January 12, 2010
Safe Haven Advisors, LLC (SHA), is a Massachusetts-based SEC-registered investment adviser. Our firm's focus on products and services for single stock risk management led us to appreciate the potential suitability for our clients of long-dated FLEX options and the capabilities of the two-year old CFLEX platform at CBOE. During the last year, CBOE and OCC executives and many options market participants have encouraged us and led us to understand the opportunity we have as investment advisers to improve the methods of valuation and dissemination of information related to long-dated and infrequently traded equity-linked options.
The worldwide market for origination of long-dated options (LDOs) is large -- $2.4 trillion per year in notional value -- and is not efficiently served. LDOs have typical terms of a year or more and are used in structured investment products for high net worth individuals and by institutional investors for risk management purposes. The traditional over-the-counter market for LDOs now faces an uncertain regulatory future, to say the least, and at a minimum, needs to be faced with more effective competition. LEAPS, the longest dated exchange-listed options, now meet about 20% of LDO demand, but are limited in the maturities and strikes offered and the number of issues supported.
OCC-guaranteed FLEX options and FLEX Gateway, our patent-pending options management and valuation system, will provide a much needed third alternative.
FLEX Gateway is designed to complement existing options industry assets – in-place distribution channels, the SEC-approved FLEX option, the CBOE CFLEX trading system and the OCC clearing and credit guarantee -- to enable efficient electronic origination of long-dated option trades. FLEX Gateway will serve thousands of institutional investors, wealth managers, bankers and agency brokers worldwide and make LDO transactions efficiently accessible for the first time.
SHA supports and urges approval of SEC Release No. 34-61183 File No. SR-CBOE-2009-087, Proposed Rule Change to Establish a Pilot Program to Modify FLEX Exercise Settlement Values and Minimum Value Sizes.
Our reasons for supporting this proposal may be summarized by observing that all investors in long-dated and infrequently traded options, especially individuals, will be better served by having the third choice – FLEX options – available on a basis that is as directly comparable and competitive as possible with the alternatives, exchange-listed LEAPS options and OTC options. Adoption of the proposed rule change will level the competitive playing field for FLEX options relative to OTC competition FLEX Gateway will serve to facilitate comparisons of FLEX options with LEAPS, as well as the expansion over time of the issues served.
Please note that our technology does NOT rely on this regulatory change – it is designed to work effectively under the existing rules. However, FLEX Gateway will be even more effective in an environment in which many more investors are able to access FLEX options on many issues in smaller increments. See www.institutionaloptionsdesk.com for more information.