[Federal Register Volume 61, Number 35 (Wednesday, February 21, 1996)]
[Notices]
[Pages 6666-6669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3838]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36841; File Nos. SR-CBOE-95-43 and SR-PSE-95-24]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Changes and Notice of Filing and Order Granting Accelerated Approval of 
Amendments by the Chicago Board Options Exchange, Inc. and the Pacific 
Stock Exchange, Inc., Relating to the Listing of Flexible Exchange 
Options on Specified Equity Securities

February 14, 1996.

I. Introduction

    On August 15, 1995, and October 5, 1995 the Chicago Board Options 
Exchange, Incorporated (``CBOE'' or ``Exchange'') and the Pacific Stock 
Exchange, Inc. (``PSE'' or ``Exchange'') (collectively the 
``Exchanges'') each, respectively, 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 provide for the listing 
and trading of Flexible Exchange Options (``FLEX Options'') on 
specified equity securities (``FLEX Equity Options''). The CBOE 
submitted to the Commission Amendment No. 1 to its proposal on December 
21, 1995.\3\ The PSE submitted to the Commission Amendment Nos. 1 and 2 
to is proposal on October 26, 1995, and January 24, 1996, 
respectively.\4\

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1 to its proposed rule change, CBOE 
proposes to: (1) set specific position limits, as described more 
fully, herein; (2) require FLEX Post Officials to call upon FLEX 
Qualified Market-Makers to quote in response to a Request for 
Quotes, whenever no FLEX Quotes are made in response to a specific 
Request for Quotes; and (3) limit FLEX Equity Option transactions to 
equities that are the subject of Non-FLEX Equity Options traded on 
the Exchange. See Letter from Michael Meyer, Attorney, CBOE, to 
Howard Kramer, Associate Director, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Market Regulation''), 
Commission, dated December 21, 1995 (``CBOE Amendment No. 1'').
    \4\ In Amendment No. 1, the Exchange makes certain technical 
amendments to conform its filing to CBOE's proposed rule change. See 
Letter from Michael D. Pierson, Senior Attorney, Market Regulation, 
PSE, to John Ayanian, Attorney, OMS, Market Regulation, Commission, 
dated October 26, 1995 (``PSE Amendment No. 1'').
    In Amendment No. 2, the Exchange makes further changes to 
conform its filing to subsequent amendments submitted to the 
Commission by the CBOE. See Letter from Michael D. Pierson, Senior 
Attorney, Market Regulation, PSE, to John Ayanian, Attorney, OMS, 
Market Regulation, Commission, dated January 24, 1996 (``PSE 
Amendment No. 2''). See also CBOE Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    Notice of CBOE and PSE proposals were published for comment and 
appeared in the Federal Register on September 12, 1995 \5\ and November 
13, 1995,\6\ respectively. One comment letter was received on CBOE's 
proposed rule change.\7\ This order approves the Exchanges' proposals, 
as amended.

    \5\ See Securities Exchange Act Release No. 36185 (September 5, 
1995), 60 FR 47415 (SR-CBOE-95-43).
    \6\ See Securities Exchange Act Release No. 36452 (November 2, 
1995), 60 FR 57027 (SR-PSE-95-24). Amendment No. 1 to PSE's proposal 
was also published for comment in this release.
    \7\ See Letter from Salvatore R. DiDonna, Executive Vice 
President & Chief Operating Officer, Swiss American Securities Inc., 
to Jonathan G. Katz, Secretary, SEC, dated September 27, 1995 
(``Swiss American Securities Letter'').
---------------------------------------------------------------------------

II. Background

    The purpose of the Exchanges' proposals is to provide a framework 
for the Exchanges to list and trade equity options that give investors 
the ability, within specified limits, to designate certain of the terms 
of the options. In recent years, an over-the-counter (``OTC'') market 
in customized equity options has developed which permits participants 
to designate the basic terms of the options, including size, term to 
expiration, exercise style, exercise price, and exercise settlement 
value, in order to meet their individual investment needs. Participants 
in this OTC market are typically institutional investors, who buy and 
sell options in large-size transactions through a relatively small 
number of securities dealers. To compete with this growing OTC market 
in customized equity options, the Exchanges propose to expand their 
FLEX Options rules \8\ to permit the introduction of trading in FLEX 
Options on specified equity securities that satisfy the Exchanges' 
listing standards for equity options and that are currently the subject 
of regular (non-FLEX) standardized options trading on the Exchange that 
is seeking to list the FLEX Option.\9\ the Exchanges' proposals will 
also FLEX Equity Option market participants to designate the following 
contract terms: (1) exercise price; (2) exercise style (i.e., 
American,\10\ European,\11\ or capped \12\); (3) expiration date; \13\ 
and (4) option type (put, call, or spread).

    \8\ See CBOE Rules 24A.1 through 24A.17 and PSE Rules 8.100 
through 8.115.
    \9\ See CBOE Amendment No. 1, supra note 3, and PSE Amendment 
No. 2, supra note 4.
    \10\ An American-style equity option is one that may be 
exercised at any time on or before the expiration date.
    \11\ A European-style equity option is one that may be exercised 
only during a limited period of time prior to expiration of the 
option.
    \12\ A capped-style equity option is one that is exercised 
automatically prior to expiration when the cap price is less than or 
equal to the closing price of the underlying security for calls or 
when the cap price is greater than or equal to the closing price of 
the underlying security for puts.
    \13\ The proposals, however, require 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.
---------------------------------------------------------------------------

    Currently, both the CBOE \14\ and PSE \15\ have received Commission 
approval to list and trade FLEX Options on several broad-based market 
indexes of equity securities (``FLEX Index Options''). The Exchanges 
believe that because of the success of these products in meeting the 
needs of investors for greater flexibility is designating the terms of 
index options within the parameters of the Exchanges' FLEX Options 
rules, the Exchanges are now proposing to provide comparable 
flexibility to investors in equity options. The Exchanges believe that 
FLEX Equity Options will further broaden the base of institutional 
investors that use FLEX Options to manage their trading and investment 
risk.

    \14\ 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).
    \15\ The Commission has approved the listing by the PSE of FLEX 
Options on the Wilshire Small Cap Index and the PSE Technology 
Index. See Securities Exchange Act Release No. 34364 (July 13, 
1994), 59 FR 36813 (July 19, 1994).
---------------------------------------------------------------------------

    For the most part, the Exchanges represent that their current rules 
governing FLEX Index Options will apply unchanged to FLEX Equity 
Options. Certain changes to the Exchanges' existing FLEX Options rules, 
however, are proposed to deal with the special characteristics of FLEX 
Equity Options. Specifically, the Exchanges propose to add several new 
definitions to accommodate the introduction of trading in FLEX Equity 
Options,\16\ and to revise certain other rules governing FLEX Options 
and their trading, as described below.

    \16\ 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.'' See CBOE Rule 24A.1 and PSE Rule 8.1000(b).
---------------------------------------------------------------------------

    As with FLEX Index Options, the Options Clearing Corporation 
(``OCC'') 

[[Page 6667]]
will be the issuer of all FLEX Equity Options. The Commission has 
designated FLEX Index Options as standardized options for purposes of 
the options disclosure framework established under Rule 9b-1 of the 
Act.\17\

    \17\ See Securities Exchange Act Release No. 31910 (February 23, 
1993), 58 FR 12056 (March 2, 1993) (``9b-1 Order''). As described in 
note 42 infra, and for the same reasons stated in the 9b-1 Order, 
FLEX Equity Options are deemed ``standardized options'' for purposes 
of the Rule 9b-1 options disclosure framework.
---------------------------------------------------------------------------

III. Description of the Proposal

    The Exchanges propose to revise their rules concerning the terms of 
FLEX Options to make specific reference to the terms of FLEX Equity 
Options.\18\ 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\19\ by a single Market-Maker in response to a Request 
for Quotes\20\ in FLEX Equity Options is the lesser of 100 contracts or 
the remaining underlying size in a closing transactions.

    \18\ CBOE Rule 24A.4 and PSE Rule 8.102.
    \19\ See CBOE Rule 24A.1(f) and PSE Rule 8.100(b)(7).
    \20\ See CBOE Rule 24A.1(k) and PSE Rule 8.100(b)(12).
---------------------------------------------------------------------------

    The Exchanges also propose 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 OCC will apply.\21\

    \21\ 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.
---------------------------------------------------------------------------

    The Exchanges represent that the trading procedures applicable to 
FLEX Equity Options will be subject to many of the same rules that 
apply to equity options traded on the Exchanges, and are similar to 
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\22\ who are obligated to respond to 
Requests for Quotes in respect of FLEX Equity Options as there are with 
FLEX Index Options. Instead, the Exchanges propose to have five or more 
``FLEX Qualified Market-Makers'',\23\ who are permitted, but not 
obligated, to 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, a FLEX Post Official\24\ may call upon a FLEX Qualified 
Market-Maker to make responsive quotes in the interests of a fair and 
orderly market. Moreover, a FLEX Post Official must call upon a FLEX 
Qualified Market-Maker to make a quote in response to a Request for 
Quotes (``RFQ'') if no quotes are made in response to the RFQ.\25\ 
Accordingly, a FLEX Qualified Market-Maker is obligated to make 
responsive quotes whenever called upon to do so by a FLEX Post 
Official. 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 Exchanges' FLEX 
Options Rules.\26\

    \22\ See CBOE Rule 24A.9 and PSE Rule 8.109.
    \23\ FLEX Qualified Market-Makers for FLEX Equity Options will 
be required to obtain a specific clearing member letter of 
guarantee, similar to FLEX Appointed Market-Makers assigned to FLEX 
Index Options. FLEX Qualified Market-makers, however, will not be 
required to maintain specific minimum financial requirements as are 
required for FLEX Appointed Market-Makers assigned to FLEX Index 
Options in CBOE Rules 24A.13 and 24A.14, and PSE Rules 8.113 and 
8.114. See, e.g., CBOE Rules 24A.9, 24A.13, 24A.14, and 24A.15; and 
PSE Rules 8.109, 8.113, 8.114, and 8.115.
    \24\ See CBOE Rule 24A.1(e) and PSE Rule 8.100(b)(7).
    \25\ See CBOE Rule 24A.9(c) and PSE Rule 8.109(c). See also CBOE 
Amendment No. 1, supra note 3, and PSE Amendment No. 2, supra note 
4.
    \26\ See CBOE Rule 24A.5 and PSE 8.103. Initially, the Request 
Response Time will be a minimum of 2 minutes and a maximum of 20 
minutes. Under the proposed rules, the Equity Floor Procedures 
Committee has the authority to set the range for the Request 
Response Time. The Exchanges will provide at least 2 days notice to 
their respective members and member organizations of any changes to 
the Request Response Time range.
---------------------------------------------------------------------------

    The Exchange represent that the rules governing priority of bids 
and offers for FLEX Equity Options are also similar to 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 principal on the trade.\27\ The Exchanges' regular 
rules of price and time priority will apply in those situations.\28\

    \27\ See CBOE Rule 24A.5(c) and PSE Rule 8.103(c).
    \28\ See CBOE Rule 6.45 and PSE Rule 6.75.
---------------------------------------------------------------------------

    The Exchanges are proposing position limits and exercise limits for 
FLEX Equity Options that are longer than the limits applicable to Non-
FLEX Equity Options 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 set forth and compared to existing limits for Non-FLEX 
Equity Options on the same underlying security.\29\

    \29\ See CBOE Rule 24A.7(b) and PSE Rule 8.107(c). See also CBOE 
Amendment No. 1, supra note 3, and PSE Amendment No. 2, supar note 
4.

------------------------------------------------------------------------
      Non-FLEX equity position limit         FLEX equity position limit 
------------------------------------------------------------------------
4,500 contracts...........................  13,500 contracts.           
7,500 contracts...........................  22,500 contracts.           
10,500 contracts..........................  31,500 contracts.           
20,000 contracts..........................  60,000 contracts.           
25,000 contracts..........................  75,000 contracts.           
------------------------------------------------------------------------

    The applicable position and exercise limit tiers for Non-FLEX 
Equity Options are based on the number of outstanding shares and 
trading volume of the underlying security.\30\ This proposal does not 
alter the applicable tier criteria set forth in the Equity Option 
Position Limit Approval Orders.

    \30\ See Securities Exchange Act Release Nos. 36409 (October 23, 
1995), 60 FR 55399 (October 31, 1995) (File Nos. SR-NYSE-95-31; SR-
PSE-95-25; SR-Amex-95-42; and SR-Phlx-95-71); and 36371 (October 13, 
1995, 60 FR 54269 (October 20, 1995) (File No. SR-CBOE-95-42) 
(collectively the ``Equity Option Position Limit Approval Orders'').
---------------------------------------------------------------------------

    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 the limits. The Exchanges believe 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 Exchanges must compete with over-the-counter markets 
throughout the world, many of which do not impose position or exercise 
limits.
    The Exchanges also propose to provide that the expiration date of a 
FLEX Equity Option may not occur on a day that falls on, or 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 FLEX Equity Option. This is intended to eliminate the 
possibility that the exercise of FLEX Equity at expiration will cause 
any untoward 

[[Page 6668]]
pressure on the market for underlying securities at the same time as 
Non-FLEX Equity Options underlying securities at the same time as Non-
FLEX Equity Options expire. The Exchanges propose that this change will 
also apply to FLEX Index Options.\31\

    \31\ Both Exchanges currently provide that the expiration date 
of a FLEX Index Option may not occur during this time period. THe 
proposed rule change merely clarifies this requirement.
---------------------------------------------------------------------------

    lThe Exchanges believe 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,\32\ 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.

    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Comments

    As noted above, the Commission received one comment letter, which 
was supportive of CBOE's FLEX Equity Option proposal. The commentator 
expressed the view that the FLEX product will provide its customers 
with the ability to negotiate equity option contract terms without 
compromising the safety and liquidity provided by the five options 
exchanges in the U.S.\33\.

    \33\ See Swiss American Securities Letter, supra note 7.
---------------------------------------------------------------------------

V. Discussion

    The Commission finds that the proposals are 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) \34\ and 11A \35\ of the Act. 
Specifically, the Commission finds that the Exchanges' proposals are 
designed to provide investors with a tailored or customized product for 
equity options currently traded on each of the respective Exchanges 
that may be more suitable to their investment needs. Moreover, 
consistent with Section 11A, the proposals should encourage fair 
competition among brokers and dealers and exchange markets, by allowing 
the Exchanges to compete with the growing OTC market in customized 
equity options.

    \34\ 15 U.S.C. 78f(b)(5).
    \35\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    The Commission believes the Exchanges' proposals reasonably address 
their 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. Additionally, the 
Commission believes that the Exchanges' proposals will help promote the 
maintenance of a fair and orderly market, consistent with Sections 
6(b)(5) and 11A of the Act, because the purpose of each proposal is to 
extend the benefits of a listed, exchange market to equity options that 
are more flexible than current listed equity options. The benefits of 
the Exchanges' options markets 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 OCC for all 
contracts traded on the Exchange.
    As indicated above, the trading procedures applicable to FLEX 
Equity Options will be subject to many of the same rules that apply to 
equity options traded on the Exchanges, and are similar to 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 \36\ 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 Exchanges propose to have five or more 
``FLEX Qualified Market-Makers'' appointed to each class of FLEX Equity 
Option who are permitted, but not obligated, to enter quotes in 
response to a Request for Quotes in a class of FLEX Equity Options in 
which the Market-Makers is qualified.\37\ To provide for adequate 
liquidity, the Exchanges provide that a FLEX Post Official may call 
upon a FLEX Qualified Market-Maker to make responsive quotes in the 
interests of a fair and orderly market.\38\ Moreover, a FLEX Post 
Official must call upon a FLEX Qualified Market-Maker to make a quote 
in response to a Request the Quotes (``RFQ'') if no quotes are made in 
response to the RFQ.\39\ Accordingly, a FLEX Qualified Market-Maker is 
obligated to make responsive quotes whenever called upon to do so by a 
FLEX Post Official. Additionally, 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 Exchanges' FLEX Options Rules.\40\ The Commission 
believes the Exchanges' trading procedures for FLEX Equity Options are 
reasonably designed to provide some of the benefits of an Exchange 
auction along with features of a negotiated transaction between 
investors. The Commission recognizes that the Exchanges' proposed FLEX 
Equity Option trading programs will allow the trading of option 
contracts of substantial value, for which continuous quotation may be 
difficult to sustain. The Commission believes that the Exchanges have 
adequately addressed these concerns by establishing procedures for 
quotes upon request, which must be firm for a designated period of time 
and which will be disseminated through the Options Price Reporting 
Authority (``OPRA'').

    \36\ See CBOE Rule 24A.9 and PSE Rule 8.109.
    \37\ The Commission notes that FLEX Qualified Market-Makers for 
FLEX Equity Options will be required to obtain a specific clearing 
member letter of guarantee, similar to FLEX Appointed Market-Makers 
assigned to FLEX Index Options. FLEX Qualified Market-Makers, 
however, will not be required to maintain specific minimum financial 
requirements as are required for FLEX Appointed Market-Makers 
assigned to FLEX Index Options in CBOE Rules 24A.13 and 24A.14, and 
PSE Rules 8.113 and 8.114. See, e.g., CBOE Rules 24A.9, 24A.13, 
24A.14, and 24A.15; and PSE Rules 8.109, 8.113, 8.114, and 8.115.
    \38\ See CBOE Rule 24A.9(b) and PSE Rule 8.109(b).
    \39\ See CBOE Rule 24A.9(c) and PSE Rule 8.109(c). See also CBOE 
Amendment No. 1, supra note 3, and PSE Amendment No. 2, supra note 
4.
    \40\ See CBOE Rule 24A.5 and PSE 8.103.
---------------------------------------------------------------------------

    The Commission believes that market impact concerns are reduced for 
FLEX Equity Options because expiration of these equity options will not 
correspond to the normal expiration of Non-FLEX Equity Options. In 
particular, FLEX Equity Options, similar to FLEX Index Options, will 
never expire on any ``Expiration Friday.'' More specifically, the 
expiration date of a FLEX Option may not occur on a day that is on, or 
within, two business days of the expiration date of a Non-FLEX Option. 
The Commission believes that this should reduce the possibility that 
the exercise of FLEX Options at expiration will cause any additional 
pressure on the market for underlying securities at the same time that 
Non-FLEX Options expire.
    Nevertheless, because the position limits for FLEX Equity Options 
are much higher than those currently existing for outstanding exchange-
traded equity options and open interest in one or more FLEX Equity 
Option series could grow to significant levels, it is possible that 
FLEX Equity Options might have an impact on the securities 

[[Page 6669]]
markets for the securities underlying FLEX Equity Options. The 
Commission expects the Exchanges to monitor the actual effect of FLEX 
Equity Options once trading commences and 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.
    The Exchanges represent that FLEX Equity Options will allow them to 
compete with OTC markets and help meet the demand for customized equity 
options products by institutional investors. 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. 
Nevertheless, the FLEX Equity Option minimum size is much smaller than 
that for FLEX Index Options. Accordingly, the Commission requests that 
the Exchanges monitor their respective comparative levels of 
institutional and retail investor open interest in FLEX Equity Options 
for one year from the commencement of their respective FLEX Equity 
Option trading programs, and each provide a report to the Commission's 
Division of Market Regulation with their findings.
    The Commission notes that effective surveillance guidelines are 
essential to ensure that the Exchanges have the capacity to adequately 
monitor trading in FLEX Equity Options for potential trading abuses. 
The Commission's staff has reviewed CBOE's surveillance program and 
believes it provides a reasonable framework in which to monitor the 
trading of FLEX Equity Options on its trading floor and detect as well 
as deter manipulation activity and other trading abuses. The PSE is in 
the process of preparing its surveillance plan to submit to the 
Commission.
    This approval order, in regard to the PSE, is contingent upon it 
submitting adequate surveillance plans that have been reviewed and 
approved by Commission staff.
    The Commission notes that trading of FLEX Equity Options is 
contingent upon receipt by the Commission of a letter from OPRA 
indicating that it has adequate systems processing capacity to 
accommodate the additional options listed in accordance with the FLEX 
Equity Options program. OPRA has reviewed CBOE's request, and has 
concluded that the additional traffic generated by FLEX Equity Options 
traded on the CBOE is within OPRA's capacity.\41\ The PSE is preparing 
to submit its request to OPRA to determine whether the additional 
traffic generated by FLEX Equity Options traded on the PSE is within 
OPRA's capacity. This approval order, in regard to the PSE, is 
contingent upon it submitting its OPRA Capacity Letter to the 
Commission's Division of Market Regulation.

    \41\ See Letter from Joe Corrigan, Executive Director, OPRA, to 
Andy Lowenthal, CBOE, dated January 26, 1996 (``OPRA Capacity 
Letter'').
---------------------------------------------------------------------------

    The Commission finds good cause for approving CBOE Amendment No. 1 
and PSE Amendment No. 2 prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, these amendments (1) set specific position limits for 
each tier of Non-FLEX Equity Option position limits; (2) require FLEX 
Post Officials to call upon FLEX Qualified Market-Makers to quote in 
response to a Request for Quotes, whenever no FLEX Quotes are made in 
response to a specific Request for Quotes; and (3) limit FLEX Equity 
Option transactions to equities that are the subject to Non-FLEX Equity 
Options traded on the Exchange. The Commission does not believe that 
the amendments raise any new or unique regulatory issues. The 
amendments also strengthen and clarify the proposal by addressing 
market impact and liquidity concerns as well as the scope of the 
proposal. Accordingly, the Commission believes, consistent with Section 
6(b)(5) of the Act, that good cause exists, to approve CBOE Amendment 
No. 1 and PSE Amendment No. 2 to their respective proposals on an 
accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning CBOE Amendment No. 1, and PSE Amendment No. 2. 
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. Sec. 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 offices of the Exchanges. All submissions should refer 
to SR-CBOE-95-43; and SR-PSE-95-24 and should be submitted by March 13, 
1996.

VI. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and Sections 6 and 11A of the Act 
in particular. In addition, the Commission finds pursuant to Rule 9b-1 
under the Act, that FLEX Options, including FLEX Equity Options, are 
standardized options for purposes of the options disclosure framework 
established under Rule 9b-1 of the Act.\42\

    \42\ 17 CFR 240.9b-1(a)(4). As part of the original approval 
process of the FLEX Options framework, the Commission delegated to 
the Director of the Division of Market Regulation the authority to 
authorize the issuance of orders designating securities as 
``standardized options'' pursuant to Rule 9b-1(a)(4) under the Act. 
See Securities Exchange Act Release No. 31911 (February 23, 1993), 
58 FR 11792 (March 1, 1993).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\43\ that the proposals (File Nos. SR-CBOE-95-43 and SR-PSE-95-24), 
as amended, are approved.

    \43\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\

    \44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3838 Filed 2-20-96; 8:45 am]
BILLING CODE 8010-01-M