[Federal Register Volume 62, Number 122 (Wednesday, June 25, 1997)]
[Notices]
[Pages 34332-34334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16575]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38743; File No. SR-CBOE-97-23]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Order Granting Accelerated Approval
of Proposed Rule Change Relating to Option Series Open for Trading
June 17, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 15, 1997, the Chicago
Board Options Exchange, Incorporated (``CBOE'' and ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the CBOE. On June 16, 1997, CBOE amended
the filing.\2\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ Letter from Stephanie Mullins, Attorney, to Peggy Blake,
Division of Market Regulation, Commission (June 16, 1997). In File
No. SR-CBOE-97-23, CBOE proposed deleting language in Rule 5.4 that
provides the Exchange ``may make application to the SEC'' to delist
an options class having no open interest, where the underlying
security no longer complies with CBOE maintenance standards. The
amendment cancels this proposed deletion.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend CBOE Rules 5.4, 5.5, 5.6 and 5.7 governing
opening of trading in series of equity options, delisting of option
series, terms of option contracts and adjustments.\3\
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\3\ The text of the proposed rule change is attached as Exhibit
A to File No. SR-CBOE-97-23 and is available at the Office of the
Secretary, CBOE and at Public Reference Room of the Commission.
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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, 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 III 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
Statutory Basis for, the Proposed Rule Change
The purpose of the proposed rule change is: (1) To amend the
procedures for opening trading in series of equity options under Rules
5.5 and 5.6 in order to allow the Exchange the same flexibility in
adding series as is permitted under other exchanges' rules; (2) to
amend Rules 5.5 and 5.6 to provide specifically for near-term options
expiration and relieve the Product Development Committee (``PDC'') of
its responsibility with respect to opening series of options; and (3)
to clarify and reorganize Rules 5.4, 5.5, 5.6 and 5.7.
(1) Conform Rules to Those of Other Exchanges
The Exchange is proposing to combine Rules 5.5 and 5.6 into one
rule and to delete certain provisions thereunder. The proposal will
provide the Exchange the same flexibility afforded other exchanges by
eliminating certain specific provisions which do not appear in other
options exchanges' rules. Specifically, the Exchange proposes to delete
Interpretations .02 and .03 to Rule 5.5 Currently, Interpretation .02
prevents the Exchange from initially opening for trading series with
three strike prices unless the price of the underlying stock is within
two percent of a strike price. The proposal would permit the Exchange
initially to open three strike prices regardless of how close the
underlying stock price is to the initial strike prices. Interpretation
.03 restricts the Exchange from adding any new strikes until the
underlying stock reaches the existing strike price. The proposal would
allow the Exchange to add new series when the Exchange believes that
doing so is necessary to maintain an orderly market, to meet customer
demand, or to adapt to market movement if the exercise price moves
substantially from the initial exercise prices, which would allow the
Exchange to add series before the underlying stock reaches an existing
strike price.
The Exchange believes the proposal gives the Exchange a more
flexible standard than the current CBOE rule and conforms the CBOE
rules to those of other exchanges, specifically the
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Pacific Stock Exchange (``PSE'') Rule 6.4 (a) to (c) and policies
thereunder.\4\ The Exchange believes the proposal would therefore allow
it to compete effectively with other exchanges in multiply-listed
options.
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\4\ See PSE Rule 6.4, Series of Options Open for Trading,
addressed in Securities Exchange Act Release No. 21985 (April 25,
1985), 50 FR 18595 (1985) (order approving File No. SR-PSE-85-9).
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The Exchange believes that the current rule, combined with a
sustained bull market, has led to the inability to list certain equity
option series that are more than nominally out-of-the-money, since even
under unusual market conditions under the current rule, a call option
can be only a little more than 5% above a security's underlying price
when first opened for trading. Although willing to make markets in such
options, the Exchange has had to deny retail and institutional customer
requests for opening additional option series in certain instances.
The Exchange believes the number of additional series that will
result from the proposed rule change, affecting equity options, will
not be significant. For this reason, CBOE does not believe that the
proposed change raises any systems capacity issues. CBOE indicates it
has the ability, subject to prior notice to its membership and
customers, to cease trading series that become inactive and have no
open interest.\5\ Additionally, the Exchange has received a letter from
the Options Price Reporting Authority (``OPRA'') indicating that the
anticipated additional traffic generated by this proposal is within
OPRA's capacity.
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\5\ CBOE's delisting procedures include the Monthly Series
Delisting Program and the Requested Strike Price Delisting Program.
The Monthly Delisting Program, performed on the Thursday prior to
the week of expiration, selects those option series which are
outside of the three strike prices surrounding the underlying value,
have no open interest and do not create a break in contiguous
series. This process delists approximately 500 option series per
month. The Requested Strike Price Delisting Program allows a member
firm to request the listing for trading of an option series which is
currently unavailable. If in the three business days following
listing there is not activity in the requested series, it is
delisted. In addition, on an informal basis, CBOE Market Operations
staff works with trading crowds to eliminate inactive series that
are not captured by the regular delisting parameters. Letter from
Patrick J. Fay, Assistant Vice President, Market Operations, CBOE,
to Michael Walinskas, Senior Special Counsel, Division of Market
Regulation, Commission (May 28, 1997).
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(2) Adoption of Near-Term Options Expiration in the Rules
The Exchange proposes to adopt a specific rule providing for near-
term expiration of equity option series to make CBOE Rules consistent
with the industry standard.\6\ The practice of the Exchange regarding
near-term options expiration has been consistent with the industry
standard since 1989, pursuant to Commission approval; however, current
Exchange Rules do not reflect this.\7\ By comparison, the NYSE has
adopted a rule specifically describing near-term expiration. The CBOE
has modeled the near-term expiration portion of the proposed rule after
the NYSE's rule.\8\ The Exchange also proposes to relieve the PDC of
its responsibilities under Rules 5.5 and 5.6 relating to opening option
series, as the PDC currently delegates these duties to CBOE staff.
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\6\ Near-term expiration means that the Exchange initially will
open series in the two nearest months, regardless of the quarterly
cycle on which that class trades, and in the next two expiration
months of the quarterly cycle previously designated by the Exchange
for that specific class. (For example, if the Exchange listed, in
late April, a new stock option on a January-April-July-October
quarterly cycle, the Exchange would list the two nearest term months
(May and June) and the next two expiration months of the cycle (July
and October). When the May series expires, the Exchange would add
January series. When the June series expires, the Exchange would add
August series as the next nearest month, and would not add April).
\7\ See Securities Exchange Act Release No. 26934 (June 14,
1989), 54 FR 26283 (June 22, 1989) (order granting permanent
approval to the options exchanges regarding the near-term options
expiration pilot program).
\8\ See NYSE Rule 703.
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(3) Clarification and Reorganization of the Rules
Current Rules 5.4, 5.5, 5.6 and 5.7, which now contain redundant
wording and inconsistencies, are being reorganized so that Exchange
staff, members and customers are clear as to which option series are
permitted to be opened for trading and under which rules to look for
guidance. The Exchange is proposing to organize the rules in a clearer
way so that Rule 5.4 only refers to Option Classes, proposed Rule 5.5
only refers to Series of Option Contracts Open for Trading,
encompassing current Rules 5.5 and parts of Rules 5.4 and 5.6. Rule 5.6
will be deleted and proposed Rule 5.7 will encompass the remaining
portion of current Rule 5.6.
The Exchange believes that by conforming CBOE Rules to those of
other Exchanges and to approved industry practices, and by clarifying
certain of its rules the proposed rule is consistent with the
provisions of Section 6(b)(5) of the Act,\9\ in that it will promote
just and equitable principles of trade, will protect investors and the
public interest, and will remove impediments to and perfect the
mechanisms of a free and open market.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE 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. 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 at 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 should refer to File No. SR-CBOE-97-23 and should be
submitted by July 16, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds CBOE's proposed rule change consistent with
the requirements of Section 6 of the Act \10\ and the rules and
regulations thereunder applicable to a national securities exchange.
Specifically, the Commission believes the proposal is consistent with
Section 6(b)(5) of the Act \11\ because it will promote just and
equitable principles of trade, will protect investors and the public
interest, and will remove impediments to and
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perfect the mechanisms of a free and open market.\12\
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\10\ 15 U.S.C. 78f.
\11\ 15 U.S.C. 78f(b)(5).
\12\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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CBOE is proposing to eliminate certain Interpretations from Rule
5.5 that restrict circumstances under which the Exchange may establish
strike prices and add new strikes in equity options series open for
trading. CBOE proposes to amend its rules so that it may initially open
three strike prices regardless of how close the underlying stock price
is to the initial strike prices, and to add new series within the
Exchange believes that doing so is necessary. The Commission believes
that CBOE's proposals to amend to procedures for opening trading in
series of equity options will provide additional flexibility in listing
new series and strikes and will bring CBOE's policies and procedures in
line with those of the other exchanges. The Commission believes that
such consistency with the policies and procedures of the other
exchanges should enhance CBOE's ability to compete in multiply-listed
options.
The Commission believes that CBOE has adequately addressed the
affect of the proposal on its existing systems capacity. CBOE and OPRA
have carefully reviewed the likely effects of additional listings
generated by the proposed rule change. Based on their representations,
the Commission understands that the anticipated additional options
series listings are within OPRA's capacity. Similarly, under CBOE's
current delisting procedures, which include the Monthly Series
Delisting Program and the Requested Strike Price Delisting Program,
\13\ CBOE regularly delists inactive option series. CBOE also works
with the trading crowds to eliminate inactive series that are not
captured by the regular delisting parameters. The Commission believes
that CBOE's current delisting standards will aid in keeping the number
of option series to a minimum while providing an optimal range of
available strike prices.
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\13\ See supra footnote 5.
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The Commission believes that CBOE's proposal to adopt a near-term
options expiration rule is appropriate and consistent with the industry
standard. CBOE has been following such standards since 1989, and has
received no complaints regarding the practice. \14\ By adopting a rule
modeled after NYSE Rule 703, CBOE is merely clarifying its current
method of sequential expiration and ensuring consistency with existing
industry standards.
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\14\ On June 14, 1989, the Commission approved, on a permanent
basis, a new-term options expiration pilot program proposed by all
of the options exchanges. See supra note 7.
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Finally, the Commission believes that the reorganization of Rules
5.4, 5.5, 5.6, and 5.7 is appropriate because such changes will result
in clarification to the Exchange, members and customers as to which
option series are permitted to be opened for trading and under which
rules to refer for guidance.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission believes it is
appropriate to approve the proposed rule change on an accelerated basis
to allow the Exchange to implement more flexible standards for the
listing of strikes and series. Recent significant price movements of
certain stocks underlying CBOE-listed options has presented the CBOE
with instances where there existed demonstrated customer interest to
list additional option strike prices that currently are violative of
existing CBOE rules. In a number of these instances, listing of the new
strikes has been permitted on competing options exchanges. The
Commission believes it is appropriate to address this regulatory
disparity without further delay. Good cause for accelerated approval is
further supported by the Commission's conclusion that CBOE's proposal
mirrors the rules and procedures of other options exchanges governing
the opening of trading in series of equity options, and the adoption of
a near-term options expiration rule. Accordingly, the proposal does not
raise any novel or unique regulatory issues. For these reasons, the
Commission believes the proposed rule change is appropriate and
consistent with Sections 19(b)(2)( and 6(b)(5) of the Act, and
therefore, is approving the proposed rule change on an accelerated
basis.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-CBOE-97-23) be, and
hereby is, approved on an accelerated basis.
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\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16575 Filed 6-24-97; 8:45 am]
BILLING CODE 8010-01-M
