[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28084-28085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38637; File No. SR-CBOE-97-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to the Trading of Index FLEX Options

May 14, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on 
March 13, 1997, 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. On May 14, 1997, CBOE submitted Amendment No. 1 
(``Amendment No. 1'') to the filing to clarify issues related to 
priority procedures applicable to FLEX options.\1\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ See Letter from Timothy H. Thompson, Senior Attorney, CBOE, 
to Steve Youhn, SEC, dated May 13, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to make certain changes to its rules governing 
the trading of Index FLEX options. Specifically, those changes involve 
a reduction in the percentage of a trade to which a Submitting Member 
indicating an intent to cross is entitled and the establishment of bid-
offer spreads for certain Index FLEX trades.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE 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 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

    The purpose of the proposed rule change is to make certain changes 
to the Exchange's rules governing the trading of Index FLEX options. 
Specifically, those changes involve a reduction in the percentage of a 
trade to which a Submitting Member indicating an intent to cross is 
entitled and the establishment of bid-offer spreads for certain Index 
FLEX trades. Since their inception,\2\ Index FLEX options have relied 
on Appointed Market-Makers (``AMMs'') supplemented by Qualified Market-
Makers (``QMMs) to provide liquidity for FLEX requests for quotes 
(``RFQs). AMMs are required, pursuant to Rule 24A.9(b), to enter a FLEX 
Quote in response to any RFQ on any FLEX Option of the class to which 
the AMM is appointed. A QMM may, but is not required to, enter a FLEX 
Quote in response to an RFQ.
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    \2\ The Exchange was approved for trading FLEX options on 
February 24, 1993. See Securities Exchange Act Release No. 31920 
(February 24, 1993), 58 FR 12280 (March 3, 1993).
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    As an inducement to attract volume that would otherwise be 
transacted in the over-the-counter market, the Exchange established 
percentage entitlements for the Exchange member that initiates FLEX 
bidding and offering by submitting an RFQ (``Submitting Member'') where 
the Submitting Member has indicated an intention to cross or act as 
principal on the trade and has matched or improved the best bid or 
offer (``BBO''). Generally, with some qualifications, the Submitting 
Member is entitled to 50% (\1/2\) of the trade in the case where the 
Submitting Member matches the BBO and 66.67% (\2/3\) of the trade where 
the Submitting Member improves the BBO.
    To the extent Submitting Members accept their entire entitlement on 
a trade, half of the trade or less would remain for the other market-
makers to share. Through experience the Exchange has learned these 
entitlements have discouraged participation by market-makers in the 
Index FLEX product. The Exchange has, therefore, decided in order to 
encourage more active participation by Exchange market-makers and to 
provide as liquid a market as possible for Index FLEX options, that the 
entitlement for Submitting Members should be reduced to the greater of 
25% or a proportional share of the trade.\3\ This means, for example, 
that if there are four market-makers participating on the trade in 
addition to the Submitting member then the Submitting member would be 
entitled to 25% of the trade even though this is greater than a 
proportional share (\1/5\) of the trade. However, if there were two 
market-makers participating on a trade along with a Submitting Member, 
the Submitting Member would be entitled to a proportional share of the 
trade, or \1/3\ of the trade. This is different from the current 
entitlement for Submitting Members in Equity FLEX Options who are 
entitled only to 25% of the trade regardless of the number of 
participants to the trade. Consequently, the rule will be revised to 
separate the treatment of Index FLEX and Equity FLEX into different 
paragraphs.
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    \3\ The rule currently provides that the Submitting Member is 
entitled to the largest of the percentage of the trade (\1/2\ or \2/
3\), $1 million Underlying Equivalent Value, or the remaining 
Underlying Equivalent Value on a closing transaction valued at less 
than $1 million. These qualifications of $1 million Underlying 
Equivalent Value or the remaining Underlying Equivalent Value remain 
in the proposed rule.
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    The proposed rule change also amends the language of subparagraphs 
(e)(iii) (A) and (B) of Rule 24A.5 to state that a submitting member 
``will have priority to execute'' the specified share of a trade that 
is the subject of a RFQ, instead of the term ``be permitted to 
execute.'' The Exchange initially adopted this rule language in 
Securities Exchange Act Release No. 37337 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.\4\ The current filing, however, inadvertently utilized the old 
rule language. Amendment No. 1 to the filing clarifies that the rule 
language will remain unchanged.
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    \4\ See Securities Exchange Act Release No. 37337 (June 19, 
1996), 61 FR 33561 (June 27, 1996).
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    The Exchange is also proposing to make a second change to its rules 
governing Index FLEX Options. This change would impose maximum bid-
offer spreads on certain Index FLEX Options. Currently, under Rule 
24A.9(d), market-makers are not required to quote a minimum bid-offer 
spread in FLEX Options because of the unique nature of the product in 
which new series are established periodically by the submission of an 
RFQ. Through experience with the trading of the

[[Page 28085]]

product over the last four years, however, the Exchange has determined 
it is appropriate to now establish maximum bid-offer spreads for Index 
FLEX AMMs and QMMs when quoting European exercise FLEX options 
overlying the S&P 100 Index or the S&P 500 Index with a time to 
expiration of more than two weeks and less than two years. The Exchange 
expects that the establishment of these spreads will increase customer 
confidence in the CBOE markets for these products. The establishment of 
these maximum bid-offer spreads will ensure tight markets for the 
majority of the Index FLEX RFQs submitted to the CBOE floor; the 
proposed spreads would have applied to 77% of the RFQs submitted in 
1996. The Exchange also believes that if, as expected, the reduction in 
the entitlement of a trade to a Submitting Member encourages more 
active participation by market-makers in the quoting process, then bid-
offer spreads, through competition, should decrease in any event.
    The bid-offer spreads which are being established for European 
exercise options overlying the S&P 100 Index or the S&P 500 Index are 
as follows.
    Options with a time to expiration greater than two weeks and less 
than or equal to one year shall have the following maximum bid/ask 
spreads:

------------------------------------------------------------------------
            Where the bid is              The maximum bid/ask spread is 
------------------------------------------------------------------------
Less than $5...........................  \3/4\ of $1                    
At least $5 but not more than $10......  $1                             
At least $10 but not more than $1.50...                                 
At least $20...........................  $2                             
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    Options with a time to expiration greater than one year and less 
than two years shall have the following maximum bid/ask spreads:

------------------------------------------------------------------------
            Where the bid is              The maximum bid/ask spread is 
------------------------------------------------------------------------
Less than $10..........................  $1.50                          
At least $10 but not more than $20.....  $2                             
At least $20 but not more than $40.....  $3                             
At least $40...........................  $4                             
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    Because the proposed rules should encourage more active 
participation of market-makers in the establishment of bid-ask spreads 
and will require the quoting of spreads on Index FLEX options within a 
certain range, CBOE believes the proposed rules are consistent with and 
further the objectives of Section 6(b)(5) of the Act in that they are 
designed to improve communications to and from the Exchange's trading 
floor in a manner that promotes just and equitable principles of trade, 
prevents fraudulent and manipulative acts and practices, and maintains 
fair and orderly markets:

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-97-16 and should be 
submitted by June 12, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13404 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M