[Federal Register Volume 59, Number 84 (Tuesday, May 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10473]
[[Page Unknown]]
[Federal Register: May 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33962; File No. SR-CBOE-93-57]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 1 to a
Proposed Rule Change by the Chicago Board Options Exchange, Inc.,
Relating to the Listing of Options and Long-Term Options on the CBOE
Global Telecommunications Index and Long-Term Options on a Reduced-
Value Global Telecommunications Index
April 25, 1994.
I. Introduction
On December 14, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide for the listing and
trading of index options on the CBOE Global Telecommunications Index
(``Global Telecommunications Index'' or ``Index''). Notice of the
proposal appeared in the Federal Register on December 30, 1993.\3\ No
comment letters were received on the proposed rule change. On March 16,
1994, the Exchange submitted Amendment No. 1 to the proposed rule
change.\4\ This order approves the Exchange's proposal.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\See Securities Exchange Act Release No. 33370 (December 22,
1993), 58 FR 69417 (December 30, 1993).
\4\Amendment No. 1 provides that the CBOE will maintain the
Index such that at least 90% of the Index, by weight, will be
composed of securities that are eligible for equity options trading
under CBOE Rule 5.3. See Letter from Eileen Smith, Director, Product
Development, Research Department, CBOE, to Brad Ritter, Attorney,
Office of Derivatives and Equity Regulation, Division of Market
Regulation, SEC, dated March 16, 1994 (``Amendment No. 1'').
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II. Description of Proposal
A. General
The CBOE proposes to list and trade options on the CBOE Global
Telecommunications Index, a new securities index developed by the CBOE
and based on stocks and ADRs\5\ of international telecommunications
companies that are traded on the American Stock Exchange (``Amex''),
the New York Stock Exchange (``NYSE''), or are national market
securities traded through the facilities of the National Association of
Securities Dealers Automated Quotation system (``NASDAQ''). The CBOE
also proposes to list either long-term options on the full-value Index
or long-term options on a reduced-value Index that will be computed at
one-tenth of the value of the Global Telecommunications Index (``Global
Telecommunications LEAPS'' or ``Index LEAPS'').\6\ Global
Telecommunications LEAPS will trade independent of and in addition to
regular Global Telecommunications Index options traded on the
Exchange,\7\ however, as discussed below, position and exercise limits
of Index LEAPS and regular Index options will be aggregated.
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\5\An ADR is a negotiable receipt which is issued by a
depositary, generally a bank, representing shares of a foreign
issuer that have been deposited and are held, on behalf of holders
of the ADRs, at a custodian bank in the foreign issuer's home
country. The securities underlying the ADRs included in the Index
are securities issued by corporations formed under the laws of
Chile, France, Hong Kong, Mexico, the Netherlands, New Zealand,
Sweden, Spain, and the United Kingdom. See discussion of standards
for ADR components, infra notes 9 and 29.
\6\LEAPS is an acronym for Long-Term Equity Anticipation
Securities. LEAPS are long-term index option series that expire from
twelve to thirty-six months from their date of issuance. See CBOE
Rule 24.9(b)(1).
\7\According to the CBOE, the Global Telecommunications Index
represents a segment of the U.S. equity market that is not currently
represented in the derivative markets and, as such, the CBOE
concludes, should offer investors a low-cost means of achieving
diversification of their portfolios toward or away from the global
telecommunications industry. The CBOE believes the Index will
provide retail and institutional investors with a means of
benefitting from their forecasts of that industry's market
performance. Options on the Index also can be utilized by portfolio
managers and investors to provide a performance measure and
evaluation guide for passively or actively managed global
telecommunications industry funds, as well as a means of hedging the
risks of investing in the global telecommunications industry.
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B. Composition of the Index
The Index is based on securities representing twenty U.S. and
foreign companies that the Exchange believes are representative of the
global telecommunications industry, all of which trade domestically as
either stocks or ADRs. Fourteen of these securities currently trade on
the NYSE, one trades on the Amex, and five trade through NASDQ. The
Index is price-weighted and will be calculated on a real-time basis
using last sale prices.
As of the close of trading on February 11, 1994, the Index was
valued at 149.63.\8\ As of November 30, 1993, the market
capitalizations of the individual securities in the Index ranged from a
high of $73.61 billion (AT&T) to a low of $144.21 million (Atlantic
Tele-Network, Inc.), with the mean and median being $14.79 billion and
$8.14 billion, respectively. The market capitalization of all the
securities in the Index was $295.74 billion. The total number of shares
outstanding for the stocks and ADRs in the Index ranged from a high of
1.35 billion shares (AT&T) to a low of 12.27 million shares (Atlantic
Tele-Network, Inc.). The average price per share of the securities in
the Index, for the six-month period between June 1 and November 30,
1993, ranged from a high of $78.19 (Compania De Telefonos De Chile) to
a low of $12.79 (Atlantic Tele-Network, Inc.). In addition, the average
daily trading volume of the stocks and ADRs in the Index, for the same
six-month period, ranged from a high of 1.89 million shares per day
(AT&T) to a low of 51,675 shares per day (Atlantic Tele-Network, Inc.),
with the mean and median being 425,652 and 252,187 shares,
respectively. Lastly, no one stock or ADR accounted for more than 9.08%
of the Index's total value (Compania De Telefonos De Chile) and the
percentage weighting of the five largest issues in the Index accounted
for 37.07% of the Index's value. The percentage weighting of the lowest
weighted component was 1.27% of the Index (Atlantic Tele-Network, Inc.)
and the percentage weighting of the five smallest issues in the Index
accounted for 11.66% of the Index's value.
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\8\See Letter from Eileen Smith, Director, Product Development,
Research Department, CBO, to Brad Ritter, Attorney, Office of
Derivatives and Equity Regulation, Division of Market Regulation,
SEC, dated February 14, 1994 (::February 14 Letter'').
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C. Maintenance
The Index will be maintained by the CBOE. The CBOE may change the
composition of the Index at any time, subject to compliance with the
maintenance criteria discussed herein, to reflect the conditions in the
global telecommunications industry. If it becomes necessary to replace
a security in the Index, the Exchange represents that it will make
every effort to add new stocks and/or ADRs that are representative of
the global telecommunications industry and will take into account a
security's capitalization, liquidity, volatility, and name recognition
of the proposed replacement. Further, securities may be replaced in the
event of certain corporate events, such as takeovers or mergers, that
change the nature of the security. If, however, the Exchange determines
to increase the number of Index component securities to greater than
twenty-six or reduce the number of Index component securities to fewer
than fourteen, the proposal provides that the CBOE will submit a rule
filing with the Commission pursuant to Section 19(b) of the Act. In
addition, in choosing replacement securities for the Index, the CBOE
will be required to ensure that at least 90% of the weight of the Index
continues to be made up of stocks and ADRs that are eligible for
standardized options trading.\9\ Finally, the CBOE will be required to
ensure that each component of the Index is subject to last sale
reporting requirements in the U.S.\10\
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\9\See Amendment No. 1, supra note 4. The CBOE's options listing
standards, which are uniform among the options exchanges, provide
that a security underlying an option must, among other things, meet
the following requirements: (1) the public float must be at least
7,000,000; (2) there must be a minimum of 2,000 stockholders; (3)
trading volume must have been at least 2.4 million over the
preceding twelve months; and (4) the market price must have been at
least $7.50 for a majority of the business days during the preceding
three calendar months. See CBOE Rule 5.3. With respect to ADRs' in
addition to the above standards: (1) the Exchange must have in place
a comprehensive surveillance agreement with the primary exchange in
the home country where the security underlying the ADR is traded: or
(2) the trading volume in the U.S. markets where the ADR is traded
represents (on a share-equivalent basis) at least 50% of the
worldwide trading volume in the security underlying the ADR over the
three month period preceding the date of selection of the ADR for
options trading; or (3) the SEC must otherwise authorize the
listing. See Securities Exchange Act Release No. 33554 (January 31,
1994), 59 FR 5622 (February 7, 1994).
\10\See February 14 Letter, supra note 8.
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D. Applicability of CBOE Rules Regarding Index Options
Except as modified by this order, the rules in Chapter XXIV of the
CBOE Rules will be applicable to Global Telecommunications Index
options and full-value and reduced-value Index LEAPS. Those rules
address, among other things, the applicable position and exercise
limits, policies regarding trading halts and suspensions, and margin
treatment for narrow-based index options.
E. Calculation of the Index
The CBOE Global Telecommunications Index is a price-weighted index
and reflects changes in the prices of the Index component securities
relative to the Index's base date of January 2, 1992. Specifically, the
Index value is calculated by adding the prices of the component stocks
and ADRs and then dividing this summation by a divisor that is equal to
the number of the components of the Index to get the average price. To
maintain the continuity of the Index, the divisor will be adjusted to
reflect non-market changes in the prices of the component securities as
well as changes in the composition of the Index. Changes that may
result in divisor adjustments include, but are not limited to, stock
splits and dividends, spin-offs, certain rights issuances, and mergers
and acquisitions.
The Index will be calculated continuously and will be disseminated
to the Options Price Reporting Authority (``OPRA'') every fifteen
seconds by the CBOE, based on the last-sale prices of the component
stocks and ADRs.\11\ OPRA, in turn, will disseminate the Index value to
other financial vendors such as Reuters, Telerate, and Quotron.
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\11\For purposes of the daily dissemination of the Index value,
if a stock included in the Index has not opened for trading, the
CBOE will use the closing value of that stock on the prior trading
day when calculating the value of the Index, until the stock opens
for trading.
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The Index value for purposes of settling outstanding regular Index
options and Index LEAPS contracts upon expiration will be calculated
based upon the regular way opening sale prices for each of the Index's
component securities in their primary market on the last trading day
prior to expiration. In the case of securities traded on and through
NASDAQ, the first reported sale price will be used. Once all of the
component stocks and ADRs have opened, the value of the Index will be
determined and that value will be used as the final settlement value
for expiring Index options contracts. If any of the component stocks or
ADRs do not open for trading on the last trading day before expiration,
then the prior trading day's (i.e., normally Thursday's) last sale
price will be used in the Index calculation. In this regard, before
deciding to use Thursday's closing value of a component security for
purposes of determining the settlement value of the Index, the CBOE
will wait until the end of the trading day on expiration Friday.
F. Contract Specifications
The proposed options on the Index will be cash-settled, European-
style options.\12\ Standard options trading hours (8:30 a.m. to 3:10
p.m. Central Standard time) will apply to the contracts. The Index
multiplier will be 100. The strike price interval will be $5.00 for
full-value Index options with a duration of one year or less to
expiration.\13\ In addition, pursuant to CBOE Rule 24.9, there may be
up to six expiration months outstanding at any given time.
Specifically, there may be up to there expiration months from the
March, June, September, and December cycle plus up to three additional
near-term months so that the two nearest term months will always be
available. As described in more detail below, the Exchange also intends
to list several Index LEAPS series that expire from twelve to thirty-
six months from the date of issuance.
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\12\A European-style option can be exercised only during a
specified period before the option expires.
\13\For a description of the strike price intervals for reduced-
value Index options and long-term Index options, See infra, Section
II.G.
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Lastly, the options on the Index will expire on the Saturday
following the third Friday of the expiration month (``Expiration
Friday''). Accordingly, since options on the Index will settle based
upon opening prices of the component securities on the last trading day
before expiration (normally a Friday), the last trading day for an
expiring Index option series will normally be the second to the last
business day before expiration (normally a Thursday).
G. Listing of Long-Term Options on the Full-Value or Reduced-Value
Global Telecommunications Index
The proposal provides that the Exchange may list long-term Index
options that expire from 12 to 36 months from listing based on the
full-value Global Telecommunications Index or a reduced value Global
Telecommunications Index that will be computed at one-tenth the value
of the full-value Index. Existing Exchange requirements applicable to
full-value and reduced-value LEAPS will apply to full-value and
reduced-value Index LEAPS.\14\ The current and closing Index value for
reduced-value Global Telecommunications LEAPS will be computed by
dividing the value of the full-value Index by 10 and rounding the
resulting figure to the nearest one-hundredth. For example, an Index
value of 149.76 would be 14.98 for the Index LEAPS and 149.73 would
become 14.97. The reduced-value Index LEAPS will have a European-style
exercise and will be subject to the same rules that govern the trading
of all the Exchange's index options, including sales practice rules,
margin requirements and floor trading procedures. Pursuant to CBOE Rule
24.9, the strike price interval for the reduced-value Index LEAPS will
be no less than $2.50 instead of $5.00.
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\14\See CBOE Rule 24.9(b).
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H. Position and Exercise Limits, Margin Requirements, and Trading Halts
Because the Index is classified as an ``industry index'' under CBOE
rules,\15\ Exchange rules that are applicable to the trading of options
on narrow-based indexes will apply to the trading of Global
Telecommunications Index options and Global Telecommunications Index
LEAPS. Specifically, Exchange rules governing margin requirements,\16\
position and exercise limits,\17\ and trading halt procedures\18\ that
are applicable to the trading of narrow-based index options will apply
to options traded on the Index. The proposal further provides that, for
purposes of determining whether a given position in reduced-value Index
LEAPS complies with applicable position and exercise limits, positions
in reduced-value Index LEAPS will be aggregated with positions in the
full-value Index options. For these purposes, ten reduced-value
contract will equal one full-value contract.
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\15\See CBOE Rule 24.1(i).
\16\Pursuant to CBOE Rule 24.11, the margin requirements for the
Index options will be: (1) for short options positions, 100% of the
current market value of the options contract plus 20% of the
underlying aggregate Index value, less any out-of-the-money amount,
with a minimum requirement of the options premium plus 10% of the
underlying Index value; and (2) for long term options positions,
100% of the options premium paid.
\17\Pursuant to CBOE Rules 24.4A and 24.5, respectively, the
position and exercise limits for the Index options will be 10,500
contracts, unless the Exchange determines, pursuant to Rules 24.4A
and 24.5 that a lower limit is warranted. See February 14 Letter,
supra note 8.
\18\Pursuant to CBOE Rule 24.7, the trading on the CBOE of Index
options may be halted or suspended whenever trading in underlying
securities whose weighted value represents more than 20% of the
Index value are halted or suspended.
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I. Surveillance
Surveillence procedures currently used to monitor trading in each
of the Exchange's other index options will also be used to monitor
trading in regular Index options and in full-value and reduced-value
Index LEAPS. These procedures include complete access to trading
activity in the underlying securities. Further, the Intermarket
Surviellance Group Agreement, dated July 14, 1983, as amended on
January 29, 1990, will be applicable to the trading of options on the
Index.\19\
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\19\The Intermarket Surveillance Group (``ISG'') was formed on
July 14, 1983 to, among other things, coordinate more effectively
surveillance and investigative information sharing arrangements in
the stock and options markets. See Intermarket Surveillance Group
Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members on January 29,
1990. See Second Amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990. The members of the ISG are: the Amex;
the Boston Stock Exchange, Inc.; the CBOE; the Chicago Stock
Exchange, Inc.; the National Association of Securities Dealers, Inc.
(``NASD''); the NYSE; the Pacific Stock Exchange, Inc.; and the
Philadelphia Stock Exchange, Inc. Because of potential opportunities
for trading abuses involving stock index futures, stock options, and
the underlying stock and the need for greater sharing of
surveillance information for these potential intermarket trading
abuses, the major stock index futures exchanges (e.g., the Chicago
Mercantile Exchange and the Chicago Board of Trade) joined the ISG
as affiliated members in 1990.
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III. Findings and Conclusions
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5).\20\ Specifically, the
Commission finds that the trading of Global telecommunications Index
options, including full-value and reduced-value Index LEAPS, will serve
to promote the public interest and help to remove impediments to a free
and open securities market by providing investors with a means of
hedging exposure to market risk associated with securities in the
global telecommunications industry.\21\
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\20\15 U.S.C. 78f(b)(5) (1988).
\21\Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function,
because any benefits that might be derived by market participants
likely would be outweighed by the potential for manipulation,
diminished public confidence in the integrity of the markets, and
other valid regulatory concerns. In this regard, the trading of
listed index options and full-value index LEAPS on the Global
Telecommunications Index will provide investors with a hedging
vehicle that should reflect the overall movement of the stocks and
ADRs comprising the global telecommunications industry in the U.S.
securities markets. The Commission also believes that these Index
options will provide investors with a means by which to make
investment decisions in the global telecommunications industry
sector of the U.S. securities markets, allowing them to establish
positions or increase existing positions in such markets in a cost
effective manner. Moreover, the Commission believes that the
reduced-value Index LEAPS, which will be traded on an index computed
at one-tenth the value of the Global Telecommunications Index, will
serve the needs of retail investors by providing them with the
opportunity to use a long-term option to hedge their portfolios from
long-term market moves at a reduced cost.
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The trading of options on the Global Telecommunications Index,
including full-value and reduced-value LEAPS on the Index, however,
raises several concerns, namely issues related to index design,
customer protection, surveillance, and market impact. The Commission
believes, for the reasons discussed below, that the CBOE adequately has
addressed these concerns.
A. Index Design and Structure
The Commission finds that the Global Telecommunications Index is a
narrow-based index. The Global Telecommunications Index is composed of
only twenty securities, all of which are within one industry--the
global telecommunications industry.\22\ Accordingly, the Commission
believes it is appropriate for the CBOE to apply its rules governing
narrow-based index options to trading in the Index options.\23\
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\22\The reduced-value Global Telecommunications Index, which is
composed of the same component securities as the Index and
calculated by dividing the Index value by ten, is identical to the
Global Telecommunications Index.
\23\See supra notes 15 through 18, and accompanying text.
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The Commission also finds that the large capitalizations, liquid
markets, and relative weightings of the Index's component securities
significantly minimize the potential for manipulation of the Index.
First, the overwhelming majority of the components that compose the
Index are actively traded, with a mean and median average daily trading
volume of 425,652 and 252,187 shares, respectively.\24\ Second, the
market capitalizations of the securities in the Index are very large,
ranging from a high of $73.61 billion to a low of $144.21 million as of
November 30, 1993, with the mean and median being $14.79 billion and
$8.14 billion, respectively. Third, although the Index is only
comprised of twenty component securities, no one particular security or
group of securities dominates the Index. Specifically, no one stock or
ADR comprises more than 9.08% of the Index's total value and the
percentage weighting of the five largest issues in the Index account
for 37.07% of the Index's value.\25\ Fourth, at least 90% of the twenty
securities in the Index by weight must be eligible for standardized
options trading.\26\ The proposed CBOE maintenance requirement that 90%
of the weighting of the Index be comprised of securities that are
eligible for options trading will ensure that the Index is almost
completely comprised of options eligible securities. Fifth, if the CBOE
increases the number of component securities to more than twenty-six or
decreases that number to less than fourteen, the CBOE will be required
to seek Commission approval pursuant to Section 19(b)(2) of the Act
before listing new strike price or expiration month series of Global
Telecommunications Index options and Index LEAPS. This will help
protect against material changes in the composition and design of the
Index that might adversely affect the CBOE's obligations to protect
investors and to maintain fair and orderly markets in Global
Telecommunications Index options and Index LEAPS. Sixth, the CBOE will
be required to ensure that each component of the Index is subject to
last sale reporting requirements in the U.S.\27\ This will further
reduce the potential for manipulation of the value of the Index.
Finally, the Commission believes that the expense of attempting to
manipulate the value of the Global Telecommunications Index in any
significant way through trading in component stocks, ADRs, or
securities underlying ADRs (or options on those securities) coupled
with, as discussed below, existing mechanisms to monitor trading
activity in those securities, will help deter such illegal activity.
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\24\In addition, for the six-month period between June 1 and
November 30, 1993, no component of the Index had an average daily
trading volume of less than 51,000 shares per day.
\25\For an index with a significantly greater number of
securities than twenty issues, the Commission might come to a
different conclusion if only a few securities accounted for a
significant portion of the index's weighting. Further, if an index
contained only a few stocks, the Commission might question whether
it can be traded as an index product.
\26\See supra note 9.
\27\See February 14 Letter, supra note 8.
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B. Customer Protection
The Commission believes that a regulatory system designed to
protect public customers must be in place before the trading of
sophisticated financial instruments, such as Global Telecommunications
Index Options (including full-value and reduced-value Global
Telecommunications (LEAPS), can commence on a national securities
exchange. The Commission notes that the trading of standardized
exchange-traded options occurs in an environment that is designed to
ensure, among other things, that: (1) the special risks of options are
disclosed to public customers; (2) only investors capable of evaluating
and bearing the risks of options trading are engaged in such trading;
and (3) special compliance procedures are applicable to options
accounts. Accordingly, because the Index options and Index LEAPS will
be subject to the same regulatory regime as the other standardized
options currently traded on the CBOE, the Commission believes that
adequate safeguards are in place to ensure the protection of investors
in Global Telecommunications Index options and full-value and reduced-
value Global Telecommunications Index LEAPS.
C. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a security index derivative
product and the exchange(s) trading the securities underlying the
derivative product is an important measure for surveillance of the
derivative and underlying securities markets. Such agreements ensure
the availability of information necessary to detect and deter potential
manipulations and other trading abuses, thereby making the security
index product less readily susceptible to manipulation.\28\ In this
regard, the CBOE, NYSE, Amex, and NASD are all members of the ISG,
which provides for the exchange of all necessary surveillance
information.\29\ Further, as to the foreign components of the Index,
either the Exchange has comprehensive surveillance sharing agreements
with the primary foreign markets for the securities underlying the ADRs
or the U.S. is the relevant market for surveillance purposes.\30\
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\28\Securities Exchange Act Release No. 31243 (September 28,
1992), 57 FR 45849 (October 5, 1992).
\29\See note 19, supra. If the prices of the ADR components, or
the composition of the Index, should change so that greater than 20%
of the weight of the Index would be represented by ADRs whose
underlying securities were not the subject of a comprehensive
surveillance sharing agreement with the CBOE, then it would be
different for the Commission to reach the conclusions reached in
this order and the Commission would have to determine whether it
would be suitable for the Exchange to continue to trade options on
this Index. The CBOE should, accordingly, notify the Commission
immediately if more than 20% of the numerical value of the Index is
represented by ADRs whose underlying securities are not subject to a
comprehensive surveillance sharing agreement. Such a change in the
current relative weights of the Index or in the composition of the
Index may warrant the submission of a rule filing pursuant to
Section 19 of the Act. In determining whether a particular ADR is
subject to a comprehensive surveillance sharing agreement see, e.g.,
Securities Exchange Act Release Nos. 31531 (November 27, 1992), 57
FR 57250 (December 3, 1994); and 33554 (January 31, 1994), 59 FR
5622 (February 7, 1994).
\30\See Securities Exchange Act release Nos. 31531 (November 27,
1992), 57 FR 57250 (December 3, 1992); and 33554 (January 31, 1994),
59 FR 5622 (February 7, 1994).
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D. Market Impact
The Commission believes that the listing and trading of Global
Telecommunications Index options, including full-value and reduced-
value Index LEAPS, on the CBOE will not adversely impact the underlying
securities markets.\31\ First, as described above, for the most part,
no one security or group of securities dominates the Index. Second,
because, at least 90% of the numerical value of the Index must be
accounted for by securities that meet the Exchange's options listing
standards,\32\ and because each of the component securities must be
subject to last sale reporting requirements,\33\ the component
securities generally will be actively-traded, highly-capitalized
securities. Third, the 10,500 contract position and exercise limits
applicable to Index options and Index LEAPS will serve to minimize
potential manipulation and market impact concerns. Forth, the risk to
investors of contra-party non-performance will be minimized because the
Index options and Index LEAPS will be issued and guaranteed by the
Options Clearing Corporation just like any other standardized option
traded in the United States.
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\31\In addition, the CBOE has represented that the CBOE and the
OPRA have the necessary systems capacity to support those new series
of index options that would result from the introduction of Index
options and Index LEAPS. See Memorandum from Joe Corrigan, Executive
Director, OPRA, to Eileen Smith, Director, Product Development,
Research Department, CBOE, dated February 14, 1994.
\32\See Amendment No. 1, supra note 4.
\33\See February 14 Letter, supra note 8.
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Lastly, the Commission believes that settling expiring Global
Telecommunications Index options (including full-value and reduced-
value Index LEAPS) based on the opening prices of component securities
is consistent with the Act. As noted in other contexts, valuing options
for exercise settlement on expiration based on opening prices rather
than closing prices may help reduce adverse effects on markets for
securities underlying options on the Index.\34\
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\34\See Securities Exchange Act Release No. 30944 (July 21,
1994), 57 FR 33376 (July 28, 1992).
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Specifically, Amendment No. 1 raises
the maintenance standards originally proposed by the Exchange by
requiring the CBOE to ensure that at least 90% of the Index, by weight,
is composed of securities that are eligible for equity options trading
pursuant to CBOE Rule 5.3. As stated above, the Commission believes
that this requirement has the effect of ensuring that the Index is
composed of highly-capitalized, actively-traded securities which serve
to minimize the possibility that the Index can be easily manipulated.
Additionally, the Commission notes that this is the same standard that
the Commission recently approved for the listing and trading of index
options and index LEAPS on the CBOE Telecommunications Index.\35\ As a
result, the Commission believes that good cause exists for approving
Amendment No. 1 on an accelerated basis.
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\35\See Securities Exchange Act Release No. 33473 (January 13,
1994), 59 FR 3383 (January 21, 1994).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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 at the Commission's Public Reference Section, 450 Fifth Street
NW., Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the File
Number SR-CBOE-93-97 and should be submitted by May 24, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-CBOE-93-57), as amended, is
approved.
\36\15 U.S.C. 73s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\37\
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\37\CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10473 Filed 5-2-94; 8:45 am]
BILLING CODE 8010-01-M