[Federal Register Volume 62, Number 209 (Wednesday, October 29, 1997)]
[Notices]
[Pages 56221-56222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28568]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34- 39265; File No. SR-PCX-97-22]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Granting Approval to Proposed Rule Change Relating to the Trading of
FLEX Index Options and LEAPS on the Dow Jones & Co. Taiwan Index
October 22, 1997
I. Introduction
On June 9, 1997, the Pacific Exchange, Inc. (``PCX '' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its rules to allow the
trading of Flexible Exchange Options (``FLEX Options'') and long-term
index option series (``LEAPS'') on the Dow Jones & Co. Taiwan Index
(``Taiwan Index'' or ``Index'').\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission previously approved the trading of
standardized cash-settled, Europeanstyle stock index options on the
Taiwan Index on December 23, 1996. See Securities Exchange Act
Release No. 38081, 62 FR 138 (January 2, 1997) (order approving File
No. SR-PSE-96-40). The Taiwan Index is a broad-based index,
comprised of 113 representative stocks traded on the Taiwan Stock
Exchange.
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The proposed rule change was published for comment in the Federal
Register on August 18, 1997.\4\ No comments were received on the
proposal. This order approves the proposal.
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\4\ See Securities Exchange Act Release No. 38920 (August 11,
1997), 62 FR 44027.
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II. Description of the Proposal
The Commission previously approved the Exchange's proposal to allow
trading in FLEX Options on the Wilshire Small Cap and PSE Technology
Indexes.\5\ FLEX Options give investors the ability, within specified
limits, to designate certain of the terms of the options. In recent
years, an over-the-counter (``OTC'') market in customized options has
developed which permits participants to designate the basis terms of
the options, including size, term to expiration, exercise style,
exercise price, and exercise settlement value, in order to meet their
individual investment needs. Participants in the OTC market are
typically institutional investors, who buy and sell options in large-
size transactions through a relatively small number of securities
dealers. To compete with this growing OTC market in customized options,
the PCX permits FLEX index options trading with the Options Clearing
Corporation (``OCC'') as issuer and guarantor.\6\
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\5\ See Securities Act Release No. 34364 (July 13, 1994), 59 FR
36813 (July 19, 1994) (order approving File No. SR-PSE-93-13)
(``Wilshire/PSE Technology Order'').
\6\ The Commission has previously designated FLEX Index Options
as standardized options for the purposes of the options disclosure
framework established under Rule 9b-1 of the Act. See Securities
Exchange Act Release No. 31910 (February 23, 1993), 58 FR 12056
(March 2, 1993). In addition, the Commission has approved the
listing by the PCX of FLEX Index Options on the Wilshire Small Cap
and PSE Technology Indexes. See Wilshire/PSE Technology Order, supra
note 5.
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The PCX now proposed to amend its Rules 8.100 and 8.102\7\ to
permit the trading of FLEX Options based on the same Dow Jones & Co.
Taiwan Index previously approved for standardized non-Flex options
trading.\8\ The PCX's proposal will allow FLEX Option market
participants to designate the following contract terms for FLEX Options
on the Taiwan Index: (1) exercise price; (2) exercise style (i.e.,
American,\9\ European,\10\ or capped \11\);
[[Page 56222]]
(3) Expiration date;\12\ (4) option type (put, call, or spread); and
(5) form of settlement (A.M., P.M. or average). These terms are
identical to the terms that can be designated for the previously
approved PCX FLEX Index Options.\13\
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\7\ These rules currently allow the Exchange to trade FLEX Index
Options on the Wilshire Small Cap Index and the PSE Technology
Index. The PCX has proposed to set position and exercise limits for
FLEX options on the Index at 200,000 contracts, as set forth in PCX
Rule 8.107. This is the same FLEX position and exercise limits
established for the Wilshire Small Cap and PSE Technology Indexes.
\8\ See supra note 3.
\9\ An American-style option is one that may be exercised at any
time on or before the expiration date.
\10\ A European-style option is one that may be exercised only
during a limited period of time prior to expiration of the option.
\11\ A capped-style index option is one that is automatically
exercised prior to expiration when the cap index value is less than
or equal to the index value for calls or when the cap index value is
greater than or equal to the index value for puts.
\12\ The expiration date of a FLEX Option may not fall on a day
that is on, or within two business days, of the expiration date of a
non-FLEX option.
\13\ See supra note 5.
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The Exchange also proposes to list and trade full-value LEAPS,
pursuant to PCX Rule 6.4(d), on the Index.\14\ LEAPS on the Index will
allow the PCX to list options series with expirations of up to three
years from the date of issuance. For LEAPS, the underlying value would
be computed by using the same levels as proposed for the Index
options.\15\
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\14\ The Exchange is not proposing to trade reduced-value LEAPS
on the Dow Taiwan Index.
\15\ Telephone conversation on October 8, 1997 between Michael
Pierson, Senior Attorney, PCX, and Deborah Flynn, Attorney, Division
of Market Regulation, Commission.
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III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\16\ Specifically, the Commission believes the proposal is
consistent with the requirements of Section 6(b)(5) of the Act \17\
because trading of FLEX Options and LEAPS on the Taiwan Index will
serve to protect investors, promote the public interest, and help to
remove impediments to a free and open securities market. The Commission
also believes that the trading of FLEX Options and LEAPS on the Index
will provide investors with more flexibility in hedging the risks
associated with holding some or all of the securities underlying the
Index.\18\ By broadening the hedging and investment opportunities of
investors, the Commission believes that the trading of FLEX Options and
LEAPS on the Index will serve to protect investors, promote the public
interest, and contribute to the maintenance of fair and orderly
markets.
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\16\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new securities product upon a finding that
the introduction of such product is in the public interest. Such a
finding would be difficult with respect to a product that served no
hedging or other economic function, because any benefits that might
be derived by market participants likely would be outweighed by the
potential for manipulation, diminished public confidence in the
integrity of the markets, and other valid regulatory concerns.
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In particular, as noted above, FLEX Options on the Index will allow
investors to customize certain terms, including size, term to
expiration, exercise style, exercise price, and exercise settlement
value.\19\ LEAPS should also benefit investors by allowing them to
hedge positions on the Index on a longer term basis through investment
in one options series, rather than having to roll shorter term
expirations into new series to remain hedged on a longer basis.
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\19\ The Commission believes that the proposal to trade FLEX
Options on the Taiwan Index should also encourage fair competition
by allowing the Exchange to compete with the growing OTC market in
customized index options to address the demands of sophisticated
portfolio managers and other institutional investors who are
increasingly relying on the OTC market to satisfy their hedging
needs.
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The Commission notes that the Taiwan Index was thoroughly reviewed
recently in connection with the Exchange's proposal to list and trade
standardized, non-FLEX options based on the Index.\20\ At that time,
the Commission found that the Exchange had adequately addressed the
Commission's concerns arising from issues relating to the design and
structure of the Index, customer protection and surveillance. The
Commission's findings relied on several factors, including the large
capitalizations, substantial trading volume, wide diversity of the
component stocks in the Taiwan Index and the size of the market
underlying the Index.\21\
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\20\ See supra note 11.
\21\ Id.
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The Commission believes that it is reasonable for the Exchange to
allow trading in FLEX Options and LEAPS based on this Index given that,
to the Commission's knowledge, there have been no significant, adverse
changes to the Index to date that would change the Commission's initial
findings approving the trading of options on the Index. For the
foregoing reasons, the Commission finds that the PCX's proposal to
trade FLEX Options and LEAPS based on the Taiwan index is consistent
with the requirements of the Act and the rules and regulations
thereunder.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-PCX-97-22) is approved.
\22\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-28568 Filed 10-28-97; 8:45 am]
BILLING CODE 8010-01-M
