Federal Register / Vol. 61, No. 204 / Monday, October 21, 1996 / Notices 54693

19(b)(2) of the Act to approve (‘‘Act’’),1 and Rule 19b–4 2 thereunder, prices at four strike price intervals Amendment No. 1 to the proposed rule notice is hereby given that on October above and four strike price intervals change on an accelerated basis. 9, 1996, the Chicago Board Options below the current value of the Index. Interested persons are invited to Exchange, Incorporated (‘‘CBOE’’ or Subsequently, as the value of the Index submit written data, views, and ‘‘Exchange’’) filed with the Securities moves up or down, the Exchange may arguments concerning Amendment No. and Exchange Commission list additional series of options (up until 1 to the rule proposal. Persons making (‘‘Commission’’) the proposed rule the fifth day prior to expiration), such written submissions should file six change as described in Items I and II that under ordinary circumstances there copies thereof with the Secretary, below, which Items have been prepared may be available for trading series of Securities and Exchange Commission, by the self-regulatory organization. The OEX options with a given expiration 450 Fifth Street, N.W., Washington, D.C. Commission is publishing this notice to date having strike prices at up to five 20549. Copies of the submission, all solicit comments on the proposed rule strike price intervals above and up to subsequent amendments, all written change from interested persons and to five strike intervals below the current statements with respect to the proposed grant accelerated approval of the value of the Index. In unusual market rule change that are filed with the proposed rule change. conditions (such as at times of Commission, and all written I. Self-Regulatory Organization’s heightened volatility) additional series communications relating to the Statement of the Terms of Substance of may be added at up to six strike price proposed rule change between the the Proposed Rule Change intervals above and six strike price Commission and any person, other than intervals below the current value of the those that may be withheld from the The Exchange proposes to amend Index. Of course, series of options public in accordance with the Rule 24.9, Interpretation and Policy .01 previously opened continue to be provisions of 5 U.S.C. 552, will be regarding the listing of additional series available, so that there may be more available for inspection and copying at of index options on the Standard & than the stated number of series traded the Commission’s Public Reference Poor’s 100 (‘‘S&P 100’’ or ‘‘OEX’’) Index at strike price intervals opposite to the Section, 450 Fifth Street, N.W., options in order to take into account the direction in which the index value has Washington, D.C. 20549. Copies of such signficantly increased levels of the S&P moved. filing also will be available for 100 since the listing procedures were For example, if a new expiration inspection and copying at the principal implemented. The text of the proposed month is introduced in an OEX option office of the CBOE. All submissions rule change is available at the Office of at a time when the current value of the should refer to File No. SR–CBOE–96– the Secretary, CBOE and at the S&P 100 Index is 598, so long as the 35 and should be submitted by Commission. strike price interval for OEX options November 12, 1996. II. Self-Regulatory Organization’s remains at 5 points, series of OEX IV. Conclusion Statement of the Purpose of, and options will be available at 580, 585, Statutory Basis for, the Proposed Rule 590 and 595 (four intervals below the For the foregoing reasons, the Change current Index value) and at 600, 605, Commission finds that the CBOE’s 610, and 615 (four intervals above the proposal to amend its firm facilitation In its filing with the Commission, the self-regulatory organization included current Index value). If the value of the exemption is consistent with the Index then moves to 608, under normal requirements of the Act and the rules statements concerning the purpose of and basis for the proposed rule change, conditions the Exchange would be able and regulations thereunder. to add series with strike prices of 620, It is therefore ordered, pursuant to and discussed any comments it received 625 and 630, which, together with the Section 19(b)(2) of the Act,21 that the on the proposed rule change. The text 610s and the 615s, provide five series proposed rule change (SR–CBOE–96– of these statements may be examined at above the current level of the Index. In 35), as amended, is approved. the places specified in Item IV below. For the Commission, by the Division of The self-regulatory organization has unusual market conditions, the Market Regulation, pursuant to delegated prepared summaries, set forth in Exchange could add sixth series with a authority.22 Sections A, B, and C below, of the most strike price of 635. In this example, Margaret H. McFarland, significant aspects of such statements. there would continue to be traded six Deputy Secretary. series with strike prices below the A. Self-Regulatory Organization’s [FR Doc. 96–26856 Filed 10–18–96; 8:45 am] current level of the Index (that is, the Statement of the Purpose of, and 580, 585, 590, 595, 600 and 605 series). BILLING CODE 8010±01±M Statutory Basis for, the Proposed Rule When the current methodology for Change adding series of OEX options was [Release No. 34±37815; File No. SR±CBOE± 1. Purpose. The purpose of the adopted in 1992, the S&P Index was at 96±61] proposed rule change is to amend the 380. This meant that five intervals (25 1 Self-Regulatory Organizations; Notice procedures for listing additional series points) constituted over 6 ⁄2% of the of Filing and Order Granting of index options on the S&P 100 Index value of the index, and six intervals (30 (OEX ) in order to take into account points) constituted almost 8% of the Accelerated Approval of Proposed 3 Rule Change by the Chicago Board the significantly increased levels of the index value. Since that time, the value Options Exchange, Incorporated S&P 100 Index since these procedures of the S&P 100 Index has increased Relating to the Opening of New Series were first put in place. Under existing considerably, to the point where it has of OEX Index Options Interpretation and Policy .01 under recently exceeded 670. At this level, five Exchange Rule 24.9, when the Exchange strike price intervals constitutes less October 11, 1996. introduces trading in a new expiration Pursuant to Section 19(b)(1) of the month for a class of OEX options, it may 3 This was consistent with the prior methodology Securities Exchange Act of 1934 initially list series of options with strike for adding new series of OEX options, which permitted up to four strike price intervals and was adopted at a time when the value of the index was 21 15 U.S.C. 78s(b)(2) (1988). 1 15 U.S.C. § 78s(b)(1). 265, thus allowing OEX options to be added up to 22 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4. 71⁄2% away from the market. 54694 Federal Register / Vol. 61, No. 204 / Monday, October 21, 1996 / Notices than 33⁄4%, and six intervals less than money OEX calls as a hedge against a market under normal circumstances, 41⁄2%, of the value of the Index. diversified stock portfolio. In some and up to 13 series in unusual Application of the current rule, cases, these strategies require that the circumstances. together with a sustained bull market, calls written must be at least 5% out-of- The number of additional series that has led to an absence of OEX call series the-money. Obviously, if the furthest will result from this proposed rule that are more than nominally out-of-the- out-of-the-money OEX call is only 4% change, which affects OEX options only, money, since even under unusual out-of-the-money, this strategy cannot will not be significant. For this reason, market conditions, which the Exchange be pursued. CBOE does not believe that the has determined now exist, an OEX call (3) Lower-priced OEX series proposed change raises any capacity can be only a little over 4% out-of-the- unavailable for retail customers. The issues. In any event, with prior notice money when first opened for trading, as Exchange has long noticed that OEX CBOE would continue to have the contrasted with approximately 8% out- order flow from retail customers is ability to delist series that become of-the-money at times when the level of concentrated in options priced below inactive if the market were to move the Index was lower. And, so long as the $5, and that when the number of away from exercise price levels at which Index continues to move in a generally available lower priced options the series were previously opened. upward direction, out-of-the-money increases, so does retail order flow. Indeed, CBOE has recently acted to calls become less out-of-the-money with Under current index levels in light of delist over 400 inactive series on this the passage of time. The adverse the existing restrictions under basis. consequences of this trend is Interpretation and Policy 24.9.01, there 2. Statutory basis. By responding to exemplified in at least three ways: (1) are a few low price OEX call options the current historically high values of the number of OEX calls eligible for available with any significant time the S&P 100 Index in a manner that will trading through the Exchange’s remaining before expiration, such that at increase the availability to investors of automatic execution system (RAES) is times there are no OEX calls available lower priced OEX options, the proposed limited; (2) institutional customers, at less than $6 premiums having more rule change is consistent with the which often apply specific parameters than two months remaining until provisions of Section 6 of the Act, and to conservative options strategies that expiration. For example, recently the Section 6(b)(5) in particular, in that it involve writing out-of-the-money OEX least expensive third month OEX call will promote just and equitable calls, are limited in their ability to was offered at 65⁄8, and the least principles of trade, will protect pursue these strategies; and (3) retail expensive fourth month call at 91⁄2. The investors and the public interest, and customers have fewer low-priced OEX effect of this is to preclude retail will remove impediments to and perfect calls available to trade. Each of these investors from participating in the OEX the mechanisms of a free and open negative consequences is discussed in call market, except at higher than market. turn below. desired price levels. (1) Fewer OEX series on RAES. The B. Self-Regulatory Organization’s In response to these concerns, CBOE guidelines followed by the OEX Floor Statement on Burden on Competition is now proposing to change the measure Procedure Committee in designating of when additional series of OEX The Exchange states that it believes series of OEX options as eligible for options may be traded from the current that the proposed rule change will trading on RAES provide that up to inflexible test based on the number of impose no burden on competition. eight series in each of the two near term strike price intervals away from the expiration months may be so C. Self-Regulatory Organization’s market to a more flexible test which designated, provided the option in any Statement on Comments on the measures the extent to which an away designated series is priced below $7. Proposed Rule Change Received from Historically, when the index was at a from the market series may be opened Members, Participants or Others lower level and thus further out-of-the- by reference to a percentage of the No written comments were solicited money series were available as current value of the index. Based on or received with respect to the proposed illustrated above, customers have had as historical patterns, it is proposed that rule change. many as sixteen series 4 of RAES-eligible under ordinary conditions the Exchange III. Commission’s Findings and Order OEX calls to choose from. Recently, should be able to add additional series Granting Accelerated Approval of however, there have been as few as six of OEX options that are as much as 8% Proposed Rule Change RAES-eligible OEX calls, four in the away from the market, and under near term month and only two in the unusual conditions it should be able to The Exchange has requested that the next-out expiration. This, of course, add series that are as much as 10% proposed rule change be given 5 reflects that at only 4% out-of-the- away from the market. Applying these accelerated effectiveness pursuant to money an OEX call with any significant percentages to current index levels, Section 19(b)(2) of the Act. The 6 time remaining until expiration will there could be as many as ten series of Commission finds that the proposed have a price above the $7 cutoff. OEX options above and below the rule change is consistent with the (2) Institutional covered writing requirements of the Act, and the rules curtailed. The Exchange has recently 5 This proposed test would apply only to OEX. and regulations thereunder applicable to All other index options are currently subject to observed a decline in institutional OEX Interpretation and Policy .05 under Rule 24.9, a national securities exchange and, in activity. When looking into possible which applies a percentage test, subject to a particular, with the requirements of causes, the Exchange learned that some maximum number of points, to adding away from Section 6(b) of the Act. Specifically, the institutional customers follow strategies the market series. Under that test, for all but long Commission believes that the proposal term options, the percentages are 15% under involving the writing of out-of-the- normal conditions and 30% where there is will enable the CBOE to respond to ‘‘demonstrated customer interest’’ in additional changing market conditions, and list 4 The proposed rule change as originally filed strike prices. index options series that provide market incorrectly states that in the example above, 6 The proposed rule change, as originally filed, participants with an effective means to customers have had as many as fourteen series of incorrectly states that there would be eight strikes RAES-eligible OEX calls to choose from. Telephone at current values. Telephone conversation between transfer risk and implement their conversation between Tim Thompson, CBOE, and Tim Thompson, CBOE, and Janice Mitnick, SEC on trading strategies. The Commission John Ayanian, SEC on October 11, 1996. October 10, 1996. believes that the discretion to list Federal Register / Vol. 61, No. 204 / Monday, October 21, 1996 / Notices 54695 additional series of index options will The S&P 100 Index has recently proper range of option strikes. help to ensure the consistent availability exceeded 670. Under the current Accordingly, the Commission believes, of index options series tailored to meet standard, five strike price intervals consistent with Section 6(b)(5) of the the needs of investors during periods of constitute less than 33⁄4% of the index, Act, that good cause exists to approve market volatility. In addition, the and six intervals constitute less than the proposed rule change on an Commission notes the CBOE’s proposal 41⁄2% of the value of the index. The accelerated basis. is similar to Rule 24.9, Interpretation proposed rule will permit the addition IV. Solicitation of Comments and Policy .05 which applies a of options series at 8% away from the percentage test, subject to a maximum of market and, under unusual market Interested persons are invited to 15%, for adding away from the market conditions, as much as 10% away from submit written data, views, and series.7 Further, the rule allows CBOE to the market. Using current index levels, arguments concerning the foregoing. use a maximum of 30% for adding there could be as many as ten series of Persons making written submissions series when there is ‘‘demonstrated OEX options above and below the should file six copies thereof with the consumer interest’’ in additional strike market under normal circumstances, Secretary, Securities and Exchange prices.8 Finally, American Stock and up to 13 series in unusual market Commission, 450 Fifth Street, N.W., Exchange (‘‘Amex’’) Rule 930C(b) allows conditions. The Commission believes Washington, D.C. 20549. Copies of the the Amex to list additional series of the that these requirements provide the submission, all subsequent same class of index options as the Exchange with the flexibility to open amendments, all written statements numerical index value of the underlying additional index options series and, at with respect to the proposed rule stock index moves substantially from the same time, appropriately limit the change that are filed with the the initial exercise price or prices. number of index options series that may Commission, and all written be outstanding at any one time. In communications relating to the The Commission believes that the addition, the Commission notes that proposed rule change between the CBOE’s proposal strikes a reasonable although the proposal permits the CBOE Commission and any person, other than balance between accommodating the to open additional index option series, those that may be withheld from the needs of market participants and the CBOE retains the discretion to list public in accordance with the avoiding the excessive proliferation of fewer series than those allowed under provisions of 5 U.S.C. § 552, will be options series. In this regard, the the proposal.10 available for inspection and copying at proposal provides that the options price The CBOE has represented that due to the Commission’s Public Reference of each series of options opened for the fact that this proposed rule change Room. Copies of such filing will also be trading shall be reasonably related to the applies only to OEX options, the available for inspection and copying at current value of the underlying index, number of additional series will not be the principal office of the Exchange. All as discussed below. The proposed rule significant. The Options Price Reporting submissions should refer to File No. change also allows the Exchange to Authority has represented that CBOE’s SR–CBOE–96–61 and should be open additional series of index options current system capacity is sufficient to submitted by November 12, 1996. for trading only after a substantial meet the expected demands of the It is therefore ordered, pursuant to movement in the value of the additional strike prices.11 Nevertheless, Section 19(b)(2) of the Act,13 that the underlying index.9 the Commission requests that the CBOE proposed rule change (SR–CBOE–96– The Commission believes that the monitor the volume of additional series 61) is hereby approved on an change in the level of the S&P 100 Index listed as a result of this rule change and accelerated basis. since the series listing rules were put the effect of these additional series on For the Commission, by the Division of into place has affected the availability of the capacity of CBOE’s, and OPRA’s and Market Regulation, pursuant to delegated series of options on the index. More vendors’ automated systems. The authority.14 specifically, CBOE states that when the Commission encourages the CBOE to Margaret McFarland, methodology for adding series of exercise its available discretion when Deputy Secretary. options was adopted in 1992, the S&P appropriate to delist inactive series that [FR Doc. 96–26857 Filed 10–18–96; 8:45 am] 100 Index was at 380. At that time, the have no open interest. BILLING CODE 8010±01±M options available under normal market The Commission finds good cause for conditions, five intervals (25 points), approving the proposed rule change [Release No. 34±37818; File No. SR±NSCC± constituted over 61⁄2% of the value of prior to the thirtieth day after the date 96±15] the index. Further, the options available of publication of notice thereof in the under the standard for unusual market Federal Register. Specifically, as stated Self-Regulatory Organizations; conditions, six intervals (30 points), above, the Commission previously National Securities Clearing constituted almost 8% of the index approved a CBOE rule similar to the Corporation; Notice of Filing of a 12 value at the time the standards were proposed rule, and believes that the Proposed Rule Change to Process implemented. proposed rule change raises no new Corporate Reorganizations Involving regulatory issues. Further, the Elections Through NSCC's Continuous 7 The 15% maximum applies to all index options Commission believes that the proposed Net Settlement System (excluding OEX), but not to long term options. rule will help the CBOE to CBOE Rule 24.9, Interpretation and Policy .05. See accommodate the needs of investors by October 11, 1996. Securities Exchange Act Release No. 31683 (December 31, 1992), 58 FR 3307 (order approving helping to ensure the availability of a Pursuant to Section 19(b)(1) of the SR–CBOE–92–36). Securities Exchange Act of 1934 (the 8 CBOE Rule 24.9, Interpretation and Policy .05. 10 See supra note 9. ‘‘Act’’),1 notice is hereby given that on Again, this standard applies to all index options 11 See Letter from Joe Corrigan, OPRA, to Mike August 7, 1996, the National Securities (except OEX), but not to long term options. Walinskas, Senior Special Counsel, Office of Market Clearing Corporation (‘‘NSCC’’) filed 9 The Commission notes, however, that the Supervision, Division of Market Regulation, SEC, Exchange is not obligated to open new series every dated October 11, 1996. time the index value changes. Opening of new 12 Securities Exchange Act Release No. 31683 13 15 U.S.C. § 78s(b)(2). series must be done in a manner that is consistent (December 31, 1992), 58 FR 3307 (approving CBOE– 14 17 CFR 200.30–3(a)(12). with the maintenance of a fair and orderly market. 92–36). 1 15 U.S.C. § 78s(b)(1) (1988)