[Federal Register Volume 63, Number 92 (Wednesday, May 13, 1998)]
[Notices]
[Pages 26658-26660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12708]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39965; International Series Release No. 1133; File No.
SR-CBOE-98-17]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change, and Amendment No. 1 Thereto, by the Chicago Board Options
Exchange, Incorporated Relating To Listing and Trading Warrants on a
Narrow-Based Index
May 6, 1998.
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 April 23, 1998, the Chicago Board Options Exchange,
incorporated (``CBOE'' or ``Exchange'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the CBOE. The Exchange also submitted an amendment to
the filing dated April 30, 1998.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change and Amendment
No. 1 from interested persons.
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\1\ 15 U.S.C. 78s(b)(1)
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Stephanie C. Mullins, Attorney, CBOE to
Marianne H. Duffy, Special Counsel, Division of Market Regulation,
SEC, dated April 30, 1998 (``Amendment No. 1''). Amendment No. 1
clarifies, among other things, that the Index, as defined above, is
narrow-based and will comply with the generic narrow-based margin
requirements (CBOE Rule 30.53) and position limited requirements
(CBOE Rule 30.35) of the Exchange.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to list and trade warrants on an equal dollar-
weighted, narrow-based index (``Index''), comprised of 15 to 20
actively traded common stocks, no more than four of which will be
foreign issued and traded. The remaining stocks will be listed on the
American Stock Exchange, Incorporated (``Amex''), New York Stock
Exchange, Incorporated (``NYSE'') or through the facilities of the
National Association of Securities Dealers Automated Quotation
(``Nasdaq'') system and are reported national market system securities
(``Nasdaq/NMS''). 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 CBOE included statements
concerning the purpose of and basis for the proposed rule change and
represented that it did not receive any comments on the proposed rule
change. The text of those statements may be examined at the places
specified in Item IV below and is set forth in Sections A, B and C
below.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is permitted to list and trade stock index warrants
under CBOE Rule 31.5E. The Exchange now is proposing to list and trade
cash-settled,
[[Page 26659]]
stock index warrants linked to the Index. At the time of listing and
trading, the warrants will meet all of the generic criteria for stock
index warrants as set forth in Exchange Rule 31.5E.
Rule 31.5E requires, among other things, that: (1) the issuer has a
tangible net worth in excess of $250,000,000 and otherwise
substantially exceeds earnings requirements in Rule 31.5(A) or meet the
alternate guidelines in paragraph (4) of Rule 31.5E; (2) the term of
the warrants shall be for a period ranging from one to five years from
date of issuance; (3) the minimum public distribution of such issues
shall be 1,000,000 warrants, together with a minimum of 400 public
holders, and have an aggregate market value of $4,000,000; and (4)
foreign country securities or American Depositary Receipts that are not
subject to a comprehensive surveillance agreement and have less than
50% of their global trading volume in dollar value in the United
States, shall not, in the aggregate, represent more than 20% of the
weight of an index, unless such index is otherwise approved for warrant
or option trading.
Index Design and Stock Selection Criteria. The Exchange represents
that the Index will be categorized as narrow-based. The stocks to be
included in the Index will be selected by a member firm of the Exchange
and will be announced at or as close as possible to the time of the
offering, and included in the Issuer's offering materials. The
component stocks in the Index will meet the following criteria prior to
trading of the warrants: (1) minimum market capitalization of $150
million, except that two component stocks may have a market
capitalization of not less than $50 million; (2) trading volume during
each of the six months prior to the offering of the warrants of not
less than one million shares, except that two of the component
securities may have a trading volume during each of the six months
prior to the offering of the warrants of not less than 500,000 shares;
(3) at least 80 percent of the component stocks will meet the then
current criteria for standardized options trading set forth in CBOE
Rule 5.3 and; (4) at least 80% of the Index components will be listed
on the Amex, NYSE, or will be Nasdaq/NMS securities.
Calculation and Dissemination of the Index Value. The Index will be
calculated using an equal dollar-weighting methodology designed to
ensure that each of the component securities is represented in an
approximately equal dollar amount in the Index. To create the Index, a
portfolio of equity securities will be established by a member firm of
the Exchange representing an investment of $10,000 in each component
security (rounded to the nearest whole share). The value of the Index
will equal the market value of the sum of the assigned number of shares
of each of the component securities divided by an Index divisor. The
Index divisor initially will be set to provide a benchmark value of 100
at the time that the warrants are priced for sales to the investing
public.
The number of shares of each component stock in the Index will
remain fixed except in the event of certain types of corporate actions
such as the payment of a dividend (other than an ordinary cash
dividend), a stock distribution, stock split, reverse stock split,
rights offering, distribution, reorganization, recapitalization, or
similar event with respect to the component securities. The number of
shares of each component security also may be adjusted, if necessary,
in the event of a merger, consolidation, dissolution, or liquidation of
an issuer or in certain other events such as the distribution of
property by an issuer to shareholders, the expropriation or
nationalization of a foreign issuer, or the imposition of certain
foreign taxes on shareholders of a foreign issuer. Shares of a
component security may be replaced (or supplemented) with another
security only under certain circumstances, such as in the event of a
merger or consolidation, the conversion of a component security into
another class of security, the termination of a depositary receipt
program, or the spin-off of a subsidiary.\4\ If the security remains in
the Index, the number of shares of the security may be adjusted to the
nearest whole share to maintain the component's relative weight in the
Index at the level immediately prior to the corporate action. In all
cases, the divisor will be adjusted, if necessary, to ensure continuity
of the value of the Index.
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\4\ No attempt will be made to find a replacement stock or to
otherwise compensate for a stock which is extinguished due to
bankruptcy or similar circumstances.
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Prices for any non-U.S. traded stock included in the Index will be
based upon prevailing prices for such stock(s) at their primary
exchange(s). Primary and backup pricing sources will be used to obtain
prices for such stocks. All non-U.S. traded stocks will be valued in
U.S. dollars using each country's cross-rate to the U.S. dollar.
Bloomberg's composite New York rates, or comparable rates, quoted at
2:00 p.m. Chicago time the previous day, will be used to convert any
non-U.S. traded stock price from the respective countries to U.S.
dollars. If there are several quotes, the first quoted rate in that
minute will be used to calculate the Index. In the event that there is
no Bloomberg exchange rate for a country's currency at 2:00 p.m. the
previous day, stocks will be valued at the first U.S. dollar cross-rate
quoted before 2:00 p.m. Chicago time the previous day.
The value of the Index will be calculated and disseminated by CBOE
every 15 seconds.
Index Warrant Trading (Exercise and Settlement). The warrants will
be direct obligations of their issuer, subject to cash settlement in
U.S. dollars and will be exercisable throughout their life (i.e.,
American-Style) or exercisable at expiration (i.e., European-Style).
Upon exercise (or at the warrant expiration date in the case of
warrants with European-Style exercise), the holder of a Warrant
structured as a ``put'' will receive payment in U.S. dollars to the
extent that the value of the Index has declined below a pre-stated cash
settlement value. Conversely, upon exercise (or at the warrant
expiration date in the case of warrants with European-Style exercise),
the holder of a Warrant structured as a ``call'' will receive payment
in U.S. dollars to the extent that the value of the Index has increased
above the pre-stated cash settlement value. Warrants that are ``out-of-
the-money'' at the time of expiration will expire worthless.
Warrant Listing Standards and Customer Safeguards. Sales practice
rules applicable to the trading of index warrants are provided for in
Exchange Rule 30.50 and to the extent provided by Rule 30.52 they are
also contained in Chapter IX of the Exchange's Rules. Rule 30.50
governs, among other things, communications with the public. Rule 30.52
subjects the transaction of customer business in stock index warrants
to many of the requirements of Chapter IX of the Exchange's rules
dealing with public customer business, including suitability. For
example, no member organization may accept an order from a customer to
purchase a stock index warrant unless that customer's account has been
approved for options transactions. The same suitability and use of
discretion provisions that are applicable to transactions in options
will be equally applicable to the warrants pursuant to CBOE rules. The
listing and trading of index warrants on the Index will be subject to
these guidelines and rules.
Other Applicable Exchange Rules. As previously stated, the CBOE
represents that the Index will be categorized as narrow-based. As such,
the generic
[[Page 26660]]
narrow-based standards regarding margin requirements provided for under
Exchange Rules 30.53 and 12.3 will apply. The applicable generic
narrow-based position and exercise limits will be determined pursuant
to Exchange Rule 30.35.
2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \5\ in general, and furthers the
objectives of Section 6(b)(5) \6\ in particular, in that it will permit
trading in warrants based on the Index pursuant to Exchange rules
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.
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\5\ 15 U.S.C. 78f.
\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any 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 solicited or received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, and Amendment No. 1 thereto, is consistent with the Act.
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 in 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 CBOE. All submissions should refer to file
number SR-CBOE-98-17 and should be submitted by June 3, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12708 Filed 5-12-98; 8:45 am]
BILLING CODE 8010-01-M