[Federal Register Volume 59, Number 72 (Thursday, April 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8929]


[[Page Unknown]]

[Federal Register: April 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33872; File No. SR-CBOE-94-05]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to Options 
on the CBOE Real Estate Investment Trust Index

April 7, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 8, 
1994, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to list and trade cash-settled, European-
style options on the CBOE Real Estate Investment Trust Index (``REIT 
Index'').
    The text of the proposed rule change is available at the Office of 
the Secretary, the CBOE, and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to enable the Exchange 
to list and trade cash-settled, European-style options on an industry 
index, the CBOE REIT Index, in accordance with CBOE Rule 24.2.
    The REIT Index will reflect a segment of the U.S. equity securities 
market that currently is not represented in the derivatives markets 
and, as such, will offer investors a low-cost means to achieve 
diversification or to tilt a portfolio toward, or away from, real 
estate investments. The REIT Index will provide retail and 
institutional investors with a means to benefit from forecasts about 
the financial performance of real estate investment trusts (``REITs'') 
and their underlying real estate assets. Options on the index also may 
be used by portfolio managers and investors to provide a performance 
measure and evaluation guide for passively or actively managed REITs, 
and may serve as a means of hedging the risks of investing in real 
estate generally, and REIT stocks in particular.
    The REIT Index is based on twenty-five REIT stocks. Twenty-three of 
those stocks currently trade on the New York Stock Exchange, and two 
currently trade on the American Stock Exchange. The REIT Index is 
price-weighted and will be calculated on a real-time basis using last-
sale prices of the securities underlying the index.
    The REIT Index is composed of stocks that ranged in market 
capitalization from $220.2 million to $1.1 billion as of February 14, 
1994. The median capitalization as of that date was $518.7 million. The 
stock with the largest weight in the index accounted for 6.5 percent of 
the total weighting, while the smallest weighted stock accounted for 
1.1 percent. Four of the component stocks are currently the subject of 
trading in equity options, and the balance of the component stocks meet 
the criteria for listing as equity options under CBOE Rule 5.3. All 
component stocks are ``reported securities'' under Rule 11Aa3-1 of the 
Act.
    The REIT Index will be calculated continuously by the CBOE or its 
designee, and the index value will be disseminated by the CBOE every 15 
seconds. If a component stock currently is not being traded, the most 
recently traded price will be used.
    As is the case with other industry indices that have been approved 
for trading on the Exchange, the REIT Index is price-weighted, 
reflecting changes in the prices of the component stocks in relation to 
the base date of the index, January 3, 1994. The REIT Index is 
calculated by summing the prices of the component stocks and then 
dividing by a divisor that yielded an index value of 200.00 as of the 
base date.
    The REIT Index will be maintained by the CBOE. To assure continuity 
in the index following an adjustment to a component security, the 
divisor will be adjusted. Changes which may result in divisor changes 
include, but are not limited to, removal and replacement of one 
component stock, component stock splits, and financial restructuring of 
a component REIT.
    The REIT Index will be reviewed approximately on a monthly basis by 
the CBOE staff. The CBOE may change the composition of the REIT Index 
at any time to reflect conditions in REIT markets. At present, all 
twenty-five REITs represented in the index invest a preponderance of 
their assets (in most cases, at least 75 percent) in real property. If 
a REIT that is included as a component stock becomes unrepresentative 
of REIT markets, the stock will be removed from the index. Whenever 
removal is necessary, every effort will be made to replace the removed 
stock with a stock that is suitably representative. In such 
circumstances, the CBOE will take into account the capitalization, 
liquidity, volatility, and name recognition of the proposed replacement 
stock.
    The CBOE most likely will maintain twenty-five stocks in the index 
at all times. Absent prior approval by the Commission, the CBOE will 
not increase to more then thirty-three nor reduce to fewer than 
seventeen the number of stocks in the REIT Index, nor will it make any 
change in the composition of the index that would cause less than 
ninety percent of the REIT Index, by weight, to be composed of stocks 
that are eligible for listing as equity options under CBOE Rule 5.3.
    The Exchange proposes to base trading in options on the REIT Index 
on the full value of the index. The Exchange may list long-term index 
option series (``LEAPS''), as provided in CBOE Rule 24.9. The Exchange 
also may provide for the listing of reduced-value LEAPS, the underlying 
value of which will be calculated at one-tenth the REIT Index value. 
The current and closing index value of any such reduced-value LEAPS, 
after the initial computation, will be rounded to the nearest one-
hundredth. Strike price intervals will be no less than $5.00 for every 
series of REIT Index options, except that reduced-value LEAPS will have 
stock price intervals that are no less than $2.50.
    REIT Index options will have European-style exercise and will be 
``A.M.-settled index options'' within the meaning of the rules in 
Chapter XXIV, including CBOE Rule 24.9, which is being amended to refer 
specifically to REIT Index options. The proposed options will expire on 
the Saturday following the third Friday of the expiration month. Thus, 
the last day for trading in an expiring series will be the second 
business day (ordinarily a Thursday) preceding the expiration date.
    As modified in this proposed rule change, the Rules in Chapter XXIV 
will be applicable to REIT Index options. The REIT Index will be deemed 
to be ``narrow-based'' for purposes of the position limit requirements 
of CBOE Rule 24.4A. Ten reduced-value options will equal one full-value 
contract for position limit purposes.
    The CBOE has the necessary systems capacity to support new series 
of options that would result from the introduction of REIT Index 
options.
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act in general, and furthers the objectives of 
section 6(b)(5) in particular, in that it is designed to enable the 
listing and trading of REIT Index options subject to just and equitable 
principles of trade and is structured to protect investors and the 
public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC. Copies of such filing also will be available for 
inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-94-05 and should be 
submitted by May 5, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\1\
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    \1\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8929 Filed 4-13-94; 8:45 am]
BILLING CODE 8010-01-M