[Federal Register Volume 60, Number 179 (Friday, September 15, 1995)]
[Notices]
[Pages 47970-47972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22965]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36207; File No. SR-CBOE-95-38]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 to the Proposed Rule Change by 
the Chicago Board Options Exchange, Inc., Relating to the Listing of 
Warrants Based on the CBOE Technology 50 Index

September 8, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 1, 1995, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The CBOE subsequently filed 
Amendment No. 1 to the proposed rule change on August 2, 1995,\2\ 
Amendment No. 2 on August 3, 1995,\3\ and Amendment No. 3 on August 29, 
1995.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ As a result of the Commission's approval of the Exchange's 
Generic Warrant Listing Standards (as defined herein), Amendment No. 
1 has been rendered moot.
    \3\ In Amendment No. 2, as discussed herein, the CBOE amended 
certain of the objective standards set forth in the section of its 
proposal entitled ``Classification of the Index as Broad-Based.'' 
See Letter from Timothy Thompson, Senior Attorney, Legal Department, 
CBOE, to Michael Walinskas, Branch Chief, Office of Market 
Supervision (``OMS''), Division of Market Regulation (``Division''), 
Commission, dated August 3, 1995 (``Amendment No. 2'').
    \4\ In Amendment No. 3, as discussed herein, the Exchange 
amended the composition of the Index to, in the Exchange's opinion, 
provide better balance between the technology industry subsectors 
represented in the Index. See Letter from William Speth, Jr., Senior 
Research Analyst, Research Department, CBOE, to Brad Ritter, Senior 
Counsel, OMS, Division, Commission, dated August 29, 1995 
(``Amendment No. 3'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes list and trade warrants on the CBOE 
Technology 50 Index (``Tech 50 Index'' or ``Index''), which the 
Exchange represents is a broad-based 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 purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled index warrants based on the Tech 50 
Index (``Index Warrants''). On August 29, 1995, the Commission approved 
the Exchange's proposal to amend its standards for the listing and 
trading of currency warrants and index warrants (``Generic Warrant 
Listing Standards'').\5\ The Exchange states that the listing and 
trading of warrants based on the Tech 50 Index will comply in all 
respects with the Generic Warrant Listing Standards.

    \5\ See Securities Exchange Act Release No. 36169 (August 29, 
1995).
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Index Design
    The Exchange represents that the Tech 50 Index is a broad-based 
index comprised of stocks of 50 of the largest domestic technology 
companies, representing various industries within that general economic 
category. The Index was designed by and will be maintained by the CBOE. 
The Index is price-weighted and reflects changes in the prices of the 
component stocks relative to the Index base date, January 3, 1995, when 
the Index was set to an initial level of 200.00.
    On August 15, 1995,\6\ the 50 stocks in the Index ranged in market 
capitalization from a low of approximately $829.28 million to a high of 
approximately $82.47 billion. Total market capitalization for the Index 
on August 15, 1995, was approximately $578.53 billion. The highest 
weighted stock in the Index on that date accounted for 5.62% of the 
weight of the Index and the lowest weighted security in the Index 
accounted for 0.68% of the weight of the Index. In aggregate, the five 
highest weighted components on that date accounted for 21.45% of the 
weight of the Index. Currently, the Exchange represents that all of the 
component stocks are eligible for the listing of standardized options 
on the Exchange pursuant to CBOE Rule 5.3.

    \6\ See Amendment No. 3, supra note 4.
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    As of August 15, 1995, the Exchange represents that the industry 
breakdown for the Index, by weight, was as follows: (1) computer 
hardware--8.20%; (2) computer software--14.63%; (3) computers systems 
and services--11.12%; (4) integrated circuit components--10.43%; (5) 
semiconductors--12.66%; (6) precision instrumentation--3.15%; (7) 
medical technology--8.74%; (8) network and server systems--10.14%; (9) 
telecommunication components--12.62%; and (10) telecommunications--
8.31%.\7\

    \7\ Id.
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Warrant Terms
    Index Warrants will be direct obligations of the issuing entity and 
will be cash-settled in U.S. dollars. Upon exercise (or at the warrant 
expiration date in the case of warrants with European-style exercise), 
the holder of an Index Warrant structured as a ``put'' will receive 
payment in U.S. dollars to the extent that the value of the Index has 
declined below a pre-stated cash settlement value. Conversely, upon 
exercise (or at the warrant expiration date in the case of warrants 
with European-style exercise), the holder of an Index Warrant 
structures as a ``call'' will receive payment in U.S. dollars to the 
extent that the Index value has increased above a pre-stated cash 
settlement value. Index Warrants that are out-of-the-money at the time 
of expiration will expire worthless.

[[Page 47971]]

Maintenance of the Index
    The Index will be maintained by the Exchange and will be reviewed 
monthly.\8\ The CBOE may change the composition of the Index at any 
time to reflect changes affecting the components of the Index or the 
various technology industry subsectors represented in the Index. If it 
becomes necessary to remove a stock from the Index (e.g., because of a 
takeover or merger), the CBOE will take into account the 
capitalization, liquidity, volatility, and name recognition of any 
proposed replacement security.\9\

    \8\ These reviews are mainly for the purpose of determining 
whether to make composition changes to the Index. These monthly 
reviews generally are not for the purpose of applying the proposed 
objective standards for ensuring that the Index remains broad-based 
(see ``Classification of the Index as Broad-Based,'' infra). 
Telephone conversation among Timothy Thompson, Senior Attorney, 
Legal Department, CBOE, Eileen Smith, Director, Product Department, 
Research Department, CBOE, and Brad Ritter, Senior Counsel, OMS, 
Division, Commission, on August 3, 1995 (``August 3 Conversation'').
    \9\ Whenever a new component is added to the Index, the CBOE 
will apply those objective standards proposed for ensuring that the 
Index remains broad-based (see ``Classification of the Index as 
Broad-Based,'' infra) that could be affected by the addition of a 
new component security to the Index. Telephone conversation between 
Timothy Thompson, Senior Attorney, Legal Department, CBOE, and Brad 
Ritter, Senior Counsel, OMS, Division, Commission, on August 4, 1995 
(``August 4 Conversation'').
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    The Exchange intends to maintain the Index with 50 components, 
however, the Exchange may increase the number of components in the 
Index by up to 33%, i.e., 66 stocks.\10\

    \10\ The Commission notes that the Exchange will be required to 
distribute a circular to members notifying them of any change in the 
components of the Index. Further, if the Exchange determines to 
maintain the Index with some number of components other than 50, the 
Exchange will be required to change the name of the Index. In such 
an event, the Exchange should immediately notify the Commission to 
determine whether a rule filing pursuant to Section 19(b) of the Act 
will be required.
Calculation and Dissemination of the Value of the Index
    The Index value will be calculated by the CBOE or its designee on a 
real-time bases using last-sale prices, and will be publicly 
disseminated \11\ every 15 seconds. If a component stock is not 
currently being traded, the most recent price at which the stock traded 
will be used in the Index value calculation. The value of the Index as 
of the close of trading on July 17, 1995, was 335.10.

    \11\ See August 3 Conversation, supra note 8.
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    The Index is price-weighted and reflects changes in the prices of 
the component stocks relative to the base date of January 3, 1995, when 
the Index was set to an initial value of 200.00. Specifically, the 
Index value is calculated by adding the prices of the component stocks 
and then dividing this sum by the Index divisor.\12\ The Index divisor 
is adjusted to reflect non-market changes in the prices of the 
component securities as well as changes in the composition of the 
Index. Changes that may result in divisor changes include, but are not 
limited to, stock splits and dividends (other than ordinary cash 
dividends),\13\ spin-offs, certain rights issuances, and mergers and 
acquisitions.

    \12\ As of August 15, 1995, the share prices of the Index 
components ranged from a high of $158.13 to a low of $19.00. See 
Amendment No. 3, supra note 4.
    \13\ See August 3 Conversation, supra note 8.
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Classification of the Index as Broad-Based \14\
    The  CBOE has designed the Index to meet certain objective criteria 
which it believes are appropriate to classify the Index as broad-based. 
To ensure that the Index remains representative of a broad spectrum of 
the various high technology industries and that stocks with low trading 
volumes are not included in the Index, the Exchange chose the current 
components and will maintain the Index according to the following 
guidelines: (1) Each underlying security selected for inclusion in the 
Index must have an average daily trading volume of at least 75,000 
shares during the preceding six months; (2) each underlying security 
included in the Index must maintain an average daily trading volume of 
at least 50,000 shares during the preceding six months; \15\ (3) no 
underlying security will represent more than 15% of the total weight of 
the Index; (4) the five most heavily weighted securities in the Index 
will not represent more than 40% of the total weight of the Index; (5) 
the Index will be comprised of at least ten technology industry 
subsectors representing a total of no less than 50 underlying 
securities; and (6) at least 75% of the total weight of the Index will 
be represented by underlying securities that are eligible for the 
listing of standardized options pursuant to CBOE Rule 5.3. The Exchange 
will conduct semi-annual reviews of the underlying securities included 
in the Index to assure that the Index continues to meet the standards 
set forth above. The Exchange represents that the above guidelines are 
similar to the requirements set forth in Interpretation .01 to Rule 7.3 
of the Pacific Stock Exchange (``PSE'') regarding the designation of 
the PSE's High Technology Index as a broad-based index for purposes of 
the trading of standardized options.

    \14\ See Amendment No. 2, supra note 3.
    \15\ See August 4 Conversation, supra note 9.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act in general and with Section 6(b)(5) in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation with persons engaged in 
facilitating and clearing transactions in securities, to 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.

(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, 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 

[[Page 47972]]
provisions of 5 U.S.C. Sec. 552, will be available for inspection and 
copying at the Commission's Public Reference Section, 450 Fifth Street, 
NW., Washington, DC 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-95-38 and should be submitted by 
October 6, 1995.

    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. 95-22965 Filed 9-14-95; 8:45 am]
BILLING CODE 8010-01-M