Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37155

16 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3CBOE Rule 4.12 states: ‘‘no member shall

exercise, for any account in which it has an interest

or for the account of any customer, a long position

in any options contract where such member or

customer, acting alone or in concert with others,

directly or indirectly has or will have exercised

within any five consecutive business days aggregate

long positions in any class of options dealt in on

the Exchange in excess of’’ the established limits set

by the Exchange.

4Exchange Act Release No. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (CBOE–97–11)

(order approving an increase in OEX position and

exercise limits).

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change were neither solicited nor

received.

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 in 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

change 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. 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, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR–CBOE–98–23 and

should be submitted by July 30, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18146 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40160; File No. SR–CBOE–

98–25]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to a Change in Position

and Exercise Limits for Equity Options

July 1, 1998.

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

Securities Exchange Act of 1934

(‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule

19b–4 thereunder,2 notice is hereby

given that on June 8, 1998, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

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 CBOE proposes to increase the

position and exercise limits on equity

options traded on the Exchange to three

times their current levels.

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

self-regulatory organization 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 self-regulatory organization 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 is proposing to increase the

position and exercise limits for equity

options traded on the Exchange to three

times their current levels. Currently,

Rule 4.11 subjects equity options to one

of five different position limits

depending on the trading volume and

outstanding shares for the underlying

security. Rule 4.12 establishes exercise

limits for the corresponding options at

the same levels.3 The limits are: 4,500;

7,500; 10,500; 20,000; and 25,000

contracts on the same side of the

market. Under the proposed changes the

new limits will be: 13,500; 22,500;

31,500; 60,000; and 75,000. The

Exchange believes sophisticated

surveillance techniques at options

exchanges adequately protect the

integrity of the markets for the options

that will be subject to these increased

position and exercise limits.

Manipulation.

The CBOE believes that position and

exercise limits, at their current levels,

no longer serve their stated purpose.

The Commission has stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition, such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.4

On the twenty-fifth anniversary of listed

options trading, the Exchange believes

that the existing surveillance procedures

and reporting requirements at options

exchanges and clearing firms that have

been developed over the years are able

to properly identify unusual and illegal

trading activity. In addition, the CBOE

believes that routine oversight

inspections of CBOE’s regulatory

programs by the Commission have not

uncovered any material inconsistencies

or shortcomings in the manner in which

the Exchange’s market surveillance is

conducted. These procedures entail a

daily monitoring of market movements
37156 Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices

5See Exchange Act Release No. 38248 (February

6, 1997), 62 FR 6474 (February 12, 1997) (adopting

Risk Based Haircuts); and CBOE Rule 12.3 Margins.

6Exchange Act Rule 13d–1.

7The Commission notes that issuers would, of

course, need to comply with all applicable

provisions of the federal securities laws in

conducting their share repurchase programs.

8See Exchange Act Release No. 39032 (September

9, 1997), 62 FR 48683 (September 16, 1997) (order

approving SR–CBOE–96–79).

9See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 189–91 (Comm. Print 1978).

10See Exchange Act Release No. 39893 (April 21,

1998), 63 FR 23317 (April 28, 1998) (notice of SR–

NASD–98–23). The Commission notes that the

NASD’s position limit filing was approved on June

12, 1998. The NASD’s position limit filing

established position and exercise limits for

conventional equity options identical to those being

proposed by CBOE in this filing. See Exchange Act

Release No. 40087 (June 12, 1998), 63 FR 33746

(June 19, 1998).

11See Exchange Act Release No. 39032

(September 9, 1997), 62 FR 48683 (September 16,

1997).

12 Id. at 48685. The Commission notes that

approval of the elimination of position and exercise

limits for FLEX equity options was granted for a

two-year pilot period and was based on several

other factors including, in large part, additional

safeguards adopted by the exchanges to allow them

to monitor large options positions.

13 15 U.S.C. 78f(b).

via automated surveillance techniques

to identify unusual activity in both the

options and underlying stock. Further,

the Exchange believes the significant

increases in unhedged options capital

charges resulting from the September

1997 adoption of risk-based haircuts

and the Exchange margin requirements

applicable to these products under

Exchange rules serves as a more

effective protection than position

limits.5

Furthermore, large stock holdings

must be disclosed to the Commission by

way of Schedule 13D or 13G.6 Options

positions are part of any reportable

positions and cannot be legally hidden.

In addition, Exchange Rule 4.13—which

requires members to file reports with

the Exchange for any customer who

held aggregate long or short positions of

200 or more option contracts of any

single class for the previous day—will

remain unchanged and an important

part of the Exchange’s surveillance

efforts.

Position and exercise limits restrict

legitimate options use. In the

Exchange’s view, equity position limits

prevent large customers like mutual

funds and pensions funds from using

options to gain meaningful exposure to

individual stocks, resulting in lost

liquidity in both the options market and

the stock market. The Exchange further

believes that equity position limits also

act as a barrier to the use of options by

corporations wishing to implement

options strategies with their own stock.

For example, existing equity position

limits could restrict the number of put

options that could be sold under a

corporate buyback program.7

Financial requirements. The

Exchange believes that financial

requirements imposed by the Exchange

and by the Commission adequately

address concerns that a member or its

customer may try to maintain an

inordinately large unhedged position in

an equity option. Current margin, and

risk-based haircut metholodogies serve

to limit the size of positions maintained

by any one account by increasing the

margin and/or capital that a member

must maintain for a large position held

by itself or by its customer. It should

also be noted that the Exchange has the

authority under paragraph (h) of Rules

12.3 and 12.10 to impose a higher

margin requirement upon the member

or member organization when the

Exchange determines a higher

requirement is warranted. In addition,

the Commission’s net capital rule, Rule

15c3–1 under the Exchange Act,

imposes a capital charge on members to

the extent of any margin deficiency

resulting from the higher margin

requirement.

Past increases have had no adverse

consequences. Equity position limits

have been gradually expanded from

1,000 contracts in 1973 to the current

level of 25,000 contracts for the largest

and most active stocks. In 1997, the SEC

approved the elimination of position

and exercise limits in FLEX Equity

options under a two-year pilot

program.8 To date, there have been no

adverse affects on the market as a result

of the past increases in the limits for

equity options or the elimination of

position and exercise limits for FLEX

Equity options.

Changes will allow options exchanges

to compete more fairly with OTC

markets. The Commission has stated

that ‘‘limits must not be established at

levels that are so low as to discourage

participation in the options market by

institutions and other investors with

substantial hedging needs or to prevent

specialists and market-makers from

adequately meeting their obligations to

maintain a fair and orderly market.’’ 9

However, in today’s market, equity

position limits put listed options at a

competitive disadvantage to over-thecounter derivatives. OTC dealers can

execute options trades through overseas

subsidiaries not subject to NASD

regulation, and therefore not subject to

position limits. As a result, the largest

trades can go unobserved and

unmonitored for regulatory and

oversight purposes. Member firms

continue to express concern to the

Exchange that position limits on CBOE

products are an impediment to their

business and that they have no choice

but to move their business to off-shore

markets where position limits are not an

issue.

In addition, the NASD has recently

filed a proposed rule change with the

Commission 10 which proposes to raise

the position limits for conventional

equity options (i.e., those options not

issued, or subject to issuance by the

Options Clearing Corporation) to three

times their current levels (which is the

same as three times the levels

established by current Exchange rules

for standardized options). Because

conventional options often have nearly

the identical terms as standardized,

Exchange-traded options, the Exchange

believes the position limits for

standardized options should be at least

as high as those for conventional

options.

The proposed changes should help to

attract business back to the Exchange

where the trades will be subject to

reporting requirements and

surveillance. In its release approving the

elimination of FLEX equity option

limits for a two-year pilot period,11 the

Commission stated that the elimination

of position limits will allow the listed

options markets to better compete with

the OTC market.

[T]he elimination of position and exercise

limits for FLEX equity options allows the

Exchanges to better compete with the

growing OTC market in customized equity

options, thereby encouraging fair competition

among brokers and exchange markets. The

attributes of the Exchanges’ options markets

versus an OTC market include, but are not

limited to, a centralized market center, an

auction market with posted transparent

market quotations and transaction reporting,

parameters and procedures for clearance and

settlement, and the guarantee of the OCC for

all contracts traded on the Exchanges.12

It should also be noted that individual

stocks are not subject to position limits.

Investors can theoretically hold 100% of

a company’s shares outstanding as long

as they file the appropriate Schedule

13D or 13G. The Exchange believes the

increase in the position and exercise

limits will better enable the Exchange to

compete against the OTC markets and is

an appropriate and responsible increase

given the nature of the Exchange’s

surveillance.

2. Basis

The Exchange believes that the

proposal is consistent with Section

6(b) 13 of the Act, in general, and Section
Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37157

14 15 U.S.C. 78f(b)(5).

15 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Proposed rule change SR–CHX–98–13, which

was filed with the Commission on June 10, 1998,

(i) requests permanent approval of the policy that

permits market makers to clear the cabinet post by

phone, and (ii) proposes to expand this policy to

include all securities traded on the trading floor.

4Securities Exchange Act Release No. 39519

(January 6, 1998), 63 FR 1985 (January 13, 1998).

6(b)(5) 14 of the Act, in particular, in that

it is designed to promote just and

equitable principles of trade and to

protect investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change were neither solicited nor

received.

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 in 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

change 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. 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, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR–CBOE–98–25 and

should be submitted by July 30, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18148 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40144; File No. SR–CHX–

98–17]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of a Proposed

Rule Change by the Chicago Stock

Exchange, Inc., to Extend the

Exchange’s Clearing the Post Policy

for Cabinet Securities

June 30, 1998.

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 June 18,

1998, the Chicago Stock Exchange, Inc.

(‘‘CHX’’ or the ‘‘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 CHX. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons and to

grant accelerated approval to the

proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to extend the

current pilot program that amends

interpretation and policy .02 of CHX

Rule 10 of Article XX and amends CHX

Rule 11 of Article XX relating to

clearing the post for cabinet securities

on an interim basis until December 6,

1998, or until the Commission approves

SR–CHX–98–13,3 whichever occurs

first. The initial six-month pilot

program was approved by the

Commission on January 6, 1998, and

expires on July 6, 1998.4 The text of the

proposed rule change is as follows:

Additions are italicized; deletions are

bracketed.

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 execution 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