97-19031. Self-Regulatory Organizations; Order Approving a Proposed Rule Change by the Chicago Board Options Exchange, Incorporated, Relating to Minimum Sizes for Closing Transactions, Exercises, and Responses to Requests for Quotes in FLEX Equity ...  

  • [Federal Register Volume 62, Number 139 (Monday, July 21, 1997)]
    [Notices]
    [Pages 39040-39042]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-19031]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-38839; File No. SR-CBOE-97-10]
    
    
    Self-Regulatory Organizations; Order Approving a Proposed Rule 
    Change by the Chicago Board Options Exchange, Incorporated, Relating to 
    Minimum Sizes for Closing Transactions, Exercises, and Responses to 
    Requests for Quotes in FLEX Equity Options
    
    July 15, 1997.
    
    I. Introduction
    
        On February 21, 1997, the Chicago Board Options Exchange, 
    Incorporated (``CBOE'' or ``Exchange'') filed a proposed rule change 
    with 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\ to 
    amend certain rules pertaining to FLEX Equity Options.
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        \1\ 15 U.S.C. 78s(b)(1).
        \2\ 17 CFR 240.19b-4.
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        Notice of the proposal was published for comment and appeared in 
    the Federal Register on May 16, 1997.\3\ No comment letters were 
    received on the proposed rule change, although the CBOE submitted a 
    letter with additional information in support of its proposal.\4\ This 
    order approves the Exchange's proposal.
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        \3\ See Securities Exchange Act Release No. 38607 (May 9, 1997), 
    62 FR 27083.
        \4\ See Letter from William J. Barclay, Vice President, 
    Strategic Planning and International Development, CBOE, to Sharon 
    Lawson, Senior Special Counsel, Office of Market Supervision, 
    Division of Market Regulation, Commission, dated April 21, 1997 
    (``CBOE Letter'').
    
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    [[Page 39041]]
    
    II. Description of the Proposal
    
        The purpose of the proposed rule change is to reduce from 100 
    contracts to 25 contracts the minimum value size of closing 
    transactions in and exercises of FLEX Equity Options, and to make a 
    comparable reduction in the minimum value size of FLEX Equity Quotes in 
    response to a Request for Quotes.
        Currently, Rule 24A.4(a)(4)(iii) imposes a 100 contract minimum on 
    all transactions in FLEX Equity Options unless the transaction is for 
    the entire remaining position in the account. According to the CBOE, 
    based on its experience to date with FLEX Equity Options, it appears 
    that the existing 100 contract minimums are too large to accommodate 
    the needs of certain firms and their customers.\5\ These firms may 
    purchase 100 or more FLEX Equity Options in an opening transaction for 
    a single firm account in which more than one of the firm's clients have 
    an interest. If one of these clients wants to redeem its investment in 
    the account, the firm likely will want to engage in a closing or 
    exercise transaction in order to reduce the account's position in those 
    FLEX Equity Options by the number being redeemed. Thus, if the 
    redeeming client's interest is less than 100 FLEX Equity Options and 
    does not represent the total remaining position in the account, Rule 
    24A.4(a)(4)(iii) as it stands presently, prevents the firm from closing 
    or exercising positions of this size. The CBOE states that this places 
    its market at a competitive disadvantage to the over-the-counter 
    (``OTC'') customized equity market where no such limitation exists.\6\
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        \5\ The Exchange notes that the existing customer base for FLEX 
    Equity Options includes both institutional investors, in particular 
    mutual funds, money managers and insurance companies, and high net 
    worth individuals who meet the ``sophisticated investor'' criteria 
    applied to various clients by Exchange member firms. See CBOE 
    Letter, supra note 4.
        \6\ Id.
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        The Exchange believes that the proposed rule change to Rule 
    24A.4(4)(iii) would remedy the situation described above, by permitting 
    an order to close or exercise as few as 25 FLEX Equity Option 
    contracts. The corresponding change to Rule 24A.4(a)(iv), which governs 
    the minimum size for FLEX Equity Quotes that may be entered in response 
    to Requests for Quotes, is necessary in order to provide the liquidity 
    needed to facilitate the execution of closing orders between 25 and 99 
    FLEX Equity Option contracts that would be permitted by the proposed 
    amendment to Rule 24A.4(4)(iii).\7\
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        \7\ The Commission notes that the minimum size for a opening 
    transaction in a request for quotes is 250 contracts for any FLEX 
    series in which there is no open interest, and 100 contracts in any 
    currently opened FLEX series. See CBOE Rule 24A.4(a)(4) (ii) and 
    (iii).
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        The Exchange notes that the Exchange would issue a circular that 
    (1) describes the new rule; and (2) reminds all members and member 
    firms of their continued responsibility to insure that FLEX Equity 
    Options are utilized only by sophisticated investors with the necessary 
    financial resources to sustain the possible losses arising from 
    transactions in the requisite FLEX Equity Options class size.\8\
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        \8\ See CBOE Letter, supra note 4.
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        The Exchange believes by providing firms and their customers 
    greater flexibility to trade FLEX Equity options by lowering from 100 
    to 25 the minimum number of contracts required for a closing 
    transaction, for exercises, and for FLEX Quotes responsive to a Request 
    for Quotes, the proposed rule change is consistent with and furthers 
    the objectives of Section 6(b)(5) of the Securities Exchange Act of 
    1934 by removing impediments to and perfecting the mechanism of a free 
    and open market in securities and otherwise serving to protect 
    investors and the public interest.
    
    III. Discussion
    
        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, and, in 
    particular, the requirements of Section 6(b)(5) of the Act.\9\ Further, 
    for the reasons discussed below, the Commission believes that 
    consistent with 6(b)(5) of the Act, the proposal should facilitate 
    transactions in securities in FLEX Equity Options consistent with 
    investor protection and the public interest.\10\
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        \9\ 15 U.S.C. 78f(b)(5).
        \10\ 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).
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        The Commission believes that the Exchange's proposal to reduce from 
    100 contracts to 25 contracts the minimum value size of closing 
    transactions in and exercises of FLEX Equity Options, and to make a 
    comparable reduction in the minimum value size of FLEX Equity Quotes in 
    response to a Request for Quotes reasonably addresses the Exchange's 
    desire to meet the demands of sophisticated investors, portfolio 
    managers and other institutional investors who may want to use FLEX 
    Equity Options, but find the minimum size requirements for closing 
    transactions too restrictive for their investment needs and may 
    therefore choose to use the OTC market. As previously noted by the 
    Commission, the benefits of the Exchanges' FLEX options market include, 
    but are not limited to, a centralized market center, an auction market 
    with posted transparent market quotations and transaction reporting, 
    parameters and procedures for clearance and settlement, and the 
    guarantee of The Options Clearing Corporation for all contracts traded 
    on the Exchange.\11\
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        \11\ See Securities Exchange Act Release No. 36841 (February 14, 
    1996) (``Original FLEX Equity Option Approval Order'').
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        The Commission notes that market participants wanting to execute an 
    opening transaction in a particular series of FLEX Equity Options will 
    still have to meet the 250 or 100 minimum contract requirement.\12\ 
    This should help to ensure that transactions in FLEX Equity Options 
    remain of substantial size and, therefore, the product is geared to an 
    institutional, rather than a retail, market. In originally approving 
    FLEX Equity Options, the Commission stated that the minimum value sizes 
    for opening transactions in FLEX Equity Options are designed to appeal 
    to institutional investors, and it is unlikely that most retail 
    investors would be able to engage in options transactions at that 
    size.\13\
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        \12\ See supra note 7.
        \13\ See Original FLEX Equity Option Approval Order, supra note 
    11.
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        The Commission notes that, in approving the proposal, adequate 
    surveillance guidelines should be in place to ensure that only 
    sophisticated investors with the necessary financial resources to 
    sustain the possible losses arising from transactions in the requisite 
    FLEX Equity Options class size are utilizing this product. The 
    Commission's staff has reviewed CBOE's surveillance program and 
    believes it provides a reasonable framework in which to monitor such 
    investor open interest.
        The Commission requests, however, that the Exchange provide a 
    report to the Commission's Division of Market Regulation describing the 
    nature of investor participation (i.e., retail vs. institutional) in 
    FLEX Equity Options for one year from the implementation date for the 
    rule change.\14\ If the
    
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    Exchange determines in the interim that the proposed rule change has 
    resulted in a pattern of retail investor participation in FLEX Equity 
    Options, it should notify the Commission's Division of Market 
    Regulation to determine if the minimum closing transaction sizes should 
    be restored to the original levels.
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        \14\ The Commission notes that the CBOE had previously committed 
    to providing the Commission with a report on the usage of FLEX 
    Equity Options after the first year of trading. Because that report 
    is due shortly and, the changes adopted herein could potentially 
    change the nature of investor participation, the Commission requests 
    that the Exchange update its report one year from the implementation 
    date for this rule change.
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        It is therefore ordered, pursuant to Section 19(b)(2) of the 
    Act,\15\ that the proposed rule change (File No. SR-CBOE-97-10) is 
    approved.
    
        \15\ 15 U.S.C. 78s(b)(2).
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        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\16\
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        \16\ 17 CFR 200.30,3(a)(12).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 97-19031 Filed 1-18-97; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
07/21/1997
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
97-19031
Pages:
39040-39042 (3 pages)
Docket Numbers:
Release No. 34-38839, File No. SR-CBOE-97-10
PDF File:
97-19031.pdf