[Federal Register Volume 60, Number 17 (Thursday, January 26, 1995)]
[Notices]
[Pages 5233-5235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1979]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35247; International Series Release No. 774 File No. 
SR-CBOE-95-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing of Warrants on the Deutscher Aktien Index (``DAX Index'')

January 19, 1995.
    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 January 5, 1995, 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.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
---------------------------------------------------------------------------

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

    The CBOE proposes to list and trade warrants based on the Deutscher 
Aktien Index (``DAX Index'' or ``Index''), a broad-based index.\3\ The 
Exchange represents that the listing and trading of warrants on the 
Exchange is permitted by CBOE Rule 31.5(E). The text of the proposed 
rule change is available at the Office of the Secretary, CBOE, and at 
the Commission.

    \3\The Exchange previously submitted a rule filing to permit the 
listing and trading of index options on a reduced-value DAX Index. 
See Securities Exchange Act Release No. 35130 (December 20, 1994), 
59 FR 66985 (December 28, 1994) (notice of File No. SR-CBOE-94-47).
---------------------------------------------------------------------------

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 Exchange represents that it 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 upon the DAX Index. The Exchange 
further represents that the listing and trading of Index warrants will 
comply in all respects with CBOE Rule 31.5(E), as discussed below.
Index Design\4\
    The DAX Index is a capitalization-weighted index of 30 German blue-
chip equity securities listed on the Frankfurt Stock Exchange 
(``FSE'').\5\ The Exchange represents that warrants on 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.

    \4\The Commission notes that the Exchange incorporates by 
reference to its proposal to list Index options, most of the 
information and representations contained in this section and in the 
following sections on Index calculation and maintenance. Id. For 
convenience, the Commission has adapted the text of that filing for 
inclusion herein.
    \5\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 AB; 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.
---------------------------------------------------------------------------

    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\6\ by the price of the 
stock and a multiple determined by the FSE.

    \6\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.
---------------------------------------------------------------------------

    As of August 31, 1994, the CBOE represents that the 30 stocks 
contained in the Index range in market capitalization from DM 1.8 
billion (US$1.14 billion)\7\ 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.

    \7\Based on the exchange rate of DM 1.5815/US$1 prevailing on 
August 31, 1994.
---------------------------------------------------------------------------

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 avilable for at least 15 components of the Index representing at 
least 70 percent 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. [[Page 5234]] 
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.\8\ 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.

    \8\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.
---------------------------------------------------------------------------

    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, as rescaled to one, 
with an additional adjustment made to maintain continuity in the value 
of the Index.\9\

    \9\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.
---------------------------------------------------------------------------

    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 Warrant Trading
    The proposed warrants will be direct obligations of their issuer 
subject to cash-settlement in U.S. dollars, and either exercisable 
throughout their life (i.e., American-style) or exercisable only 
immediately prior to their expiration date (i.e., European-style). Upon 
exercise, the holder of a warrant structured as a ``put'' will receive 
payment in U.S. dollars to the extent that the DAX Index has declined 
below a cash settlement value specified at the time of issuance. 
Conversely, upon exercise, holders of an Index warrant structured as a 
``call'' will receive payment in U.S. dollars to the extent that the 
DAX Index has increased above a cash settlement value specified at the 
time of issuance. Index warrants that are ``out-of-the-money'' at the 
time of expiration will expire worthless.
Warrant Listing Standards and Customer Safeguards
    CBOE Rule 31.5(E) sets forth the guidelines applicable to listing 
index warrants based on established foreign and domestic stock indexes. 
The warrant issues based on the DAX Index will conform to the listing 
guidelines under Rule 31.5(E) which provide that: (1) The issuer shall 
have assets in excess of $100,000,000 and otherwise substantially 
exceed the size and earnings requirements in Rule 31.5(A); (2) the term 
of the warrants shall be for a period ranging from one to five years 
from date of issuance; and (3) the minimum public distribution of such 
issues shall be one million warrants, together with a minimum of 400 
public holders and have an aggregate market value of at least $4 
million.
    Because index warrants are derivative in nature and closely 
resemble index options, the CBOE will also require that DAX Index 
warrants be sold only to customers whose accounts have been approved 
for options trading pursuant to Exchange Rule 9.7. The suitability 
standards of Exchange Rule 9.9 apply to recommendations in Index 
warrants. Further, the Exchange will require that customer positions in 
DAX Index warrants be subject to the margin requirements applicable to 
options.\10\

    \10\See CBOE Rule 12.3.
---------------------------------------------------------------------------

    In addition, Exchange Rule 30.50, Interpretation .04 requires that 
the standards of Rule 9.10(a) regarding discretionary orders be applied 
to Index warrants. This rule requires a branch office manager or 
registered options principal to approve and initial a discretionary 
order in Index warrants on the day entered. Prior to the commencement 
of trading of Index warrants, the Exchange will distribute a circular 
to its membership calling attention to certain compliance 
responsibilities when handling transactions in Index warrants. The 
Exchange will submit a draft of the circular to the Commission staff 
for approval prior to distribution to members.
    On September 28, 1994, the Exchange submitted for Commission 
approval, proposed rule changes governing customer protection and 
margin requirements for stock index warrants, currency index warrants, 
and currency warrants, and position limits for stock index 
warrants.\11\ The Exchange represents that DAX Index warrants issued 
subsequent to approval of those proposals will be subject to the new 
rules.

    \11\See Securities Exchange Act Release No. 35178 (December 29, 
1994), 60 FR 2409 (January 9, 1994) (notice of File No. SR-CBOE-94-
34).
---------------------------------------------------------------------------

Surveillance
    The Exchange expects to apply its existing index warrant 
surveillance procedures to DAX Index warrants. 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 warrant trading based on the DAX Index because they will 
enhance the surveillance of trading in the stocks comprising the Index.
    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 is designed 
to prevent fraudulent and manipulative acts and practices and to 
promote just and equitable principles of trade, and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.

    \12\15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------

(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. [[Page 5235]] 

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

    Interest 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-95-01 and should be 
submitted by February 16, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

FR Doc. 95-1979 Filed 1-25-95; 8:45 am]
BILLING CODE 8010-01-M