[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45890-45892]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23010]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38962; File No. SR-CBOE-97-36]


Notice of Filing of Proposed Rule Change by the Chicago Board 
Options Exchange, Incorporated, Related to the Procedures Regarding 
Opening Rotations

August 22, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 25, 1997, 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, II, and III below, which 
Items have been prepared by the CBOE. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1994).

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[[Page 45891]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 24.7 regarding the conditions 
under which the Exchange may halt trading in a class of index options 
and may resume trading after such a halt. The text of the proposed rule 
change is below. Additions are italicized; deletions are bracketed.

Chapter XXIV--Index Options

Rule 24.7 Trading halts or Suspensions
    (a) Trading on the Exchange in an index option shall be halted 
whenever two floor officials, in consultation with a designated 
senior executive officer of the Exchange, shall conclude in their 
judgment that such action is appropriate in the interests of a fair 
and orderly market and to protect investors. Among the facts that 
may be considered are the following:
    (i) the extent to which trading is not occurring in stocks 
underlying the index; [trading has been halted or suspended in 
underlying stocks whose weighted value represents 20% or more of the 
index value;]
    (ii) through (iv)--No Change.
    (b) Trading in options of a class or series that has been the 
subject of a halt or suspension by the Exchange may resume if two 
floor officials, in consultation with a designated senior executive 
officer of the Exchange determine that [the conditions which led to 
the halt or suspension are no longer present or that] the interests 
of a fair and orderly market are served by a resumption of trading. 
Among the factors to be considered in making this determination are 
whether the conditions which led to the halt or suspension are no 
longer present and the extent to which trading is occurring in 
stocks underlying the index. [In either event, the reopening 
rotation may not begin until the Exchange has determined that 
trading in underlying stocks whose weighted value represents more 
than 50% of the index value is occurring.]
    (c) See also Rule 6.3B for the effect of the initiation of a 
marketwide trading halt commonly known as a circuit breaker on the 
New York Stock Exchange [activation of circuit breakers in the 
underlying primary securities markets].
    (d)--No change.
* * * Interpretations and Policies
    .01--No change.
    .02--Upon reopening, a rotation shall be held in each class of 
index options unless two floor officials, in consultation with a 
designated senior executive officer of the Exchange, conclude that a 
different method of reopening is appropriate under the 
circumstances, including but not limited to, no rotation, an 
abbreviated rotation or any other variation in the manner of the 
rotation.

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 
text of these statements may be examined at the places specified in 
Item IV below. 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
    The purpose of the proposed rule change is to eliminate certain 
fixed percentage tests that presently apply both to the decision to 
halt or suspend trading in index options and to the decision to resume 
trading after such a halt, as well as to make certain related changes 
to conform to present practice.
a. Trading Halts
    Under present Rule 24.7(a)(i), one of the enumerated factors that 
the designated Exchange representatives may consider, in deciding 
whether to halt trading in an index option, is whether trading has been 
halted or suspended in underlying stocks whose weighted value 
represents ``20% or more of the index value.'' By specifying a 
percentage level that ``may be considered,'' the present rule may imply 
that it would be improper for the designated Exchange officials to 
consider trading interruptions in underlying stocks that collectively 
represent less than 20% of the index level. Moreover, the present rule 
may imply that the Exchange actually must make ongoing calculations of 
the extent to which underlying stocks are trading at any particular 
moment--something that would be difficult to do on a real time basis 
for some indexes, such as those with a large number of constituent 
stocks (e.g., the Russell 2000, which consists of 2000 stocks) or those 
as to which data on trading halts is not readily available (e.g., NDX, 
an index based on over-the-counter stocks).
    In fact, these interpretations would conflict with the purpose of 
Rule 24.7, which grants designated Exchange representatives the 
discretion to halt index option trading whenever they ``conclude in 
their judgment that such action is appropriate in the interests of a 
fair and orderly market and the protection of investors.'' Rule 
24.7(a)(i)-(iv) contains simply a non-exclusive list of factors that 
those Exchange officials may consider in exercising that discretion, so 
it would be inappropriate to appear to forbid those officials from 
considering trading disruptions in underlying stocks that fall below a 
predetermined level. Accordingly, the proposed change to Rule 
24.7(a)(i) would clarify that Exchange officials, in evaluating whether 
to halt trading in index options, are not limited to situations in 
which 20% of the underlying stocks have halted, but rather may consider 
``the extent to which'' trading is not occurring in the underlying 
stocks.
    For similar reasons, the proposed change to Rule 24.7(a)(i) also 
would enable Exchange officials to consider not just whether trading in 
underlying stocks has been ``halted or suspended,'' but whether such 
trading is ``not occurring.'' The term ``halted or suspended'' implies 
a situation in which a stock exchange has taken formal action to stop 
trading in a stock. However, in deciding whether to continue trading a 
derivative instrument like an index option, Exchange officials should 
be able to consider the extent to which underlying stocks are not 
trading, whether trading is not occurring because of formal exchange 
action, system problems, market emergencies or some other cause. 
Accordingly the proposed change to Rule 24.7(a)(i) would make clear 
that Exchange officials, in evaluating whether to halt index option 
trading, may consider the extent to which ``trading is not 
occurring''in the underlying stocks, without limiting that 
consideration to formal halts or suspensions.
b. Resumption of Trading After Trading Halts
    The proposed rule change also is designed to eliminate any 
requirement in Rule 24.7(b) that a fixed percentage of underlying 
stocks must be trading before trading in index options may resume after 
a trading halt. At present, Rule 24.7(b) allows such trading to resume 
when the appropriate Exchange officials determine either that the 
conditions that led to the halt no longer are present or that the 
interests of a fair orderly market are served by a resumption of 
trading. However, Rule 24.7(b) provides that in no event may trading 
resume until the Exchange has determined that trading is occurring in 
underlying stocks whose weighted value represents more than 50% of the 
index value.
    It is and would remain CBOE's practice, in deciding whether to 
resume

[[Page 45892]]

trading after an index options trading halt, to assess the extent to 
which underlying stocks are trading. However, it is inappropriate to 
forbid such a resumption until the level of stock trading has reached 
some predetermined, fixed level, particularly since it often may be 
difficult to make a precise determination about the weighted value of 
the underlying stocks that are trading--e.g., for indexes that are 
composed of a large number of underlying stocks. Accordingly, the 
proposed rule change would eliminate the 50% threshold and instead 
would specify that one of the factors that Exchange officials may 
consider, in determining whether the ``interests of a fair and orderly 
market are served by a resumption of trading'' is ``the extent to which 
trading is occurring in stocks underlying the index.'' The proposed 
rule therefore would enable Exchange officials to reactivate trading as 
soon as they determine that conditions warrant, without interposing an 
artificial barrier that might result from a fixed percentage test, and 
would still provide a mechanism by which CBOE officials would be able 
to give appropriate weight to the extent to which underlying stocks are 
trading.
    In addition, the proposed rule change would make clear that trading 
may resume only upon a determination by the designated Exchange 
officials that such a resumption is in the interests of a fair and 
orderly market. The present form of Rule 24.78 allows trading to resume 
(subject to the 50% requirement) when the proper Exchange officials 
determine either that the conditions that led to the halt no longer are 
present or that a resumption of trading would serve the interests of a 
fair and orderly market. Taken literally, this would enable trading to 
resume if the conditions that led to the halt no longer are present, 
even if a resumption of trading would be contrary to the interests of a 
fair and orderly market, an interpretation that would conflict with 
CBOE's practice and would be contrary to the policies under the Act. 
Accordingly, the proposed rule change would make clear that: (1) index 
option trading may resume if and only if the proper Exchange officials 
determine that such a resumption would be in the interests of a fair 
and orderly market; and (2) the fact that the conditions leading to the 
halt no longer are present is just one of the factors (as is the extent 
to which underlying stocks are trading) that those officials may 
consider in determining whether the interests of a fair and orderly 
market would be served by a resumption of trading. In SR-CBOE-97-35, 
similar changes are being proposed to Rule 6.3(b), which generally 
governs the resumption of trading after a trading halt in an equity 
option.
    Also, the proposed rule change conforms the cross reference to Rule 
6.3B that is contained in Rule 24.7(c) to the current language of Rule 
6.3B. Rule 6.3B is the Exchange's circuit breaker trading halt rule, 
and the language of Rule 6.3B was recently amended.
    Finally, the proposed rule change adds a proposed interpretation 
.02 to address how trading shall resume after a trading halt. This 
topic is not addressed in the present form of Rule 24.7, although the 
last sentence of present Rule 24.7(b) apparently assumes that a 
rotation will be used. The proposed interpretation .02 would adopt the 
identical procedure that now governs the resumption of trading after a 
circuit breaker halt, which is set forth in interpretation .02 to Rule 
6.3B. In particular, proposed interpretation .02 to Rule 24.7 would 
provide that trading would resume by a rotation after a trading halt 
unless the designated exchange officials conclude that a different 
method of reopening is appropriate under the circumstances. Under the 
proposed interpretation, those officials, among other things, could 
determine not to employ a rotation, to use an abbreviated rotation or 
otherwise to vary the manner of the rotation. This proposed 
interpretation should be adopted so that comparable rules govern the 
resumption of trading after circuit breaker halts as well as halts for 
other reasons.
2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act \2\ in that the proposed rule 
change is designed to perfect the mechanisms of a free and open market 
and to protect investors and the public interest by setting forth a 
procedure to review and address delays in the commencement of options 
trading.
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    \2\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposal will impose any 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 
proposal.

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 CBOE 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 provisions of 5 
U.S.C. Sec. 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-97-36 and should 
be submitted by September 19, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\ 17 CFR 200.30-3(a)(12)(1997).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23010 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M