[Federal Register Volume 62, Number 130 (Tuesday, July 8, 1997)]
[Notices]
[Pages 36588-36590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17663]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38789; File No. SR-CBOE-97-26]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Listing 
of Regular and Long-Term Index Options and FLEX Options on the Dow 
Jones Industrial Average

June 30, 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 
June 23, 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

    CBOE hereby proposes to amend certain of its rules to provide for 
the listing and trading on the Exchange of options on the Dow Jones 
Industrial Average TM (``DJIA'' or ``Index''), a broad-based 
index designed by Dow Jones & Company, Inc. (``Dow 
JonesTM'').\1\ Options on the DJIA TM will be 
cash-settled and will have European-style exercise provisions. The 
Exchange also proposes to amend its rules to provide for the trading of 
Flexible Exchange Options (``FLEX Options'') on the DJIA. The text of 
the proposed rule change is available at the Office of the Secretary, 
CBOE and at the Commission.
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    \1\ ``Dow Jones,'' and ``Dow Jones Industrial Average 
TM'' are trademarks of Dow Jones & Company, Inc. and have 
been licensed for use for certain purposes by CBOE. CBOE's options 
based on the Dow Jones Industrial Average are not sponsored, 
endorsed, sold or promoted by Dow Jones, and Dow Jones makes no 
representation regarding the advisability of investing in such 
products.

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[[Page 36589]]

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

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 DJIA. The DJIA is a price-weighted index of 30 of the largest, most 
liquid stocks traded on organized U.S. securities markets.\2\ Options 
initially will be based on one-one hundredth of the DJIA. Options on an 
underlying level of one-tenth of the DJIA may be introduced at a later 
date. The purpose of offering options based on either one-one-hundredth 
or one-tenth is to offer contracts which appeal to both retail and 
institutional investors. Each contract would have a different ticker 
symbol to eliminate any potential confusion.
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    \2\ Exhibit B to the proposed rule filing contains the component 
securities of the DJIA and their respective weights, and is 
available at CBOE or at the Commission, as noted in Section IV beow.
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    Index Design. The DJIA has been designed to measure the performance 
of certain high capitalization stocks. The DJIA has been calculated by 
Dow Jones & Company since 1896 and is the most commonly watched index 
of the U.S. stock market. The DJIA is a price-weighted index with each 
stock affecting the Index in proportion to its market price. Each stock 
in the Index is eligible for options trading.
    Exhibit B illustrates the capitalization and weighting of the DJIA 
component securities, as well as shares outstanding and prices on June 
5, 1997. On that date, the 30 stocks ranged in capitalization from $5.9 
billion to $200.0 billion. The total market capitalization of the Index 
was $1.7 trillion, the average capitalization of the firms in the Index 
was $57.0 billion and the median capitalization was $40.6 billion. The 
largest stock accounted for 6.30% of the total weight of the Index, 
while the smallest accounted for 1.46%. The top 5 components accounted 
for 26.18% of the weight of the Index.
    Calculation. The DJIA is a price-weighted index. The level of the 
Index reflects the total price of the component stocks divided by the 
Index Divisor. The DJIA was first calculated on May 26, 1896 and the 
index value was 40.94 on that date. The Index had a closing value of 
7305.29 on June 5, 1997. The daily calculation of the DJIA Index is 
computed by dividing the aggregate price of the companies in the Index 
by the Index Divisor. The Divisor keeps the Index comparable over time 
and is adjusted periodically to maintain the Index. The values of the 
Index will be calculated by Dow Jones & Company or its designee and 
will be disseminated at 15-second intervals during regular CBOE trading 
hours to market information vendors via the Options Price Reporting 
Authority (``OPRA'') or the Consolidated Tape Association (``CTA'').
    Maintenance. Dow Jones is responsible for maintenance of the DJIA. 
Index maintenance includes monitoring and completing the adjustments 
for company additions and deletions, stock splits, stock dividends 
(other than an ordinary cash dividend), and stock price adjustments due 
to company restructuring or spinoffs. If required, the Index Divisor 
will be adjusted to account for any of the above changes. Generally, 
index components are replaced infrequently. The editors of the Wall 
Street Journal are responsible for component additions and deletions. 
These changes are announced in the Wall Street Journal and through the 
Dow Jones New Service generally three to five days prior to 
implementation. The DJIA has been composed of 30 stocks since 1928 and 
it is expected that it will remain at 30 stocks.
    Index Option Trading. In addition to regular Index options, the 
Exchange may provide for the listing of long-term index option series 
(``LEAPS''). For LEAPS, the underlying value would be 
computed at one-tenth or one-one-hundredth of the DJIA, as applicable. 
Reduced-value LEAPS will not be available based on one-one-thousandth 
of the DJIA. The current and closing index value of any such reduced-
value LEAP will, after such initial computation, be rounded to the 
nearest one-hundredth. The Exchange will also provide for the trading 
of FLEX Options on the Index.
    Strike prices for options based on one-one-hundredth of the Index 
will be set to bracket the Index in \1/2\ point increments or greater. 
These \1/2\ point increments correspond to 5-point increments in other 
broad-based index options, such as the S&P 100 and S&P 500, because the 
size of the contract will be approximately one-tenth of the size of the 
option contracts on those other broad-based indexes. Strike prices for 
options based on one-tenth of the Index will be set in 5-point 
increments. The trading hours for options on the Index will be from 
8:30 a.m. to 3:15 p.m. Chicago time. Options based on the DJIA will be 
listed in up to three near-term months plus up to three months from the 
March quarterly cycle.
    The Exchange is also proposing to add an interpretation to Rule 
6.42 to establish the minimum increment for bids and offers in the DJIA 
at sixteenths of a dollar. Rule 6.42 currently requires bids and offers 
to be expressed in eighths of $1, except for those series trading below 
$3. Exhibit C presents proposed contract specifications for options on 
the DJIA.
    FLEX Option Trading. The Exchange is proposing changes to its FLEX 
rules to provide for the trading of FLEX options on the DJIA. The 
proposed changes include an amendment to the FLEX Option position 
limits. The change would apply the same limits to positions in options 
on the DJIA that exist for positions in other indexes in the FLEX 
program; the limits are 200,000 contracts on the same side of the 
market. For purposes of determining compliance with these limits, every 
10 option contracts based on the one-one hundredth of the DJIA should 
be counted as one contract.
    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 by Dow Jones \3\ 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.\4\

[[Page 36590]]

When the last 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.
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    \3\ Phone conversation between Eileen Smith, Director, Research 
and Product Development, CBOE, and Heather Seidel, Attorney, Market 
Regulation, Commission, on June 30, 1997.
    \4\ The Commission notes that pursuant to Article XVII, Section 
4 of the Options Clearing Corporation's (``OCC'') by-laws, OCC is 
empowered to fix an exercise settlement amount in the event it 
determines a current index value is unreported or otherwise 
unavailable. Further, OCC has the 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 (order approving SR-OCC-95-19).
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    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, Index LEAPS, and FLEX 
Options on the DJIA.
    Position Limits. The Exchange proposes to establish position limits 
for options on the DJIA at 1,000,000 contracts on either side of the 
market for option contracts that are based on one-one hundredth of the 
value of the DJIA and 100,000 for contracts based on one-tenth of the 
value of the DJIA. Positions in options based on either level of the 
DJIA will be aggregated for purposes of determining compliance with 
position limits; positions in options based on one-tenth of the value 
of the DJIA must be multiplied by a factor of 10, then aggregated with 
options based on one-one hundredth of the value of the DJIA. The broad-
based index hedge exemption will be 2,500,000 contracts for options 
based on one-one hundredth of the DJIA and 250,000 contracts for 
options based on one-tenth of the DJIA. These limits are roughly 
equivalent, in dollar terms, to the limits applicable to options on the 
S&P 500, a broad-based A.M.-settled index option.
    Exchange Rules Applicable. As modified herein, the Rules in Chapter 
XXIV will be applicable to options on the DJIA. Broad-based margin 
rules will apply to the Index. The Exchange is proposing to amend 
Chapter XXIV, Rule 24.14, Disclaimers, to identify Dow Jones and 
Company, Inc. as the index reporting authority for the DJIA and other 
Dow Jones products.
    Capacity. CBOE believes it has the necessary systems capacity to 
support new series that would result from the introduction of options 
on the DJIA. CBOE has also been informed that OPRA also has the 
capacity to support the new series.\5\ In making this determination, 
the Exchange notes that OPRA has made, and is in the process of making, 
significant enhancements to its capacity. These enhancements include: 
upgrades to computers; additional lines to firms, vendors and 
exchanges; and the introduction of new technology incorporating high 
speed data transmission. All of these enhancements will be in place 
prior to the scheduled introduction of these options contracts and will 
give more than sufficient capacity to deal with these and other new 
products.
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    \5\ See Exhibit D.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \6\ in general and furthers the objectives 
of Section 6(b)(5) \7\ in particular in that it will permit trading in 
options based on the DJIA 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.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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.

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, 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-97-26 and 
should be submitted by July 29, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-17663 Filed 7-7-97; 8:45 am]
BILLING CODE 8010-01-M