[Federal Register Volume 64, Number 65 (Tuesday, April 6, 1999)]
[Notices]
[Page 16771]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8368]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41215; File No. SR-CBOE-99-04]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to New
Series of Options Based on the Standard and Poor's 100 Index
March 26, 1999.
I. Introduction
On January 21, 1999, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission'' or ``SEC''), 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 change the permissible range
of new series of Standard and Poor's 100 Index options (``OEX'') under
unusual market conditions. Notice of the proposed rule change appeared
in the Federal Register on February 23, 1999.\3\ The Commission
received no comments on the proposal. This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 41052 (February 12,
1999), 64 FR 8893.
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to amend CBOE Rule 24.9, Interpretation and
Policy .01(d), to increase the permissible range of additional series
that may be listed for OEX options during unusual market conditions.
Interpretation and Policy .01(d) currently requires that when the
Exchange introduces trading in a new expiration month, or when
additional series of options in an existing expiration month are
opened, the Exchange shall only list series of options with exercise
prices that are ``reasonably related to the current value of the
underlying index.'' In the case of OEX options, ``reasonably related to
the current value of the underlying index'' is defined to be within
eight percent of the current index value under normal market
conditions. Under unusual market conditions, ``reasonably related to
the current value of the underlying index'' is defined to be within ten
percent of the index value. The Exchange now proposes that, for options
on OEX, exercise prices within twenty percent of the current index
value, instead of within ten percent, be deemed ``reasonably related to
the value of the underlying index'' under unusual market conditions.
III. Discussion
After careful review, 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.\4\
In particular, the Commission believes the proposal is consistent with
Section 6(b)(5), in that it is designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system.\5\
---------------------------------------------------------------------------
\4\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes that the proposal should enable the CBOE to
respond to changing market conditions by listing OEX options series
that provide market participants with an effective means to manage risk
and implement their trading strategies. The Commission further believes
that the discretion to list additional series of OEX options should
help to ensure the consistent availability of index options series
tailored to meet the needs of investors during periods of market
volatility. Additionally, the CBOE's proposal strikes an appropriate
balance between accommodating the needs of market participants and
avoiding the excessive proliferation of options series.
The proposal affects only OEX options and the unusual market
conditions that would trigger the availability of additional OEX series
under the proposal occur infrequently. The CBOE represents that unusual
market conditions occur no more than once a month on average.\6\ To
help determine whether unusual market conditions exist, the Exchange
can look to a variety of factors and objective tools, including VIX, a
volatility indicator.\7\ Moreover, even when the CBOE determines that
unusual market conditions exist, the Exchange explains that customer
demand and market maker interest ultimately will determine how many
additional series will be listed.\8\ This should help to ensure
adequate liquidity in new series.
---------------------------------------------------------------------------
\6\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to
Nancy Sanow, Senior Special Counsel, Division of Market Regulation,
SEC, dated March 3, 1999 (``CBOE Letter'').
\7\ According to the Exchange, VIX currently is at approximately
28 to 30, and unusual market conditions may occur if VIX reaches
approximately 40 or above.
\8\ See CBOE Letter, supra note 6.
---------------------------------------------------------------------------
In addition to representing that the number of additional series
resulting from the proposal will not be significant, the CBOE does not
believe that any additional series will pose a capacity problem. In
this regard, the Commission notes that the Exchange retains the ability
to limit new series and remove existing series. In addition, the
Options Price Reporting Authority (``OPRA'') has represented that
OPRA's capacity is sufficient to meet the expected demands of the
additional strike prices.\9\
---------------------------------------------------------------------------
\9\ See CBOE Letter, supra note 6 and Letter from Joe P.
Corrigan, Executive Director, Options Price Reporting Authority, to
Stephanie C. Mullins, Attorney, Chicago Board Options Exchange,
dated February 9, 1999.
---------------------------------------------------------------------------
Accordingly, the Commission believes that the proposal should
provide the Exchange with flexibility to open additional index options
series and, at the same time, minimize capacity and continue to
appropriately limit the number of index options series that may be
outstanding at any one time. Indeed, the Exchange is not obligated to
open new series every time the index value changes, and the CBOE should
only open new series in a manner that is consistent with the
maintenance of a fair and orderly market.
IV. Conclusion
For the foregoing reasons, the Commission believes 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, with Section 6(b)(5).\10\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-CBOE-99-04) is approved.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8368 Filed 4-5-99; 8:45 am]
BILLING CODE 8010-01-M