[Federal Register: March 11, 2008 (Volume 73, Number 48)]
[Notices]
[Page 13058-13060]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr08-115]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57429; File No. SR-CBOE-2006-36]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Approval of Proposed Rule Change, as
Modified by Amendments No. 1, 2, and 3 Thereto, to Modify the Minimum
Value Size for an Opening Transaction in a Currently-Opened FLEX Equity
Series and to Establish a Pilot Program that Reduces the Minimum Number
of Contracts Required for a FLEX Equity Option Opening Transaction in a
New Series
March 4, 2008.
I. Introduction
On April 14, 2006, 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 Actof 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to make changes to the minimum
value size for an opening transaction in a currently-opened FLEX Equity
series and to establish a one-and-a-half-year pilot program that
reduces the minimum number of contracts required for a FLEX Equity
Option opening transaction in a new series (``Pilot Program'').\3\ On
December 24, 2007, CBOE filed Amendments No. 1 and 2 to the proposed
rule change.\4\ The amended proposed rule change was published for
comment in the Federal Register on January 24, 2008.\5\ The Commission
received no comments on the proposal. On March 3, 2008, CBOE filed
Amendment No. 3 to the proposed rule change.\6\ This order approves the
proposed rule change, as modified by Amendments No. 1, 2, and 3.
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\1\ 15 U.S.C. 78s(b)(l).
\2\ 17 CFR 240.19b-4.
\3\ CBOE defines the term ``FLEX Equity Option'' to mean an
option on a specified underlying equity security that is subject to
the rules in Chapters 24A and 24B. See CBOE Rule 24A.1(e) and CBOE
Rule 24B.1(f), respectively.
\4\ Amendment No. 1 replaced and superseded the original filing
in its entirety. Amendment No. 2 replaced and superseded Amendment
No. 1 in its entirety.
\5\ See Securities Exchange Act Release No. 57161 (January 16,
2008), 73 FR 4293 (January 24, 2008).
\6\ Amendment No. 3 is a technical amendment that corrects a
typographical error in the proposed rule language and is not subject
to notice and comment.
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II. Description of the Proposal
CBOE is proposing to reduce the minimum value size for an opening
transaction (other than FLEX Quotes responsive to a FLEX Request for
Quotes) in any FLEX Equity Option \7\ series in which there is no open
interest at the time the Request for Quotes is submitted on a pilot
basis for one-and-a-half years. Currently, the minimum opening
transaction value size in the case of a FLEX Equity Options in a newly
established series is the lesser of (i) 250 contracts or (ii) the
number of contracts overlying $1 million in the underlying
securities.\8\ Under the Pilot Program, the Exchange proposes to reduce
the ``250 contracts'' component to ``150 contracts;'' the $1 million
underlying value component will continue to apply unchanged.\9\ If the
Exchange were to propose an extension, expansion, or permanent
implementation of the Pilot Program, the Exchange would submit, along
with a filing proposing any necessary amendments to the Pilot Program,
a pilot program report. The report would be submitted to the Commission
at least ninety days prior to the expiration date of the one-and-a-half
year Pilot Program.
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\7\ FLEX Equity Options are flexible exchange-traded options
contracts which overlie equity securities. FLEX Equity Options
provide investors with the ability to customize basic option
features including size, expiration date, exercise style, and
certain exercise prices.
\8\ Under this formula, an opening transaction in a FLEX Equity
series in a stock priced at $40 or more would reach the $1 million
limit before it would reach the contract size limit, i.e., 250
contracts times the multiplier (100) times the stock price ($40)
equals $1 million in underlying value. For a FLEX Equity series in a
stock priced at less than $40, the 250 contract size limit applies.
\9\ Under this proposed formula, an opening transaction in a
FLEX Equity series in a stock priced at approximately $66.67 or more
would reach the $1 million limit before it would reach the contract
size limit, i.e., 150 contracts times the multiplier (100) times the
stock price ($66.67) equals just over $1 million in underlying
value. For a FLEX Equity series in a stock priced at less than
$66.67, the 150 contract size limit would apply.
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Given that FLEX Equity Option transactions can occur in increments
of 100 or more contracts in subsequent opening transactions,\10\ the
Exchange believes it is reasonable to permit the initial series opening
transaction size to
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be 150 contracts (or $1 million in underlying value, whichever is
less). The Exchange believes that the proposed reduction of the minimum
value size for opening a series provides FLEX-participating members
with greater flexibility in structuring the terms of FLEX Equity
Options that best comports with their and their customers' particular
needs. The Exchange notes that the opening size requirement for FLEX
Equity Options was originally put in place to limit participation in
FLEX Equity Options to sophisticated, high net worth investors rather
than retail investors.\11\ According to CBOE, it has recently received
requests from broker-dealers representing institutional clients that
the minimum value size for opening transactions be reduced. In
proposing the reduction of the 250 contract component to 150 contracts,
CBOE stated in its filing that it is cognizant of the desire to
continue to provide both the requisite amount of investor protection
that the minimum opening size requirement was originally designed to
achieve, as well as the need for market participants to have the
flexibility to serve their customers' particular investment needs.
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\10\ Specifically, the minimum value size for a transaction in
any currently-opened FLEX Equity Option series is 100 contracts in
the case of opening transactions and 25 contracts in the case of
closing transactions (or any lesser amount in a closing transaction
that represents the remaining underlying size, whichever is less).
Additionally, the minimum value size for a FLEX Quote entered in
response to a Request for Quotes in FLEX Equity Options is the
lesser of 25 contracts or the remaining underlying size in a closing
transaction. See Exchange Rules 24A.4(a)(4)(iii)--(iv) and
24B.4(a)(5)(iii)--(iv). A ``FLEX Quote'' refers to (i) FLEX bids and
offers entered by Market-Makers and (ii) orders to purchase and
orders to sell FLEX Options entered by Exchange members other than
Market-Makers, in each case in response to a Request for Quotes. See
CBOE Rules 24A.1(h) and 24B.1(k).
\11\ The existing customer base for FLEX Options includes both
institutional investors and high net worth individuals.
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The Exchange also believes that modifying the minimum opening
transaction value size in this way will further broaden the base of
institutional investors that use FLEX Equity Options to manage their
trading and investment risk, including investors that currently trade
in the over-the-counter (``OTC'') market for customized options which
can take on contract characteristics similar to FLEX Options but for
which similar opening size restrictions do not apply. CBOE believes
market participants benefit from being able to trade these customized
options in an exchange environment in several ways, including, but not
limited to, enhanced efficiency in initiating and closing out
positions; increased market transparency; and heightened contra-party
creditworthiness due to the role of The Options Clearing Corporation as
issuer and guarantor of FLEX Equity Options.
Finally, the Exchange is also proposing to modify the minimum value
size for an opening transaction in a currently-opened FLEX Equity
series (other than FLEX Quotes responsive to a FLEX Request for
Quotes). Presently, the minimum transaction value size for an opening
transaction in a currently-opened series is 100 contracts. The Exchange
is proposing to modify the minimum size formula to the lesser of (i)
100 contracts or (ii) the number of contracts overlying $1 million in
the underlying securities. This change would only impact those FLEX
Equity series in which the underlying stock is trading at more than
$100.\12\
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\12\ Under this proposed formula, a transaction in a currently-
opened FLEX Equity series in a stock priced at more than $100 would
reach the $1 million limit before it would reach the contract size
limit, i.e., 100 contracts times the multiplier (100) times the
stock price ($100) equals $1 million in underlying value. Telephone
conference between Jennifer Lamie, Assistant General Counsel, CBOE,
and Kristie Diemer, Special Counsel, Division of Trading and
Markets, Commission, on February 28, 2008 clarifying that the
underlying stock price would have to be trading at ``more than
$100'' versus ``$100 or more'' to meet a $1 million limit before the
100 contract size limit. (``February 28 Telephone Conversation.'')
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The FLEX minimum size requirements for subsequent opening
transactions in a currently-opened series is higher for certain stocks
priced over $100 than the minimum size needed to initially open the
series in similarly priced stocks. The Exchange therefore believes
that, this change is necessaryfor there to be consistency between the
minimum size requirements for new series and currently-opened series
when the underlying stock is trading at more than $100.\13\
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\13\ For example, a new FLEX Equity series in a stock trading at
$110 could open with an initial transaction size of 91 contracts,
i.e., 91 contracts times the multiplier (100) times the stock price
($110) equals just over $1 million in underlying value. Once the
series is opened, absent the proposed change, any further opening
transactions would require a minimum contract size of 100 contracts,
despite the fact that with the stock price of $110, this would be
valued at $1.1 million, more than the value of the initial opening
transaction.
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\14\ In particular, the Commission finds that the proposed
rule change is consistent with section 6(b)(5) of the Act,\15\ which,
among other things, requires that the rules of a national securities
exchange be designed to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system and, in general, to protect investors and the public interest.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change, in reducing
the minimum opening size from 250 contracts to 150 contracts (or an
underlying value of $1 million, whichever is less) in an initial
opening transaction, should allow CBOE to better meet the needs of
investors in the FLEX Equity Options market. The requirements as
proposed, however, should still be significant enough to limit FLEX
Equity Options to institutional and high net worth customers, the
intended customers, rather than retail investors. In addition, the
Commission agrees with the Exchange that the proposal to lower the
opening size may allow more market participants to benefit from trading
customized-type options in the Exchange's FLEX Equity Options market as
opposed to the OTC market. As noted above, some of the benefits of
trading on an exchange may include, among others, enhanced efficiency
in initiating and closing out positions; increased market transparency;
and heightened contra-party creditworthiness due to the role of The
Options Clearing Corporation as issuer and guarantor of FLEX Equity
Options.
As noted above, the proposal to reduce the minimum number of
contracts required for a FLEX Equity Option in an initial opening
transaction is being approved on a one-and-a-half-year pilot basis. The
Commission has requested that CBOE provide a report to it should CBOE
wish to extend the Pilot Program or implement the change on a permanent
basis. At a minimum, the report must provide (i) data and analysis on
the open interest and trading volume in FLEX Equity Options for which
series were opened with a minimum opening size of 150 to 249 contracts
and less than $1 million in underlying value; and (ii) analysis on the
types of investors that initiated opening FLEX Equity Options
transactions (i.e., institutional, high net worth, or retail, if any).
The report, along with any filing to extend or permanently implement
the Pilot Program,\16\ should be submitted to the Commission at least
ninety days prior to the expiration date of the one-and-a-half-year
Pilot Program.
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\16\ CBOE agreed to submit any related filing (in addition to
the report) at least ninety days prior to the expiration of the
Pilot Program in the February 28 Telephone Conversation. See supra,
note 12.
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The report should provide the Commission with information on
whether the intended customers (institutional and high net worth) are
in fact the investors utilizing the lower
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opening contract requirement in the FLEX Equity Options market, as well
as whether the lower opening size has increased liquidity in FLEX
Equity Options. Based on the report's information, the Commission
should be able to determine whether the Pilot Program should be
extended or approved on a permanent basis, consistent with the Act.
The Commission also believes that the aspect of the proposal that
modifies the minimum value size for an opening transaction in a
currently-opened FLEX Equity series (other than FLEX Quotes responsive
to a FLEX Request for Quotes) to the lesser of (i) 100 contracts or
(ii) the number of contracts overlying $1 million in the underlying
securities is also consistent with the Act and the rules and
regulations thereunder. The Commission agrees with the Exchange that
this change will provide consistency between the minimum size
requirements for opening transactions in both new series and currently-
opened series when the underlying stock is trading at more than $100.
The change avoids the result that, for situations where the underlying
stock is priced over $100, the effect of current CBOE rules is to
require a higher opening amount for currently-opened series than for
newly established series.
IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-CBOE-2006-36), as modified
by Amendments No. 1, 2, and 3, be, and hereby is, approved with respect
to the minimum value size for an opening transaction in a currently-
opened FLEX Equity series (other than FLEX Quotes responsive to a FLEX
Request for Quotes) and to establish a Pilot Program for one-and-a-
half-years with respect to the reduced minimum number of contracts
required for a FLEX Equity Option Opening transaction in a new series.
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\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4748 Filed 3-10-08; 8:45 am]
BILLING CODE 8011-01-P