[Federal Register Volume 62, Number 51 (Monday, March 17, 1997)]
[Notices]
[Pages 12669-12671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6562]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38375; File No. SR-CBOE-97-14]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to the 
Transfer of the Options Business of the New York Stock Exchange to the 
Chicago Board Options Exchange

March 7, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on March 3, 1997, the Chicago 
Board Options Exchange, Incorporated (``CBOE'' and ``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 CBOE. 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend its Constitution and Rules in order to 
authorize the issuance of options trading permits (``Permits'') in 
connection with the proposed transfer of the options business of the 
New York Stock Exchange, Inc. (``NYSE'') to CBOE. CBOE also proposes to 
define the rights and obligations associated with Permits, and to 
provide for the trading of options on the NYSE Composite Index.\2\
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    \2\ The text of the proposed rule change is available at the 
Office of the Secretary, CBOE and in the Public Reference Room of 
the Commission.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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

    The purpose of the proposed rule change is to authorize the 
issuance of 75 ``Options Trading Permits'' (``Permits'') in connection 
with the proposed transfer of the NYSE's options business to CBOE, and 
to define the rights and obligations associated with such Permits.\3\ 
In addition, the proposed rule change amends CBOE rules as necessary to 
provide for the trading on CBOE of options on the NYSE Composite Index. 
The 75 Permits are proposed to be issued pursuant to the terms of an 
agreement between CBOE and NYSE. The agreement represents the 
culmination of a process initiated by NYSE in the summer of 1996 when 
it announced that it intended to discontinue its options business. At 
that time, NYSE invited interested parties wishing to continue NYSE's 
options business to bid for its acquisition by offering trading rights 
and other benefits to NYSE members, including payment for the ``going 
business'' value of the business to be acquired. Based on its bid in 
response to NYSE's invitation, NYSE determined to enter into exclusive 
negotiations with CBOE. A definitive agreement between CBOE and NYSE 
(``Agreement'') was executed as of February 5, 1997.\4\
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    \3\ On March 3, the NYSE filed with the Commission a proposed 
rule change, SR-NYSE-97-05, regarding the transfer of the NYSE 
options business to the CBOE.
    \4\ A copy of the Agreement is attached as Exhibit B to this 
filing and is available for review at the Office of the Secretary of 
CBOE, and in the Public Reference Room of the Commission.
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    The Agreement contemplates that trading in NYSE Options will 
commence on the CBOE trading floor on April 28, 1997 (``Effective 
Date''), subject to the fulfillment of specified conditions and the 
approval of this proposed rule change and the parallel filing by 
NYSE.\5\ The Agreement provides that CBOE will pay $5,000,000 as the 
purchase price for the business to be transferred, of which $1,200,000 
will be retained by NYSE to cover its costs associated with the 
termination of its options activities and as payment for a ten-year 
license granted to CBOE to enable it to trade options on the NYSE 
Composite Index, and $3,800,000 net of a tax reserve will be 
distributed pro rata to all NYSE members. Details of the cash 
distribution to NYSE members are described in Item 3 of the parallel 
proposed rule change filed by NYSE.
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    \5\ ``NYSE Options'' are defined as those classes of options 
that were trade on NYSE immediately prior to the Effective Date and 
not then also traded on CBOE, and those classes of options on at 
least 14 additional underlying stocks which CBOE has agreed to 
designate as NYSE Options during each of the seven years following 
the Effective Date.
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    The Agreement also provides that CBOE will issue up to a total of 
75 Permits to those NYSE specialist and non-specialist firms and sole 
proprietors who operated pursuant to options trading rights on NYSE on 
December 5, 1996, and who agree to transfer their options activities to 
CBOE. In the case of an NYSE specialist, the specialist firm may select 
any qualified person to act as its nominee on CBOE. In the case of a 
non-specialist, the individual acting pursuant to an options trading 
badge on NYSE on December 5, 1996, must personally relocate to Chicago 
in order to receive a Permit. If less than 75 Permits are issued to 
NYSE specialists and non-specialists, the Agreement provides that the 
difference between 75 Permits and the number of Permits so issued will 
be deposited in a lease pool to be leased to qualified persons who wish 
to trade NYSE Options on CBOE. The proceeds from the lease of these 
Permits will be paid to certain designated persons who help options 
trading rights on NYSE, as described below.
    The issuance of 75 Permits is proposed to be authorized pursuant to 
a new Section 2(e) to the Exchange's

[[Page 12670]]

Constitution. That section provides that all Permits expire on the 
seventh anniversary of the date when trading begins on the floor of 
CBOE in NYSE Options. It also specifies that Permit holders shall have 
none of the rights of members except as specified in the Rules of the 
Exchange.
    The rights and obligations of holders of Permits are set forth in 
proposed new Exchange Rule 3.27, which incorporates by reference many 
of the other rules of the Exchange pertaining to the rights and 
obligations of Exchange members generally. Subparagraph (a)(1) of Rule 
3.27 reflects the terms of the Agreement by providing that NYSE non-
specialist firms and sole proprietors who were engaged in business on 
the options floor of NYSE immediately prior to the Effective Date are 
entitled to the same number of Permits as the number of options floor 
badges they held on NYSE on December 5, 1996, but that each individual 
who held an NYSE options floor badge and acted as a non-specialist must 
personally relocate to Chicago in order to be entitled to a Permit in 
respect of that badge. Subparagraph (a)(2) provides that each 
specialist firm engaged in business on the options floor of NYSE is 
likewise entitled to the same number of Permits as the number of 
options floor badges they held on NYSE, and that, subject to the rules 
of CBOE, each such firm may designate any qualified person to be the 
firm's nominee on CBOE.
    Subparagraph (a)(3) of Rule 3.27 describes the terms of the lease 
pool pursuant to which any of the 75 Permits not issued to NYSE members 
active on the NYSE options floor, or any so issued but subsequently 
surrendered, will be leased by CBOE through an auction or other 
competitive process. The lease proceeds would ordinarily be paid to 
those person identified by NYSE as having used or leased NYSE options 
trading rights on December 5, 1996, or holders of options trading 
rights that, while not so used or leased, were formally separated from 
their NYSE memberships on that date, or transferees of such persons.
    Subparagraph (a)(4) of Rule 3.27 provides that if a Permit issued 
to a NYSE options badge holder is not used during the first year 
following the Effective Date, the Permit shall be surrendered and shall 
be added to the lease pool described above, unless the inactivity of 
the Permit has been consented to by CBOE.
    Subparagraph (a)(5) of Rule 3.27 provides that Permits issued to 
NYSE options badge holders pursuant to subparagraphs (a) (1) and (2) 
are not transferable for one year following the Effective Date, except 
as consented to by the Exchange in the event of death, hardship or 
certain successions in ownership. Following this one year period, 
Permits are freely transferable in accordance with Exchange rules 
governing the transfer of memberships generally.
    Paragraph (b) of Rule 3.27 describes the trading rights to which 
the holder of a Permit is entitled. In general, these include the right 
to be admitted to the separate CBOE trading facility devoted 
exclusively to the trading of NYSE Options, as defined in the Rule,\6\ 
and to engage in the activities of a Market-Maker, Designated Primary 
Market-Maker (``DPM'') and/or Floor Broker in respect of those options, 
subject to the applicable rules of the Exchange. In addition, the 
holder of a Permit is entitled to trade by order as principal those 
classes of options traded on CBOE's regular trading floor that were 
dually traded on both CBOE and NYSE immediately prior to the Effective 
Date. Permit holders are also entitled to trade by order as principal 
all other classes of options traded on CBOE's regular trading floor, 
provided that such trades during any calendar quarter (as measured by 
contract volume) do not exceed twenty percent of the sum of the Permit 
holder's total in person principal trades in NYSE Options and the 
Permit holder's principal trades by order in options that were dually 
traded on both CBOE and NYSE immediately prior to the Effective Date. 
Finally, a Permit holder is entitled to be admitted to the regular 
options trading floor in order to respond to the call of a Board Broker 
or Order Book Official for additional market-makers pursuant to 
Exchange Rule 7.5.
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    \6\ Supra note 6.
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    Paragraph (c) of Rule 3.27 provides that each NYSE specialist firm 
to which a Permit is issued will be appointed as the DPM in the same 
classes of NYSE Options as those for which it was designated as a 
specialist on NYSE, subject to qualifying to act as such pursuant to 
CBOE rules. Paragraph (c) also provides that the DPMs for the 
additional classes of NYSE Options designated each year shall be chosen 
from among Permit holders. Subject to the rules of the Exchange, 
specialist firms appointed as DPMs in NYSE Options shall be entitled to 
continue to act as such during the term of the Permits, and thereafter 
it they become regular members of the Exchange.
    Paragraph (d) of Rule 3.27, together with Section 2(e) of the 
Exchange Constitution, provides that Permit holders shall have the same 
rights and obligations of members, except that they shall have no right 
to petition or vote or to be counted as part of a quorum at meetings of 
members, they shall have no interest in the assets or property of the 
Exchange, they shall not share in any distribution by the Exchange, 
they shall not participate in the Exchange's member death benefit 
program, and they shall not have the right to transact business with 
the public in any securities dealt in on the Exchange other than NYSE 
Options. Holders of Permits may serve on any committee of the Exchange 
to which they are appointed, and are deemed to be appointed market-
makers in all classes of NYSE Options pursuant to Exchange Rule 8.3.
    Paragraph (d) also provides that membership application fees shall 
be waived in connection with the approval of Permit holders or their 
nominees in connection with the original issuance of a Permit but not 
the subsequent transfer or lease of a Permit, and shall also be waived 
in connection with the approval of the initial holder or its nominee as 
a regular member of the Exchange or as the nominee of a regular member. 
Membership or nominee applications made by Permit holders or their 
nominees who are not subject to a statutory disqualification and are 
not the subjects of a self-regulatory organization investigation that 
may involve their fitness for membership shall be deemed effective for 
a temporary period of six months, so as not to interrupt their Exchange 
activities while their applications are being processed.
    It is also proposed to amend certain of the rules in Chapters XXIV 
and XXIVA of the Rules of the Exchange, which govern the trading of 
index options and FLEX options, respectively, in order to provide for 
the listing and trading of options on the NYSE Composite Index. 
(Hereafter, such index is referred to as the ``Index'' and such options 
as ``NYA Options''.) The Index is a capitalization-weighted index 
comprising all of the over 2,500 common stocks listed on NYSE. The 
Index is expressed in relation to the base period market value which 
has been adjusted for capitalization changes over time. The base value 
of the Index was set at 50 on December 31, 1965. NYSE will continue to 
act as the reporting authority for the Index, and CBOE will trade NYA 
Options pursuant to a license granted by NYSE.
    As traded on NYSE and as proposed to be traded on CBOE, NYA Options 
are European-style, A.M.-settled index options, strike prices for which 
are introduced at $2.50 or $5.00 intervals for strike prices below $200 
or at or

[[Page 12671]]

above $200, respectively. The Index Multiplier for NYA Options is $100. 
CBOE proposes to apply to NYA Options the same 45,000 contract position 
and exercise limits (no more than 25,000 contracts expiring in the 
nearest expiration month) and the same hedge exemption that currently 
apply to such options under NYSE rules. In addition to regular index 
options, CBOE proposes to provide for trading in Quarterly Index 
Expiration options (``QIX'' options), long-term and reduced-vale long-
term options (``LEAPs'' and ``reduced-value LEAPs'') and A.M.-settled 
FLEX Options on the Index pursuant to the same rules and procedures 
that currently govern trading on CBOE in these types of options.
    In addition, the proposed rule change includes a few corrections to 
the table of position limits set forth in Rule 24.4 in order to add 
references to classes of index options that were inadvertently omitted 
from the table when it was last revised, and a few clarifications to 
the language of Rule 24A.4(b) concerning the specification of the 
exercise settlement values for FLEX Index Options. No substantive 
changes will result from these corrections and clarifications.
    CBOE believes that it has adequate facilities and resources to 
provide for the trading, surveillance and data dissemination called for 
by the transfer of the NYSE options business to its market. In this 
connection, CBOE intends to construct a new trading facility dedicated 
solely to NYSE Options, which will be configured and equipped in the 
same manner as its existing trading floor. The surveillance and 
regulatory responsibilities resulting from the transfer of the NYSE 
options business to CBOE are not expected to add significantly to 
CBOE's existing regulatory workload, and CBOE believes it has adequate 
resources to assume these added responsibilities. CBOE intends to add 
one additional output line to the OPRA processor for purposes of 
transmitting market information pertaining to NYSE Options. This will 
not increase the total input to OPRA because two lines from NYSE to the 
OPRA processor will be terminated at the time of the transfer to CBOE.
    CBOE believes that the purposed rule change is consistent with and 
in furtherance of the provisions of Section 6(b)(5) of the Securities 
Exchange Act of 1934 because, by permitting those NYSE members who have 
been engaged in options activities on NYSE to continue to conduct an 
options business in CBOE's regulated exchange marketplace, the proposed 
rule change is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and to protect investors and 
the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition. Instead, by providing a framework within which 
all of the members of NYSE who have been active in NYSE's options 
business may continue to conduct that business on CBOE, the proposed 
rule change is intended to strengthen the ability of those members to 
compete with other markets that may also wish to trade the options 
formerly traded on NYSE. In this regard, CBOE understands that early in 
1996, NYSE determined to continue its options business regardless of 
whether it would be able to transfer that business to CBOE or to any 
other market. NYSE's effort to transfer its options business to another 
market was made largely in order to provide a home for those of its 
options members who wished to continue in the options business, as 
evidenced by NYSE's emphasis on trading rights for its members in its 
request for bids for the acquisition of its options business.
    The terms governing the transfer of NYSE's options business to CBOE 
impose no restrictions on the ability of NYSE to resume options trading 
at any time, except that if NYSE were to resume trading options within 
one year following the Effective Date, it would have to pay CBOE 
$500,000 to offset a small portion of CBOE's costs associated with the 
transfer. Nor are any restrictions imposed on NYSE members that would 
limit their ability to trade options on NYSE if that exchange were to 
resume its options trading program. CBOE notes that any other 
securities market is also free at any time to trade any or all of the 
options formerly traded on NYSE, other than NYA Options, which will be 
exclusively licensed to CBOE.

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 thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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, NW., 
Washington, DC 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 File No. SR-CBOE-97-14 and should be 
submitted by April 7, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-6562 Filed 3-14-97; 8:45 am]
BILLING CODE 8010-01-M