[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Notices]
[Pages 33561-33562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16368]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37337; File No. SR-CBOE-96-20]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated, Relating to
FLEX Equity Options
June 19, 1996.
I. Introduction
On March 18, 1996, 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 April 8, 1996.\3\ No comment letters were
received on the proposed rule change. This order approves the
Exchange's proposal.
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\3\ See Securities Exchange Act Release No. 37051 (March 29,
1996), 61 FR 15543.
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II. Description of the Proposal
The Exchange proposes to amend two rules pertaining to FLEX Equity
Options. First, the Exchange proposes to amend Interpretation and
Policy .05 under Exchange Rule 5.5 in order to provide that new series
of FLEX Equity Options may be opened during the month in which they
will expire, so long as options of that series expire no earlier than
the day following the day the series is added. The Exchange believes
that this will provide maximum flexibility to users of FLEX Equity
Options, while avoiding the administrative costs that would be
associated with options that expire on the day they are issued.
Second, the Exchange proposes to amend Rule 24A.5(e) in order to
provide a minimum right of participation to Exchange members who
initiate Requests for Quotes in respect of FLEX Equity Options and
indicate an intention to cross or act as principal on the trade,
similar to the right of participation that applies under existing
Exchange rules in respect of FLEX Index Options. Under existing Rule
24A.5(e)(iii), a member who submits a Request for Quotes in respect of
a FLEX Index Option and indicates an intention to cross or act as
principal on the trade, and who matches the current best bid or offer
(``BBO'') during the BBO
[[Page 33562]]
Improvement Interval, has priority to execute the contra side of the
trade up to the greater of (i) one-half of the trade, (ii) $1 million
Underlying Equivalent Value, or (iii) the remaining Underlying
Equivalent Value on a closing transaction valued at less than $1
million. If the member improves the BBO and any other FLEX-
participating member matches the improved BBO, the submitting member
has priority to execute the contra side of the trade up to the greater
of (i) two-thirds of the trade, (ii) $1 million Underlying Equivalent
Value, or (iii) the remaining Underlying Equivalent Value on a closing
transaction valued at less than $1 million. By contrast, under current
Exchange rules no priority right of participation in a principal or
agency cross is given to a member who submits a Request for Quotes in
respect of a FLEX Equity Option, even if the submitting member matches
or improves the BBO.
The proposed rule change would provide that a member who submits a
Request for Quotes in respect of a FLEX Equity Option and indicates an
intention to cross or act as principal on the trade, and who matches or
improves the BBO during the BBO Improvement Interval, has a priority
right to execute the contra side of the trade for at least twenty-five
percent (25%) of the trade.\4\ The Exchange believes that the proposed
rule change will encourage members to bring FLEX Equity Option orders
to CBOE and to commit their capital to the FLEX Equity Options market
on CBOE, and thereby contribute to the liquidity of that market, by
guaranteeing them a minimum right of participation in the other side of
any trade they bring to the market if they are prepared to match or
improve the BBO.
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\4\ The proposed rule change amends the language of Rule
24A.5(e) to state that a submitting member will ``have priority'' to
execute the specified share of a trade, instead of that he will ``be
permitted'' to execute that share, in order to clarify that a member
may cross more than the designated share as to which he has priority
if no one else is willing to trade at the same or a better price.
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The Exchange believes that by providing investors with the
flexibility to request quotes for options that expire as early as the
day following the day they are issued, and by encouraging members to
submit requests for quotes in FLEX Equity Options and to commit capital
to CBOE's FLEX Equity Option market, the proposed rule change furthers
the objectives of Section 6(b)(5) of the Act to remove impediments to
and perfect the mechanism of a free and open market in securities, and
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.\5\ The
Commission believes that the Exchange's proposal to provide that new
series of FLEX Equity Options may be opened so long as they do not
expire on the same day, reasonably addresses the Exchange's desire to
meet the demands of sophisticated portfolio managers and other
institutional investors who are increasingly using the OTC market in
order to satisfy their hedging needs. In this regard, the change will
provide FLEX Equity Option users with more flexibility in establishing
expiration dates to better meet their hedging needs. Market
participants wanting to open a new series of FLEX Equity Options with a
short duration will still have to meet the 250 contract minimum
requirement. This should help to ensure that such FLEX Equity Options
are opened for legitimate trading needs.
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\5\ 15 U.S.C. 78f(b)(5).
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The Commission further notes that expiration of FLEX Equity Options
may not correspond to the normal expiration of Non-FLEX Equity Options.
More specifically, the expiration date of a FLEX Equity Option may not
occur on a day that is on, or within, two business days of the
expiration date of a Non-FLEX Equity Option.\6\ Moreover, as stated in
the FLEX Equity Option Approval Order, the Commission expects the
Exchange to take prompt action (including timely communication with the
self-regulatory organizations responsible for oversight of trading in
the underlying securities) should any unusual market effects
develop.\7\
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\6\ See Securities Exchange Act Release No. 36841 (February 14,
1996) (File No. SR-CBOE-95-43) (``FLEX Equity Option Approval
Order'').
\7\ Id.
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Additionally, the Commission believes that the Exchange's proposal
to provide a minimum right of participation of at least 25% of the
trade to Exchange members who initiate Requests for Quotes in respect
of FLEX Equity Options and indicate an intention to cross or act as
principal on the trade, is consistent with the Act. In addition, under
CBOE rules, such transactions must, in all cases, be in compliance with
the priority, parity, and precedence requirements of Section 11(a) of
the Act,\8\ and Rule 11a1-1(T) \9\ promulgated thereunder. These
provisions set forth, among other things, the conditions in which
members must yield priority to public customers' bids and offers at the
same price.
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\8\ 15 U.S.C. 78k(a).
\9\ 17 CFR 240.11a1-1(T).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-CBOE-96-20) is
approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16368 Filed 6-26-96; 8:45 am]
BILLING CODE 8010-01-M