[Federal Register Volume 60, Number 21 (Wednesday, February 1, 1995)]
[Notices]
[Pages 6325-6327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2387]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35280; File No. SR-CBOE-94-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Chicago Board 
Options Exchange, Inc. Relating to the Listing of Regular and Long-Term 
Index Options on the S&P SmallCap 600 Index

January 25, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on November 8, 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 self-regulatory organization. The 
Exchange filed Amendment No. 1 to the proposed rule change on January 
9, 1995.\2\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\15 U.S.C. Sec. 78s(b)(1).
    \2\Amendment No. 1 provides the following information regarding 
the Index: (1) Industry groups represented; (2) price and volume 
information on the component stocks; and (3) component stock 
selection criteria. See letter from Eileen Smith, Director, Product 
Development, CBOE, to Steve Youhn, Division of Market Regulation, 
Commission, dated January 5, 1995 (``Amendment No. 1'').
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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 its rules to provide for the listing and 
trading on the Exchange of cash-settled, European-style index options 
on the Standard & Poor's SmallCap 600 Index (``S&P SmallCap 600'' or 
``Index''), a broad-based index designed to measure the performance of 
small capitalization stocks.
[[Page 6326]]

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 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 stock index options on 
the S&P SmallCap 600. The S&P SmallCap 600 is a capitalization-weighted 
index of 600 domestic stocks chosen for market size, liquidity, and 
industry group representation.

(1) Index Design

    the S&P SmallCap 600 Index has been designed to measure the 
performance of small capitalization stocks. The Index is a 
capitalization-weighted index of U.S. stocks with each stock affecting 
the Index in proportion to its market capitalization.
    As of October 19, 1994, the 600 component stocks ranged in 
capitalization from $933 million to $46 million, and the market 
capitalization of the Index totalled $181 billion. The largest stock 
accounted for 0.51% of the total weighting of the Index, while the 
smallest accounted for 0.03%. The median capitalization of the firms in 
the index was $267 million. A breakdown of the stocks by trading 
markets shows that Nasdaq represents 53% of the Index (318 issues), the 
New York Stock Exchange represents 43% (257 issues), and the American 
Stock Exchange represents 4% (25 issues). The Nasdaq stocks in the 
Index are authorized as Nasdaq National Market securities, the top tier 
of Nasdaq stocks.
    A total of 98 industry groups are represented in the Index. The top 
five groups and their weights are: (1) Computer Software and Services--
9.01%; (2) Insurance--5.13%; (3) Savings and Loans--4.88%; (4) Health 
Care Services--4.31%; and (5) Banks--Regional--4.26%. During the period 
April through September 1994, the average monthly volume for the 600 
stocks ranged from 93,000 to 25.3 million shares. The average monthly 
volume was 1.9 million shares. The top 100 stocks account for 33.42% of 
the index, while the bottom 100 stocks account for 5.69% of the Index. 
The prices for each of the components ranged from $1.375 to $64.5. The 
average price was $19.37. The shares outstanding for each of the stocks 
ranged from 4.0 million to 189.0 million with an average of 17.8 
million.\3\

    \3\See Amendment No. 1, supra note 2.
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    S&P relies on several criteria to select Index component stocks. 
Among other things, stocks must trade on the New York Stock Exchange, 
American Stock Exchange, or be Nasdaq National Market securities; 
stocks must trade above $1.00 at the time of selection; companies with 
50% or more of their shares outstanding held by another corporation are 
not included; companies with 60% or more of their shares held by 
insiders are not included; stocks must have at least a six month 
trading history; stocks that do not trade on any three days during a 
12-month period are not included; and share turnover (annual trading 
volume as a percent of shares outstanding) has to exceed 20% on an 
annualized basis. Index component stocks are then chosen from the field 
of stocks that meets these criteria so that they balance the economic 
sector weightings, described above.\4\

    \4\Id.
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(2) Calculation
    The methodology used to calculate the value of the Index is similar 
to that used to calculate the value of the S&P 500 Index. The value of 
the Index is determined by adding the price of each stock times the 
number of shares outstanding. This sum is then divided by an index 
divisor (``Index Divisor'') which gives the Index a value of 100 on its 
base date of December 31, 1993. The Index Divisor is adjusted for 
pertinent changes as described below in the section titled 
``Maintenance.'' The Index has a closing value of 96.82 on September 
30, 1994.

(3) Maintenance

    The S&P SmallCap 600 will be maintained by S&P. To maintain 
continuity of the Index, the Index Divisor will be adjusted to reflect 
certain events relating to the component stocks. These events include, 
but are not limited to, adjustments for company additions and 
deletions, share changes, stock splits, stock dividends, and stock 
price adjustments due to company restructurings or spinoffs. Some 
corporate actions, such as stock splits and stock dividends, require 
simple changes in the common shares outstanding and the stock prices of 
the companies in the Index. Other corporate actions, such as share 
issuances, change the market value of the Index and require an Index 
Divisor adjustment as well.
(4) Index Option Trading
    In addition to regular Index options, the Exchange may provide for 
the listing of long-term (up to three years expiration) index options 
series (``LEAPS'') and reduced-value LEAPS on the Index. For reduced-
value LEAPS, the underlying value would be computed at one-tenth of the 
Index level. The current and closing index value of any such reduced-
value LEAP will, after such initial computation, be rounded to the 
nearest one-hundredth.
    The Exchange seeks to have the discretion to list series in 2\1/2\ 
point intervals when the Index level falls below 200. The minimum tick 
size for series trading below $3 will be \1/16\ and for series trading 
above $3 the minimum tick will be \1/8\th. The trading hours for 
options on the Index will be from 8:30 a.m. to 3:15 p.m. Chicago time.
(5) Exercise and Settlement
    The proposed options on 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 3:15 p.m. (Chicago time) 
on the immediately preceding Thursday.\5\ The Index multiplier will be 
100. The exercise settlement value of the Index at option expiration 
will be calculated by S&P based on the opening prices of the component 
securities on the business day prior to expiration (``A.M. 
Settlement''). If a stock fails to open for trading, the last available 
price on the stock will be used in the calculation of the index, as is 
done for currently listed indexes.

    \5\When the last trading day is moved because of Exchange 
holidays (such as when CBOE is closed on the Friday before 
expiration), the last trading day for expiring options will be 
Wednesday and the exercise settlement value of Index options at 
expiration will be determined at the opening of regular Thursday 
trading.
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(6) Surveillance
    The Exchange will use the same surveillance procedures currently 
used for each of the Exchange's other index options to monitor trading 
in Index options and Index LEAPS on the S&P SmallCap 600. For 
surveillance purposes, the Exchange will have complete access to 
information [[Page 6327]] regarding trading activity in the underlying 
securities.
(7) Position Limits
    The Exchange proposes to establish position limits for options on 
the S&P SmallCap 600 at 100,000 contracts on either side of the market, 
and no more than 60,000 of such contracts may be in the series in the 
nearest expiration month. The Exchange represents that these limits are 
roughly equivalent, in dollar terms, to the limits applicable to 
comparable small-capitalization indexes, including the Wilshire Small 
Cap Index and the Russell 2000 Index.
(8) Exchange Rules Applicable
    As modified herein, the Rules in Chapter XXIV will be applicable to 
S&P SmallCap 600 options.
    CBOE represents that it has the necessary systems capacity to 
support new series that would result from the introduction of S&P 
SmallCap 600 options. CBOE has also been informed that the Options 
Price Reporting Authority (``OPRA'') believes that it has the capacity 
to support such new series.\6\

    \6\See letter from Joseph P. Corrigan, Executive Director, OPRA, 
to Eileen Smith, Director, Product Development, CBOE, dated October 
26, 1994.
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    The CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act in general, and furthers the objectives of 
Section 6(b)(5) in particular in that it will permit trading in options 
based on the S&P SmallCap 600 pursuant to rules designed to prevent 
fraudulent and manipulative acts and practices and promote just and 
equitable principals of trade, and thereby will provide investors with 
the ability to invest in options based on an additional index.

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

    CBOE does not believe that the proposed rule change will impose any 
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 self-regulatory organization 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, NW., Washington, DC 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, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-CBOE-94-43 and should be submitted by February 22, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\

    \7\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2387 Filed 1-31-95; 8:45 am]
BILLING CODE 8010-01-M