[Federal Register Volume 62, Number 246 (Tuesday, December 23, 1997)]
[Notices]
[Pages 67101-67103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39453; File No. SR-CBOE-97-63]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated Relating to the Listing and Trading of Options 
on the Dow Jones High Yield Select 10 Index

December 16, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 8, 1997, the 
Chicago Board Options Exchange, Incorporated (``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 Exchange. 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. Sec. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rules 24.1, 24.6, and 24.9 
to provide for the listing and trading of options on the Dow Jones High 
Yield Select (10 Index (``Index''), a narrow-based index comprised of 
the ten highest yielding stocks from the Dow Jones Industrial Average 
(``DJIA''). Options on the Index will be cash-settled and will have 
European-style exercise provisions.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, 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 Exchange 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 Exchange 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 Exchange seeks to list and trade cash-settled, European-style 
stock index options on the Index. The Index is an equal-dollar weighted 
index comprised of the ten highest yielding stocks from the DJIA.\2\ 
The Index was designed to replicate a popular contrarian strategy which 
assumes that the ten highest-yielding stocks in the DJIA are oversold 
and, therefore, underpriced relative to the other DJIA stocks. Because 
a number of mutual funds and unit investment trusts employ this 
strategy, the Exchange believes that options based on the same general 
strategy would provide a valuable hedging and investment tool.
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    \2\ The DJIA is comprised of 30 of the largest companies traded 
on the New York Stock Exchange. The DJIA currently consists of the 
following companies: Allied Signal, Incorporated; Aluminum Company 
of America; American Express Company; AT&T Corporation; Boeing 
Company; Caterpillar, Incorporated; Chevron Corporation; Coca Cola 
Company; Du Pont E.I. de Nemours; Eastman Kodak Company, Exxon 
Corporation; General Electric Company; General Motors Corporation; 
Goodyear Tire and Rubber Company; Hewlett Packard Company; 
International Business Machines; International Paper Company; 
Johnson and Johnson; JP Morgan and Company, Incorporated; McDonalds 
Corporation; Merck and Company, Incorporated; Minnesota Mining and 
Manufacturing; Philip Morris Companies, Incorporated; Procter and 
Gamble Company; Sears Roebuck and Company; Traveler's Group 
Incorporated; Union Carbide Corporation; United Technologies 
Corporation; Wal Mart Stores, Incorporated; and Walt Disney Company. 
Earlier this year, the Commission approved the Exchange's proposed 
rule change to list and trade options on the DJIA. See Securities 
Exchange Act Release No. 39011 (Sept. 3, 1997), 62 FR 47840 (Sept. 
11, 1997).
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    According to the Exchange, the Index satisfies the generic criteria 
for listing options on narrow-based indexes set forth in Exchange Rule 
24.2, ``Designation of the Index,'' as well as the generic criteria 
appearing in the Commission's order that approved Exchange Rule 24.2 
(``Generic Index Approval Order'').\3\ Because the Exchange submitted 
this proposed rule change in accordance with the expedited approval 
procedures set forth in Exchange Rule 24.2 and the Generic Index 
Approval Order, the Exchange may list and trade options on the Index as 
soon as 30 days from December 8, 1997, the filing date of the proposed 
rule change.
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    \3\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994).
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    (a) Index Design. The Index will be constituted at the end of the 
calendar year, and will be comprised of the ten highest-yielding stocks 
from the DJIA, determined as of the close of trading on

[[Page 67102]]

the third business day prior to the last business day of the calendar 
year. The Exchange provided information in its proposed rule change 
filing that identified the ten DJIA stocks that would make up the Index 
if it were constituted as of November 20, 1997 (``Sample Index'') \4\ 
All of the stocks in the Sample Index are ``reported securities'' as 
defined in Rule 11Aa3-1 under the Act.\5\ In addition, all of the 
stocks in the Sample Index meet the Exchange's listing criteria for 
equity options as set forth in Exchange Rule 5.3. Accordingly, 100% of 
the stocks in the Sample Index, by number and weight, are eligible to 
serve as underlying securities pursuant to Exchange rules.
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    \4\ The ten stocks are: AT&T Corporation, Chevron Corporation, 
Du Pont E.I. de Nemours, Exxon Corporation, General Motors 
Corporation, Goodyear Tire and Rubber Company, International Paper 
Company, JP Morgan and Company, Minnesota Mining and Manufacturing, 
and Philip Morris Companies.
    \5\ 17 CFR 240.11Aa3-1.
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    In its proposed rule change filing, the Exchange also provided 
statistical information indicating that each of the stocks in the 
Sample Index has a market capitalization well in excess of $75 million. 
As of November 20, 1997, the stocks comprising the Sample Index ranged 
in market capitalization from $9.55 billion (Goodyear Tire and Rubber 
Company) to $154.58 billion (Exxon Corporation). The total market 
capitalization of the Sample Index as of that date was $598.77 billion. 
The mean market capitalization was $59.88 billion, and the median 
market capitalization was $49.43 billion.
    Additional information provided by the Exchange demonstrates that 
each of the component stocks in the Sample Index has experienced 
monthly trading volume well in excess of 1 million shares over the six 
month period through October, 1997. During that period, monthly trading 
volumes for the Sample Index stocks ranged from a low of 6.1 million 
shares (Goodyear Tire and Rubber Company--August, 1997), to a high of 
174 million shares (Philip Morris--June, 1997). Because the Index will 
be equal-dollar weighted at the outset, each component stock will 
comprise 10% of the Index. As described below, the Index will be 
rebalanced once each calendar quarter at which time each stock will be 
adjusted so that each component will once again have equal dollar 
weight within the Index.
    (b) Calculation of the Index. The Index will be calculated by the 
Exchange or its designee on a real-time basis using last-sale price 
information, and will be disseminated by the Exchange every 15 seconds. 
If a component stock is not being traded currently, the Exchange will 
use the most recent price at which the stock traded to calculate the 
Index. The initial value of the Index will be set to equal the value of 
the DJX as of December 31, 1997.\6\
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    \6\ The DJX is the index upon which options on the DJIA are 
based. The value of the DJX is equal to the level of the DJIA 
divided by 100. As of November 20, 1997, the value of the DJX was 
78.27.
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    The Index is equal-dollar weighted and reflects changes in the 
prices of the component stocks relative to the Index base date, January 
1, 1998, when the Index will be set to equal the value of the DJX. 
Initially, each of the component stocks is represented in equal dollar 
amounts; the level of the Index is equal to the combined market value 
of the assigned number of shares for each of the Index components, 
divided by the current Index divisor. The Index divisor is adjusted to 
reflect non-market related changes in the prices of the component 
securities and changes in the composition of the Index. Changes which 
result in divisor adjustments include, but are not limited to, 
quarterly rebalancings, special dividends, spin-offs, certain rights 
issuances, and mergers and acquisitions.
    (c) Maintenance of the Index. The Exchange will maintain the Index. 
Exchange staff will rebalance the Index quarterly on expiration Fridays 
in March, June, September, and on the last business day in December. If 
it becomes necessary to remove a stock from the Index (for example, 
because of a takeover, merger, or component change in the DJIA), it 
will be replaced by the stock from the DJIA which has the highest yield 
of those stocks not already included in the Index. As of the third 
business day before the last business day of the calendar year, the 
Exchange will determine the ten highest yielding stocks from the DJIA. 
The Exchange will disseminate notice of these ten stocks on that day. 
The reconstituted Index, as determined three business days before the 
last business day of the calendar year, will become effective as of 
January 1 of the next calendar year. The following table prepared by 
the Exchange shows the stocks eligible for inclusion in the Index from 
1987 through 1996. The table illustrates that turnover from one year to 
the next generally involves two or three stocks.\7\
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    \7\ In the table above, the symbols represent the following DJIA 
stocks: GM--General Motors; UK--Union Carbide, CHV--Chevron; EK--
Eastman Kodak; XON--Exxon Corporation; S--Sears Roebuck & Company; 
T--AT&T Corporation; ALD--Allied Signal Inc.; GT--Goodyear Tire and 
Rubber Company; DD--EI du Pont de Nemours and Company; WX--
Westinghouse Electric Corporation; AXP--American Express; TX--Texaco 
Inc.; IBM--International Business Machines; JPM--JP Morgan; Z--
Woolworth Corporation; MO--Philip Morris Companies, Inc.; UTX--
United Technologies Corporation; BA--Boeing Company; MMM--Minnesota 
Mining and Manufacturing; and IP--International Paper Company. An 
italicized ticker symbol represents a new component stock.

                                                                        
                                                                        
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1987..................   GM   UK  CHV   WX  XON    S    T  ALD   GT   DD
1988..................   GM   UK  CHV   WX  XON    S    T  ALD  UTX   BA
1989..................   GM   UK  CHV   EK  XON    S    T  ALD  UTX   DD
1990..................   GM   UK  CHV   EK  XON    S  MMM  ALD   GT   DD
1991..................   GM   UK  AXP   EK  XON    S    T  ALD   GT   DD
1992..................   GM   UK  AXP   EK  XON    S   WX  CHV   TX  IBM
1993..................   GM  UTX  AXP   EK  XON    S   WX  CHV   TX  IBM
1994..................  JPM   UK  AXP   EK  XON   MO    Z  CHV   TX   DD
1995..................  JPM    S  MMM   EK  XON   MO    Z  CHV   TX   DD
1996..................  JPM   GM  MMM   EK  XON   MO   IP  CHV   TX   DD
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    If the Index fails at any time to satisfy one or more of the 
required maintenance criteria, the Exchange will immediately notify the 
Commission of that fact and will not open for trading any additional 
series of options on the Index unless the Exchange determines that such 
failure is insignificant and the Commission concurs in that 
determination, or unless the Commission approves the continued listing 
of options on the Index under Section 19(b)(2) of the Act.\8\
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    \8\ 15 U.S.C. Sec. 78s(b)(2).
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    (d) Trading of Option Contracts Based on the Index. The Exchange 
proposes to base trading in Index options on the full value of the 
Index. The Exchange may

[[Page 67103]]

elect to list full-value, long-term index option series 
(``LEAPS''), as provided in Exchange Rule 24.9, ``Terms of 
Index Option Contracts.'' The Exchange also may provide for the listing 
of reduced-value LEAPS, for which the underlying value would be 
computed at one-tenth of the value of the Index. The current and 
closing Index value for any such reduced-value LEAP will be rounded to 
the nearest one-hundredth.
    (e) Exercise and Settlement of Option Contracts Based on the Index. 
Options listed and traded on the Index will have European-style 
exercise features and will be ``A.M.-Settled Index Options'' within the 
meaning of the Exchange Rules in Chapter XXIV, ``Index Options,'' 
including Exchange Rule 24.9, which is being amended to reference 
options based on the Index. Option contracts based on the Index will 
expire on the Saturday following the third Friday of the expiration 
month. Thus, the last day for trading in an expiring series will be the 
second business day preceding the expiration date, typically a 
Thursday.
    (f) Exchange Rules Applicable to the Trading of Index Option 
Contracts. Except as modified in this proposed rule change, the 
Exchange Rules in Chapter XXIV will apply to options listed and traded 
on the Index. In addition, option contracts based on the Index will be 
subject to the position limit requirements of Exchange Rule 24.4A, 
``Position Limits for Industry Index Options.''
    The Exchange has represented that it possesses the necessary 
systems capacity to support new series that would result from the 
introduction of option contracts based on the Index. In addition, the 
Options Price Reporting Authority (``OPR'') informed the Exchange that 
additional traffic generated by options on the Index is within OPRA's 
capacity.\9\
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    \9\ See Letter from Joseph P. Corrigan, Executive Director, 
OPRA, to William Speth, Exchange, dated November 20, 1997.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act,\10\ in general, and furthers the objectives of 
Section 6(b)(5),\11\ in particular, in that it will permit trading in 
option contracts based on the Index in accordance with rules designed 
to prevent fraudulent and manipulative acts and practices, and to 
promote just and equitable principles of trade.
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    \10\ 15 U.S.C. Sec. 78f.
    \11\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe 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

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the proposed rule change complies with the requirements set 
forth in the Generic Index Approval Order,\12\ it constitutes a stated 
policy, practice, or interpretation with respect to the administration 
of an existing Exchange rule, and, therefore, has become effective 
pursuant to Section 19(b)(3)(A) of the Act \13\ and subparagraph (e) of 
Rule 19b-4 thereunder.\14\ Pursuant to the Generic Index Approval 
Order, the Exchange may not list Index options for trading prior to 30 
days after December 8, 1997, the date the proposed rule change was 
filed with the Commission.
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    \12\ See note 3, supra.
    \13\ 15 U.S.C. Sec. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(e).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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 submissions, 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 persons, 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. 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-97-63 and should be 
submitted by January 13, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33404 Filed 12-22-97; 8:45 am]
BILLING CODE 8010-01-M