Daily Rules, Proposed Rules, and Notices of the Federal Government
The Exchange is proposing two pilots with this proposed rule change. First, CBOE is proposing to implement a fourteen-month pilot program to permit p.m. and specified average price settlements of FLEX Index Options that expire on, or within two business days of, a third-Friday-of-the-month expiration ("Blackout Period").
CBOE also proposes to eliminate the minimum value size requirements for all FLEX Options on a fourteen-month pilot basis. CBOE will submit a pilot program report if it elects to extend or expand the pilot program, or to make the program permanent. The pilot program report would include data and analysis of open interest and trading volume, and analysis of the types of investors that initiated opening FLEX
The Commission has carefully reviewed CBOE's 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
Since the Commission approved the initial listing and trading of FLEX Options in 1993,
The Commission's concern about the effect upon market volatility of p.m. settlements for FLEX Index Options during the Blackout Period remains. Nevertheless, the Commission agrees with the Exchange that allowing p.m. and averaged price settlements for FLEX Index Options during the Blackout Period may allow more market participants to benefit from trading customized-type options in the Exchange's FLEX Options market rather than the OTC market.
Moreover, the Commission believes that CBOE's proposed fourteen-month pilot will allow for the CBOE and the Commission to monitor the potential for adverse market effects. In particular, the Commission notes that CBOE will provide the Commission with both annual and interim reports analyzing volume and open interest for each broad-based FLEX Index Options class overlying an Expiration Friday, p.m.-settled FLEX Index Options series. The annual report will also contain information and analysis of FLEX Options trading patterns, and index price volatility and underlying share trading activity for series that exceed certain minimum interest parameters. This information will enable the Commission to evaluate whether allowing p.m. settlements for FLEX Index Options during the Blackout Period has resulted in increased market and price volatility in the underlying component stocks. Further, the Exchange's position reporting requirements,
The Commission also believes that CBOE's proposal to eliminate minimum size requirements for all FLEX Options on a pilot basis is consistent with the Act. Historically, the intended customers of FLEX Options were institutional and high net worth customers, rather than retail customers.
As noted above, the Exchange will be monitoring the type of customers initiating opening FLEX Options transactions as part of the minimum size pilot over its fourteen-month period. In the event the Exchange elects to extend, expand or make the minimum-size pilot permanent, this information will enable the Commission to evaluate how market participants have responded to this proposal, and what types of customers are using the FLEX Options market.
Finally, we note that the combination of eliminating restrictions on settlement values during the Blackout Period, together with reducing the minimum size, increases the potential for the FLEX Options market to act as a surrogate for the non-FLEX Options market. The Commission has previously expressed concern that the FLEX Options market not act as a surrogate for trading in standardized options, especially because the standardized options market contains certain protections for investors. For example, because the FLEX Options market is designed to contain the benefits of an auction market with the features of negotiated transactions, continuous quotes may not always be available.