[Federal Register Volume 63, Number 220 (Monday, November 16, 1998)]
[Notices]
[Pages 63759-63761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40642; File No. SR-CBOE-98-43]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to the Continued Listing of 
Options on the Nasdaq-100 Index

November 5, 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 October 2, 1998, 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 and 
II below, which Items have been prepared by the CBOE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested parties and to grant accelerated approved to the 
proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is filing this rule change to inform the Commission 
that the Nasdaq Stock Market, Inc. (``Nasdaq'') has determined to 
change the weighting methodology of its Nasdaq-100 Index 
(``Index''). The Exchange seeks continued approval to list and trade 
options on the Index after Nasdaq has instituted these changes.

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 statutory 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 III below. The CBOE has prepared summaries, set forth 
in sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 63760]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The CBOE currently lists and trades European-style, cash-settled 
options on the Nasdaq-100 Index (``NDX'') pursuant to approval by the 
Commission.\3\ The Nasdaq-100 Index is a capitalization-weighted index 
of one hundred of the largest non-financial securities trade on the 
Nasdaq Stock Marketsm. The CBOE has been informed that 
Nasdaq plans, as of December 18, 1998 (after the close of trading), to 
calculate the Index under a ``modified capitalization-weighted'' 
methodology, which is a hybrid between equal weighting and conventional 
capitalization weighting.\4\ The Exchange is requesting that the 
Commission approve the continued listing and trading of options on the 
NDX after this change is instituted by Nasdaq.
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    \3\ Exchange Act Release No. 33428 (January 5, 1994), 59 FR 1576 
(January 11, 1994).
    \4\ The Exchange will notify the Commission in the event Nasdaq 
is unable to implement this new methodology as of December 18, 1998. 
Telephone calls between Timothy Thompson, Director of Regulatory 
Affairs, Legal Department, CBOE, and Kelly McCormick, Attorney, 
Division of Market Regulation, Commission, on November 5, 1998.
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    The Monday following the expiration Friday when Nasdaq institutes 
this change, December 21, 1998, the CBOE will bring up new series of 
options overlying the Index under the current symbol, NDX. The 
outstanding series will continue to settle based on the present 
calculation method and will be traded under a new symbol. Nasdaq has 
stated that the new methodology is expected to: (1) retain in general 
the economic attributes of capitalization weighting; (2) promote 
portfolio weight diversification (thereby limiting domination of the 
Index by a few large stocks); (3) reduce Index performance distortion 
by preserving the capitalization ranking of companies; and (4) reduce 
market impact on the smallest component securities from necessary 
weight rebalancings.
    Under the new methodology, the component securities will be 
categorized as either ``Large Stocks'' or ``Small Stocks,'' depending 
on whether their current percentage weights (after taking into account 
scheduled weight adjustments due to stock repurchases, secondary 
offerings, or other corporate actions) are greater than, or less than, 
or equal to, the average percentage weight in the Index (i.e., as a 
100-stock index, the average percentage weight in the Index is 1.0%). 
The categorization will be conducted on a quarterly basis to coincide 
with Nasdaq's quarterly scheduled weight adjustment procedures.
    These quarterly categorizations will result in an Index rebalancing 
if either one or both of the following two weight distribution 
requirements are not met: (1) The current weight of the single largest 
market capitalization stock in the Index is less than or equal to 24.0% 
and (2) the ``collective weight'' of those stocks whose individual 
current weights exceed 4.5%, when added together, is less than or equal 
to 48.0%.
    If either one or both of these requirements are not met upon 
quarterly review, a weight rebalancing will be performed in accordance 
with the following rules. First, relating to requirement (1) above, if 
the current weight of the single largest stock in the Index exceeds 
24.0%, then the weights of all Large Stocks will be scaled down 
proportionately towards 1.0% be enough for the adjusted weight of the 
largest stock to be set to 20.0%. Second, relating to requirement (2) 
above, for those stocks whose individual current weights or adjusted 
weights in accordance with the preceding step are in excess of 4.5%, if 
their ``collective weight'' exceeds 48.0%, then the weights of all 
Large Stocks will be scaled down proportionately towards 1.0% by just 
enough for the ``collective weight,'' so adjusted, to be set to 40.0%.
    The aggregate weight reduction among the Large Stocks resulting 
from either or both of the above rescalings will then be resdistributed 
to the Small Stocks in the following manner. In the first iteration, 
the weight of the largest Small Stock will be scaled upwards by a 
factor that sets it equal to the average index weight of 1.0%. The 
weights of each of the smaller remaining Small Stocks will be scaled up 
by the same factor reduced in relation to each stock's relative rank 
among the Small Stocks such that the smaller the stock in the ranking, 
the less the scale-up of its weight.
    In the second iteration, the weight of the second largest Small 
Stock, already adjusted in the first iteration, will be scaled upwards 
by a factor that sets it equal to the average index weight of 1.0%. The 
weights of each of the smaller remaining Small Stocks will be scaled up 
by this same factor reduced in relation to each stock's relative 
ranking among the Small Stock such that, once again, the smaller the 
stock in the ranking, the less the scale-up of its weight.
    Additional iterations will be performed until the accumulated 
increase in weight among the Small Stocks exactly equals the aggregated 
weight reduction among the Large Stocks from rebalancing in accordance 
with weight distribution requirement (1) and/or weight distribution 
requirement (2).
    Then, to complete the rebalancing procedure, once the final percent 
weights of each stock in the Index are set, the Index share weights 
will be determined based upon the last sale prices and aggregate 
capitalization of the Index at the close of trading on the Thursday in 
the week immediately preceding the week of the third Friday in March, 
June, September, and December. Changes to the Index weights will be 
made effective after the close of trading on the third Friday in March, 
June, September, and December and an adjustment to the Index divisor 
will be made to ensure continuity of the Index.
    The CBOE will notify market participants of the Nasdaq's decision 
to alter the calculation methodology through a notice to members and 
member firms in advance of the changeover. The Exchange believes this 
action will be adequate to prevent any problems because, as mentioned 
above, the Exchange will continue to list outstanding series under a 
different symbol that will settle under the old methodology; thus, 
there will be no change to outstanding contracts. The Exchange has 
employed the same system for introducing new series after a change in 
the calculation of the index value or settlement value of an Index in 
the past.\5\
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    \5\ Exchange Act Release No. 30944 (July 21, 1992), 57 FR 33376 
(July 28, 1992) (approving SR-CBOE-92-09, which requested to 
continue to list and trade NDX options after a change in the 
exercise settlement value of the Nasdaq-100) and Exchange Act 
Release No. 37089 (April 9, 1996), 61 FR 16660 (April 16, 1996) 
(approving SR-CBOE-96-12, which requested to allow the DBOE to 
continue to list and trade SPX options after a change to A.M. 
settlement).
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2. Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act,\6\ in 
that it is designed to perfect the mechanisms of a free and open market 
and to protect investors and the public interest.
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    \6\ 15. U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition.

[[Page 63761]]

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 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 Room. Copies of all such filings will 
also be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to File No. SR-CBOE-98-43 and should 
be submitted by December 7, 1998.

IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\7\ and, in particular, the requirements 
of Section 6(b)(5) of the Act.\8\ Section 6(b)(5) of the Act requires, 
among other things, that the rules of the Exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade and to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general to protect investors and the public interest. 
Specifically, the Commission finds that the proposal to modify the 
weighting methodology of the Nasdaq-100 Index from a capitalization-
weighted index to a modified capitalization index will contribute to 
the maintenance of fair and orderly markets consistent with investor 
protection by ensuring that no one stock or group of stocks dominate 
the Index. Moreover, the Commission believes the proposal will have the 
effect of reducing the potential influence of any one stock on the 
movement of the Index.
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    \7\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed weighting method does not 
present any new or novel regulatory issues because the proposal adopts 
a method that is similar to one previously approved for the continued 
listing of options underlying the GSTI Composite Index.\9\ The Index 
will be calculated using a modified capitalization-weighted method, 
which is a hybrid between equal weighting and capitalization weighting. 
Under the new methodology, based upon quarterly examinations, the Index 
will be rebalanced if either one or both of the following two weight 
distribution requirements are not met. The first requires the then 
current weight of the single largest stock in the Index to be less than 
or equal to 24.0%. The second requirement looks at the ``collective 
weight'' of the stocks whose individual current weights exceed 4.5%; 
these stocks when added together, must be less than or equal to 48.0%. 
If either one of these two requirements is not met, a weight 
rebalancing must be performed in accordance with defined rules. In 
approving this proposal, the Commission believes that the new 
methodology should help reduce the likelihood that one or a few stocks 
will dominate the Index and have an undue effect on the Index value.
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    \9\ Exchange Act Release No. 38852 (July 18, 1997), 62 FR 40128 
(July 25, 1997).
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    The Exchange stated that Nasdaq plans to implement this new 
methodology as of December 18, 1998 (after the close of trading). The 
Exchange proposes to bring up a new series of options overlying the 
Index, based on the new methodology, on the Monday following the 
expiration Friday, December 21, 1998. The new series of options will be 
signified by the current symbol, NDX. Any outstanding series will 
continue to list under a different symbol and continue to settle under 
the old methodology. CBOE will notify market participants of the new 
calculation by a notice to members and member firms in advance of the 
changeover. The Commission believes that these procedures will help to 
ensure investors have been adequately notified about the impending 
change prior to its implementation, and should provide them with 
sufficient time to make any desired adjustments to their positions.
    The Commission finds good cause to approve the proposal prior to 
the thirtieth day after the date of publication of notice of the filing 
in the Federal Register. By accelerating the effectiveness of the 
Exchange's rule proposal, the Commission will enable the continued 
listing and trading of options on the Index without interruption after 
the change in the weighting methodology. In addition, the Commission 
believes that the proposed weighting method does not present any new or 
novel regulatory issues as the proposal adopts a weighting method that 
will assist in ensuring that one or a few components will not dominate 
the Index. Accordingly, the Commission believes that it is consistent 
with Section 6(b)(5) of the Act \10\ to approve the proposed rule 
change on an accelerated basis.
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    \10\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed change (File No. SR-CBOE-98-43) is hereby 
approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30498 Filed 11-13-98; 8:45 am]
BILLING CODE 8010-01-M