[Federal Register Volume 60, Number 184 (Friday, September 22, 1995)]
[Notices]
[Pages 49305-49307]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23558]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36242; File No. SR-CBOE-95-22]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Chicago Board
Options Exchange, Inc., Relating to Members' Compliance with Position
and Exercise Limits for Non-CBOE Listed Options
September 18, 1995.
On April 20, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend CBOE Rules 4.11,
``Position Limits,'' and 4.12. ``Exercise Limits,'' to require CBOE
members who trade non-CBOE listed option contracts and who are not
members of the exchange where the options are traded to comply with the
option position and exercise limits set by the exchange where the
transactions are effected.\3\
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\Position limits impose a ceiling on the number of option
contracts in each class on the same side of the market (i.e.,
aggregating long calls and short puts or long puts and short calls)
that can be held or written by an investor or group of investors
acting in concern. Exercise limits prohibit an investor or group of
investors acting in concert from exercising more than a specified
number of puts or calls in a particular class within five
consecutive business days.
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Notice of the proposed rule change appeared in the Federal Register
on May 31, 1995.\4\ No comments were received on the proposed rule
change.\5\
\4\See Securities Exchange Act Release No. 35759 (May 24, 1995),
60 FR 28432.
\5\The CBOE amended its proposal to indicate that the CBOE will
also apply the position limit exemptions, interpretations, and
policies of the exchange where the transactions are effected. See
Letter from Margaret G. Abrams, Attorney, CBOE, to Yvonne
Fraticelli, Attorney, Division of Market Regulation (``Division''),
Commission, dated September 6, 1995 (``Amendment No. 1'').
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The CBOE proposes to amend Exchange Rules 4.11 and 4.12 to require
CBOE members who trade non-CBOE listed option contracts and who are not
members of the exchange where the options are traded to comply with the
option position and exercise limits set by the exchange where the
transactions are affected.\6\ According to the CBOE, the proposal is
designed to eliminate a
[[Page 49306]]
jurisdictional loophole whereby a CBOE member who exceeds position or
exercise limits on another options exchange in an option class not
listed on the CBOE and who is not a member of the other exchange falls
outside of both the CBOE's and the other options exchange's
jurisdiction for position and exercise limit purposes.\7\
\6\The proposal applies to transactions in index options as well
as equity options. Telephone conversation between Margaret G.
Abrams, Attorney, CBOE, and Yvonne Fraticelli, Attorney, Options
Branch, Division, Commission, on September 14, 1995.
\7\The Commission notes that, generally, the options exchanges
have adopted uniform options position and exercise limits.
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Specifically, although CBOE Rules 4.11 and 4.12 prohibit excessive
positions or exercises in CBOE listed option contracts, they do not
currently prohibit a CBOE member from exceeding applicable limits set
by another exchange for non-CBOE listed option contracts. If the CBOE
member is not a member of the other exchange which lists the option
contracts, then the other exchange cannot enforce its position and
exercise requirements against the CBOE member.
The proposed amendments will extend CBOE Rules 4.11 and 4.12 to
apply to option contracts dealt in on any exchange (rather than only to
option contracts dealt in on the CBOE) by requiring a CBOE member who
is effecting transactions in non-CBOE listed option contracts on
another exchange, of which he or she is not a member, to comply with
the position and exercise limits set by the exchange on which the
transaction is effected.\8\ Thus, a CBOE member's customer transactions
in non-Exchange listed options will be brought within the CBOE's
jurisdiction for position and exercise limit purposes when the exchange
on which the excessive transactions are effected does not have member
jurisdiction over the CBOE member.
\8\The CBOE will also apply the position limit exemptions,
interpretations, and policies of the exchange where the transactions
are effected. See Amendment No. 1, supra note 5.
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In addition, the CBOE proposes to amend the text of CBOE Rule 4.12
to replace references to the Exchange's previous equity option position
limits with reference to the Exchange's current equity option position
limits, which were excluded inadvertently from the text of CBOE Rule
4.12 when the equity option position limits were increased in December
1993.\9\
\9\See Securities Exchange Act Release No. 33283 (December 3,
1993), 58 FR 65204 (December 13, 1993) (order approving File No. SR-
CBOE-93-43).
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Finally, the CBOE proposes to amend CBOE Rules 4.11 and 4.12 to
indicate that the Exchange's position and exercise limits are now
established by the staff of the CBOE, rather than by the CBOE's Board
of Directors (``Board'').\10\
\10\The Commission notes that any proposal to revise the
Exchange's position and exercise limits must be filed with, and
approved by, the Commission pursuant to Section 19(b)(2) under the
Act.
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The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it is designed to remove
impediments to a free and open market and to protect investors and the
public interest.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5)\11\ in that it is
designated to prevent fraudulent and manipulative acts and practices
and to protect investors and the public interest. Specifically, the
CBOE has noted that Exchange Rules 4.11 and 4.12 do not currently
prohibit CBOE members from exceeding the position and exercise limits
set by another exchange for non-CBOE listed option contracts. Thus, if
the CBOE member is not a member of the exchange which lists the
options, then neither the CBOE or the exchange that lists the options
is able to enforce its position and exercise limits against the CBOE
member. The proposal eliminates this loophole and strengthens the
Exchange's rules by requiring a CBOE member who trades non-CBOE listed
option contracts on another exchange, and who is not a member of that
exchange, to comply with the option position and exercise limits set by
the exchange where the transactions are effected.\12\
\11\15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
\12\Under the proposal, the CBOE will also apply the exemptions,
interpretations, and policies of the exchange where the options
transactions are effected. See Amendment No. 1, supra note 5.
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As the Commission has noted in the past,\13\ options position and
exercise limits are intended to prevent the establishment of large
options positions that can be used or might create incentives to
manipulate or disrupt the underlying market so as to benefit the
options position. In particular, position and exercise limits are
designated to minimize the potential for mini-manipulations\14\ and for
corners or squeezes of the underlying market. They also impose a
ceiling on the maximum position an investor with inside corporate or
market information can establish through the use of options. In
addition, they serve to reduce the possibility for disruption of the
options market itself, especially in illiquid options classes. The
proposal extends the benefits of the position and exercise limit rules
to include all exchange-traded options transactions entered into by
CBOE members by bringing a CBOE member's customer transactions in non-
CBOE exchange listed options within the CBOE's jurisdiction for
position and exercise limits purposes. The Commission also notes that
violations under CBOE Rules 4.11 and 4.12 for transactions that do not
comply with the position and exercise limits of another exchange will
be subject to the same fines or disciplinary action for position and
exercise limit violations as those applicable to CBOE options.\15\
\13\See, e.g., Securities Exchange Act Release No. 33283
(December 3, 1993), 58 FR 65204 (December 13, 1993) (order approving
File No. SR-CBOE-93-43).
\14\Mini-manipulation is an attempt to influence, over a
relatively small range, the price movement in a stock to benefit a
previously established derivatives position.
\15\See CBOE Rule 17.50, ``Imposition of Fines for Minor Rule
Violations.'' Violations of the Exchange's exercise limit rules are
subject to disciplinary action under Chapter 17, ``Discipline,'' of
the CBOE's rules.
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The Commission believes that the proposal to amend the text of CBOE
Rule 4.12 to reflect the current position limits for equity options,
which were not included in the text of CBOE Rule 4.12 when the equity
option position limits were increased in 1993, should benefit market
participants by ensuring the accuracy of CBOE Rule 4.12. The text of
CBOE Rule 4.12, as amended, will reflect the Exchange's current equity
option position and exercise limits.
The Commission also believes that it is reasonable for the Exchange
to amend CBOE Rules 4.11 and 4.12 to indicate that the Exchange's
position and exercise limits are now established by the staff of the
CBOE, rather than by the CBOE's Board. In this regard, as noted above,
any proposal to increase the Exchange's position and exercise limits
must be approved by the Commission.
The Commission finds good cause for approving Amendment No. 1 to
the proposal on an accelerated basis. Amendment No. 1 to the proposal
strengthens and clarifies the CBOE's proposal by indicating that the
CBOE will apply the position limit exemptions, interpretations, and
policies of the exchange where the transactions are effected.
Accordingly, the Commission believes it is appropriate and consistent
with Sections 6(b)(5) and 19(b) (2) of the Act to approve Amendment No.
1 to the proposal on an accelerated basis.
[[Page 49307]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted October 13, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the amended proposed rule change (File No. SR-CBOE-95-22)
is approved.
\16\15 U.S.C. Sec. 78s(b)(2) (1982).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\.
\17\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-23558 Filed 9-21-95; 8:45 am]
BILLING CODE 8010-01-M
