[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50362-50366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24494]



[[Page 50362]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37693; File No. SR-CBOE-96-43]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change, and Notice of Filing and 
Order Granting Accelerated Approval of Amendments No. 1, No. 2 and No. 
3 Thereto Relating to the Listing and Trading of Options on the Goldman 
Sachs Technology Composite Index

September 17, 1996.
    On July 2, 1996, 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 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. Notice of the proposed rule change 
was published for comment and appeared in the Federal Register on 
August 9, 1996.\3\ No comments were received on the proposal. On August 
13, 1996, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ On September 10, 1996, CBOE submitted Amendment No. 2 to the 
proposed rule change.\5\ On September 16, 1996, CBOE submitted 
Amendment No. 3 to the proposed rule change \6\ (together with 
Amendments No. 1 and No. 2, the ``Amendments''). This order approves 
the proposal, as amended, and solicits comments on Amendment No. 1, 
Amendment No. 2, and Amendment No. 3.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR Sec. 240.19b-4.
    \3\ See Securities Exchange Act Release No. 37519 (August 2, 
1996), 61 FR 41671.
    \4\ See letter from Eileen Smith, Director, Product Development, 
CBOE to Stephen Youhn, Special Counsel, Office of Market 
Supervision, Division of Market Regulation, SEC, dated August 13, 
1996. Amendment No. 1 primarily addresses issues related to Index 
maintenance criteria.
    \5\ See letter from Eileen Smith, CBOE to Stephen Youhn, SEC, 
dated September 10, 1996. Amendment No. 2 institutes a minimum 
market capitalization requirement for Index components.
    \6\ See letter from Eileen Smith, CBOE to Stephen Youhn, SEC, 
dated September 16, 1996. Amendment No. 3 clarifies Amendments No. 1 
and No. 2.
---------------------------------------------------------------------------

I. Description of the Proposal

A. Composition of the Index

    The GSTI Composite Index has been designed to measure the 
performance of the universe of high capitalization technology 
stocks.\7\ The GSTI Composite Index is a capitalization-weighted index 
with each stock affecting the Index in proportion to its market 
capitalization. All securities that meet the following criteria (the 
``GSTI Index Rules'') will automatically be included in the Index, 
either at the time of the semiannual rebalancing or when the ``fast-
add'' criteria, as defined below, are met.\8\
---------------------------------------------------------------------------

    \7\ 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.
    \8\ Amendment No. 1. All the securities to be added to or 
deleted from the Index, whether at the semi-annual rebalancing or by 
``fast-add'' or ``fast-delete,'' will be identified and selected 
solely by the CBOE staff. The GSTI Committee, which is responsible 
for maintaining the GSTI Sub-Indexes (as discussed in SR-CBOE-96-
44), is not involved in any decisions on adding or deleting 
securities from the Composite Index. Id.
---------------------------------------------------------------------------

    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. Additionally, 
only foreign companies whose primary market is in the United States 
will be eligible for the Index,\9\ 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 initial 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 Index since 
the base period and rounded up to the nearest $50 million. Third, 
company stocks with a public float below 20% of shares issued and 
outstanding are not eligible for inclusion in the Index.\10\ Fourth, 
the company stock must have annualized share turnover of 30% or more, 
based on its average daily share volume for the six calendar months 
prior to inclusion in the Index. Fifth, the components must be from a 
delineated group of Standard Industrial Classification codes or Russell 
Industry codes.\11\ Sixth, at least 75% of the weight of the Index must 
be options eligible pursuant to CBOE Rule 5.3.\12\
---------------------------------------------------------------------------

    \9\ Amendment No. 1.
    \10\ 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, Attorney, Office of Market Supervision, Division of Market 
Regulation, SEC, on July 30, 1996.
    \11\ Amendment No. 1. Included in the delineated list are 14 
categories under the SIC Code and 6 categories under the Russell 
Code.
    \12\ Amendment No. 3. As of April 30, 1996, 100% of the Index 
was options eligible. See note 25, infra, which discusses CBOE 
options eligibility standards.
---------------------------------------------------------------------------

    As of April 30, 1996, the Index was comprised of 177 stocks ranging 
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.

B. 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 base 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 on a real-time basis, 
and disseminated at 15-second intervals during regular CBOE trading 
hours to market information vendors via the Options Price Reporting 
Authority (``OPRA'').\13\
---------------------------------------------------------------------------

    \13\ Telephone conversation between Eileen Smith, CBOE and 
Sharon Lawson, Senior Special Counsel, Office of Market Supervision, 
Division of Market Regulation, SEC, on September 17, 1996. The 
original filing proposed that the Sub-Index values be calculated by 
CBOE or a designee of Goldman Sachs.
---------------------------------------------------------------------------

C. Maintenance

    The GSTI Composite Index will be maintained by the Exchange. Index 
maintenance includes monitoring Index criteria 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 restructurings or spinoffs, as well as the semiannual 
rebalancing. Any changes CBOE makes to the Index must be in

[[Page 50363]]

compliance with the inclusion and maintenance criteria.
    The Index will be rebalanced by CBOE for additions and deletions on 
a semiannual basis. Stocks will be added or deleted from the Index at 
the semiannual rebalancing in accordance with CBOE's application of the 
GSTI Index Rules,\14\ as well as compliance with the market 
capitalization cut-off value, component options eligibility 
percentages, trading volume requirements and weighting limitations 
noted below. In particular, 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. Further, at the semiannual rebalancing, CBOE will consult 
with the Commission staff if any component's market capitalization 
drops below $75 million at the time of the semiannual rebalancing and 
that component is not options eligible,\15\ less than 75% of the 
capitalization of the Index is represented by stocks eligible for 
options trading,\16\ and/or 10% or more of the weight of the Index is 
composed of stocks with average daily volume for the previous six-month 
period of less than 20,000 shares.\17\ If any of these situations 
occur, the CBOE will discuss with Commission staff what action should 
be taken, including whether the Index should be reclassified as narrow-
based, opening transactions should be prohibited and/or new Index 
series should not continue to be listed. Additionally, CBOE will notify 
Commission staff if the largest component of the Index is greater than 
15% of the weight of the Index, or the top five components are greater 
than 50% of the weight of the Index.\18\
---------------------------------------------------------------------------

    \14\ The GSTI Index is based on pre-determined criteria (the 
GSTI Index Rules) which have been publicly disseminated. See Section 
I(A), supra.
    \15\ Amendment No. 3.
    \16\ Amendment No. 3.
    \17\ Amendment No. 3.
    \18\ Amendment No. 1. After notification of Commission staff, 
CBOE will monitor the Index for the following three month period. At 
the end of that time period, CBOE, in conjunction with Commission 
staff, will determine if the Index should be reclassified as narrow-
based.
---------------------------------------------------------------------------

    At the rebalancing, 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 seven (7) 
business days inclusive prior to the effective date. Notice of the new 
component list will be disseminated by the Exchange to the public at 
least five trading days before the effective date, unless unforeseen 
circumstances require a shorter period.
    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 three to five trading days prior to 
the effective date of the Fast Add or Delete, unless unforeseen 
circumstances require a shorter period.
    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, excluding the 
requirement for minimum share turnover ratio.\19\ Further, the stock 
must rank in the top quartile of market capitalization of the GSTI 
Composite Index based on the previous month-end closing prices.
---------------------------------------------------------------------------

    \19\ As noted above, CBOE will ensure 75% of the Index is 
options eligible at each semiannual rebalancing. These standards 
contain minimum trade volume requirements. See note 25, infra.
---------------------------------------------------------------------------

    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 company to be merged into another company (``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 or 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 the filing. In the event that trading in an 
Index constituent is suspended for thirty (30) trading days, CBOE will 
remove the company from the Index unless an announcement has been made 
that the stock will commence trading within the next ten days.\20\ Any 
such removal will be preannounced and, for purposes of minimizing 
impact to be Index, the stock to be removed will be removed at the 
value at which it last traded.
---------------------------------------------------------------------------

    \20\ Amendment No. 1.
---------------------------------------------------------------------------

    Except for stocks which meet the criteria for Fast Add or Delete 
(as described above), stocks can only be added or deleted by CBOE from 
the Index at the time of the semiannual rebalancing.

D. 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/
16th and for series trading above $3 the minimum tick will be 1/18th. 
The trading hours for options on the Index will be from 8:30 a.m. to 
3:10 p.m. Chicago time.

E. 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 3:10 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.\21\ When the last 
trading day is moved because of Exchange holidays (such as when CBOE is 
closed on the

[[Page 50364]]

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.
---------------------------------------------------------------------------

    \21\ The Commission notes, however, that pursuant to Article 
XVII, Section 4 of OCC's by-laws, OCC is empowered to fix an 
exercise settlement amount in the event that OCC determines that the 
current index value is unreported or otherwise unavailable. Further, 
OCC has authority to fix an exercise settlement amount whenever the 
primary market for the securities representing a substantial part of 
the value of an underlying index is not open for trading at the time 
when the current index value (i.e., the value used for exercise 
settlement purposes) ordinarily would be determined. See Securities 
Exchange Act Release No. 37315 (June 17, 1996, 61 FR 42671 (August 
16, 1996) (order approving SR-OCC-95-19).
---------------------------------------------------------------------------

F. Surveillance

    The Exchange will use the same surveillance procedures currently 
utilized for each of the Exchange's other index options of monitor 
trading in Index options and Index LEAPS on the GSTI Composite Index.

G. 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 contracts 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 similar 
indices.

H. Exchange Rules Applicable and Systems Capacity.

    As modified herein, the Rules in Chapter XXIV will be applicable to 
the trading of GSTI Composite Index options.
    CBOE has stated that it 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 new series.\22\
---------------------------------------------------------------------------

    \22\ 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).
---------------------------------------------------------------------------

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirement 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).\23\ The Commission 
finds that the trading of options on the Index will permit investors to 
participate in the price movement of the securities on which the Index 
is based. The Commission also believes that the trading of options on 
the Index is allow investors holding positions in some of all of the 
securities underlying the Index to hedge the risks associated with 
their portfolios. Accordingly, the Commission believes GSTI Composite 
Index options will provide investors with an important trading and 
hedging mechanism that should reflect accurately the overall movement 
of the securities contained in the Index. By broadening the hedging and 
investment opportunities of investors, the Commission believes that the 
trading of options on the GSTI Composite Index will serve to protect 
investors, promote the public interest, and contribute to the 
maintenance of fair and orderly markets.\24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. Sec. 78f(b)(5).
    \24\ Pursuant to section 6(b)95) of the Act, the Commission must 
predicate approval of any new option or warrant proposal upon a 
finding that the introduction of such new derivative instrument is 
in the public interest. Such a finding would be difficult for a 
derivative instrument that served no hedging or other economic 
function, because any benefits that might be derived by market 
participants likely would be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns. In this regard, the 
trading of listed options on the GSTI Index will provide investors 
with a hedging vehicle that should reflect the overall movement of 
the universe of highly capitalized technology stocks primarily 
traded on U.S. markets.
---------------------------------------------------------------------------

    The trading of Goldman Sachs Technology Composite Index options, 
however, raised several issues, including issues related to index 
design, customer protection, surveillance, and market impact. For the 
reasons discussed below, the Commission believes that the CBEO has 
adequately addressed these issues.

A. Index Design and Structure

    The Commission finds that it is appropriate and consistent with the 
Act to classify the Index as broad-based, and therefore to permit 
Exchange rules applicable to the trading of broad-based index options 
to apply to the Index options. Specifically, the Commission believes 
the Index is broad-based because it reflects a substantial segment of 
the U.S. equities market, in general, and high capitalization 
technology securities, in particular. First, the high technology sector 
is a substantial segment of the U.S. equities market, the GSTI Index 
Rules ensure that the Index continues to reflect that segment. Second, 
the Index includes multiple industries within the high technology 
segment of the securities market, such as computer and office 
equipment, industry machinery, radio and television broadcasting and 
communications equipment, and telephone and telegraph apparatus, and 
does not rely solely on computer-related companies. Third, the Index 
consists of 177 actively traded securities (all options eligible as of 
April 30, 1996 \25\), all of which trade on the New York Stock 
Exchange, the American Stock Exchange or through the facilities of the 
Nasdaq. Fourth, the market capitalization of the stocks comprising the 
Index is very large. Specifically, the total capitalization of the 
Index as of April 30, 1996 was approximately $791.7 billion. Market 
capitalization of the individual stocks ranges from $604 million to 
$67.3 billion, with an average capitalization of $4.47 billion. Fifth, 
no stock or group of stocks dominates the weight of the Index. 
Specifically, no single stock accounted for more than 8.5% of the total 
weighting of the Index, and the five highest weighted securities 
accounted for only 35% of the Index value.\26\ Accordingly, the 
Commission believes it is appropriate to classify the Index as broad-
based.
---------------------------------------------------------------------------

    \25\ The standards for options eligibility, which are uniform 
among the options exchanges, provide that a security underlying an 
option must, among other things, meet the following requirements: 
(1) the public float must be at least 7,000,000; (2) there must be a 
minimum of 2,000 stockholders; (3) trading volume must have been at 
least 2.4 million over the preceding twelve months; and (4) the 
market price must have been at least $7.50 for a majority of the 
business days during the preceding three calendar months. See CBOE 
Rule 5.3, Interpretation .01.
    \26\ Amendment No. 1. If the largest component of the Index is 
greater than 15% of the weight of the Index, or the top five 
components are greater than 50% of the weight of the Index, CBOE 
will notify Commission staff. After notification of Commission 
staff, CBOE will monitor the Index for the following three month 
period. At the end of that time period, CBOE, in conjunction with 
Commission staff, will determine if the Index should be reclassified 
as narrow-based. This standard regarding the weight of Index 
components should ensure that if the Index becomes dominated by one 
or a few securities, the Commission and CBOE will re-review the 
Index's broad-based status.
---------------------------------------------------------------------------

    The Commission also believes that the general broad 
diversification, capitalization, and relatively liquid markets of the 
Index's component stocks significantly minimize the potential for 
manipulation of the Index. First, as discussed above, the Index 
represents a broad cross-section of domestically traded high 
capitalization technology stocks, with no single industry group or 
stock dominating the Index. Second, the majority of the stocks that 
comprise the Index are actively traded.\27\ Third, the Commission 
believes that the Index selection and maintenance criteria will serve 
to ensure that the Index will not be dominated by low priced stocks 
with small capitalizations, floats and trading volumes.\28\ Fourth, the 
CBOE has represented that it will monitor the Index semiannually and 
will consult with staff of the Commission when: (A)

[[Page 50365]]

less than 75% of the weight of the Index is options eligible \29\ (B) 
10% or more of the weight of the Index is composed of stocks with 
average daily volume of less than 20,000 shares for the previous six 
month period; \30\ (C) the market capitalization of any component falls 
below $75 million at a time the component is not options eligible; \31\ 
or (D) the largest component of the Index is greater than 15% of the 
weight of the Index, or the top five components are greater than 50% of 
the weight of the Index \32\. In the event the Index fails to satisfy 
any of the criteria in A, B and C above, CBOE will consult with the 
Commission to determine the appropriate regulatory response, including 
but not limited to the reclassification of the Index as narrow-based, 
prohibiting opening transactions and/or discontinuing the listing of 
new series of Index options.\33\ As noted above, as to component 
weight, CBOE will monitor the Index for a three month period and, in 
conjunction with Commission staff, will determine whether the Index 
should be reclassified as narrow-based.\34\
---------------------------------------------------------------------------

    \27\ As stated above, in order to qualify for inclusion in the 
Index, a company must have annualized share turnover of 30% or more 
based on its average daily share volume for the six calendar months 
prior to inclusion into the Index.
    \28\ In this regard, the Commission notes that the GSTI 
Composite Index is comprised of the universe of technology stocks 
that meet the GSTI Index Rules criteria. There are no subjective 
criteria in determining the components of the Index. See Amendment 
No. 1.
    \29\ Amendment No. 3.
    \30\ Amendment No. 3.
    \31\ Amendment No. 3.
    \32\ Amendment No. 1.
    \33\ Amendment No. 3.
    \34\ Amendment No. 1.
---------------------------------------------------------------------------

    Fifth, the Exchange has proposed reasonable position and exercise 
limits for the Index options that will serve to minimize potential 
manipulation and other market impact concerns. The position limits, at 
100,000 contracts on either side of the market, with no more than 
60,000 of such contracts permitted to be in the series in the nearest 
expiration month, are roughly equivalent in dollar terms to the limits 
applicable to options on other similar indices. Accordingly, the 
Commission believes these factors minimize the potential for 
manipulation because it is unlikely that attempted manipulations of the 
prices of the Index components would affect significantly the Index's 
value. Moreover, the surveillance procedures discussed below should 
detect as well as deter potential manipulation and other trading 
abuses.

B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as Index options, can 
commence on a national securities exchange. The Commission notes that 
the trading of standardized exchange-traded options occurs in an 
environment that is designed to ensure, among other things, that: (1) 
the special risks of options are disclosed to public customers; (2) 
only investors capable of evaluating and bearing the risk of options 
trading are engaged in such trading; and (3) special compliance 
procedures are applicable to options accounts. Accordingly, because the 
Index options will be subject to the same regulatory regime as the 
other standardized options traded on the CBOE, the commission believes 
that adequate safeguards are in place to ensure the protection of 
investors in Index options.

C. Surveillance

    The Commission generally believes that a surveillance sharing 
agreement between an exchange proposing to list a stock index 
derivative product and the exchange(s) trading the stocks underlying 
the derivative product is an important measure for surveillance of the 
derivative and underlying securities markets. Such agreements ensure 
the availability of information necessary to detect and deter potential 
manipulations and other trading abuses, thereby making the stock index 
product less readily susceptible to manipulation.\35\ In this regard, 
the New York Stock Exchange, Inc., American Stock Exchange, Inc. and 
the National Association of Securities Dealers, Inc., on whose markets 
the component securities of the Index trade, are all members of the 
Intermarket Surveillance Group (``ISG'').\36\
---------------------------------------------------------------------------

    \35\ See Securities Exchange Act Release No. 31243 (October 5, 
1992), 57 FR 45849.
    \36\ The 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, dated July 14, 1983, 
amended January 29, 1990. The members of the ISG are the following: 
American Stock Exchange; Boston Stock Exchange, Inc.; CBOE; Chicago 
Stock Exchange, Inc.; National Association of Securities Dealers, 
Inc.; New York Stock Exchange, Inc.; Pacific Stock Exchange Inc.; 
and Philadelphia Stock Exchange, Inc. The major stock index futures 
exchanges (including the Chicago Mercantile Exchange and the Chicago 
Board of Trade) joined the ISG as affiliate members in 1990.
---------------------------------------------------------------------------

    Options on the individual component securities also trade on 
markets which are ISB members. In addition, the CBOE will apply the 
same surveillance procedures as those used for existing broad based 
index, options trading on the CBOE.

D. Market Impact

    The Commission believes that the listing and trading of GSTI 
Composite Index options on the CBOE will not adversely affect the 
underlying securities markets.\37\ First, as described above, the Index 
is broad-based and comprised of 177 stocks. No one stock or industry 
group dominates the Index and the maintenance standards will help to 
ensure this continues even if some of the Index components change.\38\ 
Second, as noted above, the stocks contained in the Index have large 
capitalizations and are actively traded. Should 10% or more of the 
weight of the Index be composed of stocks with an average daily volume 
of less than 20,000 for the previous six months, CBOE will consult with 
Commission staff.\39\
---------------------------------------------------------------------------

    \37\ The CBOE has stated that it has the necessary systems 
capacity to support new series that would result from the 
introduction of the GSTI Index options. As stated above, OPRA has 
represented that additional traffic generated by options and LEAPS 
on the Index is within OPRA's capacity. See note 22, supra.
    \38\See note 18, supra, and accompanying text.
    \39\ Amendment No. 3. CBOE's consultation with Commission staff 
will address whether the Index should be reclassified as narrow-
based, whether opening transactions should be prohibited and whether 
listing of new series should be discontinued if the Index does not 
meet the market value criteria. Id.
---------------------------------------------------------------------------

    Third, as of April 30, 1996, all stocks comprising the Index were 
options eligible\40\ and the maintenance standards ensure that, at 
least, 75% of the weight of the Index will continue to be eligible for 
options trading.\41\ Fourth, existing CBOE stock index options rules 
and surveillance procedures will apply to Index options. Fifth, the 
position limits of 100,000 contracts on either side of the market, with 
no more than 60,000 of such contracts in a series in the nearest month 
expiration month, will serve to minimize potential manipulation and 
market impact concerns. Sixth, the risk to investors of contra-party 
non-performance will be minimized because the Index options will be 
issued and guaranteed by the Options Clearing Corporation just like any 
other standardized option traded in the United States.
---------------------------------------------------------------------------

    \40\ Telephone conversation with Eileen Smith, CBOE and Janice 
Mitnick, SEC, on July 30, 1996.
    \41\ See notes 16-18, supra, and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission believes that settling expiring GSTI 
Composite Index options (including full-value and reduced-value Index 
LEAPS) based on the opening prices of component securities is 
reasonable and consistent with the Act. As noted in other contexts, 
valuing expiring index options for exercise settlement purposes based 
on opening prices rather than closing prices may help reduce adverse 
effects on the securities underlying options on the Index.\42\
---------------------------------------------------------------------------

    \42\ Securities Exchange Act Release No. 30944 (July 28, 1992), 
57 FR 33376.

---------------------------------------------------------------------------

[[Page 50366]]

    The Commission finds good cause for approving the Amendments prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Specifically, the Amendments clarify 
issues related to foreign securities, public float and suspension of 
trading of component securities. In addition, the Amendments establish 
maintenance criteria and provide that the CBOE will monitor the Index, 
and will notify Commission staff in the event that certain Index 
component levels fall below these designated thresholds. The Commission 
believes that these monitoring provisions ensure that the Index 
continues to be comprised of highly capitalized, actively traded 
securities. In addition, the maintenance criteria will ensure that the 
Index does not become dominated by one or a few securities. 
Accordingly, the Commission believes it is consistent with Sections 
6(b)(5) and 19(b)(2) of the Act to find that good cause exists to 
approve the Amendments to the proposal on an accelerated basis.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the Amendments. 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. Sec. 552, will be available for inspection and copying in 
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 October 16, 1996.

IV. Conclusion

    For the reasons discussed above, the Commission finds that the 
amended proposal is consistent with the Act, and, in particular, 
Section 6 of the Act.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\43\ that the proposed rule change (SR-CBOE-96-43), as amended, is 
approved.
---------------------------------------------------------------------------

    \43\ 15 U.S.C. Sec. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR Sec. 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 96-24494 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M