[Federal Register Volume 61, Number 33 (Friday, February 16, 1996)]
[Notices]
[Pages 6274-6276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3579]



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[[Page 6275]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36826; International Series Release No. 931; File No. 
SR-CBOE-95-54]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc. Relating to Currency Warrants Based on the Value 
of the U.S. Dollar in Relation to the Brazilian Real

February 9, 1996.
    On September 13, 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 currency 
warrants based upon the value of the U.S. dollar in relation to the 
Brazilian Real (``Real warrants''). Notice of the proposal was 
published for comment and appeared in the Federal Register on November 
16, 1995.\3\ No comment letters were received on the proposal. On 
January 5, 1996, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ This order approves the CBOE's proposal, as amended.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 36464 (November 8, 
1995), 60 FR 57607 (November 16, 1995).
    \4\ In Amendment No. 1, the Exchange proposes to increase the 
minimum add-on margin for out-of-the-money Real warrants from 2% to 
7%. Additionally, the Exchange clarifies that for purposes of 
determining the settlement value of the Real warrants, the Exchange 
will require the issuer or issuer's designee to use the Federal 
Reserve Board noon buying rate (``Fed noon buying rate'') which is 
published by the Federal Reserve Bank of New York. Alternatively, in 
the event the Federal Reserve Bank were to discontinue publishing 
this figure, the Exchange would require the issuer to use the 
exchange rate published by the Central Bank of Brazil. See Letter 
from Timothy Thompson, Senior Attorney, CBOE, to James McHale, 
Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated January 4, 1996 (``Amendment No. 1'').
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I. Description of the Proposal

    CBOE Rule 31.5(e) permits the exchange to list and trade currency 
warrants. The listing and trading of Real warrants will comply in all 
respects with CBOE Rule 31.5(E).

A. Currency Warrant Trading

    Real warrants will be unsecured obligations of their issuers and 
will be cash-settled in U.S. dollars.\5\ The warrants will be either 
exercisable throughout their life (i.e., American style) or exercisable 
only on their expiration date (i.e., European style). Upon exercise, 
the holder of a Real warrant structured as a ``put'' would receive 
payment in U.S. dollars to the extent that the value of the Brazilian 
Real has declined in relation to the U.S. dollar below a pre-stated 
base price. Conversely, holders of a Real warrant structured as a 
``call'' would, upon exercise, receive payment in U.S. dollars to the 
extent that the value of the Brazilian Real in relation to the U.S. 
dollar has increased above the pre-stated base price. Warrants that are 
``out-of-the-money'' at the time of expiration will expire worthless.

    \5\ As stated in note 4 supra, the CBOE will require the issuer 
or issuer's designee to use the Fed noon buying rate for determining 
settlement value, but if the Fed noon buying rate is unavailable, 
the Exchange will require the use of the exchange rate published by 
the Central Bank of Brazil (``Brazil rate''). The Brazil rate is 
disseminated daily by the Central Bank of Brazil through the 
SISBACEN, which is a large foreign-currency-exchange computer 
network linking the Central Bank to the interbank market. See 
Memorandum from the Division of Economic Analysis, Commodity Futures 
Trading Commission (``CFTC''), to Commissioners, CFTC, dated October 
10, 1995 (regarding the application of the Chicago Mercantile 
Exchange for designation as a contract market in Brazilian Real 
futures and futures options).
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B. Warrant Listing Standards and Customer Safeguards

    The Exchange has established revised generic listing standards for 
currency warrants, which are contained in CBOE Rule 31.5(E).\6\ Any 
issue of Real warrants will conform to the listing criteria under Rule 
31.5(E) which provide that: (1) The issuer shall have minimum tangible 
net worth in excess of $150,000,000 and otherwise substantially exceed 
the size and earnings requirements in Rule 31.5(A); (2) the term of the 
warrants shall be for a period ranging from one to five years from date 
of issuance; and (3) the minimum public distribution of such issues 
shall be 1,000,000 warrants, together with a minimum of 400 public 
holders, and have a minimum aggregate market value of $4,000,000. In 
addition, where an issuer has a minimum tangible net worth in excess of 
$150,000,000 but less than $250,000,000, the Exchange shall not list 
Real warrants of the issuer if the value of such warrants plus the 
aggregate value, based upon the original issuing price, of all 
outstanding stock index, currency index and currency warrants of the 
issuer (and its affiliates) that are listed for trading on a national 
securities exchange or traded through the facilities of the National 
Association of Securities Dealers Automated Quotation System 
(``NASDAQ'') exceeds 25% of the issuer's net worth.

    \6\ See Securities Exchange Act Release No. 36169 (August 29, 
1995), 60 FR 46644 (September 7, 1995) (``generic warrant listing 
order'').
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    Moreover, pursuant to the generic warrant listing order, Real 
warrants may be sold only to customers whose accounts have been 
approved for options trading pursuant to Exchange Rule 9.7. Moreover, 
the suitability standards of Exchange Rule 9.9, and the standards of 
Rule 9.10(a), regarding discretionary orders, will be applicable. 
Pursuant to CBOE Rule 30.53(d), the Exchange will require members and 
member organizations to report to the CBOE any positions of 100,000 or 
more Real warrants on the same side of the market.\7\ Finally, prior to 
the commencement of trading of Real warrants, the Exchange will 
distribute a circular to its membership calling attention to certain of 
these compliance responsibilities when handling transactions in Real 
warrants.\8\

    \7\ See generic warrant listing order, supra note 6.
    \8\ The circular should highlight: (1) That Real warrants may be 
sold only to customers with options approved accounts; (2) the 
applicable suitability requirements; (3) the standards regarding 
discretionary orders; (4) the reporting requirements for positions 
of 100,000 or more Real warrants on the same side of the market; and 
(5) the applicable customer margin requirements.
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C. Margin Requirements

    The new listing standards also set forth the applicable margin 
requirements for currency warrants. New Exchange Rule 30.53 requires 
minimum margin on any currency warrant carried ``short'' in a 
customer's account to be 100% of the current market value of each such 
warrant plus an ``add-on'' percentage of the product of the units of 
underlying currency per warrant and the spot price for such currency. 
The Exchange has calculated frequency distributions reflecting 
percentage price returns for all one (1) and five (5) day periods for 
the Brazilian Real for the period of September 1, 1992 through August 
30, 1995. These distributions demonstrate that more than 97.5% of all 
five (5) day returns for the three (3) year period would have been 
covered by 10.0% of the underlying Real value.
    Based upon these results, the Exchange is proposing to set the 
margin ``add-on'' percentage for Brazilian Real warrants at 10% for 
both initial and maintenance margin, with a minimum add-on for out-of-
the money warrants of 7%.\9\ Additionally, the Exchange will conduct 
periodic reviews of the volatility in the Brazilian Real. Pursuant to 
Rule 30.53(a), if the Exchange determines that a higher customer 

[[Page 6276]]
margin level would be appropriate, the CBOE will take immediate steps 
to implement the change. If, on the other hand, the Exchange determines 
that a lower margin percentage would be appropriate, the Exchange must 
file a proposal with the Commission pursuant to Section 19(b) of the 
Act to modify the margin add-on percentages applicable to Real 
warrants. Should the customer margin levels for Real warrants be 
changed, the Exchange will promptly notify the Exchange's membership 
and the public.

    \9\ See Amendment No. 1, supra note 4.
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II. Discussion

    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) \10\ in that it will 
help remove impediments to a free and open securities market and 
facilitate transactions in securities by providing investors with a 
low-cost means to participate in the performance of the Brazilian 
economy or to hedge against the risk of investing in that economy. 
Specifically, the Commission believes that the trading of listed 
warrants on the Brazilian Real should provide investors with a hedging 
and risk transfer vehicle that will reflect the overall movement of the 
Brazilian Real in relation to the U.S. dollar. In this regard, Real 
warrants should provide investors with an efficient and effective means 
of managing risk associated with the Brazilian Real.

    \10\ 15 U.S.C. 78f(b)(5).
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    Moreover, Real warrants will conform to the listing standards in 
Rule 31.5(E), and the other provisions of the generic warrant listing 
order. These rules provide a regulatory framework for trading currency 
warrants, and should help to provide for fair and orderly markets in 
Real warrants. Under these rules, the Exchange will limit transactions 
in Real warrants to customers with options approved accounts and impose 
the CBOE's options suitability standards and discretionary accounts 
standards to transactions in Real warrants. Additionally, the 
requirements established by the Exchange for reporting positions of 
100,000 or more Real warrants on the same side of the market should 
assist the CBOE in detecting and deterring attempts at manipulation.
    Furthermore, the CBOE has proposed adequate customer margin 
requirements. The proposed add-on margin (i.e. 10% with a minimum add-
on for out-of-the-money warrants of 7%) provides sufficient coverage to 
account for historical and potential volatility in the Brazilian Real 
in relation to the U.S. dollar. The Exchange will conduct periodic 
reviews of the volatility in the Brazilian Real and must take immediate 
steps to increase the existing customer margin levels if the Exchange 
determines that the existing levels are no longer adequate. As a 
result, the Commission believes that the proposed customer margin 
levels and the review and maintenance criteria for those margin levels 
will result in adequate coverage of contract obligations and are 
designed to reduce risks arising from inadequate margin levels.
    Finally, the Exchange will prepare and distribute to its membership 
a circular describing each issue of Real warrants listed by the CBOE, 
calling attention to certain compliance responsibilities when handling 
transactions in Real warrants.\11\

    \11\ See supra note 8.
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. 
Specifically, Amendment No. 1 increases the minimum add-on margin for 
out-of-the-money Real warrants from 2% to 7%, to protect against 
greater fluctuations in the value of the Real. In addition, Amendment 
No. 1 clarifies that the Exchange will require any issuer of Real 
warrants to use a reliable, widely disseminated, and unbiased source 
for determining settlement value of the Real warrants. The Exchange 
will require the issuer or issuer's designee to use the Fed noon buying 
rate, published by the Federal Reserve Bank of New York for settlement 
purposes. Alternatively, in the event the Fed noon buying rate is 
unavailable, the Exchange will require the issuer to use the exchange 
rate published by the Central Bank of Brazil.\12\ Based on the above, 
the Commission finds good cause to accelerate approval of Amendment No. 
1.

    \12\ See notes 4 and 5 supra.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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 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 File No. SR-CBOE-95-54 and should be 
submitted by March 8, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-95-54), as amended, is 
approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\

    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3579 Filed 2-15-96; 8:45 am]
BILLING CODE 8010-01-M