[Federal Register Volume 62, Number 130 (Tuesday, July 8, 1997)]
[Notices]
[Pages 36590-36592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17665]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38791; File No. SR-CBOE-97-28]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
Listing of Regular Options, Full and Reduced Value Long-Term Index 
Options, and FLEX Options on the Dow Jones Utility Average

June 30, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 36591]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange hereby proposes to amend certain of its rules to 
provide for the listing and trading on the Exchange of options on the 
Dow Jones Utility Average TM (``DJUA'' or ``Index''), a 
narrowbased index designed by Dow Jones & Company, Inc. (``Dow Jones) 
TM'') \3\ Options on the DJUA 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 DJUA.
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    \3\``Dow Jones TM,'' and ``Dow Jones Utility Average 
TM,'' are trademarks of Dow Jones & Company, Inc. and 
have been licensed for use for certain purposes by the Chicago Board 
Options Exchange, Inc. CBOE's options based on the Dow Jones Utility 
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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    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 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 DJUA. The DJUA is a price-weighted index of 15 of the largest, most 
liquid U.S. utility industry stocks.\4\ Options will be based on the 
full value of the DJUA level.
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    \4\ A list of the component stocks and their relative weights 
was submitted by the Exchange as Exhibit B to the rule filing. 
Exhibit B is available at the Exchange and at the Commission at the 
address in Section IV, infra.
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    Index Design. The DJUA has been designed to measure the performance 
of certain high capitalization utility stocks. The DJUA has been 
calculated by Dow Jones & Company, Inc. since January 1929 and is the 
one of the most commonly watched indexes of the U.S. stock market. The 
DJUA 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. The Exchange believes that options on the DJUA meet 
the generic listing criteria for options on narrow-based indexes which 
would have entitled the Exchange to file for approval of the listing of 
this product with the Commission under Exchange Rule 24.2(b) as a 
stated policy, practice, or interpretation within the meaning of 
paragraph (3)(A) of subsection 19(b) of the Exchange Act.
    On June 5, 1997, the 15 stocks ranged in capitalization from $2.1 
billion to $14.1 billion. The total market capitalization of the Index 
was $107.5 billion, the average capitalization was $7.2 billion and the 
median capitalization of the firms in the Index was $6.9 billion. The 
largest stock accounted for 13.18% of the total weighting of the Index, 
while the smallest accounted for 3.01%. The top five stocks in the 
Index accounted for 49.8% of the total weighting of the Index.
    Calculation. The DJUA is a price-weighted index. The level of the 
Index reflects the total price of the component stocks divided by the 
Index Divisor. The DJUA was first calculated on January 2, 1929 and the 
index value was 85.64 on that date. The Index had a closing value of 
221.11 on June 5, 1997. The daily calculation of the DJUA 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 
or the Consolidated Tape Association.
    Maintenance. Dow Jones is responsible for maintenance of the DJUA. 
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 News Service prior to implementation. Currently the DJUA has 
15 components, and it is expected that it will remain at 15 components.
    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. The Exchange will also provide 
for the trading of FLEX Options on the Index.
    Strike prices will be set to bracket the index in 2\1/2\ point 
increments or greater. 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 3:02 p.m. Chicago time.
    FLEX Option Trading. The Exchange is proposing changes to its FLEX 
rules to provide for the trading of FLEX options on the DJUA. The 
proposed changes include an amendment to the FLEX Option position 
limits. Position limits would be as established by the Exchange but in 
no event would be greater than five times the limits for standard 
options on the DJUA.
    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 
3:02 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 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.\5\ When the last

[[Page 36592]]

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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    \5\ 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 DJUA.
    Position Limits. Options on the DJUA would be subject to the 
position limits for industry index options set forth in Rule 24.4A. 
Currently, standard options on the DJUA would qualify for a position 
limit of 15,000 contracts under the terms of Rule 24.4A.
    Exchange Rules Applicable. As modified herein, the Rules in Chapter 
XXIV will be applicable to Options on the DJUA. Narrow-based margin 
rules will apply to the Index as set forth in Rule 24.11.
    Capacity. CBOE believes it has the necessary systems capacity to 
support new series that would result from the introduction of Options 
on the DJUA. CBOE has also been informed that the Options Price 
Reporting Authority (``OPRA'') also has the capacity to support the new 
series. 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; the 
addition of 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.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \6\ of the Act 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 DJUA 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, 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 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-97-28 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. 97-17665 Filed 7-7-97; 8:45 am]
BILLING CODE 8010-01-M