[Federal Register Volume 61, Number 204 (Monday, October 21, 1996)]
[Notices]
[Pages 54693-54695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26857]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37815; File No. SR-CBOE-96-61]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Board Options Exchange, Incorporated Relating to the Opening of New
Series of OEX Index Options
October 11, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on October 9, 1996, 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 and II below, which Items have been prepared by
the self-regulatory organization. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons and to grant accelerated approval of the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 24.9, Interpretation and Policy
.01 regarding the listing of additional series of index options on the
Standard & Poor's 100 (``S&P 100'' or ``OEX'') Index options in order
to take into account the signficantly increased levels of the S&P 100
since the listing procedures were implemented. The text of the proposed
rule change is available at the Office of the Secretary, CBOE and at
the Commission.
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 IV below. The self-regulatory organization
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 amend the
procedures for listing additional series of index options on the S&P
100 Index (OEX ) in order to take into account the
significantly increased levels of the S&P 100 Index since these
procedures were first put in place. Under existing Interpretation and
Policy .01 under Exchange Rule 24.9, when the Exchange introduces
trading in a new expiration month for a class of OEX options, it may
initially list series of options with strike prices at four strike
price intervals above and four strike price intervals below the current
value of the Index. Subsequently, as the value of the Index moves up or
down, the Exchange may list additional series of options (up until the
fifth day prior to expiration), such that under ordinary circumstances
there may be available for trading series of OEX options with a given
expiration date having strike prices at up to five strike price
intervals above and up to five strike intervals below the current value
of the Index. In unusual market conditions (such as at times of
heightened volatility) additional series may be added at up to six
strike price intervals above and six strike price intervals below the
current value of the Index. Of course, series of options previously
opened continue to be available, so that there may be more than the
stated number of series traded at strike price intervals opposite to
the direction in which the index value has moved.
For example, if a new expiration month is introduced in an OEX
option at a time when the current value of the S&P 100 Index is 598, so
long as the strike price interval for OEX options remains at 5 points,
series of OEX options will be available at 580, 585, 590 and 595 (four
intervals below the current Index value) and at 600, 605, 610, and 615
(four intervals above the current Index value). If the value of the
Index then moves to 608, under normal conditions the Exchange would be
able to add series with strike prices of 620, 625 and 630, which,
together with the 610s and the 615s, provide five series above the
current level of the Index. In unusual market conditions, the Exchange
could add sixth series with a strike price of 635. In this example,
there would continue to be traded six series with strike prices below
the current level of the Index (that is, the 580, 585, 590, 595, 600
and 605 series).
When the current methodology for adding series of OEX options was
adopted in 1992, the S&P Index was at 380. This meant that five
intervals (25 points) constituted over 6\1/2\% of the value of the
index, and six intervals (30 points) constituted almost 8% of the index
value.\3\ Since that time, the value of the S&P 100 Index has increased
considerably, to the point where it has recently exceeded 670. At this
level, five strike price intervals constitutes less
[[Page 54694]]
than 3\3/4\%, and six intervals less than 4\1/2\%, of the value of the
Index.
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\3\ This was consistent with the prior methodology 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
265, thus allowing OEX options to be added up to 7\1/2\% away from
the market.
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Application of the current rule, together with a sustained bull
market, has led to an absence of OEX call series that are more than
nominally out-of-the-money, since even under unusual market conditions,
which the Exchange has determined now exist, an OEX call can be only a
little over 4% out-of-the-money when first opened for trading, as
contrasted with approximately 8% out-of-the-money at times when the
level of the Index was lower. And, so long as the Index continues to
move in a generally upward direction, out-of-the-money calls become
less out-of-the-money with the passage of time. The adverse
consequences of this trend is exemplified in at least three ways: (1)
the number of OEX calls eligible for trading through the Exchange's
automatic execution system (RAES) is limited; (2) institutional
customers, which often apply specific parameters to conservative
options strategies that involve writing out-of-the-money OEX calls, are
limited in their ability to pursue these strategies; and (3) retail
customers have fewer low-priced OEX calls available to trade. Each of
these negative consequences is discussed in turn below.
(1) Fewer OEX series on RAES. The guidelines followed by the OEX
Floor Procedure Committee in designating series of OEX options as
eligible for trading on RAES provide that up to eight series in each of
the two near term expiration months may be so designated, provided the
option in any designated series is priced below $7. Historically, when
the index was at a lower level and thus further out-of-the-money series
were available as illustrated above, customers have had as many as
sixteen series \4\ of RAES-eligible OEX calls to choose from. Recently,
however, there have been as few as six RAES-eligible OEX calls, four in
the near term month and only two in the next-out expiration. This, of
course, reflects that at only 4% out-of-the-money an OEX call with any
significant time remaining until expiration will have a price above the
$7 cutoff.
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\4\ The proposed rule change as originally filed incorrectly
states that in the example above, customers have had as many as
fourteen series of RAES-eligible OEX calls to choose from. Telephone
conversation between Tim Thompson, CBOE, and John Ayanian, SEC on
October 11, 1996.
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(2) Institutional covered writing curtailed. The Exchange has
recently observed a decline in institutional OEX activity. When looking
into possible causes, the Exchange learned that some institutional
customers follow strategies involving the writing of out-of-the-money
OEX calls as a hedge against a diversified stock portfolio. In some
cases, these strategies require that the calls written must be at least
5% out-of-the-money. Obviously, if the furthest out-of-the-money OEX
call is only 4% out-of-the-money, this strategy cannot be pursued.
(3) Lower-priced OEX series unavailable for retail customers. The
Exchange has long noticed that OEX order flow from retail customers is
concentrated in options priced below $5, and that when the number of
available lower priced options increases, so does retail order flow.
Under current index levels in light of the existing restrictions under
Interpretation and Policy 24.9.01, there are a few low price OEX call
options available with any significant time remaining before
expiration, such that at times there are no OEX calls available at less
than $6 premiums having more than two months remaining until
expiration. For example, recently the least expensive third month OEX
call was offered at 6\5/8\, and the least expensive fourth month call
at 9\1/2\. The effect of this is to preclude retail investors from
participating in the OEX call market, except at higher than desired
price levels.
In response to these concerns, CBOE is now proposing to change the
measure of when additional series of OEX options may be traded from the
current inflexible test based on the number of strike price intervals
away from the market to a more flexible test which measures the extent
to which an away from the market series may be opened by reference to a
percentage of the current value of the index. Based on historical
patterns, it is proposed that under ordinary conditions the Exchange
should be able to add additional series of OEX options that are as much
as 8% away from the market, and under unusual conditions it should be
able to add series that are as much as 10% away from the market.\5\
Applying these percentages to current index levels, there could be as
many as ten series \6\ of OEX options above and below the market under
normal circumstances, and up to 13 series in unusual circumstances.
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\5\ This proposed test would apply only to OEX. All other index
options are currently subject to Interpretation and Policy .05 under
Rule 24.9, which applies a percentage test, subject to a maximum
number of points, to adding away from the market series. Under that
test, for all but long term options, the percentages are 15% under
normal conditions and 30% where there is ``demonstrated customer
interest'' in additional strike prices.
\6\ The proposed rule change, as originally filed, incorrectly
states that there would be eight strikes at current values.
Telephone conversation between Tim Thompson, CBOE, and Janice
Mitnick, SEC on October 10, 1996.
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The number of additional series that will result from this proposed
rule change, which affects OEX options only, will not be significant.
For this reason, CBOE does not believe that the proposed change raises
any capacity issues. In any event, with prior notice CBOE would
continue to have the ability to delist series that become inactive if
the market were to move away from exercise price levels at which the
series were previously opened. Indeed, CBOE has recently acted to
delist over 400 inactive series on this basis.
2. Statutory basis. By responding to the current historically high
values of the S&P 100 Index in a manner that will increase the
availability to investors of lower priced OEX options, the proposed
rule change is consistent with the provisions of Section 6 of the Act,
and Section 6(b)(5) in particular, in that it will promote just and
equitable principles of trade, will protect investors and the public
interest, and will remove impediments to and perfect the mechanisms of
a free and open market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange states that it believes that the proposed rule change
will impose no 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
proposed rule change.
III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Exchange has requested that the proposed rule change be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. 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, with
the requirements of Section 6(b) of the Act. Specifically, the
Commission believes that the proposal will enable the CBOE to respond
to changing market conditions, and list index options series that
provide market participants with an effective means to transfer risk
and implement their trading strategies. The Commission believes that
the discretion to list
[[Page 54695]]
additional series of index options will help to ensure the consistent
availability of index options series tailored to meet the needs of
investors during periods of market volatility. In addition, the
Commission notes the CBOE's proposal is similar to Rule 24.9,
Interpretation and Policy .05 which applies a percentage test, subject
to a maximum of 15%, for adding away from the market series.\7\
Further, the rule allows CBOE to use a maximum of 30% for adding series
when there is ``demonstrated consumer interest'' in additional strike
prices.\8\ Finally, American Stock Exchange (``Amex'') Rule 930C(b)
allows the Amex to list additional series of the same class of index
options as the numerical index value of the underlying stock index
moves substantially from the initial exercise price or prices.
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\7\ The 15% maximum applies to all index options (excluding
OEX), but not to long term options. CBOE Rule 24.9, Interpretation
and Policy .05. See Securities Exchange Act Release No. 31683
(December 31, 1992), 58 FR 3307 (order approving SR-CBOE-92-36).
\8\ CBOE Rule 24.9, Interpretation and Policy .05. Again, this
standard applies to all index options (except OEX), but not to long
term options.
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The Commission believes that the CBOE's proposal strikes a
reasonable balance between accommodating the needs of market
participants and avoiding the excessive proliferation of options
series. In this regard, the proposal provides that the options price of
each series of options opened for trading shall be reasonably related
to the current value of the underlying index, as discussed below. The
proposed rule change also allows the Exchange to open additional series
of index options for trading only after a substantial movement in the
value of the underlying index.\9\
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\9\ The Commission notes, however, that the Exchange is not
obligated to open new series every time the index value changes.
Opening of new series must be done in a manner that is consistent
with the maintenance of a fair and orderly market.
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The Commission believes that the change in the level of the S&P 100
Index since the series listing rules were put into place has affected
the availability of series of options on the index. More specifically,
CBOE states that when the methodology for adding series of options was
adopted in 1992, the S&P 100 Index was at 380. At that time, the
options available under normal market conditions, five intervals (25
points), constituted over 6\1/2\% of the value of the index. Further,
the options available under the standard for unusual market conditions,
six intervals (30 points), constituted almost 8% of the index value at
the time the standards were implemented.
The S&P 100 Index has recently exceeded 670. Under the current
standard, five strike price intervals constitute less than 3\3/4\% of
the index, and six intervals constitute less than 4\1/2\% of the value
of the index. The proposed rule will permit the addition of options
series at 8% away from the market and, under unusual market conditions,
as much as 10% away from the market. Using current index levels, there
could be as many as ten series of OEX options above and below the
market under normal circumstances, and up to 13 series in unusual
market conditions. The Commission believes that these requirements
provide the Exchange with the flexibility to open additional index
options series and, at the same time, appropriately limit the number of
index options series that may be outstanding at any one time. In
addition, the Commission notes that although the proposal permits the
CBOE to open additional index option series, the CBOE retains the
discretion to list fewer series than those allowed under the
proposal.\10\
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\10\ See supra note 9.
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The CBOE has represented that due to the fact that this proposed
rule change applies only to OEX options, the number of additional
series will not be significant. The Options Price Reporting Authority
has represented that CBOE's current system capacity is sufficient to
meet the expected demands of the additional strike prices.\11\
Nevertheless, the Commission requests that the CBOE monitor the volume
of additional series listed as a result of this rule change and the
effect of these additional series on the capacity of CBOE's, and OPRA's
and vendors' automated systems. The Commission encourages the CBOE to
exercise its available discretion when appropriate to delist inactive
series that have no open interest.
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\11\ See Letter from Joe Corrigan, OPRA, to Mike Walinskas,
Senior Special Counsel, Office of Market Supervision, Division of
Market Regulation, SEC, dated October 11, 1996.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. Specifically, as stated above,
the Commission previously approved a CBOE rule similar to the proposed
rule,\12\ and believes that the proposed rule change raises no new
regulatory issues. Further, the Commission believes that the proposed
rule will help the CBOE to accommodate the needs of investors by
helping to ensure the availability of a proper range of option strikes.
Accordingly, the Commission believes, consistent with Section 6(b)(5)
of the Act, that good cause exists to approve the proposed rule change
on an accelerated basis.
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\12\ Securities Exchange Act Release No. 31683 (December 31,
1992), 58 FR 3307 (approving CBOE-92-36).
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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, 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-CBOE-96-61 and
should be submitted by November 12, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-96-61) is hereby
approved on an accelerated basis.
\13\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret McFarland,
Deputy Secretary.
[FR Doc. 96-26857 Filed 10-18-96; 8:45 am]
BILLING CODE 8010-01-M