[Federal Register Volume 59, Number 205 (Tuesday, October 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26351]


[[Page Unknown]]

[Federal Register: October 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34854; International Series Release No. 732; File No. 
SR-CBOE-94-32]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Chicago Board Options Exchange, Inc. Relating to Warrants on 
the Nikkei Stock Index 300

October 18, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78S(b)(1), notice is hereby given that on 
September 2, 1994, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

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

    The CBOE proposes to list and trade warrants on the Nikkei Stock 
Index 300 (``Nikkei 300'' or ``Index''). The text of the proposed rule 
change is available at the Office of the Secretary, CBOE, and at the 
Commission.

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 self-regulatory organization 
included statements concerning the purpose or 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 self-regulatory organization 
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

1. Purpose
    The Exchange is permitted to list and trade index warrants under 
CBOE Rule 31.5(E). The Exchange is now proposing to list and trade 
index warrants based on the Nikkei 300. The listing and trading of 
index warrants on the Nikkei 300 would comply in all respects with CBOE 
Rule 31.5(E). CBOE has received the Commission's approval to list and 
trade options on the Nikkei 300.\1\
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    \1\See Securities Exchange Act Release No. 34388 (July 15, 
1994), 59 FR 37789 (July 25, 1994) (approving File No. SR-CBOE-94-
14).
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    Index design. The Nikkei 300 is a broad-based, capitalization-
weighted index designed to be representative of stocks on the Tokyo 
Stock Exchange. It was designed by and is maintained by Nihon Keizai 
Shimbun, Inc. The Index is fully described in SR-CBOE-94-14, the 
Exchange's rule filing relating to the listing and trading of options 
on the Nikkei 300.\2\
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    \2\See supra, note 1.
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    Index warrant trading. The warrants on the Index would be direct 
obligations of their issuers and would be cash-settled in U.S. dollars. 
The warrants would have either American or European style exercise. 
Upon exercise, or at the warrant expiration date in the case of 
warrants with European style exercise, the holder of a warrant 
structured as a ``put'' would receive payment in U.S. dollars to the 
extent that the index value has declined below a pre-stated cash 
settlement value. Conversely, holders of a warrant structured as a 
``call'' would, upon exercise or at expiration, receive payment in U.S. 
dollars to the extent that the index value has increased above the pre-
stated cash settlement value. Warrants that are out-of-the-money at the 
time of expiration would expire worthless.
    Warrant listing standards and customer safeguards. In SR-CBOE-90-
08,\3\ the Exchange established generic listing standards for index 
warrants, which are contained in CBOE Rule 31.5(E). The filing also 
established certain sales practice rules for the trading of index 
warrants, which are contained in Chapter IX of the Exchange's Rules. 
The listing and trading of index warrants on the Nikkei 300 would be 
subject to those guidelines and rules.
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    \3\See Securities Exchange Act Release No. 28556 (October 19, 
1990), 55 FR 43233 (October 26, 1990).
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    Under Rule 31.5(E), (i) issuers shall meet the CBOE's size and 
earnings criteria for equity issues and have assets in excess of 
$100,000,000; (ii) the term of the warrants shall be for a period 
ranging from one to five years from the date of issuance; and (iii) the 
minimum public distribution of such issues shall be 1,000,000 warrants, 
together with a minimum of 400 public holders, and have an aggregate 
market value of $4,000,000.
    Because index warrants are derivative in nature and closely 
resemble index options, CBOE would also require safeguards designed to 
meet the investor protection concerns raised by the trading of index 
options. The Exchange would require that index warrants on the Nikkei 
300 be sold only to customers whose accounts have been approved for 
options trading under CBOE Rule 9.7.\4\ CBOE Rule 30.50, Interpretation 
.02 also applies the suitability standards of CBOE Rule 9.9 to 
recommendations in index warrants.
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    \4\Telephone conversation between James R. McDaniel, Schiff 
Hardin & Waite, and Beth A. Stekler, Attorney, Division of Market 
Regulation, SEC, on October 17, 1994.
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    In addition, CBOE Rule 30.50, Interpretation .04 requires that the 
standards of Rule 9.10(a) regarding discretionary orders be applied to 
index warrants. It requires a branch office manager or registered 
options principal to approve and initial a discretionary order in index 
warrants on the day entered. Also, prior to commencement of trading, 
the Exchange would distribute a circular to its members calling 
attention to specific risks associated with warrants calling attention 
to specific risks associated with warrants on the Index if the Exchange 
is required to do so by Commission policy.
2. Statutory Basis
    The listing and trading of warrants on the Nikkei 300 is consistent 
with Section 6(b) of the ACt in general and furthers the objectives of 
Section 6(b)(5) of the Act in particular because it will help remove 
impediments to a free and open securities market and facilitate 
transactions in securities because the Index warrants will provide 
investors a means by which to hedge investments in the Japanese equity 
market and provide a surrogate instrument for trading in the Japanese 
securities market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule amendments will not impose any burden on 
competition.

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

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the 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 at 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 20549. 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-94-32 and should be 
submitted by November 15, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-26351 Filed 10-19-94; 8:45 am]
BILLING CODE 8010-01-M