Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36185

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the CBOE corrected the

filing number, changing it from SR–CBOE–99–02.

See letter from Christopher R. Hill, Attorney, Office

of Enforcement, CBOE, to Nancy Sanow, Assistant

Director, Division of Market Regulation,

Commission, dated February 24 (‘‘Amendment No.

1’’).

procedure for affecting a clean-up sale at

a single price outside the APQ is fairest

to all parties and, accordingly, does not

propose to amend this process.

The Exchange is proposing to adopt

eQPriority on a six-month pilot program

basis to assess its benefits and costs.

2. Statutory Basis

The proposed rule change is

consistent with section 6(b) of the Act

in general and furthers the objectives of

section 6(b)(5) in particular in that it is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and, in general, to protect

investors and the public interest; and is

not designed to permit unfair

discrimination between customers,

issuers, brokers and dealers.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The proposed rule change will impose

no burden on competition not necessary

or appropriate in furtherance of the

purposes of the Act.

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. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change 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 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 in Washington, D.C. Copies of

such filing will also be available for

inspection and copying at the principal

office of the Amex. All submissions

should refer to File No. SR–Amex–00–

07 and should be submitted June 28,

2000.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14259 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42857; File No. SR–CBOE–

00–02]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Chicago Board

Options Exchange, Inc. Governing the

Final Settlement Value of Index

Options in the Event of a Primary

Market Closure

May 30, 2000.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

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

notice is hereby given that on February

15, 2000, the Chicago Board Options

Exchange, Inc. (‘‘CBOE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which Items

have been prepared by the Exchange.

On February 25, 2000, the CBOE

submitted Amendment No. 1 to the

proposed rule change. 3 The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons and to

approve the proposal on an accelerated

basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to amend its rules

governing the settlement procedures for

its index options in certain unusual

circumstances. The text of the proposed

rule change is available at the CBOE and

at the Commission’s Public Reference

Room.

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

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 CBOE 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

Based on recent events, the Exchange

proposes to change settlement

procedures for index options when a

primary market for underlying stocks in

an index does not open on the

scheduled settlement day. Under such

circumstances, the proposed rule

change will allow the use of the next

available opening prices for the affected

underlying securities to calculate the

settlement value of the index options.

On Thursday, September 16, 1999, it

was feared that the New York Stock

Exchange, Inc. (‘‘NYSE’’) would not

open for business the next day as

Hurricane Floyd traveled up the Eastern

seaboard. In the event that the NYSE

had not opened on Friday, September

17, an expiration Friday, the settlement

of index options and futures contracts

would have been affected. A review of

this situation demonstrates the critical

need for this rule change.

Current CBOE index option

settlement rules do not expressly

address a situation when an entire

primary market, such as the NYSE, fails

to open for business. The closest

applicable rules, such as CBOE Rule

24.9(a)(4), provide that a specific

underlying security in an index does not

open, the last reported sale price of such

a security will be used to determine the

36186 Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices

4See CME Rule 4003.A. In part, CME Rule 4003.A

states, ‘‘If the primary market for a component stock

in the index does not open on the day scheduled

for determination of the Final Settlement Price,

then the price of that stock shall be determined, for

the purposes of calculating the Final Settlement

Price, based on the opening price of that stock on

the next day that its primary market is open for

trading.’’ 5 15 U.S.C. 78f(b)(5).

settlement price of index options. Thus,

if Hurricane Floyd had prevented the

NYSE from opening on Friday,

September 17, the final settlement value

of September index options would have

been established by looking backward to

the previous day’s closing prices for

NYSE stocks (i.e., the closing prices on

Thursday, September 16.)

This ‘backward focus’ of the CBOE

index option settlement rules threatened

to cause severe difficulties during the

Hurricane Floyd situation, both for

investors who traded stock index

options against the underlying stocks as

well as those who traded the index

options against index futures. Both

groups of investors rely upon the final

settlement value of index options to

converge with the corresponding values

of the underlying stock index or stock

index future. For both groups, however,

the backward focus of the CBOE index

option settlement rules threatened to

prevent this convergence in September.

Many public customers and market

makers use stock index options to hedge

‘‘cash’’ positions they hold in the stocks

which make up the index. Because

current CBOE settlement rules would

have looked backwards to the Thursday,

September 16, closing prices of NYSE

stocks to determine the final settlement

value of September stock index options

if the NYSE had not opened on Friday,

September 17, investors who wished to

make sure their stock position

converged with their option position in

the event of a Friday NYSE closure

would have had to exit their NYSE stock

positions that Thursday.

Obviously, however, no investor

could know for certain on Thursday

whether weather conditions on Friday

would prevent the opening of the NYSE.

Thus, the backward focus of the current

CBOE settlement rule forced investors

who wished to stay hedged to guess

about the future. If they guessed that

Hurricane Floyd would keep the NYSE

closed on Friday, they would have to

exit their stock positions on Thursday.

If they guessed that Floyd would not

close the NYSE, they would hold their

stock positions until Friday. Either way,

if they guessed wrong, their stock and

option positions would not converge at

expiration, and they would be exposed

to the very market risk they had sought

to use options to avoid.

Public customers and market makers

that trade index options against stock

index futures faced similar difficulties.

For example, numerous investors trade

the SPX (the index option based on the

S&P 500 Stock Index) against the S&P

500 future, which trades at the Chicago

Mercantile Exchange, Inc. (‘‘CME’’).

Unlike CBOE’s settlement rules, the

CME’s settlement rules for the S&P 500

future are forward-focused. If a primary

market for a component stock in the

S&P 500 Index does not open on the day

scheduled for determination of the Final

Settlement price of the S&P 500 future,

then the price of that stock is

determined, for the purposes of

calculating the Final Settlement Price of

the future, based on the opening price

of that stock on the next day that its

primary market is open for trading.4

Thus, if Hurricane Floyd had

prevented the NYSE from opening on

Friday, September 17, the final

settlement value of the September S&P

500 futures would have been

established under CME rules according

to the opening price that following

Monday, September 20, of those stocks

which had not traded on Friday. At the

same time, the final settlement value of

the SPX options would have been

established under CBOE rules according

to the closing price of those stocks on

Thursday, September 16. In other

words, the final settlement values of the

September SPX options and the

September S&P 500 futures would most

likely have differed, rather than

converged.

Had this occurred, the Exchange

believes that it would have affected a

significant number of SPX traders (both

public customers and market makers)

because a lot of them hedge their option

positions with S&P 500 futures

contracts. Had the S&P futures and the

SPX not converged at expiration on

Friday, September 17, these traders

could have faced significant unexpected

exposure to market risk.

The problems detailed above can be

prevented if the CBOE changes its index

option settlement rules to be forwardfocused. If such a rule had been in place

for SPX options on Thursday,

September 16, no public customer or

market maker would have been forced

to guess on Thursday about the impact

of Hurricane Floyd on Friday. If weather

had shut the NYSE down until Monday,

September 20, the final settlement value

of the September SPX options would be

calculated using the Monday opening

prices of the NYSE stocks. Any investor

using SPX options to hedge stock

positions in the S&P 500 Index could

have held their stock positions until

they knew what was going to happen on

Friday. Even if the NYSE had been

closed that day, they could have simply

exited their stock positions with

confidence on Monday simply by

entering ‘‘Market on Open’’ orders for

all affected stocks. Further, a forwardfocused settlement rule in cases of

primary market closure would also have

assured convergence at settlement

between the value of index options and

index futures.

For all the above reasons, there is a

strong consensus among market

participants consulted by the Exchange

that the Exchange should change its

index option settlement rules to be

forward-focused, and this proposed rule

change achieves that in its amendment

of CBOE Rule 24.9(a)(4) and its addition

of the new CBOE Rule 24.7(e). The

provision set forth in the proposed new

Rule 24.7(e) would apply to all index

options traded on the Exchange. In the

event that a primary market for one or

more securities underlying a current

index does not open for trading on a

given day, the price of such securities

shall be determined, for purposes of

calculating the current index value at

expiration, by reference to the opening

price of those securities on the next day

that their primary market reopens for

trading.

This provision also recognizes the

authority of the Options Clearing

Corporation (‘‘OCC’’) to establish a final

settlement value for index options in the

event of a primary market closure

pursuant to its Rules and By-Laws. The

proposed rule change makes clear that

such action by the OCC would take

precedence in determining any final

index settlement value.

2. Statutory Basis

CBOE believes that the proposed

changes to CBOE Rules 24.7 and

24.9(a)(4) are consistent with and in

furtherance of the provisions of section

6(b)(5) 5 of the Act. By establishing a

CBOE Rule which defines current index

option settlement values in the event of

a primary market closure, and does so

with a forward rather than a backward

focus, this filing will help public

customers and market makers alike to be

better able to use stock index options to

predictably hedge their transactions in

stock index futures and/or the

underlying stocks themselves. The

Exchange believes that this will improve

the efficiency of, remove impediments

to, and perfect the mechanisms of, a free

and open market and a national market

system, thus better protecting investors

and the public interest.

Federal Register / Vol. 65, No. 110 / Wednesday, June 7, 2000 / Notices 36187

6 15 U.S.C. 78f(b)(5).

7 In addition, pursuant to section 3(f) of the Act,

the Commission has considered the proposed rule’s

impact on efficiency, competition, and capital

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

8 15 U.S.C. 78f(b)(5).

9See Release No. 34–42769 (May 9, 2000), 65 FR

31036 (May 15, 2000) (order approving SR–OCC–

00–01.)

10 15 U.S.C. 78f.

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

12 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the Exchange corrected

the Schedule of Dues and Fees contained in

Appendix A to reflect what the Exchange’s fee

schedule stated with respect to equity option

customer order fees and trade match fees before the

proposed rule change was filed. See Letter from

Angelo Evangelou, Attorney, Legal Division, CBOE,

to Jennifer Colihan, Attorney, Division of Market

Regulation, SEC, dated April 11, 2000

(‘‘Amendment No. 1’’).

3. Statutory Basis

The CBOE believes the proposed rule

change is consistent with and furthers

the objectives of section 6(b)(5) 6 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.

B. 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.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Member, Participants, or Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. 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, 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 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–00–02 and should be

submitted by June 28, 2000.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

After careful review, the Commission

finds that the proposal is consistent

with the requirements of the Act.7 In

particular, the Commission finds the

proposal is consistent with section

6(b)(5) 8 of the Act. Section 6(b)(5)

requires, among other things, that the

rules of an exchange be designed to

promote just and equitable principles of

trade and to protect investors and the

public interest.

The Commission believes that the

proposal promotes just and equitable

principles of trade. In particular, the

proposal clarifies index settlement

procedures in the unusual situation

when a primary market where

component stocks trade is closed on the

index settlement day. By way of

example, the CBOE discusses a situation

in the fall of 1999 when some people

thought the NYSE would be closed on

the settlement day. This closure would

have affected many index options

traded on CBOE, including S&P 500

index options. If the market did not

open, CBOE’s settlement rules would

have required the Exchange and the

OCC to look at the previous closing

prices for component stocks that traded

on the NYSE. This procedure varied

from the settlement procedures of a

futures exchange that traded futures on

the S&P 500 index. Moreover, the

settlement procedure also placed

investors in S&P 500 index options in

the unusual situation of having to guess

as to whether the NYSE would open on

the settlement day. By relying on the

opening price of a security on the next

day the primary market is open, the

proposal helps clarify CBOE index

settlement procedures and also makes

these procedures conform to industry

practice in the futures markets. Further,

the proposal helps reduce investor

confusion by implementing rules that

foster investor certainty in the unusual

situation when a primary market where

component stocks trade is closed on the

index settlement day.

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. A virtually identical

proposal, SR–OCC–00–01, was

published in the Federal Register for

the full 21-day comment period and the

Commission received no public

comments.9 The current proposal

mirrors the changes that were proposed

by the OCC in SR–OCC–00–01. The

Commission believes, therefore, that

granting accelerated approval to the

proposed rule change is appropriate and

consistent with section 6 of the Act.10

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,11 that the

proposed rule change (SR–CBOE–00–

02), as amended, is hereby approved on

an accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–14257 Filed 6–6–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42850; File No. SR–CBOE–

00–06]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Board Options Exchange,

Incorporated Relating to Exchange

Fees

May 30, 2000.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

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

notice is hereby given that on March 3,

2000, the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

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

rule change as described in Items I, II,

and III below, which Items have been

prepared by the CBOE. On April 12,

2000, the Exchange submitted

Amendment No. 1 to the proposed rule

change.3 The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to make

certain changes to its fee schedule. The

text of the proposed rule change is

available at the Office of the Secretary,

CBOE and at the Commission.