[Federal Register Volume 61, Number 17 (Thursday, January 25, 1996)]
[Notices]
[Pages 2324-2326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1181]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36738; File No. SR-CBOE-96-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., to Increase SPX 
Position and Exercise Limits, to Increase SPX Firm Facilitation, Index 
Hedge, and Money Managers Exemptions, and To Extend Broad-Based Index 
Hedge Exemption to Broker-Dealers

January 19, 1996.
    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 January 8, 1996, 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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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, and other related 
rules, to increase the S&P 500 index option (``SPX'') position and 
exercise limits, to increase the SPX firm facilitation, index hedge, 
and money manager exemptions, to extend the broad-based index hedge 
exemption to broker-dealers, and to expand the types of qualified 
portfolios for the index hedge exemption. The text of the proposed rule 
change is available at the Office of the Secretary, the CBOE, and 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 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 CBOE is proposing a number of revisions to Exchange Rule 24.4, 
the position limit rule for broad-based index options, as well as other 
related Exchange rules. First, member firms have expressed to the CBOE 
their need for relief from the current SPX position and exercise 
limits, which have not increased since 1992.\3\ Between 1992 and the 
present, however, volume in the SPX index option class has more than 
doubled, and open interest has remained consistently high.\4\ The CBOE 
believes that by increasing the existing 45,000 contract limit to 
100,000 contracts, the investing public as well as CBOE members and 
member firms will be afforded greater opportunity and flexibility to 
use SPX options for their hedging needs. The CBOE does not believe that 
the higher limit will increase any potential for market disruption.

    \3\ Securities Exchange Act Release No. 30944 (July 21, 1992), 
57 FR 33376 (July 28, 1992) (approval order for SR-CBOE-92-13).
    \4\ The CBOE notes that in September 1992, the average daily SPX 
index option volume during expiration week was 86,682 contracts and 
open interest was 1.3 million contracts. In comparison, in March 
1995, the average daily SPX index option volume during expiration 
week was 208,678 contracts and open interest was 1.2 million 
contracts. In each of the years 1992 through 1994, approximately 300 
market-maker exemptions from SPX position limits were granted. In 
contrast, from January through November 20, 1995, 455 market-maker 
exemptions from SPX position limits were granted.
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    To enhance its ability to monitor for unhedged, speculative 
positions as well as to create a database of non-standard hedge 
practices, the CBOE will add a reporting requirement for accounts 
having SPX positions in excess of 45,000 contracts on the same side of 
the market. This reporting requirement will allow the CBOE to gather 
data on hedging practices that do not fit into the CBOE definition of a 
qualified portfolio. 

[[Page 2325]]
In the event a position exceeds the 45,000 contract threshold and 
appears to be unhedged, the CBOE will take such steps as, but not 
limited to, the following: (1) contacting the clearing firm for the 
subject account and/or the Options Clearing Corporation (``OCC'') to 
identify possible hedges; (2) asking for information about collateral 
and/or escrow receipts; and (3) evaluating the suitability of the 
subject account.
    Second, in light of the increased SPX index option contract volume 
and the interest expressed by the member firm community, the Exchange 
proposes to increase the SPX firm facilitation and index hedge 
exemptions to 400,000 contracts each (form the existing 100,000 and 
150,000 contracts permitted respectively).\5\ The Exchange also propose 
to increase the SPX money manager exemption to 600,000 exempted same-
side of the market contracts, with no more than 325,000 contracts in 
any single account (from the existing 250,000 and 135,000 contracts 
permitted respectively).\6\

    \5\ The CBOE notes that the SPX index hedge and firm 
facilitation exemptions are each in addition to the SPX standard 
100,000 contract limit proposed herein.
    \6\ In this regard, the CBOE notes that it is in discussions 
with member firms and the Commission to consider a delta-based 
methodology for calculating all option position limits.
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    Third, the CBOE proposes to extend the broad-based index hedge 
exemption that is contained in Exchange Rule 24.4 (``hedge exemption'') 
to broker-dealers. The existing hedge exemption is currently available 
only to public customers, including money managers. The CBOE notes that 
the corresponding equity hedge exemption contained in Exchange Rule 
4.11.04 is available to broker-dealers as well as to public customers. 
The Exchange believes that it can better meet the needs of securities 
professionals by making the Exchange Rule 24.4 hedge exemption 
available to them to the same extent that the hedge exemption is 
available to public customers.
    Fourth, the CBOE proposes to expand the types of qualified 
portfolios described in Exchange Rule 24.4.01 and the types of option 
strategies that qualify for higher position limits. As the investing 
public and broker-dealers use a broader and more sophisticated range of 
hedging strategies, the CBOE believes that there is a need to include 
in a qualified portfolio exchange-listed products that overlay various 
broad-based indexes, including, but not limited to, futures, other 
options classes, warrants and structured products, where the indexes 
are represented in margin or cross-margin product groups at the OCC. 
The OCC has agreed to provide information to the CBOE regarding 
allowable product groups and correlation levels. The OCC's requirement 
with respect to broad-based indexes of approximately a 90-95 percent 
correlation should ensure that both the portfolio and the instruments 
hedging that portfolio will move in a similar manner.
    Among the modifications the CBOE proposes within the list of 
hedging transactions eligible for the index hedge exemption is the 
treatment of a ``collar'' \7\ position as one contract rather than as 
two contracts in proposed Interpretation .01(f)(5) to Exchange Rule 
24.4. A collar is a short call/long put option combination that is 
designed to protect the value of a related stock portfolio. Within a 
limited range, the collar has less opportunity to benefit from upward 
and downward price changes than either of the collar's components. If 
the market climbs, the collar is equivalent to a covered write 
position. If the market declines, the collar is equivalent to a long 
put position. Because the strategy requires both the purchase of puts 
and the sale of calls, the CBOE believes that the position is more 
appropriately treated as one contract for hedging purposes rather than 
two separate put and call components. For the same reasons, because a 
strategy involving a covered write accompanied by a debit put spread 
requires a collar component, the CBOE also believes that the short call 
and long put should be treated as one contract in proposed 
Interpretation .01(f)(7).

    \7\ In existing Rule 24.4.02(a)(5), a collar position is 
referred to as a ``hedgewrap.''
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    The CBOE includes in proposed Exchange Rule 24.4.01(d) a definition 
of the unhedged value of a qualified portfolio. An example of a 
qualified portfolio is included in the rule to show how the CBOE would 
determine the number of contracts that qualify for an index hedge 
exemption.
    Lastly, the CBOE proposes to conform Exchange Rule 24.11A 
concerning debit put spread cash account transactions to proposed 
Exchange Rule 24.4, as well as to make other editorial changes to 
Exchange Rule 24.4 which are designed to streamline the rule and to 
eliminate confusing provisions. As part of overhauling Exchange Rule 
24.4, the CBOE notes that some of the changes include the following: 
(1) the treatment of SPX index option limits and qualified hedging 
transactions will be included with the treatment of all other broad-
based index options; (2) the treatment of Quarterly Index Expiration 
(``QIXs'') options will be consolidated from three paragraphs to one; 
and (3) the Exchange Rule 24.4.01(c) current requirement that an 
account with an option hedge position (``hedge exemption account'') be 
carried by a CBOE clearing member will be modified to provide that the 
hedge exemption account can be carried by any member of an Intermarket 
Surveillance Group (``ISG'') participant. This is because the hedge 
exemption account can be monitored through ISG information-sharing 
arrangements in accordance with Exchange Rule 15.9 concerning 
regulatory cooperation.
    Because the increased SPX index option standard limits and SPX 
exemptions, together with the expansion of the index hedge exemption 
and the qualified portfolio provisions, will enhance the depth and 
liquidity of the market for both members and investors in general, the 
Exchange believes that this rule change is consistent with and furthers 
the objectives of Section 6(b)(5) of the Act in that it would remove 
impediments to and perfect the mechanism of a free and open market in a 
manner consistent with the protection of investors and the public 
interest.

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

    The CBOE does not believe that the proposed rule change will impose 
any inappropriate 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 publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds longer period to be 
appropriate and publishes its reasons for so finding, or (ii) as to 
which the CBOE consents, the Commission will:
    A. By order approve the 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 

[[Page 2326]]
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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-96-01 and should be 
submitted by February 15, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1181 Filed 1-24-96; 8:45 am]
BILLING CODE 8010-01-M