[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