[Federal Register Volume 62, Number 228 (Wednesday, November 26, 1997)]
[Notices]
[Pages 63209-63210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31019]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39338; File No. SR-CBOE-97-48]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change Relating to a Reduction in 
the Value of the Standard & Poor's 100 Stock Index and a Corresponding 
Increase in the Existing Position and Exercise Limits for the Option 
Traded on the Index

 November 19, 1997.

I. Introduction

    On September 19, 1997, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to double current position and 
exercise limits in connection with a reduction by Standard & Poor's 
(``S&P'') of the value of its S&P 100 Stock Index (``Index'') option 
(``OEX'') to one-half of its present value by doubling the divisor used 
in calculating the Index.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change appeared in the Federal Register on 
October 10, 1997.\3\ No comments were received on the proposed rule 
change. This order approves the CBOE's proposal.
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    \3\ See Securities Exchange Act Release No. 39192 (October 3, 
1997) 62 FR 53040.
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II. Description of the Proposal

    In March 1983, the CBOE began trading OEX options,\4\ which are 
American-style, cash-settled options on the Index. The Exchange notes 
that the value of the OEX has doubled in value since mid-1995, such 
that the value of the Index stood at 928.20 as of August 7, 1997. As a 
result of the significant increase in the value of the underlying 
Index, the premium for OEX options also has increased. This has caused 
OEX options to trade at a level that may be uncomfortably high for 
retail investors, a large and important part of the market for OEX 
options.
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    \4\ See Securities Exchange Act Release No. 19264 (November 22, 
1997) 47 FR 53981 (November 30, 1982).
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    As a result, pursuant to CBOE's request, S&P (the reporting 
authority and sole party responsible for maintaining the Index) has 
agreed to a ``two-for-one split'' of the Index. The change, which will 
be implemented immediately following the November expiration,\5\ will 
result in a halving of the Index level, as well as a doubling of the 
number of OEX contracts outstanding, such that for each OEX contract 
held, the holder will receive two contracts at the reduced value, with 
a strike price of one-half of the original strike price.\6\
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    \5\ The Index is scheduled to be split on November 24, 1997. 
Telephone conversation between Timothy Thompson, Senior Attorney, 
CBOE, and Michael Walinskas, Senior Special Counsel, Division of 
Market Regulation, Commission, on November 10, 1997.
    \6\ The value of reduced-value Long-Term AnticiPation Securities 
(``LEAPS'') based on the Index will not be affected by the proposed 
change in the value of the Index. Therefore, reduced value OEX 
LEAPS, based on one-tenth of the value of the Index, will be based 
on one-fifth of the value of the Index after the value of the Index 
is reduced by one-half. See Letter from Timothy H. Thompson, Senior 
Attorney, CBOE, to Michael Walinskas, Division of Market Regulation, 
Commission, dated November 11, 1997.
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    In addition to the above, the CBOE proposes to double the position 
limits applicable to the OEX from 25,000 to 50,000 contracts.\7\ The 
CBOE also proposes to double the exercise limits applicable to OEX 
options from 15,000 to 30,000 contracts. The Exchange believes this 
increase in the position and exercise limits is justified because the 
reduction in the divisor would result in each contract overlying only 
one-half of the value of a current OEX contract. Consequently, the 
revised position and exercise limits would be equivalent to the current 
levels in terms of the value of the Index.
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    \7\ The Exchange has separately requested an increase in the 
position and exercise limits for OEX. See Securities Exchange Act 
Release No. 38525 (April 18, 1997) 62 FR 20046 (April 24, 1997) 
(noticing SR-CBOE-97-11).
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    The CBOE announced the effective date of the change by way of an 
Exchange circular to its membership, which also described the changes 
to the strike prices and the position and exercise limits.\8\
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    \8\ In this regard, the Commission notes that in a circular 
dated November 13, 1997, the CBOE provided notice to its members and 
member organizations of the S&P's intent to reduce the value of the 
Index by one-half and of the CBOE's intent to double the position 
and exercise limits for OEX.
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    The Exchange expects the proposed changes to attract additional 
customer business in OEX in those series in which retail customers are 
interested most in trading. The Exchange believes the proposed change 
will permit some retail investors to trade these options who otherwise 
have been priced out of the market due to the recent market surge. The 
Exchange further believes that OEX options provide an important 
opportunity for investors to hedge and speculate upon the market risk 
associated with the stocks comprising this broad-based, widely followed 
Index. By reducing the value of the Index, investors will be able to 
utilize this trading vehicle, while extending a smaller outlay of 
capital. The Exchange believes that this should attract additional 
investors and create a more active and liquid trading environment.
    The Exchange believes that reducing the value of the Index does not 
raise manipulation concerns and will not cause adverse market impact 
because the Exchange will continue to employ the same surveillance 
procedures and has proposed an orderly procedure to achieve the Index 
split, including adequate prior notice to market participants.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 6(b) of the Act \9\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ Specifically, because reducing the value of the Index 
will enhance the depth and liquidity of the market for both members and 
investors in general, the Commission believes that this rule change is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act \11\ in that it would remove impediments to and perfect the 
mechanism of a free and open market in a manner consistent with the 
protection of investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
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    By reducing the value of the Index, the Commission believes that a 
broader range of investors will be provided with a means to hedge their 
exposure to the market risk associated with the stocks underlying the 
Index. Similarly, the Commission believes that reducing the value of 
the Index may attract additional investors, thus creating a more active 
and liquid trading market in OEX.
    The Commission also believes that CBOE's adjustments to its 
position and exercise limits are appropriate and consistent with the 
Act. In particular,

[[Page 63210]]

the Commission believes that the position and exercise limits are 
reasonable in light of the fact that the size of the OEX contract will 
be halved. Doubling the position and exercise limits, therefore, will 
permit market participants to maintain, after the split of the Index, 
their current level of investment in OEX options.
    The Commission further believes that doubling the Index's divisor 
will not have an adverse market impact or make trading in OEX options 
susceptible to manipulation. After the split, the Index will continue 
to be comprised of the same stocks with the same weightings and will be 
calculated in the same manner, except for the proposed change in the 
divisor. The Commission notes that the CBOE's surveillance procedures 
also will remain the same.
    Finally, the Commission notes that the Exchange provided notice of 
the proposed changes to the Index and the OEX contract to its 
membership through a circular.\12\ The Commission believes that the 
CBOE provided adequate notice to market participants regarding this 
change to the Index value and the OEX contract prior to its 
implementation.
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    \12\ See supra note 8.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the CBOE's 
proposal is consistent with the requirements of the Act and the rules 
and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-97-48) is approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31019 Filed 11-25-97; 8:45 am]
BILLING CODE 8010-01-M