Split Expiration of Index Options and Futures on June 19, 1987

TO: All NASD Members and Other Interested Persons

FROM: Options Committee of the NASD Board of Governors

The June 19, 1987, expiration of index options and futures contracts, in addition to being a quarterly expiration, will be unique in that it will mark the first time that the settlement prices of the various stock indices will not be uniformly based on the closing price, of the primary market, of each component stock. Depending on the derivative instrument, some will settle vs. a value calculated against the primary market opening (a.m.) price of each component stock while others will continue to settle vs. a value calculated against the primary market closing (p.m.) stock prices.

Due to the unusual nature of this "split expiration," the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and others have raised concerns about the potential for trading abuses that may occur during the a.m./p.m. expirations. As appropriate, trading positions in expiring index options and futures contracts, together with related trading in underlying stocks, will be closely monitored. In particular, the NASD will closely examine unusual trading activity in NASDAQ/NMS stocks that are components of indices underlying expiring derivative products.

The SEC and CFTC have advised the NASD that members may be required to address questions such as what economic rationale was employed in establishing, liquidating, or substituting positions and why identifiable alternatives were not employed. To the extent that such inquiries may involve customer accounts, members are reminded of their obligation to use due diligence to learn the essential facts relative to every customer and every order adopted on behalf of customer accounts.

Questions concerning this notice may be directed to James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.