[Federal Register: December 16, 2002 (Volume 67, Number 241)]
[Notices]
[Page 77106-77108]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de02-84]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46957; File No. SR-CBOE-2002-62]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Proposing to Amend
Interpretation .01(b)(2) and .05(d)(ii) to CBOE Rule 5.3 Which
Establish the Pricing Criteria for Securities that Underlie Options
Traded on the Exchange
December 6, 2002.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act''), \1\ and Rule 19b-4 thereunder, \2\
notice is hereby given that on October 11, 2002, the Chicago Board
Options Exchange, Inc. (``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 Exchange. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend Interpretation .01(b)(2) and .05(d)(ii) to
CBOE Rule 5.3, which establish the pricing criteria for securities that
underlie options traded on the Exchange. The text of the proposed rule
change follows. Additions are in italics. Deleted text is in
[brackets].
* * * * *
Chapter V--Securities Dealt In
* * * * *
Criteria for Underlying Securities
Rule 5.3
(a) Underlying securities in respect of which put or call option
contracts are approved for listing and trading on the Exchange must
meet the following criteria:
(1) The security must be duly registered and
(i) Listed on a national securities exchange; or
(ii) Traded through the facilities of a national securities
association and reported as a ``national market system'' (``NMS'')
security as set forth in Rule 11Aa3-1 under the Securities Exchange Act
of 1934; and
(2) The security shall be characterized by a substantial number of
outstanding shares which are widely held and actively traded.
(b) In addition, the Board of Directors shall from time to time
establish guidelines to be considered by the Exchange in evaluating
potential underlying securities for Exchange option transactions. There
are, however, many relevant factors which must be considered in
arriving at such a determination. The fact that a particular security
may meet the guidelines established by the Board does not necessarily
mean that it will be approved as an underlying security. Further, in
exceptional circumstances an underlying security may be approved by the
Exchange even though it does not meet all of the guidelines. The
Exchange may also give consideration to maintaining diversity among
various industries and issuers in selecting underlying securities.
. . . Interpretations and Policies:
.01 The Board of Directors has established guidelines to be
considered by the Exchange in evaluating potential underlying
securities for Exchange option transactions. Absent exceptional
circumstances with respect to Paragraphs (a)(1) or (2), or (b)(1) or
(2) listed below, at the time the Exchange selects an underlying
security for Exchange option transactions, the following guidelines
with respect to the issuer shall be met.
(a) Guidelines applicable to the issuer of the security are:
(1) There are a minimum of 7,000,000 shares of the underlying
security which are owned by persons other than those required to report
their stock holdings under Section 16(a) of the Securities Exchange Act
of 1934.
(2) There are a minimum of 2,000 holders of the underlying
security.
(3) The issuer is in compliance with any applicable requirements of
the Securities Exchange Act of 1934.
(b) Guidelines applicable to the market for the security are:
(1) Trading volume (in all markets in which the underlying security
is traded) has been at least 2,400,000 shares in the preceding twelve
months.
(2) (A) If the underlying security is a ``covered security'' as
defined under Section 18(b)(1)(A) of the Securities Act of 1933, the
market price per share of the underlying security has been at least
$3.00 for the previous five consecutive business days preceding the
date on which the Exchange submits a certificate to the Options
Clearing Corporation for listing and trading. For purposes of this
Interpretation .01(b)(2)(A), the market price of such underlying
security is measured by the closing price reported in the primary
market in which the underlying security is traded.
(B) If the underlying security is not a ``covered security'',
[T]the market price per share of the underlying security has been at
least $7.50 for the majority of business days during the three calendar
months preceding the date of selection, as measured by the lowest
closing price reported in any market in which the underlying security
traded on each of the subject days.
.02-.04 No Change.
.05(a)-(c) No Change.
(d) In the case of a Restructuring transaction that satisfies
either or both of the conditions of subparagraphs (a)(1) or (a)(2)
above in which shares of a Restructure Security are sold in a public
offering or pursuant to a rights distribution:
(i) The Exchange may assume the satisfaction of one or both of the
requirements of paragraphs (a)(1) and
[[Page 77107]]
(a)(2) of Interpretation and Policy .01 above on the date the
Restructure Security is selected for options trading only if: (A) The
applicable conditions set forth in clause (i) of paragraph (c) above
are met with respect to whichever of these requirements is assumed to
be satisfied, or (B) the condition set forth in clause (ii) of
paragraph (c) above is met, in either case subject to the limitations
stated in said paragraph (c).
(ii) The Exchange may certify that the market price of the
Restructure Security satisfies the requirement of paragraph (b)(2) of
Interpretation and Policy .01 above by relying on the market price
history of the Original Security prior to the ex-date for the
Restructuring Transaction in the manner described in paragraph (a)
above, but only if the Restructure Security has traded ``regular way''
on an exchange or automatic quotation system for at least five trading
days immediately preceding the date of selection, and at the close of
trading on each trading day preceding the date of selection, as well as
at the opening of trading on the date of selection the market price of
the Restructure Security was at least $7.50, or, if the Restructure
Security is a Covered Security, as defined in paragraph (b)(2) of
Interpretation and Policy .01 above, the market price of the
Restructure Security was at least $3.00.
(iii) No Change.
.06-.09 No Change.
* * * * *
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 aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its pricing requirement for
securities that underlie options traded on the Exchange (``underlying
security''). Currently, Interpretation .01(b)(2) to CBOE Rule 5.3
requires that the market price per share of any underlying security
must be at least $7.50 for the majority of business days during the
three calendar months preceding the date of selection of an option
class, as measured by the lowest closing price reported in any market
in which the underlying security traded on each of the subject days.
The Exchange now proposes to amend Interpretation .01(b)(2) to CBOE
Rule 5.3 to provide that, for underlying securities that are deemed
Covered Securities, as defined under section 18(b)(1)(A) of the
Securities Act of 1933 (``1933 Act''),\3\ the closing market price of
the underlying security must be at least $3.00 per share for the five
previous consecutive business days prior to the date on which CBOE
submits an option class certification. For Underlying Securities that
are not Covered Securities, the Exchange states that the current $7.50
price per share requirement would continue to apply.
---------------------------------------------------------------------------
\3\ Section 18(b)(1)(A) of the 1933 Act provides that, ``[a]
security is a covered security if such security is--listed, or
authorized for listing, on the New York Stock Exchange or the
American Stock Exchange, or listed, or authorized for listing, on
the National Market System of the Nasdaq Stock Market (or any
successor to such entities) * * *'' 15 U.S.C. 77r(b)(1)(A). The term
Covered Security, for the operation of proposed amendments to
Interpretation .01(b)(2) to CBOE Rule 5.3 herein, would not include
those securities defined under section 18(b)(1)(B) of the 1933 Act.
15 U.S.C. 77r(b)(1)(B).
---------------------------------------------------------------------------
When the $7.50 price requirement was first implemented, the listed
options market was in its infancy. Now more than twenty-eight years
after the CBOE first started trading listed options, the Exchange
states the listed options market is a mature market with sophisticated
investors. The Exchange does not believe that this particular criteria
serves to accomplish its presumed intended purpose, i.e., to prevent
the proliferation of option classes on overlying securities that lack
liquidity needed to maintain fair and orderly markets. The Exchange
states that it now seeks to move away from what it believes is a
paternalistic approach to listing standards and allow the desires of
its customers and the workings of the marketplace to determine the
securities on which the Exchange will list options.
In determining to list any number of new option classes, the
Exchange must ensure that its own systems and those of the Options
Price Reporting Authority (``OPRA'') have the capacity to handle the
potential increased capacity requirements. Also, due to recent trends
in the securities markets, there has been a marked increase in the
number of underlying securities that, but for the pricing standard,
would otherwise qualify for options listing on the Exchange. The
Exchange states that changing the pricing standard to the proposed
$3.00 market price per share requirement would allow the Exchange to
evaluate whether to list options on a greater number of classes without
compromising investor protection.
The Exchange does not propose to amend any of the other criteria in
CBOE Rule 5.3, including the requirements that: there must be a minimum
of 7,000,000 shares of the underlying security owned by public
investors; there must be a minimum of 2,000 holders of the underlying
security; and, that there must be a trading volume of at least
2,400,000 shares in the preceding twelve months. Additionally, by
requiring the Underlying Security to be listed on the New York Stock
Exchange, Inc., American Stock Exchange LLC (``Amex''), or Nasdaq
National Market System (``Nasdaq''),\4\ the Exchange states that this
would ensure that the underlying security meets the highest listing
standards in the securities industry. However, if the underlying
security does not qualify as a Covered Security, the $7.50 market price
per share standard still will apply.
---------------------------------------------------------------------------
\4\ See 15 U.S.C. 77r(b)(1)(A).
---------------------------------------------------------------------------
The Exchange believes that the proposed $3.00 market price per
share standard is also consistent with the guideline price in CBOE's
Delisting Criteria Rule,\5\ which is used to determine whether an
underlying security previously approved for Exchange options
transactions no longer meets the requirements for the continuance of
approval. Interpretations and Policies .01(d) and .02 to CBOE Rule 5.4
sets a $3 market price per share as the threshold for determining
whether the Exchange may continue listing and trading options on an
underlying security that was previously approved for options trading
under CBOE Rule 5.3. As long as a $3.00 standard is recognized as an
acceptable pricing standard for options trading, albeit as a standard
for continued listing, the Exchange believes that the proposed $3.00
should be the threshold standard for initial listing standards as well.
---------------------------------------------------------------------------
\5\ See Interpretation .01 to CBOE Rule 5.4.
---------------------------------------------------------------------------
The Exchange also proposes, as a safeguard against price
manipulation, that the underlying security have a closing market price
of at least $3.00 per share for the previous five consecutive business
days preceding the date on which the Exchange submits a certificate to
the Options Clearing Corporation for listing and trading. The market
price of such underlying security
[[Page 77108]]
would be measured by the closing price reported in the primary market
in which the underlying security is traded. The Exchange believes that
a ``look back'' period of five consecutive days would provide a
sufficient measure of protection from any attempts to manipulate the
market price of the underlying security.
The Exchange also believes that the proposed rule change would
encourage the delisting of inactive option classes, particularly those
classes in which the market price of the underlying security is below
$7.50. Currently, a Designated Primary Market Maker (``DPM'') on the
Exchange to whom an option class has been allocated may be reluctant to
delist an inactive option class if the market price of the underlying
security is below $7.50 because once delisted, the Exchange's current
initial listing criteria must be met to re-list the option class,
including the requirement that the market price per share of the
underlying security be at least $7.50 for the majority of business days
during the preceding three months. The Exchange also notes that the
Commission recently granted CBOE approval to list additional series on
an option class even though the market price of the underlying security
is below $3, provided that at least one other options exchange trades
the series to be added, and at the time the other options exchange
added that series, it met the requirements to add new series, including
the $3 price requirement.\6\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 46501 (September 16,
2002), 67 FR 59585 (September 23, 2002) (SR-CBOE-2002-52). The
Exchange represents that these rules are consistent with similar
rules regarding listing and maintenance standards of the Amex,
International Securities Exchange, Inc., Pacific Exchange, Inc., and
the Philadelphia Stock Exchange, Inc.
---------------------------------------------------------------------------
The proposed $3 price standard and the five-day look-back period
would provide a reliable test for stability and, at the same time,
presents a more reasonable time period for qualifying the price of an
underlying security. The Exchange further believes that this proposed
abbreviated qualification period, in combination with CBOE's existing
quarterly delisting program,\7\ would contribute to reducing
unnecessary quote traffic.
---------------------------------------------------------------------------
\7\ CBOE states that it maintains an active delisting program
which requires the quarterly delisting of multiply listed option
classes that do not trade more than 20 contracts per day on the
Exchange.
---------------------------------------------------------------------------
Finally, for the purposes of consistency within CBOE Rules, the
Exchange proposes to amend Interpretation and Policy .05(d)(ii) to CBOE
Rule 5.3. Currently, Interpretation .05(d)(ii) to CBOE Rule 5.3
provides a method to certify that the market price of a Restructure
Security satisfies the pricing requirement of Interpretation and Policy
.01(b)(2) to CBOE Rule 5.3 and specifically references the $7.50 market
price per share. In order to make Interpretation .05(d)(ii) to CBOE
Rule 5.3 consistent with the pricing standard change to Interpretation
.01(b)(2) to CBOE Rule 5.3, the amended rule would reflect that the
market price standard for Restructure Securities also shall be reduced
from $7.50 to $3.00 as long as the Restructure Security is a Covered
Security.
2. Statutory Basis
The Exchange believes that the current proposal will allow the
Exchange to provide investors with those options that are most useful
and demanded by them without sacrificing any investor protection. As
such, the Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \8\ in general and furthers the objectives
of section 6(b)(5) \9\ in particular in that it will promote just and
equitable principles of trade; facilitate transactions in securities,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system; and protect investors and the
public interest.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any 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 date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such 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, 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, NW., Washington, DC 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 at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-CBOE-2002-62 and
should be submitted by January 6, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31550 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P