[Federal Register Volume 65, Number 206 (Tuesday, October 24, 2000)]
[Notices]
[Pages 63657-63658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27238]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43456; File No. SR-CBOE-00-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to an 
Increase in the Position Limits for Nasdaq 100 Stock Index Options

October 17, 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 April 10, 2000, the Chicago Board Options Exchange, Inc. (``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 Exchange. 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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend Exchange Rule 24.4--Position Limits for 
Broad Based Index Options, to increase the standard position and 
exercise limits for the NASDAQ 100 Index (``NDX'') option class, expand 
the index hedge exemption, and eliminate the near term position limit 
restriction. The text of the proposed rule change is available at the 
CBOE and at the Commission's Public Reference Room.

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 CBOE proposes to amend Exchange Rule 24.4 by increasing the 
broad based index option position limit for the NDX, eliminating the 
restriction on near term NDX option positions, and increasing the NDX 
index hedge exemption. Specifically, the Exchange proposes to increase 
the overall position limit from 25,000 contracts to 75,000 contracts--a 
tripling of the current limit.\3\ The Exchange also proposes to 
eliminate the 15,000 contract near term limit. Lastly, the Exchange 
proposes to raise the index hedge exemption from 75,000 option 
contracts, which is in addition to the standard limit, to 150,000 
option contracts.\4\
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    \3\ Exercise limits will continue to correspond to position 
limits, so that investors may exercise the number of contracts set 
forth as the position limit, during any five consecutive business 
day period.
    \4\ The Exchange recently listed and traded options based on a 
value of \1/10\ the current value of the Nasdaq 100 Index and made 
related changes to position and exercise limits for that option 
class. See Securities Exchange Act Release No. 43000 (June 30, 
2000), 65 FR 42409 (July 10, 2000).
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    The CBOE believes that an increase in position and exercise limits 
for NDX options is appropriate for several reasons. The current limit 
of 25,000 contracts, with no more than 15,000 contracts in the near 
term series, has been in place since the inception of trading in the 
NDX option class on February 7, 1994. The CBOE notes that the 
Commission recently approved rule filings increasing position and 
exercise limits for standardized equity option

[[Page 63658]]

contracts.\5\ The Commission also approved the elimination of position 
and exercise limits for certain broad-based index option contracts for 
a 2-year pilot program.\6\ The highest equity option position limit 
tier is now 75,000 contracts. As a comparison, market capitalization 
for IBM, which has a base position limit of 75,000 contracts, is 
approximately $191 billion, while the market capitalization for NDX 
with a 25,000/15,000 position limit is over $4.2 trillion. 
Additionally, the average daily volume and open interest in NDX has 
increased by approximately 150% since October 1999 (see Exhibit B). 
Based on these statistics and the recent position limit relief granted 
for standardized equity options, the CBOE believes it is reasonable to 
allow for changes to the position and exercise limits for NDX index 
options.
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    \5\ See Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842 (January 12, 1999) (File Nos. SR-CBOE-98-25; Amex-
98-22; PCX-98-33; and Phlx-98-36) (increasing position limits for 
standardized equity options to 13,500, 22,500, 31,500, 60,000, and 
75,000).
    \6\ See Securities Exchange Act Release No. 40969 (January 22, 
1999), 64 FR 4911 (February 1, 1999) (File No. SR-CBOE-98-23); 
Securities Exchange Act Release No. 41011 (February 1, 1999), 64 FR 
6405 (February 9, 1999) (File No. SR-Amex-98-38).
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    With respect to the near term limitation, the Exchange believes 
that the rationale for imposing such a limitation is not applicable to 
the NDX. Historically, a front month limitation was established for 
American style broad-based index options as a measure to lessen market 
volatility experienced at the close of trading on expiration when 
stock/index programs were unwound.\7\ However, these conditions are not 
relevant for the NDX. NDX is a European style contract with a 
settlement value based on a volume weighting of opening stock prices as 
reported within the first five (5) minutes of trading. Additionally, it 
should be noted that the CBOE's surveillance procedures during the week 
of expiration include communication with NASD Regulation to determine 
whether there are any concerns regarding potential manipulation in the 
securities, which comprise the NASDAQ 100. Staff believes that the 
front month limit for NDX options is not necessary, and that it only 
provides a further restriction to the investing public, and, therefore, 
should be eliminated. Eliminating the front month position and exercise 
limits for NDX index options may bring additional depth an liquidity, 
in terms of both volume and open interest, to the NDX without 
significantly increasing concern regarding intermarket manipulations or 
disruptions of the index options or the underlying component 
securities.
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    \7\ According to CBOE, OEX is the only American style broad-
based index option traded on the Exchange. The Exchange stated that 
a front month limitation was established for the OEX index option 
when the Exchange initially sought to increase the position limits 
for the option. Other broad-based index options traded on the 
Exchange are European style options, and therefore can only be 
exercised on the expiration date. Telephone conversation between Pat 
Cerny, Director, Department of Market Regulation, CBOE, and Joseph 
Corcoran, Attorney, Division of Market Regulation, Commission, on 
October 12, 2000.
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2. Statutory Basis
    The CBOE believes the proposed rule change is consistent with and 
the furthers the objectives of Section 6(b)(5) \8\ 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.
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    \8\ 15 U.S.C. 78f(b)(5).
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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. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice and 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 self-regulatory organization 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, including whether the proposed rule 
is consistent with 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-00-14 and should 
be submitted by November 14, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-27238 Filed 10-23-00; 8:45 am]
BILLING CODE 8010-01-M