[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2702-2703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1222]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38152; File No. SR-CBOE-96-79]
January 10, 1997.


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to the 
Elimination of Position and Exercise Limits for FLEX Equity Options

    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 December 27, 1996, the Chicago Board Options Exchange, Inc. 
(``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 self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE, pursuant to Rule 19b-4 of the Act, proposes to revise 
Exchange Rules 4.11, 4.12, and 24A.7 to eliminate position and exercise 
limits for FLEX Equity Options.

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 CBOE 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

1. Purpose
    The purpose of the proposed rule change is to eliminate position 
and exercise limits for FLEX Equity Options. Currently, Exchange Rule 
24A.7(b) sets forth position limits for FLEX Equity Options \3\ equal 
to three times the positions limits for corresponding Non-FLEX Equity 
Options. Generally, position limits are set forth in Exchange Rule 4.11 
and exercise limits are set forth in Exchange Rule 4.12.
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    \3\ In general, FLEX Equity Options provide investors with the 
ability to customize basic option features including size, 
expiration date, and exercise style.
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    The Exchange believes that the elimination of such limits is 
appropriate given the institutional nature of the market for FLEX 
Equity Options. According to the Exchange, many large investors find 
the use of exchange-traded options impractical because of the 
constraints imposed by position limits. The Exchange believes that the 
elimination of position limits will attract additional investors to 
exchange-traded options, thereby reducing transaction costs as well as 
improving price efficiency for all exchange-traded option market 
participants.
    The Exchange also believes that FLEX Equity Options, after the 
elimination of position limits, may become an important part of large 
investors' investment strategies. In the absence of position limits, 
investors will be able to use options to implement specific viewpoints 
regarding the underlying common stock.
    The Exchange also anticipates that issuers of stocks underlying 
FLEX Equity Options will use these options, primarily through the sale 
of puts, as part of their stock repurchase programs.\4\ In many cases, 
the size of announced buy-back programs significantly exceeds the 
number of shares that could be repurchased under the position limits 
currently imposed on FLEX Equity Options. While the Exchange does not 
expect that corporate

[[Page 2703]]

issuers will use the sale of put options to buy all the securities that 
are covered by their repurchase programs, FLEX Equity Options without 
position limits at least will provide issuers with an alternative. The 
inability of corporations to use the sale of exchange-traded equity put 
options on a significant scale relegates this activity to less 
transparent markets, such as offshore markets which do not come under 
Commission oversight.
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    \4\ The Commission notes that issuers would, of course, need to 
comply with all applicable provisions of the federal securities laws 
in conducting their share repurchase programs.
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    Pursuant to Section 13(d) of the Act and the rules and regulations 
thereunder, the inclusion of any option position is required when 
reporting the beneficial ownership of more than 5% of any equity 
security.\5\ The integration of options and reporting requirements in 
the underlying security pursuant to Section 13(d) makes large option 
positions widely known and easily monitored by regulators and other 
market participants. In this light, FLEX Equity Options trading will 
have the transparency of any exchange-traded option transaction or 
position (open interest) plus the call market focus of liquidity 
inherent in the Request for Quote (``RFQ'') process. Similar to Non-
FLEX options, positions in FLEX options are required, pursuant to 
Exchange Rule 4.13, to be reported to the Exchange when an account 
establishes aggregate same-side of the market position of 200 or more 
FLEX option contracts.
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    \5\ Pursuant to Rule 13d-3 under the Act, a person will be 
deemed to be the beneficial owner of a security if that person has 
the right to acquire beneficial ownership of such security within 
sixty days, including the right to acquire through the exercise of 
any option.
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    The Exchange recognizes the theoretical possibility that a would-be 
manipulator could initiate a large FLEX Equity Option RFQ with no 
intention of actually trading. Such tactics, however, would be obvious 
to the Exchange surveillance staff as well as to the Commission, and 
could be handled under current Exchange rules.
2. Statutory Basis
    The CBOE believes 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 perfect the 
mechanisms of a free and open market and to protect investors and the 
public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the 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 the 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. 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 office of the CBOE. All 
submissions should refer to File No. SR-CBOE-96-79 and should be 
submitted by February 7, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1222 Filed 1-16-97; 8:45 am]
BILLING CODE 8010-01-M