[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Notices]
[Pages 29154-29155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14401]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37257; International Series Release No. 989; File No.
SR-CBOE-96-33]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Incorporated Relating To Strike Prices for Options on the
Mexican Indice de Precios y Cotizaciones
May 30, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78c(b)(1), notice is hereby given that on May 30,
1996, the Chicago Board Options Exchange, Incorporated (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items, I, II, and III below, which items have been prepared by the
CBOE. The Commission is publishing this notice to solicit comments on
the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE hereby gives notice that it proposes to add Interpretation
.06 to Rule 24.9, Terms of Index Option Contracts, concerning the use
of ``implied forward levels'' instead of the ``current index level'' in
determining the strike prices to add for options on the Indice de
Precios y Cotizaciones (``IPC'' or ``Index'').
The text of the proposed rule change is available at the Office of
the Secretary, CBOE and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the CBOE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The CBOE has prepared summaries, set forth in sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The purpose of this rule proposal is to permit the Exchange to list
strike prices on the IPC based upon the ``implied forward level''
instead of upon the current index level. Currently, under
Interpretation .05 to Rule 24.9, the Exchange may list strike prices,
except in the case of long-term options, up to the lesser of 50 points
or 15% above or below the current index level. In the case of long-term
options (other than reduced value long-term options), the Exchange may
list strike prices within 25% of the current index level.
Because of the high prevailing market interest rates in Mexico
(currently about 28%), CBOE believes that centering strike prices
around the current index value is impractical. Although IPC options are
traded in terms of U.S. dollars, they are priced using these high
Mexican rates. According to CBOE, high interest rates imply a high cost
of holding the underlying securities because an investor must borrow at
28% to purchase the Mexican securities ) or forego earning 28% on money
previously invested). Therefore, over a given period of time, for
example three months, the expected value of the IPC is approximately 7%
(28% times \1/4\
[[Page 29155]]
year) higher than the current value.\1\ Based on a current index value
of approximately 335,\2\ 7% implies a forward price of the Index of
about 360 at the end of three months. Therefore, the strike prices for
a three month option would need to bracket 360 rather than 335.
---------------------------------------------------------------------------
\1\ This same pricing situtation occurs in options based on U.S.
securities, however, since U.S. interest rates are low relative to
Mexico, the effect is quite small and does not necessitate the need
for pricing off of an implied forward level.
\2\ Full value IPC index options are priced at \1/10\ the value
of the IPC Index.
---------------------------------------------------------------------------
To address this problem, the Exchange intends to center the strike
prices around the implied forward price of the IPC, rather than around
the current index value. The implied forward price will change for each
expiration month since one component of determining the implied forward
price is the time to expiration. The formula for determining the
implied forward price will be the index level times ecaretr*t,
where r equals the current Mexican interest rate,\3\ and t equals the
time to expiration.
---------------------------------------------------------------------------
\3\ The Mexican interest rate generally used in the calculation
would be the Cetes rate with the appropriate maturity.
---------------------------------------------------------------------------
CBOE will adhere to all other rules, interpretations and policies
regarding strike price introduction, with the exception that the index
level will be calculated as described above. CBOE will monitor the
implied forward rate on a continuous basis and CBOE market-makers will
monitor the rate continuously for purposes of trading the options.
Finally, CBOE will issue a circular to the membership describing this
policy for centering strike prices around the implied forward level.
By interpreting the current rules in such a manner that the
Exchange may list strike prices that more accurately reflect the
expected value of the IPC, CBOE believes the proposed rule change is
consistent with and furthers the objectives of Section 6(b)(5) of the
Act, in that it is designed to perfect the mechanisms of a free and
open market and to protect 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
No comments were solicited or received with respect to the proposed
rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change constitutes a stated policy,
practice or interpretation with respect to the enforcement of an
existing CBOE rule, it has become effective pursuant to Section
19(b)(3)(A) of the Act and subparagraph (e) of Rule 19b-4 thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission may summarily abrogate such rule change if it appears to
the Commission that such action is necessary or appropriate in the
public interest, for the protection of investors, or otherwise in
furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 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 the File No. SR-CBOE-96-33 and should be
submitted by June 28, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
---------------------------------------------------------------------------
\4\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Jonathan G. Katz,
Secretary.
[FR Doc. 96-14401 Filed 6-6-96; 8:45 am]
BILLING CODE 8010-01-M
