[Federal Register Volume 64, Number 104 (Tuesday, June 1, 1999)]
[Notices]
[Pages 29370-29377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13811]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41435; File No. SR-CBOE-99-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
Option Exercise Procedures \1\
May 21, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that
on January 20, 1999, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or the ``SEC'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the CBOE. The proposal was amended on May 11, 1999.\4\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ The CBOE amended the title of this filing in Amendment No.
1. See infra note 4.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ In Amendment No. 1, the Exchange made typographical
corrections to, clarified the purpose of, and expanded the scope of
the proposed rule change. (``Amendment No. 1''). See Letter from
Arthur B. Reinstein, Counsel, CBOE, to Hong-anh Tran, Attorney,
Division of Market Regulation (``Division''), Commission, dated May
10, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
CBOE proposes to amend Exchange Rules 4.16 and 11.1 to permit the
exercise of American-style, cash-settled index options following a
trading halt that occurs at or after 3:00 p.m. Such exercises will be
permitted at or after 3:00 p.m. through 3:20 p.m. (CT), the normal
deadline for exercising such options. The Exchange is also proposing to
amend its Regulatory Circular concerning the Exchange's procedures and
requirements regarding the exercise of American-style, cash-settled
index options (``Exercise Regulatory Circular'') \5\ to reflect these
changes and to reflect changes to CBOE Rules 4.16 and 11.1 that were
recently approved by the Commission. Additionally, the Exchange is
proposing to permit CBOE's President or his designee to extend the
applicable deadline for the delivery of Exchange-required exercise
notifications, for either an American-style, cash-settled index options
or a non-cash settled equity options, if unusual circumstances are
present.\6\ Attached as Exhibit A to this Notice is the text of the
proposed rule. Proposed new language is italicized; proposed deletions
are in [brackets].
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\5\ See Securities Exchange Act Release No. 40334 (August 18,
1998), 63 FR 45275 (August 25, 1998) File No. SR-CBOE-98-34.
\6\ See Amendment No. 1, supra note 4.
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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 self-regulatory organization
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 self-regulatory organization
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
American-style, Cash-Settled Index Options
The CBOE proposes to modify its rules governing the exercise of
American-style, cash-settled index during certain trading halts.
Currently, the Exchange trades only one type of American-style, cash-
settled index option contract, Standard & Poor's 100 index options
(``OEX index options'').\7\ Index options generally are traded on the
Exchange from 8:30 a.m. to 3:15 p.m. (CT).\8\ CBOE Rule 11.1 governs
the exercise of options contracts, including index option contracts.
CBOE Rule 11.1 provides that CBOE members shall follow the procedures
of the Options Clearing Corporation (``OCC'') as well as those of the
exchange when exercising option contracts. Options generally may be
exercised at any time during the trading day, and proposed CBOE Rule
11.1.03 requires members intending to exercise American-style, cash-
settled index option contracts to deliver an ``exercise advice'' to a
place designated by the Exchange no later than five minutes after the
close of trading on that
[[Page 29371]]
day.\9\ However, under CBOE Rule 11.1.05 (which is now proposed to be
moved to CBOE Rule 11.1.03(h)), and CBOE Rule 4.16(b),\10\ exercises of
cash-settled index options are prohibited during any time when trading
in such options is delayed, halted or suspended, unless otherwise
determined by the President of the Exchange or his designee.\11\ Thus,
although exercises of OEX index options may occur until 3:20 p.m. (CT)
in the absence of a trading halt, no exercises of OEX index options
currently are permitted when a trading halt in such options is in
effect.
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\7\ Although OEX index options are the only standardized
American-style, cash-settled index options currently traded on the
Exchange, the revised Rules also would apply to exercises of
American-style, cash-settled FLEX Index Option contracts. All other
CBOE index options are European-style, with exercise permitted only
upon their expiration.
\8\ CBOE Rule 24.6, Days and Hours of Business.
\9\ See Amendment No. 1, supra note 4.
\10\ Id.
\11\ Notwithstanding this prohibition, the exercise of a cash-
settled index option may be processed and given effect in accordance
with and subject to the rules of the OCC while trading in an option
is delayed, halted, or suspended if it can be documented that the
decision to exercise the option was made during allowable time
frames prior to the delay, halt or suspension. CBOE Rule 11.1.05
(which is now proposed to be moved to proposed CBOE Rule
11.1.03(h)(i)), Exercise of Option Contracts.
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The current rules governing the exercise of index options were
developed with recognition of the distinction between holders of long
and holders of short positions in index options. The Exchange has long
noted that one of the distinctive characteristics of a cash-settled
option is that its exercise is functionally equivalent to trading out
of the long position, and, conversely, the assignment of a short index
option eliminates the position as if it had been closed through a
purchase transaction. Absent any restrictions upon exercise, holders of
long positions would be able to exercise their options after the close
of trading and during trading halts. Because holders of short positions
are unable to trade out of their positions when trading has been closed
or halted, they would be at a disadvantage to holders of long
positions. To minimize the effect this disparity might have on holders
of short positions in the event of a trading halt immediately prior to
expiration of an option, the Exchange amended CBOE Rule 4.16(a) in 1983
to permit the Exchange's Board of Directors to restrict exercises of
index options other than on the last trading day before expiration
Friday.\12\ Exercises of expiring index options cannot be restricted in
any way on expiration Friday.
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\12\ CBOE Rule 4.16(a), Other Restrictions on Options
Transactions and Exercises; See also, Securities Exchange Act
Release No. 19590 (March 10, 1983), 48 FR 11196 (March 16, 1983)
(File No. SR-CBOE-83-6); and see Amendment No. 1, supra note 4.
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Since 1991 the Exchange has permitted the exercise of index options
for a ``five minute window'' subsequent to the close of trading on the
Exchange.\13\ The rule permitting the exercise of cash-settled index
options up to 3:20 p.m. (CT) allows market participants to make
investment decisions based on the evaluation of their final positions
after having completed trading for the day. In addition, by allowing
traders and market makers to concentrate on their trading activities,
rather than submitting exercise advice prior to the close of the
market, and to determine whether or not their hedging orders on other
markets were executed, as well as to their exercise their index option
positions on the Exchange if necessary to avoid remaining unhedged
overnight, the five-minute window benefits options investors generally
by fostering higher quality markets. Moreover, the additional five-
minute exercise period provides market participants with additional
time to evaluate the closing prices of the securities that comprise an
index and to determine whether or not to exercise their positions.\14\
Thus, in light of these benefits, the Exchange adopted the five-minute
window permitting exercises after the close of trading on the Exchange
notwithstanding that investors holding short positions in index options
would not have the same opportunity to unwind their positions during
this period as would holders of long positions. In doing so, the
Exchange deemed the benefits to the overall OEX index market from the
five-minute exercise period to exceed any potential harm that might
result to short holders as a result of the disparity in trading
opportunities.
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\13\ See Securities Exchange Act Release No. 29860 (October 25,
1991), 56 FR 56264 (November 1, 1991) (File No. SR-CBOE-91-28).
\14\ Id.
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The Exchange has now reconsidered its policy with respect to the
exercise of American-style, cash-settled index options and proposes to
eliminate the current ban on exercises with respect to trading halts in
such options that occur at or after 3:00 p.m. (CT). As mentioned, the
trading markets for the equity securities underlying index options
generally are closed for trading by 3:00 p.m. (CT), thereby
establishing the closing value of a given index. By this time, OEX
market participants are already watching the market for opportunities
to exercise their options. Many participants in the OEX index options
market use the closing value of the index to make trading and hedging
decisions (including transactions in the related futures market)
contingent upon exercise of an OEX index option position or the
expected assignment of a short position. Given this, the Exchange
believes that the occurrence of trading halt at or after 3:00 p.m. (CT)
should not fundamentally alter the ability of these market participants
to exercise their index options.\15\ While permitting the exercise of
index options during trading halts that occur at or after 3:00 p.m.
(CT) increases the disparity in trading opportunities between holders
of short and long positions in OEX index options, the Exchange believes
that any increase in disparity is incremental over the situation that
exists today by virtue of the five-minute exercise window after the
close of the Exchange, and would be exceeded by the additional benefits
that would be afforded to the OEX market under the proposed Rule.\16\
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\15\ While the implementing the standard five-minute exercise
window after a trading halt has been announced would provide floor
traders with sufficient opportunity to exercise, such a small window
may not provide other market participants with a sufficient
opportunity to do so and would add to the increased operational
burdens of member firms resulting from the trading halt itself.
\16\ The Exchange generally will continue to prohibit American-
style, cash-settled index option exercises during any trading halt
which occurs before 3:00 p.m. (CT), as the length of time required
to provide sufficient notice and opportunity equally to all market
participants during an intraday trading halt would unfairly expand
the opportunity for holders of long index option positions to
exercise when short option holders are prohibited from trading.
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The Exchange also believes that a uniform policy of permitting
exercises of OEX index options after the close of the Exchange will
reduce the potential for confusion among its members and customers,
especially during late trading halts. In doing so, such a policy would
further the efficient operation of the Exchange during such periods. To
the extent that a closing rotation were held after a late trading halt,
the Exchange proposes that exercises of American-style, cash-settled
index options would continue to be permitted during the rotation and
for a five-minute period thereafter, as is currently the case.
The Exchange also proposes to amend CBOE Rules 4.16(b) and CBOE
Rule 11.1.03, and proposes to reflect these corresponding changes in
the Exercise Regulatory Circular to make clear that in the case of an
American-style, cash-settled FLEX Index Option, the references in CBOE
Rule 4.16(b), CBOE Rule 11.1.03, and the Exercise Regulatory Circular
to a trading delay, halt, suspension, resumption, closing rotation, or
modified trading hours will mean the occurrence of the applicable
condition in the standardized option on the index underlying the FLEX
Index Option (rather than the occurrence of
[[Page 29372]]
the applicable condition in the FLEX Index Option itself).\17\ The
Exchange states that this is consistent with how the Exchange has
historically applied the exercise provisions that are applicable in the
above market conditions to American-style, cash-settled FLEX Index
Options, and the Exchange proposes herein to codify the Exchange's
prior exercise practices as they apply to American-style, cash-settled
FLEX Index Options.\18\
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\17\ See Amendment No. 1, supra note 4.
\18\ Id.
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Thus, for example, if there is a trading halt that occurs before
3:00 p.m. in the standardized Standard & Poor's 500 Index (SPX) options
(which are European-style options), exercises of American-style, cash-
settled SPX FLEX options will be prohibited during the trading
halt.\19\ However, based on the proposal, if there is a trading halt in
the standardized SPX options that occurs at or after 3:00 p.m.,
exercises of American-style, cash-settled SPX FLEX options may occur
through 3:20 p.m.\20\ Additionally, based on the proposal, if there is
a closing rotation in the standardized SPX options, exercises of
American-style, cash-settled SPX FLEX options may occur during the
closing rotation and for five minutes after the end of the closing
rotation.\21\ If there were no provision which provided for the
foregoing, the holder of an American-style, cash-settled SPX FLEX
option would have no ability to exercise the option during a closing
rotation because CBOE Rule 24A.3 does not permit closing rotations to
be conducted in FLEX options.\22\ The purpose of the provisions
discussed above is to avoid this differential treatment and to treat
all American-style, cash-settled index options in the same manner with
regard to exercise restrictions.\23\
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\19\ Id.
\20\ Id.
\21\ Id.
\22\ Id.
\23\ Id.
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Additionally, with the exception of some nonsubstantive wording
changes, the Exchange is proposing to move the text of CBOE Rule
11.1.05 to proposed CBOE Rule 11.1.03(h) for ease of reference for
Exchange members since CBOE Rule 11.1.05 relates to the exercise of
American-style, cash-settled index options and the provisions of Rule
11.1 that specifically relate to the exercise of American-style, cash-
settled index options are set forth in Rule 11.1.03.\24\ The Exchange
is also proposing to amend the Exercise Regulatory Circular to reflect
recently adopted changes to CBOE Rule 4.16(b) and CBOE Rule 11.1.05
(which is now proposed to be moved to proposed CBOE Rule
11.1.03(h)),\25\ which permit the President of the Exchange (or his
designee) to allow the exercise of American-style, cash-settled index
options during any trading delay, halt or suspension.\26\ As noted in
the Exercise Regulatory Circular, the Exchange anticipates that, in
general, such a determination would be based on extraordinary
circumstances.\27\
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\24\ Id.
\25\ Id.
\26\ See Securities Exchange Act Release No. 40951 (January 15,
1999), 64 FR 4482 (January 28, 1999) (File No. CBOE-98-33).
\27\ See Amendment No. 1, supra note 4.
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The Exchange also proposes to narrow the evidence that may be
submitted to the Exchange by a member to document that a decision to
exercise an American-style, cash-settled option was made prior to a
trading delay, halt or suspension. Exchange members are excepted from
the general prohibition on exercising such index options during trading
halts, delays, or suspensions provided they can document that the
decision to exercise was made prior to the trading halt, delay, or
suspension.\28\ The Exchange believes that it would be preferable to
rely on and encourage the most objective evidence available as to the
timing of an exercise determination. Therefore, the Exchange proposes
to no longer, ordinarily, accept internal exercise memoranda prepared
by CBOE members as evidence of timely exercises. The Exchange will,
however, continue to accept ``exercise advices'' transmitted via C/MAS
or a member's copy of an exercise advice previously submitted to the
Exchange as evidence that an exercise determination was made prior to a
subsequent trading delay, halt, or suspension.\29\
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\28\ Id.
\29\ See Exercise Regulatory Circular, Section 11.
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Further, the Exchange proposes to permit CBOE's President or his
designee to extend the applicable deadline for the delivery of
``exercise advice'' and ``advice cancel'' notifications pursuant to
CBOE Rule 11.1.03(c) for American-style, cash-settled index options if
unusual circumstances are present.\30\ The exercise deadline for
standardized American-style, cash-settled index options is normally
3:20 p.m. (CT) and is in effect on every trading day except that the
deadline is not in effect on expiration Friday for expiring
contracts.\31\ On occasion, there may be situations in which the
regular 3:20 p.m. (CT) deadline for CBOE members to notify the Exchange
of exercise decisions concerning and American-style, cash-settled index
option may not allow market participants a sufficient amount of time in
which to make and process those exercise decisions due to the presence
of unusual circumstances.\32\ For example, there have been rare
occasions in which the reporting authority for an index has been late
in reporting the closing index value for the index.\33\ Consequently,
market participants have found it difficult on those occasions to make
and process exercise decisions before the 3:20 p.m. (CT) deadline.\34\
This amendment proposes to permit the President or his designee to
extend the applicable deadline for the delivery of ``exercise advice''
and ``advice cancel'' notifications pursuant to CBOE Rule 11.1.03(c)
for American-style, cash-settled index options in unusual situations
like the foregoing.\35\
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\30\ See Amendment No. 1, supra note 4.
\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
\35\ Id.
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Noncash-Settled Equity Options
The exercise cutoff time for noncash-settled options is 4:30 p.m.
(CT) and is in effect on expiration Friday for expiring contracts. The
cutoff time is only applicable with respect to expiring contracts on
expiration Friday because at other times an option holder who makes a
late decision to either exercise or not to exercise an option will
always end up holding either the option or the underlying stock, the
value of which will be similarly effected by any material late
news.\36\
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\36\ Id.
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For reasons comparable to the reasons for proposing to grant the
President or his designee the authority to extend the exercise deadline
for American-style, cash-settled index options, this amendment also
proposes, under CBOE Rule 11.1(b) and CBOE Rule 11.1.06, to grant
similar authority to the President or his designee to extend the 4:30
p.m. (CT) exercise cutoff time for a noncash-settled equity option if
unusual circumstances are present (in which case, the Exchange proposes
that the deadline for the delivery of an exercise instruction,
``contrary exercise advice,'' and ``advice cancel'' pursuant to CBOE
Rule 11.1.06 will be the revised exercise cutoff time designated by the
President or his designee).\37\ For example, there have been rare
occasions in which the closing rotation in an equity option has ended
shortly before 4:30 p.m. (CT).\38\ A late-ending closing rotation
delays a
[[Page 29373]]
market participant's ability to take the actions necessary to make and
process an exercise decision. For example, in order to make and process
an exercise decision, a market participant may need to obtain
confirmations of trades executed that day, review the participant's
positions in the applicable option and the underlying stock, review the
closing price of the option and underlying stock, and/or prepare
exercise instruction, ``contrary exercise advice,'' and ``advice
cancel'' forms. This amendment proposes to permit the President or his
designee to extend the exercise cutoff time in unusual situations like
the foregoing in order to allow market participants sufficient time in
which to make and process exercise decisions.\39\
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\37\ Id.
\38\ Id.
\39\ Id.
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American-Style, Cash-Settled Index Options and Noncash-Settled Equity
Options
Under the Exchange's current rules, there is a time window
following the close of trading during which long option holders are
permitted to exercise their option positions while at the same time
short option holders do not have the ability to trade out of their
positions. Accordingly, one of the inherent differences between holding
a long or short option position is that there is a disparity between
the ability of long and short option holders to take market action
following the close of trading.\40\ The purpose of the Exchange's
exercise deadline for American-style, cash-settled index options and
the exercise cutoff time for noncash-settled equity options is to
restrict this disparity to a limited time period following the close of
trading in those situations in which long option holders have the
ability to take action through the exercise or non-exercise of an
option that can affect their position in the market.\41\ Although
permitting the President or his designee to extend the applicable
exercise deadline or cutoff time in unusual circumstances would
marginally increase this existing disparity, the Exchange believes any
potential detriment that may result from the foregoing would be far
exceeded by the benefit to the marketplace as a whole that is derived
from allowing the President or his designee to permit market
participants sufficient time in which to make and process exercise
decisions.\42\ The Exchange also notes that the President or his
designee will only exercise this authority in unusual circumstances and
thus extensions in the applicable exercise deadline or cutoff time will
not occur often.\43\
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\40\ Id.
\41\ Id.
\42\ Id.
\43\ Id.
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Similarly, in exercising the authority to extend the exercise
deadline for an American-style, cash-settled index option or the
exercise cut-off time for a noncash-settled equity option in unusual
circumstances, the Exchange states that the President or his designee
would in no event extend the applicable exercise deadline or cut-off
time beyond the exercise cut-off time required by the Options Clearing
Corporation (``OCC'').\44\ Chapter VIII of OCC's Rules generally sets
forth the applicable OCC exercise cut-off-times.\45\
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\44\ Id.
\45\ See OCC, Chapter VIII, (Exercise and Assignment).
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2. Statutory Basis
The proposed rule change will benefit the market for American-
style, cash-settled index options (including OEX options) by permitting
market participants to utilize the closing value of such indexes to
make trading and hedging decisions (including transactions in the
related futures market) contingent upon the ability to exercise a long
index option position or the expected assignment of a short index
option position. The proposed rule change will also benefit market
participants by permitting the President or his designee to extend the
applicable deadline for the delivery of Exchange-required exercise
notifications, for either American-style, cash-settled index options or
noncash-settled equity options, to allow market participants sufficient
time to make and process exercise decisions in the event that unusual
circumstances are present which make it difficult to make and process
exercise decisions during the regular time frame for doing so.\46\
Additionally, the proposed rule changes will clarify, refine, and
enhance the Exchange's rules relating to the exercise of option
contracts.\47\
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\46\ See Amendment No. 1, supra note 4.
\47\ Id.
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Accordingly, the exchange believes that the proposed rule change is
consistent with Section 6 of the Act, and in particular, with Section
6(b)(5),\48\ in that it is designed to, among other things, foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information regarding the exercise
of outstanding option contracts, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.\49\
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\48\ 5 U.S.C. 78f(b)(5).
\49\ See Amendment No. 1 supra note 4.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The exchange 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 funds 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 proposed 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 proposed rule
change is consistent with the Act. 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-
0069. 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. 20549-0609. Copies of such filing will also be
available for inspection and copying at the principal office of CBOE.
All submissions should refer to the File No. SR-CBOE-99-03
[[Page 29374]]
and should be submitted by June 22, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
EXHIBIT A
(Proposed new language of the Rules of the Exchange as currently in
effect is italicized; proposed deletions are in [brackets].)
Chicago Board Options Exchange, Incorporated Rules
* * * * *
CHAPTER IV--Business Conduct
Other Restrictions on Options Transactions and Exercises
RULE 4.16
(a) Unchanged.
(b) [With the exception of the last business day prior to
expiration, exercises of cash-settled index options shall be prohibited
during any time when trading in such options is delayed, halted, or
suspended, unless otherwise determined by the President or his
designee. Notwithstanding such a prohibition, the exercise of a cash-
settled index option may be processed and given effect in accordance
with and subject to the rules of the Clearing Corporation while trading
in the option is delayed, halted, or suspended if it can be documented
that the decision to exercise the option was made during allowable time
frames prior to the delay, halt, or suspension.] Exercises of American-
style, cash-settled index options shall be prohibited during any time
when trading in such options is delayed, halted, or suspended, subject
to the following exceptions:
(i) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
rules of the Clearing Corporation while trading in the option is
delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension.*
(ii) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration.*
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 3:00
p.m. (CT). In the event of such a trading halt, exercises may occur
through 3:20 p.m. (CT). In addition, if trading resumes following such
a trading halt (such as by closing rotation), exercises may occur
during the resumption of trading and for five (5) minutes after the
close of the resumption of trading. The provisions of this subparagraph
(b)(iii) are subject to the authority of the Board to impose
restrictions on transactions and exercises pursuant to paragraph (a) of
this Rule.
(iv) The President or his designee may determine to permit the
exercise of American-style, cash-settled index options while trading in
such options is delayed, halted, or suspended.*
In the case of an American-style, cash-settled FLEX Index Option, the
references in this paragraph (b) to a trading delay, halt, suspension,
resumption, or closing rotation shall mean the occurrence of the
applicable condition in the standardized option on the index underlying
the FLEX Index Option (rather than the occurrence of the applicable
condition in the FLEX Index Option itself).
. . . Interpretations and Policies:
.01 Unchanged.
.02 Unchanged.
* With the exception of some wording changes, these provisions
are currently generally set forth in Rule 4.16(b) and are not newly
proposed provisions.
* * * * *
CHAPTER XI--Exercises and Deliveries
Exercise of Option Contracts
RULE 11.1
(a) Unchanged.
(b) The exercise cutoff time for all noncash-settled options shall
be 4:30 p.m. (CT) on the business day immediately prior to the
expiration date. This is the latest time at which an exercise
instruction for expiring noncash-settled positions may be (1) Prepared
by a Clearing Member for its proprietary positions, (2) submitted to a
Clearing Member by a member (including, but not limited to, a Market
Maker or Floor Broker), or (3) accepted by a Clearing Member from or on
behalf of a customer. The President or his designee may determine to
extend the 4:30 p.m. (CT) exercise cutoff time for a noncash-settled
options if unusual circumstances are present. Notwithstanding the
foregoing, members may prepare, submit or accept exercise instructions
for noncash-settled options after the applicable exercise cutoff time
but prior to expiration (i) In order to remedy mistakes or errors made
in good faith, (ii) to take appropriate action as the result of a
failure to reconcile unmatched Exchange transactions, or (iii) where
exceptional circumstances relating to a customer's or member's ability
to communicate exercise instructions to a Clearing Member (or a
Clearing Member's ability to receive exercise instructions) prior to
such cutoff time warrant such action.
(c)-(d) Unchanged.
. . . Interpretations and Policies:
.01-.02 Unchanged.
.03 Clearing Members must follow the procedures of the Clearing
Corporation when exercising American-style, cash-settled index option
contracts issued or to be issued in any account at the Clearing
Corporation. Members must also follow the procedures set forth below
with respect to American-style, cash-settled index options:
(a) For all contracts exercised by the member or by any customer of
the member, an ``exercise advice'' must be delivered by the member in
such form or manner prescribed by the Exchange to a place designated by
the Exchange no later than 3:20 p.m. (CT), or if trading hours are
extended or modified in the applicable option class, no later than five
(5) minutes after the close of trading on that day.
(b) Subsequent to the delivery of an ``exercise advice'', should
the member or a customer of the member determine not to exercise all or
part of the advised contracts, the member must also deliver an ``advice
cancel'' in such form or manner prescribed by the Exchange to a place
designated by the Exchange no later than 3:20 p.m. (CT), or if trading
hours are extended or modified in the applicable option class, no later
than five (5) minutes after the close of trading on that day.
(c) The President or his designee may determine to extend the
applicable deadline for the delivery of ``exercise advice'' and
``advice cancel'' notifications pursuant to this Interpretation .03 if
unusual circumstances are present.
(d)[(c)] No member may prepare, time stamp or submit an ``exercise
advice'' prior to the purchase of the contracts to be exercised if the
member knew or had reason to know that the contracts had not yet been
purchased.
(e)[(d)] The failure of any member to follow the procedures in this
Interpretation .03 may be referred to the Business Conduct Committee
and result in the assessment of a
[[Page 29375]]
fine, which may include but is not limited to disgorgement of potential
economic gain obtained or loss avoided by the subject exercise, as
determined by the Committee.
(f)[(e)] Preparing or submitting an ``exercise advice'' or ``advice
cancel'' after the applicable deadline on the basis of material
information released after such deadline, in addition to constituting a
violation of this Rule, is activity inconsistent with just and
equitable principles of trade.
(g)[(f)] The procedures set forth in subparagraphs (a)-(b) of this
Interpretation .03 do not apply (i) on the business day prior to
expiration in series expiring on a day other than a business day or
(ii) on the expiration day in series expiring on a business day.
(h)[(g)] Exercises of American-style, cash-settled index options
(and the submissions of corresponding ``exercise advice'' and ``advice
cancel'' forms) shall be prohibited during any time when trading in
such options is delayed, halted, or suspended, subject to the following
exceptions:*
(i) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
rules of the Clearing Corporation while trading in the option is
delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt,
suspension. Acceptable documentation shall ordinarily be limited to an
``exercise advice'' previously transmitted via C/MACS or a member's
copy of an ``exercise advice'' previously submitted to the Exchange.*
(ii) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration.*
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 3:00
p.m. (CT). In the event of such a trading halt, exercises may occur
through 3:20 p.m. (CT). In addition, if trading resumes following
[such] a trading halt (such as by closing rotation), exercises may
occur during the resumption of trading for five (5) minutes after the
close of the resumption of trading. The provisions of this subparagraph
(iii) are subject to the authority of the Board to impose restrictions
on transactions and exercises pursuant to Rule 4.16(a).
(iv) The President or his designee may determine to permit the
exercise of American-style, cash-settled index options while trading in
such options is delayed, halted, or suspended.*
In the case of an American-style, cash-settled FLEX Index Option, the
references in this paragraph (h) to a trading delay, halt, suspension,
resumption, or closing rotation shall mean the occurrence of the
applicable condition in the standardized option on the index underlying
the FLEX Index Option (rather than the occurrence of the applicable
condition in the FLEX Index Option itself).
.04 Unchanged.
.05 [With the exception of the last business day prior to expiration,
exercises of cash-settled index options (and the submission of
corresponding ``exercise advice'' and ``advice cancel'' forms) shall be
prohibited in accordance with Rule 4.16(b) during any time when trading
in such options is delayed, halted or suspended, unless otherwise
determined by the President or his designee. Notwithstanding such a
prohibition, the exercise of a cash-settled index option may be
processed and given effect in accordance with and subject to the rules
of the Clearing Corporation while trading in the option is delayed,
halted, or suspended if it can be documented that the decision to
exercise the option was made during allowable time frames prior to the
delay, halt, or suspension.] Deleted effective, 1999(99-).
.06 Clearing Members must follow the procedures of the Clearing
Corporation when exercising expiring noncash-settled equity option
contracts. Members must also follow the procedures set forth below with
respect to the exercise of noncash-settled equity option contracts
which would otherwise not be exercised, or the nonexercise of such
contracts which otherwise would be exercised, by operation of the
exercise by exception provisions of Clearing Corporation Rule 805:
(a) For all contracts so exercised or not exercised by the member
or by any customer of the member, as ``contrary exercise advice'' must
be delivered by the member in such form or manner prescribed by the
Exchange to a place designated by the Exchange no later than 4:30 p.m.
(CT).
(b) Subsequent to the delivery of a ``contrary exercise advice'',
should the member or a customer of the member determine to act other
than as reflected on the original advice form, the member must also
deliver an ``advice cancel'' in such form or manner prescribed by the
Exchange to a place designated by the Exchange no later than 4:30 p.m.
(CT).
(c) The procedures set forth in subparagraphs (A)-(B) of this
Interpretation .06 shall not apply with respect to any option class
that is not subject to the exercise by exception provisions of Clearing
Corporation Rule 805 (``Non Ex-by-Ex Option Class''). Instead, for all
option contracts in a Non Ex-by-Ex Option Class that are exercised by
the member or by a customer of the member, each exercise instruction
that is prepared, submitted or accepted by the member with respect to
such contracts must also be delivered by the member in such form or
manner prescribed by the Exchange to a place designated by the Exchange
no later than 4:30 p.m. (CT).
(d) The President or his designee may determine pursuant to Rule
11.1(b) to extend the 4:30 p.m. (CT) exercise cutoff time for a
noncash-settled equity option if unusual circumstances are present. In
the event of such an extension, the deadline for the delivery of an
exercise instruction, ``contrary exercise advice'' and ``advice
cancel'' pursuant to this Interpretation .06 shall be the revised
exercise cutoff time designated by the President or his designee
pursuant to Rule 11.1(b).
(e) [d] The member shall be excused from compliance with the
procedures set forth in subparagraphs (a)-(c) of this Interpretation
.06 in the event that one of the exceptions set forth in clause (i),
(ii) or (iii) of Rule 11.1(b) is applicable and the member complies
with the requirements of Interpretation .01 of this Rule.
(f) [(e)] The failure of any member to follow the procedures in
this Interpretation .06 may be referred to the Business Conduct
Committee and result in the assessment of a fine, which may include but
is not limited to disgorgement of potential economic gain obtained or
loss avoided by the subject exercise, as
[[Page 29376]]
determined by the Committee.
(g)[(f)] Preparing or submitting an exercise instruction,
``contrary exercise advice'' or ``advice cancel'' after the applicable
deadline [4:30 p.m. (CT)] on the basis of material information released
after such deadline [time], in addition to constituting a violation of
this Rule, is activity inconsistent with just and equitable principles
of trade.
.07 Unchanged.
* With the exception of some wording changes, these provisions
are proposed to be moved from Rule 11.1.05 and are not newly
proposed provisions.
* * * * *
Regulatory Circular RG [98-90] 99-
DATE: [August 24] ____, [1998] 1999
TO: Members and Member Organizations
FROM: Regulatory Services Division
RE: S&P 100 Index and American-Style FLEX Index Option Exercise
Procedures
This memorandum describes [is being issued to remind members and
member organizations of the] exercise procedures and requirements of
Exchange Rules 11.1 and 24.18 as they pertain to the exercise of
Standard & Poor's 100 Stock Index option contracts, American-Style FLEX
Index Option contracts, and any other American-style cash-settled index
option contracts.
1. Members who prepare their own exercise instruction memoranda
must prepare and time stamp such memoranda upon making the decision to
exercise.
2. Clearing firms must prepare and time stamp an exercise
instruction memorandum upon receipt of instructions to exercise from a
customer or market-maker or upon making the decision to exercise on
behalf of a proprietary account.
3. An ``exercise advice'' must be submitted to the Exchange no
later than 3:20 p.m. (CT) for all American-style, cash-settled index
option contracts exercised. However, ``exercise advices'' are not
required to be submitted to the Exchange (i) on the business day prior
to expiration with respect to expiring non-FLEX American-style, cash-
settled index option contracts, (ii) on the day of expiration with
respect to expiring FLEX American-style cash-settled index option
contracts that expire on a business day, or (iii) on the business days
prior to expiration with respect to expiring FLEX American-style, cash-
settled index option contracts that expire on a day other than a
business day.
4. An ``exercise advice'' must be clearly and accurately completed
prior to submission. Staff will not remove an ``exercise advice'' for
any alteration once it has been deposited in a drop-off box.
5. Clearing firms may enter exercises for any market-maker,
customer, or proprietary account on OCC's Clearing Management and
Control System
(C/MACS) in lieu of physically delivering an ``exercise advice'' to the
Exchange trading floor. Such entries must be made no later than 3:20
p.m. (CT) and serve as both an exercise instruction to OCC and an
``exercise advice'' to the Exchange.
6. Members acting on their own behalf or on behalf of a customer
may only submit an ``exercise advice'' and exercise instruction for the
``net long position'' open in any series of American-style index
options for the account at the time the advice or instruction is
submitted. For a complete explanation of this requirement, members
should refer to Exchange Rule 24.18 and to Exchange Regulatory Circular
RG96-94.
7. If a member decides not to exercise all or part of the amount
indicated on an ``exercise advice'' previously submitted to the
Exchange, he or she must submit another ``exercise advice'' to the
Exchange, with the cancel box checked, no later than 3:20 p.m. (CT).
(``Exercise advice cancellations'' do not cancel exercise instruction
memoranda already submitted to the clearing firm).
8. The ``exercise advice'' drop-off boxes are located on the
Exchange's trading floor adjacent to the OEX trading crowd. The drop-
off boxes are removed at 3:20:59 p.m. (CT). Submitting an ``exercise
advice'' or ``exercise advice cancellation'' after this time is a
violation of Exchange Rule 11.1, and doing so on the basis of material
information released after this time, in addition to violating Rule
11.1, may constitute activity inconsistent with just and equitable
principles of trade. If a member inadvertently fails to submit an
``exercise advice'' or ``exercise advice cancellation'' before the
applicable deadline, the member should still consider submitting the
advice or cancellation to the Exchange's Department of Market
Regulation as soon as possible after the deadline (even though a
violation of Rule 11.1 will still exist) in order to help to establish
the time at which the exercise decision was made.
9. The joint account participant who makes the decision to exercise
on behalf of the joint account must indicate both the joint account
acronym and his or her individual acronym on both the exercise
instruction memorandum and the ``exercise advice''.
10. The submission an of ``exercise advice'' to the Exchange does
not initiate an exercise at OCC; members must also submit an exercise
instruction memorandum to their clearing firm.
11. In the event that any of the following market conditions are
declared, the below provisions will apply (including C/MACS entries):
[Delayed Opening other than on the Last Business Day Prior to
Expiration: The ``exercise advice'' drop-off boxes will not be placed
in the designated areas until trading commences. Exercises may not be
effected, nor will ``exercise advices'' be accepted until trading
commences.]
Delayed Opening or Trading Halt [other than on the Last Business
Day Prior to Expiration]: Exercises of American-style, cash-settled
index options (and the submission of corresponding ``exercise advice''
and ``advice cancel'' forms) shall be prohibited during any time when
trading in such options is delayed, halted, or suspended, subject to
the following exceptions:
(i) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
rules of the Clearing Corporation while trading in the option is
delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension. Acceptable documentation shall ordinarily be limited to an
``exercise advice'' previously transmitted to via C/MACS or a member's
copy of an ``exercise advice'' previously submitted to the Exchange.*
(ii) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration.*
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 3:00
p.m. (CT). In the event of such a trading halt, exercises may occur
through 3:20 p.m. (CT). In addition, if trading resumes following such
a trading halt (such as by closing rotation), exercises may occur
during the resumption of trading and for five (5) minutes after the
close of the resumption of trading. The provisions of this subparagraph
(iii) are subject to the authority of the Board to impose restrictions
on transactions and exercises pursuant to Rule 4.16(a).
(iv) The President or his designee may determine to permit the
exercise of American-style, cash-settled index
[[Page 29377]]
options while trading in such options is delayed, halted, or
suspended.*
In general, such a determination would be based on extraordinary
circumstances.
To the extent that exercises of American-style, cash-settled index
options are not permitted due to a delayed opening, the ``exercise
advice'' drop-off boxes will not be placed in the designated areas
until trading commences. Exercises may not be effected, nor will
``exercise advices'' be accepted until trading commences. Exercises may
not be effected, nor will ``exercise advices'' be accepted until
trading commences.
To the extent that exercises of Amercian-style, cash-settled index
options are not permitted due to a trading halt, the ``exercise
advice'' drop-off boxes will be immediately removed from the designated
areas upon the declaration of the trading halt and will be returned to
the designated areas upon the resumption of trading. [Exercises may not
be effected, nor will ``exercises advices'' be accepted during a
trading halt.] These restrictions shall remain in place until trading
resumes.
[Notwithstanding both of the above, an exercise may be processed
and given effect in accordance with and subject to OCC rules if it can
be documented that the decision to exercise was made during allowable
time frames prior to the delayed opening or trading halt. Acceptable
documentation shall ordinarily be limited to an ``exercise advice''
previously transmitted via
C/MACS, an internal exercise memorandum previously prepared and time-
stamped by a member, or a member's copy of an ``exercise advice''
previously submitted to the Exchange.]
[Modified Trading Hours: The ``exercise advice'' drop-off boxes
will be removed five minutes after the designated closing time in the
event that trading hours are modified. Exercises may not be effected,
nor will ``exercise advises'' be accepted after such time.]**
Closing Rotation: The ``exercise advice'' drop-off boxes will
remain at the designated areas and ``exercise advices'' will be
accepted until five minutes after the completion of the closing
rotation.
Modified Trading Hours: If trading hours are extended or modified,
the exercise deadline will be five minutes after the close of trading
on that day instead of 3:20 p.m. (CT). The ``exercise advice'' drop-off
boxes will be removed after the modified exercise deadline, and
exercises may not be effected, nor will ``exercise advices'' be
accepted, after such time.
FLEX Index Options: In the case of an American-style, cash-settled
FLEX Index Option, the references in this Paragraph 11 to a trading
delay, halt, suspension, resumption, closing rotation, or modified
trading hours shall mean the occurrence of the applicable condition in
the standardized option on the index underlying the FLEX Index Option
(rather than the occurrence of the applicable condition in the FLEX
Index Option itself).
12. The President or his designee may determine to extend the
applicable deadline for the delivery of ``exercise advice'' and
``advice cancel'' notifications if unusual circumstances are present.
Any questions pertaining to index option exercises can be addressed
to Karen Charleston at (312) 786-7724 or Pat Cerny at (312) 786-7722.
(Regulatory Circulars RG89-13, RG92-02, RG94-61, [and] RG96-95, and RG
98-90 Revised)
* With the exception of some wording changes, these provisions
are currently generally set forth in Rule 4.16(b) and Rule 11.1.05
(which is now proposed to be moved to proposed Rule 11.1.03(h)) and
are not newly proposed provisions, except that acceptable
documentation under Section 11(i) of the Exercise Regulatory
Circular is proposed to no longer include internal exercise
memoranda.
** The provision regarding modified trading hours is proposed to
be moved to after the provision regarding closing rotations and to
be reworded without changing its substance.
[FR Doc. 99-13811 Filed 5-28-99; 8:45 am]
BILLING CODE 8010-01-M
