[Federal Register Volume 61, Number 25 (Tuesday, February 6, 1996)]
[Notices]
[Pages 4502-4504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2405]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36786; File No. SR-CBOE-96-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated, Relating to the Listing and Trading of Options 
on the CBOE Internet Index

January 29, 1996.
    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 January 19, 1996, the Chicago Board Options Exchange, Incorporated 
filed with the Securities and Exchange 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 Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') proposes to list and trade options on the CBOE Internet 
Index (``Internet Index'' or ``Index''). The text of the proposed rule 
change is available at the Office of the Secretary, CBOE and at the 
Commission. 

[[Page 4503]]


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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item IV below and is set forth in sections (A), 
(B), and (C) below.

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

    The Exchange proposes to list and trade cash-settled, European-
style stock index options on the CBOE Internet Index, based on shares 
of 15 widely held companies involved in providing Internet access 
services, and in the design and manufacture of software and hardware 
that facilitates Internet access.\3\ The Exchange believes that options 
on the Index will provide investors with a low-cost means to 
participate in the performance of this sector or to hedge against the 
risk of investing in this sector.

    \3\ The component securities of the Index are America Online 
Inc.; Cisco Systems Inc.; H&R Block (Compuserve); McAfee Associates 
Inc.; Microcom Inc.; Netcom On-Line Communication Svcs.; NetManage 
Inc.; Netscape Communications Corp.; Oracle Corporation; Psinet 
Inc.; Quarterdeck Office Systems Inc.; Silicon Graphics Inc.; 
Spyglass Inc.; Sun Microsystems Inc.; UUnet Technologies Inc.
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    All of the stocks comprising the Index are U.S. securities and 
currently trade on the New York Stock Exchange (``NYSE'') or through 
the facilities of the National Association of Securities Dealers 
Automated Quotation System and are reported national market system 
securities (``NASDAQ/NMS''). Additionally, all of the stocks are 
``reported securities'' as defined in Rule 11Aa3-1 under the Exchange 
Act. The Exchange is filing this proposal pursuant to the generic 
criteria for listing options on narrow-based indexes as set forth in 
Exchange Rule 24.2 and the Commission's order approving that Rule (the 
``Generic Index Approval Order'')\4\ as outlined below. In accordance 
with Rule 24.2, CBOE proposes to list and trade options on the Internet 
Index beginning 30 days from the filing date of this proposed rule 
change.

    \4\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval 
Order'').
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Eligibility Standards for Index Components

    Pursuant to Rule 24.2, all of the component securities of the Index 
are listed on the NYSE or are NASDAQ/NMS listed, and each of the stocks 
in the Index has a minimum market capitalization of at least 75 
million. Specifically, the stocks comprising the Index range in 
capitalization from $325 million to $20.25 billion as of December 29, 
1995. The total capitalization as of that date was $66.27 billion. The 
mean capitalization was $4.42 billion. The median capitalization was 
$1.90 billion.
    Additionally, the average monthly trading volume for each of the 
component stocks in the Index have had monthly trading volume well in 
excess of 1 million shares over the six month period through December 
of 1995. The average monthly volumes for these stocks over the six 
month period ranged from a low of 6.93 million shares to a high of 
141.32 million shares.
    Netscape Communications Corp., however, does not meet the monthly 
trading volume criteria, because it was the subject of an initial 
public offering on August 9, 1995 and accordingly, has not yet 
accumulated at least six months of trading volume data. Since that 
time, Netscape trading volume has averaged 16.47 million shares per 
month. Currently, two of the fifteen stocks in the Index are not 
eligible for options trading because they do not have 7,000,000 
outstanding shares owned by persons other than those required to report 
their stock holding under Section 16(a) of the Act. The Exchange 
represents that Netscape Communications Corp. will be options eligible 
on or before February 6, 1996, at which time the Index will have only 
one component (Spyglass Inc.), equally 6.67% of the Index, that is not 
eligible for options trading. Thus, at the time the Index is listed for 
options trading. Thus, at the time the Index is listed for trading, 
93.33% of the weight of the Index and 93.33% of the number of 
components will be eligible for options trading.

Index Design and Calculation

    The Index is equal-dollar weighted, with each stock comprising 
6.67% of the total Index weight. The top 5 stocks in the Index account 
for 33.33% of the Index. The Index reflects changes in the prices of 
the component stocks relative to the Index base data, August 9, 1995 
with the Index was set to 100.00. Specifically, each of the component 
securities is initially represented in equal dollar amounts, with the 
level of the Index equal to the combined market value of the assigned 
number of shares for each of the Index components divided by the 
current Index divisor. The Index divisor is adjusted to maintain 
continuity in the Index at the time of certain types of changes. 
Changes which may result in divisor changes include, but are not 
limited to, quarterly re-balancing, special dividends, spin-offs, 
certain rights issuances, and mergers and acquisitions.
    The Index will be calculated on a real-time basis using last-sale 
prices by CBOE or its designee, and will be disseminated every 15 
seconds by CBOE. If a component stock is not currently being traded, 
the most recent price at which the stock traded will be used in the 
Index calculation. The value of the Index at the close of trading on 
December 29, 1995 was 144.57.

Maintenance of the Index

    The Index will be maintained by CBOE. The Index is re-balanced 
after the class of business on Expiration Fridays on the March 
Quarterly Cycle. In addition, the Index is reviewed on approximately a 
monthly basis by the CBOE staff. CBOE may change the composition of the 
Index at any time to reflect changes affecting the components of the 
Index or the Internet industry generally. If it becomes necessary to 
remove a stock from the Index (for example, because of a takeover or 
merger), CBOE will only add a stock having the maintenance criteria 
specified in CBOE's Rules and the Generic Index Approval Order. CBOE 
will take into account the capitalization, liquidity, volatility and 
name recognition of any proposed replacement stock.
    Agsent prior Commission approval, CBOE will not increase to more 
than 20, or decrease to fewer than 10, the number of stocks in the 
Index. In addition, the CBOE will not make any change in the 
composition of the Index would cause fewer than 90% of the stocks by 
weight, or fewer than 80% of the total number of stocks in the index, 
to qualify as stock eligibility for equity options trading under CBOE 
Rule 5.3.

    If the Index fails at any time to satisfy the maintenance criteria, 
the Exchange will immediately notify the Commission of that fact and 
will not open trading any additional series of options on the Index 
unless such failure is determined by the Exchange not to be significant 
and the Commission concurs that determination, or unlesss the continued 
listing of options on the Internet Index has been approved by the 
Commission under Section 19(b)(2) of the Act.

[[Page 4504]]


Expiration and Settlement

    Internet Index options will have European-style exercise (i.e., 
exercises are permitted at expiration only), and will be ``A.M.-settled 
index options'' within the meaning of the Rules in Chapter XXIV, 
including Rule 24.9, which is being amended to refer specifically to 
Internet Index options. In the case of securities traded through the 
NASDAQ system, the first reported regular way sale price will be used. 
The proposed options will expire on the Saturday following the third 
Friday of the expiration month. Thus, the last day for trading in a 
expiring series will be the second business day (ordinarily a Thursday) 
preceding the expiration date. If any component stock does not open for 
trading on its primary market on the last trading day before 
expiration, then the prior day's last sale price will be used in the 
calculation.
    The exchange proposes to base trading in options on the Internet 
Index on the full value of that Index. The Exchange may list full-value 
long-term index option series (``LEAPS''), as provided in 
Rule 24.9. The Exchange also may provide for the listing of reduced-
value LEAPS, for which 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.

Exchange Rules Applicable to Stock Index Options

    Except as modified herein, the Rules in Chapter XXIV will be 
applicable to Internet Index options. These Rules cover issues such as 
surveillance, exercise prices, and position limits. Index option 
contracts based on the Internet Index will be subject to the position 
limit requirements of Rule 24.4A. Currently the position limit is 
12,000 contracts. Ten reduced-value options will equal one full-value 
contract for such purposes. Surveillance procedures currently used to 
monitor trading in each of the Exchange's other index options will also 
be used to monitor trading in options on the Internet Index.
    CBOE represents that it has the necessary systems capacity to 
support new series that would result from the introduction of Internet 
Index options. CBOE has also been informed that OPRA has the capacity 
to support such new series.\5\

    \5\ See Memorandum from Joe Corrigan, Executive Director, OPRA, 
to Tom Knorring, CBOE, dated January 18, 1996.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Securities Exchange Act of 1934 (the ``Act'') 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it will permit trading in options based on the Internet 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.

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

    CBOE 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

    Because the foregoing rule change complies with the standards set 
forth in the Generic Index Approval Order, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act. Pursuant to the Generic 
Index Approval Order,\6\ the Exchange may not list CBOE Internet Index 
options for trading prior to 30 days after January 19, 1996, the date 
the proposed rule change was filed with the Commission. At any time 
within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

    \6\ See Generic Index Approval Order, supra note 4.
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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-96-04 and should be 
submitted by February 27, 1996.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-2405 Filed 2-5-96; 8:45 am]
BILLING CODE 8010-01-M