[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Notices]
[Pages 27642-27643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13097]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38616; File No. AR-PCX-97-09]


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

May 12, 1997.
    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 April 1, 1997, the Pacific Exchange, Inc. (``PCX'' 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX, pursuant to Rule 19b-4 of the Act, proposes to eliminate 
position and exercise limits for FLEX Equity Options under a two-year 
pilot program.\3\
---------------------------------------------------------------------------

    \3\ In general, FLEX Equity Options provide investors with the 
ability to customize basic option features, including size, 
expiration date, exercise style, and exercise price.
---------------------------------------------------------------------------

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 PCX 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 PCX 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 Exchange is proposing to adopt a two-year pilot program under 
which the position and exercise limits for FLEX Equity Options would be 
eliminated. Exchange Rule 8.107(c) currently provides that position 
limits for FLEX Equity Options are set at three times the position 
limits for non-FLEX equity options.\4\ Rule 8.108(a) provides that the 
exercise limits for FLEX options are equivalent to the FLEX position 
limits prescribed in Exchange Rule 8.107.
---------------------------------------------------------------------------

    \4\ The Exchange notes that the elimination of position and 
exercise limits for FLEX Equity Options also has been proposed by 
other options exchanges. See Securities Exchange Act Release Nos. 
37280 (June 5, 1996), 61 FR 29774 (June 12, 1996) (notice of File 
No. SR-Amex-96-19), and 38152 (January 10, 1997), 62 FR 2702 
(January 17, 1997) (notice of File No. SR-CBOE-96-79).
---------------------------------------------------------------------------

    The Exchange believes that the elimination of such limits is 
appropriate given the institutional nature of the market for FLEX 
Equity Options. The Exchange believes that 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 these options to implement specific 
viewpoints regarding the underlying common stock.
    In addition, 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\ Such reporting requirement make 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

[[Page 27643]]

liquidity inherent in the Request for Quote (``RFQ'') process. Similar 
to non-FLEX options, positions in FLEX options are required to be 
reported to the Exchange when an account establishes aggregate same-
side of the market position of 200 or more FLEX option contracts. In 
this manner, the Exchange's proposal is based on the belief that 
manipulation is best controlled through active and transparent markets.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
    Pursuant to the two-year pilot program, the Exchange will provide 
to the Commission a status report on the program six months prior to 
its expiration. In addition, in connection with the monitoring and 
surveillance of the large FLEX Equity Option positions, Exchange 
members and member organizations (not including Market Makers) will be 
required to file a report with the Exchange whenever an account they 
are carrying holds a position in excess of three times the standard 
option position limit for that issue. In addition, the Options Clearing 
Corporation (``OCC'') will be contacted when such a report is filed and 
will be asked to conduct a risk evaluation of the account and its 
position. If OCC's risk evaluation indicates a cause for concern, the 
Exchange will notify the member firm carrying the account and assess 
the circumstances of the transactions, along with the firm's view of 
the exposure of the account, and determine whether the account is 
approved and suitable for the strategies used. This monitoring of 
accounts should provide the Exchange with the information necessary to 
determine whether additional margin and/or capital charges should be 
imposed in light of the risks associated with this position in 
accordance with proposed Exchange Rule 8.107(c).
2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general, and with Section 6(b)(5) in 
particular,\6\ in that it is designed to perfect the mechanisms of a 
free and open market and to protect investors and the public interest.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. Sec. 78f(b)(5) (1988).
---------------------------------------------------------------------------

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

    The PCX 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

    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 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 PCX 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 also will be available 
for inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-97-09 and should be 
submitted by July 7, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
---------------------------------------------------------------------------

    \7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13097 Filed 5-19-97; 8:45 am]
BILLING CODE 8010-01-M