[Federal Register Volume 59, Number 107 (Monday, June 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13604]


[[Page Unknown]]

[Federal Register: June 6, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34132; File No. SR-CBOE-93-55]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the 
Chicago Board Options Exchange, Inc. Relating to the Listing and 
Trading Options on the Israeli Index

May 31, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 8, 1993, the Chicago Board Options Exchange (``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 self-regulatory 
organization. The Exchange filed Amendment No. 1 to the proposed rule 
change on April 29, 1994, and Amendment No. 2 on May 12, 1994.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\Amendment No. 2, which supersedes Amendment No. 1, proposes 
to: (1) reduce the number of components of the proposed Israeli 
Index (``Index'') from 20 to 15; (2) require that the Index be 
maintained such that at least 85% of the Index, by weight, and at 
least 80% of the number of components of the Index be eligible for 
standardized options trading pursuant to CBOE Rule 5.3; (3) classify 
the Index as a narrow-based index for purposes of CBOE's rules; (4) 
provide position and exercise limits of 7,500 contracts on the same 
side of the market for Index options pursuant to CBOE Rule 24.4A; 
and (5) provide that the Exchange shall submit a proposed rule 
change pursuant to Section 19 of the Act and Rule 19b-4 thereunder 
prior to increasing the number of components of the Index to greater 
than 20 or fewer than 10. See Letter from Eileen Smith, Director, 
Product Development, Research Department, CBOE, to Brad Ritter, 
Attorney, Office of Derivatives and Exchange Oversight, Division of 
Market Regulation, Commission, dated May 12, 1994 (``Amendment No. 
2'').
---------------------------------------------------------------------------

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

    As provided in Exchange Rule 24.2, ``Designation of the Index,''\4\ 
the CBOE proposes to list for trading options on the Israeli Index 
(``Index''). The text of the proposed rule change is available at the 
Office of the Secretary, CBOE, and at the Commission.
---------------------------------------------------------------------------

    \4\Exchange Rule 24.2 provides, in part, that the Commission 
must approve a particular index upon which options are traded.
---------------------------------------------------------------------------

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 Exchange 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 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style\5\ index options on the 
Israeli Index (``Index''). The Index will initially consist of fourteen 
stocks issued by Israeli companies, and one American Depositary Receipt 
(``ADR'')\6\ overlying an Israeli company.\7\ According to the 
Exchange, no proxy for the performance of the Israeli economy is 
currently available in the U.S. derivative markets. Therefore, the 
Exchange believes, options on the Index will provide investors with a 
low-cost means of participating in the performance of the Israeli 
economy or to hedge against the risk of investing in that economy.
---------------------------------------------------------------------------

    \5\European-style options can only be exercised during a 
specified period before the options expire.
    \6\An American Depositary Receipt 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.
    \7\The component securities of the Index are: Biotechnology 
General Corp.; Comverse Technology Inc.; Fourth Dimension Software 
Ltd.; ECI Telecom Ltd.; Elbit Ltd.; Elron Electronic Industries 
Ltd.; Geotek Industries Inc.; IIS Intelligent Information Systems 
Ltd.; Lannet Data Communications Ltd.; Orbotech Ltd.; Scitex Corp. 
Ltd.; Sapiens International Corp.; Tadiran Ltd.; Teva Pharmaceutical 
Industries Ltd. (ADR); and Teledata Communication Ltd.
---------------------------------------------------------------------------

Index Design

    One of the components of the Index currently trades on the New York 
Stock Exchange and fourteen (including one ADR representing 11.37% of 
the weight of the Index as of March 31, 1994) currently are National 
Market securities traded through the facilities of the National 
Association of Securities Dealers, Inc. Automated Quotation System 
(``NASDAQ''). The 14 non-ADR components of the Index are listed for 
trading only in the United States, and for the ADR component, more than 
50% of the combined world-wide trading volume for the ADR and the 
underlying security occurs in the U.S. through NASDAQ.\8\ Accordingly, 
the Exchange believes that options on the Index should not raise the 
types of surveillance concerns that may be raised by options on an 
index of non-U.S. traded stocks.
---------------------------------------------------------------------------

    \8\See Amendment No. 2, supra note 3.
---------------------------------------------------------------------------

    As of March 31, 1994, the securities comprising the Index ranged in 
market capitalization from a low of $124.11 million to a high of $2.08 
billion. The average capitalization as of that date was $566.83 
million. The component accounting for the largest percentage of the 
total weighting of the Index on that date was Elbit Ltd. (13.12%), 
while the smallest was Biotechnology General Corp. (1.92%).

Calculation

    The Index is price-weighted and reflects changes in the prices of 
the component stocks relative to the base date of January 2, 1992. The 
Index value is calculated by summing the prices of the component 
securities and then dividing by a divisor that yielded an index value 
of 100.00 as of that date.
    The Index will be calculated by CBOE or its designee on a real-time 
basis using last-sale prices and will be disseminated every 15 seconds 
by the Exchange. If a component stock of the Index is not currently 
being traded, the most recent price at which the stock traded will be 
used in the Index calculation.

Maintenance

    The Index will be maintained by the Exchange. To maintain 
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, spin-offs, certain 
rights issuances, and mergers and acquisitions.
    The Exchange states that the Index will be reviewed on 
approximately a monthly basis by the CBOE staff. The Exchange may 
change the composition of the Index at any time or from time to time to 
reflect the changes affecting the components of the Index or the 
Israeli economy generally. If it becomes necessary to remove a stock 
from the Index (generally due to a takeover or merger), every effort 
will be made to add to the Index an Israeli stock that is traded in the 
U.S. and not in Israel. (According to the Exchange, there are currently 
46 Israeli stocks trading in the United States, of which five are also 
traded in Israel.) In such circumstances, CBOE will take into account 
the capitalization, liquidity, volatility, and name recognition of the 
proposed replacement stock. The Exchange will most likely maintain 
fifteen stocks in the Index at all times.\9\
---------------------------------------------------------------------------

    \9\The Exchange will notify the Commission of changes in the 
number of components in the Index. Prior to increasing the number of 
components of the Index to more than 20 or decreasing the number of 
components to less than 10, the Exchange will be required to submit 
a rule filing pursuant to Section 19 of the Act and Rule 19b-4 
thereunder. Id.
---------------------------------------------------------------------------

Long-Term Index Options

    In addition to Index options on the full-value of the Index, the 
Exchange also proposes to list long-term Index option series 
(``LEAPS'') as provided in CBOE Rule 24.9, and reduced-value Index 
LEAPS for which the underlying value would be computed at one-tenth 
(\1/10\th) of the value of the Index. The current and closing index 
value of any such reduced-value Index LEAPS will, after such initial 
computation, be rounded to the nearest one-hundredth. Other than the 
reduced value, all other specifications and calculations for the 
reduced-value Index LEAPS will remain the same.

Exercise and Settlement

    Index options will have European-style exercise and will be ``A.M.-
settled index options'' within the meaning of the rules in Chapter XXIV 
of the Exchange's rules.\10\ The CBOE proposes to amend Rule 24.9 to 
refer specifically to Israeli Index options. The Exchange states that 
the proposed Index options would 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.
---------------------------------------------------------------------------

    \10\Under CBOE Rule 24.9, A.M.-settled index options are settled 
based on an index value derived from opening prices on the last day 
of trading prior to expiration.
---------------------------------------------------------------------------

Exchange Rules Applicable

    Except as modified in the proposal, the Rules in Chapter XXIV of 
the Exchange's rules regarding narrow-based or industry indexes will be 
applicable to Index options. Index option contracts based on the 
Israeli Index will be subject to position limits on 7,500 contracts on 
the same side of the market pursuant to CBOE Rule 24.4A. For purposes 
of position and exercise limits Index LEAPS will be aggregated with 
Index options on a one for one basis. Under the proposal, ten reduced-
value Index LEAPS contracts will equal one full-value Index option or 
Index LEAPS for purposes of aggregating positions. The Exchange 
represents that it has the necessary systems capacity to support new 
options series that would result from the introduction of Israeli Index 
options and Index LEAPS.
    The Exchange believes that the proposed rule change is consistent 
with section 6 of the Act, in general, and furthers the objectives of 
section 6(b)(5) of the Act,\11\in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade, and thereby will provide 
investors with the ability to invest in options based on an additional 
index.
---------------------------------------------------------------------------

    \11\15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------

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

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

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 Exchange 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 will also be available for 
inspection and copying at the principal office of the CBOE.
    All submissions should refer to File No. SR-CBOE-93-55 and should 
be submitted by June 27, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13604 Filed 6-3-94; 8:45 am]
BILLING CODE 8010-01-M