[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2702-2703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1222]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38152; File No. SR-CBOE-96-79]
January 10, 1997.
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to the
Elimination of Position and Exercise Limits for FLEX Equity Options
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 27, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE, pursuant to Rule 19b-4 of the Act, proposes to revise
Exchange Rules 4.11, 4.12, and 24A.7 to eliminate position and exercise
limits for FLEX Equity Options.
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 CBOE 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 purpose of the proposed rule change is to eliminate position
and exercise limits for FLEX Equity Options. Currently, Exchange Rule
24A.7(b) sets forth position limits for FLEX Equity Options \3\ equal
to three times the positions limits for corresponding Non-FLEX Equity
Options. Generally, position limits are set forth in Exchange Rule 4.11
and exercise limits are set forth in Exchange Rule 4.12.
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\3\ In general, FLEX Equity Options provide investors with the
ability to customize basic option features including size,
expiration date, and exercise style.
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The Exchange believes that the elimination of such limits is
appropriate given the institutional nature of the market for FLEX
Equity Options. According to the Exchange, many large investors find
the use of exchange-traded options impractical because of the
constraints imposed by position limits. The Exchange believes that the
elimination of position limits will attract additional investors to
exchange-traded options, thereby reducing transaction costs as well as
improving price efficiency for all exchange-traded option market
participants.
The Exchange also believes that FLEX Equity Options, after the
elimination of position limits, may become an important part of large
investors' investment strategies. In the absence of position limits,
investors will be able to use options to implement specific viewpoints
regarding the underlying common stock.
The Exchange also anticipates that issuers of stocks underlying
FLEX Equity Options will use these options, primarily through the sale
of puts, as part of their stock repurchase programs.\4\ In many cases,
the size of announced buy-back programs significantly exceeds the
number of shares that could be repurchased under the position limits
currently imposed on FLEX Equity Options. While the Exchange does not
expect that corporate
[[Page 2703]]
issuers will use the sale of put options to buy all the securities that
are covered by their repurchase programs, FLEX Equity Options without
position limits at least will provide issuers with an alternative. The
inability of corporations to use the sale of exchange-traded equity put
options on a significant scale relegates this activity to less
transparent markets, such as offshore markets which do not come under
Commission oversight.
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\4\ The Commission notes that issuers would, of course, need to
comply with all applicable provisions of the federal securities laws
in conducting their share repurchase programs.
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Pursuant to Section 13(d) of the Act and the rules and regulations
thereunder, the inclusion of any option position is required when
reporting the beneficial ownership of more than 5% of any equity
security.\5\ The integration of options and reporting requirements in
the underlying security pursuant to Section 13(d) makes large option
positions widely known and easily monitored by regulators and other
market participants. In this light, FLEX Equity Options trading will
have the transparency of any exchange-traded option transaction or
position (open interest) plus the call market focus of liquidity
inherent in the Request for Quote (``RFQ'') process. Similar to Non-
FLEX options, positions in FLEX options are required, pursuant to
Exchange Rule 4.13, to be reported to the Exchange when an account
establishes aggregate same-side of the market position of 200 or more
FLEX option contracts.
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\5\ Pursuant to Rule 13d-3 under the Act, a person will be
deemed to be the beneficial owner of a security if that person has
the right to acquire beneficial ownership of such security within
sixty days, including the right to acquire through the exercise of
any option.
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The Exchange recognizes the theoretical possibility that a would-be
manipulator could initiate a large FLEX Equity Option RFQ with no
intention of actually trading. Such tactics, however, would be obvious
to the Exchange surveillance staff as well as to the Commission, and
could be handled under current Exchange rules.
2. Statutory Basis
The CBOE believes 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 perfect the
mechanisms of a free and open market and to protect investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the 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 self-regulatory organization consents, the Commission will:
A. by order approve the 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the CBOE. All
submissions should refer to File No. SR-CBOE-96-79 and should be
submitted by February 7, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1222 Filed 1-16-97; 8:45 am]
BILLING CODE 8010-01-M
