[Federal Register Volume 59, Number 191 (Tuesday, October 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24516]


[[Page Unknown]]

[Federal Register: October 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34724; International Series Release No. 718; File No. 
SR-CBOE-94-25]

 

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 CBOE Emerging Latin American Markets Index

September 27, 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 July 20, 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. The Exchange 
filed Amendment No. 1 to the proposed rule change on August 18, 
1994,\3\ and Amendment No. 2 on September 26, 1994.\4\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \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 Latin American 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 Latin American 
Markets Index would initially be set at 7,500 contracts. See Letter 
from Eileen Smith, Director, Product Development, Research 
Department, CBOE, to Brad Ritter, Senior Counsel, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Division''), 
Commission, dated August 18, 1994 (``Amendment No. 1'').
    \4\In Amendment No. 2, the CBOE proposes to expand the CBOE 
Emerging Latin American Markets Index to ten securities by adding 
the Emerging Mexico Fund as a component security. See Letter from 
Scott Lyden, Senior Research Analyst, Research Department, CBOE, to 
Brad Ritter, Senior Counsel, OMS, Division, Commission, dated 
September 26, 1994 (``Amendment No. 2'').
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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,''\5\ 
the CBOE proposes to list for trading options on the CBOE Emerging 
Latin American Markets Index (``Emerging Latin American Markets Index'' 
or ``Index''). The text of the proposed rule change is available at the 
Office of the Secretary, CBOE, and at the Commission.
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    \5\Exchange Rule 24.2 provides, in part, that the Commission 
must approve a particular index upon which options are traded.
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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\6\ index options on the 
Emerging Latin American Markets Index. The Index will initially consist 
of ten\7\ closed-end funds which invest in the stocks of firms in the 
emerging 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 Latin American emerging markets.
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    \6\European-style options can only be exercised during a 
specified period before the options expire.
    \7\See Amendment No. 2, supra note 4.
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Index Design
    The Emerging Latin American Markets Index will initially consist of 
ten closed-end funds.\8\ All of the closed-end fund components of the 
Index currently trade on the New York Stock Exchange.
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    \8\The components of the Index are the: Latin American Discovery 
Fund Inc.; Latin American Equity Fund Inc.; Latin America Investment 
Fund Inc.; Argentina Fund Inc.; Brazilian Emerging Mexico Fund; 
Mexico Equity and Income Fund Inc.; and Mexico Fund Inc. Id.
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    As of September 15, 1994, the closed-end funds comprising the Index 
ranged in market capitalization from a low of $118.63 million to a high 
of $1.294 billion. The average capitalization as of that date was 
$313.35 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. (16.64%), while the smallest was the Argentina Fund 
Inc. (5.65%).
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 
September 15, 1994, was 168.07.
    The Index will be calculated by CBOE or its designee on a real-time 
basis using last-scale 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 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 nine 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\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.\9\ The CBOE proposes to amend Rule 24.9 to 
refer specifically to Emerging Latin American 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.
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    \9\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.
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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.\10\ Pursuant to Exchange Rule 24.4A, Index option 
contracts based on the Emerging Latin American Markets Index will be 
subject to position limits of 7,500 contracts.\11\ 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 an 
Index LEAPS.
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    \10\See Amendment No. 1, supra note 3.
    \11\Id.
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    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,\12\ in particular, in that it will provide 
investors with an opportunity to invest in options based upon the 
Emerging Latin American 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.
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    \12\15U.S.C. 78f(b)(5) (1988).
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(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-94-25 and should be 
submitted by October 25, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\17 CFR 200.30-3(a)(12) (1933).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24516 Filed 10-3-94; 8:45 am]
BILLING CODE 8010-01-M