[Federal Register Volume 63, Number 186 (Friday, September 25, 1998)]
[Notices]
[Pages 51393-51394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25657]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40451; File No. SR-CBOE-98-21]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
Minimum Opening Transaction Size in FLEX Equity Options
September 18, 1998.
I. Introduction
On May 18, 1998, the Chicago Board Options Exchange, Incorporated
(``CBOE or Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ a proposed rule change
which was published for comment in Securities Exchange Act Release No.
40221 (July 16, 1998).\2\ No comments were received on the proposal.
For the reasons discussed below, the Commission is approving the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 63 FR 39610 (July 23, 1998).
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II. Description of the Proposal
The Exchange proposes to change the minimum value size for opening
transactions (other than FLEX Quotes responsive to a FLEX Request for
Quotes) in any FLEX Equity Option \3\ series in which there is no open
interest at the time the Request for Quotes is submitted. The proposal
will change CBOE Rule 24A.4 from requiring a minimum value size for
these opening transactions from 250 contracts to the lesser of 250
contracts or the number of contracts overlying $1 million of the
underlying securities. According to the CBOE, the rule was originally
put in place with a minimum of 250 contracts in order to limit
participation in FLEX Equity options to sophisticated, high net worth
individuals. The Exchange believes the dollar value of the securities
underlying the FLEX Equity Options, if set at the right limit, can also
prevent the participation of investors who do not have adequate
resources. The CBOE notices that the limitation on the minimum value
size for opening transactions in FLEX Index Options is
[[Page 51394]]
tied to the same type of standard, the underlying equivalent value.\4\
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\3\ FLEX equity options are flexible exchange-traded options
contracts which overlie equity securities. In addition, FLEX equity
options provide investors with the ability to customize basic option
features including size, expiration date, exercise style, and
certain exercise prices.
\4\ The term ``underlying equivalent value'' is defined in CBOE
Rule 24A.1(r) for FLEX Index options, but it is not a defined term
for FLEX Equity options. As noted in CBOE's filing, however, the
amount of the ``underlying equivalent value'' for FLEX equity
options is calculated by multiplying the number of contracts times
the multiplier (100) times the stock price.
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III. Discussion
The Commission believes that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, with Section 6(b)(5)
which requires, among other things, that the rules of an exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and to perfect the mechanism of a free and open market
and a national market system, and, in general, to protect investors and
the public interest.\5\
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\5\ 15 U.S.C. 78f(b)(5).
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The Commission believes that changing the requisite minimum value
size of opening transactions in FLEX Equity Options to include a
minimum dollar amount as an alternative to the existing 250 contract
opening size requirement will promote just and equitable principles of
trade and facilitate transactions in securities while continuing to
foster the public interest and investor protection. In particular, the
Commission notes that the minimum size requirement for opening
transactions in FLEX equity options was originally designed to ensure
that FLEX equity options were primarily used by sophisticated, high net
worth individuals rather than retail investors. While it appears that
the minimum contract size fulfilled its purpose, the Commission agrees
with the CBOE that the result of the existing rule is to require a much
greater dollar investment for options on higher priced stocks than for
options lower priced stocks. For example, an investor can purchase 250
contracts in a Flex Equity series on low priced stocks (i.e., those
worth less than $40) meeting the minimum requirement without even
investing a minimum of $1 million, while an investor prepared to invest
$1 million may be unable to purchase contracts in a Flex Equity series
in higher priced stocks (i.e., those worth more than $40). An opening
transaction in a Flex Equity series on a stock priced at $40.01 or more
would reach this $1 million limit before it would reach the contract
size limit, i.e., 250 contracts times the multiplier (100) times the
stock price ($40.01) totals $1,000,250. million in underlying value.
Based on the above, the Commission believes it appropriate to
provide, as an alternative to the 250 fixed contract amount, an opening
minimum size for FLEX equity options of $1 million. In approving the
dollar value as an alternative to the fixed number of contracts, the
Commission recognizes that the investment for FLEX equity options on
lower priced stocks may still be considerably low. Nevertheless, the
Commission believes the alternative requirements are appropriate
because they will provide flexibility to investors and will not unduly
restrict access to the FLEX equity options market. In summary, the
Commission believes that the proposed rule change could result in
improved liquidity for FLEX equity options while preserving the
investor protections inherent in CBOE Rule 24A.4.
IV. Conclusion
For the foregoing reasons, the Commission believes that the CBOE's
proposal is consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a national securities
exchange.\6\
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\6\ In addition, in approving this rule, the Commission notes
that it has also considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-CBOE-98-21) be, and hereby
is, approved.
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\7\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-25657 Filed 9-24-98; 8:45 am]
BILLING CODE 8010-01-M