[Federal Register Volume 60, Number 166 (Monday, August 28, 1995)]
[Notices]
[Pages 44529-44530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21228]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36128; International Series Release No. 843; File No. 
SR-CBOE-95-41]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Relating to 
Warrants on the Japanese Export Stock Index

August 21, 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 August 7, 1995, the Chicago Board Options Exchange, Incorporated 
(``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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade warrants on the Japanese 
Export Stock Index (``Japan Export Index'' or ``Index''). The text of 
the proposed rule change is available at the Office of the Secretary, 
the Exchange, 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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (A), (B), and (C) below, of the most significant aspects of 
such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    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 Japan Export 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

    The Japan Export Index is an ``equal dollar weighted'' broad-based 
index comprised of the stocks of 40 of the largest Japanese export 
companies, as measured by total yen-denominated export revenue, listed 
on the Tokyo Stock Exchange (``TSE'').\3\ At the outset each of the 
component securities comprising the Index will be equally represented. 
Thus, on the day warrants on the Index are priced for sale to the 
investing public, each component security will represent 2.5% of the 
original Index value.

    \3\ The components of the Index are as follows: Aiwa; 
Bridgestone Corp.; Canon; Casio Computer; Citizen Watch. Fuji Heavy 
Inds.; Fuji Photo Film; Hitachi, Honda Motor; Isuzu Motor; Kawasaki 
Heavy Ind.; Kawasaki Steel; Komatsu Ltd.; Konica Corp.; Kyocera 
Corp.; Kyushu Matsushita; Matsu-Kotob Eltr.; Matsushita Elect I; 
Mazda Motor; Mitsubishi Heavy; Mitsubishi Motors; NEC; Nikon Corp.; 
Nintento; Nippon Steel; Nissan Motor; OKI Electric Ind.; Pioneer 
Eltr.; Ricoh Co. Ltd.; Sanyo Electric; Sega Enterprises; Sharp 
Corp.; Sony; Sumitomo Mtl. Ind.; Suzuki Motor; TDK Corportion; 
Toshiba; Toyota Motor; Victor Co. of Japan; and Yamaha Motor.
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    The Japan Export Index stocks are drawn from a broad base of 
industries and are representative of the industrial composition of the 
broader Japanese equity market. Business sector representation in the 
Index as of June 30, 1995, was as follows: (1) Autos and auto parts 
(25%) (10 Issues); (2) Electric Machinery--diversified (22.5%) (9 
issues); (3) Consumer Electronics (20%) (8 issues); (4) Iron and Steel 
(7.50%) (3 issues); (5) Precision instruments (7.5%) (3 issues); (6) 
Shipbuilding (5%) (2 issues); (7) Chemicals (5%) (2 issues); (8) 
Machinery (2.5%) (1 issue); (9) Computers and semiconductors (2.5%) (1 
issue); and (10) Services (2.5%) (1 issue).
    As of June 30, 1995, the CBOE represents that the 40 stocks 
contained in the Index range in market capitalization from $1.59 
billion to $74.76 billion. The median capitalization of the component 
securities in the Index was $7.6 billion. Total market capitalization 
for the Index was approximately $451 billion.\4\

    \4\ Based on the exchange rate of 85 yen/US$ 1 prevailing on 
June 30, 1995.
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Calculation

    The Index will be calculated by determining a multiplier such that 
each security will represent an equal percentage (2.5%) of the Index on 
the date the warrants are priced for initial sale to the public. The 
Index value for any day will equal the sum of the products of the most 
recently available market prices and the applicable multipliers for the 
component securities. The Index value will be set equal to 100 on the 
date the warrants are priced for initial offering to the public. In the 
event that a security does not trade on a given day, the previous day's 
last sale price is used for purposes of calculating the Index. In the 
event that a given security has not traded for more than one day, then 
the last sale price on the last day on which the security was traded 
will be used.

Maintenance

    The Index will be calculated by the Exchange based on closing 
prices on the TSE each day and will be disseminated before the opening 
of trading via Options Price Reporting Authority. The Index will be 
rebalanced on the last trading day of the year such that the components 
again represent an equal percentage (2.5%) of the Index. The components 
of the Index will remain unchanged unless it becomes necessary to 
remove a component security due to a merger, takeover, or some other 
event where the issuer of the component security is not the surviving 
entity. If a component security is removed, another security will be 
added to preserve the character of the Index. To ensure continuity in 
the Index's value, the index divisor will be adjusted to reflect, among 
other things, certain rights issuances, stock splits, rebalancing, and 
component security changes.

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'' would receive 
payment in U.S. dollars to the extent that the index value has declined 
below a pre-stated cash settlement value. Conversely, upon exercise, 
the holder of a warrant structured as a ``call'' would 

[[Page 44530]]
receive payment in U.S. dollars to the extent that the index value has 
increased above the prestated cash settlement value. Warrants that are 
``out-of-the-money'' at the time of expiration will expire worthless.

Warrant Listing Standards and Customer Safeguards

    The Exchange has established listing standards for index warrants 
which are contained in CBOE Rule 31.5E.\5\ The Exchange also has 
established certain sales practice rules for the trading of index 
warrants which are contained in Chapter IX of the Exchange's Rules. The 
Exchange represents that the listing and trading of index warrants on 
the Japan Export Index will be subject to these guidelines and rules.

    \5\ Currently, Rule 31.5E provides that: (1) Issues of warrants 
must substantially exceed the Exchange's criteria for the listing of 
equity issues under CBOE Rule 31.5A and have assets in excess of 
$100 million; (2) particular warrant issues must have at least (i) 
one million warrants outstanding, (ii) a principal amount/aggregate 
market value of $4 million, and (iii) 400 public holders; and (3) 
warrant issues must have a term of one to five years from the date 
of issuance.
    The Exchange has submitted to the Commission a proposed rule change 
to amend its listing criteria for stock index warrants.\6\ The Exchange 
represents that the Generic Warrant Listing Standards will be 
applicable to the listing and trading of currency and index warrants 
generally, including Japan Export Index warrants. If the listing of 
Japan Export Index warrants is approved prior to Commission approval of 
the Generic Warrant Listing Standards, the CBOE represents that it will 
require that (1) these warrants be sold only to accounts approved for 
the trading of standardized options\7\ and (2) index options margin 
will be applied.\8\ Finally, prior to the commencement of trading, the 
Exchange will distribute a circular to its membership calling attention 
to certain compliance responsibilities when handling transactions in 
the Japan Export Index warrants.\9\

    \6\ These proposed standards will govern all aspects of the 
listing and trading of index warrants, including, position and 
exercise limits, reportable positions, automatic exercise, 
settlement, margin, and notification of early exercise. See 
Securities Exchange Act Release No. 35178 (December 29, 1994), 60 FR 
2409 (January 9, 1995) (notice of File No. SR-CBOE-94-34) (``Generic 
Warrant Listing Standards'').
    \7\ See CBOE Rule 9.7.
    \8\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and John Ayanian, 
Attorney, Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Market Regulation''), Commission, on August 17, 1995.
    \9\ Id.
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Surveillance

    The Exchange expects to apply its existing index warrant 
surveillance procedures to Japan Export Index warrants. The Exchange 
has a market surveillance agreement with the Tokyo Stock Exchange 
(``TSE'') which was obtained in connection with CBOE trading of options 
of the Nikkei 300 Index (``Nikkei 300''). Approximately 73% of the 
stocks in the Index are also components of the Nikkei 300 Index. The 
Exchange notes that the TSE is under the regulatory oversight of the 
Ministry of Finance (``MOF'') and believes that the ongoing oversight 
of all securities trading activity on the TSE by the MOF will help to 
ensure that trading of the component securities included in the Japan 
Export Index will be appropriately monitored. Finally, the Exchange is 
aware of a Memorandum of Understanding (``MOU'') between the Commission 
and the MOF that provides a framework for mutual assistance in 
investigatory and regulatory matters.
    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, in particular, in that it is designed to 
facilitate transactions in securities and to remove impediments to and 
perfect the mechanism of a free and open market and facilitate 
transactions in securities because the Index warrants will provide 
investors a means by which to hedge existing investments in the 
Japanese equity market.

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

    The Exchange 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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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, 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. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to SR-CBOE-95-41 and should be submitted by 
September 18, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\

    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21228 Filed 8-25-95; 8:45 am]
BILLING CODE 8010-01-M