50966 Federal Register / Vol. 62, No. 188 / Monday, September 29, 1997 / Notices

truly happening with respect to the cost

of a college education and what steps

can or should be taken to ensure that a

quality post secondary education

remains affordable. This report is to

include the Commission’s

recommendations for administrative

and legislative actions that the

Commission considers advisable on the

issues it is investigating. The

Commission announces its meeting

schedule, thereby notifying the general

public of their opportunity to attend.

These meetings are designed to give

interested parties the opportunity to

present the Commission with

information these parties believe will

assist the Commission in its task.

DATE AND TIME: October 16, 1997; 8:15

A.M.–5:30 P.M. Agenda items and

topics to be discussed: Chairman’s

report; update on research agenda and

work plan as this relates to the functions

of the Commission established by

statute; laws, regulations, and mandates

in higher education; student financial

aid policies and programs; instructional,

administrative, and technological cost

factors in higher education; and other

substantive items raised by Commission

members or Commission working

groups.

LOCATION: Herbert Hoover Memorial

Building, Stauffer Auditorium, Serra

and Galvez Streets, Stanford, California.

Parking is available for a fee in the lot

on Galvez Street.

DATE AND TIME: October 27, 1997; 9:00

A.M.–11:30 A.M. and 1:00 P.M.–3:00

P.M. A hearing will be held at which

interested members of the public will be

given an opportunity to present

representatives of the Commission with

information on the issues which the

Commission has been charged with

considering. The period for submitting

comments in writing begins with the

publication of this notice. Only

comments received by COB October 20

will be considered for possible oral

testimony on October 27. The

Commission may need to limit the

number of individuals who appear

before it and the time allotted to these

individuals. Persons also may be

assigned a specific time to appear. A

schedule will be announced by COB

October 23.

DATE AND TIME: November 7, 1997; 8:15

A.M.–5:30 P.M. Agenda items and

topics to be discussed: Chairman’s

report; update on research agenda and

work plan as this relates to the functions

of the Commission established by

statute; laws, regulations, and mandates

in higher education; student financial

aid policies and programs; instructional,

administrative, and technological cost

factors in higher education; and other

substantive items raised by Commission

members or Commission working

groups.

LOCATION: Boston, Massachusetts.

DATE AND TIME: November 17–18, 1997,

8:15 A.M.–5:30 P.M., each day. Agenda

items and topics to be discussed:

Chairman’s report; update on research

agenda and work plan as this relates to

the functions of the Commission

established by statute; laws, regulations,

and mandates in higher education;

student financial aid policies and

programs; instructional, administrative,

and technological cost factors in higher

education; and other substantive items

raised by Commission members or

Commission working groups.

LOCATION: Belmont University, 1900

Belmont Boulevard, Nashville,

Tennessee.

DATE AND TIME: December 4, 1997, 8:15

A.M.–5:00 P.M.

LOCATION: Washington, D.C.

FOR FURTHER INFORMATION CONTACT:

Carmelita Pratt, Administrative Officer,

National Commission on the Cost of

Higher Education, 1615 M Street, N.W.,

Suite 240, Washington, D.C. 20036.

Telephone (202) 634–6501. Facsimile:

(202) 634–6038.

SUPPLEMENTARY INFORMATION: The

National Commission on the Cost of

Higher Education was established by

Public Law 105–18, dated June 12, 1997.

Transcripts are kept of all public

Commission proceedings and are

available for public inspection at the

offices of the National Commission on

the Cost of Higher Education, 1615 M

Street, N.W., Suite 240, Washington,

D.C. 20036. Contact Carmelita Pratt at

the phone number listed above.

Carmelita Pratt,

Administrative Officer.

[FR Doc. 97–25681 Filed 9–26–97; 8:45 am]

BILLING CODE 6820–DR–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39109; File No. 265–19]

Consumer Affairs Advisory

Committee; Meeting

AGENCY: Securities and Exchange

Commission.

ACTION: Notice of meeting of the

Securities and Exchange Commission

(‘‘Commission’’) Consumer Affairs

Advisory Committee (‘‘Commission’’).

SUMMARY: The Securities and Exchange

Commission’s Consumer Affairs

Advisory Committee will meet on

Tuesday, October 14, 1997, in Room

1C30 at the Commission’s Headquarters,

450 Fifth Street, N.W., Washington,

D.C., beginning at 9:30 a.m. The meeting

will be open to the public. This notice

also serves to invite the public to submit

written comments to the Committee.

ADDRESSES: You should submit written

comments in triplicate and refer to File

No. 265–19. Send your comments to

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT:

Geraldine M. Walsh, Special Counsel to

the Director, Office of Investor

Education and Assistance, (202) 942–

7040; Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: Section

10(a) of the Federal Advisory Committee

Act, 5 U.S.C. App. 10a, requires the

Securities and Exchange Commission to

give notice that the Consumer Affairs

Advisory Committee will meet on

October 14, 1997, in Room 1C30 at the

Commission’s Headquarters, 450 Fifth

Street, N.W., Washington, D.C.,

beginning at 9:30 a.m. The meeting will

be open to the public.

The Committee’s responsibilities

include assisting the Commission in

identifying investor problems and being

more responsive to their needs. The

Committee will explore fundamental

issues of concern to investors, including

matters currently under consideration

by the Commission and topics of

emerging concern to investors and the

financial services industry.

Dated: September 22, 1997.

Jonathan G. Katz,

Advisory Committee Management Officer.

[FR Doc. 97–25693 Filed 9–26–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39115; File No. SR–CBOE–

96–75]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 1, 2, and 3 to the Proposed Rule

Change by the Chicago Board Options

Exchange, Incorporated Relating to the

Listing and Trading of Packaged

Butterfly Spreads

September 22, 1997.

I. Introduction

On December 16, 1996, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’
Federal Register / Vol. 62, No. 188 / Monday, September 29, 1997 / Notices 50967

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38213

(January 28, 1997), 62 FR 5265 (February 4, 1997).

4 In Amendment No. 1, the Exchange provided a

new definition for ‘‘butterfly spread interval’’ and

several revisions to the margin rules, as described

more fully herein. See Letter from Tim Thompson,

Senior Attorney, CBOE, to John Ayanian, Special

Counsel, Office of Market Supervision (‘‘OMS’’),

Division of Market Regulation (‘‘Market

Regulation’’), Commission, dated March 18, 1997

(‘‘Amendment No. 1’’).

5 In Amendment No. 2, the Exchange amended its

margin rules as they apply to spread positions

where the long index option contract is a Packaged

Butterfly Spread. Amendment No. 2, also verified

that CBOE will list and add series for Packaged

Butterfly Spreads in accordance with Rule 24.9,

Interpretation and Policy .01(c). Finally, in

Amendment No. 2, the Exchange indicated that

position limits for Packaged Butterfly Spreads based

on the S&P 500 and 100 will be the same as existing

position limits for the respective index options and

will be aggregated with other option contracts on

the same index. See Letter from William M. Speth,

Sr. Research Analyst, Product Development,

Research Department, CBOE, to Howard L. Kramer,

Senior Associate Director, OMS, Market Regulation,

Commission, dated May 2, 1997 (‘‘Amendment No.

2’’).

6 In Amendment No. 3, the Exchange made

several technical, non-substantive changes to the

proposal. In addition, the Exchange made changes

to the margin rules. In particular, the Exchange

amended its margin rules (and modified

Amendment No. 2), to indicate that margin

treatment for spread positions set forth in Rule

24.11(c)(1)(B) do not apply for spread positions

where one or both positions comprising the spread

are Packaged Butterfly Spreads. As proposed in new

Rule 24.11(c)(1)(D), if a spread position involves a

Packaged Butterfly Spread, as either the long

options position or the short options position, the

minimum margin required on such a position will

be the full purchase price on the long position plus

the margin required in Rule 24.11(b) for the short

position. The Exchange also clarified its policy for

changing butterfly spread intervals, as described

more fully herein. See Letter from Eileen Smith,

Director, Product Development, Research

Department, CBOE, to John Ayanian, Special

Counsel, OMS, Market Regulation, Commission,

dated June 4, 1997 (‘‘Amendment No. 3’’).

7A butterfly spread is a combination of four

option positions of the same type (put or call) and

the same expiration on thee same underlying

interest using three different strike prices. For

example, using only calls, a butterfly spread would

consist of buying one call at the lowest strike price,

selling two calls at the middle strike price and

buying one call at the highest strike price. A

butterfly spread with a butterfly spread interval of

30 might consist of one long December (expiration

month) 670 (strike price) call option, two short

December 700 call options, and one long December

730 call option.

8Only European-style Packaged Butterfly Spreads

will be available to investors. A European-style

option is one that may be exercised only during a

limited period of time prior to expiration.

9An American-style option is one that may be

exercised at any time prior to expiration.

10See Amendment No. 3, supra note 6.

11Specifically, the ‘‘butterfly spread interval’’

means a value specified by the Exchange which,

when added to the exercise price and subtracted

from the exercise price defines a range of index

values over which the option has an exercise

settlement amount greater than $0. See Amendment

No. 1, supra note 4.

12See Rule 24.11(c)(a)(D) and Amendment No. 3,

supra note 6.

or ‘‘Exchange’’) filed a proposed rule

change with the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 to list for trading Packaged

Butterfly Spreads based upon the S&P

100 and the S&P 500 Indexes.

Notice of the proposal was published

for comment and appeared in the

Federal Register on February 4, 1997.3

The Exchange filed with the

Commission Amendment Nos. 1,4 2,5

and 3 6 to the proposal on March 18,

May 2, and June 5, 1997, respectively.

No comment letters were received on

the proposed rule change. This order

orders the Exchange’s proposal, as

amended.

II. Description of the Proposal

The Exchange proposes to list for

trading Packaged Butterfly Spreads

based upon the S&P 100 index and the

S&P 500 index. A Packaged Butterfly

Spread is a packaged European-style

option that replicates the behavior and

payout of a butterfly spread 7 composed

of standard index option contracts. The

Exchange proposes that the Packaged

Butterfly Spreads on the S&P 100 and

500 indexes will have a multiplier of

100. Because Packaged Butterfly

Spreads composed of puts are identical

to those composed of calls the Exchange

will not list both puts and calls; there

will be only one call option listed for

each strike price and butterfly interval.

The Exchange believes Packaged

Butterfly Spreads on the Indexes will

provide advantages to the investing

public that are not provided for by

standard index options. First, the

Exchange believes Packaged Butterfly

spreads offer investors a relatively low

risk security which results because

Packaged Butterfly Spreads, by their

nature, have a maximum gain and loss

that can be realized regardless of the

movement in the index level. Packaged

Butterfly Spreads allow investors to

profit from trendless markets with

limited risk. Second, the ‘‘packaging’’ of

a strategy of four option positions into

one option product reduces transactionrelated expenses because the investor

will only have to enter into one

transaction. Third, in the case of

Packaged Butterfly Spreads overlying

the S&P 100, the investor will have the

opportunity to invest in an option

product that has European-style

exercise.8 Standard S&P 100 options

(‘‘OEX’’) have American-style exercise.9

The Exchange expects Packaged

Butterfly Spreads to be supported

enthusiastically by market-makers

because butterfly spread trading is a

familiar strategy to professional traders

and the Packaged Butterfly Spreads can

be easily incorporated into the overall

risk profile of the market-maker’s

trading strategy in standard index

options.

The Exchange proposes to amend

Rule 24.1 to describe the new product 10

as well as the term ‘‘butterfly spread

interval’’.11

Position and Exercise Limits

The Exchange is proposing position

limits for Packaged Butterfly Spreads

overlying the S&P 100 of 25,000

contracts. The Exchange is proposing

position limits for Packaged Butterfly

Spreads overlying the S&P 500 of

100,000 contracts. For position limit

purposes, Packaged Butterfly Spreads

will be aggregated with option contracts

on the same index. These position limits

are consistent with the position limits

that have been established for standard

index options on the S&P 100 and 500

indexes, respectively. The exercise

limits for Packaged Butterfly Spreads

will be equal to the position limits set

forth above in accordance with the

terms of CBOE Rule 24.5.

Margin

With respect to margin, risk exposure

is limited in Packaged Butterfly

Spreads, and therefore, the maximum

margin requirements should not exceed

the maximum exposure amount which,

for each Packaged Butterfly Spread

option contract equals the butterfly

spread interval times the index

multiplier. The proposed amendments

state that the maximum margin required

for a Packaged Butterfly Spread option

contract carried in a short position shall

not exceed this maximum exposure

amount. In addition, margin

requirements for spread positions set

forth in Rule 24.11(c)(1)(B) does not

apply for spread positions where one or

both positions comprising the spread

are Packaged Butterfly Spreads. If a

spread position involves a Packaged

Butterfly Spread, as either the long

position or the short position, the

minimum margin required on such a

position will be the full purchase price

on the long position plus the margin

required in Rule 24.11(b) for the short

position.12

Listing of Series. The Exchange

expects to list contracts having butterfly

spread intervals of ranging from 10 to 50

points. The Exchange does not intend to

simultaneously open series with more

than one butterfly spread interval.

However, the CBOE may introduce a
50968 Federal Register / Vol. 62, No. 188 / Monday, September 29, 1997 / Notices

13See Amendment No. 2, supra note 5.

14See Memorandum from Joe Corrigan, OPRA, to

Eileen Smith, CBOE, dated November 21, 1996.

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

16 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

17Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

option proposal upon a finding that the

introduction of such new derivative instrument that

served no hedging or other economic function,

because any benefits that might be derived by

market participants likely would be outweighed by

the potential for manipulation, diminished public

confidence in the integrity of the markets, and other

valid regulatory concerns. In this regard, the trading

of Packaged Butterfly Spreads on the S&P 500 and

100 will provide investors with another hedging

vehicle that should reflect the overall movement of

the U.S.-listed stock market.

18The Commission notes that CBOE Rule 24.1, as

amended, defines Packaged Butterfly Spreads.

Because the current Exchange proposed definition

is limited to Packaged Butterfly Spreads on the S&P

500 and 100 Indexes, the Exchange is required to

submit a rule filing pursuant to Section 19(b) of the

Act in order to list Packaged Butterfly Spreads on

another stock index or individual security.

19The Exchange represents that it would not

allow margin offset, pursuant to Rule 24.11(c),

between spread with different spreads intervals. See

Amendment No. 3, supra note 6.

20See Securities Exchange Act Release No. 29865

(October 28, 1991), 56 FR 56255 (November 1,

1991).

21See supra note 12.

new series with a new butterfly spread

interval with a new ticker symbol

resulting in a brief period (1 or 2

months) of open series with two

butterfly spread intervals. Initially, the

Exchange intends to list an at-themoney and various strikes around the

at-the-money in the first two near-term

months in accordance with Rule 24.9,

Interpretation and Policy .01(c).13 New

strikes will be added when the

underlying trades through the highest or

lowest strike available.

Settlement

The expiration date for Packaged

Butterfly Spreads will be the Saturday

immediately following the third Friday

of the expiration month. Exercise will

result in the delivery of cash on the

business day following expiration. The

exercise settlement amount is equal to

the greater of: (1) Butterfly spread

interval minus the difference between

the index settlement value and the

midpoint of the butterfly multiplied by

the multiplier ($100), and (2) $0.

Packaged Butterfly Spreads will have a

European-style of exercise.

Miscellaneous

CBOE will use the same surveillance

methods it currently employs with

respect to their broad-based index

options.

CBOE has also been informed that the

Options Price Reporting Authority

recently added another outgoing high

speed line from OPRA processor and

thus, has the capacity to support the

new series associated with the listing of

Packaged Butterfly Spreads.14

III. Commission Finding and

Conclusions

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, the

requirements of Section 6(b)(5) of the

Act.15 Moreover, the Exchange’s

proposal to list and trade Package

Butterfly Spreads on the S&P 100 and

S&P 500 indexes strikes a reasonable

balance between the Commission’s

mandates under Section 6(b)(5) to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system while

protecting investors and the public

interest.16 Specifically, the Commission

finds that the Packaged Butterfly

Spreads are an innovative financial

product that will provide investors with

additional choices and flexibility in

their use of derivatives.17 In addition,

Packaged Butterfly Spreads offer both

holders and writers of options a means

to participate in the options markets at

a predetermined maximum gain or loss.

Under the terms of Packaged Butterfly

Spreads, the option writer’s (holder’s)

maximum loss (gain) is established at

the time of the investment by the

option’s butterfly spread interval.

Accordingly, Packaged Butterfly

Spreads permit investors to participate

in the options market at a known cost.

In addition, the Commission believes

that Packaged Butterfly Spreads, which

replicate the combination of four

separate option positions on the same

underlying interest and expiration,

likely will benefit investors by

providing them with a more efficient

and cost effective method of executing

spread transactions.

The Commission also finds that the

specific rules proposed by the CBOE to

accommodate Packaged Butterfly

Spreads are consistent with the Act.18

Specifically, the Commission believes

that it is reasonable for the Exchange to

set a butterfly spread interval range from

10 to 50 points. In response to the

Commission’s concerns about investor

confusion by having series of Packaged

Butterfly Spreads simultaneously open

with different butterfly spread intervals,

the Exchange does not intend to

simultaneously open series with more

than one butterfly spread interval.

However, the CBOE may introduce a

new series with a new butterfly spread

interval with a new ticker symbol

resulting in a brief period (1 or 2

months) of open series with two

butterfly spread intervals.19 The

Commission notes that the Exchange

may submit a ‘‘noncontroversial filing’’

pursuant to Section 19(b)(3)(A) of the

Act and Rule 19b-4(e)(6) thereunder if it

decided to change the present butterfly

spread range (currently 10 to 50 points)

and the proposal does not raise any

other regulatory issues.

The Commission also notes that

Packaged Butterfly Spreads on the S&P

500 and S&P 100 indexes will be subject

to the same position and exercise limit

requirements that currently apply to

S&P 500 and S&P 100 index options,

respectively. In particular, Packaged

Butterfly Spreads on the S&P 500 will

be aggregated with all other S&P 500

index options, subject to a 100,000

contract limit under Rule 24.4(b).

Packaged Butterfly Spreads on the S&P

100 index will be aggregated with all

other S&P 100 index options, subject to

a 25,000 contract limit under Rule

24.4(b).

The Commission believes that the

proposed margin treatment for Packaged

Butterfly Spreads in cash and margin

accounts is consistent wit the Act.

Specifically, the Commission believes

that, similar to short capped options

positions,20 it is reasonable to permit

short Packaged Butterfly Spreads

positions in a cash account so long as

the maximum exposure (the butterfly

spreads interval) is deposited. This

position is the equivalent of a

completely covered position, because

the maximum risk of loss is already on

deposit. In addition, the Commission

believes that the proposed margin

requirements for Packaged Butterfly

Spreads in margin accounts is

reasonable because they are virtually

identical to the margin requirements for

traditional short stock index options

positions held in margin accounts,

except that a limit equal to the

maximum exposure to the option writer

is placed on the margin requirement. It

is reasonable to limit the margin in this

way because the margin would cover

100% of the writer’s exposure, thereby

requiring no additional margin calls.

The Commission also believes it is

reasonable to require for any spread

position involving a Packaged Butterfly

Spread a minimum margin deposit

equal to the full purchase price on the

long position plus the margin required

in Rule 24.11(b) for the short position.21

Accordingly, the Commission believes it

is reasonable under such circumstances

to prohibit application of margin
Federal Register / Vol. 62, No. 188 / Monday, September 29, 1997 / Notices 50969

22The writer’s maximum exposure of this spread

position is determined as follows:

short loss¥long gain=maximum exposure

$5,000¥(670¥650)×100

$5,000¥(20)×100

$500¥$2,000=($3,000)

23 In reviewing any disclosure materials

submitted, the Commission intends to assure that

the materials specifically describe the risks and

characteristics associated with trading Packaged

Spreads. Trading trading of Packaged Butterfly

Spreads is Packaged Spreads. The trading of

Packaged Butterfly Spreads is expressly contingent

upon the Commission’s approval of such an ODD

supplement.

24As described above, Packaged Butterfly

Spreads on the S&P 500 and 100 indexes will be

aggregated with other options on the same index.

25Accordingly, this proposed amendment

eliminates the provision in Amendment No. 2

which would have allowed spread positions

involving long Packaged Butterfly Spread positions

to receive margin treatment under the spread rule.

See Amendment No. 3, supra note 6.

requirements for spread positions

involving a Packaged Butterfly Spread

because the required margin deposit

would not always cover 100% of the

writer’s exposure. For example, a spread

involving a long 670 S&P 500 index call

option and a short 650 Packaged

Butterfly Spread on the S&P 500, with

a butterfly spread interval of 50, the

margin deposit requirement under the

margin rule for spread transactions

would be the lesser of (1) The difference

in aggregate exercises prices

((670¥650)×100=$2,000) and (2) the

butterfly spread interval times the

multiplier (i.e., 50×100=$5,000). The

margin deposit requirement under the

spread rule, if allowed, would be

$2,000. The writer’s maximum exposure

(when the current index level is 650),

however, is $3,000.22 For this spread

position, the margin requirement under

proposed CBOE Rule 24.11(c)(1)(D) will

be the full purchase price of the long

position (premium×$100) plus the

butterfly spread interval times the index

multiplier (50×$100) of the short

position.

In summary, the Commission believes

that the Packaged Butterfly Spreads on

the S&P 500 and S&P 100 Indexes will

provide investors with additional

choices and flexibility in their use of

derivatives and offer both holders and

writers of options a means to participate

in the options markets at a

predetermined maximum gain or loss.

Further, the Commission notes that in

order to promote investor protection

and to ensure adequate disclosure in

connection with Packaged Butterfly

Spreads, the rules pertaining to

standardized options and the

requirements of Exchange Act Rule 9b–

1 will apply to trading in Packaged

Butterfly Spreads. The Commission

believes it is important to provide

investors with information regarding the

rights and characteristics of Packaged

Butterfly Spreads. In this regard,

Packaged Butterfly Spread investors will

receive a special supplement to the

Options Clearing Corporation’s (‘‘OCC’’)

Options Disclosure Document (‘‘ODD

Supplement’’) explaining in detail the

risks and characteristics of Packaged

Spreads.23

The Commission finds good cause for

approving Amendment Nos. 1, 2, and 3

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. Specifically,

Amendment No. 1 to CBOE’s proposal

set forth a new definition for ‘‘butterfly

spread interval’’ and several technical

revisions to the margin rules, as

described above.

Amendment No. 2 to CBOE’s

proposal: (1) Verifies that CBOE will list

and add series for Packaged Butterfly

Spreads in accordance with Rule 24.9,

Interpretation and Policy .01(c); and (2)

sets position limits for Packaged

Butterfly Spreads based on the S&P 500

and 100 to equal existing position limits

for the respective index options.24

The first change described above is

clarifying in nature and will prevent

undue proliferation of options series on

Packaged Butterfly Spreads. The

Commission believes the Exchange’s

proposed reduction in position limits

from those originally proposed presents

no new regulatory issues and can be

approved on an accelerated basis.

Further, the originally proposed higher

position limits were subject to the full

21-day comment period without any

comments being received by the

Commission.

Amentment No. 3 to CBOE’s proposal

also makes several technical nonsubstantive changes. In addition, the

Exchange amended the definition of

Packaged Butterfly Spread to further

clarify that the product is intended to

replicate the behavior of the

combination of four separate options, as

described above. Finally, Amendment

No. 3 provides that margin requirements

for spread positions set forth in Rule

24.11(c)(1)(B) do not apply for spread

positions where one or both positions

comprising the spread are Packaged

Butterfly Spreads. 25 The Commission

believes that the proposed changes to

the margin requirements present no new

regulatory issues and further

strengthens the Exchange’s proposal by

ensuring that adequate margin will be

deposited by those with positions

involving Packaged Butterfly Spreads.

The Commission believes that the

changes proposed in Amendment Nos.

1, 2, and 3, unless otherwise stated

above, merely clarify in the rule text

what was originally proposed by the

Exchange and will help to ensure that

investors understand the specifications

and trading characteristics of the

Packaged Butterfly Spread contracts. In

addition, the Commission notes that the

original proposal was published for the

full 21-day comment period without any

comments being received by the

Commission. Moreover, the Commission

believes that the foregoing amendments

raise no new regulatory issues.

Accordingly, the Commission finds

good cause, consistent with Sections

6(b)(5) and 19(b)(2) of the Act, to

approve Amendment Nos. 1, 2, and 3 to

the proposed rule change, on an

accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

1, 2, and 3 to the proposed rule change.

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. § 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to SR–CBOE–96–75 and

should be submitted by October 20,

1997.

V. Conclusion

Based upon the aforementioned

factors, the Commission finds that the

proposed changes relating to the listing

and trading of Packaged Butterfly

Spreads on the S&P 500 and 100 are

consistent with the requirements of

Section 6(b)(5) and the rules and

regulations thereunder. The initiation of

Packaged Butterfly Spread trading,

however, is conditioned upon the

issuance of an order approving an ODD

Supplement, pursuant to Rule 9b–1 of

the Act.
50970 Federal Register / Vol. 62, No. 188 / Monday, September 29, 1997 / Notices

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

27 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38213

(January 28, 1997), 62 FR 5265 (February 4, 1997).

4 In Amendment No. 1, the Exchange provided a

new definition for ‘‘vertical spread interval’’ and

several technical non-substantive revisions to the

margin rules. See Letter from Tim Thompson,

Senior Attorney, CBOE, to John Ayanian, Special

Counsel, Office of Market Supervision (‘‘OMS’’),

Division of Market Regulation (‘‘Market

Regulation’’), Commission, dated March 18, 1997

(‘‘Amendment No. 1’’).

5 In Amendment No. 2, the Exchange amended its

spread rules for margin when the short index option

of a spread position is a Packaged Vertical Spread,

as described more fully herein. Amendment No. 2

also verified that CBOE will list and add series for

Packaged Vertical Spreads in accordance with Rule

24.9, Interpretation and Policy .01(c). Finally, in

Amendment No. 2, the Exchange indicated that

position limits for Packaged Vertical Spreads based

on the S&P 500 and 100 will be the same as existing

position limits for the respective index options and

will be aggregated with other option contracts on

the same index. See Letter from William M. Speth,

Sr. Research Analyst, Product Development,

Research Department, CBOE, to Howard L. Kramer,

Senior Associate Director, OMS, Market Regulation,

Commission, dated May 2, 1997 (‘‘Amendment No.

2’’).

6 In Amendment No. 3, the Exchange made

several non-substantive changes to the proposal. In

addition, added Rule 24.4(e) to reflect that position

limits for Packaged Vertical Spreads with

multipliers of 500 would have position limits equal

to 1/5th of the position limits for products with

multipliers of 100. The Exchange also clarified that

for Packaged Vertical Spreads with multipliers of

500, the spread rules for margin would only apply

when there are 5 contracts with a 100 multiplier

offsetting one contract with a 500 multiplier.

Finally, the Exchange also clarified its policy for

changing the multiplier and/or the vertical spread

intervals, as described more fully herein. See

vertical spread intervals, as described more fully

herein. See Letter from Eileen Smith, Director,

Product Development, Research Department, CBOE,

to John Ayanian, Special Counsel, OMS, Market

Regulation, Commission, dated June 4, 1997

(‘‘Amendment No. 3’’).

7A vertical spread is the combination of one long

and one short options position having the same

expiration. A call vertical spread will have a lower

strike price on the long options and a put spread

will have a higher strike price on the long option.

For example, a call vertical spread might consist of

one long December (expiration month) 700 (strike

price) call option and one short December 690 call

option.

8See Amendment No. 3, supra note 6.

9Only European-style Packaged Vertical Spreads

will be available to investors. A European-style

option is one that may be exercised only during a

limited period of time prior to expiration.

10An American-style option is one that may be

exercised at any time prior to expiration.

11See Amendment No. 3, supra note 6.

12Specifically, the ‘‘vertical spread interval’’

means a value specified by the Exchange which,

when added to the exercise price for call series or

subtracted from the exercise price for put series

defines the index level over which (for calls) and

under which (for puts) the value of the contract will

have its maximum value at expiration. See

Amendment No. 1, supra note 4.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,26 that the

proposed rule change (File No. SR–

CBOE–96–75), is amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.27

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–25688 Filed 9–26–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39116; File No. SR–CBOE–

96–76]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 1, 2, and 3 to the Proposed Rule

Change by the Chicago Board Options

Exchange, Incorporated Relating to the

Listing and Trading of Packaged

Vertical Spreads

September 22, 1997.

I. Introduction

On December 16, 1996, the Chicago

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

or ‘‘Exchange’’) filed a proposed rule

change with the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

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

of 1934 (‘’Act’’) 1 and Rule 19b–4

thereunder,2 to list for trading Packaged

Vertical Spreads based upon the S&P

100 and the S&P 500 Indexes.

Notice of the proposal was published

for comment and appeared in the

Federal Register on February 4, 1997.3

The Exchange filed with the

commission Amendment Nos. 1,4 2,5

and 36 to the proposal on March 18,

May 2, and June 5 1997, respectively.

No comment letters were received on

the proposed rule change. This order

approves the Exchange’s proposal, as

amended.

II. Description of the Proposal

The Exchange proposes to list for

trading Packaged vertical Spreads based

upon the S&P 100 index and the S&P

500 index (‘‘Indexes’’). A Packaged

Vertical Spread is a packaged Europeanstyle option that replicates the behavior

and payout of a vertical spread 7

composed of standard index option

contracts. The Exchange proposes that

the Packaged Vertical Spreads may have

a multiplier of 100 (as with standard

index options overlying the S&P 100

and the S&P 500) or a multiplier of 500.

To date, the Exchange has not

determined whether Packaged Vertical

Spreads will initially have a multiplier

of 100 or 500. The Exchange, however,

does not intend to simultaneously open

series with both a 100 and a 500

multiplier. If the Exchange introduces

Packaged Vertical Spreads with a new

multiplier with a new tricker symbol, it

will only result in a brief period (1 or

2 months) of open series with both a 100

and a 500 multiplier. The Exchange

represents further that it will notify the

Commission so that it can be

determined what appropriate steps

should be taken prior to listing

Packaged Vertical Spreads with the

different multiplier.8

The Exchange believes Packaged

Vertical Spreads on the Indexes will

provide advantages to the investing

public that are not provided for by

standard index options. First, the

Exchange believes the Packaged Vertical

Spreads on the Indexes will offer

investors a relatively low risk security

which results because Packaged Vertical

Spreads, by their nature, have a

maximum gain and loss that can be

realized regardless of the movement in

the index level. These options are the

equivalent of standard vertical spreads

(i.e., the combination of one long and

one short options position with the

same expiration) traded as a single

security. Second, the ‘‘packaging’’ of a

strategy of two option positions into one

option product reduces transactionrelated expenses because the investor

will only have to enter into one

transaction. In the case of Packaged

Vertical Spreads with a multiplier of

500, the transaction-related expenses

would be substantially reduced from a

comparable trade involving standard

index options which currently have a

100 multiplier. Third, in the case of

Packaged Vertical Spreads overlying the

S&P 100, the investor will have the

opportunity to invest in an option

product that has European-style

exercise.9 Standard S&P 100 options

(‘‘OEX’’) have American-style

exercise.10 Accordingly, with Packaged

Vertical Spreads there is no early

exercise risk. The Exchange expects

Packaged Vertical Spreads on the

Indexes to be supported enthusiastically

by market-makers because vertical

spread trading is a familiar strategy to

professional traders and the Packaged

Vertical Spreads can be easily

incorporated into the overall risk profile

of the market-maker’s trading strategy in

standard index options.

The Exchange proposes to amend

Rule 24.1 to describe the new product 11

as well as the term ‘‘vertical spread

interval’’.12