[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31882]


[Federal Register: December 28, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35130; International Series Release No. 763, File No. 
SR-CBOE-94-47]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing of Options and Long-Term Options on a Reduced-Value of the 
Deutsche Aktien Index (``DAX Index'')

December 20, 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 November 18, 1994, the Chicago Board Options Exchange, Inc. 
(``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 
Exchange. 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. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend certain of its rules to provide for the 
listing and trading on the Exchange of options and long-term options on 
a reduced-value of the Deutsche Aktien Index (``DAX Index'' or 
``Index'') computed at one-tenth of the full-value of the DAX 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 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\3\ stock index options 
on a reduced-value of the DAX Index. The DAX Index is a capitalization-
weighted index of 30 German blue-chip equity securities listed on the 
Frankfurt Stock Exchange (``FSE'').\4\ The Exchange represents that 
options on the reduced-value of the DAX Index will provide investors 
with a low-cost means of participating in the German economy and 
hedging against the risk of investing in that economy.
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    \3\A European-style option can be exercised only during a 
specified time period before the option expires.
    \4\The components of the Index are as follows: Allianz AG 
Holdings, BASF AG, Bayer AG, Bayer Hypo/Wech, BMW, Bayer Vereinsbank 
AG, Commerzbank AG, Continental AG, Daimler-Benz AG, Deutsche 
Babcock AG; Deutsche Bank AG, Degussa AG, Dresdner Bank AG, Henkel 
KGAA-Pfd, Hoechst AG, Karstadt AG, Kaufhof Holdings AG, Lufthansa 
AG, Linde AG, Man AG, Metallgesellsch, Mannesmann AG, Preussag AG, 
RWE AG, Schering AG, Siemens AG, Thyssen AG, Veba AG, Viag AG, and 
Volkswagen AG.
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Index Design
    The 30 stocks comprising the DAX Index were selected by the FSE for 
their high market capitalization and high degree of liquidity. The DAX 
Index stocks are drawn from a broad base of industries and are 
representative of the industrial composition of the broader German 
equity market. The CBOE represents that the stocks contained in the 
Index account for 70% of the trading volume on the FSE.
    The DAX Index is weighted by the market capitalization of the 
component stocks. The capitalization of a particular stock in the Index 
is calculated by multiplying the listed capital\5\ by the price of the 
stock and a multiple determined by the FSE.
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    \5\Listed capital is determined based on the issuer's preferred 
and common shares registered for trading on the FSE. The CBOE notes 
that domestic indexes, such as the S&P 500 Index, are calculated 
based on the shares of common stock only.
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    As of August 31, 1994, the CBOE represents that the 30 stocks 
contained in the Index ranged in market capitalization from DM 1.8 
billion (US$1.14 billion)\6\ to DM 50.1 billion (US$31.7 billion) with 
the median capitalization of the firms in the Index of DM 9.9 billion 
(US$6.3 billion). Also as of that date, the largest 13 stocks in the 
Index accounted for approximately 75% of the total weight of the Index 
with no single security accounting for more than 10.87% or less than 
0.37% of the total weight of the Index. Average daily trading volume in 
the components of the Index for the period from March 1, 1994, through 
August 31, 1994, ranged from a low of 50,981 shares to a high of 
820,738 shares, with an average daily trading volume for all components 
during that period of approximately 295,000 shares. The Index is 
composed of ten broad industry groups, including, among others, 
chemicals, automobile, and insurance companies which, the CBOE 
represents, reflect the industry composition of the German equity 
market.
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    \6\Based on the exchange rate of DM 1.5815/US$1 prevailing on 
August 31, 1994).
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Calculation
    The DAX Index reflects changes in the capitalization of the 
component stocks relative to the base value of 1,000 on December 30, 
1987. The base value was reached by multiplying the price of each stock 
by the number of listed shares of that stock, obtaining the sum for all 
components, and then dividing by a divisor determined to give the Index 
an initial value of 1,000. The Index had a closing value of 2,212.85 on 
August 31, 1994.
    The value of the DAX Index is calculated every minute by the FSE 
from 9:30 a.m. to 1:30 p.m., Frankfurt time (3:30 a.m. to 7:30 a.m. 
Eastern time), based on last sale prices of the component stocks. The 
value of the Index is not disseminated by the FSE until opening prices 
are available for at least 15 components of the Index representing at 
least 70% of the capitalization of the Index. Thereafter, with respect 
to any stock that has not yet opened for trading, the Index value is 
calculated using the previous day's closing price for those components.
Maintenance
    The Index is maintained by the FSE. The value of the Index is 
calculated by the FSE and disseminated over Reuters News Service, among 
others.
    In order to maintain continuity of the value of the Index, the FSE 
adjusts the Index to reflect certain events relating to the component 
stocks. For example, the FSE adjusts the Index value to reflect cash 
dividends paid on the component securities.\7\ An adjustment is also 
applied by the FSE whenever a company issues new shares for which the 
shareholders have preemptive rights, or when other intra-year events, 
such as mergers and spinoffs, occur.
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    \7\The CBOE represents that the FSE makes this adjustment 
because German companies usually pay their dividends only once per 
year (generally in June or July). If not adjusted, the annual 
dividend payment would result in a significant drop in the value of 
the Index at the time when the dividends are paid. As a result, the 
CBOE represents that the FSE calculates the dividend adjustment such 
that share prices reflect full dividend reinvestment. As calculated 
by the FSE, adjustments are made by multiplying each stock's 
capitalization by an adjustment factor (related to the amount of the 
dividend) that is particular to each stock. The resulting 
``adjusted'' capitalization for each of the 30 stocks is summed and 
divided by the base date capitalization.
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    The number of listed shares of each stock used in the calculation 
of the value of the Index is updated by the FSE annually in September. 
At that time, the adjustment factors mentioned above, which reflect the 
dividend payments and/or intra-year adjustments, are rescaled to one, 
with an additional adjustment made to maintain continuity in the value 
of the Index.\8\
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    \8\The FSE also multiplies the ratio of capitalization (current 
capitalization divided by base date capitalization) by the ``chain 
index factor.'' The FSE employs the ``chain index factor'' to 
reflect all previous dividend and capitalization adjustments made 
during the year. In this manner, continuity in the value of the 
Index is maintained despite changes in the shares and rescaling of 
the individual adjustment factors back to one.
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    In addition, the composition of the Index is reviewed periodically 
by the FSE. It is the FSE's policy not to alter the composition of the 
DAX Index unless a stock fails to meet certain criteria, e.g., market 
capitalization and trading volume. Replacements are usually made from a 
list of substitute stocks. If it is not possible to substitute a stock 
from the same industry group, a stock from another industry may be 
substituted.
Index Option Trading
    The Exchange proposes to establish the ``trading value'' of the 
Index for options trading purposes at one-tenth of the Index value as 
calculated by the FSE. For instance, if the DAX Index value was 
2,080.21, the trading value will be calculated by the CBOE by dividing 
the Index value by 10, and then rounding to the nearest one-hundredth. 
In this example, the options trading value of the DAX Index would be 
208.02. The U.S. dollar value underlying one DAX Index option would 
therefore be US$20,802--that is, 208.02 multiplied by $100.
    In addition to regular options on the reduced-value of the DAX 
Index, the Exchange may provide for the listing of long-term index 
option series (``Index LEAPS'') and reduced-value Index LEAPS on the 
trading value of the DAX Index. For reduced-value Index LEAPS, the 
underlying value would be computed at one-tenth of the trading value of 
the DAX Index, i.e., 1/100th of the value of the DAX Index as 
calculated by the FSE. The current and closing reduced-value of the 
trading value of the Index for purposes of reduced-value Index LEAPS 
will, after such initial computation, be rounded to the nearest 
hundredth.
    The trading hours for options on the reduced-value of the DAX 
Index, including Index LEAPS, will be from 9:00 a.m. to 4:15 p.m. 
Eastern time. Currently, the trading hours of the Exchange and the FSE 
do not overlap. The Exchange, therefore, will disseminate the trading 
value of the Index based on the most recent closing value of the Index 
as calculated by the FSE. After the close of the FSE, however, trading 
continues in the 30 stocks comprising the DAX Index on the FSE's 
Integrated Stock Exchange Trading and Information System (``IBIS'').\9\ 
The trading hours of IBIS and the Exchange will overlap for the two 
hour period between 9:00 a.m. to 11:00 a.m. Eastern time. During this 
two hour period, the Exchange will disseminate an Index trading value 
based on the ``indicative'' DAX Index value disseminated by IBIS. When 
trading on IBIS has concluded, the exchange will disseminate an Index 
trading value based on the last indicative DAX Index level as 
disseminated by IBIS. To avoid any confusion, the trading value based 
on the IBIS indicative DAX Index value will have a different ticker 
symbol from the trading value based on the actual DAX Index value as 
reported by the FSE.
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    \9\The CBOE represents that IBIS is a screen-based trading and 
information system that is available for trading from 8:30 a.m. to 
5:00 p.m. Frankfurt time (2:30 a.m. to 11:00 a.m. Eastern time). 
IBIS, as part of the FSE, is subject to the same rules and 
regulations as floor trading on the FSE. IBIS began operating in 
April 1991.
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    The option premium values for the reduced-value Index options, 
including Index LEAPS, will be quoted in U.S. dollars and, therefore, 
trading accounts will be denominated in U.S. dollars. The CBOE 
represents that all systems of the Exchange, The Options Clearing 
Corporation (``OCC''), and Exchange clearing members can accommodate 
trading, clearance and settlement of the reduced-value Index options, 
including Index LEAPS, without alteration, thus facilitating the 
trading of reduced-value DAX Index options by U.S. retail customers.
    For strike prices under $200, the Exchange proposes to reserve the 
right to list series in 2\1/2\ point intervals.
Exercise and Settlement
    The proposed options on the reduced-value of the Index will expire 
on the Saturday following the third Friday of the expiration month. 
Trading in the expiring contract month will normally cease at 4:15 p.m. 
Eastern time on the immediately preceding Thursday. The CBOE represents 
that the FSE will normally calculate the Index value used for the 
exercise settlement value based on an average of the values of the DAX 
Index between 1:21 p.m. and 1:30 p.m. Frankfurt time (7:21 a.m. to 7:30 
a.m. Eastern time),\10\ on the Friday following the last day of trading 
of the options on the CBOE.\11\ As a result, the reduced-value DAX 
Index options will normally cease trading on the CBOE on the Thursday 
before expiration but the exercise settlement value will be based on 
the closing prices (reported by the FSE) of the component securities of 
the Index on the Friday before expiration.\12\ If a component stock 
does not trade during this interval, or if it fails to open for 
trading, the last available price on the stock will be used by the FSE 
in the calculation of the Index value, as is done, according to the 
CBOE, for other indexes for which options are presently listed and 
traded on the Exchange. When the last trading day for the reduced-value 
Index options is moved because of Exchange holidays (such as when the 
CBOE is closed on the Friday before expiration), the last trading day 
for expiring reduced-value Index options, including Index LEAPS, will 
be the Wednesday before expiration and the exercise settlement trading 
value of the reduced-value Index options at expiration will be 
determined by the CBOE at the close of the regular Thursday trading 
session on the FSE, even if the FSE is open on Friday.\13\ If the FSE 
is closed on the Friday before expiration, the last trading day for 
expiring reduced-value Index options will be the Wednesday immediately 
prior to expiration.
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    \10\The FSE will calculate this average Index trading value 
based on the average of 10 separate DAX levels taken once per minute 
during this period.
    \11\The CBOE will divide this number by 10 to determine the 
exercise settlement value of reduced-value Index options and Index 
LEAPS, and by 100 to determine the exercise settlement value for 
reduced-value Index LEAPS.
    \12\Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and Brad Ritter, 
Senior Counsel, Office of Market Supervision (``OMS''), Division of 
Market Regulation (``Division''), Commission, on December 2, 1994.
    \13\In this case, the CBOE will collect the values of the Index 
reported by the FSE during the period from 1:21 p.m. to 1:30 p.m. 
Frankfurt time, on the Thursday before expiration, and will average 
these values for purposes of determining the exercise settlement 
value for the expiring Index options, including full and reduced-
value Index LEAPS. Telephone conversation between Eileen Smith, 
Director, Product Development, Research Department, CBOE, and Brad 
Ritter, Senior Counsel, OMS, Division, Commission, on December 2, 
1994.
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Surveillance
    The Exchange expects to apply its existing index options 
surveillance procedures to reduced-value Index options, including Index 
LEAPS. The Exchange has a market surveillance agreement with the FSE. 
The Exchange represents that this agreement will enable the Exchange to 
carry out its regulatory responsibilities with respect to the 
surveillance of trading in the stocks comprising the Index.
    In addition, the German legislature recently adopted new laws that 
criminalize insider trading and provide for the creation, on or around 
January 1995, of an independent securities regulatory authority. The 
Exchange believes that these developments will facilitate Commission 
approval of options trading based on the DAX Index because they will 
enhance the surveillance of trading in the stocks comprising the Index.
Position Limits
    The Exchange proposes to establish position limits for options on 
the reduced-value DAX Index, including Index LEAPS, of 50,000 contracts 
on either side of the market, provided that no more than 30,000 on such 
contracts are in the series in the nearest expiration month. Pursuant 
to CBOE rules,\14\ positions in reduced-value Index options will be 
aggregated with positions in Index LEAPS. For these purposes, ten 
reduced-value Index LEAPS (i.e., Index LEAPS based on \1/100\th of the 
value of the DAX Index calculated by the FSE) will be the equivalent of 
one regular reduced-value Index option contract.
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    \14\See CBOE Rule 24.4.
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Exchange Rules Applicable
    Except as modified herein, the Rules in Chapter XXIV will be 
applicable to reduced-value DAY Index options, including Index LEAPS.
    CBOE represents that it has the necessary systems capacity to 
support new series that would result from the introduction of reduced-
value DAX Index options, including Index LEAPS. CBOE also represents 
that it has been informed that the Options Price Reporting Authority 
(``OPRA'') has the capacity to support such new series.
    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,\15\ in particular, in that it will permit 
the trading of options based on the DAX Index pursuant to rules 
designed to prevent fraudulent and manipulative acts and practices and 
to promote just and equitable principles of trade.
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    \15\15 U.S.C. Sec. 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, 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-94-47 and should be 
submitted by [insert date 21 days after the date of publication].

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31882 Filed 12-27-94; 8:45 am]
BILLING CODE 8010-01-M