[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Notices]
[Pages 13550-13553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7396]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36995; International Release No. 954: File No. SR-CBOE 
95-71]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change and Amendment No. 1 Thereto Relating to Listing 
Criteria for Equity Linked Term Notes (``ELNs'')

March 20, 1996.
    Pursuant to Section 19(b)(1), of the Securities Exchange Act of 
1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on 
December 20, 1995, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the CBOE. On 
January 18, 1996, CBOE filed Amendment No. 1 (``Amendment No. 1'') to 
the proposed rule change to clarify issues relating to the issuance of 
ELNs on non-U.S. companies that trade in the U.S. market as sponsored 
American Depositary Receipts, ordinary shares, or otherwise.\1\ This 
Order approves the proposed rule change, as amended, on an accelerated 
basis and also solicits comments on the proposed rule change, as 
amended, from interested persons.

    \1\ Letter from Timothy Thompson, CBOE, to Michael Walinskas, 
SEC, dated January 17, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules relating to the listing 
criteria for equity linked term notes. The text of the proposed rule 
change is available at the Office of the Secretary of the 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 CBOE 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. 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

    ELNs are intermediate-term (i.e., two to seven years), non-
convertible hybrid securities, the value of which is based, at least in 
part, on the value of another issuer's common stock, non-convertible 
preferred stock, or certain sponsored American Depositary Receipts 
(``ADRs''). ELNs may pay periodic interest or may be issued as zero-
coupon instruments with no payments to holders prior to maturity. ELNs 
also may be subject to a ``cap'' on the maximum principal amount to be 
repaid to holders upon maturity, or, conversely, they may feature a 
``floor'' on the minimum principal amount paid to holders upon 
maturity. A specific issue of ELNs, for example, may provide holders 
with a fixed semi-annual interest payment, while capping the maximum 
amount to be repaid upon maturity at 135% of the issuance price, with 
no minimum floor guarantee on the principal to be repaid at maturity. 
Another issue of ELNs might offer lower semi-annual payments based upon 
a floating interest rate with a minimum floor for the repayment of 
principal of 75% of the issuance price. The flexibility available to an 
issuer of ELNs permits the creation of securities which offer issuers 
and investors the opportunity to more precisely focus on a specific 
investment strategy.
    The CBOE's proposal would modify the listing standards applicable 
to the underlying linked security. Paragraph (e) of Rule 31.5.I 
specifies that a common stock or a non-convertible preferred stock may 
be considered for listing on the Exchange if the underlying stock meets 
one of three alternative criteria for market capitalization and trading 
volume. Lower levels of market capitalization require a higher trading 
volume for the Exchange to consider listing an ELN on that security. 
The Exchange believes that two of the three trading volume levels could 
be reduced without compromising investor protection.
    Specifically, the Exchange is proposing that the Exchange be 
permitted to list an ELN on a security with a market capitalization of 
at least $1.5 billion if that security has trading volume in U.S. 
markets of at least 10 million shares during the 12 month period 
preceding the listing. Currently, paragraph (e) requires trading volume 
of 20 million shares for such securities. In

[[Page 13551]]
addition, the Exchange is proposing that it be permitted to list an ELN 
on a security with a market capitalization of at least $500 million if 
that security has a trading volume in U.S. markets of at least 15 
million shares during the 12 month period preceding the listing. 
Currently, paragraph (e) requires trading volume of 80 million shares 
for such securities. This reduction in the trading volume levels would 
enable the Exchange to list ELNs on a wider range of securities and 
provide investors a new opportunity to participate in the market 
performance of these securities.
    Paragraph (e) would also be revised to specify that the Exchange 
will file a rule change with the Commission pursuant to Section 19(b) 
of the Act (rather than merely obtaining concurrence of SEC staff) if 
it desires to list an ELN on an underlying security that does not meet 
the market capitalization or trading volume criteria set forth in the 
rule.
    Second, CBOE proposes to amend the ELNs listing standard governing 
which non-U.S. securities are eligible to be linked to ELNs. Presently, 
under paragraph (h) of Rule 31.5.I, the Exchange may list ELNs on 
actively traded non-U.S. securities which are traded in the U.S. market 
as sponsored ADRs or otherwise, provided that: (1) The Exchange has in 
place a comprehensive surveillance sharing agreement with the primary 
exchange on which the non-U.S. security is traded (in the case of an 
ADR, the primary exchange on which the security underlying the ADR is 
traded); or (2) the combined trading volume of the non-U.S. security 
and other related non-U.S. securities (as defined below) occurring in 
the U.S. market represents (on a share equivalent basis with respect to 
any ADRs) (``U.S. Trading Volume'') at least 50% of the combined 
worldwide trading volume in the non-U.S. security during the six month 
period preceding the date of listing (``50% Test'').
    This paragraph (h) would be revised in three respects. First, the 
Exchange proposes to revise the manner in which the 50% test is 
calculated such that trading in the non-U.S. security and other related 
non-U.S. securities in any market with which the Exchange has in place 
a comprehensive, effective surveillance sharing agreement would be 
added to the U.S. market volume for the purpose of determining whether 
the 50% test has been met. Currently, only trading in the U.S. market 
counts toward satisfying the 50% test. This change is consistent with 
the change to the listing criteria for options on ADRs. This change 
would also be reflected in Interpretation .01 to Rule 31.5.I.
    CBOE also proposes to add an alternative set of criteria to 
paragraph (h) of Rule 31.5.I in order to add a third alternative set of 
criteria under which the Exchange may list an ELN on a non-U.S. 
security. This new standard, referred to as the 20% Test + Daily 
Trading Volume Standard (``20% Test + Daily Trading Volume Standard'') 
would permit the Exchange to list an ELN on a non-U.S. security if each 
of the following three conditions were satisfied: (1) The combined 
trading worldwide volume of the non-U.S. security in the U.S. market 
represents (on a share equivalent basis with respect to ADRs) at least 
20% of the combined worldwide trading volume in the non-U.S. security 
and other related non-U.S. securities over the six month period 
preceding the date of selection of the non-U.S. security for ELN 
trading; \2\ (2) the average trading volume for the non-U.S. security 
in the U.S. market over the six months preceding the date of selection 
of the non-U.S. security for ELN trading is at least 100,000 shares per 
day; \3\ and (3) the trading volume for the non-U.S. security in the 
U.S. is at least 60,000 shares per day for a majority of the trading 
days for the six months preceding the date of selection of the non-U.S. 
security for ELN trading.\4\

    \2\ The calculation for the 20% Test + Daily Trading Volume 
Standard does not include foreign markets with which the Exchange 
has in place a comprehensive surveillance sharing agreement. See 
Amendment No. 1.
    \3\ See Amendment No. 1.
    \4\ Id.
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    As with the 50% Test, the Daily Trading Volume Standard will allow 
the listing of ELNs on non-U.S. securities in the absence of a 
comprehensive, effective surveillance sharing agreement between the 
Exchange and the primary exchange on which the non-U.S. security is 
traded (in the case of an ADR, the home country where the security 
underlying the ADR is traded). The Exchange believes the Daily Trading 
Volume Standard is justified because it will enable the Exchange to 
list ELNs on non-U.S. securities that are widely followed by U.S. 
investors but that do not meet the 50% Test. Although the Daily Trading 
Volume Standard reduces from 50% to 20% the percentage of worldwide 
trading that must occur in the U.S. market, it also requires the non-
U.S. security to meet certain trading levels in the U.S. market. The 
Exchange believes the Daily Trading Volume Standard's requirement of 
observable, high trading volume should ameliorate regulatory concerns 
regarding investor protection. In addition, it should be noted that the 
Daily Trading Volume Standard is the same standard approved by the 
Commission in determining on which ADRs the Exchange may list options, 
except that CBOE believes the standard for ELNs is actually stricter 
because it requires the 20% test to be met over a longer period (six 
months instead of three).\5\

    \5\ See also note 2, supra.
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    Finally, the Exchange proposes to amend paragraph (g) to Rule 
31.5.I in order to clarify the limitation on the number of ELNs that 
may be linked to a particular security. Specifically, the issuance of 
ELNs relating to any underlying non-U.S. security may not exceed 2% of 
the total shares outstanding worldwide if at least 20% of the worldwide 
trading volume occurs in the U.S. market during the six-month period 
preceding the date of listing.\6\ The Exchange notes that this change 
is consistent with the Daily Trading Volume Standard requirement 
contained in paragraph (h) that requires at least 20% of the combined 
worldwide trading volume in the non-U.S. security to occur in U.S. 
markets.\7\ This change would also be reflected in Interpretation .04 
to the Rule.

    \6\ The other size limitations in CBOE's rule remains unchanged. 
Accordingly, the size of ELN issuances linked to non-U.S. securities 
will be limited to 3% of the total shares of the underlying security 
outstanding provided, however, at least 50% of the worldwide trading 
volume for the security for the six-months prior to listing occurred 
in the U.S. market, or 5% of the total shares of the underlying 
security outstanding provided at least 70% of the worldwide trading 
volume for the security for the six-months prior to listing occurred 
in the U.S. market.
    \7\ As with the 20% Test + Daily Trading Volume Standard, 
foreign markets with which the Exchange has in place a comprehensive 
surveillance sharing agreement are not included in the calculation 
for purposes of determining the size of eligible ELN issuances.
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    Because this new listing standard would enable the Exchange to list 
ELNs on widely followed non-U.S. securities without comprising investor 
protection concerns, 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 promote just 
and equitable principles of trade, to foster cooperation with persons 
engaged in facilitating and clearing transactions in securities, and to 
protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

[[Page 13552]]


C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Comments were neither solicited nor received.

III. 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).\8\ In particular, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirement that the rules of an exchange be designed to promote just 
and equitable principles of trade and not to permit unfair 
discrimination between customers, issuers, brokers, and dealers.

    \8\ 15 U.S.C. 78f(b)(5) (1982).
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    The Commission finds that the proposal to reduce the trading volume 
requirement for eligible linked securities will expand the number of 
securities that can be linked to ELNs while maintaining the requirement 
that the linked security be an actively traded, highly capitalized 
common stock or ADR. While the proposal reduces the trading volume 
criteria for securities with market capitalizations in the $1.5 billion 
and $500 million tiers to 10 million and 15 million shares, 
respectively (from 20 and 80 million shares, respectively), the 
Commission nevertheless believes that, together, the applicable 
capitalization and new trading volume requirements will continue to 
help ensure that ELNs are only issued on highly liquid securities of 
broadly capitalized companies. Accordingly, the Commission believes 
that these requirements will continue to help reduce the likelihood of 
any adverse market impact on the securities underlying ELNs.
    The Commission notes that the Exchange has deleted the provision 
that allows it to list ELNs on securities not meeting the market 
capitalization and trading volume criteria if the Division of Market 
Regulation of the SEC concurs.\9\ The revised criteria will expand the 
number of securities eligible for ELNs trading. The increased 
flexibility in the ELNs listing criteria should effectively reduce or 
eliminate the need for additional discretion in this area, in addition 
to providing issuers and the Exchange with specific and clear guidance 
on the applicable listing criteria for a security to be eligible to 
underlie an ELN.

    \9\ As noted above, CBOE has replaced this section with a 
provision stating it would have to file a Section 19(b) rule change 
if it desires to list an ELN on an underlying security that does not 
meet these standards.
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    The Commission also believes that the additional proposed 
amendments to the listing standards for ELNs on non-U.S. securities 
will benefit investors by effectively increasing the number of 
available ELNs-eligible non-U.S. securities. At the same time, as 
described below, the proposal provides safeguards designed to reduce 
the potential for manipulation and other abusive trading strategies in 
connection with the trading of non-U.S. security ELNs and their 
underlying securities. Accordingly, the Commission believes that the 
proposal will extend the benefits associated with ELNs on non-U.S. 
securities without compromising the effectiveness of the Exchange's 
listing standards for such securities.
    Currently, the 50% Test allows the Exchange to list ELNs on a non-
U.S. security in the absence of a comprehensive/effective surveillance 
sharing agreement with the primary exchange where the non-U.S. security 
trades if the combined trading volume of the non-U.S. security and 
other related non-U.S. securities occurring in the U.S. market during 
the six month period preceding the selection of the non-U.S. security 
for ELN listing represents (on a share equivalent basis) at least 50% 
of the combined world-wide trading volume in such securities.
    The Commission has previously concluded that the 50% Test helps to 
ensure that the relevant pricing market for non-U.S. securities 
underlying ELNs occurs in the U.S. market.\10\ In such cases, the 
Commission has previously found that the U.S. market is the 
instrumental market for purposes of deterring and detecting potential 
manipulations or other abusive trading strategies in conjunction with 
transactions in the overlying non-U.S. security ELN market. Because the 
U.S. self-regulatory organizations which comprise the U.S. market for 
non-U.S. securities are members of the Intermarket Surveillance 
Group,\11\ the Commission has concluded that there exists an effective 
surveillance sharing agreement to permit the exchanges and the NASD to 
adequately investigate any potential manipulations of the non-U.S. 
security ELNs or their underlying securities.

    \10\ See Securities Exchange Act Release Nos. 34549 (August 18, 
1994), 59 FR 43873 (August 25, 1994) (SR-Amex-93-46); 34759 
(September 30, 1994), 59 FR 50939 (October 6, 1994) (SR-CBOE-94-04); 
34758 (September 30, 1994), 59 FR 50943 (October 6, 1994) (SR-NASD-
94-49); 34985 (November 18, 1994), 59 FR 60860 (November 28, 1994) 
(SR-NYSE-94-37); and 35479 (March 13, 1995), 60 FR 14993 (March 21, 
1995) (SR-Phlx-95-09) (``ELN Approval Orders'').
    \11\ The Intermarket Surveillance Group (``ISG'') was formed on 
July 14, 1983 to, among other things, coordinate more effectively 
surveillance and investigative information sharing arrangements in 
the stock and options markets. See Intermarket Surveillance Group 
Agreement, July 14, 1983. The most recent amendment to the ISG 
Agreement, which incorporates the original agreement and all 
amendments made thereafter, was signed by ISG members on January 29, 
1990. See Second Amendment to the Intermarket Surveillance Group 
Agreement, January 29, 1990. The members of the ISG are: The 
American Stock Exchange, Inc.; the Boston Stock Exchange, Inc.; the 
CBOE; the Chicago Stock Exchange, Inc.; the National Association of 
Securities Dealers, Inc.; the New York Stock Exchange, Inc.; the 
Pacific Stock Exchange, Inc.; and the Philadelphia Stock Exchange, 
Inc. Because of potential opportunities for trading abuses involving 
stock index futures, stock options, and the underlying stock and the 
need for greater sharing of surveillance information for these 
potential intermarket trading abuses, the major stock index futures 
exchanges (e.g., the Chicago Mercantile Exchange and the Chicago 
Board of Trade) joined the ISG as affiliate members in 1990.
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    The Exchange proposes to modify the 50% Test to include in the U.S. 
market volume calculation the trading volume in non-U.S. securities and 
other related non-U.S. securities that occur in any market with which 
the Exchange has in place a comprehensive/effective surveillance 
sharing agreement. The Commission believes that this proposed 
modification of the 50% Test is consistent with the Act and with the 
Commission's approach in the ELN Approval Orders because it will 
continue to ensure that the majority of world-wide trading volume in 
the non-U.S. security and other related non-U.S. securities occurs in 
trading markets with which the Exchange has in place a comprehensive/
effective surveillance sharing agreement. The existence of such 
agreements should deter as well as detect manipulations or other 
abusive trading strategies and also provide an adequate mechanism for 
obtaining market and trading information from the non-U.S. markets that 
list the non-U.S. security underlying the Exchange's ELNs in order to 
adequately investigate any potential abuse or manipulation.
    Additionally, the Commission finds that the proposed 20% Test + 
Daily Trading Volume Standard is consistent with the Act and with the 
ELN Approval Orders. As noted above, the 20% Test + Daily Trading 
Volume Standard will allow the Exchange to list ELNs on a non-U.S. 
security if, over the six month period preceding the date of selection 
of the non-U.S. security for ELNs trading (1) the combined world-wide 
trading volume for the non-U.S. security in the U.S. market represents 
(on a share equivalent basis) at least 20% of the combined world-wide

[[Page 13553]]
trading volume in the non-U.S. security and other related non-U.S. 
securities; \12\ (2) the average daily trading volume for the non-U.S. 
security in the U.S. market is at least 100,000 shares; and (3) the 
trading volume for the non-U.S. security in the U.S. market is at least 
60,000 shares per day for a majority of the trading days.

    \12\ The Commission notes that the 20% Test + Daily Trading 
Volume Standard does not include worldwide trading volume in the 
non-U.S. security that takes place in a foreign market regardless of 
the existence of a comprehensive surveillance sharing agreement with 
the listing exchange. The 20% Test is a minimum U.S. market share 
trading test intended to permit the listing of ELNs only on non-U.S. 
securities that have active and liquid markets in the U.S.
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    The Commission believes that these requirements present a 
reasonable alternative to the 50% Test by limiting the actual listing 
of ELNs on non-U.S. securities to only those non-U.S. securities that 
have a significant amount of U.S. market trading volume. This will 
ensure that the U.S. market is sufficiently active to serve as a 
relevant pricing market for the non-U.S. security and that the 
underlying foreign security is readily available to meet the delivery 
requirements upon exercise of the ELN. Accordingly, the Commission 
believes that the 20% Test + Daily Trading Volume Standard should help 
to ensure that the U.S. markets serve a significant role in the price 
discovery of the applicable non-U.S. security and are generally deep, 
liquid markets.
    Finally, the Exchange believes, for similar reasons, that it is 
appropriate to reduce the minimum U.S. trading volume requirements for 
ELNs issuances from 30% to 20%. As noted above, the Commission believes 
that the 20% Test + Daily Trading Volume Standard will ensure that an 
underlying non-U.S. security has deep and liquid markets to sustain an 
ELNs listing. The Commission believes that it is appropriate to adjust 
the limitations on the size of the ELNs issuance to correspond to this 
requirement. Accordingly, where the trading volume in the U.S. market 
for the underlying non-U.S. security is between 20% and 50% of the 
worldwide trading volume, the issuance will be limited to 2% of the 
total outstanding shares of the underlying security. The 20% minimum 
U.S. trading volume requirement should continue to ensure that the U.S. 
market is significant enough to accommodate ELNs trading. In this 
regard, the Commission believes that these restrictions will minimize 
the possibility that trading in such issuances will adversely impact 
the market for the security to which it is linked.
    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 to the proposed rule change prior to the 
thirtieth day after the date of publication of notice thereof in the 
Federal Register in order to allow CBOE to implement these changes to 
its ELNs Listing Standards without delay. The proposal will provide the 
Exchange with increased flexibility in the listing of ELNs products on 
both U.S. and non-U.S. securities without compromising investor 
protection concerns. In addition, the CBOE proposal is substantially 
similar to, and is being approved concurrently with, two American Stock 
Exchange proposals relating to ELNs listing standards, both of which 
were subject to the full notice and comment period.\13\ The Commission 
notes that no comment letters were received on these Amex proposals. 
Accordingly, the Commission does not believe the CBOE proposal, as 
amended, raises any new or unique regulatory issues. For these reasons, 
the Commission believes there is good cause, consistent with Sections 
6(b)(5) and 19(b)(2) of the Act, to approve the proposed rule change 
and Amendment No. 1 on an accelerated basis.

    \13\ See Securities Exchange Act Release Nos. 36538 (Nov. 30, 
1995) (notice of filing of SR-Amex-95-44) and 36578 (Dec. 13, 1995) 
(notice of filing of SR-Amex-95-48).
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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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by April 17, 1996.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-95-71) is approved, as 
amended.


    \14\ 15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\

    \15\ 17 CFR Sec. 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7396 Filed 3-26-96; 8:45 am]
BILLING CODE 8010-01-M