Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on May 20, 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The CBOE proposes to increase position and exercise limits for options on the DIAMONDS Trust (“DIA”) to 300,000 contracts on the same side of the market. The Exchange's reporting requirements for DIAMONDS Trust options will serve to identify options holdings and information concerning Start Printed Page 67674the hedging of these positions. The text of the proposed rule change is set forth below. Proposed new language is italicized; proposed deletions are in brackets.
Chapter IV—Business Conduct
Rule 4.11. Position Limits NO CHANGE
* * * Interpretations and Policies:
.01 through .06 NO CHANGE.
.07 The position limits under Rule 4.11 applicable to options on shares or other securities that represent interests in registered investment companies (or series thereof) organized as open-end management investment companies, unit investment trusts or similar entities that satisfy the criteria set forth in Interpretation and Policy .06 under Rule 5.3 shall be the same as the position limits applicable to equity options under Rule 4.11 and Interpretations and Policies thereunder. The position limits under Rule 4.11 applicable to options on the Nasdaq-100 Index Tracking StockSM (“QQQ”) and the DIAMONDS Trust (DIA) shall be 300,000 option contracts.
Rule 4.12. Exercise Limits NO CHANGE
* * * Interpretations and Policies:
.01 NO CHANGE.
.02 The exercise limits established under Rule 4.12 in respect of options on shares or other securities that represent interests in registered investment companies (or series thereof) organized as open-end management investment companies, unit investment trusts or similar entities that satisfy the criteria set forth in Interpretation and Policy .06 under Rule 5.3 shall be equivalent to the position limits prescribed for such options in Interpretation and Policy .0 7 under Rule 4.11, subject to any exemptions granted in respect of such position limits.
Rule 4.13. Reports Related to Position Limits
(a) NO CHANGE.
(b) In addition to the reporting requirement described in paragraph (a) of this Rule, each member (other than an Exchange market-maker or DPM) that maintains a position in excess of 10,000 non-FLEX equity option contracts or 100,000 QQQ or DIA contracts on the same side of the market on behalf of its own account or for the account of a customer, shall report information as to whether such positions are hedged, and provide documentation to as to how such contracts are hedged, in a manner and form prescribed by the Exchange. In addition, whenever the Exchange determines based on a report to the Department of Market Regulation or otherwise, that a higher margin requirement is necessary in light of the risks associated with an under-hedged QQQ or DIA option position in excess of 100,000 contracts or Non-FLEX equity option position in excess of 10,000 contracts on the same side of the market, the Exchange may consider imposing additional margin upon the account maintaining such under-hedged position, pursuant to its authority under Exchange Rule 12.10. Additionally, it should be noted that the clearing firm carrying the account will be subject to capital charges under SEC Rule 15c3-1 to the extent of any margin deficiency resulting from the higher margin requirements.
(c)-(d) 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 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 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
The Commission has stated that position and exercise limits “must not be established at levels that are so low as to discourage participation in the options market by institutions and other investors with substantial hedging needs or to prevent specialists and market-makers from adequately meeting their obligations to maintain a fair and orderly market.” 
The DIAMONDS Trust, based on the Dow Jones Industrial Average, is among the most actively traded exchange-traded funds, averaging 4.5 million shares per day during the previous six months. Moreover, the components comprising the fund are themselves among the most actively traded and widely held securities listed in the U.S. As shown in the following table, the average number of shares outstanding for the 30 components of the DJIA is 2.55 billion shares, ranging from a high of 9.9 billion shares (General Electric Co.) to a low of 291.7 million shares (Eastman Kodak Co.). The 6-month average daily trading volume ranges from a high of 48 million shares per day (Intel Corp.) to a low of 2 million shares per day (Caterpillar, Inc.).
|Ticker||Company name||Shares out (millions)||Stock volume 6-mo ADV|
|1 INTC||INTEL CORP||6,703.00||48,065,436|
|2 MSFT||MICROSOFT CORP||5,415.46||29,527,880|
|3 GE||GENERAL ELECTRIC CO||9,935.63||23,410,290|
|4 C||CITIGROUP INC||5,165.40||13,221,095|
|5 T||AT&T CORP||3,566.31||12,964,184|
|6 XOM||EXXON MOBIL CORPORATION||6,792.60||10,953,032|
|7 HPQ||HEWLETT-PACKARD CO||3,019.17||10,634,250|
|8 JPM||JP MORGAN CHASE & CO||1,990.20||10,080,997|
|9 IBM||INTL BUSINESS MACHINES CORP||1,716.94||8,435,996|
|10 DIS||THE WALT DISNEY CO.||2,039.34||8,013,419|
|11 WMT||WAL-MART STORES INC||4,451.23||7,512,838|
|12 JNJ||JOHNSON & JOHNSON||3,047.15||7,264,796|
|13 SBC||SBC COMMUNICATIONS INC||3,340.17||7,064,081|
|Start Printed Page 67675|
|14 HD||HOME DEPOT INC||2,350.05||6,898,992|
|15 MRK||MERCK & CO., INC.||2,271.09||6,878,693|
|16 MO||PHILIP MORRIS COMPANIES INC||2,147.30||5,855,147|
|17 AXP||AMERICAN EXPRESS CO||1,340.95||5,017,522|
|18 KO||COCA-COLA CO/THE||2,484.72||4,773,278|
|19 MCD||MCDONALD'S CORPORATION||1,271.96||4,682,622|
|20 BA||BOEING CO||838.71||3,947,814|
|21 GM||GENERAL MOTORS CORP||560.50||3,845,899|
|22 HON||HONEYWELL INTERNATIONAL INC||814.97||3,721,316|
|23 AA||ALCOA INC||846.65||3,578,749|
|24 PG||PROCTER & GAMBLE CO||1,299.61||3,223,338|
|25 DD||DU PONT (E.I.) DE NEMOURS||992.95||3,137,774|
|26 IP||INTERNATIONAL PAPER CO||482.72||2,851,071|
|27 EK||EASTMAN KODAK CO||291.74||2,811,618|
|28 UTX||UNITED TECHNOLOGIES CORP||472.86||2,540,922|
|29 MMM||3M CO||389.35||2,014,652|
|30 CAT||CATERPILLAR INC||343.45||1,988,112|
The Exchange notes that there are currently no position limits for DJX options, which are the same size and have an equivalent economic payoff as options on DIAMONDS. Based on DIAMONDS portfolio holdings as of May 6, 2002, the proposed position limit of 300,000 contracts represents a holding of just over 2 million shares of each security comprising the DJIA, which is less than 1% of each components' outstanding shares and, in most cases, equal to no more than 1 day's trading volume. The 300,000 contract position limit is currently in place for options on the Nasdaq-100 Index Tracking Stock (QQQ). The Exchange believes that increasing position limits for this product will lead to a more liquid and competitive market environment for DIA options that will benefit customers interested in this product.
Consistent with the reporting requirement for QQQ options, the Exchange will require that each member or member organization that maintains a position on the same side of the market in excess of 100,000 contracts in the DIA option class, for its own account or for the account of a customer report certain information. This data would include, but would not be limited to, the option position, whether such position is hedged and if so, a description of the hedge and if applicable, the collateral used to carry the position. Exchange market-makers (including DPMs) would continue to be exempt from this reporting requirement as market-maker information can be accessed through the Exchange's market surveillance systems. In addition, the general reporting requirement for customer accounts that maintain a position in excess of 200 contracts will remain at this level for DIA options.
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5), in particular, 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, to remove impediments to and perfect the mechanism of a free and open market and a national market system, to protect investors and the public interest and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.
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 that is not necessary or appropriate in furtherance of the purposes of the Act.
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 Start Printed Page 67676submissions should refer to the File No. SR-CBOE-2002-26 and should be submitted by November 27, 2002.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. See H.R. Rep. No. IFC-3, 96th Cong., 1st Sess. At 189-91 (Comm. Print 1978).Back to Citation
4. See CBOE Rule 4.13(a).Back to Citation
[FR Doc. 02-28130 Filed 11-5-02; 8:45 am]
BILLING CODE 8010-01-P