Federal Register / Vol. 65, No. 25 / Monday, February 7, 2000 / Notices 5921

9 In approving this proposed Plan amendment,

the Commission has considered the proposal’s

impact on efficiency, competition,and capital

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

10 15 U.S.C. 78k–1.

11 17 CFR 240.11Aa3–02.

11 17 CFR 200.30–3(a)(29).

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

2 17 CFR 240.19b–4.

3The Commission approved this Interpretation in

1996. See Release No. 34–37726 (September 25,

1996), 61 FR 51474 (October 2, 1996).

and regulations thereunder.9

Specifically, the Commission believes

that the proposed amendment, which

allocates the limited capacity of the

OPRA system among the options

markets, is consistent with Rule 11Aa3–

2 in that it will contribute to the

maintenance of fair and orderly markets

and remove impediments to and perfect

the mechanisms of a national market

system. The Commission notes that the

aggregate message traffic generated by

the options exchanges is rapidly

approaching the outside limit of OPRA’s

systems capacity. OPRA’s processor has

informed the Commission that current

plans to enhance OPRA’s systems are

not expected to be completed before the

end of the second quarter of this year,

at the earliest. Consequently, the

Commission is concerned that, absent

an agreed-to program to allocate systems

capacity among the options markets that

is put in place immediately, systems

queuing of options quotes may be the

norm, to the detriment of all investors

and other participants in the options

markets. The Commission believes that

the agreed-upon allocation proposal is a

reasonable means for addressing

potential strains on capacity that may

occur between now and March 4, 2000.

The Commission finds good cause to

accelerate the proposed Plan

amendment prior to the thirtieth day

after the date of publication in the

Federal Register. The Commission notes

that the proposed Plan amendment is

intended to allocate OPRA system

capacity for a short period of time to

mitigate potential disruption to the

orderly dissemination of options market

information caused by the inability of

the OPRA system to handle the

anticipated quote message traffic. The

commission believes that approving the

proposed capacity allocation will

provide the options exchanges and

OPRA with an immediate, short-term

solution to a pressing problem, while

giving the Commission and the options

markets additional time to evaluate and

possibly, implement, other quote

mitigation strategies. In addition, the

limited time frame of the applicability

of the capacity allocation program

should provide the Commission and the

options exchanges with greater

flexibility to modify the program, as

necessary, to ensure the fairness of the

allocation process to all of the options

markets going forward. The Commission

finds, therefore, that granting

accelerated approval of the proposed

Plan amendment is appropriate and

consistent with Section 11A of the

Act.10

V. Conclusion

It is therefore ordered, pursuant to

Rule 11Aa3–2 of the Act,11 that the

proposed Plan amendment (SR–OPRA–

00–02) is approved on an accelerated

basis through March 4, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–2607 Filed 2–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42371; File No. SR–CBOE–

99–63]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Chicago Board

Options Exchange, Inc. Relating to

Exercise Price Intervals for FLEX

Equity Options

January 31, 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 December 10, 1999,

the Chicago Board Options Exchange,

Inc. (‘‘CBOE’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I and II

below, which Items have been prepared

by the Exchange. The Commission is

publishing this notice and order 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

CBOE proposes to delete

Interpretation .01 of CBOE Rule

24A.4(c)(2) 3 which limits exercise price

intervals and exercise prices for FLEX

Equity call options to those that apply

to Non-FLEX Equity call options. The

text of the proposed rule change is

available at the Office of the Secretary,

CBOE and at the Commission.

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 III 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 delete Interpretation .01

under CBOE Rule 24A.4(c)(2). This

interpretation limits the exercise price

intervals and exercise prices available

for FLEX Equity call options to those

intervals and prices that are available

for Non-FLEX Equity call options

pursuant to Interpretation and Policy

.01 under CBOE Rule 5.5. This policy

was intended to eliminate uncertainty

concerning what constitutes a

‘‘qualified’’ covered call for certain

purposes under the Internal Revenue

Code pending clarification of this tax

issue.

Currently, under Section 1092(c)(4)(B)

of the Internal Revenue Code, certain

covered short positions in call options

qualify for advantageous tax treatment if

the options are not in the money by

more than a specified amount at the

time they are written. One measure used

to determine whether a call option is

qualified is whether its exercise or

‘‘strike’’ price is no lower than the

‘‘lowest qualified benchmark price,’’

which is generally the highest strike

price available for trading that is less

than the current price of the underlying

stock. Since the exercise prices of FLEX

Equity Options are not subject to the

same intervals that apply to Non-FLEX

Equity Options, this has raised the

question whether the existence of a

series of FLEX Equity Options with a

strike price of, for example, 58 when the

price of the underlying stock is 59

would disqualify a Non-FLEX call

option with a strike price of 55, which

would otherwise be the highest strike

price available that is less than the price

of the stock.

5922 Federal Register / Vol. 65, No. 25 / Monday, February 7, 2000 / Notices

4 Department of the Treasury, IRS REG–104641–

97, 63 FR 34616 (June 25, 1998).

5 Department of the Treasury, IRS REG–104641–

97, 65 FR 3812 (January 25, 2000).

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

7 Id.

8 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).

9 15 U.S.C. 78f(b)(5).

10The Commission expects that the Options

Disclosure Document (‘‘ODD’’) will promptly be

amended to reflect the removal of the risk strike

price limitation for FLEX equity call options. See

October 1996 Supplement to the ODD. Telephone

call between Timothy Thompson, Director,

Regulatory Affairs, CBOE, and Katherine A.

England, Assistant Director, Division of Market

Regulation, Commission, on January 31, 2000.

11See Release No. 34–40584 (October 21, 1998),

63 FR 58080 (October 29, 1998) (notice of filing of

SR–CBOE–98–39.)

12 15 U.S.C. 78f.

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

14 17 CFR 200.30–3(a)(12)

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

2 17 CFR 240.19b–4.

The Internal Revenue Service (‘‘IRS’’)

reviewed this issue and proposed

rulemaking that would not require that

strike prices established by equity

options with flexible terms be taken into

account in determining whether

standard term equity options are too

deep in the money to receive qualified

covered call treatment.4 The IRS

approved this proposal on January 25,

2000.5 The effect of the IRS rulemaking

and the Exchange’s proposed

withdrawal of the limitation on the

exercise price of Equity FLEX call

options is that certain taxpayers,

particularly institutional and other large

investors, can engage in transactions in

Equity FLEX call options with a wider

range of exercise prices (as was

originally intended) without affecting

the applicability of Section 1092 of the

Internal Revenue Code for qualified

covered call options involving equity

options with standard terms.

The Exchange believes that the

proposed rule change, by eliminating a

restriction on Equity FLEX call options

which has restricted their usefulness as

a risk managing mechanism, will

remove impediments to and perfect the

mechanism of a free and open market in

FLEX Equity Options, and thus is

consistent with the objectives of Section

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

2. Statutory Basis

The Exchange believes that the

proposed rule change is consistent with

and furthers the objectives of Section

6(b)(5) 7 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

Members, 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 wit the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

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

20549–0609. 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–99–63 and should be

submitted by February 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.8 In

particular, the Commission finds the

proposal is consistent with Section

6(b)(5) 9 of the Act. Section6(b)(5)

requires, among other things, that the

rules of an exchange be designed to

remove impediments to a free and open

market and to protect investors and the

public interest.

The Commission believes that the

proposal allows sophisticated, high networth investors to take full advantage of

FLEX options. In part, FLEX options

were created to allow investors to

manage their risks by having the ability

to negotiate strike prices, contract terms

for exercise style (i.e., American,

European, or capped), and expiration

dates. However, because of the potential

adverse tax effect on qualified covered

calls, the Exchange limited FLEX call

strike prices to those available for

standardized equity calls. Now that the

tax issue has been clarified, this

limitation is being removed. With the

removal of this limitation, the

Commission believes that sophisticated,

high net-worth investors will better be

able to take advantage of the riskmanagement mechanisms provided by

FLEX options. 10

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–CBOE–98–39, was

published in the Federal Register for

the full 21-day comment period and the

Commission received no public

comment.11 CBOE later withdrew SR–

CBOE–98–39 because the IRS had not

yet acted on its proposed rulemaking.

The current proposal mirrors the

changes that were originally proposed

in SR–CBOE–98–39. In addition, the

proposal allows FLEX options to be

used as they were originally intended to

be used, and therefore raises no new

regulatory issues. The Commission

believes, therefore, that granting

accelerated approval to the proposed

rule change is appropriate and

consistent with Section 6 of the Act.12

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,13 that the

proposed rule change (SR–CBOE–98–

39) is hereby approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–2606 Filed 2–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42365; File No. SR–Phlx–

99–46]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Philadelphia Stock Exchange, Inc.

Relating to Registration of Trading

Floor Personnel

January 28, 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 November

19, 1999, the Philadelphia Stock

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