[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45890-45892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23010]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38962; File No. SR-CBOE-97-36]
Notice of Filing of Proposed Rule Change by the Chicago Board
Options Exchange, Incorporated, Related to the Procedures Regarding
Opening Rotations
August 22, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on July 25, 1997, the Chicago
Board Options Exchange, Incorporated (``CBOE'' or ``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. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1994).
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[[Page 45891]]
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend CBOE Rule 24.7 regarding the conditions
under which the Exchange may halt trading in a class of index options
and may resume trading after such a halt. The text of the proposed rule
change is below. Additions are italicized; deletions are bracketed.
Chapter XXIV--Index Options
Rule 24.7 Trading halts or Suspensions
(a) Trading on the Exchange in an index option shall be halted
whenever two floor officials, in consultation with a designated
senior executive officer of the Exchange, shall conclude in their
judgment that such action is appropriate in the interests of a fair
and orderly market and to protect investors. Among the facts that
may be considered are the following:
(i) the extent to which trading is not occurring in stocks
underlying the index; [trading has been halted or suspended in
underlying stocks whose weighted value represents 20% or more of the
index value;]
(ii) through (iv)--No Change.
(b) Trading in options of a class or series that has been the
subject of a halt or suspension by the Exchange may resume if two
floor officials, in consultation with a designated senior executive
officer of the Exchange determine that [the conditions which led to
the halt or suspension are no longer present or that] the interests
of a fair and orderly market are served by a resumption of trading.
Among the factors to be considered in making this determination are
whether the conditions which led to the halt or suspension are no
longer present and the extent to which trading is occurring in
stocks underlying the index. [In either event, the reopening
rotation may not begin until the Exchange has determined that
trading in underlying stocks whose weighted value represents more
than 50% of the index value is occurring.]
(c) See also Rule 6.3B for the effect of the initiation of a
marketwide trading halt commonly known as a circuit breaker on the
New York Stock Exchange [activation of circuit breakers in the
underlying primary securities markets].
(d)--No change.
* * * Interpretations and Policies
.01--No change.
.02--Upon reopening, a rotation shall be held in each class of
index options unless two floor officials, in consultation with a
designated senior executive officer of the Exchange, conclude that a
different method of reopening is appropriate under the
circumstances, including but not limited to, no rotation, an
abbreviated rotation or any other variation in the manner of the
rotation.
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
1. Purpose
The purpose of the proposed rule change is to eliminate certain
fixed percentage tests that presently apply both to the decision to
halt or suspend trading in index options and to the decision to resume
trading after such a halt, as well as to make certain related changes
to conform to present practice.
a. Trading Halts
Under present Rule 24.7(a)(i), one of the enumerated factors that
the designated Exchange representatives may consider, in deciding
whether to halt trading in an index option, is whether trading has been
halted or suspended in underlying stocks whose weighted value
represents ``20% or more of the index value.'' By specifying a
percentage level that ``may be considered,'' the present rule may imply
that it would be improper for the designated Exchange officials to
consider trading interruptions in underlying stocks that collectively
represent less than 20% of the index level. Moreover, the present rule
may imply that the Exchange actually must make ongoing calculations of
the extent to which underlying stocks are trading at any particular
moment--something that would be difficult to do on a real time basis
for some indexes, such as those with a large number of constituent
stocks (e.g., the Russell 2000, which consists of 2000 stocks) or those
as to which data on trading halts is not readily available (e.g., NDX,
an index based on over-the-counter stocks).
In fact, these interpretations would conflict with the purpose of
Rule 24.7, which grants designated Exchange representatives the
discretion to halt index option trading whenever they ``conclude in
their judgment that such action is appropriate in the interests of a
fair and orderly market and the protection of investors.'' Rule
24.7(a)(i)-(iv) contains simply a non-exclusive list of factors that
those Exchange officials may consider in exercising that discretion, so
it would be inappropriate to appear to forbid those officials from
considering trading disruptions in underlying stocks that fall below a
predetermined level. Accordingly, the proposed change to Rule
24.7(a)(i) would clarify that Exchange officials, in evaluating whether
to halt trading in index options, are not limited to situations in
which 20% of the underlying stocks have halted, but rather may consider
``the extent to which'' trading is not occurring in the underlying
stocks.
For similar reasons, the proposed change to Rule 24.7(a)(i) also
would enable Exchange officials to consider not just whether trading in
underlying stocks has been ``halted or suspended,'' but whether such
trading is ``not occurring.'' The term ``halted or suspended'' implies
a situation in which a stock exchange has taken formal action to stop
trading in a stock. However, in deciding whether to continue trading a
derivative instrument like an index option, Exchange officials should
be able to consider the extent to which underlying stocks are not
trading, whether trading is not occurring because of formal exchange
action, system problems, market emergencies or some other cause.
Accordingly the proposed change to Rule 24.7(a)(i) would make clear
that Exchange officials, in evaluating whether to halt index option
trading, may consider the extent to which ``trading is not
occurring''in the underlying stocks, without limiting that
consideration to formal halts or suspensions.
b. Resumption of Trading After Trading Halts
The proposed rule change also is designed to eliminate any
requirement in Rule 24.7(b) that a fixed percentage of underlying
stocks must be trading before trading in index options may resume after
a trading halt. At present, Rule 24.7(b) allows such trading to resume
when the appropriate Exchange officials determine either that the
conditions that led to the halt no longer are present or that the
interests of a fair orderly market are served by a resumption of
trading. However, Rule 24.7(b) provides that in no event may trading
resume until the Exchange has determined that trading is occurring in
underlying stocks whose weighted value represents more than 50% of the
index value.
It is and would remain CBOE's practice, in deciding whether to
resume
[[Page 45892]]
trading after an index options trading halt, to assess the extent to
which underlying stocks are trading. However, it is inappropriate to
forbid such a resumption until the level of stock trading has reached
some predetermined, fixed level, particularly since it often may be
difficult to make a precise determination about the weighted value of
the underlying stocks that are trading--e.g., for indexes that are
composed of a large number of underlying stocks. Accordingly, the
proposed rule change would eliminate the 50% threshold and instead
would specify that one of the factors that Exchange officials may
consider, in determining whether the ``interests of a fair and orderly
market are served by a resumption of trading'' is ``the extent to which
trading is occurring in stocks underlying the index.'' The proposed
rule therefore would enable Exchange officials to reactivate trading as
soon as they determine that conditions warrant, without interposing an
artificial barrier that might result from a fixed percentage test, and
would still provide a mechanism by which CBOE officials would be able
to give appropriate weight to the extent to which underlying stocks are
trading.
In addition, the proposed rule change would make clear that trading
may resume only upon a determination by the designated Exchange
officials that such a resumption is in the interests of a fair and
orderly market. The present form of Rule 24.78 allows trading to resume
(subject to the 50% requirement) when the proper Exchange officials
determine either that the conditions that led to the halt no longer are
present or that a resumption of trading would serve the interests of a
fair and orderly market. Taken literally, this would enable trading to
resume if the conditions that led to the halt no longer are present,
even if a resumption of trading would be contrary to the interests of a
fair and orderly market, an interpretation that would conflict with
CBOE's practice and would be contrary to the policies under the Act.
Accordingly, the proposed rule change would make clear that: (1) index
option trading may resume if and only if the proper Exchange officials
determine that such a resumption would be in the interests of a fair
and orderly market; and (2) the fact that the conditions leading to the
halt no longer are present is just one of the factors (as is the extent
to which underlying stocks are trading) that those officials may
consider in determining whether the interests of a fair and orderly
market would be served by a resumption of trading. In SR-CBOE-97-35,
similar changes are being proposed to Rule 6.3(b), which generally
governs the resumption of trading after a trading halt in an equity
option.
Also, the proposed rule change conforms the cross reference to Rule
6.3B that is contained in Rule 24.7(c) to the current language of Rule
6.3B. Rule 6.3B is the Exchange's circuit breaker trading halt rule,
and the language of Rule 6.3B was recently amended.
Finally, the proposed rule change adds a proposed interpretation
.02 to address how trading shall resume after a trading halt. This
topic is not addressed in the present form of Rule 24.7, although the
last sentence of present Rule 24.7(b) apparently assumes that a
rotation will be used. The proposed interpretation .02 would adopt the
identical procedure that now governs the resumption of trading after a
circuit breaker halt, which is set forth in interpretation .02 to Rule
6.3B. In particular, proposed interpretation .02 to Rule 24.7 would
provide that trading would resume by a rotation after a trading halt
unless the designated exchange officials conclude that a different
method of reopening is appropriate under the circumstances. Under the
proposed interpretation, those officials, among other things, could
determine not to employ a rotation, to use an abbreviated rotation or
otherwise to vary the manner of the rotation. This proposed
interpretation should be adopted so that comparable rules govern the
resumption of trading after circuit breaker halts as well as halts for
other reasons.
2. Statutory Basis
The proposed rule change is consistent with and furthers the
objectives of Section 6(b)(5) of the Act \2\ in that the proposed rule
change is designed to perfect the mechanisms of a free and open market
and to protect investors and the public interest by setting forth a
procedure to review and address delays in the commencement of options
trading.
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\2\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposal 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
proposal.
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 finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the CBOE 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, 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 provisions of 5
U.S.C. Sec. 552, will be available for inspection and copying in the
Commission's Public Reference Room. 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-97-36 and should
be submitted by September 19, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\3\
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\3\ 17 CFR 200.30-3(a)(12)(1997).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23010 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M
