24238 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

10 15 U.S.C. 78f(b)(5).

11 15 U.S.C. 78s(b)(2).

12 15 U.S.C. 78s(b)(2).

13 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3The Exchange’s Exercise Regulatory Circular

sets forth procedures and requirements regarding

the exercise of American-style, cash-settled index

options. In 1998, the CBOE filed with the

Commission the Exercise Regulatory Circular, See

Securities Exchange Act Release No. 40334 (August

18, 1998), 63 FR 45275 (August 25, 1998) (File No.

CBOE–98–34).

4See Letter from Arthur B. Reinstein, Counsel,

CBOE, to Hong-anh Tran, Attorney, Division of

Market Regulation (‘‘Division’’), SEC, dated May 10,

1999 (‘‘Amendment No. 1’’).

5Securities Exchange Act Release No. 41435 (May

21, 1999), 64 FR 29370 (June 1, 1999) (File No. SR–

CBOE–99–03).

6Currently, the Exchange trades only one type of

standardized American-style, cash-settled index

option contract, Standard & Poor’s 100 index

options (‘‘OEX index options’’). 7CBOE Rule 24.6, Days and Hours of Business. 8The Exchange is proposing to move the text of

CBOE Rule 11.1.05, which relates to the exercise of

American-style, cash-settled index options, to

proposed CBOE Rule 11.1.03(h) for ease of reference

for Exchange members. 9The Exchange is also proposing to reflect the

Commission’s 1999 approved rule changes to CBOE

Rule 11.1.05 and CBOE Rule 4.16(b) in an Exercise

Regulatory Circular. In 1999, the Commission

approved rule amendments to CBOE Rule 11.1.05

and CBOE Rule 4.16(b), which state that with the

exception of the last business day prior to

expiration, exercises of cash-settled index options

will be prohibited during any time when trading in

such options is delayed, halted, or suspended,

unless otherwise determined by the Exchange’s

President or his designee. The 1999 rule

amendments also stated that, notwithstanding this

prohibition, the exercise of a cash-settled index

option may be processed and given effect in

accordance with and subject to the rules of the OCC

while trading in an option is delayed, halted, or

suspended if it can be documented that the decision

to exercise the option was made during allowable

time frames prior to the delay, halt or suspension.

The Commission approved these rule amendments

in 1999, but the Exchange did not propose, at that

time, to reflect those rule amendments in an

Exercise Regulatory Circular. See Securities

Exchange Act Release No. 40951 (January 15, 1999),

64 FR 4482 (January 28, 1999) (File No. SR–CBOE–

98–33).

Accordingly, the Commission finds that

good cause exists, consistent with

section 6(b)(5) 10 and 19(b)(2) 11 of the

Act to accelerate approval of

Amendment No. 1 to the proposed rule

change.

III. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1, including whether Amendment No. 1

is consistent with the Act. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549–0609. 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

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, in Washington, DC. 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–99–

38 and should be submitted by May 16,

2000.

IV. Conclusion

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,12 that the

proposed rule change (SR–CBOE–99–

38), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.13

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10260 Filed 4–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42693; File No. SR–CBOE–

99–03]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. Relating to Option Exercise

Procedures

April 17, 2000.

On January 20, 1999, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or the ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) a proposed

rule change pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder.2

In its filing, CBOE proposes to amend

Exchange Rules 4.16 and 11.1 relating to

option exercise procedures for noncashsettled equity options and Americanstyle, cash-settled index options, as well

as to reflect in an Exercise Regulatory

Circular the proposed changes to

American-style, cash-settled index

options, and a change approved in a

prior Commission Order relating to

those options.3 On May 10, 1999, the

Exchange submitted to the Commission

Amendment No. 1 to the proposed rule

change.4 The proposed rule change and

Amendment No. 1 were published for

comment in the Federal Register on

June 1, 1999.5 The Commission received

no comments on the proposal. This

Order approves the proposed rule

change as amended.

I. Description of the Proposal

A. Exercise Procedures for AmericanStyle, Cash-Settled Index Options After

Certain Trading Halts and During a

Trading Resumption That May Follow

Such Trading Halts

The CBOE proposes to modify its

rules governing the exercise of

American-style, cash-settled index

options during certain trading halts. In

addition, if trading resumes following a

trading halt (such as by closing

rotation), the Exchange proposes to

permit exercises to occur during the

resumption of trading and for five

minutes after the close of the

resumption of trading. In particular, the

Exchange proposes to modify CBOE

Rules 11.1 and 4.16 to permit the

exercise of American-style, cash-settled

index options during a trading halt that

occurs at or after 3:00 p.m. (Central

Time).6 A number of index options are

traded on the Exchange from 8:30 a.m.

To 3:15 p.m. (CT),7 whereas the markets

for the equity securities underlying

those index options generally close for

trading by 3:00 p.m. (CT). CBOE Rule

11.1 governs the exercise of option

contracts, including index option

contracts, and provides that Exchange

members will follow the procedures of

the Options Clearing Corporation

(‘‘OCC’’), as well as those of the

Exchange, when exercising option

contracts. CBOE Rule 4.16 governs other

restrictions on options transactions and

exercises. Under CBOE Rule 11.1.05 8

and CBOE Rule 4.16(b), exercises of

cash-settled index options are

prohibited whenever trading in such

options is delayed, halted or suspended,

unless otherwise determined by the

Exchange’s President or his designee.9

The Exchange has long noted that one

of the distinctive characteristics of a

cash-settled option is that its exercise is

functionally equivalent to trading out of

the long position, and, conversely, the

assignment of a short option eliminates

Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices 24239

10Exercises of expiring American-style, cashsettled index options cannot be restricted in any

way on the last business day prior to their

expiration. See CBOE Rules 4.16 and 11.1.

11See CBOE Rule 11.1.03. See Securities

Exchange Act Release No. 29860 (October 25, 1991),

56 FR 56254 (November 1, 1991) (File No. SR–

CBOE–91–28).

12While implementing the standard five minutes

exercise window after a trading halt has been

announced would provide floor traders with

sufficient opportunity to exercise, such a small

window may not provide other market participants

with a sufficient opportunity to do so an would add

to the increased operational burdens of member

firms resulting from the trading halt itself.

13See proposed CBOE Rule 4.16(b)(iii) and

proposed CBOE Rule 11.1(h)(iii).

14The Exchange also proposes to reflect these

rule amendments in an Exercise Regulatory

Circular.

15Pursuant to a telephone conversation between

Arthur B. Reinstein, Counsel, CBOE, and Hong-anh

Tran, Attorney, Division, SEC, dated August 30,

1999.

the position as if it had been closed

through a purchase transaction. Absent

any restrictions upon exercise, holders

of long positions would be able to

unwind their positions by exercising

their options through the OCC during

trading halts and after the close of

trading. Because holders of short

positions are precluded from unwinding

their positions through trading (i.e., sell

their options) when trading on the

CBOE is closed or halted, they would be

at a disadvantage to holders of long

positions. These rules were developed

to reduce the advantage arising for those

in long positions over those in short

positions during trading halts (on any

days other than on the last trading day

before expiration Friday).10

Since 1991, the Exchange has

permitted holders of long index options

an additional five minutes subsequent

to the close of trading on the CBOE to

make their exercise decisions (i.e.,

generally up to 3:20 p.m. (CT)).11 The

Exchange believed that the five-minute

exercise window benefitted options

investors generally by fostering higher

quality markets. In particular,

permitting the exercise of Americanstyle, cash-settled index options up to

3:20 p.m. (CT) allows market

participants to make investment

decisions based on the evaluation of

their final positions after having

completed trading for the day.

Moreover, the additional five-minute

exercise period provides market

participants with additional time to

evaluate the closing prices of the

securities that comprise an index and to

determine whether or not to exercise

their positions. The Exchange adopted

the five-minute exercise window

notwithstanding that investors holding

short positions in index options would

not have the same opportunity to trade

(i.e., to unwind their options positions)

during this period as would holders of

long index positions, who would be able

to exercise through the OCC during the

same period. In doing so, the Exchange

believes that the benefits to the overall

American-style, cash-settled index

market from the five-minute exercise

period exceed any potential harm that

might result to holders of short index

options.

The Exchange now proposes to amend

the Exchange Rules 4.16 and 11.1

relating to exercise restrictions for

American-style, cash-settled index

options and to permit holders of long

index options to exercise through the

OCC during trading halts occurring at

our after 3:00 p.m. (CT). As mentioned,

the trading markets for the equity

securities underlying those index

options generally are closed for trading

by 3:00 p.m. (CT), and their closing

values are generally established by this

time. Market participants will seek to

exercise their index options by this

time. Many participations in the index

options market utilize the closing value

of the index to make trading and

hedging decisions (including

transactions in the related futures

market) contingent upon exercise of an

index option position or expected

assignment of a short position. Given

this, the Exchange believes that the

occurrence of a trading halt at or after

3:00 p.m. (CT) should not

fundamentally alter the ability of

holders of long index options to exercise

their options.12 While permitting the

exercise of American-style, cash-settled

index options during trading halts that

occur at or after 3:00 p.m. (CT) increases

the difference in treatment between

holders of short and long positions in

American-style, cash-settled index

options, the Exchange believes that any

increase in the difference of treatment is

incremental given that the Exchange

currently allows holders of long index

options positions an additional five

minutes after the close of the Exchange

to make their exercise decisions. The

Exchange represents that the additional

benefits that would be afforded to the

index market under the proposed rule

amendments outweighs the additional

differences in treatment between

holders of long and short index options

positions.

Furthermore, the Exchange proposes

that if trading resumes following a

trading halt (such as by closing

rotation), the Exchange would continue

to permit holders of long index options

in American-style, cash-settled index

options to make their exercise decisions

during the resumption of trading and for

a five-minute period after the close of

the resumption of trading. The

Exchange represents that permitting the

additional five-minute exercise period

after the close of the resumption of

trading is consistent with what the

Exchange currently permits as the

additional exercise period after the daily

close of trading on the Exchange.13

The Exchange generally will continue

to prohibit American-style, cash-settled

index option exercises during any

trading halt which occurs before 3:00

p.m., as the length of time required to

provide sufficient notice and

opportunity equally to all market

participants during an intra-day trading

halt would unfairly expand the

opportunity for holders of long index

option positions to exercise when short

option holders are prohibited from

trading.

B. Exercise Procedures for Americanstyle, Cash-settled Flex Index Options

The Exchange proposes to amend

CBOE Rules 4.16(b) and CBOE Rule

11.1.03 to treat both standardized and

FLEX American-style, cash-settled

index options in the same manner with

respect to exercise restrictions.14 In

particular, the Exchange proposes to

amend the language in proposed CBOE

Rules 4.16(b) and 11.1.03 to state that if

a trading delay, halt, suspension,

resumption, closing rotation, or

modified trading hours occurs in a

standardized index option (either

American-style or European-style), then

the Exchange will treat the related

American-style, cash-settled FLEX

Index Option (if any) for purposes of

exercise procedures as if that same

condition had occurred in the

American-style, cash-settled FELX

Index Option. The Exchange would then

apply the same exercise procedures to

the related American-style, cash-settled

FLEX Index Option as established for

the standardized index option following

the market condition. Although the

market condition will be deemed to

have taken place in the related

American-style, cash-settled FLEX

Index Option for the purpose of

triggering the same exercise procedures

relating to that market condition, the

market condition may or may not have

actually occurred with respect to the

American-style, cash-settled FLEX

Index Option.15

Thus, for example, if there is a trading

halt that occurs before 3:00 p.m. (CT) in

standardized Standard & Poor’s 500

Index (SPX) options (which are

European-style options and which can

be exercised only at expiration),

24240 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

16The Exchange represents that the rule

amendments would not actually cause a closing

rotation to occur in the American-style, cash-settled

SPX FLEX options. Pursuant to a telephone

conversation between Arthur B. Reinstein, Counsel,

CBOE, and Hong-anh Tran, Attorney, Division, SEC,

dated August 30, 1999.

17The Exchange presently sets forth in the same

Exercise Regulatory Circular the exercise

procedures relating to standardized and FLEX,

American-style, cash-settled index options.

18The exercise cutoff time for noncash-settled

equity options is 4:30 p.m. (CT) and is in effect on

expiration Friday for expiring contracts. Members

must not exercise through the OCC past this

exercise cutoff time unless one of the three

exceptions in CBOE Rule 11.1 applies. Members

who violate this rule are subject to disciplinary

action, including summary fines under CBOE Rule

17.50(g)(8).

19The Exchange has a rule relating to the

deadline for the delivery of exercise notifications

for American-style, cash-settled index options, but

no similar rule relating to the exercise cutoff time

for these options. See CBOE Rule 11.1.03.

20The OCC has separate rules regarding the cutoff

time by which exercise notices must be delivered

to the OCC by the clearing members. See OCC

Chapter VIII, (Exercise and Assignment).

exercises of American-style, cash-settled

SPX FLEX options would be prohibited

during the trading halt. Similarly, if

there is a trading halt in the

standardized SPX options that occurs at

or after 3:00 p.m. (CT), the Exchange

would deem that a trading halt has also

occurred in the related American-style,

cash-settled SPX FLEX options, and

would allow exercises of Americanstyle, cash-settled SPX FLEX options to

occur through 3:20 p.m. (CT).

Additionally, if there was a closing

rotation in the standardized SPX

options, the Exchange would deem that

a closing rotation has occurred in the

related American-style, cash-settled SPX

FLEX options for the purpose of

triggering the exercise procedures

relating to that condition, and would

allow exercises of American-style, cashsettled SPX FLEX options to occur

during the closing rotation for

standardized SPX options and for five

minutes thereafter.16

The Exchange represents that the

proposed amendment is consistent with

how the Exchange has historically

applied the exercise provisions that are

applicable in the above market

conditions to American-style, cashsettled FLEX Index Options. Hence, the

Exchange proposes to codify the

Exchange’s prior exercise practices as

they apply to American-style, cashsettled FLEX Index Options.17

C. Extension of Exercise Notification

Deadline and Cut-off-Time

The Exchange proposes to amend the

second provision of proposed CBOE

Rule 11.1.06(d) to grant the CBOE

President or his designee the authority

to extend the exercise notification

deadline for noncash-settled equity

options under unusual circumstances.

The Exchange also proposes to amend

CBOE Rule 11.1(b) and the first

provision within proposed CBOE Rule

11.1.06(d) to grant the President of

CBOE or his designee the authority to

extend the 4:30 p.m., exercise cutoff

time for noncash-settled equity options

under unusual circumstances.18 In such

case, the deadline for the delivery of an

exercise instruction, ‘‘contrary exercise

advice,’’ and ‘‘advice cancel’’ based on

proposed CBOE Rule 11.1.06(d) would

be the revised exercise cutoff time

designated by the President or his

designee. For example, on rare

occasions, the closing rotation in an

equity option has ended shortly before

4:30 p.m. (CT) (i.e., the normal exercise

cutoff time for these options). The

exchange believes that a late-ending

closing rotation delays a market

participant in taking the actions

necessary to make and process an

exercise decision. This proposal would

permit the President or his designee to

extend the exercise notification

deadline and the exercise cutoff time so

that market participants can have

adequate time to make informed

exercise decisions and to process them

under unusual situations.

The Exchange also proposes to permit

CBOE’s President or his designee to

extend the applicable deadline for the

delivery of ‘‘exercise advice’’ and

‘‘advice cancel’’ notifications pursuant

to CBOE Rule 11.1.03(c) for Americanstyle, cash-settled index options if

unusual circumstances are present.19

CBOE Rule 11.1.03 currently requires

members to notify the Exchange by 3:20

p.m. (CT) (or if trading hours are

extended or modified in the applicable

option class, no later than five minutes

after the close of trading on that day) of

their exercise decisions with respect to

American-style, cash-settled index

options and sets forth procedures for

providing such notification. The

Exchange represents that under certain

unusual circumstances, market

participants have had difficulty meeting

the 3:20 p.m. (CT) notification deadline.

For example, on rare occasions, the

reporting authority for an index has

been late in reporting the closing value

for the index. Consequently, market

participants have found it difficult on

those occasions to make and process

exercise decisions before the 3:20 p.m.

(CT) deadline. This amendment

proposes to amend CBOE Rule

11.1.03(c) to permit the President of

CBOE or his designee to extend the

applicable deadline for the delivery to

the Exchange of ‘‘exercise advice’’ and

‘‘advice cancel’’ notifications for

American-style, cash-settled index

options under unusual situations.

Under the Exchange’s current rules,

there is a time window following the

close of trading during which long

option holders are permitted to exercise

their option positions while at the same

time short option holders do not have

the ability to trade out of their positions.

Accordingly, as discussed above, one of

the inherent differences between

holding a long or short option position

is that there is a disparity between the

ability of long and short option holders

to take market action following the close

of trading. The purpose of the

Exchange’s exercise deadline for

American-style, cash-settled index

options and non-cash-settled equity

options, as well as the exercise cutoff

time for non-cash settled equity options

is to restrict this disparity to a limited

time period following the close of

trading in those situations in which long

option holders have the ability to take

action through the exercise or nonexercise of an option that can affect

their position in the market. Although

permitting the President of CBOE or his

designee the authority to extend the

applicable exercise deadline or cut-off

time in unusual circumstances would

marginally increase this existing

disparity, the Exchange believes that

any potential detriment that may result

from the implementation of the

foregoing rule would be far exceeded by

the benefit to the marketplace as a

whole that is derived from allowing the

President of CBOE or his designee to

permit market participants sufficient

time to make informed exercise

decisions and to process their exercise

decisions under unusual circumstances.

The Exchange further notes that the

President or his designee will only

exercise this authority in unusual

circumstances and thus that extensions

in the applicable exercise deadline or

cut-off time will not occur often. The

Exchange represents that the President

or his designee would in no event

extend the applicable exercise deadline

or cutoff time beyond the exercise cutoff

time required by the OCC.20

D. Documentation Evidencing Timely

Exercise Determinations Made Prior to a

Trading Delay, Halt or Suspension

As discussed above, Exchange

members are expected from the general

prohibition on exercising Americanstyle, cash-settled index options during

trading halts, delays, or suspensions

Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices 24241

21See Exercise Regulatory Circular, Section 11.

22 15 U.S.C. 78f(b)(5).

23 In approving the proposal, the Commission has

considered its impact on efficiency, competition,

and capital formation 15 U.S.C. 78c(f).

24See Securities Exchange Act Release No. 40334

(August 18, 1998), 63 FR 45275 (August 25, 1998)

(SR–CBOE–98–34).

25The Commission also notes that the Exchange

is moving the text of CBOE Rule 11.1.05 (which

related to the procedures for exercise of Americanstyle, case-settled index options) to proposed CBOE

Rule 11.1.03(h). CBOE Rule 11.1.03 sets forth the

exercise procedures and requirements of Americanstyle, cash-settled index options. The Commission

believes that these changes do not substantially

alter the meaning of, and will make it easy for

Exchange members to refer to these rules because

all the provisions relating to the exercise

procedures for American-style, cash-settled index

options will be set forth under the same rule.

provided they can document that the

decision to exercise was made prior to

the trading halt, delay, or suspension.

Currently, the Exchange accepts as

evidence of timely exercises internal

exercise memoranda prepared by CBOE

members, a copy of ‘‘exercise advices’’

transmitted electronically to OCC via

OCC’s Clearing Management and

Control System (C/MAS), or a member’s

‘‘exercise advice’’ previously submitted

to the Exchange.

The Exchange now believes that it

would be preferable to rely on, and

encourage the most objective evidence

available as to, the timing of an exercise

decision. For this reason, the Exchange

proposes to no longer ordinarily accept

internal exercise memoranda prepared

by CBOE members. The Exchange will

continue to accept ‘‘exercise advices’’

transmitted via C/MAS, or a member’s

copy of an exercise advice previously

submitted to the Exchange as evidence

of timely exercise decisions made prior

to a trading delay, or suspension.21

II. Discussion

After careful consideration, the

Commission has determined to approve

the Exchange’s proposal, finding that it

is consistent with Section 6(b)(5) of the

Act.22 Section 6(b)(5) provides that the

rules of an exchange be designed to

foster cooperation and coordination

with persons engaged in regulating,

clearing, settling, and processing

information regarding the exercise of

outstanding option contracts, to remove

impediments to and perfect the

mechanisms of a free and open market,

to promote just and equitable principles

of trade, and to protect investors and the

public interest.23

A. Exercise Procedures for AmericanStyle, Cash-Settled Options After

Certain Trading Halts and During a

Trading Resumption That May Follow

Such Trading Halt

First, the Commission believes that

the proposal relating to the ability of

market participants to exercise

American-style, cash-settled index

options during a trading halt occurring

at or after 3:00 p.m. (CT) is appropriate

based on the reasons set forth below.

The Commission believes that the

occurrence of a trading halt at or after

3:00 p.m. (CT) should not

fundamentally alter the ability of

holders of long index options to exercise

through the OCC. As discussed above,

the trading markets for the equity

securities underlying index options

generally are closed for trading by 3:00

p.m. (CT), thereby establishing the value

of a given index. By this time, market

participants are already watching the

market for opportunities to exercise

their index options. Many participants

in the index options market use the

closing value of the index to make

trading and hedging decisions

(including transactions in the related

futures market) contingent upon

exercise of an index option position or

the expected assignment of a short

position. Thus, the Exchange believes

that the occurrence of a trading halt at

or after 3:00 p.m. (CT) should not

fundamentally alter the ability of

holders of long index options to exercise

their options.

Because the Exchange currently

allows its members an additional five

minutes after the close of trading for the

holders of long index options to make

their exercise decisions, the

Commission believes that the

implementation of the above rule

amendment would only marginally

increase the exercise time period for

holders of long index options to exercise

through the OCC. The Commission

believes that permitting holders of long

positions in an American-style, cashsettled index, option to submit their

exercise decisions during a trading halt

occurring at or after 3:00 p.m. (CT)

would remove the impediments to, and

perfect the mechanism of, a free and

open market during such a halt.

The Commission also believes that the

proposed amendment to permit exercise

of standardized American-style, cashsettled index options during a trading

resumption (such as a closing rotation)

following a trading halt occurring at or

after 3:00 p.m. (CT), and for a five

minute period thereafter, is appropriate

because it will promote just and

equitable principles of trade. First, the

Commission believes that the proposed

amendment will reduce potential

confusion among CBOE members and

customers during a trading resumption

that may follow a trading halt occurring

at or after 3:00 p.m. (CT). Second, the

Exchange presently permits an

additional five-minute window after the

close of options trading on the Exchange

for market participants to make exercise

decisions. The Commission believes

that the proposed amendment, which

will also permit the additional fiveminute window after the close of a

trading resumption following a late

trading halt, will maintain consistency

among the rules of the Exchange, and

will promote just and equitable

principles of trade.

B. Options Exercise Procedures for

American-Style, Cash-Settled Flex Index

Options

The Commission also believes that the

proposed amendment to treat all

American-style, cash-settled index

options (standardized and FLEX) in the

same manner with regard to exercise

procedures is reasonable because it

promotes just and equitable principles

of trade. In particular, CBOE’s Exercise

Regulatory Circular, which the

Exchange filed with the Commission in

1998,24 currently sets forth the policies

regarding exercise procedures and

requirements for all American-style,

cash-settled index options. The

Exchange has always treated all

American-style, cash-settled index

options in the same manner with

respect to exercise procedures.

However, certain rules relating to FLEX

options would make it impossible for all

American-style, cash-settled index

options to be treated the same for

exercise procedure purposes. For

example, the CBOE cannot apply to

American-style, cash-settled FLEX

Index Options its proposed rule

regarding exercise procedures during a

closing rotation and for five minutes

thereafter such rotation because CBOE

Rule 24A.3 currently does not permit

opening or closing rotations to be

conducted in FLEX options.

Accordingly, the CBOE is proposed to

change CBOE Rules 4.16(b) and

11.1.03 25 to deem, for purposes of the

exercise procedures, a trading delay,

halt, suspension, resumption, closing

rotation, or modified trading hours to

take place in the American-style, cashsettled FLEX Index Options, anytime

the same condition occurs in the related

American-style, cash-settled

standardized index option (either

American-style or European-style). The

Commission believes that the proposal

is appropriate and necessary to ensure

that equal treatment of two similar

options products.

24242 Federal Register / Vol. 65, No. 80 / Tuesday, April 25, 2000 / Notices

26See Securities Exchange Act Release No. 40334

(August 18, 1998), 63 FR 45275 (August 25, 1998)

(SR–CBOE–98–34).

26 15 U.S.C. 78s(b)(2).

27 17 CFR 200.30–3(a)(12)

1 15 U.S.C. 78s(b)(1).

2Securities Exchange Act Release No 42504

(March 8, 2000), 65 FR 14003.

3Letters from Stephen J. Dolmatch, Executive

Vice President, General Counsel, and Secretary,

Chase Mellon Financial Group (April 3, 2000); John

Cirrito, Chief Operating Officer and Managing

Director, ING Barings (April 5, 2000); William

Talbot, Vice President, Pershing (April 5, 2000);

Jerome Clair, Chairman, Securities Industry

Association (‘‘SIA’’) Operations Committee, SIA

(April 6, 2000); Larry E. Thompson, Managing

Director and Deputy General Counsel, DTC (Apri 7,

2000); Charles V. Rossi, Division President,

EquiServe Limited Partnership (April 19, 2000).

4For a description of DRS limited participants,

refer to Securities Exchange Act Release No. 37931

(November 7, 1996), 61 FR 58600 (November 15,

1996).

5For a description of DRS and Profile, see

Securities Exchange Act Release No. 35038

(December 1, 1994), 59 FR 63652 (concept release

relating to DRS); Securities Exchange Act Release

No. 41862 (September 10, 1999), 64 FR 51162

(September 21, 1999) (order approving

implementation of the Profile Modification feature

of DRS); Securities Exchange Act Release No. 42366

(January 28, 2000), 65 FR 5714 (February 4, 2000)

(order approving an interpretation of an existing

rule pertaining to DRS).

6 DTC’s procedures governing the use of Profile in

PTS are attached as Exhibits 3 and 4 to DTC’s filing.

Copies of DTC’s proposed rule change and the

attached exhibits are available at the Commission’s

Public Reference Section or through DTC. In

addition, DTC understands that the DRS Committee

is developing guidelines to the use of DRS. When

such guidelines have been approved by the DRS

Committee, DTC will work with the DRS Committee

to implement the guidelines. Members of the DRS

Committee include representatives from the

American Society of Corporate Secretaries,

Corporate Transfer Association, Securities Industry

Association, Securities Transfer Association, and

DTC.

C. Extension of Exercise Notification

Deadline and Exercise Cutoff

The Commission notes that the

purpose of the Exchange’s exercise

notification deadline 26 for Americanstyle, cash-settled index options, and

noncash-settled equity options, as well

as the exercise cutoff time for noncashsettled equity options is to limit the

differences in the ability of long options

holders as compared to short options

holders to offset their positions through

exercise following the close of trading.

The Commission recognizes that

permitting the President or his designee

to extend the applicable exercise

deadline or cut-off time in unusual

circumstances will marginally increase

this existing disparity. The Commission,

however, believes that any potential

detriment that may result from

increasing the disparity between long

and short options holders will be

exceeded by the benefit of allowing the

President or his designees to give

market participants additional time in

which to make and process exercise

decisions under unusual circumstances.

Furthermore, the Commission

believes that the proposed rule change

will promote efficient exercise

procedures for both equity and index

options by permitting market

participants the opportunity to make

informed decisions before exercising

their options under unusual

circumstances. For example, it would be

an unusual circumstance if the reporting

authority was late in reporting the

closing value of an American-style,

cash-settled index option, or if there

were not enough time to process an

exercise decision for a noncash-settled

equity option due to a late closing

rotation that ended just before the

normal deadline for submitting the

exercise notice to the Exchange. These

provisions will also promote just and

equitable principles of trade because

public customers or Exchange members

should not have to make exercise

decisions based on incomplete

information about the index value (in

the case of index options) and should

have time to process their exercise

decisions (in the case of equity options).

The Commission also notes that the

Exchange represents that its President or

his designee will only exercise this

authority in unusual circumstances, and

that extensions in the applicable

exercise deadline or cutoff time will not

occur often. The Exchange further

represents that the Exchange’s President

or his designee will in no event extend

the applicable exercise deadline or cutoff time beyond the time required by the

OCC for submission of exercise

instructions by its clearing members.

D. Documentation Evidencing Timely

Exercise Determinations Made Prior to a

Trading Delay, Halt, or Suspension

Finally, the Commission believes that

it is reasonable for the Exchange to no

longer ordinarily accept internal

exercise memoranda prepared by CBOE

members as evidence of timely exercise

determinations of American-style, cashsettled (standardized, or FLEX) index

options made prior to a trading delay,

halt, or suspension. The Commission

believes that by allowing only objective

evidence to indicate timely exercise

determinations, the proposal promotes

the ability of the Exchange to verify the

authenticity of the exercise documents.

III. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,27 that the

proposed rule change (SR–CBOE–99–

03) is approved, as amended.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.28

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–10262 Filed 4–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42704; File No. SR–DTC–

00–04]

Self-Regulatory Organizations; the

Depository Trust Company; Order

Granting Approval of a Proposed Rule

Change Relating to the Profile

Modification Feature of the Direct

Registration System

April 19, 2000.

On February 28, 2000, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’), pursuant to section

19(b)(1) of the Securities Exchange Act

or 1934 (‘‘Act’’),1 a proposed rule

change. Notice of the proposal was

published in the Federal Register on

March 15, 2000.2 The Commission

received five comment letters in

response to the proposed rule change.3

The Commission is publishing this

order to grant approval of the proposed

rule change.

I. Description

The Profile Modification System

(‘‘Profile’’), a feature of the Direct

Registration System (‘‘DRS’’), is an

electronic messaging system that allows

a DTC participant (i.e., generally a

broker-dealer) or a DRS limited

participant (i.e., a transfer agent) 4 to

submit instructions to transfer investors’

book-entry position from one to the

other.5 The primary purpose of DTC’s

filing is to modify Profile by

incorporating the use of an electronic

screen-based indemnification. As

described more fully below, the

inclusion of the electronic

indemnification in Profile enables DTC

to make DRS fully operational and

available for use by qualified issuers,

DTC participants, and DRS limited

participants. DTC’s filing also

establishes the procedures governing the

use of Profile in the Participant

Terminal System (‘‘PTS’’) 6 and specifies

the fees connected with the use of

Profile.

A. Background

Since 1996 when the New York Stock

Exchange, Inc. (‘‘NYSE’’) and the

National Association of Securities