[Federal Register Volume 61, Number 155 (Friday, August 9, 1996)]
[Notices]
[Pages 41671-41673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20310]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37519; File No. SR-CBOE-96-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Listing and Trading of Options on the Goldman Sachs Technology 
Composite Index

August 2, 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 July 2, 
1996, the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization.\1\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ Concurrent with this proposal, CBOE has filed for approval 
to list and trade options on six different sub-indexes, each of 
which is a narrow-based index, composed of components of the Goldman 
Sachs Technology Composite Index proposed in this filing. See SR-
CBOE-96-44.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to provide for the listing and trading on the 
Exchange of options on the Goldman Sachs Technology Composite Index 
(``GSTI Composite Index'' or ``Index''), a cash-settled, broad-based 
index designed to measure the performance of high capitalization 
technology stocks.\2\
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    \2\ A list of the securities comprising the GSTI Composite 
Index, as well as listed shares outstanding and prices as of April 
30, 1996, was submitted by the Exchange as Exhibit B, and is 
available at the Office of the Secretary, CBOE and at the 
Commission.
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    The text of the proposed rule change 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 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. The 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

1. Purpose
    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 GSTI Composite Index. The GSTI Composite Index is a capitalization-
weighted index of the universe of technology-related company stocks 
which meet certain objective criteria.
    Index Design. The GSTI Composite Index has been designed to measure 
the performance of high capitalization technology stocks. The GSTI 
Composite Index is a capitalization-weighted index with each stock 
affecting the Index in proportion to its market capitalization.
    As mentioned above, the GSTI Composite Index will consist of the 
universe of technology-related stocks that meet certain objective 
criteria. First, the company's stock must trade on the New York Stock 
Exchange, the American Stock Exchange, or through the facilities of the 
NASDAQ and be ``reported securities'' under Rule 11Aa3-1. Only 
outstanding common shares are eligible for inclusion; American 
Depositary Receipts are not eligible. Second, the total market 
capitalization of the company's stock must be equal to or greater than 
the capitalization ``cutoff'' value. The base period ``cutoff'' value 
will be $600 million, but this value will be adjusted on each 
semiannual rebalancing date (as described below) to reflect the price 
performance of the GSTI Composite Index since the base period and 
rounded up to the nearest $50 million. Index constituents with 
capitalization below 50% of the ``cutoff'' value on a semiannual 
rebalancing date shall be removed after the close on the effective date 
of the rebalancing. Third, company stocks with a public float below 20% 
of shares issued and outstanding are not eligible for inclusion in the 
GSTI Composite Index.\3\ Fourth, the company stock must have annualized 
share turnover over 30% or more based on its average daily share volume 
for the six calendar months prior to inclusion in the Index. Finally, 
the components must be from a group of specified Standard Industrial 
Classification codes or Russell Industry codes.
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    \3\ The public float is determined by dividing the number of 
shares which are owned by persons other than those required to 
report their stock holdings under Section 16(a) of the Act by the 
total number of shares outstanding. With respect to options on 
underlying individual components, CBOE Rule 5.3, Interpretations and 
Policies .01(a)(1) requires a minimum of 7,000,000 shares of the 
underlying security which are owned by persons other than those 
required to report their stock holdings under Section 16(a) of the 
Act. Telephone conversation with Eileen Smith, CBOE and Janice 
Mitnick, SEC, on July 30, 1996.
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    As of April 30, 1995, the GSTI Composite Index was comprised of 177 
stocks ranged in capitalization from $604 million to $67.3 billion. The 
largest stock accounted for 8.5% of the total weighting of the Index, 
while the smallest accounted for 0.08%. The median capitalization of 
the firms in the Index was $1.5 billion.
    Calculation. The methodology used to calculate the value of the 
Index is similar to the methodology used to calculate the value of 
other well-known broad-based indices. The level of the Index reflects 
the total market value of all the component stocks relative to a 
particular based period. The GSTI Composite Index base date is April 
30, 1996, when the Index value was set to 100. The daily calculation of 
the GSTI Composite Index is computed by dividing the total market value 
of the components in the Index by the Index Divisor. The divisor is 
adjusted as needed to ensure continuity in the Index whenever there are 
additions and deletions from the Index, share changes, or adjustments 
to a component's price to reflect offerings, spinoffs, or extraordinary 
cash dividends. The values of the Index will be calculated by CBOE or a 
designee of Goldman Sachs, and disseminated at 15-second intervals

[[Page 41672]]

during regular CBOE trading hours to market information vendors via the 
Options Price Reporting Authority (``OPRA'').
    Maintenance. The GSTI Composite Index will be maintained by the 
Exchange. Index maintenance includes monitoring and completing the 
adjustments for company additions and deletions, share changes, stock 
splits, stock dividends, and stock price adjustments due to such events 
as company restructuring or spinoffs.
    Stocks may be added or deleted from the Index at a time other than 
at the rebalancing according to the ``Fast Add and Delete'' Rule. All 
Index constituent changes made in accordance with this rule will be 
announced by the Exchange at least five trading days prior to the 
effective date of the Fast Add or Delete whenever possible.
    Any technology-related company whose shares start trading between 
semiannual rebalancings is eligible to be Fast Added to the Index if 
all the inclusion criteria described above are met and the stock ranks 
in the top quartile of market capitalization of the GSTI Composite 
Index on the previous month-end closing prices. No minimum share 
turnover ratio is required.
    If two companies in the Index merge or if an Index constituent 
merges with a company not currently in the Index, the merged company 
shall remain in the Index if it meets all the Index inclusion criteria. 
If the target company is currently in the Index, it will be Fast 
Deleted after the close on the date the merger is completed.
    If a GSTI Composite Index constituent is acquired by a non-Index 
company, the acquiring company may be added to the Index if it meets 
the inclusion criteria; otherwise, the target company will be Fast 
Deleted. Any such additions or deletions will be effective after the 
close on the date the acquisition is completed.
    If a company in the Index spins off another company, the parent and 
the spinoff will remain in the Index provided that each meets the Index 
inclusion criteria. If either the parent of the spinoff fails to meet 
the inclusion criteria, it will be removed from the Index.
    In the event that a company represented in the Index files for 
bankruptcy, its stock will be removed from the Index effective after 
the close on the date of filing. In the event that trading in an Index 
constituent is suspended for thirty (30) trading days, a decision will 
be made whether the stock will be removed from the Index. Any such 
removal will be preannounced and, for purposes of minimizing impact to 
the Index, the stock to be removed will be removed at the value at 
which it last traded.
    The GSTI Index will be rebalanced for additions and deletions on a 
semiannual basis. Stocks will be added or deleted from the Index at the 
rebalancing based on the inclusion criteria described in the ``Index 
Design'' section above. Index share changes will be made to reflect the 
outstanding shares and closing prices of all Index constituents on the 
``rebalancing'' date. The changes will be implemented after the close 
on the ``effective'' date. The effective dates shall be the third 
Friday of January and July. The rebalancing date shall be 7 business 
days inclusive prior to the effective date. The Exchange will screen 
the technology stocks for inclusion in the Index and will determine the 
components of the Index. Notice of the new component list will be 
disseminated by the Exchange to the public before trading begins on 
Monday. Therefore, Goldman Sachs will not learn of the new composition 
during regular U.S. trading hours.
    Except for stocks which meet the criteria for Fast Add or Delete 
(as described above), stocks can only be added or deleted from the 
Index at the time of the semiannual rebalancing.
    Index Option Trading. In addition to regular Index options, the 
Exchange may provide for the listing of 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 Index level. The current and closing Index value of any 
such reduced-value LEAP will, after such initial computation, be 
rounded to the nearest one-hundredth.
    Strike prices will be set to bracket the Index in a minimum of 2\1/
2\ point increments for strikes below 200 and in 5 point increments 
above 200. The minimum tick size for series trading below $3 will be 
\1/16\th and for series trading above $3 the minimum tick will be \1/
8\th. The trading hours for options on the Index will be from 8:30 a.m. 
to 3:15 p.m. Chicago time.
    Exercise and Settlement. The proposed options on the Index will 
expire on the Saturday following the third Friday of the expiration 
month. Trading in the expiring contract month will normally cease at 
3:15 p.m. (Chicago time) on the business day preceding the last day of 
trading in the component securities of the Index (ordinarily the 
Thursday before expiration Saturday, unless there is an intervening 
holiday). The exercise settlement value of the Index at option 
expiration will be calculated based on the opening prices of the 
component securities on the business day prior to expiration. If a 
stock fails to open for trading, the last available price on the stock 
will be used in the calculation of the Index, as is done for currently 
listed indexes. When the trading day is moved because of Exchange 
holidays (such as when CBOE is closed on the Friday before expiration), 
the last trading day for expiring options will be Wednesday and the 
exercise settlement value of Index options at expiration will be 
determined at the opening of regular Thursday trading.
    Surveillance. The Exchange will use the same surveillance 
procedures currently utilized for each of the Exchange's other index 
options to monitor trading in Index options and Index LEAPS on the GSTI 
Composite Index.
    Position Limits. The Exchange proposes to establish position limits 
for options on the Index at 100,000 contracts on either side of the 
market, with no more than 60,000 of such contract permitted to be in 
the series in the nearest expiration month. These limits are roughly 
equivalent, in dollar terms, to the limits applicable to options on 
other indices.
    Exchange Rules Applicable. As modified herein, the Rules in Chapter 
XXIV will be applicable to GSTI Composite Index options.
    CBOE has the necessary systems capacity to support new series that 
would result from the introduction of GSTI Composite Index options. 
CBOE has also been informed that the OPRA has the capacity to support 
such new series.\4\
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    \4\ See memo from Joe Corrigan, Executive Director, OPRA, to 
Eileen Smith, Director of Product Research, CBOE, dated June 26, 
1996 (confirming that the traffic generated is within the OPRA's 
capacity).
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    CBOE believes the proposed rule change is consistent with Section 
6(b) of 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 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.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with Section 
6(b) of 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 IPC pursuant to rules designed to prevent fradulent and

[[Page 41673]]

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

    The Exchange believes the proposed rule change will impose no 
burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, will 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 Room. 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-96-43 and should 
be submitted by August 30, 1996.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 C.F.R. 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-20310 Filed 8-8-96; 8:45 am]
BILLING CODE 8010-01-M