[Federal Register Volume 64, Number 23 (Thursday, February 4, 1999)]
[Notices]
[Pages 5693-5695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2605]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40995; File No. SR-CBOE-99-05]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
Listing of Options on the Dow Jones E*Commerce Index

January 28, 1999.
    Pursuant to Section 19(b)(1) of the Securities Act of 1934,\1\ 
notice is hereby given that on January 28, 1999, 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 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).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``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 
E*Commerce Index (``E*Commerce Index'' or ``Index''), a narrow-based 
Index designed by Dow Jones & Company, Inc. (``Dow 
JonesTM'').\2\ The E*Commere Index is a modified 
capitalization-weighted, cash-settled index with European-style 
exercise.
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    \2\ Dow Jones & Company, Inc. (``Dow Jones'') has licensed ``Dow 
JonesTM,''and ``Dow Jones E*Commerce Index'' for use for 
certain purposes to the Chicago Board Options Exchange, 
Incorporated. CBOE's options based on the Dow Jones E*Commerce Index 
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.

[[Page 5694]]

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 parts of such 
statements.

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

    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 Dow Jones E*Commerce Index. The Index is a modified capitalization-
weighted index of 15 of the largest, most liquid U.S. Internet commerce 
stocks. Internet commerce companies are involved in providing a good or 
service through an open network such as the Internet.
1. Purpose

Index Design

    The E*Commerce Index has been designed to measure the performance 
of certain Internet commerce stocks. All of the stocks in the Index are 
U.S. securities and currently trade through the facilities of the 
National Association of Securities Dealers Automated Quotation System 
and are reported national market system securities. In addition, all of 
the stocks are ``reported securities'' as defined in Rule 11Aa3-1 under 
the Exchange Act.
    The Exchange represents that in all but one respect, options on the 
E*Commerce Index meet the generic listing criteria for options on 
narrow-based indexes which may be filed 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. The only variation is that the Index is calculated using 
a modified capitalization-weighting methodology.
    Each of the stocks in the E*Commerce Index has a market 
capitalization in excess of $75 million. Specifically, the stocks 
comprising the Index range in capitalization from $378.9 million to 
$26.15 billion as of January 21, 1999. The total capitalization as of 
that date was $76.50 billion. The mean capitalization was $5.10 
billion. The median capitalization was $1.94 billion.
    The CBOE indicates that all but two of the component stocks meet 
the trading volume criteria set forth in paragraph (b)(3) of CBOE Rule 
24.2. E-Bay, Inc. does not meet the criteria of CBOE Rule 24.2(b)(e) 
because it was the subject of an initial public offering on September 
24, 1998. Since that time, E-Bay, Inc. has average 1.24 million shares 
per day and it is expected that the company will exceed the trading 
volume criteria in early February 1999. Additionally, Ticketmaster On-
line CitySearch does not meet the volume criteria because it was the 
subject of a spin-off on December 3, 1998. However, the Exchange 
represents that the company currently satisfies the requirements of 
CBOE Rule 5.3 applicable to individual underlying securities and is the 
subject of options trading. Furthermore, since the company was spun 
off, it has averaged 1.5 million shares per day. The Exchange 
represents that each of the component stocks in the E*Commerce Index 
has had monthly trading volume in excess of one million shares over the 
six month period through January 1999. The average monthly volume over 
the six-month period for the stocks in the Index ranged from a low of 
8.3 million shares to a high of 292.5 million shares.
    Currently, two of the fifteen stocks in the Index are not eligible 
for options trading. However, the CBOE represents that Cyberian 
Outpost, Inc. will be eligible on January 28, 1999 and Geocities will 
be eligible on February 8, 1999. Therefore, each stock in the Index 
will be eligible for options trading before the anticipated start of 
options trading.
    As the initial re-balancing on January 4, 1999, the largest stock 
accounted for 10.00% of the total weight of the Index, while the 
smallest accounted for 1.43%. The top five stocks in the Index 
accounted for 50.00% of the total weight of the Index. Accordingly, the 
Exchange's generic listing standards for narrow based indexes are more 
than met with respect to the criteria of market capitalization, 
weighting constraints and trading volume.

Calculation and Dissemination of Index Value

    The E*Commerce Index is calculated on a ``modified capitalization-
weighted'' method. This method is a hybrid between equal weighting 
(which may pose liquidity concerns for smaller-cap stocks) and normal-
cap weighting (which may result in two or three stocks dominating the 
index's performance). Under this method, the maximum weight for any 
stock in the Index will be set to 10%, or ``capped,'' on the quarterly 
rebalancing date. The weight of all the remaining stocks shall be 
market capitalization weighted. Thus, the weights of these remaining 
stocks are not ``capped.''
    For stocks which are not ``capped,'' index shares will equal the 
company's outstanding common shares. For stocks that are ``capped,'' 
index shares will equal its maximum weight, multiplied by the adjusted 
total market capitalization of the Index, divided by the stock's 
closing price on the rebalancing date. The index's adjusted total 
market capitalization is the total outstanding market capitalization 
adjusted to reflect the combined weight of all of the ``capped'' 
stocks.
    The level of the Index reflects the adjusted total capitalization 
of the component stocks divided by the Index Divisor. The Index divisor 
was initially calculated to yield a benchmark level of 200.00 at the 
close of trading on January 4, 1999. The Index divisor will be adjusted 
as needed to ensure continuity whenever there are additions or 
deletions from an index, share changes, or adjustments to a component's 
price to reflect rights offerings, spinoffs, special cash dividends, 
etc.
    The values of the Index will be calculated by Dow Jones or its 
designee and will be disseminated to market information vendors at 15-
second intervals during regular CBOE trading hours via the Options 
Price Reporting Authority or the Consolidated Tape Association. If a 
component stock is not currently being traded, the most recent price at 
which the stock traded will be used in the Index calculation. The Index 
had a closing level of 259.43 on January 21, 1999.

Index Maintenance

    The CBOE represents that Dow Jones is responsible for maintenance 
of the E*Commerce Index. Index maintenance generally 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.
    The Exchange represents that the Index will satisfy the maintenance 
criteria set forth in CBOE Rule 24.2(c). The Index will be re-balanced 
at the close of business on expiration Friday on the March quarterly 
cycle. In addition, the number of Index components will not increase to 
more than 20 nor decrease to fewer than 10.

[[Page 5695]]

Component changes will be made such that 90% of the Index by weight and 
80% of the total number of stocks in the index are eligible for options 
trading under CBOE Rule 5.3.
    If the Index fails at any time to satisfy the maintenance criteria, 
the CBOE will immediately notify the Commission and will not open for 
trading any additional series of options on the Index, unless the 
continued listing of options has been approved by the Commission under 
Section 19(b)(2) of the Securities Exchange Act.

Index Options Trading

    In addition to regular Index options, the Exchange may provide for 
the listing of long-term index option shares (``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. Exhibit C presents proposed contract specifications for the 
E*Commerce Index options.
    Strike prices will be set to bracket the index in a minimum of 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 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.

Exercise and Settlement

    The CBOE proposes that 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 
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. When the last 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.

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 and Index LEAPS.

Position Limits

    Options on the E*Commerce Index would be subject to the position 
limits for industry index options set forth in CBOE Rule 24.4A.

Exchange Rules Applicable

    The Rules of Chapter XXIV will be applicable to options on the 
E*Commerce Index. Narrow-based margin rules will apply to the Index as 
set forth in CBOE 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 
E*Commerce Index. CBOE has also been informed that the Options Price 
Reporting Authority also has the capacity to support the new series.
2. Basis
    The proposed rule change is consistent with Section 6(b) \3\ of the 
Act 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 
E*Commerce 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

    The CBOE 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 solicited or received with respect to the 
proposed rule change.

III. Date of 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 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 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

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 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, NW, Washington, DC 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-99-05 in the caption above and should be submitted by 
February 25, 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. 99-2605 Filed 2-3-99; 8:45 am]
BILLING CODE 8010-01-M