regulatory organizations; proposed rule changes: Chicago Board Options Exchange, Inc.,
[Federal Register: July 25, 2000 (Volume 65, Number 143)]
[Notices]
[Page 45805-45808]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25jy00-96]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-4052; File No. SR-CBOE-00-16]
Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval to a Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to an Increase in Narrow-Based Index Option Position and Exercise Limits
July 18, 2000.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
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(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on April 11, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filedwith the Securities and Exchange Commission (``Commission'') a proposed rule change to increase the position and exercise limits for narrow-based index options. The CBOE amended its proposal on June 13, 2000.\3\ The proposed rule change, as amended, is described in Items I and II below, which have been prepared by the Exchange. The Commission is publishing this notice and order to solicit comments on the proposed rule change and Amendment No. 1 from interested persons and to approve the proposal, as amended, on an accelerated basis.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Mary L. Bender, Senior Vice President and Chief Regulatory Officer, Division of Regulatory Services, CBOE, to Joseph Corcoran, Division of Market Regulation (``Division''), Commission, dated June 12, 2000 (``Amendment No. 1''). In Amendment No. 1, the CBOE revised CBOE Rule 24.4A(a)(i) to provide that the position limits for options on a narrow-based index will be: (1) 18,000 contracts if the CBOE determines, during the semi-annual review conducted pursuant to CBOE Rule 24.4A(a)(ii), that any single underlying stock accounted, on average, for 30% or more of the index value during the 30-day period immediately preceding the review; (2) 24,000 contracts if the CBOE determines, during its semiannual review, that any single underlying stock accounted, on aveage, for 20% or more of the index value or that any five underlying stocks together accounted, on average, for more than 50% of the index value, but that no single stock in the group accounted, on average, for 30% or more of the index value during the 30-day period immediately preceding the review; or (3) 31,500 contracts if the CBOE determines that the conditions specified in (1) or (2) which would require the establishment of a lower limit have not occurred.
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposes to amend Exchange Rule 24.4A, ``Position Limits for Industry Index Options,'' to increase the position and exercise limits for narrow-based (industry) index options to the levels currently in place for industry index options listed on the Philadelphia Stock Exchange, Inc. (``Phlx'') and on the American Stock Exchange, Inc. (``Amex''). The text of the proposed rule change is available at the CBOE and at the Commission's public reference room.
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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 III below. The CBOE has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
The CBOE proposes to amend CBOE Rule 24.4A to increase the position and exercise limits for narrow-based (industry) index options, which are subject to a three-tier position and exercise limit determination.\4\ The CBOE's proposal, as amended, will make the CBOE's position and exercise limits for narrow-based index options consistent with a recently approved increase in position and exercise limits for narrow-based index options listed on the Phlx and Amex.\5\ Specifically, the CBOE proposes to increase the position and exercise levels for narrow-based index options from 9,000, 12,000 and 15,000 contracts to 18,000, 24,000 and 31,500 contracts. The CBOE requests that the Commission approve the proposal on an accelerated basis to allow for uniformity among the options exchanges with regard to position and exercise limits for narrow-based index options, which in turn should promote fair competition among the exchanges. The CBOE believes that the possibility of investor confusion will be eliminated in a trading environment with uniform position and exercise limits for industry index options.
\4\ CBOE Rule 24.5, ``Exercise Limits,'' provides that the exercise limits for index options will be equivalent to the position limits prescribed for options with the nearest expiration date in CBOE Rule 24.4 or 24.4A.
\5\ See Securities Exchange Act Release No. 42132 (November 12, 1999), 64 FR 63837 (November 22, 1999) (order approving File Nos. SR-Amex 98-39 and SR-Phlx-98-39) (``Narrow-Based Index Option Order'').
The CBOE notes that exercise limits for narrow-based index options will continue to correspond to position limits, so that investors may exercise the number of contracts set forth as the position limit during any five consecutive business day period.
As of April 3, 2000, the CBOE listed the following industry index options, with limits as shown:
(1) S&P Banking Index--15,000 contracts;
(2) S&P Chemical Index--9,000 contracts;
(3) S&P Health Care Index--12,000 contracts; (4) S&P Insurance Index--9,000 contracts; (5) S&P Retail Index--12,000 contracts; (6) S&P Transportation Index--12,000 contracts; (7) CBOE Automotive Index--12,000 contracts; (8) CBOE Computer Software Index--12,000 contracts; (9) CBOE Gaming Index--12,000 contracts; (10) CBOE Gold Index--15,000 contracts; (11) CBOE Internet Index--15,000 contracts; (12) CBOE Latin 15 Index--15,000 contracts; (13) CBOE Mexico Index--12,000 contracts; (14) CBOE Oil Index--15,000 contracts; (15) CBOE Technology Index--15,000 contracts; (16) GSTI Hardware Index--12,000 contracts; (17) GSTI Internet Index--12,000 contracts; (18) GSTI Multimedia Networking Index--12,000 contracts; (19) GSTI Services Index--12,000 contracts; (20) GSTI Software Index--12,000 contracts; (21) DJUA Index--15,000 contracts; (22) DJTA Index--15,000 contracts; (23) Dow Jones Internet Commerce Index--15,000 contracts; (24) Dow 10 Index--12,000 contracts; and, (25) GSTI Semiconductor Index--12,000 contracts.
In addition to providing regulatory equality, the CBOE believes that an increase in position and exercise limits for narrow-based index options is appropriate for several reasons. First, the CBOE believes that increased position and exercise limits for narrow-based index options may bring additional depth and liquidity, in terms of both volume and open interest, to these index options classes without significantly increasing concerns regarding inter-market manipulations or disruptions of the index options or the underlying component securities.
Second, the CBOE notes that the Commission recently approved rule changes increasing the position and exercise limits for standardized equity option contracts. \6\ The Commission also approved the elimination of position
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and exercise limits for certain broad-based index option contracts for a two-year pilot program.\7\ Given these recent changes to various options exchanges' position and exercise limit rules, the CBOE believes that it is reasonable to allow for corresponding changes to the position and exercise limits for narrow-based index options.
\6\ See Securities Exchange Act Release No. 40875 (December 31, 1998), 64 FR 1842 (January 12, 1999) (order approving File Nos. SR- CBOE-98-25, SR-Amex-98-22, SR-PCX-98-33, and SR-Phlx-98-36).
\7\ See Securities Exchange Act Release Nos. 40969 (January 22, 1999), 64 FR 4911 (February 1, 1999) (order approving File No. SR- CBOE-98-23); and 41011 (February 1, 1999), 64 FR 6405 (February 9, 1999) (order approving File No. SR-Amex-98-38).
Third, the CBOE notes that the proposal, while increasing the position limits for narrow-based index options, continues to reflect the unique characteristics of each index option and to maintain the structure of the current three-tiered system. Specifically, under the proposal, as amended, the lowest proposed limit, 18,000 contracts, will apply to narrow-based index options in which a single underlying stock accounted on average for 30% or more of the index value during the 30- day period immediately preceding the Exchange's semi-annual review of industry index option position limits. A position limit of 24,000 contracts will apply if: (i) Any single underlying stock accounted, on average, for 20% or more of the index value, or (ii) any five underlying stocks together accounted, on average, for more than 50% of the index value, but no single stock in the group accounted, on average, for 30% or more of the index value, during the 30-day period immediately preceding the Exchange's semi-annual review of industry index option position limits. The 31,500-contract limit will apply only if the Exchange determines that the above-specified conditions requiring either the 18,000-contract limit or the 24,000-contract limit have not occurred. 2. Statutory Basis
The CBOE believes the proposed rule change is consistent with and furthers the objectives of Section 6(b)(5) \8\ of the Act in that it is designed to remove impediments to a free and open market and to protect investors and the public interest.
\8\ 15 U.S.C. 78f(b)(5).
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Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose any burden on competition that is necessary or appropriate in furtherance of the purposes of the Act.
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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 proposed rule change.
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Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 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-00-16 and should be submitted by August 15, 2000.
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Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change
The Commission finds that the proposal is consistent with the requirements of the Act.\9\ In particular, the Commission finds the proposal is consistent with Section 6(b)(5) \10\ of the Act. Section 6(b)(5) requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative practices, to promote just and equitable principles of trade, and to protect investors and the public interest.
\9\ In approving this rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
The Commission believes that the CBOE's proposal to increase its position and exercise limits for narrow-based index options is appropriate for several reasons. First, the Commission notes that the proposal will increase the CBOE's position and exercise limits for narrow-based index options to the levels adopted by the Phlx and the Amex, which the Commission previously approved.\11\ Accordingly, the Commission finds that the proposal will help to assure fair competition among exchange markets, consistent with the Congressional findings in Section 11A(a)(1)(C)(iii) of the Act.\12\
\11\ See Narrow-Based Index Option Order, supra note 5.
\12\ See 15 U.S.C. 78k-1(a)(1)(C)(iii).
Second, the Commission believes that increasing position and exercise limits for narrow-based index options may bring additional depth and liquidity, in terms of both volume and open interest, to these index options classes without significantly increasing concerns regarding intermarket manipulations or disruptions of the index options or the underlying component securities.
Third, increasing position and exercise limits for narrow-based index options should better serve the hedging needs of institutions that engage in trading strategies different from those covered under the index hedge exemption policy.
Fourth, the Commission notes that the proposal, while increasing the position limits for narrow-based index options, continues to reflect the unique characteristics of each index option and to maintain the structure of the current three-tiered system. Specifically, under the proposal, as amended, the lowest proposed limit, 18,000 contracts, will apply to narrow-based index options in which a single underlying stock accounted for 30% or more of the index value during the 30-day period immediately preceding the Exchange's semi-annual review of industry index option position limits. A position and exercise limit of 24,000 contracts will apply if any single underlying stock accounted, on average, for 20% or more of the index value or any five underlying stocks accounted, on average, for more than 50% of the index value, but no single stock in the group accounted, on average, for 30% or more of the index value during the 30-day period immediately preceding the Exchange's semi-annual review of industry index option position limits. The 31,500-contract limit will apply only if the Exchange determines that the conditions requiring either the 18,000-contract limit or the 24,000-contract limit have not occurred.\13\
\13\ See Amendment No. 1, supra note 3.
Fifth, the Commission believes that financial requirements imposed by the Exchange and by the Commission adequately address concerns that a CBOE member or its customers may try to maintain a large unhedged position in a narrow-based index option. In this regard, the Commission notes that
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current margin and risk-based haircut methodologies serve to limit the size of positions that a CBOE member or its customer may maintain.\14\ The CBOE also has the authority under its rules to impose a higher margin requirement upon the member or member organization when it determines that a higher requirement is warranted.\15\ Monitoring accounts maintaining large positions should provide the Exchange with information necessary to determine whether to impose additional margin and/or whether to assess capital charges upon a member organization carrying the account. In addition, the Commission's net capital rule, Rule 15c3-1 under the Exchange Act, imposes a capital charge on members to the extent of any margin deficiency resulting from the higher margin requirement. The Commission also notes that the Options Clearing Corporation will serve as the counter-party guarantor in every exchange-traded transaction.
\14\ In particular, Exchange Act Rule 15c3-1 requires a capital change equal to the maximum potential loss on a broker-dealer's aggregate index position over a +(-) 10% market move. In addition, the adoption of risk-based haircuts in 1997 resulted in significant increases in capital charges for unhedged options positions. See Securities Exchange Act Release No. 38248 (February 6, 1997), 62 FR 6474 (February 12, 1997) (adopting risk-based haircuts). With regard to margin requirements, CBOE Rule 12.3 provides a customer margin requirement for an unhedged position in a listed narrow-based index option equal to the option premium plus 20% of the product of the current index group value and the applicable index multiplier, reduced by any out-of-the-money account, with a minimum margin requirement equal to the option premium plus 10% of the product of the current index group value and the applicable index multiplier.
\15\ See CBOE Rule 12.10.
Sixth, the Commission notes that the index options and other types of index-based derivatives (e.g., forwards and swaps) are not subject to position and exercise limits in the OTC market. The Commission believes that increasing position and exercise limits for narrow-based index options will better allow the Exchange to compete with the OTC market.
Finally, the absence of any discernible manipulative problems for narrow-based index options at existing levels leads the Commission to conclude that the proposed increases are reasonable and that they can be safely implemented.\16\ The Commission believes that the Exchange's surveillance programs are adequate to detect and deter violations of position and exercise limits, as well as to detect and deter attempted manipulation and other trading abuses through the use of such illegal positions by market participants.\17\
\16\ Telephone Conversation between Mary L. Bender, Senior Vice President and Chief Regulatory Officer, Division of Regulatory Services, CBOE, and Joseph Corcoran, Division, Commission, on June 27, 2000.
\17\ The Commission emphasizes that the Exchange must closely monitor compliance with position and exercise limits and impose appropriate sanctions for failures to comply with the Exchange's position and exercise limit rules.
The Commission finds good cause to approve the proposed rule change and Amendment No. 1 prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. As discussed above, the proposed rule change, as amended, is identical to proposals by the Phlx and Amex that the Commission previously approved.\18\ The Commission notes that no comments were received on either the Phlx's or Amex's proposal. In addition, the Commission is not aware of any problems arising from the position and exercise limits approved in the Phlx and Amex proposals. Amendment No. 1 conforms CBOE's position and exercise limits for narrow-based index options to the levels adopted by the Phlx and Amex. Accordingly, the Commission finds that, consistent with Sections 6(b) and 19(b)(2) of the Act, there is good cause to approve the proposal and Amendment No. 1 to the proposal on an accelerated basis.
\18\ See Narrow-Based Index Option Order, supra note 5.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\19\ that the proposed rule change (SR-CBOE-00-16), as amended, is hereby approved on an accelerated basis.
\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\20\
\20\ 17 CFR 200.30-3(a)(12).
Jonathan G. Katz, Secretary.
[FR Doc. 00-18743Filed7-24-00; 8:45 am]
BILLING CODE 8010-01-M
