[Federal Register Volume 66, Number 104 (Wednesday, May 30, 2001)]
[Notices]
[Pages 29369-29370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13530]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44335; File No. SR-CBOE-2001-26]


Self-Regulatory Organizations; Notice Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to a Four Month Extension of the Pilot 
Program To Eliminate Position and Exercise Limits for FLEX Equity 
Options

May 22, 2001.
    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 May 21, 2001, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the CBOE. The proposed rule change has been filed by the CBOE as a 
``non-controversial'' rule change under Rule 19-4(f)(6).\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange seeks a four month extension of the pilot program that 
provides for the elimination of position and exercise limits for S&P 
100 Index (``OEX''), S&P 500 Index (``SPX''), and Dow Jones Industrial 
Average (``DJX'') index options as well as for FLEX options overlying 
these indexes. 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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On January 22, 1999, the Commission approved a two-year pilot 
program (``Pilot Program'') that allowed for the elimination of 
position and exercise limits for options on the SPX, OEX, and DJX as 
well as for FLEX options overlying these indexes.\4\ By order dated 
January 30, 2001, the Commission extended the Pilot Program until May 
22, 2001.\5\ The purpose of this proposed rule change is to request a 
four-month extension of the Pilot Program until September 22, 2001 to 
allow the Commission additional time to consider the Exchange's 
separate application for permanent approval of the Pilot Program.\6\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 40969 (January 22, 
1999), 64 FR 49111 (February 1, 1999) (approving SR-CBOE-99-23). 
(``Approval Order'')
    \5\ See Securities Exchange Act Release No. 43867 (January 22, 
2001), 66 FR 8250 (January 30, 2001) (approving SR-CBOE-01-01).
    \6\ By separate filing (SR-CBOE-2001-22), CBOE requests 
permanent approval of the Pilot Program.
---------------------------------------------------------------------------

    The Approval Order required the Exchange to submit a report to the 
Commission on the status of the Pilot Program so that the Commission 
could use this information to evaluate any consequences of the program 
and to

[[Page 29370]]

determine whether to approve the elimination of position and exercise 
limits for these products on a permanent basis.\7\ The CBOE submitted 
the required report to the Commission on December 21, 2000.\8\ The 
report indicates that during the review period, CBOE did not discover 
any instances where an account maintained an unusually large unhedged 
position. The data from the report found that only 12 accounts 
established positions in excess of 10% of the standard limit applicable 
to each index at the time the Pilot Program was approved. These 
positions were all in SPX and most were established by firms and market 
makers. All of the accounts were hedged, although to different degrees. 
Most important, CBOE's analysis did not discover any aberrations caused 
by large unhedged positions during the life of the Pilot Program. For 
this reason, the Exchange believes that its experience with the Pilot 
Program has been positive. Accordingly, CBOE requests that the 
effectiveness of the Pilot Program be extended four months.
---------------------------------------------------------------------------

    \7\ In the Approval Order, the Commission stated: ``CBOE will 
provide the Commission with a report detailing the size and 
different types of strategies employed with respect to positions 
established in those classes not subject to position limits. In 
addition, the report will note whether any problems resulted due to 
the no limit approach and any other information that may be useful 
in evaluating the effectiveness of the pilot program. The Commission 
expects that CBOE will take prompt action, including timely 
communication with the Commission and other marketplace self-
regulatory organizations responsible for oversight of trading in 
component stocks, should any unanticipated adverse market effects 
develop.''
    \8\ Letter from Patricia L. Cerny, Director, Office of Trading 
Practices, CBOE, to Elizabeth King, Division of Market Regulation, 
SEC, dated December 21, 2000.
---------------------------------------------------------------------------

2. Statutory Basis
    The proposed rule change is consistent with section 6(b) \9\ of the 
Act in general and in particular with Section 6(b)(5) \10\ in 
particular in that it is designed to promote just and equitable 
principles of trade as well as to protect investors and the public 
interest, by allowing for the extension of a Pilot Program that has 
enabled more business to be transacted on the exchanges that might 
otherwise have been transacted in the over the counter (``OTC'') market 
without the benefit of Exchange transparency and the guarantee of The 
Options Clearing Corporation. The Exchange also believes that the 
proposed rule change is consistent with section 11A of the Act \11\ in 
that it will enhance competition by allowing the Exchange to compete 
better with the OTC market in options and with entities not subject to 
position limit rules.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

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

    The Exchange represents that the proposed rule change will impose 
no 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

    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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) thereunder \13\ 
because the proposed rule change (1) does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for 30 days from the date of the filing, or such shorter time that the 
Commission may designate if consistent with the protection of investors 
and the public interest.\14\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). For purposes only of accelerating 
the operative date of this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \14\ The Commission has determined to waive the requirement the 
CBOE provide the Commission with written notice of its intent to 
file the proposed rule change at least five business days prior to 
the filing date.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
    The Exchange has requested that the rule change be accelerated to 
become operative on May 22, 2001, because such action will allow the 
Exchange to continue the Pilot Program without interruption while the 
Commission determines whether to approve the Pilot Program on a 
permanent basis. The Commission finds that accelerating the operative 
date of the rule change to prevent interruption of the Pilot Program 
while the Commission considers the permanent approval request is 
consistent with the protection of investors and the public interest, 
and thus designates May 22, 2001 as the operative date of the 
filing.\15\
---------------------------------------------------------------------------

    \15\ The Commission requests that the CBOE update the Commission 
on any problems that have developed with the pilot since the last 
extension, including any compliance issues, and whether there have 
been any large unhedged positions that have raised concerns for the 
CBOE. In addition, the Commission reiterates the expectation that 
the CBOE will take prompt action, including timely communication 
with the Commission and other marketplace self-regulatory 
organizations responsible for oversight of trading in component 
stocks, should any unanticipated adverse market effects develop. See 
note 7, supra.
---------------------------------------------------------------------------

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-
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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to the File No. SR-CBOE-2001-26 and 
should be submitted by June 20, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13530 Filed 5-29-01; 8:45 am]
BILLING CODE 8010-01-M