[Federal Register Volume 61, Number 180 (Monday, September 16, 1996)]
[Notices]
[Pages 48722-48724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23560]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37659; File No. SR-CBOE-96-40]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Board Options Exchange, Inc., to Change the Method for Determining the
Exercise Settlement Value of Nasdaq-100 Options
September 6, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 28, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Exchange subsequently filed Amendment No. 1 to the
proposed rule change on September 5, 1996.\3\ The CBOE has requested
accelerated approval for the proposal, as amended. This order approves
the CBOE's proposal, as amended, on an accelerated basis and solicits
comments from interested persons.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Timothy Thompson, CBOE, to Matthew Morris,
Office of Market Supervision, Division of Market Regulation,
Commission, dated September 5, 1996 (``Amendment No. 1''). In
Amendment No. 1, the CBOE amended its proposal in two respects.
First, the Exchange will issue a regulatory circular to its
membership in the event that the Nasdaq makes a substantive change
to the method for determining the settlement value of the Nasdaq-
100. The Exchange will endeavor to issue a regulatory circular at
least seven days in advance of the effectiveness of the change or as
soon as practicable after it learns of the change. Second, if the
Nasdaq makes a change in the settlement methodology, the Exchange
will consult with the Commission to determine whether such a
revision is a material change from the current methodology to
warrant a rule filing pursuant to Sections 19(b)(2) or 19(b)(3) of
the Act. Because the Exchange does not control the decision to
change the settlement methodology, however, it is possible that the
Exchange may not be made aware of a change in the settlement
methodology until after the Nasdaq has instituted such change. In
this event, the Exchange will still consult with the Commission
concerning the need for a possible rule filing.
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I. Self-Regulatory Organizations's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE is proposing to modify its rule concerning the method for
determining the settlement value of Nasdaq-100 options (``NDX'').\4\ In
this manner, the CBOE will clarify that the NDX's settlement value is
determined using the volume-weighted averaging methodology developed by
the Nasdaq Stock Market, Inc., as modified by the Nasdaq from time to
time.
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\4\ The NDX is a capitalization-weighted index composed of the
stocks of 100 of the largest non-financial issuers whose securities
are traded on Nasdaq.
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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 III below. The self-regulatory
organization has
[[Page 48723]]
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 modify the language
of the rule describing the method of settling NDX options. The
settlement methodology itself is not changing. The proposed rule would
describe the settlement methodology as the then current index value as
calculated by Nasdaq and reported to the CBOE using the volume-weighted
prices (``VWPs'') of the securities underlying the Nasdaq-100 Index,
which VWPs shall be calculated according to the then current volume-
weighted averaging methodology developed by Nasdaq.\5\
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\5\ Nasdaq is the official reporting authority under Exchange
rules for the Nasdaq-100 Index and sends its settlement value to the
CBOE.
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The Exchange's rule currently describes the methodology employed by
Nasdaq in determining the settlement value for Nasdaq-100 options in a
general manner.\6\ The rule, however, does not describe, and was not
intended to describe, every nuance of the settlement methodology used
by Nasdaq. For example, the rule does not explain that Nasdaq will
adjust the values for corrections up until the end of the five-minute
period for the last stock in the Nasdaq-100. Similarly, the rule does
not explain that trade reports with modifiers that are not reported in
the last sale prices that are publicly disseminated by Nasdaq will not
be used in the computation of the volume-weighted average of the
underlying stock. In fact, Nasdaq has made minor technical changes to
the valuation methodology since the Exchange filed its rule.\7\
Although no changes are presently anticipated, the possibility exists
that there could be other minor changes in the calculation method in
the future. Therefore, the Exchange believes that a more general
description of the settlement methodology will prevent any possible
confusion that this rule was intended to describe every detail of the
NDX settlement calculation. Rather, the CBOE rule will simply serve as
an indication that interested parties should refer to relevant Exchange
regulatory circulars or Nasdaq for more detail, if required.
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\6\ The current methodology employed by Nasdaq in determining
the NDX settlement value can be generally described as follows.
Nasdaq computes a VWP for each stock underlying the Nasdaq-100 Index
by looking at transaction prices in the five-minute period (usually
8:30 to 8:35 a.m., Chicago time) beginning with a stock's first
transaction price at or after 8:30 a.m., Chicago time, as reported
by Nasdaq. The VWP of each stock in the Index is calculated as the
weighted average of its transaction prices during this five-minute
period. The weight associated with a particular transaction price is
the fraction of the total volume of trading during this five-minute
period which was executed at this transaction price. If the first
transaction of a stock occurs after 2:55 p.m., Chicago time, then
its VWP is computed from transaction prices reported before 3:00
p.m., Chicago time.
\7\ For example, the Exchange has issued a regulatory circular
to its membership informing them of a recent technical change made
by Nasdaq. This circular informed the membership that only trade
reports which update the last sale on Nasdaq will be included in the
calculation of the volume-weighted average.
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2. Statutory Basis
The Exchange believes that because this rule change will prevent
confusion regarding whether the CBOE rules present the details of the
methodology used by Nasdaq in determining the settlement value of the
Nasdaq-100, this rule change is based upon and is in furtherance of the
objectives of Section 6(b)(5) of the Act in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The self-regulatory organization does not believe that the proposed
rule change will impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments were neither solicited nor received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, D.C. 20549. Copies of such filings also will be
available for inspection and copying at the principal office of the
CBOE. All submissions should refer to File No. SR-CBOE-96-40 and should
be submitted by October 7, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, the requirements of
Section 6(b)(5) thereunder. Specifically, the Commission finds that the
CBOE's proposal to make the description of the method for determining
the exercise settlement value of Nasdaq-100 options more general will
contribute to the maintenance of fair and orderly markets by helping to
prevent confusion regarding the completeness of the CBOE's description.
As noted above, the rule change does not change the current
settlement methodology for the Nasdaq-100. Rather, the change will
provide the CBOE with a more flexible means through which to implement
certain minor, non-substantive changes to the settlement methodology
that Nasdaq may impose.\8\ At the same time, the proposal will ensure
that the CBOE membership and the investing public are adequately
informed of any changes in the settlement methodology through the
issuance of regulatory circulars.\9\
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\8\ The Commission notes that if the Nasdaq makes a change to
the settlement methodology, the Exchange will consult with the
Commission to determine whether this revision is a material change
from the current methodology to warrant a rule filing pursuant to
Section 19(b) of the Act or Rule 19b-4 thereunder. The Commission
also realizes that because the Exchange does not control the
decision to change the settlement methodology, it is possible that
the Exchange may not be made aware of a change in the settlement
methodology until after the Nasdaq has instituted such change. In
this event, the Exchange will still consult with the Commission
concerning the need for a possible rule filing.
\9\ According to the CBOE, the Exchange will endeavor to issue a
regulatory circular at least seven days in advance of the
effectiveness of a substantive change to the method of determining
the settlement value of the Nasdaq-100, or as soon as practicable
after the Exchange learns of the change.
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The Commission finds good cause to approve the proposal prior to
the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. By accelerating the effectiveness of
the CBOE's rule
[[Page 48724]]
proposal, the Commission will enable the new language to become
effective prior to the next expiration. In addition, the Commission
believes that the proposed settlement method does not present any new
or novel regulatory issues as the CBOE's proposal merely restates in a
more general manner that which the Commission has already approved.\10\
Accordingly, the Commission believes that it is consistent with
Sections 6(b)(5) and 19(b)(2) of the Act to approve the proposed rule
change on an accelerated basis.
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\10\ See Securities Exchange Act Release No. 37089 (April 9,
1996), 61 FR 16660 (April 16, 1996) (File No. SR-CBOE-96-12).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \11\ of the
Act, that the proposed rule change (File No. SR-CBOE-96-40), as
amended, is hereby approved on an accelerated basis.
\11\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23560 Filed 9-13-96; 8:45 am]
BILLING CODE 8010-01-M
