[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21007]


[[Page Unknown]]

[Federal Register: August 26, 1994]


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

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34552; International Series Release No. 703; File No. 
SR-CBOE-94-19]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to the Listing and Trading 
Options on the CBOE Emerging Markets Index

August 19, 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 June 30, 1994, 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 CBOE. On August 
18, 1994, the Exchange filed Amendment No. 1 to the proposed rule 
change.\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\In Amendment No. 1, the Exchange proposes to treat the CBOE 
Emerging Markets Index as a narrow-based index for purposes of 
margin and position limit treatment. Pursuant to CBOE Rule 24.4A, 
the position limits for the CBOE Emerging Markets Index would 
initially be set at 10,500 contracts. See Letter from Eileen Smith, 
Director, Product Development, Research Department, CBOE, to Brad 
Ritter, Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated August 18, 1994 (``Amendment No. 1'').
---------------------------------------------------------------------------

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 CBOE Emerging 
Markets Index (``Emerging Markets Index'' or ``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 
Emerging Markets Index. The Index will initially consist of 25 closed-
end funds which invest in the stocks of firms in the emerging Asian and 
Latin American economies. According to the Exchange, no proxy for the 
performance of these emerging economies is currently available in the 
U.S. derivatives markets. The Exchange believes, therefore, that 
options on the Index will provide investors with a low-cost means of 
participating in the performance of these markets and/or hedging 
against the risk of investing in the Asian and Latin American emerging 
markets.
---------------------------------------------------------------------------

    \5\European-style options can only be exercised during a 
specified period before the options expire.
---------------------------------------------------------------------------

Index Design
    The Emerging Markets Index will initially consist of 25 closed-end 
funds.\6\ All of the closed-end fund components of the Index currently 
trade on the New York Stock Exchange.
---------------------------------------------------------------------------

    \6\The components of the Index are the: Asia Pacific Fund; Asia 
Tigers Fund Inc.; China Fund Inc.; Greater China Fund Inc.; Jardine 
Fleming China Region Fund Inc.; Morgan Stanley India Fund; Indonesia 
Fund Inc.; Jakarta Growth Fund Inc.; Korea Fund Inc.; Korea Equity 
Fund Inc.; Malaysia Fund Inc.; First Philippine Fund Inc.; Singapore 
Fund Inc.; ROC Taiwan Fund; Taiwan Fund Inc.; Thai Fund Inc.; Latin 
American Discovery Fund Inc.; Latin American Equity Fund Inc.; Latin 
America Investment Fund Inc.; Argentina Fund Inc.; Brazilian Equity 
Fund Inc.; Brazil Fund Inc.; Chile Fund Inc.; Mexico Equity and 
Income Fund Inc.; and Mexico Fund Inc.
---------------------------------------------------------------------------

    As of June 15, 1994, the closed-end funds comprising the Index 
ranged in market capitalization from a low of $49.4 million to a high 
of $1.146 billion. The average capitalization as of that date was $146 
million. The closed-end fund accounting for the largest percentage of 
the total weighting of the Index on that date was the Chile Fund Inc. 
(9.07%), while the smallest was the Korea Equity Fund Inc. (1.98%).
Calculation
    The Index is price-weighted and reflects changes in the prices of 
the components relative to the base date of December 31, 1991. 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 value of the Index at the close on June 
15, 1994, was 151.69.
    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 closed-end fund is not currently being 
traded, the most recent price at which the closed-end fund 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, certain rights 
issuances.
    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 
emerging Asian and Latin American markets generally. If it becomes 
necessary to remove a component from the Index, every effort will be 
made to add a closed-end fund that preserves the character of the 
Index. In such circumstances, the CBOE will take into account the 
capitalization, liquidity, volatility, and name recognition of the 
proposed replacement closed-end fund. The Exchange will most likely 
maintain 25 closed-end funds in the Index at all times.
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\) 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.\7\ The CBOE proposes to amend Rule 24.9 to 
refer specifically to Emerging Markets 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.
---------------------------------------------------------------------------

    \7\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 indexes will be applicable 
to Index options.\8\ Pursuant to Exchange Rule 24.4A, Index option 
contracts based on the Emerging Markets Index will be subject to the 
position limits of 10,500 contracts.\9\ 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 LEAP 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 Index options and Index LEAPS.
---------------------------------------------------------------------------

    \8\See Amendment No. 1, supra note 3.
    \9\Id.
---------------------------------------------------------------------------

    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,\10\ in particular, in that it will provide 
investors with an opportunity to invest in options based upon the 
Emerging Markets Index pursuant to rules designed to prevent fraudulent 
and manipulative acts and practices, promote just and equitable 
principles of trade, foster cooperation and coordination with persons 
facilitating transactions in securities, remove impediments to and 
perfect the mechanism of a free and open market, and protect investors 
and the public interest.
---------------------------------------------------------------------------

    \10\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 it 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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 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-94-19 and should be 
submitted by September 16, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21007 Filed 8-25-94; 8:45 am]
BILLING CODE 8010-01-M