[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29360]


[[Page Unknown]]

[Federal Register: November 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34991; International Series Release No. 753; File No. 
SR-CBOE-94-31]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Substitution of Component Securities of the CBOE Mexico Index

November 21, 1994.
    Purusant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on September 2, 1994, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') 
submitted to the Securities and Exchange Commission (``Commission'') a 
proposed rule change seeking authority to replace one component 
security in the CBOE Mexico Index (``Index'') with a closed-end country 
fund comprised solely of Mexican securities (``Mexico Fund''), if the 
Exchange decides that such a substitution is necessary or desirable. 
The Exchange represents that the purpose of such a substitution would 
be to make the Index more attractive to investors and to facilitate 
hedging of the Index by substituting a more liquid component.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    The proposal was published for comment in the Federal Register on 
September 26, 1994.\3\ No comments were received on the proposed rule 
change.
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    \3\See Securities Exchange Act Release No. 34688 (September 20, 
1994), 59 FR 49092 (September 26, 1994).
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    The Commission believes 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, Section 6(b)(5) of the Act.\4\ Specifically, the Commission 
believes that the proposal is 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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    \4\15 U.S.C. 78f(b)(5) (1988).
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    The Index is an equal dollar-weighted index comprised of stocks and 
American Depositary Receipts (``ADRs'') representing ten Mexican 
companies. The Index satisfies the generic criteria, set forth in CBOE 
Rule 24.2, for listing options on narrow-based indexes.\5\ The CBOE 
will not replace any component security with the Mexico Fund unless 
after such substitution the Index continues to satisfy the initial 
listing and maintenance criteria specified in CBOE Rule 24.2.
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    \5\See Securities Exchange Act Release No. 34157 (June 3, 1994), 
59 FR 30062 (June 10, 1994) (``Exchange Act Release No. 34157'').
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    Although the Mexico Fund is not currently eligible to have 
standardized options listed on it,\6\ the Mexico Fund exceeds all 
numerical criteria that component securities of the Index are required 
to satisfy.\7\ As of August 1, 1994, the Mexico Fund had a market 
capitalization of $1,187,567,000.\8\ Also, the Mexico Fund had average 
monthly trading volume of 5.4 million shares for the six-month period 
through July 1994.\9\ The monthly trading volume did not drop below 2.8 
million shares during that period.
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    \6\See Securities Exchange Act Release No. 33068 (October 19, 
1993), 58 FR 55093 (October 25, 1993) (``Exchange Act Release No. 
33068'').
    \7\See CBOE Rules 5.4 and 24.2.
    \8\The initial listing and maintenance criteria for the Index 
require that Index components have a minimum market capitalization 
of $75 million, provided, however, that components accounting for no 
more than 10% of the Index, by weight, may have a minimum market 
capitalization of $50 million.
    \9\The initial listing (maintenance) criteria for the Index 
require that Index components have a minimum six-month average 
monthly trading volume of one million (500,000) shares, provided, 
however, that components accounting for no more than 10% of the 
Index, by weight, may have a minimum six-month average trading 
volume of 500,000 (400,000) shares.
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    The substitution of the Mexico Fund for a component security in the 
Index would also be consistent with the listing criteria that no 
component security of the Index account for greater than 25% of the 
index, by weight. Even though the Mexico Fund currently holds common 
stocks and ADRs that are also components of the Index,\10\ because the 
Index is equal dollar-weighted, the Mexico Fund will account for 10% of 
the weight of the Index immediately following each quarterly 
rebalancing of the Index. As a result, even if it were possible for the 
holdings of the Mexico Fund to consist entirely of one Index component, 
that security would then constitute 20% of the weight of the Index 
immediately following each quarterly rebalancing of the Index, which is 
below the 25% specified in the initial listing and maintenance criteria 
for the Index.
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    \10\For example, as of January 1, 1994, Telefonos de Mexico 
(``Telemex'') was the Index component most highly represented in the 
Mexico Fund. As of that date, shares of the series of Telmex stock 
that underlie the ADRs traded in the U.S. accounted for 4.29% of the 
net assets of the Mexico Fund. See Letter from Eileen Smith, 
Director, Product Development, Research Department, CBOE, to Brad 
Ritter, Senior Counsel, Office of Market Supervision, Division of 
Market Regulation, Commission, dated September 19, 1994. As a 
result, Telmex accounted for approximately 10.43% of the weight of 
the Index on that date.
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    Moreover, the Exchange will not substitute the Mexico Fund for a 
component security of the Index unless at that time, securities 
representing at least 90% of the Index, by weight, are eligible for the 
trading of standardized equity options under CBOE Rule 5.3, as required 
by the initial listing and maintenance criteria for the Index. Finally, 
the inclusion of the Mexico Fund as a component security of the Index 
will not exceed the allowable number of components of the Index that 
are not subject to comprehensive surveillance sharing agreements.\11\ 
Based on the foregoing, the Commission concludes that approval of the 
proposed rule change is consistent with the Act.\12\
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    \11\The criteria pursuant to which the CBOE lists options on the 
Mexico Index require that no more than 20% of the weight of the 
index be comprised of components that are not subject to a 
comprehensive surveillance sharing agreement between the CBOE and 
the primary market of the particular security. See Exchange Act 
Release No. 34157, supra note 5. In this case, however, because the 
Index is equal dollar-weighted and there is the additional 
requirement that at least 90% of the Index components, by weight, 
must be options eligible, no more than 10% of the number of Index 
components (i.e., one component) can consist of such securities at 
each quarterly rebalancing of the Index. Because the Mexico Fund is 
not eligible for standardized options trading pursuant to the 
Commission's order allowing options on country funds, the Mexico 
Fund must be counted against this foreign component limit even 
though the New York Stock Exchange is the primary market for the 
shares issued by the fund. See Exchange Act Release No. 33068, supra 
note 6.
    \12\The Commission notes that this conclusion is based in large 
part on the fact that the Index is equal dollar-weighted. As noted 
above, equal dollar-weighting in this case ensures that at each 
quarterly rebalancing of the Index, each component accounts for 10% 
of the weight of the Index. Therefore, even if the Mexico Fund were 
to hold a position in only one security, that security could not 
account for more than 20% of the total weight of the Index at each 
rebalancing. As a result, the Commission's findings set forth herein 
are specific to the Mexico Index. If this proposal was put forth for 
an index that used a different weighting method to calculate the 
value of the index, the Commission would have concerns with how the 
exchange submitting the proposal would monitor the index to ensure 
that the weightings of individual component securities, including 
the weightings attributable to the holdings of the particular 
country fund(s) being substituted, remain within the maintenance 
criteria for that index.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-CBOE-94-31) is 
hereby approved.
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    \13\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-29360 Filed 11-28-94; 8:45 am]
BILLING CODE 8010-01-M