[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57027-57028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27880]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36452; File No. SR-PSE-95-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Pacific 
Stock Exchange Incorporated, Relating to the Listing and Trading of 
Flexible Exchange Options on Specified Equity Securities

November 2, 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 October 5, 1995, the Pacific Stock Exchange Incorporated (``PSE'' 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 Exchange. On 
October 25, 1995, the Exchange filed with the Commission Amendment No. 
1 to the proposed rule change.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange first proposes to add the 
definition of ``FLEX Post Official'' to PSE Rule 8.100(b)(7). 
Second, the Exchange proposes to add as new PSE Rule 8.114, the 
provision on financial requirements for FLEX Appointed Market 
Makers, which had been inadvertently deleted from the proposed rule 
change as originally filed. Third, the Exchange proposes to re-
number PSE Rule 8.114, as PSE Rule 8.115. See Letter from Michael D. 
Pierson, Senior Attorney, Market Regulation, PSE, to John Ayanian, 
Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated October 26, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange 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 the Office of the Secretary, the 
Exchange, 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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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 PSE's FLEX 
Options rules \4\ 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 PSE in respect of several broad market indexes of equity 
securities (``FLEX Index Options'').\5\

    \4\ See PSE Rules 8.100 through 8.114.
    \5\ Specifically, the Commission has approved the listing by the 
PSE of FLEX Options on the Wilshire Small Cap and PSE Technology 
Indexes. See Securities Exchange Act Release No. 34364 (July 13, 
1994), 59 FR 36813 (July 19, 1994) (approval of FLEX Options on the 
Wilshire Small Cap and PSE Technology Indexes).
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    For the most part, the PSE represents that the current rules 
governing FLEX Index Options will apply unchanged to FLEX Equity 
Options. Certain changes to the PSE's existing FLEX Options rules, 
however, are proposed to deal with the special characteristics of FLEX 
Equity Options. Specifically, the PSE proposes to add several new 
definitions to rule 8.100 to accommodate the introduction of trading in 
FLEX Equity Options,\6\ and to revise certain other PSE rules 
describing FLEX Options and governing their trading, as described 
below.

    \6\ 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 PSE proposes to revise Rule 8.102 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 (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 
\7\ by a single Market-Maker in response to a Request for Quotes \8\ in 
FLEX Equity Options is the lesser of 100 contracts or the remaining 
underlying size in a closing transaction.

    \7\ See PSE Rule 8.100(b)(7).
    \8\ See PSE Rule 8.100(b)(12).
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    The PSE 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.\9\

    \9\ 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 PSE represents that the trading procedures applicable to FLEX 
Equity Options will be mostly the same as 

[[Page 57028]]
those that apply to FLEX Index Options, except that unless the Exchange 
decides otherwise, there will not be FLEX Appointed Market-Makers \10\ 
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 PSE proposes to have five or more ``FLEX Qualified Market-Makers'' 
appointed to each class of FLEX Equity Option 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), \11\ 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 \12\ 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 PSE's FLEX Options Rules.\13\

    \10\ See  Rule 8.109.
    \11\See, e.g., PSE Rules 8.109, 8.113, 8.114, and 8.115.
    \12\ See PSE Rule 8.100(b)(7).
    \13\ See PSE Rule 8.103.
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    The PSE 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; \14\ as to such a 
member the Exchange's regular rules of price and time priority shall 
apply.\15\

    \14\ See PSE Rule 8.103(c).
    \15\ See PSE Rule 6.75.
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    The PSE 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. 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 
PSE believes that the larger position and exercise limits for FLEX 
Options and the nonaggregation of positions and exercises in FLEX 
Options and Non-FLEX Options reflect the institutional nature of the 
market for FLEX Options and the fact that the PSE 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.\16\

    \16\ Current PSE Rule 7.52(b)(4) 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(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 self-regulatory organization 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, N.W., Washington, D.C. 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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the PSE. All 
submissions should refer to SR-PSE-95-24 and should be submitted by 
December 4, 1995.

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

    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
FR Doc. 95-27880 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M