The boards of governors of both exchanges announced on Thursday that they had approved an agreement that outlines broad terms for the consolidation of the two institutions. Under the proposed agreement, the Chicago facility, the world's largest option exchange, would be the successor entity. The Pacific Exchange, the world's third largest exchange, would remain in San Francisco and would be supported by the Chicago Exchange's technology.The agreement also backs plans to build a new trading facility in San Francisco.

The combined entity would be the first equity derivatives exchange in the world to trade on average more than 1 million contracts per day. With the addition of the Pacific product line, the Chicago Board Options Exchange would trade options on more than 1,700 stocks and 40indexes.

The combination will result in considerable economies of scale, particularly in the development of costly new trading systems,'' said William Brodsky, chief executive officer of the Chicago Exchange.

The proposed union would join two of the youngest and most technologically advanced exchanges. The Chicago Board, which opened in 1973, has developed a big business in trading stock options tied to the Dow Jones Industrial Average and the Standard and Poor's 500-stock index.

The Pacific Exchange developed out of the merger of the Los Angeles and San Francisco exchanges in 1957. It has grown rapidly in recent years with its popular options in high technology companies like Microsoft.

The members of both exchanges would retain membership in the new entity.Details of the agreement are expected to be resolved over the next several weeks by committees of each exchange.

The proposed merger would be the latest in a series of deals involving the nation's leading financial exchanges, one being that ofAmerican Stock Exchange and the Nasdaq. A tentative deal for CBOE to merge with the Philadelphia Exchange fell apart recently because of the Chicago Exchange's demand that the other exchange's trading move to the midwest in two years.