[Federal Register Volume 61, Number 65 (Wednesday, April 3, 1996)]
[Notices]
[Pages 14845-14847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8170]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37026; File No. SR-CBOE-96-16]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to the Listing of Options on the CBOE Computer 
Networking Index

March 26, 1996.
    Pursuant to Section 19(b)(1) of the Securities and Exchange of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
13, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to list for trading cash-settled, European-style 
\1\ options on the CBOE Computer Networking Index (``Computer 
Networking Index'' or ``Index''), an index comprised of the stocks of 
15 widely held companies involved in providing computer networking 
services, and in the design and manufacture of software and hardware 
that facilitates computer networking.

    \1\ A European-style option can be exercised only during a 
specified period immediately prior to the expiration of the option.
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    The text of the proposed rule changes is available at the Office of 
the Secretary, 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 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 these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
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

    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style options on the Index. 
According to the CBOE, the Index meets all of the generic criteria for 
listing options on narrow-based indexes as set forth in CBOE Rule 24.2, 
``Designation of the Index,'' and in the Commission's order approving 
CBOE Rule 24.2.\2\ In accordance with CBOE Rule 24.2, the CBOE proposes 
to list and trade options on the Index beginning 30 days from the 
filing date of the proposed rule change.

    \2\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval 
Order'').
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    The Index consists of the stocks of 15 widely held companies 
involved in providing computer networking services, and in the design 
and manufacture of software and hardware that facilitates computer 
networking.\3\ According to the CBOE, no proxy for the performance of 
this industry group is currently available in the U.S. derivative 
markets, and 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 components of the Index are: Ascend Communications, 
Inc., Bay Networks Inc.; 3Com Corporation; Cabletron Systems, Inc.; 
Cascade Communications Corporation; Cisco Systems, Inc.; Digi 
International, Inc.; Fore Systems, Inc.; FTP Software Inc.; Madge 
Networks, NV; Network General Corporation; Netmanage, Inc.; 
Newbridge Networks Corporation; Stratacom, Inc.; and Xircom, Inc.
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    Index Design. All of the stocks currently comprising the Index are 
U.S. securities that trade on the New York Stock Exchange, Inc. 
(``NYSE'') or through the facilities of the National Association of 
Securities Dealers Automated Quotation System (``NASDAQ''). 
Additionally, all of the Index's component stocks are ``reported 
securities'' as defined in Rule 11Aa3-1 under the Act.
    According to the CBOE, each of the stocks in the Index has a market 
capitalization in excess of $200 million. Specifically, as of February 
21, 1996, the stocks comprising the Index ranged in capitalization from 
$204 million to $25.82 billion, and the Index's total capitalization 
was $68.1 billion. In addition, as of February 21, 1996, the mean 
capitalization of the Index's component stocks was $4.54 billion and 
the median capitalization was $2.98 billion.
    The CBOE represents that all of the Index's component stocks have 
had

[[Page 14846]]
monthly trading volume well in excess of 1 million shares over the six-
month period through June 1996, and that the average monthly volumes 
for these stocks over the six-month period ranged from a low of 3.04 
million shares to a high of 231.8 million shares. Thus, the 100% of the 
weight of the Index and 100% of the number of components will be 
eligible for options trading. According to the CBOE, each of the 
Index's component stocks is currently the subject of options trading.
    The Index is an equal dollar-weighted index, with each stock 
comprising 6.67% of the total Index weight. The top five stocks in the 
Index account for 33.35% of the Index. Accordingly, the Index meets the 
Exchange's generic listing standards for narrow-based indexes with 
respect to market capitalization, weighting constraints, options 
eligibility, and trading volume.
    Calculation: The Index will be calculated on a real-time basis 
using last-sale prices by the CBOE or its designee, and will be 
disseminated every 15 seconds by the CBOE. If a component stock is not 
being traded currently, the CBOE will use the most recent price at 
which the stock traded to calculate the Index. At the close on February 
21, 1996, the value of the Index was 220.20.
    The Index is equal dollar-weighted and reflects changes in the 
prices of the component stocks relative to the Index base date, 
December 16, 1994, when the Index was set at 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, including, but not limited to, quarterly re-balancing, special 
dividends, spin-offs, certain rights issuances, and mergers and 
acquisitions.
    Maintenance: The CBOE will maintain the index. The Index will be 
re-balanced after the close of business on expiration Fridays on the 
March quarterly cycle. In addition, the CBOE staff will review the 
Index on approximately a monthly basis. The CBOE may change the 
composition of the Index at any time to reflect changes affecting the 
components of the Index or the computer networking industry generally. 
If it becomes necessary to remove a stock from the Index (for example, 
because of a takeover or merger), the CBOE will add only a stock having 
characteristics that will permit the Index to remain within the 
maintenance criteria specified in the CBOE's rules and in the Generic 
Index Approval Order.\4\ The CBOE will take into account the 
capitalization, liquidity, volatility, and name recognition of any 
proposed replacement stock.

    \4\ See note 2, supra.
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    Absent prior Commission approval, the 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 that 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 stocks eligible for equity options trading under 
CBOE Rule 5.3, ``Criteria for Underlying Securities.'' \5\

    \5\ Under the CBOE's rules, the Index must continue to satisfy 
this requirement. See CBOE Rule 24.2(c)(1).
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    If the Index fails at any time to satisfy the maintenance criteria, 
the Exchange will notify the Commission of that fact immediately and 
will not open for trading any additional series of options on the Index 
unless the CBOE determines that such failure is not significant and the 
Commission concurs in that determination, or unless the Commission 
approves the continued listing of options on the Index under Section 
19(b)(2) of the Act.
    Index Options Trading: The CBOE proposes to base trading in Index 
options on the full value of the Index. The CBOE may list full-value 
long-term index option series (``LEAPS''), as provided in CBOE Rule 
24.9, ``Terms of Index Option Contracts.'' 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 be rounded to the nearest one-hundredth after the initial 
calculation.
    Exercise and Settlement: Index options will have European-style 
exercise and will be ``A.M.-settled Index Options'' within the meaning 
of the rules in Chapter XXIV, ``Index Options,'' of the CBOE's rules, 
including CBOE Rule 24.9, ``Terms of Index Option Contracts,'' which 
the CBOE is amending to refer specifically to Index options. The 
proposed options will expire on the Saturday following the third Friday 
of the expiration month. Thus, the last day for trading in an expiring 
series will be the second business day (ordinarily a Thursday) 
preceding the expiration date.
    Exchange Rules Applicable: Except as modified herein, the rules in 
Chapter XXIV of the CBOE's rules will apply to the Index. Options based 
on the Index will be subject to the position limit requirements of CBOE 
Rule 24.4A, ``Position Limits for Industry Index Options.'' Currently, 
the position limit for Index options is 12,000 contracts. Ten reduced-
value Index options will equal one full-value Index option for position 
and exercise limit purposes.
    The CBOE represents that the Exchange has the necessary systems 
capacity to support new series that will result from the introduction 
of Index options. In addition, the Options Price Reporting Authority 
(``OPRA'') has the capacity to support the new series.\6\

    \6\ See Memorandum from Joseph P. Corrigan, Executive Director, 
OPRA, to William Speth, CBOE, dated March 1, 1996.
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    The CBOE believes that the proposal is consistent with Section 6(b) 
of the Act, in general, and, in particular, with Section 6(b)(5), in 
that it will permit trading in options based on the 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 the additional index.

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

    The 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 either 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,\7\ it has become effective 
pursuant to Section 19(b)(3)(A) of the Act and subparagraph (e) of Rule 
19b-4 thereunder. Pursuant to the Generic Index Approval Order, the 
Exchange may not list Index options for trading prior to 30 days after 
March13, 1996, the date of the proposed rule change was filed with the 
Commission. At any time within 60 days of the filing of such 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

[[Page 14847]]
the protection of investors, or otherwise in furtherance of the 
purposes of the Act.

    \7\See note 2, supra.
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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 at 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 above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by April 24, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-8170 Filed 4-2-96; 8:45 am]
BILLING CODE 8010-01-M