[Federal Register Volume 63, Number 245 (Tuesday, December 22, 1998)]
[Notices]
[Pages 70816-70818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33815]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40794; File No. SR-CBOE-98-49]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Related to 
Trading and Listing Options on the Dow Jones Equity REIT Index

December 15, 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 November 5, 1998 the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change as 
described in Items I, II, and III 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 persons.
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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 proposes to amend certain of its rules to provide for 
the listing and trading of options on the Dow Jones Equity Real Estate 
Investment Trust Index (``Index''), a broad-based index. 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, CBOE and at the Commission.

[[Page 70817]]

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 
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 CBOE 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

(a) Purpose
    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style, A.M.-settled stock 
index options on the Dow Jones Equity Real Estate Investment Trust 
(REIT) Index. The Index is a capitalization-weighted index currently 
composed of 116 equity REITs.
    Index Design. The Index has been designed to measure the 
performance of REITs that comprise 95% of the market capitalization of 
the equity REIT investable universe. The equity REIT investable 
universe includes equity REITs that are listed on the New York Stock 
Exchange (``NYSE''), the American Stock Exchange (``AMEX'') and the 
NASDAQ National Market, and are subject to a screening process that: 
(1) eliminates REITs that have more than 10 no-trading days over the 
past quarter; (2) eliminates REITs that comprise the bottom 1% of the 
aggregate REIT market capitalization; and (3) eliminates REITs that 
comprise the bottom 0.01% of the average dollar-trading volume. All of 
the component REITs are ``reported securities,'' as that term is 
defined in Rule 11Aa3-1 under the Act. The Index is a capitalization-
weighted index with each REIT affecting the Index in proportion to its 
market capitalization. All but one REIT in the Index is eligible for 
options trading.
    On October 20, 1998, the 116 equity REITs ranged in capitalization 
from $207 million to $6.13 billion. The largest REIT accounted for 
5.08% of the total weighting of the Index, while the smallest accounted 
for 0.17%. The total capitalization of the REITs in the Index was 
$120.4 billion. The average capitalization was $1.04 billion, and the 
median capitalization was $655 million.
    As of October 20, 1998, the Index components represented eleven 
distinct property classifications: office property (21.01%), apartments 
(19.31%), shopping centers (12.27%), hotels/restaurants (9.33%), 
regional malls (9.17%), diversified (8.56%), warehouses/industrial 
(7.53%), healthcare (5.35%), self-storage (4.99%), manufactured homes 
(1.65%) and outlet centers (0.83%). In addition, the Index components 
are diversified by geographical region, representing real estate 
investments throughout much of the United States.
    Calculation. The methodology used to calculate the value of the 
Index is similar to the methodology used to calculate the value of 
other well-known broad-based indices. The level of the Index reflects 
the total market value of the component REITs relative to a particular 
base period. The Index base date is January 2, 1990, when the Index 
value was set to 100. The Index had a closing value of 131.44 on 
October 19, 1998. The daily calculation of the Index is computed by 
dividing the total market value 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 or its designee and disseminated at 15-
second intervals during regular CBOE trading hours to market 
information vendors via the Options Price Reporting Authority 
(``OPRA'').
    Maintenance. Dow Jones or its designee is responsible for the 
maintenance of the Index. Index maintenance includes monitoring and 
completing the adjustments for company additions and deletions, share 
changes, stock splits, stock dividends (other than an ordinary cash 
dividend), and stock price adjustments due to company restructuring or 
spin-offs. Some corporate actions, such as stock splits and stock 
dividends, require simple changes in the common shares outstanding and 
the stock prices of the companies in the Index. Other corporate 
actions, such as share issuances or component changes, may change the 
market value of the Index and require an index divisor adjustment as 
well.
    The Index is reviewed on a quarterly basis by adding or deleting 
REITs using end-of-quarter market capitalization values. If any 
component REIT fails to meet the targeted threshold or the investable 
universe cutoff rules, it will be deleted from the Index. Non-component 
REITs that become eligible for inclusion are added, largest to 
smallest, until the 95% threshold is attained. In order to preserve the 
continuity of the Index, the actual threshold may be slightly higher or 
lower than the targeted 95%. An annual review is performed to update 
any changes in an issue's investment structure and/or property type. As 
a result of these periodic reviews, over time the number of component 
securities in the Index may change. The Exchange will notify the 
Commission if the number of securities in the Index drops by 40 or 
more.
    In addition, the Exchange will notify the Commission if any of the 
following occurs: 10% or more of the weight of the Index is represented 
by REITs having a market value less than $75 million; less than 80% of 
the Index is represented by component REITs that are eligible for 
options trading; 10% or more of the weight of the Index is represented 
by component REITs trading less than 20,000 shares per day; the largest 
component REIT accounts for more than 15% of the weight of the Index or 
the largest five components in the aggregate account for more than 50% 
of the weight of the Index.
    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 LEAP 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.
    Strike prices will be set to bracket the Index in 2\1/2\ point 
increments for strikes below 200 and 5 point increments above 200. The 
minimum tick size for series trading below $3 will be \1/16\th and for 
series 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).
    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 or its designee based on the 
opening prices of the component securities on the business day prior to 
expiration. If a REIT fails to open for trading, the last available 
price of the REIT will be used in the calculation of the Index, as is 
done for currently listed indexes. When the last trading day is

[[Page 70818]]

moved because of Exchange holidays (such as when the 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.
    Surveillance. The Exchange will use the same surveillance 
procedures currently utilized for each of the Exchange's other index 
options to monitor trading on options and LEAPs on the Index. For 
surveillance purposes, the Exchange will complete access to information 
regarding activity in the under securities.
    Position Limits. The Exchange proposes to establish position limits 
for options on the Index at 250,000 contracts on either side of the 
market. These limits are roughly equivalent, in dollar terms, to the 
limits applicable to options on other indices.
    Exchange Rules Applicable. As modified herein, the Rules in Chapter 
XXIV will be applicable to the Index options. Broad-based margin rules 
will apply to the Index. In addition, the Index will have a broad-based 
index hedge exemption of 625,000 contracts.
    Disclaimer Language. CBOE is proposing to amend Rule 24.14 in order 
to include specific reference to Dow Jones & Company, Inc., as being 
entitled to the benefit of the disclaimer of liability in respect of 
the Index. CBOE believes it has the necessary systems capacity to 
support new series that would result from the introduction of the Index 
options. CBOE also has been assured that the OPRA also has the capacity 
to support the new series.
(b) Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\3\ in general and furthers the objectives of Section 6(b)(5) \4\ In 
particular in that it will permit trading in options based on the Dow 
Jones Equity REIT Index 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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    \3\ 15 U.S.C. 78f(b).
    \4\ 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.

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

    Within 35 days of the date of 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 such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interesed 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, 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 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 such filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to File No. SR-CBOE-98-49 and should be 
submitted by January 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-33815 Filed 12-21-98; 8:45 am]
BILLING CODE 8010-01-M