[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27636-27638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13099]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38613; File No. SR-CBOE-97-09]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Board Options Exchange, Inc., Relating to an Increase in Position and
Exercise Limits for Industry Index Options
May 12, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February
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19, 1997, 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 and
II below, which Items have been prepared by the self-regulatory
organization. The Exchange has requested accelerated approval for the
proposal. This order approves the CBOE's proposal on an accelerated
basis and solicits comments from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1)(1988).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its rules to increase position
and exercise limits for narrow-based (or industry) index options from
6,000, 9,000, or 12,000 contracts to 9,000, 12,000, or 15,000
contract.\3\
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\3\ Position limits impose a ceiling on the number of option
contracts which an investor or group of investors acting in concert
may hold or write in each class of options on the same side of the
market. (i.e., aggregating long calls and short puts or long puts
and short calls). Exercise limits prohibit an investor or group of
investors acting in concert from exercising more than a specified
number of puts or calls in a particular class within five
consecutive business days.
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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 Exchange 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 III below. The Exchange 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
Currently, Exchange Rules 24.4A and 24.5 provide that position and
exercise limits for narrow-based index options be set at one of three
levels depending upon the weightings of the component securities in
such narrow-based index. Accordingly, a narrow-based index option will
have a 6,000 contract limit if a single component security accounts for
more than 30% of the index value; a 9,000 contract limit if a single
component security accounts for more than 20% (but less than 30%) of
the index value or any five component securities together account for
more than 50% of the index value; and a 12,000 contract limit for those
narrow-based indexes that do not fall within any one of the other
categories.\4\ Because the current stringent position limits create
difficulties for investors, the Exchange is proposing to increase these
limits to 9,000, 12,000, and 15,000 contracts, respectively, based on
existing qualifications for determining the appropriate position limit
tier set forth in Exchange Rule 24.4A.
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\4\ The CBOE currently lists options on over 20 narrow-based
indices. As of January 15, 1997, the CBOE narrow-based indices at
the 12,000 contract limit include CBOE Mexico Index, CBOE REIT
Index, CBOE Telecommunications Index, CBOE Latin 15 Index, CBOE
Technology Index, and CBOE Internet Index. As of January 15, 1997,
the CBOE narrow-based indices at the 9,000 contract limit include
S&P Chemical Index, S&P Health Care Index,
S&P Insurance Index, S&P Retail Index,
S&P Transportation Index, CBOE Computer Software Index.
CBOE Environmental Index, CBOE Gaming Index, CBOE Israel Index, CBOE
Automotive Index, CBOE Oil Index, CBOE Gold Index, GSTI
TM Hardware Index, GSTI TM Internet Index GSTI
TM Multimedia Networking Index, GSTI TM
Semiconductor Index, GSTI TM Services Index, and GSTI
Software Index. Lastly, as of January 15, 1997, there are no narrow-
based indices on the CBOE at the 6,000 contract limit.
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The CBOE also notes that the existing levels have been in place
since 1995.\5\ The Exchange believes that the proposed limits of 9,000,
12,000, and 15,000 contracts will increase the depth and liquidity of
the market for narrow-based index options without causing any market
disruption. In addition, the Exchange will continue to monitor for
possible manipulation and violations of the position and exercise
limits through the use of the monitoring systems currently in place,
and notes that to date it has not found it necessary to open any
manipulation inquiries notwithstanding prior increases in position and
exercise limits.
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\5\ See Securities Exchange Act Release nO. 36439 (October 31,
1995), 60 FR 56075 (November 6, 1995) (order establishing position
and exercise limits for narrow-based index options at 6,000, 9,000,
or 12,000 contracts) (CBOE-95-56).
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2. Statutory Basis
The Exchange believes that the proposal 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 will allow investors to utilize
narrow-based index options more fully as part of their investment
portfolios as well as increase the depth and liquidity of the market,
thereby removing impediments to and perfecting the mechanism of a free
and open market and a national market system in a manner consistent
with the protection of investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received with respect to the
proposed rule change.
III. 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, NW., 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, NW.,
Washington, D.C. 20549. Copies of such filings also will be available
for inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-97-09 and should be
submitted by June 10, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, the requirements of
Section 6(b)(5) thereunder.
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
option contracts that a member or customer can hold or exercise. These
rules are intended to prevent the establishment of large options
positions that can be used or might create incentives to manipulate or
disrupt the underlying market so as to benefit the options position. At
the same time, the Commission has recognized that option position and
exercise limits
[[Page 27638]]
must not be established at levels that are so low as to discourage
participation in the options market by institutions and other investors
with substantial hedging needs or to prevent specialists and market
makers from adequately meeting their obligations to maintain a fair and
orderly market.
In this regard, the CBOE has stated that the current position
limits discourage market participation by certain large investors and
the institutions that compete to facilitate their trading. In addition,
the CBOE notes that the index option trading volume has increased
significantly since 1995, when the current narrow-based index option
position limits were established. In light of the increased volume of
narrow-based index option trading and the needs of investors and market
makers, the Commission believes that the CBOE's proposal is a
reasonable effort to accommodate the needs of market participants.
In addition, the Commission notes that the proposal, while
increasing the positions limits for narrow-based index options,
continues to reflect the unique characteristics of each index option
and maintains the structure of the current three-tiered system.
Specifically, the lowest proposed limit, 9,000 contracts, will apply to
narrow-based index options in which a single underlying stock accounts,
on average, for 30% or more of the index value during the 30-day period
immediately preceding the Exchange's review of narrow-based index
options positions limits. A position limit of 12,000 contracts will
apply if any single underlying stock accounts, on average, for 20% or
more of the index value or any five underlying stocks together account,
on average, for more than 50% of the index value, but no single stock
in the group accounts, on average, for 30% or more of the index value
during the 30-day period immediately preceding the Exchange's review of
narrow-based index option position limits. The 15,000 contract limit
will apply only if the Exchange determines that the conditions
requiring either the 9,000 contract limit or the 12,000 contract limit
have not occurred.
The Commission believes that the proposed increases for the three
tiers of 25%, 33%, and 50%, for highest to lowest, respectively, appear
to be appropriate and consistent with the Commission's evolutionary
approach to position and exercise limits. In this regard, the absence
of discernible manipulative problems under the current three-tiered
position and exercise limit system for narrow-based index options leads
the Commission to conclude that the increases proposed by the Exchange
are warranted. The Commission recognizes that there are no ideal limits
in the sense that options positions of any given size can be stated
conclusively to be free of any manipulative concerns. Based upon the
absence of discernible manipulation or disruption problems under
current limits, however, the Commission believes that the proposed
limits can be safely considered. Accordingly, the Commission believes
that the CBOE's proposed increases of existing position and exercise
limits for narrow-based index options is appropriate.\6\
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\6\ The Commission continues to believe that proposals to
increase position limits and exercise limits must be justified and
evaluated separately. After reviewing the proposed exercise limits,
along with the eligibility criteria for each tier, the Commission
has concluded that the proposed exercise limit increases for the
three-tiered framework do not raise manipulation problems or
increase concerns over market disruption in the underlying
securities.
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The Commission notes that the Exchange has had considerable
experience monitoring the current three-tiered framework in narrow-
based index options. The Commission has not found that differing
position and exercise limit requirements based on the particular
options product to have created programming or monitoring problems for
securities firms, or to have led to significant customer confusion.
Based on the current experience in handling position and exercise
limits, the Commission believes that the proposed increase in position
and exercise limits for narrow-based index options will not cause
significant problems.
Finally, the Commission believes that the Exchange's surveillance
programs are adequate to detect and to deter violations of position and
exercise limits as well as to detect and deter attempted manipulative
activity and other trading abuses through the use of such illegal
positions by market participants.
The Commission finds good cause to approve the proposal prior to
the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. On October 24, 1996, the Commission
approved an identical proposal for the Philadelphia Stock Exchange,
Inc. (``Phlx'').\7\ The Phlx's proposal was subject to the full comment
period and generated no responses. Similarly, on January 23, 1997, the
Commission granted accelerated approval to an identical proposal for
the American Stock Exchange, Inc. (``Amex'').\8\ Accordingly, the
Commission believes that it is consistent with Sections 6(b)(5) and
19(b)(2) of the Act to approve the proposed rule change on an
accelerated basis.
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\7\ See Securities Exchange Act Release No. 37863 (October 24,
1996), 61 FR 56599 (November 1, 1996) (order establishing position
and exercise limits for narrow-based index options at 9,000, 12,000,
or 15,000 contracts) (Phlx-96-33).
\8\ See Securities Exchange Act Release No. 38202 (January 23,
1997), 62 FR 4555 (January 30, 1997) (order establishing position
and exercise limits for narrow-based index options at 9,000, 12,000,
or 15,000 contracts) (Amex-96-41).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the
Act, that the proposed rule change (File No. SR-CBOE-97-09) is hereby
approved on an accelerated basis.
\9\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13099 Filed 5-19-97; 8:45 am]
BILLING CODE 8010-01-M
