[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