[Federal Register: November 19, 2002 (Volume 67, Number 223)]
[Notices]
[Page 69775-69776]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19no02-126]
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SECURITIES AND EXCHANGE COMMISSION
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to an
Extension of the Permissible Maturity of Flexible Exchange Index
Options to Ten Years
November 12, 2002.
[Release No. 34-46815; File No. SR-CBOE-2002-23)]
On April 30, 2002, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to revise CBOE Rule 24A.4,
``Terms of FLEX Options,'' to provide a maximum term of up to ten years
for Flexible Exchange (``FLEX'') index options \3\ under certain
circumstances.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ FLEX index options allow investors to customize certain
option terms, including size, expiration date, exercise style, and
exercise price.
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The proposed rule change was published for comment in the Federal
Register on August 21, 2002.\4\ No comments were received regarding the
proposal. This order approves the proposed rule change.
Currently, CBOE Rule 24A.4(a)(4)(i) provides a maximum term of five
years for FLEX index options. The CBOE proposes to amend CBOE Rule
24A.4(a)(4)(i) to provide a maximum term of up to ten years for FLEX
index options, provided that the FLEX Post Official determines that
sufficient liquidity exists among FLEX index participating members to
support a request for a quote for such options. To determine whether
sufficient liquidity exists to support a request for a quote, the FLEX
Post Official will ask FLEX index market makers and other FLEX index
traders (including the Submitting Member) whether they are interested
in making a two-sided market in the proposed series for the size
requested.\5\ If the FLEX index market makers and FLEX index traders
respond affirmatively, the FLEX Post Official will open a Request for
Quotes for the proposed series, which will trade pursuant to the
provisions of CBOE Rule 24A.5, ``FLEX Trading Procedures and
Principles.''\6\ The CBOE believes that this requirement will help to
prevent the proliferation of longer-term FLEX index options where there
is no interest in trading such options.
The margin requirements for the proposed FLEX index options will be
the same as the margin requirements that apply currently to existing
FLEX index options and to other listed options.\7\ Thus, the required
minimum initial and maintenance margin for a proposed FLEX index option
with more than nine months to expiration will be at least 75% of the
current market value of the option.\8\ The required minimum initial and
maintenance margin for a short position in the proposed FLEX index
options will be the same as the margin required for short positions in
other listed broad-based index options.\9\
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\4\ See Securities Exchange Act Release No. 46363 (August 15,
2002), 67 FR 54243.
\5\ See letter from Jaime Galvan, Attorney II, CBOE, to Yvonne
Fraticelli, Division of Market Regulation, Commission, dated October
14, 2002 (``October 14 Letter'').
\6\ See October 14 Letter, supra note 5.
\7\ See October 14 Letter, supra note 5.
\8\ See CBOE Rule 12.3(c)(4)(B).
\9\ See October 14 Letter, supra note 5. Under the CBOE's rules,
the required minimum initial and maintenance margin for an unhedged
position in a listed broad-based index option carried short in a
customer's account is 100% of the current market value of the option
plus 15% of the product of the current index group value and the
applicable index multiplier, reduced by any out-of-the-money amount,
with a minimum margin requirement equal to 100% of the current
market value of the option plus 10% of the product of the current
index group value and the applicable index multiplier. See CBOE Rule
12.3(c)(5)(A).
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According to the CBOE, the Exchange has received numerous requests
from broker-dealers to extend the maturity of FLEX index options to ten
years to permit their institutional customers that trade or issue
securities with five-to ten-year terms to hedge their long-term risk.
The CBOE states that the proposal will allow institutions to use long-
term FLEX
[[Page 69776]]
index options to protect their portfolios from long-term market moves
at a known and limited cost. In addition, the CBOE believes that the
proposal will better serve the long-term hedging needs of institutional
investors and provide those investors with an alternative to hedging
their portfolios with off-exchange customized index options and
warrants.
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, with the requirements of section 6(b) of the Act \10\ and
the rules and regulations thereunder. Specifically, the Commission
finds that the proposal is consistent with the requirements under
section 6(b)(5) of the Act \11\ that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and to protect investors and the
public interest.\12\
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
\12\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission believes that extending the permissible maturity of
FLEX index options to a maximum term of up to ten years will help to
meet the long-term hedging requirements of institutional investors and
other market participants.\13\ The proposal should benefit market
participants with long-term hedging needs by allowing them to hedge
positions on a long-term basis through an investment in one option
series, rather than having to roll shorter-term expirations into new
series to remain hedged over an extended period of time. In addition,
the proposal will allow market participants to hedge long-term risk
with an exchange-traded option, thereby providing an alternative to
hedging positions with over-the-counter (``OTC'') products and
extending the benefits of a listed, exchange market to longer-term
index options.\14\ The extension of the permissible maturity term for
FLEX index options to up to ten years also could help to expand the
depth and liquidity of the FLEX index option market.
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\13\ FLEX index options are designed to appeal to institutional
investors or extremely high net worth individuals who have the
experience and ability to engage in negotiated, customized
transactions. In this regard, the Commission notes that the required
minimum size for an opening transaction in any FLEX index option
series in which there is no open interest is $10 million Underlying
Equivalent Value (the aggregate underlying monetary value covered by
that number of contracts, derived by multiplying the index
multiplier by the current index value times the given number of FLEX
index options). See CBOE Rule 24A.4(a)(4)(ii).
\14\ As the Commission has noted previously, the benefits of the
CBOE's market versus an OTC market include, but are not limited to,
a centralized market center, an auction market with posted
transparent market quotations and transaction reporting,
standardized contract specifications, parameters and procedures for
clearance and settlement, and the guarantee of the Options Clearing
Corporation (``OCC'') for all contracts traded on the CBOE. See
Securities Exchange Act Release No. 31920 (February 24, 1993), 58 FR
12280 (March 3, 1993) (File No. SR-CBOE-92-17) (approving the CBOE's
proposal to list and trade FLEX options on the S&P 500 Index and the
S&P 100 Index).
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The Commission notes that a series of the proposed FLEX index
options may be issued only if a FLEX Post Official determines that
there is sufficient liquidity among FLEX index participating members to
support the request for a quote for such options. This requirement
should help to prevent the proliferation of longer term FLEX index
options series where there is no interest in trading such options. In
addition, as with all exchange-traded options, the OCC will act as the
counter-party guarantor, thereby ensuring that obligations will be met
over the long term. In approving this proposal, the Commission notes
that the extension to ten years is based, in part, on the nature of the
FLEX market, which is geared toward institutional investors and high
net worth individuals.\15\ The Commission believes that because of
their experience, these market participants may be better able to
assess the risks of longer term index option products.\16\
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\15\ See note 13, supra.
\16\ See also note 12 in Securities Exchange Act Release No.
39524 (January 8, 1998), 63 FR 3009 (January 20, 1998) (order
approving File No. SR-CBOE-97-57) (noting certain concerns that may
be raised by long-term options).
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For the foregoing reasons, the Commission finds that the proposal
is consistent with the requirements of the Act and rules and
regulations thereunder.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-CBOE-2002-23) is approved.
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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. 02-29240 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-P