[Federal Register Volume 60, Number 166 (Monday, August 28, 1995)]
[Notices]
[Pages 44526-44529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21273]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36125; International Series Release No. 841 File No. 
SR-CBOE-95-39]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing and Trading of Options and Long-Term Options on the CBOE 
Germany 25 Index and Long-Term Options on a Reduced-Value 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 amend certain of its rules to 
provide for the listing and trading on the Exchange of options on the 
CBOE Germany 25 Index (``Germany 25 Index'' or ``Index''). 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 

[[Page 44527]]
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 cash-settled, European-style \3\ stock index options 
on the Germany 25 Index. The Index is a capitalization-weighted index 
of 25 German blue-chip equities listed on the Frankfurt Stock Exchange 
(``FSE''). The Exchange represents that options on the 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.

    \3\ Europen-style options may only be exercised during a 
specified period before the options expire.
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Index Design
    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 
vlaue) 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.\4\

    \4\ 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) \5\ 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 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.

    \5\ The CBO 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.
    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,\6\ 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 German 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.

    \6\ See supra note 4 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 Option Trading
    In addition to regular Index options, the Exchange may provide for 
the listing of long-term index option series (``LEAPS'') and reduced-
value LEAPS on the Index (``Index LEAPS'').
    For reduced-value Index LEAPS, the underlying value will be 
computed at one-tenth of the Index level. The current and closing index 
value of any such reduced-value Index LEAPs will, after such initial 
computation, be rounded to the nearest one-hundredth.
    The trading hours for options on the Index will be from 8 a.m. to 
3:15 p.m., Chicago time. Currently, the trading hours of the Exchange 
and the FSE do not overlap.\7\ 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'').\8\ The trading hours of IBIS and the Exchange 
currently overlap for the two hours period between 8:00 a.m. and 10:00 
a.m., Chicago time. During this two hour 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.\9\ 

[[Page 44528]]
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.

    \7\ 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).
    \8\ According to the Exchange, the Deutsche Borse AG, the 
holding company for the FSE, states that IBIS is a screenbased 
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.
    \9\ The Exchange intends to calculate the ``indicative'' Index 
with the same method of calculation as described above for the 
actual Index.
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    The option premium values will be quoted in U.S. dollars and, 
therefore, trading accounts will be denominated in U.S. dollars. For 
strike prices under $200, the Exchange reserves the right to list 
series in 2\1/2\ point intervals.
Surveillance
    The Exchange expects to apply its existing index options 
surveillance procedures to Index options. In 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.\10\ The Exchange understands that these developments will 
facilitate the effective coordination between the Commission and the 
appropriate German regulatory authority of option trading on the 
Germany 25 Index because they will enhance the surveillance of trading 
in the stocks comprising the Index. In addition, the Exchange will 
continue to pursue its own independent agreement with the Deutsche 
Borse AG (the holding company that owns the FSE) and/or the FSE.\11\

    \10\ The Commission notes that this new regulatory body, the 
Bundesaufsichtsamt fur den Wertpapierhandel, was established in 
January 1995.
    \11\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and Brad Ritter, 
Senior Counsel, OMS, Division, Commission, on August 8, 1995.
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, unless a holiday occurs. The 
exercise settlement value of the Index at option expiration will be 
calculated by the Exchange on the day following the last day of trading 
in the expiring contracts. The exercise settlement value of Index 
options at expiration will be determined at the close of the regular 
Friday trading sessions at the FSE in Germany, ordinarily at 1:30 p.m., 
Frankfurt time (6:30 a.m., Chicago time), i.e., values of component 
stocks disseminated through IBIS will not be used in calculating the 
settlement values for Index options or Index LEAPS.\12\ If an Index 
stock does not open for trading at the FSE, the last available price on 
the FSE of the stock will be used in the calculation of the value of 
the Index. When expirations are moved in accordance with Exchange 
holidays, such as when the 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 close of the regular Thursday trading sessions at 
the FSE in Germany even if the FSE is open on Friday. If the FSE will 
be closed on the Friday before expiration but the CBOE will not, the 
last trading day for expiring Index options and Index LEAPS will be 
Wednesday.\13\

    \12\ Id.
    \13\ In this circumstance, the CBOE will issue a notice to 
members informing them that the last trading day for Index options 
and Index LEAPS will be on Wednesday even though the CBOE will be 
open on expiration Friday. Id.
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Position Limits
    The Exchange proposes to establish position limits for options on 
the Index of 50,000 contracts on either side of the market, with no 
more than 30,000 contracts in the series with the nearest expiration 
month. The Exchange represents that these limits are roughly 
equivalent, in dollar terms, to the limits applicable to options on 
other approved broad-based indexes.
Exchange Rules Applicable
    Except as modified herein, the rules in Chapter XXIV of the CBOE's 
rules will be applicable to Germany 25 Index options, including Index 
LEAPS.
    The Exchange states that it has the necessary systems capacity to 
support new series that would result from the introduction of Germany 
25 Index options. The CBOE also states that it has been informed that 
the Options Price Reporting Authority (``OPRA'') has the capacity to 
support such new series.\14\

    \14\ See Letter from Joe Corrigan, Executive Director, OPRA, to 
Eileen Smith, Director, Product Development, Research Department, 
CBOE, dated November 21, 1994.
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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,\15\ in particular, in that it is designed 
to permit trading in options based on the Germany 25 Index pursuant to 
rules designed to prevent fraudulent and manipulative acts and 
practices and to promote just and equitable principles of trade, and 
thereby will provide investors with the ability to invest in options 
based on an additional index.

    \15\ 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-95-39 and should be 
submitted by September 18, 1995.


[[Page 44529]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21273 Filed 8-25-95; 8:45 am]
BILLING CODE 8010-01-M