[Federal Register Volume 62, Number 161 (Wednesday, August 20, 1997)]
[Notices]
[Pages 44299-44301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-22059]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38933; File No. SR-PCX-97-25]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. Relating to the Reduction in Minimum Size for Closing
Transactions in FLEX Equity Options
August 13, 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 July 21, 1997, the Pacific Exchange, Inc. (``PCX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the PCX. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval to the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to reduce from 100 contracts to 25 contracts
the minimum value size of closing transactions in and exercises of FLEX
Equity Options, and to make a comparable reduction in the minimum value
size of FLEX Equity Quotes in response to a Request for Quotes. The
text of the proposed rule change is available at the Office of the
Secretary, PCX 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 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 III below. The self-regulatory organization 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 reduce from 100
contracts to 25 contracts the minimum value size of closing
transactions in and exercises of FLEX Equity Options, and to make a
comparable reduction in the minimum value size of FLEX Equity Quotes in
response to a Request for Quotes.
Currently, Rule 8.102(d)(3) imposes a 100 contract minimum on all
transactions in FLEX Equity Options unless the transaction is for the
entire remaining position in the account. The Exchange believes that
the current minimum value size of closing and exercise transactions in
FLEX Equity Options is too large to accommodate the needs of certain
members firms and their customers.\3\ These firms may purchase 100 or
more FLEX Equity Options in an opening transaction for a single firm
account in which more than one of the firm's clients have an interest.
If one of these clients wants to redeem its investment in the account,
the firm likely will want to engage in a closing or exercise
transaction in order to reduce the account's position in those FLEX
Equity Options by the number being redeemed. Thus, if the redeeming
client's interest is less than 100 FLEX Equity Options and does not
represent the total remaining position in the account, Rule
8.102(d)(3), as it stands presently, prevents the firm from closing or
exercising positions of this size.
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\3\ The Exchange notes that the existing customer base for FLEX
Equity Options includes both institutional investors, in particular
mutual funds, money managers and insurance companies, and high net
worth individuals who meet the ``sophisticated investor'' criteria
applied to various clients by Exchange member firms.
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The Exchange believes that the proposed rule change would remedy
the situation described above, by permitting an order to close or
exercise as few as
[[Page 44300]]
25 FLEX Equity Option contracts. The corresponding change to Rule
8.102(d)(4), which governs the minimum size for FLEX Equity Quotas that
may be entered in response to Request for Quotes, is necessary in order
to provide the liquidity needed to facilitate the execution of closing
orders between 25 and 99 FLEX Equity Option contracts that would be
permitted by the proposed amendment to Rule 8.102(d)(3).\4\
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\4\ The Commission notes that the minimum size for an opening
transaction in a Request for Quotes is 250 contracts for any FLEX
series in which there is no open interest, and 100 contracts in any
currently opened FLEX series. See PCX Rule 8.102(d)(2) and (3).
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The Exchange represents that it will issue a circular that (1)
describes the new rule; and (2) reminds all members and member firms of
their continuing responsibility to ensure that FLEX Equity Options are
utilized only by sophisticated investors with the necessary financial
resources to sustain the possible losses arising from transactions in
the requisite FLEX Equity Options class size.\5\ The Exchange also will
submit surveillance procedures for the Commission's review.\6\ The
Exchange believes these procedures will help to ensure that only such
sophisticated investors are utilizing this product.
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\5\ See File No. SR-PCX-97-25.
\6\ Id.
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The Exchange believes by providing firms and their customers
greater flexibility to trade FLEX Equity Options by lowering from 100
to 25 the minimum number of contracts required for a closing
transaction, for exercises, and for FLEX Quotes responsive to a Request
for Quotes, the proposed rule change is consistent with and furthers
the objectives of Section 6(b)(5) of the Act \7\ by removing
impediments to and perfecting the mechanism of a free and open market
in securities and other serving to protect investors and the public
interest.
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\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX does not believe that the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. 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 NW., Washington, DC 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. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street NW., Washington,
DC 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the PCX. All submissions should
refer to File No. SR-PCX-97-25 and should be submitted by September 10,
1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Exchange has requested accelerated effectiveness of this
proposed rule change. The Commission has reviewed carefully the PCX's
proposed rule change and believes, for the reasons set forth below, the
proposal is consistent with the requirements of Section 6 of the
Act,\8\ and the rules and regulations thereunder applicable to a
national securities exchange.\9\ Specifically, the Commission believes
the proposal is consistent with Section 6(b)(5) of the Act \10\ because
it should facilitate transactions in securities in FLEX Equity Options
consistent with investor protection and the public interest.
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\8\ 15 U.S.C. 78f.
\9\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the Exchange's proposal to reduce from
100 contracts to 25 contracts the minimum value size of closing
transactions in and exercise of FLEX Equity Options, and to make a
comparable reduction in the minimum value size of FLEX Equity Quotes in
response to a Request for Quotes, reasonably addresses the Exchange's
desire to meet the demands of sophisticated investors, portfolio
managers and other institutional investors who may want to use FLEX
Equity Options, but find the minimum size requirements for closing
transactions too restrictive for their investment needs and may
therefore choose to use the over-the-counter market. As previously
noted by the Commission, the benefits of the Exchange's FLEX options
market 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 the Options Clearing Corporation for
all contracts traded on the Exchange.\11\
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\11\ See Securities Exchange Act Release No. 36841 (February 14,
1996), 61 FR 6666 (February 21, 1996) (``Original FLEX Equity Option
Approval Order'').
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The Commission notes that market participants wanting to execute an
opening transaction in a particular series of FLEX Equity Options will
continue to be required to meet the 250 or 100 minimum contract
requirement.\12\ The Commission believes that this should help to
ensure that transactions in FLEX Equity Options remain of substantial
size and, therefore, the product is geared to an institutional, rather
than a retail market. In originally approving FLEX Equity Options, the
Commission stated that 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.\13\
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\12\ See supra note 4.
\13\ See Original FLEX Equity Option Approval Order, supra note
11.
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The Commission further notes that, in approving the proposal,
adequate surveillance guidelines should be in place to ensure that only
sophisticated investors with the necessary financial resources to
sustain the possible losses arising from transactions in the requisite
FLEX Equity Options class size are utilizing this product. The
Commission's staff has reviewed the PCX's surveillance program and
believes it provides a reasonable framework in which to monitor such
investor open interest.
The Commission requests, however, that the Exchange provide a
report to the Commission's Division of Market Regulation describing the
nature of investor participation (i.e., retail vs. institutional) in
FLEX Equity Options for one year from the implementation date for the
rule change.\14\ If the
[[Page 44301]]
Exchange determines in the interim that the proposed rule change has
resulted in a pattern of retail investor participation in FLEX Equity
Options, it should notify the Commission's Division of Market
Regulation to determine if the minimum closing transaction sizes should
be restored to the original levels.
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\14\ The Commission notes that the PCX has previously committed
to providing the Commission with a report on the usage of FLEX
Equity Options after the first year of trading. See Original FLEX
Equity Option Approval Order, supra note 11. Because that report is
due to the Commission shortly and the changes adopted herein could
potentially change the nature of investor participation, the
Commission requests that the Exchange update its report one year
from the implementation date of this rule change.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission notes that the
proposed rule change is identical to a proposal of the Chicago Board
Options Exchange (``CBOE'') that was recently approved by the
Commission.\15\ Therefore, the Commission believes that the proposal
raises no new regulatory issues. In addition, the Commission notes that
public comments were solicited on the CBOE's proposal for the full
statutory period and no comments were received. Finally, as the
proposal conforms the rules of the Exchange's FLEX Equity options
market to that of another exchange offering FLEX products, the
Commission believes that the proposed rule will allow the PCX to
compete more effectively in the FLEX options market. Based on the
above, the Commission believes that granting accelerated approval of
the proposed rule change is consistent with Sections 6 and 19(b)(2) of
the Act.\16\
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\15\ See Securities Exchange Act Release No. 38839 (July 15,
1997), 62 FR 39040 (July 21, 1997) (order approving File No. SR-
CBOE-97-10).
\16\ 15 U.S.C. 78f and 78s(b)(2).
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It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-PCX-97-25) is hereby
approved on an accelerated basis.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-22059 Filed 8-19-97; 8:45 am]
BILLING CODE 8010-01-M