[Federal Register Volume 60, Number 166 (Monday, August 28, 1995)]
[Notices]
[Pages 44522-44524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21271]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36121; International Series Release No. 840; File No. 
SR-CBOE-95-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing and Trading of Warrants Based on the CBOE Germany 25 Index

August 18, 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 4, 1995, the Chicago Board Options Exchange (``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 CBOE. 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 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange hereby proposes to list and trade warrants based on 
the CBOE Germany 25 Index (``Germany 25 Index'' or ``Index'') pursuant 
to CBOE Rule 31.5E (``Index Warrants''). The Exchange represents that 
the Index is broad-based. 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 warrants based on the Germany 25 Index. The Exchange 
represents that it is permitted to list and trade index warrants based 
on certain foreign broad-based stock indexes pursuant to CBOE Rule 
31.5E.\3\ The Exchange is now proposing to list and trade Index 
Warrants. According to the Exchange, the listing and trading of 
warrants on the Germany 25 Index will comply in all respects with CBOE 
Rule 31.5E.

    \3\ Currently, Rule 31.5E provides that: (1) Issuers 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.
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Index Design \4\
    The Germany 25 Index is a capitalization-weighted index consisting 
of 25 of the largest capitalized German equities traded on the 
Frankfurt Stock Exchange (``FSE''). The Exchange represents that Index 
Warrants will provide investors with the ability to gain investment 
exposure to one of the largest and most industrialized countries in 
Europe and to hedge existing investments in German securities.

    \4\ See File No. SR-CBOE-95-39 (CBOE proposal to list options 
based on the Germany 25 Index).
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    The 25 stocks comprising the Germany 25 Index were selected by the 
CBOE for their high market capitalization and high degree of liquidity. 
According to the Exchange, the Index stocks are drawn from a broad base 
of industries and are representative of the industrial composition of 
the broader German equity market. Specifically, the Index components 
are the top 25 German stocks by market capitalization excluding: (1) 
Stocks with average daily volume less than 50,000 shares per day over 
the past six months; and (2) preferred stock of an issuer if that 
issuer also has publicly-traded common stock. The Index will be 
reviewed annually by the CBOE at the end of May in each year and any 
composition changes resulting from that review will be implemented 
after the June expiration in that year.
    The Germany 25 Index is weighted by the capitalization (market 
value) of the component stocks. The capitalization of a particular 
stock in the Index is calculated by multiplying the listed shares 
(including common, preferred, and treasury shares) by the price of the 
stock.\5\

    \5\ The Commission notes that this varies from the method used 
to calculate the values of domestic capitalization-weighted indexes, 
such as the S&P 100 Index. For such domestic indexes, values are 
determined based solely on the outstanding shares of common stock of 
each component in the indexes.
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    On June 30, 1995, the 25 stocks in the Index ranged in 
capitalization from DM 3.656 billion ($2.648 billion) \6\ to DM 51.642 
billion ($37.408 billion). The total capitalization of the stocks in 
the index on that date was DM 399.1 billion ($289.1 billion); the mean 
capitalization was DM 15.96 billion ($11.564 billion) and the median 
capitalization was DM 11.144 billion ($8.072 billion). The largest 
stock by capitalization (Allianz 

[[Page 44523]]
AG Holdings) accounted for 12.94% of the total weighting of the Index, 
while the smallest (Kaufhof) accounted for 0.92%. The top 5 stocks 
accounted for 44.56% of the total weighting on that date.

    \6\ The CBOE represents that dollar values used herein are based 
on a German mark/U.S. dollar exchange rate of 1.3805 marks per U.S. 
dollar prevailing on June 30, 1995.
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    For the period from January 1, 1995 through June 30, 1995, average 
daily volume in Germany 25 Index stocks ranged from a low of 
approximately 87,629 shares to a high of 2.53 million shares traded per 
day, with a mean daily trading volume for all the stocks in the Index 
during that period of 523,501 shares traded per day.
    The Exchange represents that the Index is composed of ten (10) 
broad industry groupings, such as chemicals, automobile and insurance 
companies, among others, which reflect the industry composition of the 
German equity market.
Calculation
    The CBOE states that the Germany 25 Index will reflect changes in 
the capitalization of the component stocks relative to the 
capitalization on a base date. The base date for the Index is June 30, 
1995, at which time the Index was given a value of 200 by the CBOE. The 
Index value of 200 was reached by multiplying the price of each stock 
by the number of listed shares,\7\ obtaining the sum of these values 
for all component stocks, and then dividing by a divisor determined to 
give the Index a value of 200. The CBOE states that the Germany 25 
Index will be calculated by CBOE or its designee based on the most 
recent closing prices of the component stocks as reported by the FSE.

    \7\ See supra note 5 and accompanying text.
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Maintenance
    The Index will be maintained and calculated by the Exchange. To 
maintain continuity of the Index, the Exchange will adjust the Index to 
reflect certain events relating to the component stocks. For example, 
the Exchange will adjust the Index divisor to reflect cash dividends 
paid on the component securities. The Exchange will make this 
adjustment because German companies usually pay their dividends only 
once per year (generally in May or June). If not adjusted, the annual 
dividend payment would result in a significant drop in the Index value 
at the time when the dividends are paid. The divisor will be adjusted 
immediately prior to each ex-dividend date so that the Index level will 
not be affected by the dividend payment. A similar adjustment will be 
applied when a company issues new shares for which the shareholders 
have preemptive rights, or when other intra-year events, such as 
mergers and spinoffs, occur.
    Index replacements, other than those described above, will only be 
made if a component must be removed from the Index because of a merger 
or takeover. In that case, the next eligible component will be added, 
i.e., the German security with the highest market capitalization not 
then included in the Index that satisfies the criteria set forth above.
Index Warrant Trading
    The proposed Index 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 on their expiration date (if not exercisable prior to such date). 
The holder of an Index 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, holders of an 
Index Warrant structured as a ``call'' would, upon exercise or at 
expiration, receive payment in U.S. dollars to the extent that the 
Index value has increased above the pre-stated cash settlement value. 
If ``out-of-the-money'' at the time of expiration, the Index Warrants 
would expire worthless.
    Currently,\8\ the trading hours of the Exchange and the FSE do not 
overlap.\9\ The Exchange, therefore will disseminate the value of the 
Index based on the most recent closing prices of the component stocks 
as reported by the FSE. After the close of the FSE, however, trading 
continues in the 25 stocks comprising the Index on the FSE's Integrated 
Stock Exchange Trading and Information System (``IBIS'').\10\ The 
trading hours of IBIS and the Exchange currently overlap from the 
opening of trading at the CBOE until 10:00 a.m., Chicago time. During 
this period, the Exchange will calculate and disseminate an 
``indicative'' Germany 25 Index level based on the most recent prices 
of the component stocks as reported by IBIS.\11\ When trading on IBIS 
has concluded (10:00 a.m. Chicago time), the Exchange will disseminate 
the last ``indicative'' Index level. To avoid any confusion, the 
``indicative'' Index level will have a different ticker symbol from the 
actual Index level.

    \8\ See supra note 4. Telephone conversation between Eileen 
Smith, Director, Product Development, Research Department, CBOE, and 
Brad Ritter, Senior Counsel, OMS, Division, Commission, on August 
17, 1995.
    \9\ The FSE's trading hours are from 10:30 a.m. to 1:30 p.m., 
Frankfurt time (3:30 a.m. to 6:30 a.m., Chicago time).
    \10\ According to the Exchange, the Deutsche Borse AG, the 
holding company for the FSE, states 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 (1:30 a.m. to 10:00 a.m., 
Chicago time). The CBOE represents that IBIS, as part of the FSE, is 
subject to the same rules and regulations as floor trading on the 
FSE. According to the Exchange, IBIS began operating in April, 1991.
    \11\ The Exchange intends to calculate the ``indicative'' Index 
with the same method of calculation as described above for the 
actual Index.
Warrant Listing Standards and Customer Safeguards
    The Exchange has established generic listing standards for index 
warrants which are contained in CBOE Rule 31.5E.\12\ 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 Germany 25 Index will be subject to these guidelines and rules.

    \12\ See supra note 3.
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    The Exchange has submitted to the Commission a proposed rule change 
to amend its listing criteria for stock index warrants.\13\ The 
Exchange represents that the Generic Warrant Listing Standards will be 
applicable to the listing and trading of currency and index warrants 
generally, including Germany 25 Index warrants. If the listing of 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\14\ and (2) index options margin will 
be applied.\15\ 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 
Index Warrants.\16\

    \13\ 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'').
    \14\ See CBOE Rule 9.7.
    \15\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and Brad Ritter, 
Senior Counsel, OMS, Division, Commission, on August 17, 1995.
    \16\ Id.
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Surveillance
    The Exchange expects to apply its existing index warrant 
surveillance procedures to Index Warrants. In 

[[Page 44524]]
addition, the CBOE states that the German legislature recently adopted 
new laws regarding insider trading that also provide for the creation 
of an independent regulatory authority.\17\ The Exchange understands 
that these developments will facilitate the effective coordination 
between the Commission and the appropriate German regulatory 
authorities of warrant trading on the Germany 25 Index because they 
will enhance the surveillance of trading in the stocks comprising the 
Index.\18\ In addition, the Exchange will continue to pursue its own 
independent surveillance sharing agreement with the Deutsche Borse AG 
(the holding company that owns the FSE) and/or the FSE.\19\

    \17\ The Commission notes that this new regulatory body, the 
Bundesaufsichtsamt fur den Wertpapierhandel, was established in 
January 1995.
    \18\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and Brad Ritter, 
Senior Counsel, OMS, Division, Commission, on August 8, 1995.
    \19\ Id.
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    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,\20\ in particular, in that it is designed 
to permit trading in warrants based on the Germany 25 Index pursuant to 
rules designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and to protect investors and the public 
interest.

    \20\ 15 U.S.C. 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, 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 CBOE. All 
submissions should refer to File No. SR-CBOE-95-40 and should be 
submitted by September 18, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\

    \21\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21271 Filed 8-25-95; 8:45 am]
BILLING CODE 8010-01-M