[Federal Register Volume 59, Number 117 (Monday, June 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14888]
[[Page Unknown]]
[Federal Register: June 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34203; International Series Release No. 673; File No.
SR-CBOE-93-33]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change Relating to FLEX Options
Designated in Foreign Currencies
June 13, 1994.
I. Introduction
On August 24, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposal to trade and settle Flexible Exchange Options
(``FLEX Options'') in specified foreign currencies.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
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The proposed rule change was published for comment and appeared in
the Federal Register on October 3, 1993.\3\ No comments were received
on the proposed rule change.
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\3\See Securities Exchange Act Release No. 32977 (September 28,
1993), 58 FR 51660 (October 3, 1993).
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II. Description of the Proposal
The purpose of the CBOE's FLEX Option program is to provide a
frame-work for the Exchange to list and trade index options that give
investors the ability, within specified limits, to designate certain of
the terms of the options.\4\ Such terms currently include the
underlying index,\5\ type (put, call, or spread), exercise style
(American, European, or European-Capped), expiration date,\6\ strike
price, and form of settlement (a.m. settlement versus p.m.
settlement).\7\
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\4\The Commission approved the CBOE's FLEX Options framework on
February 24, 1993, permitting the Exchange to list and trade FLEX
Options based on the Standard & Poor's Corporation (``S&P'') 100
(``OEX'') and 500 (``SPX'') Indexes. See Securities Exchange Act
Release No. 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993)
(``FLEX Options Approval Order'').
\5\The CBOE lists and trades FLEX Options based on the OEX and
SPX Indexes, which consist of 100 and 500 highly capitalized stocks,
respectively, FLEX Options Approval Order, id; the Russell 2000,
which consists of the bottom 2,000 of the 3,000 largest U.S. equity
securities in terms of domestic market capitalization, Securities
Exchange Act Release No. 32694 (July 29, 1993), 58 FR 41814 (August
5, 1993) (``Russell 2000 Approval Order''); and the Nasdaq 100,
which consists of the stocks of 100 of the largest, non-financial
U.S. issuers quoted on the Nasdaq National Market, Securities
Exchange Act Release No. 34052 (May 12, 1994), 59 FR 25972 (May 18,
1994) (``Nasdaq 100 Approval Order'').
\6\A market participant's ability to designate the expiration
date is not without limitation. Specifically, in order to protect
against possible market disruptions that may otherwise result from
the concurrent expiration of listed options and FLEX Options, the
expiration dates for FLEX Options must be at least three business
days away from the expiration dates for existing listed options. See
FLEX Options Approval Order, supra note 4.
\7\See CBOE Rule 24A.4, Terms of FLEX Contracts.
In the FLEX Options Approval Order, supra note 4, the Commission
designated FLEX Options as ``standardized options'' for purposes of
the options disclosure framework established under Rule 9b-1 under
the Act. See Securities Exchange Act Release No. 31919 (February 24,
1993), 58 FR 12286 (March 3, 1993) (``9b-1 Order''). For the same
reasons stated in the 9b-1 Order, FLEX Options on specified foreign
currencies are deemed ``standardized options'' for purposes of the
Rule 9b-1 options disclosure framework.
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In the present proposal, the CBOE is seeking to expand its FLEX
Options program to allow FLEX Options to be designated for trading and
settled in certain specified foreign currencies.
The permitted designated foreign currencies include British Pounds,
Canadian Dollars, Japanese Yen, Deutsche Marks, Swiss Francs, French
Francs, or European Currency Units (``ECU''), as well as U.S. Dollars.
In implementing its proposal, the CBOE is changing CBOE Rule 24A.4
(``Rule 24A.4'') (``Terms of FLEX Contracts'') in three ways. First,
the CBOE proposes amending Rule 24A.4(c) to add settlement currency to
the list of contract term categories that parties to any FLEX Option
contract are required to designate. Second, the CBOE proposes amending
Rule 24A.4(d) to make it clear that bids and offers responsive to FLEX
Requests for Quotes\8\ must be stated in terms of the designated
currency and may be expressed only as a specific designated currency
amount or as a percentage of the ``Underlying Equivalent Value''\9\
(and thus not in the form of a fractional price). Third, the CBOE
proposes amending Rule 24A.4(f) to list the various currencies in which
FLEX Options may be quoted, traded, and settled (``Eligible
Currencies'').
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\8\The term ``Request for Quotes'' means the initial request
supplied by a submitting member to initiate FLEX Option bidding and
offering. CBOE Rule 24A.1.
\9\CBOE Rule 24A.1 defines ``Underlying Equivalent Value'' to
mean the aggregate underlying monetary value covered by that number
of contracts, derived by multiplying the index multiplier by the
current index value times the given number of FLEX Options
contracts.
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Minor changes to certain other FLEX Options rules have also been
proposed by the Exchange. The Exchange proposes to add a new paragraph
(g) to Rule 24A.5 (``FLEX Trading Procedures and Principals'') to
specify for each Eligible Currency the minimum permissible increments
of change in currency amounts for successive FLEX Quotes. Also, the
Exchange proposes an amendment to Rule 24A.9 respecting appointment of
FLEX Market Makers to clarify that the CBOE will appoint market makers
to FLEX Options in respect of particular settlement currencies for FLEX
Option-eligible indexes.
In codifying the incremental changes for bids and offers applicable
to FLEX Options,\10\ the CBOE proposes applicable foreign currency
increments. Hence, changes in decimal bids and offers in the designated
currencies shall meet or exceed the following minimums: U.S. Dollars--
$.01; Canadian Dollars--$.01; Japanese Yen--.01Y; Deutsche Marks--
.01DM; British Pounds--.01; Swiss Francs--.01SF; French
Frances--.01F; ECU--.01ECU.\11\
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\10\Proposed CBOE Rule 24A.5(g).
\11\The CBOE SPX Floor Procedure Committee may set other
minimums from time to time to ensure fair and orderly markets. Id.
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Finally, new definitions, as well as changes to certain existing
definitions, are proposed. Specifically, a definition of the term
``Index Multiplier'' is proposed to be added to Rule 24A.1 that would
identify the applicable Index Multiplier for each settlement
currency.\12\ Also, the Exchange proposes amending the term
``Underlying Equivalent Value''\13\ to state that aggregate underlying
monetary values will be computed in terms of U.S. Dollars, regardless
of the settlement currency involved. Such computations are intended to
simplify the administration of FLEX Option rules that refer to
Underlying Equivalent Values.\14\ In addition, the proposed rule change
defines the term ``Series of FLEX Options,'' which is used in the
current FLEX Options rules without being specifically defined, to mean
all FLEX Option contracts of the same class having the same exercise
price, exercise style, exercise settlement value, expiration date, and
index multiplier.
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\12\Proposed CBOE Rule 24A.1(h). The CBOE selected the following
Index Multipliers for FLEX Options on domestic Indexes: Candian
Dollars--$100; Japanese Yen--10,000Y; Deutsche Marks--200DM; British
Pounds--100; Swiss Francs--200SF; French Francs--500F,
ECU--100EUC.
\13\See supra note 9.
\14\For example, CBOE Rule 24A.4(e)(ii) requires that the
minimum value of an opening transaction in any FLEX series for which
there is no open interest be $10 million in Underlying Equivalent
Value. Other provisions of the FLEX Rules rely similarly on the term
Underlying Equivalent Value.
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III. Discussion
The Commission finds the proposed rule change consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange, and, in particular, the
requirements of Sections 6(b)(5) and 11A of the Act,\15\ because the
proposed rule change is designed to provide investors with a tailored
or customized product that may be more suitable to their investment
needs. As noted by the CBOE, the OTC market in customized index options
has developed, in part, to meet the needs of institutional investors
who require increased flexibility for the purpose of satisfying
particular investment objectives that could not be met by the
standardized or exchange markets in options. Accordingly, the
Commission believes that the CBOE's proposal to expand the list of
variable FLEX Option contract terms to include certain designated
foreign currencies is a reasonable response by the Exchange to meet the
demands of sophisticated portfolio managers and other institutional
investors. These investors increasingly have relied on the OTC market
to satisfy their hedging needs; therefore, the CBOE's proposal will
promote competition among these markets.
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\15\15 U.S.C. 78f(b)(5) (1988) and 78k-1 (1982). See FLEX
Options Approval Order, supra note 4, Russell 2000 Approval Order,
and Nasdaq 100 Approval Order, supra note 5, for the Commission's
findings and discussions relating to the FLEX Options program. These
findings are incorporated by reference herein.
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In addition, the Commission believes that the CBOE's proposal will
help to promote the maintenance of a fair and orderly market because
the purpose of the proposal is to extend the benefits of a listed
exchange market to FLEX Options that trade and settle in certain
designated foreign currencies.
The benefits of the Exchange's options market versus the OTC market
include, but are not limited to, a centralized market center, an
auction market with posted transparent market quotations and
transaction reporting, standardized contract specifications, parameters
and procedures for clearance and settlement, and the guarantee of The
Options Clearing Corporation (``OCC'') for all contracts traded on the
Exchange.
The proposal also should benefit investors by providing them more
flexibility by permitting them to designate settlement terms in various
foreign currencies while continuing to ensure adequate investor
protection in the trading of these products. Each of the designated
currencies is a world-wide currency and currently eligible for options
trading individually. The potential risks of settling FLEX Options in
foreign currencies rather than U.S. Dollars is also disclosed in the
recently amended Options Disclosure Document (``ODD'') pursuant to Rule
9b-1 of the Act.\16\ The amended ODD now states that the settlement
currency may be a variable term fixed by the parties out of those
currencies specified by the options market on which the transaction
occurs as being available for flexibly structured options. The ODD also
describes certain inherent characteristics and risks associated with
transactions that involve foreign currencies.\17\
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\16\17 CFR 240.9b-1 (1993); Securities Exchange Act Release No.
33582 (February, 1994).
\17\See Characteristics and Risks of Standardized Options
(February, 1994).
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The Commission finds that the Index Multipliers and the incremental
changes for bids and offers selected by the CBOE are reasonable. In
each instance, the value of the amount of each foreign currency
selected by the CBOE is generally equivalent to the corresponding
amount of U.S. Dollars.
The Commission also finds that it is appropriate for the Exchange
to appoint market markers to FLEX Options with respect to the
particular settlement currencies of each eligible FLEX Options
index.\18\ Distinguishing among the various settlement currencies in
this fashion should help ensure that market makers will have the
experience and expertise to quote FLEX Options in the particular
currency.
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\18\See proposed CBOE Rule 24A.5(g).
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Finally, based on representations from the CBOE, the Commission
believes that the CBOE and Options Price Reporting Authority (``OPRA'')
will have adequate systems processing capacity to accommodate FLEX
Options containing a contract term relating to settlement currency.\19\
In addition, OPRA has represented that any additional traffic generated
by the CBOE's proposal is within OPRA's capacity.\20\
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\19\See letter from Charles J. Henry, President and Chief
Operating Officer, CBOE, to Francois Mazur, Attorney, Options
Branch, Division of Market Regulation, Commission, dated May 23,
1994.
\20\See letter from Joseph P. Corrigan, Executive Director,
OPRA, to Bill Barclay, CBOE, dated May 23, 1994.
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IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Sections 6 and
11A of the Act. In addition, the Commission also finds, pursuant to
Rule 9b-1 under the Act, that FLEX Options with a contract term
relating to settlement currency are standardized options for purposes
of the options disclosure framework established under Rule 9b-1.\21\
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\21\17 CFR 240.9b-1 (1993). As part of the original approval
process of the FLEX Options framework, the Commission delegated to
the Director of the Division the authority to authorize the issuance
of orders designating securities as standardized options pursuant to
Rule 9b-1(a)94) under the Act. See Securities Exchange Act Release
No. 31911 (February 23, 1993), 58 FR 11792 (March 1, 1993). On May
4, 1993, then-Chairman Richard Breeden, pursuant to Public Law 87-
592, 76 Stat. 394 [15 U.S.C. 78d-1, 78d-2], and Article 30-3 of the
Commission's Statement of Organization; Conduct and Ethics; and
Information and Requests [17 CFR 200.30-3], designated that persons
serving in the position of Deputy Director, Associate Director, and
Assistant Director in the Division be authorized to issue orders
designating securities as ``standardized options'' pursuant to Rule
9b-1(a)(4). Accordingly, this subdelegation provides the Division
with the necessary authority for designating FLEX Options with
contract terms that may vary with respect to certain specified
foreign currencies as ``standardized options.'' See Designation of
Personnel to Perform Delegated Functions in the Division of Market
Regulation, dated May 4, 1993.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (File No. SR-CBOE-93-33) is
approved.
\22\15 U.S.C. 78s(b)(2) (1988).
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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) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-14888 Filed 6-17-94; 8:45 am]
BILLING CODE 8010-01-M
