[Federal Register Volume 60, Number 176 (Tuesday, September 12, 1995)]
[Notices]
[Pages 47415-47417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22536]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36185; File No. SR-CBOE-95-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing of Flexible Exchange Options on Specified Equity Securities

September 5, 1995.
    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 August 15, 1995, the Chicago Board Options Exchange (``CBOE'' 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 CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its rules to provide for the listing and 
trading of Flexible Exchange Options (``FLEX Options'') on specified 
equity securities (``FLEX Equity Options''). The text of the proposed 
rule change is available at 

[[Page 47416]]
the Office of the Secretary, the CBOE, and at the Commission.

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 Exchange 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 IV below. The CBOE 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

    The purpose of the proposed rule change is to expand the CBOE's 
FLEX Options rules \3\ to permit the introduction of trading in FLEX 
Options on specified equity securities that satisfy the Exchange's 
listing standards for equity options. Currently, FLEX Options are 
listed and traded on the CBOE in respect of several broad market 
indexes of equity securities (``FLEX Index Options'').\4\ The Exchange 
states that because of the success of these products in meeting the 
needs of investors for greater flexibility in designating the terms of 
index options within the parameters of the CBOE's FLEX Options rules, 
the Exchange is now proposing to provide comparable flexibility to 
investors in equity options. The CBOE believes that by extending the 
FLEX Options program in this way, the result will be to further broaden 
the base of institutional investors that use FLEX Options to manage 
their trading and investment risk.

    \3\ See CBOE Rules 24A.1 through 24A.17.
    \4\ Specifically, the Commission has approved the listing by the 
CBOE of FLEX Options on the S&P 100 (``OEX''), S&P 500 (``SPX''), 
Nasdaq 100, and Russell 2000 Indexes. See Securities Exchange Act 
Release Nos. 31920 (February 24, 1993), 58 FR 12280 (March 3, 1993) 
(approval of FLEX Options on the SPX and OEX indexes), 34052 (May 
12, 1994), 59 FR 25972 (May 18, 1994) (approval of FLEX Options on 
the Nasdaq 100 index), and 32694 (July 29, 1993), 58 FR 41814 (July 
5, 1993) (approval of FLEX Options on the Russell 2000 index).
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    For the most part, the CBOE represents that the current rules 
governing FLEX Index Options will apply unchanged to FLEX Equity 
Options. Certain changes to the CBOE's existing FLEX Options rules, 
however, are proposed to deal with the special characteristics of FLEX 
Equity Options. Specifically, the CBOE proposes to add several new 
definitions to Rule 24A.1 to accommodate the introduction of trading in 
FLEX Equity Options,\5\ and to revise certain other CBOE rules 
describing FLEX Options and governing their trading, as described 
below.

    \5\ In addition to the term FLEX Equity Options, the proposal 
also defines the terms ``FLEX Index Options,'' ``Non-FLEX Options,'' 
``Non-FLEX Equity Option,'' and, ``Applicable Floor Procedure 
Committee.''
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    The CBOE proposes to revise Rule 24A.4 concerning the terms of FLEX 
Options to make specific reference to the terms of FLEX Equity Options. 
Specifically, FLEX Equity Options will have (1) a maximum term of three 
years, (2) a minimum size of 250 contracts for an opening transaction 
in a new series, and and (3) a minimum size of 100 contracts for an 
opening or closing transaction in a series in which there is already 
open interest (or any lesser amount in a closing transaction that 
represents the remaining underlying size). The minimum value size for 
FLEX Quotes \6\ by a single Market-Maker in response to a Request for 
Quotes \7\ in FLEX Equity Options is the lesser of 100 contracts or the 
remaining underlying size in a closing transaction.

    \6\ See CBOE Rule 24A.1(f).
    \7\ See CBOE Rule 24A.1(k).
    The CBOE also proposes to allow exercise prices and premiums for 
FLEX Equity Options to be stated in dollar amounts or percentages, with 
premiums rounded to the nearest minimum tick and exercise prices 
rounded to the nearest one-eighth. The exercise of FLEX Equity Options 
will be by physical delivery, and the exercise-by-exception procedures 
of The Options Clearing Corporation (``OCC'') will apply.\8\

    \8\ OCC Rule 805 provides for automatic exercise of in-the-money 
options at expiration without the submission of an exercise notice 
to the OCC if the price of the security underlying the option is at 
or above a certain price (for calls) or at or below a certain price 
(for puts); and the non-exercise of an option at expiration if the 
price of the security underlying the option does not satisfy such 
price levels. See OCC Rule 805.
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    The CBOE represents that the trading procedures applicable to FLEX 
Equity Options will be mostly the same as those that apply to FLEX 
Index Options, except that unless the Exchange's Market Performance 
Committee decides otherwise, there will not be FLEX Appointed Market-
Makers \9\ who are obligated to respond to Requests for Quotes in 
respect of FLEX Equity Options as there are in respect of FLEX Index 
Options. Instead, the CBOE proposes to have five or more ``FLEX 
Qualified Market-Makers'' appointed to each class of FLEX Equity 
Options who must satisfy essentially the same standards of 
qualification as FLEX Appointed Market-Makers (including the 
requirement for a specific clearing member letter of guarantee for FLEX 
Options),\10\ and who may, but without obligation to do so, enter 
quotes in response to a Request for Quotes in a class of FLEX Equity 
Options in which the Market-Maker is qualified. In addition, FLEX 
Qualified Market-Makers will be obligated to make responsive quotes 
when called upon to do so by a FLEX Post Official \11\ in the interests 
of a fair and orderly market. Quotes of FLEX Qualified Market-Makers 
must satisfy the minimum size parameters discussed above for FLEX 
Equity Options and must be entered within the time periods provided in 
the CBOE's FLEX Options Rules.\12\

    \9\ See CBOE Rule 24A.9.
    \10\ See, e.g., CBOE Rules 24A.9, 24A.13, 24A.14, and 24A.15.
    \11\ See CBOE Rule 24A.1(e).
    \12\ See CBOE Rule 24A.5.
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    The CBOE represents that the rules governing priority of bids and 
offers for FLEX Equity Options are also much the same as those that 
apply to FLEX Index Options, except that in the case of FLEX Equity 
Options, no guaranteed minimum right of participation is provided to an 
Exchange member that initiates a Request for Quotes and indicates an 
intention to cross or act as principle on the trade; \13\ as to such a 
member the Exchange's regular rules of price and time priority shall 
apply.\14\

    \13\ See CBOE Rule 24A.5(c).
    \14\ See CBOE Rule 6.45.
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    The CBOE represents that position limits and exercise limits for 
FLEX Equity Options are proposed to be larger than the limits 
applicable to Non-FLEX Equity Options, in the same manner and for the 
same reasons that the position and exercise limits for FLEX Index 
Options are larger than those applicable to Non-FLEX Index Options. 
Position and exercise limits for FLEX Equity Options are proposed to be 
five times the limits for Non-FLEX Equity Options on the same 
underlying security. This compares with limits for OEX FLEX Index 
Options that are eight times the limits for Non-FLEX OEX Options and 
limits for SPX FLEX Index Options that are 4.44 times the limits for 
Non-FLEX SPX Options. Also, as is currently the case for FLEX Index 
Options, it is proposed that there will be no aggregation of positions 
or exercises in FLEX Equity Options with positions or exercises in Non-
FLEX Equity Options for purposes of position or exercise limits. The 
CBOE believes that the larger position and exercise limits for FLEX 
Options and the nonaggregation of positions and exercises in FLEX 
Options 

[[Page 47417]]
and Non-FLEX Options reflect the institutional nature of the market for 
FLEX Options and the fact that the CBOE must compete with over-the-
counter markets throughout the world, many of which do not impose any 
position or exercise limits whatsoever.
    Also, the Exchange proposes to provide that the expiration date of 
a FLEX Equity Option may not fall on a day that is within two business 
days of the expiration date of a Non-FLEX Equity Option. This is 
intended to eliminate the possibility that the exercise of FLEX Equity 
Options at expiration will cause any untoward pressure on the market 
for underlying securities at the same time as Non-FLEX Options expire. 
The Exchange proposes that this change will also apply to FLEX Index 
Options.\15\

    \15\ CBOE Rule 24A.4(c)(iv) currently provides that the 
expiration date of a FLEX Index Option may not fall within three 
business days of the expiration date of a Non-FLEX Index Option.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\16\ in particular, in that it is designed 
to promote just and equitable principles of trade, remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and to protect investors and the public interest in that 
extending the existing FLEX Option program to encompass FLEX Options on 
specified equity securities will for the first time provide investors 
with a regulated, transparent exchange market in flexible options on 
individual equity securities.

    \16\ 15 U.S.C. 78f(b)(5) (1988).
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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 
impose any inappropriate burden on competition.

(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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-95-43 and should be 
submitted by October 3, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22536 Filed 9-11-95; 8:45 am]
BILLING CODE 8010-01-M