[Federal Register Volume 60, Number 133 (Wednesday, July 12, 1995)]
[Notices]
[Pages 35971-35976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16996]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35930; International Series Release No. 824, File No. 
SR-CBOE-95-20]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to the Listing of Options and Long-
Term Options on the CBOE Latin 15 Index and Long-Term Options on a 
Reduced-Value CBOE Latin 15 Index

June 30, 1995.

I. Introduction

    On March 20, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to provide for the listing and 
trading of index options on the CBOE Latin 15 Index (``Latin 15'' or 
``Index''). Notice of the proposal appeared in the Federal Register on 
April 13, 1995.\3\ No comment letters were received on the proposed 
rule change. The Exchange subsequently filed Amendment No. 1 to the 
proposed rule change on June 6, 1995,\4\ and Amendment No. 2 on June 
13, 1995.\5\ This order approves the Exchange's proposal, as amended.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 35573 (April 6, 
1995), 60 FR 18862.
    \4\ In Amendment No. 1, as discussed more fully herein, the 
Exchange proposed certain maintenance standards for the Latin 15 
Index. See Letter from Eileen Smith, Director, Product Development, 
Research Department, CBOE, to Brad Ritter, Senior Counsel, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Division''), Commission, dated June 7, 1995 (``Amendment No. 
1'').
    \5\ In Amendment No. 2, the Exchange extends the proposed 
trading hours for options on the Index from 3:10 p.m., Chicago time, 
to 3:15 p.m., Chicago time. See Letter from Eileen Smith, Director, 
Product Development, Research Department, CBOE, to Brad Ritter, 
Senior Counsel, OMS, Division, Commission, dated June 13, 1995 
(``Amendment No. 2'').
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II. Description of Proposal

A. General

    The CBOE proposes to list for trading options on the Latin 15 
Index, a new securities index developed by the CBOE. The Latin 15 Index 
consists of fifteen components, including American Depositary Receipts 
(``ADRs''), American Depositary Shares (``ADSs''), and closed-end 
country funds from four Latin American countries: Argentina, Brazil, 
Chile, and Mexico.\6\ The CBOE also proposes to list either long-term 
options on the full-value Index or long-term options on a reduced-value 
Index that will be computed at one-tenth of the value of the Latin 15 
Index (``Latin 15 LEAPS'' or ``Index LEAPS'').\7\ Latin 15 leaps will 
trade independent of and in addition to regular Index options traded on 
the Exchange,\8\ however, as discussed below, for purposes of position 
and exercise limits, positions in Index LEAPS and regular Index options 
will be aggregated.

    \6\ The components of the Index are: Argentina Fund Inc.; 
Telefonica de Argentina S.A.; YPF Sociedad Anonima S.A.; Aracruz 
Celulose S.A.; Brazil Fund, Inc.; Brazilian Equity Fund, Inc.; Banco 
Osorno Y La Union; Compania de Telefonos de Chile; Empresa Nacional 
Electricidad S.A.; Empresas La Moderna S.A. de C.V.; Grupo Tribasa 
S.A. de C.V.; Coca Cola Femsa S.A.; Telefonos de Mexico S.A.; Grupo 
Televisa S.A.; and Vitro Sociedad Anonima.
    \7\ LEAPS is an acronym for Long-Term Equity Anticipation 
Securities. LEAPS are long-term index option series that expire from 
12 to 60 months from their date of issuance. See CBOE Rule 
24.9(b)(1).
    \8\ According to the CBOE, the Latin 15 Index represents a 
segment of the U.S. equity market that is not currently represented 
in the derivative markets and as such, the CBOE concludes, should 
offer investors a low-cost means of achieving diversification of 
their portfolios toward or away from Latin American market 
securities.
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B. Composition of the Index

    The Index was designed by the Exchange and is based on a 
combination of 12 ADRs and ADSs overlying Latin American securities, 
and the shares of three closed-end country funds that invest in Latin 
American securities. The shares of each of the components contained in 
the Index currently traded in the U.S. on the New York Stock Exchange 
(``NYSE'').

[[Page 35972]]

    As of the close of trading on June 1, 1995, the Index was valued at 
131.92. As of the close of trading on March 14, 1995, the market 
capitalizations of the components comprising the Index ranged in 
capitalization from a low of $77.17 million to a high of $10.58 
billion. The total capitalization on that date was $38.77 billion; the 
mean capitalization was $2.58 billion; and the median capitalization 
was $812.50 million. The largest component accounted for 11.67% of the 
total weight of the Index, and the five largest components accounted 
for 46.67% of the total weight of the Index. On that same date, the 
smallest component accounted for 5.00% of the total weight of the 
Index. The average trading volume of the components of the Index, for 
the period from September 1, 1994, through February 28, 1995, ranged 
from a high of 5.78 million shares per day to a low of 52,579 shares 
per day.

C. Maintenance

    The Index will be maintained by the CBOE. The CBOE may change the 
composition of the Index at any time, subject to compliance with the 
maintenance criteria discussed below, to reflect the conditions in the 
Latin American securities markets. If it becomes necessary to replace a 
component of the Index, the Exchange represents that every effort will 
be made to add only replacement securities (i.e., ADRs, ADSs, and 
closed-end country funds) that preserve the character of the Index. 
Moreover, replacement securities must be listed on either the American 
Stock Exchange (``Amex'') or the NYSE, or must be Nasdaq National 
Market (``Nasdaq/NM'') securities.\9\ In considering securities to be 
added to the Index, the CBOE will take into account the capitalization, 
liquidity, volatility, and the name recognition of the particular 
securities. Further, a component of the Index may be replaced in the 
event of certain events, such as a merger, consolidation, dissolution, 
or liquidation, or a change in the investment objectives of a country 
fund component.

    \9\ The Commission notes that the CBOE will be required to 
ensure that each component in the Index is a ``reported security'' 
as defined in Rule 11Aa3-1 of the Act.
    The Exchange will most likely maintain 15 components in the 
Index.\10\ In addition, in choosing securities as replacements for or 
additions to the Index, the CBOE will not make a composition change 
that would result in less than 85% of the weight of the Index or 80% of 
the number of components in the Index satisfying the listing criteria 
for standardized options trading set forth in CBOE Rule 5.3 \11\ (for 
securities that are not then the subject of standardized options 
trading) and CBOE Rule 5.4 \12\ (for securities that are then the 
subject of standardized options trading).\13\ Additionally, at least 
twice each year, the CBOE will review the Index and apply these same 
standards to ensure that not less than 85% of the weight of the Index 
and 80% of the number of securities represented in the Index continue 
to satisfy the criteria for standardized options trading set forth in 
CBOE Rule 5.3 (for securities that are not then the subject of 
standardized options trading) and CBOE Rule 5.4 (for securities that 
are then the subject of standardized options trading).\14\

    \10\ In no event will the CBOE decrease the number of components 
in the Index to less than 10. The Commission notes that if the CBOE 
determines to increase the number of components to greater than 20, 
the Exchange will be required to submit a rule filing pursuant to 
Section 19(b) of the Act.
    \11\ See Amendment No. 1, supra note 4. The CBOE's options 
listing standards, which are uniform among the options exchanges, 
provide that a security underlying an option must, among other 
things, meet the following requirements: (1) the public float must 
be at least 7,000,000 shares; (2) there must be a minimum of 2,000 
stockholders; (3) trading volume in the U.S. must have been at least 
2.4 million over the preceding twelve months; and (4) the U.S. 
market price must have been at least $7.50 for a majority of the 
business days during the preceding three calendar months. See CBOE 
Rule 5.3, Interpretation and Policy .01.
    \12\ See Amendment No. 1, supra note 4. The CBOE's options 
maintenance standards, which are uniform among the options 
exchanges, provide that a security underlying an option must, among 
other things, meet the following requirements: (1) the public float 
must be at least 6,300,000 shares; (2) there must be a minimum of 
1,600 stockholders; (3) trading volume in the U.S. must have been at 
least 1.8 million over the preceding twelve months; and (4) the U.S. 
market price must have been at least $5.00 for a majority of the 
business days during the preceding six calendar months. See CBOE 
Rule 5.3, Interpretation and Policy .01.
    \13\ For these purposes, the closed-end fund components of the 
Index will be deemed to satisfy the listing criteria for 
standardized options trading if they satisfy the numerical 
requirements in CBOE Rule 5.3, Interpretation and Policy .01 (for 
closed-end country fund shares that are not then the subject of 
standardized options trading) and CBOE Rule 5.4, Interpretation and 
Policy .01 (for securities that are then the subject of standardized 
options trading). It is currently the case, therefore, that closed-
end fund components of the Index that are not eligible for 
standardized options trading pursuant to the Commission's Country 
Fund Approval Order (see infra note 36) are counted as being options 
eligible for purposes of this 85%/80% requirement.
    \14\ Id.
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    Moreover, at least twice each year, based on the most recent 
Commission filings by the closed-end funds represented in the Index, 
the CBOE will review the holdings of each of the closed-end funds to 
determine whether: (1) Any security that is not eligible for 
standardized options trading and that is held by one or more closed-end 
funds represented in the Index accounts, in aggregate, for more than 5% 
of the weight of the Index; or (2) securities from any one country that 
are not eligible for standardized options trading and that are held by 
one or more closed-end funds represented in the Index account, in 
aggregate, for more than 25% of the weight of the Index.
    The CBOE will promptly notify the Commission staff at any time that 
the CBOE determines that the Index fails to satisfy any of the above 
maintenance criteria. Further, in such an event, the Exchange will not 
open for trading any additional series of Index options or Index LEAPS 
unless the Exchange determines that such failure is not significant, 
and the Commission staff affirmatively concurs in that determination, 
or unless the Commission specifically approves the continued listing of 
the class of Index options or Index LEAPS pursuant to a proposal filed 
in accordance with Section 19(b)(2) of the Act.\15\

    \15\ See Amendment No. 1, supra note 4.
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D. Applicability of CBOE Rules Regarding Index Options

    Except as modified by this order, the rules in Chapter XXIV of the 
CBOE Rules will be applicable to Index options and full-value and 
reduced-value Index LEAPS. In accordance with Chapter XXIV of CBOE's 
rules, the Index will be treated as a narrow-based index for purposes 
of applicable position and exercise limits, policies regarding trading 
halts and suspensions, and margin treatment.\16\

    \16\ See infra Section II.H.
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E. Calculation of the Index

    The value of the CBOE Latin 15 Index is calculated using a 
``modified equal-dollar-weighted'' formula, meaning that each of the 
components (fund shares or individual stocks) from each of the four 
countries is represented in approximately equal dollar amounts in 
relation to the other shares from that country. The countries in the 
index are then weighted, at the beginning of each quarter, as follows: 
Argentina--17.5%, Brazil--35%, Chile--17.5%, and Mexico--30%. The 
Exchange believes this methodology will present a fairer representation 
of the respective economies. The ``modified'' description refers to the 
fact that the dollar-weighting is performed on a country by country 
basis and not between shares of different countries.
    The number of shares of each component security in the Index will 
remain fixed between quarterly reviews except in the event of certain 
types of corporate actions, such as the payment 

[[Page 35973]]
of a dividend (other than an ordinary cash dividend), stock 
distributions, stock splits, reverse stock splits, rights offerings, or 
a distribution, reorganization, recapitalization, or some such similar 
event with respect to an Index component. When the Index is adjusted 
between quarterly reviews, the number of shares of the relevant 
component in the portfolio will be adjusted, to the nearest whole 
share, to maintain the component's relative weight in the Index at the 
level immediately prior to the corporate action. In the event of a 
replacement, the average dollar value of the remaining portfolio 
components will be calculated and that amount invested in the new 
component stock, to the nearest whole share. In both cases, the divisor 
will be adjusted, if necessary, to ensure continuity in the value of 
the Index.\17\

    \17\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and Brad Ritter, 
Senior Counsel, OMS, Division, Commission, on June 12, 1995.
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    The value of the Index will be calculated continuously and will be 
disseminated to the Options Price Reporting Authority (``OPRA'') every 
fifteen seconds by the CBOE, based on the last-sale prices of the 
securities comprising the Index.\18\ OPRA, in turn, will disseminate 
the Index value to other financial vendors such as Reuters, Telerate, 
and Quotron.

    \18\ For purposes of dissemination of the Index value, if the 
shares of an ADR, ADS, or closed-end country fund included in the 
Index have not opened for trading, the CBOE will use the closing 
value of those shares on the prior trading day when calculating the 
value of the Index, until those shares open for trading.
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    The Index value for purposes of settling outstanding regular Index 
options and full-value and reduced-value Index LEAPS contracts upon 
expiration will be calculated based upon the regular way opening sale 
prices for each of the securities comprising the Index in their primary 
market on the last trading day prior to expiration.\19\ In the event 
that a security traded as a Nasdaq/NM security is added to the Index, 
the first reported sale price for those shares will be used for 
determining a settlement value. Once the shares of all of the component 
securities represented in the Index have opened for trading, the value 
of the Index will be determined and that value will be used as the 
final settlement value for expiring Index options contracts, including 
full-value and reduced-value Index LEAPS. If any of the components of 
the Index do not open for trading on the last trading day before 
expiration, then the prior trading day's (i.e., normally Thursday's) 
last sale price will be used in the Index value calculation. In this 
regard, before deciding to use Thursday's closing value for a security 
contained in the Index for purposes of determining the settlement value 
of the Index, the CBOE will wait until the end of the trading day on 
Expiration Friday (as defined herein).

    \19\ As noted above, each of the component securities currently 
trade on the NYSE. Moreover, the NYSE is the primary market for an 
overwhelming majority of the securities contained in the Index.
F. Contract Specifications

    The proposed options on the Index will be cash-settled, European-
style options.\20\ Standard options trading hours (8:30 a.m. to 3:15 
p.m., Chicago time) \21\ will apply to the contracts. The Index 
multiplier will be $100. The strike price interval will be $5.00 for 
full-value Index options with a duration of one year or less to 
expiration.\22\ In addition, pursuant to CBOE Rule 24.9, there may be 
up to six expiration months outstanding at any given time. 
Specifically, there may be up to three expiration months from the 
March, June, September, and December cycle plus up to three additional 
near-term months so that the two nearest term months will always be 
available. As described in more detail below, the Exchange also intends 
to list several Index LEAPS series that expire from 12 to 60 months 
from the date of issuance.

    \20\ A European-style option can be exercised only during a 
specified period before the option expires.
    \21\ See Amendment No. 2, supra note 5.
    \22\ For a description of the strike price intervals for 
reduced-value Index options and long-term Index options, See infra, 
Section II.G.
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    Lastly, the options on the Index will expire on the Saturday 
following the third Friday of the expiration month (``Expiration 
Friday''). Accordingly, because options on the Index will settle based 
upon opening prices of the securities comprising the Index on the last 
trading day before expiration (normally Expiration Friday), the last 
trading day for an expiring Index option series will normally be the 
second to the last business day before expiration (normally a 
Thursday).

G. Listing of Long-Term Options on the Full-Value or Reduced-Value 
Latin 15 Index

    The proposal provides that the Exchange may list long-term Index 
options that expire from 12 to 60 months from listing based on the 
full-value Index or a reduced-value Index that will be computed at one-
tenth of the full-value Latin 15 Index. Existing Exchange requirements 
applicable to full-value Index options will apply to full-value and 
reduced-value Index LEAPS.\23\ The current and closing Index value for 
reduced-value Latin 15 LEAPS will be computed by dividing the value of 
the full-value Index by 10 and rounding the resulting figure to the 
nearest one-hundredth. For example, an Index value of 125.46 would be 
12.55 for the reduced-value Index LEAPS and an Index value of 125.44 
would be 12.54 for the reduced-value Index LEAPS. The reduced-valued 
Index LEAPS will also be European-style and will be subject to the same 
rules that govern the trading of Index options, including sales 
practice rules, margin requirements and floor trading procedures. 
Pursuant to CBOE Rule 24.9, the strike price interval for the reduced-
value Index LEAPS will be no less than $2.50 instead of $5.00.

    \23\ See CBOE Rule 24.9(b).
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H. Position and Exercise Limits, Margin Requirements, and Trading Halts

    Exchange rules governing margin requirements,\24\ position and 
exercise limits,\25\ and trading halt procedures \26\ that are 
applicable to the trading of narrow-based index options will apply to 
options traded on the Index. The proposal further provides that, for 
purposes of determining whether given positions in full-value and 
reduced-value Index LEAPS comply with applicable position and exercise 
limits, positions in full-value and reduced-value Index LEAPS will be 
aggregated with positions in the regular Index options. For these 
purposes, ten reduced-value contracts will equal one full-value 
contract.

    \24\ Pursuant to CBOE Rule 24.11, the margin requirements for 
the Index options will be: (1) for short options positions, 100% of 
the current market value of the options contract plus 20% of the 
underlying aggregate Index value, less any out-of-the-money amount, 
with a minimum requirement of the options premium plus 10% of the 
underlying Index value; and (2) for long options positions, 100% of 
the options premium paid.
    \25\ Pursuant to CBOE Rules 24.4A and 24.5, respectively, the 
position and exercise limits for the Index options will be 10,500 
contracts, unless the Exchange determines, pursuant to such rules, 
that a lower limit is warranted.
    \26\ Pursuant to CBOE Rule 24.7, the trading on the CBOE of 
index options and Index LEAPS may be halted or suspended whenever 
trading in component securities whose weighted value represents more 
than 20% of the Index value are halted or suspended.
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I. Surveillance

    Surveillance procedures currently used to monitor trading in each 
of the Exchange's other index options will also be used to monitor 
trading in regular Index options and in full-value and reduced-value 
Index LEAPS. These procedures include complete access to trading 
activity in the shares of the securities comprising the Index. 

[[Page 35974]]
Further, the Intermarket Surveillance Group Agreement will be 
applicable to the trading of options on the Index.\27\

    \27\ The Intermarket Surveillance Group (``ISG'') was formed on 
July 14, 1983 to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. See Intermarket Surveillance Group 
Agreement, July 14, 1983. The most recent amendment to the ISG 
Agreement, which incorporates the original agreement and all 
amendments made thereafter, was signed by ISG members on January 29, 
1990. See Second Amendment to the Intermarket Surveillance Group 
Agreement, January 29, 1990. The members of the ISG are: the Amex; 
the Boston Stock Exchange, Inc.; the CBOE; the Chicago Stock 
Exchange, Inc.; the National Association of Securities Dealers, Inc. 
(``NASD''); the NYSE; the Pacific Stock Exchange, Inc.; and the 
Philadelphia Stock Exchange, Inc. Because of potential opportunities 
for trading abuses involving stock index futures, stock options, and 
the underlying stock and the need for greater sharing of 
surveillance information for these potential intermarket trading 
abuses, the major stock index futures exchanges (e.g., the Chicago 
Mercantile Exchange and the Chicago Board of Trade) joined the ISG 
as affiliate members in 1990.
III. Findings and Conclusions

    The Commission finds 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, the requirements of Section 6(b)(5).\28\ Specifically, the 
Commission finds that the trading of Latin 15 Index options, including 
full-value and reduced-value Index LEAPS, will serve to promote the 
public interest and help to remove impediments to a free and open 
securities market by providing investors with a means of hedging 
exposure to market risk associated with emerging Latin American market 
securities.\29\

    \28\ 15 U.S.C. Sec. 78f(b)(5) (1988).
    \29\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new option proposal upon a finding that 
the introduction of such new derivative instrument is in the public 
interest. Such a finding would be difficult for a derivative 
instrument that served no hedging or other economic function because 
any benefits that might be derived by market participants likely 
would be outweighed by the potential for manipulation, diminished 
public confidence in the integrity of the markets, and other valid 
regulatory concerns. In this regard, the trading of listed Index 
options and full-value and reduced-value Index LEAPS will provide 
investors with a hedging vehicle that should reflect the overall 
movement of Latin American market securities.
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    The trading of options on the Latin 15 Index, including full-value 
and reduced-value Index LEAPS, however, raises several issues related 
to index design, customer protection, surveillance, and market impact. 
The Commission believes, for the reasons discussed below, that the CBOE 
has adequately addressed these issues.

A. Index Design and Structure

    In light of the number of component stocks and overall 
capitalization of the Latin 15 Index, the Commission finds that it is 
appropriate to treat the Latin 15 Index as a narrow-based index under 
CBOE rules for purposes of applicable position and exercise limits, 
trading halt and suspension procedures, and margin treatment.\30\

    \30\ The reduced-value Latin 15 Index, which consists of the 
same component mutual fund components as the Index and is calculated 
by dividing the Index value by ten, is identical to the Latin 15 
Index.
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    The commission also finds that the large capitalizations, liquid 
markets, and relative weightings of the individual securities 
comprising the Index minimize the potential for manipulation of the 
Index. First, the securities comprising the Index are actively traded, 
with an average daily trading volume for all components for the period 
from September 1, 1994 through February 28, 1995, of approximately 
629,412 shares per day. Second, the market capitalizations of the 
components of the Index are large, ranging from a high of $10.58 
billion to a low of $77.17 million as of March 14, 1995, with the mean 
and median being $2.58 billion and $812.50 million, respectively. 
Third, although the Index is composed of only 15 securities, no 
particular component security or group of securities dominates the 
Index. Specifically, as of March 14, 1995, no component security 
contained in the Index accounted for more than 11.67% of the Index's 
total value and the five highest weighted securities in the Index 
accounted for 46.67% of the Index's value.
    Fourth, the proposed maintenance criteria will serve to ensure 
that: (1) the Index remains composed substantially of liquid, highly 
capitalized securities; and (2) the Index is not dominated by any one 
security that does not satisfy the Exchange's options listing criteria, 
any non-options eligible security held by one or more of the country 
funds represented in the Index, or non-options eligible securities from 
any one country held by one or more of the country funds represented in 
the Index. Specifically, in considering changes to the composition of 
the Index, 85% of the weight of the Index and 80% of the number of 
components in the Index must comply with the listing criteria for 
standardized options trading set forth in CBOE Rule 5.3 (for securities 
that are not then the subject of standardized options trading) and CBOE 
Rule 5.4 (for securities that are then the subject of standardized 
options trading).\31\ Additionally, the CBOE is required to review the 
composition of the Index at least semiannually to ensure that the Index 
continues to meet this 85%/80% criterion.

    \31\ See supra note 13. Additionally, the securities contained 
in the Index must be ``reported'' securities and must be traded on 
the Amex or the NYSE or must be Nasdaq/NM securities. The CBOE is 
also limited in its ability to change the number of components in 
the Index without having to obtain Commission approval. See supra 
notes 9 and 10.
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    Moreover, at least twice each year, based on the most recent 
Commission filings by the closed-end funds represented in the Index, 
the CBOE will review the holdings of each of the closed-end funds to 
determine whether: (1) Any security that is not eligible for 
standardized options trading and that is held by one or more country 
funds represented in the Index accounts, in aggregate, for more than 5% 
of the weight of the Index; or (2) securities from any one country that 
are not eligible for standardized options trading and that are held by 
one or more country funds represented in the Index account, in 
aggregate, for more than 25% of the weight of the Index. These 
maintenance standards will ensure that a non-options eligible security 
or group of such securities from a foreign country where the CBOE does 
not have a comprehensive surveillance sharing agreement will not 
account for a significant percentage of the weight of the Index.
    The CBOE will promptly notify the Commission staff at any time that 
the CBOE determines that the Index fails to satisfy any of the above 
maintenance criteria. Further, in such an event, the Exchange will not 
open for trading any additional series of Index options or Index LEAPS 
unless the Exchange determines that such failure is not significant, 
and the Commission staff affirmatively concurs in that determination, 
or unless the Commission specifically approves the continued listing of 
that class of Index options or Index LEAPS pursuant to a proposal filed 
in accordance with Section 19(b) of the Act.\32\

    \32\ See Amendment No. 1, supra note 4.
    For the above reasons, the Commission believes that these criteria 
minimize the potential for manipulation of the Index and eliminate 
domination concerns.

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated 

[[Page 35975]]
financial instruments, such as Latin 15 Index options, including full-
value and reduced-value Latin 15 LEAPS, can commence on a national 
securities exchange. The Commission notes that the trading of 
standardized exchange-traded options occurs in an environment that is 
designed to ensure, among other things, that: (1) the special risks of 
options are disclosed to public customers; (2) only investors capable 
of evaluating and bearing the risks of options trading are engaged in 
such trading; and (3) special compliance procedures are applicable to 
options accounts. Accordingly, because the Index options and Index 
LEAPS will be subject to the same regulatory regime as the other 
standardized index options currently traded on the CBOE, the Commission 
believes that adequate safeguards are in place to ensure the protection 
of investors in Latin 15 Index options and full-value and reduced-value 
Latin 15 Index LEAPS.

C. Surveillance

    The Commission believes that a surveillance sharing agreement 
between an exchange proposing to list a stock index derivative product 
and the exchange(s) trading the stocks underlying the derivative 
product is an important measure for surveillance of the derivative and 
underlying securities markets. Such agreements ensure the availability 
of information necessary to detect and deter potential manipulations 
and other trading abuses, thereby making the stock index product less 
readily susceptible to manipulation.\33\ In this regard, the Commission 
notes that the NYSE, which currently is the primary market for the vast 
majority of the Index's component securities, is a member of the 
ISG.\34\ The Commission believes that this arrangement ensures the 
availability of information necessary to detect and deter potential 
manipulations and other trading abuses, thereby making the Index 
options and full-value and reduced-value Index LEAPS less readily 
susceptible to manipulation.\35\

    \33\ See Securities Exchange Act Release No. 31243 (September 
28, 1992), 57 FR 45849 (October 5, 1992).
    \34\ See supra note 27.
    \34\ See, e.q., Securities Exchange Act Release No. 31243 
(September 28, 1992), 57 FR 45849 (October 5, 1992) (order approving 
the listing of index options and index LEAPS on the CBOE Biotech 
Index).
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    The Commission notes that the shares of the three closed-end 
country funds contained in the Index are not eligible for standardized 
options trading predominantly as a result of the lack of relevant 
market information sharing agreements between the CBOE and the home 
markets of the securities held by the funds.\36\ For several reasons, 
however, the Commission believes that including these closed-end 
country funds in the Index is appropriate. First, the NYSE is the 
primary market for each of the closed-end fund components in the Index. 
As a result, as noted above, the CBOE can obtain information regarding 
the trading of the closed-end fund securities through the ISG.\37\ 
Second, the maintenance criteria discussed above ensure, among other 
things, (1) that the Index will not become a surrogate for trading 
options on either the closed-end country funds represented in the Index 
or individual Latin American market securities held by those component 
country funds for which standardized options could not otherwise be 
traded, and (2) minimize the potential for manipulation of the value of 
the Index.\38\ The Commission also notes that these maintenance 
criteria ensure that if additional closed-end funds are added to the 
Index, the Index will be subject to the same standards that the 
Commission approved for the Exchange's Emerging Markets Index and the 
Emerging Asian Markets Index, both of which are composed solely of 
closed-end funds.\39\

    \36\ Options on the securities issued by international funds are 
eligible for standardized options trading where those securities 
meet or exceed the Exchange's established uniform options listing 
standards (see supra notes 10 and 11) and (1) the Exchange has a 
market information sharing agreement with the primary home exchange 
on which each of the foreign securities comprising the fund's 
portfolio trade, (2) the fund is classified as a diversified fund, 
as that term is defined by Section 5(b) of the Investment Company 
Act, 15 U.S.C. Sec. 80a-5(b), and the fund's portfolio is composed 
of securities from five or more countries, or (3) the listing of a 
particular international fund option is specifically approved by the 
Commission. See Securities Exchange Act Release No. 33068 (October 
19, 1993), 58 FR 55093 (October 25, 1993) (``Country Fund Approval 
Order'').
    \37\ See supra note 27.
    \38\ See supra Section III.A.
    \39\ See Securities Exchange Act Release Nos. 35303 (January 31, 
1995), 60 FR 7607, (February 8, 1995) (approval of CBOE Emerging 
Markets Index), and 35304 (January 31, 1995), 60 FR 7601, (February 
8, 1995) (approval of CBOE Emerging Asian Markets Index).
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    Finally, in contrast to other foreign securities products, 
international closed-end country funds hold portfolios of securities 
chosen by portfolio managers.\40\ Although the composition of the 
portfolio of each country fund represented in the Index is published on 
a semiannual basis, the securities held by each country fund 
represented in the Index can be changed at any time at the discretion 
of the portfolio managers, as long as their investment decisions are 
consistent with the stated investment objectives and policies of the 
particular closed-end fund. For these reasons, the Commission believes 
that it generally would be difficult for someone to use options on the 
Index to attempt a manipulation of the market for any particular 
closed-end country fund represented in the Index or to attempt a 
manipulation of the Index through a manipulation of the shares of one 
or more of the closed-end country funds contained in the Index.

    \40\ See Country Fund Approval Order, supra note 36.
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    The Commission notes that generally the only people who could 
attempt such a manipulation would be people who have access to 
``inside'' information about the composition of the portfolio of a 
closed-end fund and the trading activities of the country fund's 
portfolio manager.\41\ The Investment Advisers Act of 1940 (``Advisers 
Act''),\42\ and the rules promulgated thereunder, contain provisions 
designed to detect and deter certain advisory employees and affiliates 
from trading in any securities based on ``inside'' information about 
the investment decisions of a closed-end fund. Rule 204-2(a)(12) under 
the Advisers Act requires an investment adviser to make and keep 
accurate records of every transaction in a security in which the 
investment advisor or any advisory representative has a beneficial 
interest. Accordingly, the Commission believes that the Advisers Act 
gives it the authority to review the trading activities of anyone who 
is likely to have access to the information necessary to use options on 
the Index to attempt a manipulation of the relevant markets.

    \41\ Id.
    \42\ 15 U.S.C. 80b-1 et. seq. (1988).
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D. Market Impact

    The Commission believes that the listing and trading on the CBOE of 
Latin 15 Index options, including full-value and reduced-value Index 
LEAPS, will not adversely impact the markets for the securities 
contained in the Index.\43\ First, because of the ``modified equal-
dollar-weighting'' formula described above, no one security or group of 
securities represented in the Index will dominate the weight of the 
Index immediately following a quarterly rebalancing. Second, the 
maintenance criteria for the Index ensure that: (1) The Index will be 
substantially comprised of securities that satisfy the Exchange's 

[[Page 35976]]
listing standards for standardized options trading; and (2) individual 
securities that are not options eligible that are held by one or more 
of the country funds represented in the Index and non-options eligible 
securities from individual countries represented by those holdings will 
not dominate the Index.\44\ Third, because the securities comprising 
the Index must be ``reported securities'' as defined in Rule 11Aa3-1 of 
the Act, the components of the Index generally will be actively-traded 
and highly-capitalized. Fourth, the 10,500 contract position and 
exercise limits applicable to Index options and Index LEAPS will serve 
to minimize potential manipulation and market impact concerns.

    \43\ In addition, the CBOE has represented that the CBOE and the 
OPRA have the necessary systems capacity to support those new series 
of index options that would result from the introduction of Index 
options and Index LEAPS. See Memorandum from Joe Corrigan, Executive 
Director, OPRA, to Eileen Smith, Director, Product Development, 
Research Department, CBOE, dated March 17, 1995.
    \44\ See supra Section III.A.
    Lastly, the Commission believes that settling expiring Latin 15 
Index options, including full-value and reduced-value Index LEAPS, 
based on the opening prices of the component securities is consistent 
with the Act. As noted in other contexts, valuing options for exercise 
settlement on expiration based on opening prices rather than closing 
prices may help reduce adverse effects on markets for the closed-end 
fund securities underlying options on the Index.\45\

    \45\ See Securities Exchange Act Release No. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992). The Commission notes that prior 
to listing Index options or Index LEAPS (or any other product based 
on the Index), the CBOE will be required to review the Index and its 
components based on the then most recent semiannual reports filed 
with the Commission by each of the closed-end funds represented in 
the Index to ensure that the listing criteria discussed above are 
satisfied.
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    The Commission finds good cause for approving Amendment Nos. 1 and 
2 to the proposal prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 1 provides objective maintenance criteria 
which, for the reasons stated above, minimize the potential for 
manipulation of the Index and the securities comprising the Index. 
Further, as discussed above, the Commission believes that these 
maintenance criteria significantly strengthen the customer protection 
and surveillance aspects of the proposal, as originally proposed.\46\

    \46\ See supra note III.A.
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    Amendment No. 2 merely extends the proposed trading hours for 
options on the Index by five minutes (i.e., until 3:15 p.m., Chicago 
time). The Commission notes that this is consistent with CBOE Rule 24.6 
whereby trading until 3:10 p.m. is the exception to the general rule 
that index options traded at the CBOE trade until 3:15 p.m., Chicago 
time.
    Based on the above, the Commission finds good cause for approving 
Amendment Nos. 1 and 2 to the proposed rule change on an accelerated 
basis and believes that the proposal, as amended, is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 1 and 2. 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 at 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 the File Number SR-CBOE-95-20 and should be 
submitted by August 2, 1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\47\ that the proposed rule change (SR-CBOE-95-20), as amended, is 
approved.

    \47\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\48\

    \48\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-16996 Filed 7-11-95; 8:45 am]
BILLING CODE 8010-01-M