[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Notices]
[Pages 56587-56588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28002]



[[Page 56587]]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37873; File No. SR-CBOE-96-52]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Options 
on Interests in Exchange-Listed, Open-End Investment Companies

October 25, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on 
July 29, 1996, the Chicago Board Options Exchange, Inc. (``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. 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 the adoption of rules to permit the trading of 
options on interest in open-end, exchange-listed investment companies 
that hold securities comprising or based on an index or portfolio of 
securities designed to replicate substantially a specific component of 
a designated stock index.
    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, 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

    The purpose of the proposed rule change is to provide for the 
trading of options on shares or units of open-end, exchange-listed 
investment companies that hold securities comprising or based on an 
index or portfolio of securities that is designed to provide investment 
results that substantially correspond to the price and yield 
performance of a designated stock index. Specifically, the Exchange 
intends to trade options on interests in investment companies such as 
CountryBasketsTM, which are shares issued by series of an open-end 
investment company approved for listing on the New York Stock Exchange 
(``NYSE'') and, in the case of the initial nine series CountryBaskets, 
are designed to replicate substantially the performance of specific 
components of the FT/S&P-Actuaries World IndexTM (``FT/S&P-
AWITM'').\1\
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    \1\ CountryBasketsTM'' is a servicemark of Deutsche Morgan 
Grenfell/C.J. Lawrence Inc. (``DMG''). ``FT/S&P-Actuaries World 
IndexTM'' and ``FT/S&P-AWITM'' are trademarks of The 
Financial Times Limited and Standard & Poor's (``S&P''), and are 
licensed for use by DMG.
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    CountryBaskets are structured either as shares issued by a series 
of an open-end management investment company that invests in an indexed 
portfolio of securities, or as interests in unit investment trusts 
(``UITs'') that have as their assets shares of an open-end investment 
company that holds the underlying indexed portfolio. In either case, 
CountryBasket securities will be continually distributed through 
``Creation Transactions.'' To effect a Creation Transaction, a person 
would buy shares of the open-end investment company in exchange for an 
in-kind deposit of the indexed portfolio of securities and a specified 
amount of cash to make the deposit equal the net asset value of the 
fund shares being purchased. Creation Transactions may occur only in 
``Creation Unit'' size, which is either 100,000 or 250,000 fund shares, 
depending on the fund. In the case of CountryBaskets structured as 
UITs, the trust would issue a creation unit-size aggregation of 
redeemable units of beneficial interest in exchange for shares of the 
underlying fund. Thus it will always be possible for a person to 
acquire additional CountryBaskets by means of a Creation Transaction.
    Nine series of CountryBaskets were authorized for trading on the 
NYSE earlier this year.\2\ These initial nine series are based on FT-
Actuaries World Indices for Australia, France, Germany, Hong Kong, 
Italy, Japan, South Africa, United Kingdom and the United States. 
Options on these same nine series of CountryBaskets are proposed to be 
traded on the CBOE pursuant to the same rules and procedures that apply 
generally to trading in options on equity securities or indexes of 
equity securities, except that special listing criteria are proposed to 
apply to options on CountryBaskets. Also, reflecting the open-ended 
nature of CountryBaskets, the Exchange is not proposing any position or 
exercise limits to apply to options on CountryBaskets.
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    \2\ See Securities Exchange Act Release No. 36923 (March 5, 
1996), 61 FR 10410 (March 13, 1996).
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    The listing standards proposed for options on CountryBaskets are 
set forth in proposed Interpretation and Policy .06 under CBOE Rule 5.3 
and in Interpretation .10 under CBOE Rule 5.4. These standards, which 
provide for the listing of European-style options only, are 
substantially the same as those that apply to the initial and continued 
listing of CountryBaskets on the NYSE under the recently approved rules 
of that exchange.\3\ Conforming the listing standards for options on 
CountryBaskets to the listing standards that apply to CountryBaskets 
themselves will assure that whenever there is trading in the underlying 
CountryBaskets, options on these same CountryBaskets may also be 
available. Similarly, CBOE's proposed listing standards provide that 
there will be no opening transactions in CountryBasket options, and all 
such options will trade on a liquidation-only basis, if CountryBaskets 
should cease to trade on an exchange or as national market securities 
in the over-the-counter market. The availability of options on 
CountryBaskets should be beneficial to investors in CountryBaskets, 
since it will permit these investors to utilize options to adjust the 
risks and rewards of CountryBasket investing to their individual needs. 
It should also add to the depth and liquidity of the market for 
CountryBaskets by permitting market makers in that market to hedge the 
risks of their market-making activities.
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    \3\ See NYSE Listed Company Manual, Paragraph 703.16.
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    Reflecting the open-ended nature of CountryBaskets, the NYSE's 
maintenance listing standards for CountryBaskets do not include 
criteria based on either the number of Units outstanding or on their 
trading volume.\4\ Similarly, the CBOE believes it is neither necessary 
nor appropriate to apply traditional position or exercise limits to 
CountryBasket options, and it is proposing to amend Rules 4.11 and 4.12 
to provide that these limits shall not ordinarily apply. Since it 
should always be possible to create more CountryBaskets at their net 
asset value

[[Page 56588]]

by making an in-kind deposit of the securities that comprise the 
underlying index or portfolio, there is no limit on the available 
supply of underlying CountryBaskets. Accordingly, the Exchange believes 
that there is not the same need for option position and exercise limits 
to protect the underlying market against squeezes and other types of 
manipulation that applies to options on securities that are not open-
ended. Furthermore, the CBOE believes that in the absence of any 
maintenance listing requirements in the underlying market that call for 
a minimum number of Units or for minimum trading volume, position and 
exercise limits would not be meaningful as a percentage of either of 
these measures. For these reasons, and to assure that so long as there 
is trading in the underlying CountryBaskets there can also be trading 
in the related options, the CBOE is not proposing any position or 
exercise limits for CountryBasket options. The CBOE reserves the right, 
however, to impose position and exercise limits if, for reasons not now 
foreseeable, such limits should ever be needed in the interest of fair 
and orderly markets in the options or the underlying CountryBaskets.
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    \4\ NYSE requires at least 300,000 Units to be outstanding 
before trading in a series of CountryBaskets may commence. Although 
there is no comparable maintenance standard, as a practical matter 
there can never be trading in a series of CountryBaskets in which 
there is less than one Creation Unit (100,000 or 250,000 shares, 
depending on the series) outstanding, since CountryBaskets may only 
be created and redeemed in Creation Unit size, and if the last 
outstanding Creation Unit should ever be redeemed, the series (and 
options on that series) will cease to trade.
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    Reflecting that the underlying portfolios of CountryBaskets are 
indexed, it is proposed to amend Interpretation and Policy .01 under 
Exchange Rule 5.5 to provide that the minimum strike price intervals 
for options on CountryBaskets will be $2.50 where the strike price is 
$200 or less, and $5.00 where the strike price is over $200. These are 
comparable to the strike price intervals provided in Interpretation and 
Policy .01 under Exchange Rule 24.9, as applicable to broad-based index 
options having strike prices at about the level expected for 
CountryBasket options.
    Margin requirements are proposed for options on CountryBaskets at 
the same levels that apply to options generally under Exchange Rule 
12.3, except that, reflecting the indexed nature of underlying 
portfolios of CountryBaskets, minimum margin must be deposited and 
maintained equal to 100% of the current market value of the option plus 
15% (instead of 20%) of the market value of equivalent units of the 
underlying security value. In this respect, the margin requirements 
proposed for options on CountryBaskets are comparable to margin 
requirements that currently apply to market index options under 
Exchange Rule 24.11(b)(i).
    The CBOE believes it has the necessary systems capacity to support 
the additional series of options that would result from the 
introduction of CountryBaskets options, and it has been advised that 
the Options Price Reporting Authority (``OPRA'') also will have the 
capacity to support these additional series upon implementation of an 
additional outgoing high speed line from the OPRA processor.
    The Exchange represents that 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, because, by providing for the trading 
of options on CountryBaskets within the framework of the CBOE's 
regulated market place while there is trading in the underlying 
CountryBaskets in other exchange markets, the proposed rule change is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and to protect investors and the public interest.

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

    The Exchange believes the proposed rule change will impose no 
inappropriate 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, 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 at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-96-52 and should be 
submitted by November 22, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28002 Filed 10-31-96; 8:45 am]
BILLING CODE 8010-01-M