[Federal Register Volume 64, Number 4 (Thursday, January 7, 1999)]
[Notices]
[Pages 1059-1060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-309]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40840; File No. SR-PCX-98-45]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. Relating to Opening Transaction Size in Flex Equity
Options
December 28, 1998.
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 September 11, 1998, the Pacific Exchange, Inc. (``PCX'' 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 Exchange. On
October 29, 1998, the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ The Exchange submitted Amendment No. 2 to the
proposed rule change on December 15, 1998.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons and to grant accelerated approval to the
proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Robert Pacileo, Jr., Staff Attorney, PCX, to
Joseph Corcoran, Division of Market Regulation (``Division''),
Commission, dated October 29, 1998 (``Amendment No. 1''). In
Amendment No. 1, the PCX proposes to define the term ``Underlying
Equivalent Value'' for FLEX Equity Options and provides an example
demonstrating the need for the proposed rule change. See also note
6, infra.
\4\ See Letter from Robert Pacileo, Jr., Staff Attorney, PCX, to
Michael A. Walinskas, Division, Commission, dated December 14, 1998
(``Amendment No. 2''). In Amendment No. 2, the Exchange proposes to
incorporate the term ``Underlying Equivalent Value'' into the text
of the proposed rule change and to clarify the example demonstrating
the need for the proposed rule change, as set forth in the purpose
section below.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PCX proposes to change the requirement for initiating an
opening transaction in any FLEX Equity Option\5\ series that has no
open interest, such that the requirement will now be the lesser of 250
contracts or the number of contracts overlying $1 million of the
underlying securities. The text of the proposed rule change is
available at the Office of Secretary, the PCX, and at the Commission.
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\5\ FLEX Equity Options are flexible exchange-traded options
contracts based on equity securities. FLEX Equity Options provide
investors with the ability to customize basic option features
including size, expiration date, exercise style, and certain
exercise prices.
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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 PCX 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 III below. The PCX 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 PCX proposes to change the requirement for initiating an
opening transaction in any FLEX Equity Option series that has no open
interest, such that the requirement will now be the lesser of 250
contracts or the number of contracts overlying $1 million of the
underlying securities.\6\ The Commission recently approved a similar
rule change for the Chicago Board Options Exchange (``CBOE'').\7\
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\6\ The Commission notes that under the proposal, the $1 million
of the underlying securities is defined in Amendment No. 1 as
``Underlying Equivalent Value.'' The definition reads: ``[t]he term
`Underlying Equivalent Value' in respect of a given number of FLEX
equity options is calculated by multiplying the number of contracts
times the multiplier (100) times the stock price.''
\7\ See Securities Exchange Act Release No. 40451 (September 18,
1998) 63 FR 51393 (September 25, 1998) (order approving File No. SR-
CBOE-98-21).
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The Exchange is proposing the rule change because it believes that
the current rule, which states that the minimum value size for an
opening transaction shall be 250 contracts, is overly restrictive. The
Exchange believes that limiting participation in FLEX Equity Options
based on the number of contracts purchased may reduce liquidity and
trading interest in FLEX Equity Options for higher priced equities. The
Exchange believes that the value of the securities underlying the FLEX
Equity Options, if set at the right limit, can also prevent the
participation of investors who do not have adequate resources. The
Exchange believes that
[[Page 1060]]
the number of contracts overlying $1 million in underlying securities
is adequate to provide the requisite amount of investor protection.
While it appears that the minimum contract size fulfilled its
purpose, the Exchange believes that the result of the existing rule is
to require a much greater dollar investment for options on higher
priced stocks than for options on lower priced stock. For example, an
investor can purchase 250 contracts in a FLEX equity series on low
priced stocks (i.e., those worth less than $40) meeting the minimum
contract requirement without even investing a minimum of $1 million,
while an investor prepared to invest $1 million may be unable to
purchase contracts in a FLEX equity series in higher priced stocks
(i.e., those worth more than $40). For example, an opening transaction
in a FLEX equity series on a stock priced above $40 would reach the $1
million limit before it would reach the contract size limit, i.e. 249
contracts times the multiplier (100) times the stock price ($41.00)
totals $1,020,900 in underlying value.\8\
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\8\ See Amendment No. 2, supra note 4.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \9\ in that it is designed to perfect
the mechanisms of a free and open market, to promote just and equitable
principles of trade, to facilitate transactions in securities, and in
general, to protect investors and the public interest.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. 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. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filings will also be available for inspection and copying at the
principal office of the PCX. All submissions should refer to File No.
SR-PCX-98-45 and should be submitted by January 28, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission believes that the proposed rule change is consistent
with the Act and rules and regulations thereunder applicable to a
national securities exchange, and, in particular, with Section 6(b)(5)
\10\ which requires, among other things, that the rule of an exchange
be designed to promote just and equitable principles of trade, to
remove impediments to and to perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\10\ Id.
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The Commission believes that the proposed rule, which provides a
minimum dollar amount for an opening transaction in FLEX Equity Options
as an alternative to the existing 250 fixed contract requirement,
facilitates transactions in securities while continuing to provide
investor protection and foster the public interest. Specifically, the
Commission notes the minimum size requirement of 250 contracts for an
opening transaction in FLEX Equity Options was designed to ensure that
FLEX Equity Options were primarily used by sophisticated, high net
worth investors rather than retail investors. Although it appears that
the minimum contract size fulfilled its purpose, the Commission agrees
with the PCX that the result of the existing rule is to require a
greater dollar investment for options on higher priced stocks than for
options on lower priced stocks. Under the existing rule, an investor
could have purchased 250 FLEX contracts in a stock priced below $40 a
share without reaching $1 million. However, under the current rule, an
investor wanting to purchase 249 FLEX contracts in a stock priced over
$40 a share would not be allowed to enter this FLEX opening transaction
even though the investor would have a position valued at over $1
million.
Based on the foregoing, the Commission believes the $1 million
minimum amount for an opening transaction in FLEX Equity Options is an
appropriate alternative to the 250 fixed contract requirement. In
approving the $1 million alternative, the Commission recognizes that an
individual can meet the 250 contract limit without purchasing $1
million of FLEX Equity Option contracts. Nevertheless, the Commission
believes that the alternative requirements are appropriate because they
will provide flexibility to investors and will not unduly restrict
access to the FLEX Equity Options market. Further, the Commission
believes that the alternative requirements could increase liquidity in
the FLEX Equity Options market while continuing to provide for investor
protection.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission notices that the
proposed rule is similar to one previously approved by the Commission
for another exchange.\11\ The Commission also notes that the previous
filing was submitted for the full 21-day notice and comment period, and
the Commission received no public comments. Additionally, the proposed
rule change raises no new issue of regulatory concern. The Commission
believes, therefore, that granting accelerated approval to the amended
proposed rule change is appropriate and consistent with Section 6 of
the Act.\12\
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\11\ See supra note 7.
\12\ 15 U.S.C. 78f.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-PCX-98-45), as amended, is
hereby approved on an accelerated basis.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-309 Filed 1-6-99; 8:45am]
BILLING CODE 8010-01-M
