Self-Regulatory Organizations; Chicago Board Options Exchange, Inc; Order Approving Proposed Rule Change to Revise the Limits for Introducing New Series of Index Options

I. Introduction

On August 18, 1999, the Chicago Board Options Exchange, Inc. (“CBOE” or the “Board”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, a proposed rule change relating to the limits for introducing new series of index options. The proposed rule change was published for comment in the Federal Register on March 14, 2000.

II. Description of the Proposal

The CBOE has filed with the Commission a proposed rule change to amend Interpretations .01 and .05 of Exchange Rule 24.9, “Terms of Index Option Contracts,” regarding the limits on new series of index options. The proposal would permit the CBOE to introduce new series of index options if their strike prices are within 30% of the current index value. The proposed rule change also would permit the CBOE to introduce new series of index options with strike prices of more than 30% away from the current index value, where demonstrated customer interest exists for those new option series.

Currently, Interpretation .05 of CBOE Rule 24.9 allows the CBOE to list additional series of the same class of index options, other than options based on the S&P 100 Index (“OEX”), when the current index value of the underlying index moves substantially from the exercise price of those index options trading on the Exchange. Under the Exchange's rules, the exercise price for each new series of index options must be “reasonably related” to the current index value of the underlying index to which the options relate at or around the time the series of options is first opened for trading on the Exchange. Interpretation .05 defines “reasonably related,” for all options other than long term index options (“LEAPS”) and OEX index options, as: (a) The lesser of 50 points of the current index value or 15% of the current index value; and (b) where demonstrated customer interest exists, the lesser of 100 points of the current index value or 30% of the current index value. For OEX options, which are governed by Interpretation .01 of Rule 24.9, “reasonably related” is defined to be 8% of the current index value, or 20% if unusual market conditions exist. Under the Exchange's proposal, OEX options would be subject to the same parameters as other index options.

The CBOE represents that the proposed rule change will enable the Exchange to more effectively respond to changing market conditions and provide market participants with effective risk management strategies in rapidly changing markets. The CBOE believes that the proposal will benefit Exchange members and their customers, because the proposal will permit the CBOE to introduce new series of index options as warranted by market conditions and eliminate an obsolete formula that is tied to a fixed number of index options.

III. Discussion

The Commission finds that the proposal is consistent with the requirements of the Act. In particular, the Commission finds that the proposed rule change furthers the objectives of section 6(b)(5), in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and national market system.

The Exchange proposal would allow the Exchange to introduce new series of index options with strike prices that are within 30% of the current index value of the underlying index. In addition, the Exchange would be permitted to introduce new series of index options, without regard to the 30 percent limitation, whenever demonstrated customer interest exists.

The Commission believes that the proposed rule change will allow the Exchange to meet the needs of its members and their customers, while also promoting just and equitable principles of trade, and removing impediments to and perfecting the mechanism of a free and open market and national market system. The Commission also believes that the Exchange's proposal to utilize a single percentage, rather than a numerical standard, will assist the CBOE to better calculate whether, in a rapidly changing market, a proposed new series of index options is reasonably related to the value of the underlying index. Moreover, the Commission believes that allowing new series to be introduced without regard to the 30% limitation, whenever demonstrated customer interest exists, will provide greater flexibility to options customers. Finally, the Commission believes that it is appropriate for the Exchange to no longer maintain a separate definition of “reasonably related” for OEX options.

IV. Conclusion

It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-CBOE-99-44) is approved.