[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Notices]
[Pages 29154-29155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14401]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37257; International Series Release No. 989; File No. 
SR-CBOE-96-33]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating To Strike Prices for Options on the 
Mexican Indice de Precios y Cotizaciones

May 30, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78c(b)(1), notice is hereby given that on May 30, 
1996, the Chicago Board Options Exchange, Incorporated (``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 
CBOE. 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 hereby gives notice that it proposes to add Interpretation 
.06 to Rule 24.9, Terms of Index Option Contracts, concerning the use 
of ``implied forward levels'' instead of the ``current index level'' in 
determining the strike prices to add for options on the Indice de 
Precios y Cotizaciones (``IPC'' or ``Index'').
    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 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 this rule proposal is to permit the Exchange to list 
strike prices on the IPC based upon the ``implied forward level'' 
instead of upon the current index level. Currently, under 
Interpretation .05 to Rule 24.9, the Exchange may list strike prices, 
except in the case of long-term options, up to the lesser of 50 points 
or 15% above or below the current index level. In the case of long-term 
options (other than reduced value long-term options), the Exchange may 
list strike prices within 25% of the current index level.
    Because of the high prevailing market interest rates in Mexico 
(currently about 28%), CBOE believes that centering strike prices 
around the current index value is impractical. Although IPC options are 
traded in terms of U.S. dollars, they are priced using these high 
Mexican rates. According to CBOE, high interest rates imply a high cost 
of holding the underlying securities because an investor must borrow at 
28% to purchase the Mexican securities ) or forego earning 28% on money 
previously invested). Therefore, over a given period of time, for 
example three months, the expected value of the IPC is approximately 7% 
(28% times \1/4\

[[Page 29155]]

year) higher than the current value.\1\ Based on a current index value 
of approximately 335,\2\ 7% implies a forward price of the Index of 
about 360 at the end of three months. Therefore, the strike prices for 
a three month option would need to bracket 360 rather than 335.
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    \1\ This same pricing situtation occurs in options based on U.S. 
securities, however, since U.S. interest rates are low relative to 
Mexico, the effect is quite small and does not necessitate the need 
for pricing off of an implied forward level.
    \2\ Full value IPC index options are priced at \1/10\ the value 
of the IPC Index.
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    To address this problem, the Exchange intends to center the strike 
prices around the implied forward price of the IPC, rather than around 
the current index value. The implied forward price will change for each 
expiration month since one component of determining the implied forward 
price is the time to expiration. The formula for determining the 
implied forward price will be the index level times e<SUP>caretr*t, 
where r equals the current Mexican interest rate,\3\ and t equals the 
time to expiration.
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    \3\ The Mexican interest rate generally used in the calculation 
would be the Cetes rate with the appropriate maturity.
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    CBOE will adhere to all other rules, interpretations and policies 
regarding strike price introduction, with the exception that the index 
level will be calculated as described above. CBOE will monitor the 
implied forward rate on a continuous basis and CBOE market-makers will 
monitor the rate continuously for purposes of trading the options. 
Finally, CBOE will issue a circular to the membership describing this 
policy for centering strike prices around the implied forward level.
    By interpreting the current rules in such a manner that the 
Exchange may list strike prices that more accurately reflect the 
expected value of the IPC, CBOE believes the proposed rule change is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act, in that it is designed to perfect the mechanisms of a free and 
open market 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 inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    No 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

    Because the foregoing rule change constitutes a stated policy, 
practice or interpretation with respect to the enforcement of an 
existing CBOE rule, it has become effective pursuant to Section 
19(b)(3)(A) of the Act and subparagraph (e) of Rule 19b-4 thereunder. 
At any time within 60 days of the filing of the 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.

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, N.W., 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 in 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 the File No. SR-CBOE-96-33 and should be 
submitted by June 28, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-14401 Filed 6-6-96; 8:45 am]
BILLING CODE 8010-01-M