[Federal Register Volume 60, Number 211 (Wednesday, November 1, 1995)]
[Notices]
[Pages 55620-55623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27003]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36415; International Series Release No. 877; File No. 
SR-CBOE-95-45]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change Relating to the Listing and 
Trading of Options on the CBOE Mexico 30 Index

October 25, 1995.
    On August 21, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade options on the 
CBOE Mexico 30 Index (``Mexico 30 Index'' or ``Index''), a broad-based, 
modified capitalization weighted index comprised of thirty Mexican 
stocks. On August 25, 1995, the CBOE submitted Amendment No. 1 to the 
proposal to establish additional Index maintenance criteria.\3\ Notice 
of the proposed rule change and Amendment No. 1 thereto appeared in the 
Federal Register on September 1, 1995.\4\ No comments were received on 
the proposal. This order approves the proposal, as amended.

    \1\15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).
    \2\17 CFR 240.19b-4 (1994).
    \3\See Letter from Eileen Smith, CBOE, to Steve Youhn, SEC, 
dated August 25, 1995.
    \4\See Securities Exchange Act Release No. 36160 (Aug. 28, 
1995), 60 FR 45755.
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I. Description of the Proposal

    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style stock index options on 
the Mexico 30 Index.\5\ The Index is comprised of 30 representative 
stocks traded on the Mexican Stock Exchange (``Bolsa'').\6\ The CBOE 
represents that the Index is deemed to be a broad-based index under 
Rule 24.1(i)(1).

    \5\A European-style option may only be exercised during a 
specified period before expiration.
    \6\The components of the Index are Alfa SA-A; Apasco SA; Grupo 
Casa Autrey; Banacci-B; Grupo Carso-A1; Controla Com M-B; Cemex SA-
B; Cifra SA-C; Desc SA-B; Empresas Moderna-A; Fomento Econ M-B; 
Grupo Embotelladoro Mexico; Grupo Financiero Bancomer-B; Grupo 
Financiero Serfin-B; Grupo Gigante; Grupo Modelo-C; Grupo Mexico-B; 
Grupo Tribasa-CPO; Hylsamex SA-BCP; Empresas ICA; Iusacell; 
Kimberly-Clark M-A; Coca-Cola Femsa; Grupo Industrial Maseca-B; 
Grupo Sidek-B; Tubos de Acero; Telefonos de Mexico-L; Tolmex SA-B2; 
Grupo Telev-CPO; and Vitro SA.
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A. Index Design

    The Index was designed by and is maintained by the CBOE and the 
Chicago Mercantile Exchange (``CME''). CBOE represents that the 30 
stocks comprising the Index were selected for their high market 
capitalization and their high degree of liquidity, and further believes 
that they are representative of the industrial composition of the 
broader Mexican equity market. The Mexico 30 Index is composed of 15 
broad industry groups, including building materials, diversified 
holding companies, telecommunications, mining and beverages.
    The Index is weighted by the market capitalization of the component 
stocks. However, the CBOE will adjust the Index on a semi-annual basis 
(occurring after the close on expiration Fridays in December and June), 
if necessary, to ensure that no single component shall have a weight in 
the Index greater than 25%, and that the top three weighted component 
stocks in the Index do not account for more than 45% of the weight of 
the Index.\7\ For example, on June 16, 1995, the most recent review 
date, Telefonos de Mexico (``TMX'') would have had a weight of 30.41% 
of the Index. To reduce TMX's weight, the Exchange reduced the number 
of outstanding TMX shares used in the calculation of the Index from 
8.0375 billion to 6.1303 billion. As of July 31, 1995, TMX represented 
23.61% of the Index value.

    \7\See Amendment No. 1. As of July 31, 1995, the top three 
stocks represented 43.6% of the weight of the Index.
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    The average daily capitalization of the Index for the year ended 
July 31, 1995 was $58.2 billion.\8\ The median capitalization of the 
stocks in the Index on July 31, 1995, was 4.507 billion pesos ($737 
million at the exchange rate of 6.115 pesos per dollar prevailing on 
July 31, 1995). The average market capitalization of these stocks was 
$1.54 billion on the same date (using the same rate of exchange). The 
individual market capitalization of these stocks ranged from $156 
million (Grupo Sidek-B) to $13.3 billion (TMX) on the same date. The 
largest stock accounted for 23.61% of the Index, while the smallest 
accounted for 0.36%. The top five stocks in the Index by weight 
accounted for 55.02% of the Index. The average daily trading volume in 
the component securities for the period from February 1995 through July 
1995, ranged from a low of approximately 9,270 shares to a high of 
14,123,392 shares, with an average daily trading volume for all 
components of the Index of approximately 1,479,390 shares per day.

    \8\On July 31, 1995, the total capitalization of the Index was 
$46.21 billion, which represented 49.35% of the overall 
capitalization of the Mexican Bolsa.
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B. Calculation and Maintenance of Index

    The value of the Index is determined by multiplying the price of 
each stock times the number of shares outstanding, adding those sums 
and dividing by a divisor which gives the Index a value of 200 on its 
base date of January 3, 1995. The Index had a closing value of 203.07 
on July 31, 1995. The Index will be maintained by the CBOE and CME and, 
in order to maintain continuity of the Index, the divisor of the Index 
will be adjusted to reflect certain events relating to the component 
stocks. These events include, but are not limited to, changes in the 
number of shares outstanding, spin-offs, certain rights issuances, and 
mergers and acquisitions. In addition, as noted above, CBOE will 
maintain the Index to ensure that no one component, or the top three 
components, represent more than 25% or 45% of the weight of the Index, 
respectively. Any changes to the composition of the Index which are 
made as a result of these maintenance standards will be done on a semi-
annual 

[[Page 55621]]
basis in December and June of each year.
    The composition of the Index will be reviewed periodically and the 
CBOE and CME may make component changes at any time to ensure that the 
Index continues to represent the overall character of the Mexican 
equity market. When considering replacement stocks, CBOE and CME will 
choose from among the most heavily capitalized and actively traded 
stocks on the Bolsa.\9\ In addition, CBOE and CME will consider other 
factors including industry grouping, level of foreign accessibility 
(i.e., whether foreigners may purchase the stock), name recognition, 
and volatility.

    \9\See Letter from William M. Speth, Jr., CBOE, to Steve Youhn, 
SEC, dated October 23, 1995.
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C. Index Option Trading

    The Exchange also proposes to base trading in options on the Index 
on the full value of the Index as expressed in U.S. dollars. The 
Exchange also may provide for the listing of full-value long-term index 
option series (``LEAPS'') and reduced-value LEAPS on the 
Index. For reduced-value LEAPS, the underlying value would be computed 
at one-tenth of the value of the Index. The current and closing index 
value of any such reduced-value LEAP will, after such initial 
computation, be rounded to the nearest one-hundredth. The Exchange will 
list expiration months for Mexico 30 Index options and Index LEAPS in 
accordance with CBOE Rule 24.9.
    The trading hours for options on the Index will be from 8:30 a.m. 
Chicago time to 3:15 Chicago time. Bridge Information Systems 
(``Bridge'') will calculate the value of the Index every fifteen 
seconds throughout the trading day and disseminate the Index value 
through the Options Price Reporting Authority (``OPRA'').\10\ Bridge 
obtains quotes and trade information on a real-time basis directly from 
the Bolsa through an electronic feed. The trading hours of the Bolsa 
are the same as those of the New York Stock Exchange, 8:30 a.m. through 
3:00 p.m. Chicago time. Accordingly, the value of the Index will be 
based upon the prices of the components as traded or quoted on the 
Bolsa.\11\

    \10\See Amendment No. 1.
    \11\As noted above Mexico Index options will continue to trade 
for 15 minutes after the Bolsa closes. This is consistent with 
trading times for other index options and also gives market 
participants the opportunity to adjust their positions after the 
Bolsa closes.
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    The Exchange is proposing to establish position limits for Mexico 
30 Index options equal to 50,000 contracts on the same side of the 
market, with no more than 30,000 contracts in the series with the 
nearest expiration date. According to the Exchange, these limits are 
roughly equivalent, in dollar terms, to the limits applicable to 
options on other indices. Ten reduced-value options will equal one 
full-value contract for such purposes. Furthermore, the hedge exemption 
rule applicable to broad-based index options, Commentary .01 to CBOE 
Rule 24.4, will apply to Mexico 30 Index options.\12\

    \12\Telephone Conversation between Patricia Cerny, Market 
Surveillance, CBOE, and Stephen M. Youhn, SEC, on October 18, 1995.
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    CBOE also represents that it has the necessary systems capacity to 
support new series that would result from the introduction of Mexico 3 
0 Index options. CBOE has been informed that OPRA has the capacity to 
support such new series.\13\

    \12\See Letter from Joe Corrigan, OPRA, to Eileen Smith, CBOE, 
dated August 1, 1995.
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D. Exercise and Settlement

    The proposed options on the Index will expire on the Saturday 
following the third Friday of the expiration month and trading in the 
expiring contract month on CBOE will normally cease on Friday at 3:15 
p.m. (Chicago time) unless a holiday occurs. The exercise settlement 
value of Index options at expiration will be determined from closing 
prices established at the close of the regular Friday trading sessions 
in Mexico. If a stock does not trade during this interval or if it 
fails to open for trading, the last available price of the stock will 
be used in the calculation of the Index. When expirations are removed 
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 Thursday and the exercise settlement value of Index 
options at expiration will be determined at the close of the regular 
Thursday trading sessions in Mexico even if the Mexican markets are 
open on Friday. If the Mexican markets are closed on the Friday before 
expiration but the CBOE is open for trading, the last trading day for 
expiring options will similarly be Thursday, with the exercise 
settlement value being determined from Thursday closing prices on the 
Bolsa.

E. Surveillance

    The Exchange will apply its existing index option surveillance 
procedures to Index options. In addition, the Exchange is aware of a 
Memorandum of Understanding (``MOU'') between the Commission and the 
Mexican Comision Nacional Bancaria y de Valores (``CNBV''). As 
discussed below, this MOU will enable the Commission to obtain 
information concerning the trading of the component stocks of the 
Mexico 30 Index. As discussed below, the Exchange will seek to enter 
into an effective surveillance agreement with the Bolsa.

II. 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).\14\ The Commission 
finds that the trading of options based on the Mexico 30 Index, 
including long-term options based on either the full or a reduced value 
of the Index, will serve to protect investors, promote the public 
interest, and help to remove impediments to a free and open securities 
market by providing investors with a means to hedge exposure to market 
risk associated with the Mexican equity market and provide a risk 
management instrument for positions in the Mexican securities 
market.\15\ The trading of options on the Index will permit investors 
to participate in the price movements of the 30 Mexican equity 
securities underlying the Index. As a result, the trading of options on 
the Index will allow investors holding some or all of the securities 
underlying the Index to hedge the risks associated with those 
positions. Thus, the trading of options based on the Mexico 30 Index 
will provide investors with a valuable hedging vehicle that should 
reflect accurately the overall movement of the Mexican equity market.

    \14\15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
    \15\Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of rule changes pertaining to 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.
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    The trading of Index options and Index LEAPS on the Mexico 30 
Index, however, raises several issues related to index design and 
structure, customer protection, and surveillance. The Commission 
believes, however, for the reasons discussed below, that the CBOE has 
adequately addressed these issues.

A. Index Design and Structure

    The Commission finds that it is appropriate and consistent with the 
Act to apply the Exchange rules applicable 

[[Page 55622]]
to broad-based index options to the Index options.\16\ First, the Index 
consists of 30 of the most actively traded stocks on the Bolsa.\17\ 
Second, stocks in the Index are among the most highly capitalized 
stocks on the Bolsa. For example, on July 31, 1995, the market 
capitalization of the individual stocks in the Index ranged from a high 
of $13.3 billion to a low of $156 million, with a mean value of U.S. 
$1.54 billion. Third, the average daily capitalization of the Index, 
for the year-ended July 31, 1995, was U.S. $58.2 billion.\18\ While 
this figure is smaller than other previously approved broad-based 
indexes on U.S. securities, it is nonetheless a substantial 
capitalization for a foreign market and represents almost half of the 
total capitalization of the Bolsa.\19\ Fourth, the Index includes 
stocks of companies from fifteen separate industries, with no industry 
segment comprising more than 25% of the Index's total value. Fifth, 
CBOE maintenance criteria require that no single index component shall 
comprise more than 25% of the Index's total value and that the 
percentage weighting of the three largest issues in the Index shall not 
exceed 45% of the Index's value. This will help to ensure that a single 
stock or small group of stocks does not dominate the Index. Sixth, the 
Index component stock listing and maintenance criteria will serve to 
ensure that the Index maintains its broad representative sample of 
stocks on the Bolsa. In addition, the maintenance criteria will ensure 
that the Index continues to be comprised of component stocks that are 
among the most highly capitalized and actively traded stocks on the 
Bolsa. Accordingly, the Commission believes it is appropriate to 
classify the Index as broad-based.

    \16\In addition, the reduced value Mexico 30 Index, which is 
comprised of the same component securities as the Index, and 
calculated by dividing the Index by ten, is essentially identical to 
the Mexico 30 Index.
    \17\While some of the stocks in the Index have relatively low 
trading volume, they account for a small percentage of the Index 
weighting.
    \18\In the event the aggregate capitalization of the Index falls 
below $30 billion, the CBOE will consult with the Commission 
regarding appropriate regulatory responses.
    \19\A foreign index capitalization that is smaller than that of 
the Mexico Index would raise questions regarding whether that 
particular index warranted broad-based index options treatment.
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    Furthermore, the Commission believes that the general broad 
diversification of the Index component stocks, as well as their high 
capitalizations and trading activity, minimize the potential for 
manipulation of the Index. First, as discussed above, the Index 
represents a broad cross-section of highly-capitalized Mexican stocks, 
with no single industry group or stock dominating the Index. Second, 
the stocks that comprise the Index are relatively actively traded. 
Third, the Commission believes that the index selection and maintenance 
criteria will serve to ensure that the Index continues to represent 
stocks with the highest capitalizations and trading volumes on the 
Bolsa. In addition, the Exchange has proposed position and exercise 
limits for the Index options that are consistent with other broad-based 
index options.

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as Mexico 30 Index options 
and Index 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 options 
currently traded on the CBOE, the Commission believes that adequate 
safeguards are in place to ensure the protection of investors in Mexico 
30 Index options and Index LEAPS.\20\

    \20\In addition, CBOE has represented that it and OPRA have the 
necessary systems capacity to support those new series of options 
that would result from the introduction of Index options and Index 
LEAPS. See Memorandum from Joe Corrigan, Executive Director, OPRA, 
to Eileen Smith, CBOE, dated August 1, 1995.
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C. Surveillance

    In evaluating derivative instruments, the Commission, consistent 
with the protection of investors, considers the degree to which the 
derivative instrument is susceptible to manipulation. The ability to 
obtain information necessary to detect and deter market manipulation 
and other trading abuses is a critical factor in the Commission's 
evaluation. It is for this reason that it is important that the SEC 
determine that there is an adequate mechanism in place to provide for 
the exchange of information between the market trading the derivative 
product and the market on which the securities underlying the 
derivative product are traded. Such mechanisms enable officials to 
surveil trading in both the derivative product and the underlying 
securities.\21\ For foreign stock index derivative products, such 
mechanisms are especially important for the relevant foreign and 
domestic exchanges to facilitate the collection of necessary 
regulatory, surveillance and other information.

    \21\The Commission believes that a comprehensive surveillance 
sharing agreement should provide the parties thereto with the 
ability to obtain information necessary to detect and deter market 
manipulation and other trading abuses. Consequently, the Commission 
generally requires that such agreements require that the parties 
provide each other, upon request, with information about market 
trading activity, clearing activity, and the identity of the 
purchasers and sellers of securities underlying the derivative 
product. See, e.g., Securities Exchange Act Release No. 31529 (Nov. 
27, 1992), 57 FR 574248.
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    With respect to the CBOE proposal, CBOE and the Bolsa do not have a 
written surveillance sharing agreement that covers the trading of 
Mexico 30 Index options at this time.\22\ Moreover, it is the 
Commission's understanding that the Bolsa currently is not able to 
provide the requisite information for a comprehensive surveillance 
sharing instrument. Thus it would be impossible for the CBOE to secure 
a comprehensive agreement. In such cases, the Commission has relied in 
the past on surveillance sharing arrangements between the relevant 
regulators. In regard to the Index, first, the Commission notes that 
the Bolsa is under the regulatory oversight of the CNBV, which has 
responsibility for both the Mexican securities and derivatives markets. 
The Commission and the CNBV have concluded a Memorandum of 
Understanding, dated October 18, 1990, that provides a framework for 
mutual assistance in investigatory and regulatory issues.\23\ Based on 
the relationship between the SEC and CNBV and the terms of the MOU, the 
Commission understands that both it and the CNBV could acquire 
information from and provide information to the other similar to that 
which would be required in a comprehensive surveillance sharing 
agreement between exchanges.\24\ Moreover, the agencies could make a 
request for information under the MOU 

[[Page 55623]]
on behalf of an SRO that needed the information for regulatory 
purposes. Thus, should the CBOE need information on Mexican trading in 
the Index component securities to investigate incidents involving 
trading of Index options, the SEC could request such information from 
the CNBV under the MOU. While this arrangement certainly would be 
enhanced by the existence of direct exchange to exchange surveillance 
sharing agreements, it is nonetheless consistent with other instances 
where the Commission has explored alternatives when the relevant 
foreign exchange was unwilling or unable to enter into a comprehensive 
surveillance sharing agreement.\25\

    \22\The CBOE has committed to make every effort to enter into a 
comprehensive surveillance sharing agreement with the Bolsa.
    \23\The CNBV is the successor to the Comision Nacional de 
Valores of Mexico, which was merged with the Mexican Ranking 
Commission in April 1995 to form the CNBV. See National Banking and 
Securities Commission Act, Mexico, dated April 24, 1995.
    \24\This information could include transaction, clearing, and 
customer identity information necessary to conduct an investigation.
    \25\See, e.g., Securities Exchange Act Release No. 36070 (Aug. 
9, 1995), 60 FR 42205 (Aug. 15, 1995) (Order Approving Proposed Rule 
Changes Relating to the Listing and Trading of Warrants on the 
Deutscher Aktienindex).
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    Accordingly, the Commission believes the MOU provides sufficient 
basis for the exchange of necessary surveillance information. The 
Commission continues to believe strongly, however, that the Bolsa and 
the CBOE should continue to work together to consummate a formal 
surveillance sharing agreement to cover Mexico 30 Index options as soon 
as practicable.
    It therefore is ordered, pursuant to section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-CBOE-95-45) is approved, as 
amended.

    \26\15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\

    \27\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27003 Filed 10-31-95; 8:45 am]
BILLING CODE 8010-01-M