"THE OPTIONS MARKETS: A CORNERSTONE
                 OF U.S. CAPITAL MARKETS TODAY"



               Remarks by Chairman Arthur Levitt
              US Securities & Exchange Commission
             13th Annual Risk Management Conference
              Tucson, Arizona -- January 30, 1997



This seems to be "Duke Chapman Month" in the securities industry
-- I spoke at a Chicago dinner in honor of Duke just two weeks
ago.  I told a lot of personal stories about him there, so today
let me say a few words about the business side.

Duke has been providing strong leadership as Chairman of the
Board of CBOE since 1986.  As you know, he faced some very
difficult challenges early on, most notably the 1987 market
break, which brought a large decline in options trading volume.
He has played a key role in revitalizing the industry since then.
CBOE has seen enormous growth during his tenure, including new
records set last year for equity option trading volume and open
interest.

Not only has the market benefited -- so have investors.  Under
Duke's leadership, CBOE has undertaken a host of investor
education initiatives, including development of the CBOE Options
Institute, which conducts classes and coordinates seminars for
thousands of investors and market professionals each year.  CBOE
has also sponsored numerous options industry conferences and
recently developed a Web Site that has been receiving more than
300,000 visits per month.  These programs have helped educate the
public about the intelligent use of options -- resulting in more
customers who are better-informed about using the product to
manage risk, provide insurance, and enhance income.

In an industry known for its creativity, Duke has earned a
reputation as an innovator -- he fostered the development of many
new products, including long-term options known as LEAPs; FLEX
options, to allow users to customize terms of the contract;
products based on foreign markets, including options on ADRs and
foreign indices; and sector and broad market index products, such
as the SPX contract, which returned to prominence and success
during Duke's tenure.

One of the most important arenas for innovation today is
technology.  In recent years, CBOE has repeatedly been recognized
as a pioneer in developing state-of-the-art trading and
automation systems that execute transactions with unsurpassed
speed and accuracy.  These systems include PAR workstations,
which route orders directly to floor brokers; market maker hand-
held terminals; and superior computer servers, which result in
better real-time price and market information for the trading
floor.

On a personal note, I've known Duke since we were at Williams
College together.  We've been neighbors in Westport, Connecticut,
and in New York City.  We shared an office in New York, in the
General Motors building.

We've worked together, fished together, studied together, and
celebrated together.  I've seen every side of Duke and so you
have it on good authority when I say that he is a man of great
and generous humanity.

He is at the height of his profession, and perfectly comfortable
in the halls of power, whether Washington or Wall Street, London
or LaSalle.

And yet, it's never gone to his head -- not before January 1997
became "Duke Chapman Month," anyway -- he's always been equally
at home with porters as with Presidents.  That's a rare quality -
- but then, Duke is a rare human being.  I thank him for his
contribution to the success of our capital markets.

Those markets today are the deepest and most liquid on the face
of the earth -- they've made possible the American economic
miracle.

They've raised much more than capital -- they've raised the
quality of life.

Our capital markets play a vital role in sustaining our national
economy -- and our options markets play a vital role in
sustaining our capital markets.  As those markets continue to
grow, I want to talk to you today about three issues that warrant
our continuing attention: the regulation of options and
derivatives; the question of soft dollars; and some problems in
exchange governance.


Derivatives

     The popularity of derivatives, and their international
nature, has earned them plenty of attention -- some well
deserved, but not all of it pleasant.

Over the past several years, we've seen many headlines about
significant derivatives losses by corporate and municipal end-
users and dealers alike.  The collapse of Britain's Barings Bank;
the problems at MetallGesellschaft, and, in the United States,
the Bankers Trust enforcement action are all still fresh in our
minds.  These events heightened concern over whether derivatives
are being used properly.

It's clear that regulators and market participants must recognize
and work together to address the potential risks posed by
derivatives trading.

At the same time, we must avoid the temptation to demonize
derivatives, which are a vital tool in modern financial markets.
They are so useful in managing risk that if they didn't exist, we
would surely have to invent them.

Like any financial instrument, derivatives require certain ground
rules, and regulators can provide that.  But we must resist the
siren call for stringent regulation that occurs in the wake of
every new loss -- especially since the typical derivatives loss
is less a failure of regulation, than a failure of oversight by
the parties involved.

Derivatives are like electricity -- dangerous if mishandled, but
also capable of doing enormous good.  Intelligent oversight can
often make the crucial difference.

An important oversight role is played by investors in our capital
markets, who act as a check on significant decisions undertaken
by management.  The SEC adopted rules two days ago that will
enable investors to better understand the way a company is using
derivative instruments.  These rules require companies to
disclose specific information about their derivative activities
and related market risks.  The rules will also give investors
tangible, quantifiable information about these instruments and
their potential consequences for a company's financial position.

We do not claim ours is the perfect solution, but it is an
important first step in responding to the dramatic growth in the
use of derivatives.  As I've noted before, you can't address fast-
changing instruments with ironclad regulations.  We will phase
these requirements in and revisit them within 3 years, to
consider how effective they are and how they might be improved.

The truth is that, when it comes to derivatives, both regulators
and industry particpants have obligations.  We need to fulfill
those obligations, to unlock the promise of derivatives without
exposing our markets to inordinate hazards.


Regulation of Exchange-Traded Options

The Commission's role in the options markets has historically
focused on protecting investors, facilitating fair competition,
and promoting full disclosure.

Regulation reasonably designed to accomplish these goals adds
value to the marketplace, creating an understanding among
participants that the market is fair.  The current success of US
exchange options markets is attributable in great part to the
confidence investors have that these markets are fair and honest.
Such confidence can hardly be achieved without proper regulation.

At the same time, the Commission realizes that regulation comes
at some cost to markets.  In each instance, we weigh the merit of
regulation against the anticipated cost.  As an example of our
sensitivity to industry concerns and costs, let me mention the
changes we are currently considering for the Net Capital Rule.

The first has to do with option pricing.  In response to the
significant growth in the use of options, the Commission
conducted an extensive review of the option "haircut" methodology
set forth in the net capital rule.  For anyone who may be
wondering why all of a sudden I'm talking about personal
grooming, a "haircut" is the formula used to figure the value of
securities when calculating a firm's net capital.

Several alternatives were explored, one of which was the subject
of a position taken by the Commission in 1994.  At that time, we
permitted broker-dealers to use theoretical option pricing models
to calculate required net capital for both listed options, and
the related positions that hedge those options.  This approach
had favorable results and I am pleased to announce today that the
Commission has just approved permanent amendments to the net
capital rule that codify the use of option pricing models.  I
expect that these amendments will reflect the risk inherent in
broker-dealer options positions more accurately.  Their approval
marks the first time the Commission has formally adopted and
permitted the use of modelling techniques for regulatory capital
purposes.

The second proposed change to the net capital rules involves the
use of value-at-risk models.  Securities firms are increasingly
turning to such models as a way of analyzing, controlling, and
reporting the amount of market risk incurred through their
trading activities, especially derivatives trading.  The
increased use of value-at-risk models by broker-dealers has
prompted Commission staff to consider permitting the same
approach for regulatory capital purposes.

The objective of the value-at-risk model is to determine how
changes in market conditions may affect the value of a portfolio
over a given period of time, with a given level of probability.
There is some variation in how value-at-risk is applied.  I want
to make it clear today that, while we're willing to consider this
and other ideas, more work needs to be done.  We need your best
advice on using, testing, and validating these models -- as well
as on how the self-regulatory organizations might monitor their
use.

One other plan being considered would create a new class of
broker-dealer registration for firms' derivatives subsidiaries.
This new class of "limited purpose" broker-dealers would be
subject to special regulatory requirements tailored to the
derivatives business.  Not only would this facilitate derivatives
transactions -- it would also improve our oversight of the
derivatives market.

Our openness to such ideas demonstrates, I think, the
responsiveness of this Commission to the cry for regulation that
is less burdensome, but not less effective.  This is especially
important at a time when exchange options markets are facing
competition from over-the-counter markets, domestically and
abroad.

It's true that OTC markets enjoy certain advantages over exchange
markets: they're able to customize options transactions to a
particular client's needs, and execute those transactions without
transparency to the marketplace, while being subject to fewer
regulatory restrictions than exchange-traded transactions.

But let's not forget the upside of transparency for the Exchange
markets.  The listed markets offer significant advantages over
the OTC market in at least three key areas.

First, exchange markets offer greater liquidity.  The OTC market
offers little or none -- in fact, the lack of liquidity in the
OTC options market was a major catalyst for developing exchange-
traded stock options markets in the 1970s.

Second, exchange markets offer better credit risk protection.
While OTC dealers have made progress in providing good credit
profiles to their counterparties, the exchanges continue to
possess a significant advantage -- the Options Clearing
Corporation -- a triple A-rated credit organization serving as
the central clearinghouse and guarantor of all exchange-traded
options.

The third advantage of exchange markets is better price
discovery.  Exchange-traded options are priced by multiple market
participants in a centralized quote- or order-driven structure.
OTC pricing is less efficient, often piggybacking on exchange
pricing mechanisms.

The Exchange options markets have been building on these
strengths.  Over the last several years, they've made great
strides in attracting business onto the trading floor.  They have
developed FLEX option products, offering customization of some of
the key terms available in the OTC market.  They have expanded
the array of options products available.  They have refined
access to futures and equity markets, allowing market
participants to hedge their positions more effectively.  And they
have helped us identify outdated or overly burdensome regulation.
In fact, as I speak, the SEC is working with the options
exchanges on regulatory reforms in the areas of position limits,
customer margin rules, and broker-dealer required capital.

The Commission recognizes that both the Exchange and OTC options
markets serve the needs of their investors -- many of whom use
both markets in a complementary manner.  Both markets are viable
and are likely to remain so.  But it's no secret that the SEC
supports efforts to attract OTC business to exchanges, which
offer greater transparency.

The Commission is prepared to continue to work with the exchange
markets in order to increase their competitiveness with the OTC
market.  We are always willing to revisit existing rules to
determine whether they continue to serve their intended purpose,
and to evaluate how they might be simplified or clarified.

At the same time, we don't want to eviscerate rules for
standardized options merely to match the OTC regulatory
structure.  The greatest assets of the listed options markets are
the soundness, transparency, and financial safeguards they offer.


Soft Dollars

The buy side appreciates these assets -- indeed, there are few
things more important to average buyers than to know not only
that they will be dealt with fairly, but also that their
interests will be held above all other interests involved in the
transaction.

Soft dollars were recently called the frequent flyer miles of the
brokerage business.  Although I recognize some similarities
between the two, there is one striking difference.  When I
personally buy a plane ticket and receive frequent flier miles,
the benefit is mine and mine alone.  But when a money manager
uses a broker to execute a transaction on behalf of a client and
receives soft dollar payments, those benefits can be used by the
manager or the client.  The potential conflict of interest is
clear, and it troubles me.

I well understand that the law allows soft dollar payments under
certain circumstances.  To my mind, however, there are some hard
questions that need to be answered.

Doesn't the practice threaten to erode investor confidence in the
market and in brokers?  Shouldn't the central factor in a
manager's choosing a broker be, "Who will give the lowest price
or best execution?" -- not, "Who will pay the most soft dollars?"
These and other questions are worth the time and attention of
industry members, regulators, and even legislators.

Late last year, I announced a special examination of the soft-
dollar practices of investment advisers, broker-dealers, and
institutional investors.  We are looking carefully at existing
procedures -- the types of services and products paid for in soft
dollars, as well as the effect of these payments on the price
paid for execution of transactions.

I ask all who may make and receive such payments to take this
opportunity to satisfy yourselves that your practices comply
fully with the law.  I would take special care to ensure that the
services provided or obtained are of benefit to the client, not
merely the managers.  It would be far better for you to catch and
correct any violations, than to leave it to the SEC.

Exchange Governance

There is one other issue I want to touch on before I close.  It
is important to both the SEC and institutional investors.  It
concerns exchange governance.

I am a strong advocate of public representation on boards of
organizations that operate in the public interest.  The self-
regulatory organizations are prime examples of such
organizations.

The underlying principle of securities industry self-regulation
is the enormous public interest involved in the successful
operation of our markets.  Designation as a self-regulatory
organization carries huge responsibilities with respect to the
public.  There is no better way to ensure fulfillment of those
responsibilities than to have public representation on the board.

Recent events involving SROs underscore the need for more public
participation in their Boards and Committees -- indeed, as a
result of the problems at Nasdaq, the NASD now has a majority of
public directors for the first time in its history.

The advice and suggestions of people actively involved in our
markets -- such as the people in this room -- have helped the
Commission immeasurably over the years.  You played a critical
role most recently in helping to craft our Order Execution Rules,
for example.  I ask today for your assistance and support in
developing better Board and Committee composition measures.


Conclusion

The issues I've discussed today -- the use and regulation of
derivatives; "soft dollar" payments; and exchange governance --
all deserve our attention, at a time when options and other
derivatives are making an unprecedented contribution to US
markets, especially our equity markets.  You provide extremely
valuable risk management tools for market participants.

We want to work with the exchanges and the industry to keep US
options markets the very best in the world, by making sure the
regulatory structure suits the needs of the industry and
investors, without whom there would be no options markets.

I didn't feel that Washington had a monopoly on wisdom before I
came to the SEC, and I don't feel that way now.  My first
instinct, on every complex question of market regulation, is to
look to market participants themselves for an answer.  The
Derivatives Policy Group is a good example of our preferred
approach -- wherever possible, we seek consensus, not
confrontation, and voluntary action, as opposed to regulation.

I can't promise that we'll always agree with you.  But I can
promise that we'll always listen to you, hear you out, and take
your ideas and recommendations seriously.

In the final analysis, we share the same goal: markets that
continue to inspire the confidence of investors.  I look forward
to continuing to work with you to achieve that goal.

                         #     #     #