[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17520]


[[Page Unknown]]

[Federal Register: July 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34370; International Series Release No. 685; File No. 
SR-CBOE-93-55]

 

Self-Regulatory Organizations; Order Approving and Notice of 
Filing and Order Granting Accelerated Approval of Amendment Nos. 3 and 
4 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 Israeli Index and Long-Term Options on a Reduced-Value CBOE 
Israeli Index

July 13, 1994.

I. Introduction

    On December 8, 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 Israeli Index (``Israeli Index'' 
or ``Index''). The Exchange filed Amendment No. 1 to the proposed rule 
change on April 29, 1994, and Amendment No. 2 on May 12, 1994.\3\ 
Notice of the proposal appeared in the Federal Register on June 6, 
1994.\4\ No comment letters were received on the proposed rule change. 
The Exchange subsequently filed Amendment No. 3 to the proposed rule 
change on June 27, 1994,\5\ and Amendment No. 4 to the proposed rule 
change on July 11, 1994.\6\ This order approves the Exchange's 
proposal, as amended.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \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 are 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 Market Supervision (``Office''), Division of 
Market Regulation (``Division''), Commission, dated May 12, 1994.
    \4\See Securities Exchange Act Release No. 34132 (May 31, 1994), 
59 FR 29314 (June 6, 1994).
    \5\In Amendment No. 3, the Exchange provides that: (1) any time 
that a replacement security is chosen for the Index, the security 
will be traded either on a U.S. securities exchange or as a National 
Market security traded through the facilities of NASDAQ (as defined 
herein); and (2) all components of the Index shall be ``reported 
securities'' under Rule 11Aa3-1 of the Act. See Letter from Eileen 
Smith, Director, Product Development, Research Department, CBOE, to 
Brad Ritter, Attorney, Office, Division, Commission, dated June 27, 
1994 (``Amendment No. 3'').
    \6\In Amendment No. 4, the CBOE proposed to alter the 
composition of the Index by removing Elbit Ltd. and Elron Electronic 
Industries as components of the Index, and replacing them with (1) 
Ampal-American Israel, and (2) Electronics for Imaging. See Letter 
from Eileen Smith, Director, Product Development, Research 
Department, CBOE, to Brad Ritter, Attorney, Office Division, 
Commission, dated July 11, 1994.
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II. Description of Proposal

A. General

    The CBOE proposes to list for trading options on the CBOE Israeli 
Index, a new securities index developed by the CBOE and based on 
Israeli stocks and ADRs\7\ that are traded on the American Stock 
Exchange (``Amex''), the New York Stock Exchange (``NYSE''), or are 
National Market (``NM'') 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 Israeli 
Index (``Israeli LEAPS'' or ``Index LEAPS'').\8\ Israeli LEAPS will 
trade independent of and in addition to regular Israeli Index options 
traded on the Exchange,\9\ however, as discussed below, position and 
exercise limits of Index LEAPS and regular Index options will be 
aggregated.
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    \7\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. See discussion of standards for ADR components, infra notes 
11 and 29.
    \8\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).
    \9\According to the CBOE, the Israeli Index represents a segment 
of the U.S. equity market that is not currently represented in the 
derivative markets and, as much, the CBOE concludes, should offer 
investors a low-cost means of achieving diversification of their 
portfolios toward or away from Israeli securities. The CBOE believes 
the Index will provide retail and institutional investors with a 
means of benefitting from their forecasts of the performance of 
Israeli securities. Options on the Index also can be utilized by 
portfolio managers and investors as a means of hedging the risks of 
investing in Israeli securities.
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B. Composition of the Index

    The Index was designed by the Exchange and is presently based on 
securities representing fifteen Israeli companies that the Exchange 
believes are representative of the Israeli economy, all of which trade 
in the U.S. as either stocks or ADRs. Fourteen of these securities 
currently trade through NASDAQ as NM securities, and one trades on the 
NYSE. 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 June 28, 1994, the Index was valued 
at 100.37. As of March 31, 1994, the market capitalizations of the 
individual securities in the Index ranged from a high of $2.08 billion 
to a low of $124.11 million, with the mean and median being $566.83 
million and $324.83 million, respectively. The market capitalization of 
all the securities in the Index was $8.50 billion. The total number of 
shares outstanding for the stocks and ADRs in the Index ranged from a 
high of 76.07 million shares to a low of 10.38 million shares. The 
average price per share in the U.S. of the securities in the Index, for 
the six-month period between October 1, 1993, and March 31, 1994, 
ranged from a high of $39.75 to a low of $5.34. In addition, the 
average daily trading volume in the U.S. of the stocks and ADRs in the 
Index, for the same six-month period, ranged from a high of 750,492 
shares per day to a low of 28,444 shares per day. Lastly, no one 
component accounted for more than 13.12% of the Index's total value and 
the percentage weighting of the five largest issues in the Index 
accounted for 51.25% of the Index's value. The percentage weighting of 
the lowest weighted component was 1.92% of the Index and the percentage 
weighting of the five smallest issues in the Index accounted for 19.03% 
of the Index's value.

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 
market for Israeli securities. If it becomes necessary to replace a 
security in the Index, the Exchange represents that it will only add 
new Israeli stocks and/or ADRs that are traded in the U.S. securities 
markets\10\ 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 or reduce the number of Index component securities to fewer than 
ten, 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 85% of the weight of the Index and at 
least 80% of the number of components continues to be made up of stocks 
and ADRs that are eligible for standardized options trading.\11\ 
Finally, the CBOE will be required to ensure that each component of the 
Index is subject to last sale reporting pursuant to Rule 11Aa3-1 of the 
Act.\12\
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    \10\See Amendment No. 3, supra note 5.
    \11\The CBOE's options listing standards, which are uniform 
among the options exchanges, provides 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 shares; (2) there 
must be a minimum of 2,000 stockholders; (3) trading volume in the 
U.S. must have been at least 2.4 million over the preceding twelve 
months; and (4) the U.S. 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 for the three month period preceding the date 
of listing in the U.S. markets for ADRs overlying any class of the 
foreign issuer's common stock (on a share-equivalent basis) is at 
least 50% of the sum of the (i) combined world-wide trading volume 
for all classes of the foreign issuer's common stock, and (ii) 
combined trading volume for all ADRs overlying any of these classes 
of stock; or (3) the SEC must otherwise authorize the listing. In 
addition, the percentage of the world-wide trading volume for the 
security underlying an ADR that occurs in the U.S. ADR market must 
meet a maintenance standard of 30% or more in order for options on 
that particular ADR to continue to be traded on the CBOE. See 
Securities Exchange Act Release No. 33554 (January 31, 1994), 59 FR 
5622 (February 7, 1994).
    \12\See Amendment No. 3, supra note 5.
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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 Israeli 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 Israeli 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.\13\ OPRA, in turn, will disseminate the Index value to 
other financial vendors such as Reuters, Telerate, and Quotron.
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    \13\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 pay on expiration Friday.

F. Contract Specifications

    The proposed options on the Index will be cash-settled, European-
style options.\14\ Standard options trading hours (8:30 a.m. to 3:15 
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.\15\ 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 three 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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    \14\A European-style option can be exercised only during a 
specified period before the option expires.
    \15\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 
Israeli 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 Israeli Index or a reduced-value Israeli 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.\16\ The current 
and closing Index value for reduced-value Israeli 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 100.76 would be 10.08 for the Index LEAPS 
and 100.74 would become 10.07. 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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    \16\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,\17\ Exchange rules that are applicable to the trading of options 
on narrow-based indexes will apply to the trading of Israeli Index 
options and Israeli Index LEAPS. Specifically, Exchange rules governing 
margin requirements,\18\ position and exercise limits,\19\ and trading 
halt procedures\20\ 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 contracts will equal one full-value 
contract.
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    \17\See CBOE Rule 24.1(i).
    \18\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 options positions, 100% of 
the options premium paid.
    \19\Pursuant to CBOE Rules 24.4A and 24.5, respectively, the 
position and exercise limits for the Index options will be 7,500 
contracts, unless the Exchange determines, pursuant to Rules 24.4A 
and 24.5 that a lower limit is warranted.
    \20\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

    Surveillance 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 
Surveillance Group Agreement, dated July 14, 1983, as amended on 
January 29, 1990, will be applicable to the trading of options on the 
Index.\21\
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    \21\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 affiliate 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).\22\ Specifically, the 
Commission finds that the trading of Israeli 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 Israeli securities.\23\
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    \22\15 U.S.C. 78f(b)(5)(1988).
    \23\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 will provide 
investors with a hedging vehicle that should reflect the overall 
movement of Israeli stocks and ADRs 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 
regarding Israeli securities traded in 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 Israel 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 Israeli Index, including full-value 
and reduced-value Index LEAPS, 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 Israeli Index is a narrow-based 
index. The Israeli Index is composed of only fifteen securities, all of 
which represent Israeli companies.\24\ Accordingly, in light of the 
limited number of stocks in the Index, the Commission believes it is 
proper to classify the Israeli Index as narrow-based and apply CBOE's 
rules governing narrow-based index options to trading in the Index 
options.\25\
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    \24\The reduced-value Israeli Index, which is imposed of the 
same component securities as the Index and calculated by dividing 
the Index value by ten, is identical to the Israeli Index.
    \25\See supra notes 17 through 20, 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 comprise the 
Index are actively traded, with an average daily trading volume for the 
period from October 1, 1993 through March 31, 1994, ranging from a high 
of 750,492 shares per day to a low of 28,444 shares per day. Second, 
the market capitalizations of the securities in the Index are very 
large, ranging from a high of $2.08 billion to a low of $124.11 million 
as of March 31, 1994, with the mean and median being $566.83 million 
and $324.83 million, respectively. Third, although the Index is only 
comprised of fifteen component securities, no one particular security 
or group of securities dominates the Index. Specifically, no one stock 
or ADR comprises more than 13.12% of the Index's total value and the 
percentage weighting of the five largest issues in the Index account 
for 51.25% of the Index's value.\26\ Fourth, at least 85% of the 
securities in the Index, by weight, and at least 80% of the number of 
components of the Index, must be eligible for standardized options 
trading. This proposed maintenance requirement will ensure that the 
Index is substantially comprised of options eligible securities. Fifth, 
if the CBOE increases the number of component securities to more than 
twenty or decreases that number to less than ten, 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 
Israeli 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 Israeli 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 pursuant to Rule 11Aa3-1 
of the Act.\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 Israeli Index in 
any significant way through trading in component stocks, ADRs, or 
securities underlying ADRs (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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    \26\For an index with a significantly greater number of 
securities than fifteen components, 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.
    \27\See Amendment No. 3, supra note 5.
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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 Israeli Index options 
(including full-value and reduced-value Israeli 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 Israeli Index options and full-value and reduced-value 
Israeli 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 present and future ADR components of 
the Index,\30\ either the Exchange will have comprehensive surveillance 
sharing agreements with the primary foreign markets for the securities 
underlying the ADRs or the U.S. will be the relevant market for 
surveillance purposes.\31\
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    \28\Securities Exchange Act Release No. 31243 (September 28, 
1992), 57 FR 45849 (October 5, 1992).
    \29\See note 21, 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 
difficult 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, 1992); and 33554 (January 31, 1994), 59 FR 
5622 (February 7, 1994).
    \30\Presently, Teva Pharmaceuticals is the only ADR component of 
the Index.
    \31\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 Israeli 
Index options, including full-value and reduced-value Index LEAPS, on 
the CBOE will not adversely impact the underlying securities 
markets.\32\ First, as described above, for the most part, no one 
security or group of securities dominates the Index. Second, because at 
least 85% of the numerical value of the Index and at least 80% of the 
components of the Index must be accounted for by securities that meet 
the Exchange's options listing standards, and because each of the 
component securities must be subject to last sale reporting pursuant to 
Rule 11Aa3-1 of the Act,\33\ the component securities generally will be 
actively-traded, highly-capitalized securities. Third, the 7,500 
contract position and exercise limits applicable to Index options and 
Index LEAPS will serve to minimize potential manipulation and market 
impact concerns.
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    \32\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.
    \33\See Amendment No. 3, supra note 5.
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    Lastly, the Commission believes that settling expiring Israeli 
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, 
1992), 57 FR 33376 (July 28, 1992).
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    The Commission finds good cause for approving Amendment Nos. 3 and 
4 prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. Specifically, Amendment No. 3 
provides that only securities that are subject to last sale reporting 
pursuant to Rule 11Aa3-1 of the Act and that are traded in the U.S. 
either on an exchange or through NASDAQ as NM securities may be added 
to the Index. The Commission believes that these requirements 
strengthen the customer protection and surveillance aspects of the 
proposal by ensuring that the value of the Index that is disseminated 
is based on the most current component pricing information and that 
surveillance will be facilitated through the ISG.\35\ Amendment No. 4 
merely substitutes two of the originally proposed components of the 
Index with two new components that satisfy the eligibility and 
maintenance criteria discussed above. As a result, the Commission 
believes that good cause exists for approving Amendment Nos. 3 and 4 on 
an accelerated basis.
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    \35\See supra note 21.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 3 and 4. 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-93-55 and should be submitted by [insert date 21 days 
after the date of this publication].
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-CBOE-93-55), as amended, is 
approved.

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    \36\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
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    \37\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17520 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M