[Federal Register Volume 62, Number 43 (Wednesday, March 5, 1997)]
[Notices]
[Pages 10098-10100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5371]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38342; File No. SR-CBOE-97-03]


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

February 26, 1997.
    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 January 
22, 1997, 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 interests in listed, open-end, investment companies that 
hold a portfolio of securities comprising or based on a broad-based 
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 listed shares or units of open-end, indexed, 
investment companies. For purposes of this filing, indexed investment 
companies are those that hold a portfolio of securities comprising or 
based on a designated broad-based stock index such that the investment 
company is designed to provide investment results that substantially 
correspond to the price and yield performance of the designated index. 
The kinds of shares or units issued by open-end, investment companies 
that are within the scope of the proposed rule change include listed 
shares issued by open-end, managed investment companies or by series of 
such funds, or listed interests in open-end unit investment trusts 
(``UITs'') that have as their assets either an indexed portfolio of 
equity securities or shares of an open-end investment company that 
holds such a portfolio. (Shares or other interests in investment 
companies are herein referred to as ``shares.''). ``Listed'' shares are 
those that are principally traded on a national securities exchange or 
through the facilities of a national

[[Page 10099]]

securities association and reported as a ``national market security.''
    The open-end investment companies that qualify as underlying 
securities for options under this proposal continuously offer to sell 
their shares or interests at net asset value, although in some cases 
the offering of such shares may be made only in large block-size units 
(sometimes referred to as ``Creation Units'') in exchange for an in-
kind deposit of the underlying indexed portfolio of securities (or in 
the case of UITs holding shares of an indexed fund, an in-kind deposit 
of shares of the indexed fund) and a specified amount of cash to make 
the deposit equal the net asset value of the fund shares being 
purchased. Thus, it will always be possible for a person to purchase 
block-size units of shares of an underlying fund or UIT at net asset 
value by means of an in-kind deposit. The value of a Creation Unit 
varies from fund to fund, but it generally is of substantial 
size.1
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    \1\ For example, Creation Units for the series of indexed open-
end management investment companies approved for listing on the 
American Stock Exchange and known as ``WEBs'' represent from 80,000 
to 600,000 shares, which were valued from $450,000 to $10,000,000, 
depending on the series, at the time the Amex rules applicable to 
WEBs were approved. See Securities Exchange Act Release No. 36947 
(March 8, 1996) (order approving Amex Rules applicable to WEBs). 
Similarly, a Creation Unit for listed UITs indexed to the S&P 500 
Index represents 50,000 units, valued at $3,750,000 at the current 
level of that Index.
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    Similarly, redemptions of shares of underlying investment companies 
may always be made at net asset value, although, as for purchases, in 
some cases redemptions may be made only in block-size Creation Units, 
in which case payment of redemption proceeds will be made only in the 
form of an in-kind distribution of the securities comprising the 
underlying indexed portfolio or shares of the underlying indexed fund.
    Options on open-end investment companies are proposed to be traded 
on 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 this category of options, and these options are proposed to be 
subject to position and exercise limits on the same basis as broad-
based index options.
    The listing standards proposed for options on open-end investment 
companies are set forth in proposed Interpretation and Policy. .06 
under CBOE Rule 5.3 and in Interpretation .10 under CBOE Rules 5.4. 
These standards, which provide for the listing of European-style 
options only, are substantially the same as those that have been 
applied to the initial and continued listing of various open-end 
investment companies on other securities exchanges. There is also the 
requirement, comparable to that which applies to index options, that 
the preponderant weight of a non-U.S. index must be represented by 
stocks traded on exchanges that have entered into surveillance sharing 
agreements with the Exchange. CBOE's proposed listing standards provide 
that there will be no opening transactions in investment company 
options and all such options will trade on a liquidation-only basis if 
the underlying investment companies should cease to trade on an 
exchange or as national market securities in the over-the-counter 
market. Conforming the listing standards for options on open-end 
investment companies to those applicable to the underlying investment 
companies themselves assures that options may be considered for listing 
on CBOE on all open-end investment companies that are themselves listed 
on an exchange or on Nasdaq.
    This in turn should be beneficial to investors in listed investment 
companies enabling them to adjust the risks and rewards of their 
investments to suit their individual needs. The ability of these 
options should also add to the depth and liquidity of the market for 
the underlying investment companies by permitting market makers in that 
market to hedge the risks of their market-making activities.
    Exchange maintenance listing standards for open-end investment 
companies do not include criteria based on either the number of shares 
or other units outstanding or on their trading volume.\2\ The CBOE 
believes the absence of such criteria is justified on the ground that 
since it should always be possible to create additional shares or other 
interests in open-end investment companies at their net asset value 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 such shares or interests. This, in turn, in the CBOE's view, 
should make it highly unlikely that the market for listed, open-end 
investment company shares could be capable of manipulation, since 
whenever the market price for such shares departs from net asset value, 
there will be arbitrage opportunities either to purchase or redeem 
shares at net asset value that should bring prices back in line.
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    \2\ See, for example, the maintenance listing standards 
contained in Amex Rules 1002(b) and 1002A(b), applicable to indexed 
UIT interests and indexed mutual funds, respectively. 
Notwithstanding the absence of maintenance standards requiring a 
minimum number of shares outstanding, as a practical matter there 
can never be trading in a series of a listed investment company in 
which there is less than one Creation Unit outstanding, since listed 
open-end investment companies 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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    For this same reason, there is not the same need for option 
position and exercise limits to protect the underlying market against 
squeezes and other types of manipulation as their may be for options or 
securities that are not open-ended. Furthermore, in the absence of any 
maintenance listing requirements in the underlying market that call for 
a minimum number of shares or units or for minimum trading volume, 
position and exercise limits are not meaningful as a percentage of 
either of these measures. Nevertheless, CBOE is proposing to subject 
options on indexed, open-end, listed investment companies to the same 
position and exercise limits that currently apply to indexed European-
exercise style options generally. After some period of experience with 
these limits, CBOE may propose their relaxation or elimination, but any 
such proposal would be subject to being filed and approved under 
section 19(b)2) of the Securities Exchange Act of 1934.
    Reflecting the indexed nature of the underlying portfolios of the 
investment companies on which options are proposed to be traded, the 
Exchange proposes to amend Interpretation and Policy .01 under Exchange 
Rule 5.5 to provide that the minimum strike price intervals for these 
options 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 listed investment company 
options.
    Margin requirements are proposed for options on listed investment 
companies at the same levels that apply to options generally under 
Exchange Rule 12.3, except that, reflecting the indexed nature of 
underlying portfolios of these investment companies, 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 listed, indexed investment 
companies are comparable to margin requirements that currently apply to

[[Page 10100]]

market index options under Exchange Rule 24.11(b)(i).
    CBOE believes it has the necessary systems capacity to support the 
additional series of options that would result from the introduction of 
investment company options, and it has been advised that the Options 
Price Reporting Authority (``OPRA'') also has the capacity to support 
these additional services.\3\
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    \3\ See memorandum from Joseph Corrigan, Executive Director, 
OPRA, to Eileen Smith, CBOE, dated January 21, 1997.
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    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 listed, indexed, 
open-end investment companies within the framework of CBOE's regulated 
market place while there is trading in the underlying investment 
companies 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. 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-97-03 and should be 
submitted by March 26, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5371 Filed 3-4-97; 8:45 am]
BILLING CODE 8010-01-M