Federal Register / Vol. 62, No. 228 / Wednesday, November 26, 1997 / Notices 63209

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 39192

(October 3, 1997) 62 FR 53040.

4See Securities Exchange Act Release No. 19264

(November 22, 1997) 47 FR 53981 (November 30,

1982).

5The 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.

6The 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 onehalf. See Letter from Timothy H. Thompson, Senior

Attorney, CBOE, to Michael Walinskas, Division of

Market Regulation, Commission, dated November

11, 1997.

7The 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).

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.

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).

received the company’s election. See

Investment Company Act Release No.

11703 (March 26, 1981).

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31018 Filed 11–25–97; 8:45 am]

BILLING CODE 8010–01–M

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.

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.

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.

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

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.

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

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.

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,
63210 Federal Register / Vol. 62, No. 228 / Wednesday, November 26, 1997 / Notices

12See supra note 8.

13 15 U.S.C. 78s(b)(2).

14 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1).

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.

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–31019 Filed 11–25–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39337; File No. SR–CHX–

97–30]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Stock Exchange, Incorporated

Codifying the Exchange’s Clearing the

Post Policy

November 19, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

October 23, 1997, the Chicago Stock

Exchange, Incorporated (‘‘CHX’’ 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 self-regulatory

organization. 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 add

interpretation and policy .02 to Rule 10

of Article XX relating to clearing the

post. The text of the proposed rule

change is as follows: Additions are

italicized.

Article XX

Rule 10. Manner of Bidding and

Offering.

No change in text.

* * * Interpretations and Policies

.02 Clearing the Post.

Policy. All orders received by floor

brokers or originated by market makers

on the floor of the Exchange must

effectively clear the post before the

orders may be routed to another market,

either via the ITS System or through the

use of alternative means.

Floor brokers who receive an order on

the floor have a fiduciary responsibility

to seek a best price executive for such

order. This responsibility includes

clearing of the Exchange’s post prior to

routing an order to another market so

that other buying and selling interest at

the post can be checked for a potential

execution that may be as good as or

better than the execution available in

another market.

Market makers are required to provide

depth and liquidity to the Exchange

market, among other things. Exchange

Rules require that all market maker

transactions constitute a course of

dealings reasonably calculated to

contribute to the maintenance of a fair

and orderly market. In so doing, market

makers must adhere to traditional

agency/auction market principles on the

floor. Transactions by Exchange market

makers on other exchanges which fail to

clear the Exchange post do not

constitute such a course of dealings.

Notwithstanding the above, it is

understood that on occasion a customer

will insist on special handling for a

particular order that would preclude it

from clearing the post on the Exchange

floor. For example, a customer might

request that a specific order be given a

primary market execution. These

situations must be documented and

reported to the Exchange. Customer

directives for special handling of all

orders in a particular stock or all stocks,

however, will not be considered as

exceptions to the clearing the post

policy.

All executions resulting from bids and

offers reflected on Instinet terminals

resident on the Exchange floor

constitute ‘‘orders’’ which are

‘‘communicated’’ to the Exchange floor.

Therefore, all orders resulting from

interest reflected on Instinet terminals

on the Exchange floor must be handled

as any other order communicated to the

floor. All such orders must be presented

to the post during normal trading hours.

All trades between Instinet and

Exchange floor members are Exchange

trades and must be executed on the

Exchange.

Method of Clearing the Post. The

Exchange’s clearing the post policy

requires the floor broker or market

maker to be physically present at the

post. A market maker, after requesting

the specialist’s market quote, must bid

or offer the price and size of his

intended interest at the post. A floor

broker must clear the post by requesting

a market quote from the specialist. If the

specialist or any other member who has

the post indicates an interest to trade at

the price that was bid or offered by the

market maker or the price of the floor

broker’s order (even though that order

has not yet been bid or offered), then the

trade may be consummated with the

specialist (or whomever has the post) in

accordance with existing Exchange

priority, parity and precedence rules. If

the specialist (or any other member who

has the post) indicates interest to trade

at that price but the member

communicating the intended interest,

including Instinet interest, determines

not to consummate the trade with the

specialist or such member, then, to

preserve the Exchange’s existing

priority, parity and precedence rules,

the trade may not be done with any

other Exchange floor member. (See

Article XXX, Rule 2.) If the trade is

consummated with the specialist or

other member who has the post, the

specialist (or any customer represented

by the specialist) is not required to pay

any fees to the broker or market maker

in connection with the execution of the

order, unless such fee is expressly

authorized by an Exchange Rule. If the

specialist does not indicate an interest

to trade, then the trade may be

consummated with another Exchange