[Federal Register Volume 60, Number 78 (Monday, April 24, 1995)]
[Notices]
[Page 20132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9978]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35617; File No. SR-CBOE-95-02]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to the 
Listing of Long-Term Index Options Series (``LEAPS'') With a Duration 
of up to Sixty Months Until Expiration

April 17, 1995.
    On January 19, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to permit the listing of long-
term index options series (``LEAPS'') with a duration of up to sixty 
months (five years) until expiration. Notice of the proposal appeared 
in the Federal Register on February 1, 1995.\3\ No comment letters were 
received on the proposed rule change. This order approves the CBOE 
proposal.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See Securities Exchange Act Release No. 35278 (January 25, 
1995), 60 FR 6324.
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    The purpose of the proposed rule change is to permit the Exchange 
to list index LEAPS with a duration of up to sixty months (five 
years).\4\ Presently, the Exchange has authority pursuant to CBOE Rule 
24.9(b) to list index LEAPS that expire from twelve to thirty-six 
months from the time they are listed. The Exchange represents that 
there has been increasing member firm and customer interest in longer 
term instruments. The Exchange, therefore, is proposing to amend 
Exchange Rule 24.9 to permit the listing of index options with up to 
sixty months until expiration. In addition, the Exchange proposes to 
amend Rule 24.9 to allow for up to ten expiration months for index 
LEAPS, as opposed to the six months currently allowed. The proposal 
does not change any other rule regarding the listing and trading of 
index LEAPS.\5\

    \4\The proposal would permit five-year LEAPS on both broad-based 
and narrow-based indexes on which LEAPS have been approved for 
trading on the CBOE.
    \5\See CBOE Rule 24.9(b).
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    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5).\6\ Specifically, the 
Commission believes the proposal is designed to provide investors with 
additional means of hedging equity portfolios from long-term market 
risk with an exchange-traded security (i.e., a standardized option), 
thereby facilitating transactions in options and contributing to the 
protection of investors and the maintenance of fair and orderly 
markets.\7\

    \6\15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
    \7\The Commission also finds that extending the maximum term for 
Index LEAPS from three to five years does not alter the Commission's 
designation of index LEAPS as standardized options pursuant to Rule 
9b-1(a)(4) of the Act.
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    Currently, institutional customers use index options to hedge the 
risks associated with holding diversified equity portfolios. The 
Commission continues to believe, as originally stated in its approval 
of the listing of index LEAPS by the Exchange, that allowing investors 
to lock in their hedges with longer-term index LEAPS will permit 
institutions to protect better their portfolios from adverse market 
moves.\8\ Further, the Commission believes that index LEAPS with up to 
five years until expiration will allow this protection at a known and 
limited cost.\9\ Moreover, the proposal will provide institutions with 
an additional securities product with which to hedge their portfolios 
as an alternative to hedging with futures positions or off-exchange 
customized index options.\10\ Accordingly, the Commission believes that 
the proposed rule change will better serve the long-term hedging needs 
of institutional investors.\11\

    \8\See Securities Exchange Act Release No. 24853 (August 27, 
1987), 52 FR 33486 (September 3, 1987).
    \9\Id.
    \10\Id.
    \11\The Commission's findings are predicated on the somewhat 
limited length of five-year index LEAPS. Any subsequent proposal to 
list index LEAPS with expirations beyond five years could alter the 
nature of the product and would raise new regulatory concerns, 
including, among other things, the appropriate margin treatment, 
disclosure, and trading rules for the product.
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    Finally, although as with index LEAPS presently trading on the 
Exchange, specific strike price interval, bid/ask differential, and 
price continuity rules will not apply until the proposed longer-term 
index LEAPS have less than 12 months until expiration,\12\ the 
Commission notes that CBOE's general rule obligating market makers to 
maintain fair and orderly markets will continue to apply to the 
proposed longer-term index LEAPS.\13\ The Commission believes that the 
requirements of CBOE Rule 8.7(a) are broad enough, even in the absence 
of strike price interval, bid/ask differential, and continuity 
requirements, to provide the Exchange with the authority to make a 
finding of inadequate market maker performance should market makers 
enter into transactions or make bids or offers (or fail to do so) in 
the proposed longer-term index LEAPS that are inconsistent with the 
maintenance of a fair and orderly market.

    \12\See CBOE Rule 24.9(b)(1).
    \13\See CBOE Rule 8.7(a).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-CBOE-95-02) is 
approved.

    \14\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-9978 Filed 4-21-95; 8:45 am]
BILLING CODE 8010-01-M