[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