[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31204]


[[Page Unknown]]

[Federal Register: December 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35087; File No. SR-CHX-94-21]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Chicago Stock 
Exchange, Incorporated Relating to the Rules for the Listing and 
Trading of Stock Index and Currency Warrants

December 12, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November 
3, 1994, the Chicago Stock Exchange, Incorporated (``CHX'' 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organizations Statement of the Terms of Substance of 
the Proposed Rule Change

    The Exchange proposes to (1) amend Article XXVIII, Rule 8 to revise 
the listing criteria for stock index (``stock index'' or ``index'') 
warrants and currency warrants (``currency warrants''),\1\ (2) add a 
new Part V to the Rules of the Exchange to provide rules for the 
trading of index warrants, and (3) amend Article X, Rule 3 of the 
Exchange's rules to specify the customer margin requirements for the 
purchase or short sale of index warrants. On Dec. 5, 1994, the CHX 
amended certain surveillance related matters addressed in the filing. 
See footnote 3, infra.
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    \1\Currency warrants, as used in this filing, may refer to 
warrants on individual currencies (or cross currencies) or to 
warrants on a specific currency index group (``currency index 
warrants'').
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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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in section (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

Purpose
    The Exchange proposes to: (1) amend its listing guidelines for 
stock index and currency warrants, (2) establish various new rules for 
the trading of stock index and currency warrants, and (3) establish 
special customer margin requirements for positions in stock index and 
currency warrants.
Description of the Proposed Rules
    CHX seeks to amend Article XXVIII, Rule 8 of the Exchange's rules 
to provide a higher standard for warrant issuers than currently exists. 
Specifically, future warrant issuers would be expected to have a 
minimum tangible net worth in excess of $150,000,000. Moreover, the 
aggregate original issue price of all of a particular issuer's warrant 
offerings (combined with offerings by its affiliates) that are listed 
on a national securities exchange or on NASDAQ would not be permitted 
to exceed 25% of the issuer's net worth. The proposed amendment will 
require that each warrant issue will be automatically exercised on 
either the delisting date (if the issue is not listed upon another 
organized securities market) or upon expiration. Article XXVIII, Rule 8 
also will be amended to provide that, for stock index warrants where 25 
percent or more of the value of the underlying index is represented by 
securities that are traded primarily in the U.S., the opening prices of 
the U.S. traded securities in the index will be used to determine the 
settlement value of the underlying index.
    Article X, Rule 3 is being amended to apply the customer margin 
requirements used for broad based index and currency options to index 
warrants and currency warrants, respectively. Thus, purchases of stock 
index and currency warrants will require payment in full, and short 
sales of stock index warrants will require initial margin of: (i) 100 
percent of the current value of the warrant plus (ii) 15 percent of the 
current value of the underlying broad stock index less the amount by 
which the warrant is out of the money up to a maximum of five percent 
of the index value. Short sales of currency warrants similarly will 
follow the margin requirements applicable to listed currency options. 
The Exchange proposes that the index and currency warrant margin 
requirements be permitted offset treatment for spread, straddle and 
covered positions.\2\
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    \2\The staff of the Commission has indicated to the Exchange 
that it must request and obtain appropriate interpretive or no-
action relief from the Commission in order to permit its index and 
currency warrant margin requirements to allow offset treatment for 
spread, straddle and covered positions.
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    Article LI is being amended to add definitions related to the 
listing, trading, and margin requirements of stock index, currency, and 
currency index warrants.
    Proposed Part V of the Exchange rules applies to the trading of 
index warrants and currency warrants. Proposed Article LIII, Rule 1 
provides that, unless the context otherwise requires or a specific rule 
in Part V applies, the provisions of the Constitution and all other 
rules and policies of the Exchange apply to trading of such securities.
    Proposed Article LIII, Rule 2 states that no member or member 
organization shall accept an order from a customer for the purchase or 
sale of an index or currency warrant unless the customer's account has 
been approved for options trading pursuant to Exchange Article XXVIII, 
Rule 3.
    Proposed Article LIII, Rules 3, 4, 5, and 6 require that the 
options rules for suitability, discretionary account trading, 
supervision of accounts and customer complaints be applied to stock 
index and currency warrants.
    Proposed Article LIII, Rule 7 requires approval by a Compliance 
Registered Options Principal of all advertisements, sales literature 
and educational material issued by a member organization pertaining to 
stock index and currency warrants. The rule further requires Exchange 
approval of all advertisements and educational materials pertaining to 
stock index and currency warrants.
    Proposed Article LIII, Rule 8 provides that position limits for 
stock index warrants on the same index with original issue prices of 
ten dollars or less will be fifteen million warrants covering all such 
issues. In addition, with respect to warrants on the Standard & Poor's 
MidCap 400 Index, the position limit will be seven and one half million 
warrants covering all such issues, provided the original issue prices 
of the warrants are not greater than $10. Further, with respect to 
warrants on the Russell 2000 Index, the position limit will be twelve 
and one half million warrants. The rule provides that warrants with an 
original issue price of ten dollars or more will be weighted more 
heavily than warrants with an original issue price of ten dollars or 
less in calculating position limits. The rule gives the Exchange the 
authority to require the liquidation of a position in stock index 
warrants that is in excess of the position limits set forth in the 
rule, and commentary to the rule provides procedures for allowing 
limited exceptions to the position limits.
    Proposed Article LIII, Rule 9 provides for exercise limits on stock 
index warrants analogous to those found in stock index options and 
states that such limits are separate and distinct from any exercise 
limits that may be imposed by the issuers of stock index warrants.
    Proposed Article LIII, Rule 10, requires that the trading halt 
provisions in Article IX, Rule 10A shall be applied to the trading of 
stock index warrants.
    Upon SEC approval of the foregoing amendments, the Exchange 
proposes that it will only file rule changes for specific warrant 
issues where there is no corresponding option or warrant on the same 
underlying index already listed on a national securities exchange or 
NASDAQ. Accordingly, when a listed option or warrant overlies a 
particular broad based index, the Exchange proposes it be able to list 
warrants on that index without further SEC review and approval pursuant 
to Section 19(b) of the Act.
    Both initial and maintenance listing standards for stock index 
warrants will require that no more than 20% of the securities in the 
underlying index, by weight, may be comprised of foreign securities or 
American depositary receipts (``ADRs'') overlying foreign securities 
that are not subject to comprehensive surveillance sharing agreements 
between the CHX and the primary exchange on which the foreign security 
(including a foreign security underlying an ADR) is traded.\3\ Finally, 
prior to trading index or currency warrants, the Exchange will 
distribute a circular to its membership providing guidance regarding 
member firm compliance responsibilities (including suitability 
recommendations) when handling transactions in index or currency 
warrants.
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    \3\Telephone conversation between David T. Rusoff, Foley & 
Lardner, and Stephen M. Youhn, SEC, on December 5, 1994 (``Amendment 
No. 1''). The Exchange proposes that the ``20% test'' be applied in 
the same manner as that contained in Securities Exchange Act Release 
No. 34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (Commission 
approval order allowing the expedited trading approval of certain 
narrow-based index options).
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    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the goals of Section 
6(b)(5) in particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose a burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 date 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 submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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 
principal office of the above-referenced self-regulatory organization. 
All submissions should refer to file number in the caption above and 
should be submitted by January 10, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31204 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-M