments. The Exchange, therefore, is proposing to amend
Exchange Rule 24.9 to permit the listing of index options with up to
sixty months until expiration. In addition, the Exchange proposes to
amend Rule 24.9 to allow for up to ten expiration months for index
LEAPS, as opposed to the six months currently allowed. The proposal
does not change any other rule regarding the listing and trading of
index LEAPS.\5\
\4\The proposal would permit five-year LEAPS on both broad-based
and narrow-based indexes on which LEAPS have been approved for
trading on the CBOE.
\5\See CBOE Rule 24.9(b).
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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).\6\ Specifically, the
Commission believes the proposal is designed to provide investors with
additional means of hedging equity portfolios from long-term market
risk with an exchange-traded security (i.e., a standardized option),
thereby facilitating transactions in options and contributing to the
protection of investors and the maintenance of fair and orderly
markets.\7\
\6\15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
\7\The Commission also finds that extending the maximum term for
Index LEAPS from three to five years does not alter the Commission's
designation of index LEAPS as standardized options pursuant to Rule
9b-1(a)(4) of the Act.
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Currently, institutional customers use index options to hedge the
risks associated with holding diversified equity portfolios. The
Commission continues to believe, as originally stated in its approval
of the listing of index LEAPS by the Exchange, that allowing investors
to lock in their hedges with longer-term index LEAPS will permit
institutions to protect better their portfolios from adverse market
moves.\8\ Further, the Commission believes that index LEAPS with up to
five years until expiration will allow this protection at a known and
limited cost.\9\ Moreover, the proposal will provide institutions with
an additional securities product with which to hedge their portfolios
as an alternative to hedging with futures positions or off-exchange
customized index options.\10\ Accordingly, the Commission believes that
the proposed rule change will better serve the long-term hedging needs
of institutional investors.\11\
\8\See Securities Exchange Act Release No. 24853 (August 27,
1987), 52 FR 33486 (September 3, 1987).
\9\Id.
\10\Id.
\11\The Commission's findings are predicated on the somewhat
limited length of five-year index LEAPS. Any subsequent proposal to
list index LEAPS with expirations beyond five years could alter the
nature of the product and would raise new regulatory concerns,
including, among other things, the appropriate margin treatment,
disclosure, and trading rules for the product.
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Finally, although as with index LEAPS presently trading on the
Exchange, specific strike price interval, bid/ask differential, and
price continuity rules will not apply until the proposed longer-term
index LEAPS have less than 12 months until expiration,\12\ the
Commission notes that CBOE's general rule obligating market makers to
maintain fair and orderly markets will continue to apply to the
proposed longer-term index LEAPS.\13\ The Commission believes that the
requirements of CBOE Rule 8.7(a) are broad enough, even in the absence
of strike price interval, bid/ask differential, and continuity
requirements, to provide the Exchange with the authority to make a
finding of inadequate market maker performance should market makers
enter into transactions or make bids or offers (or fail to do so) in
the proposed longer-term index LEAPS that are inconsistent with the
maintenance of a fair and orderly market.
\12\See CBOE Rule 24.9(b)(1).
\13\See CBOE Rule 8.7(a).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (File No. SR-CBOE-95-02) is
approved.
\14\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9978 Filed 4-21-95; 8:45 am]
BILLING CODE 8010-01-M
