[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)] [Notices] [Pages 25937-25939] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 99-12068] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-41376; File No. SR-CBOE-99-14] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to Listing Criteria for Warrants May 6, 1999. 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 6, 1999, 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, 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Rule 31.5.E to add an alternative set of distribution criteria for broad-based stock index warrants. The text of the proposed rule change follows. Italics indicate material to be added. * * * * * Chicago Board Options Exchange, Inc. Rules * * * CHAPTER XXXI Criteria for Original Listing * * * Rule 31.5 Criteria for Eligibility of Securities * * * E. Currency, Currency Index and Stock Index Warrants * * * (2) Public Distribution. The Exchange may list warrants that meet either of the two alternative sets of criteria below. (i) Alternative 1 Warrants outstanding..................................... 1,000,000 Principal amount/aggregate market value.................. $4,000,000 Number of public holders................................. 400 (ii) Alternative 2 Warrants outstanding..................................... 2,000,000 Principal amount/aggregate market value.................. $12,000,000 [[Page 25938]] Number of public holders................................. case by case Initial price............................................ $6/warrant * * * 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 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 purpose of the proposed rule change is to amend CBOE Rule 31.5.E, which sets forth the listing criteria for ``Currency, Currency Index and Stock Index Warrants.'' Currently, the listing criteria for warrants under Exchange Rule 31.5.E require that the following public distribution requirements be met before a warrant may be listed for trading on the Exchange: (1) Warrants outstanding: 1,000,000; (2) principal amount/aggregate market value: $4,000,000; and (3) number of public holders: 400. Other marketplaces have similar listing criteria for warrants. Although not specifically included in Rule 31.5, the Exchange represents that industry practice has been to discourage the listing of instruments of this kind that are priced below $4 per unit-- a practice that the CBOE finds appropriate. CBOE member firms have advised staff of the Exchange that the existing 400-holder requirement for broad-based stock index warrants frequently poses a significant barrier to seeking a listing on the CBOE. Unlike offerings of common stock and common stock warrants, offerings of stock index warrants are limited to options-approved accounts and are primarily directed to institutional and high net worth clients. The Exchange argues that member firms often find it considerably more cost effective to offer stock index warrants either offshore or in the over-the-counter (OTC) derivatives market. This is because achieving the existing 400-holder requirement usually entails an extensive and drawn out marketing effort--an effort that, in the Exchange's view, does not provide any additional market or investor benefits. At the same time, CBOE believes that stock index warrant investors would be generally better served by having these securities listed and traded on the Exchange, where transaction size and prices are broadly disseminated. To be more competitive with the OTC and overseas marketplaces in the listing of stock index warrants, the Exchange is proposing to establish an alternative set of distribution criteria without a minimum public holder requirement. Under this alternative, the minimum number of public holders required for a stock index warrant to be listed would not be defined, but would be determined on a case by case basis. Other criteria would include: (1) Minimum warrants outstanding: 2,000,000, which is double the existing requirement; (2) minimum principal amount/ aggregate market value: $12,000,000, which is three times the existing requirement; and (3) minimum price: $6 per warrant, which is one and one-half times the minimum based on existing informal guidelines. Adoption of these criteria would, in the opinion of the Exchange, enhance listing competition for these products while accommodating the transaction size normally attractive to institutional and high net worth investors, who the Exchange believes to be major users of these types of instruments. The Exchange does not believe that the minimum holder requirement has the importance for stock index warrants that it may have for common stock or common stock warrant listings. Stock index warrants, it argues, are economically equivalent to standardized options, which are routinely introduced without any immediate ``open interest.'' While investor interest may ultimately develop for these products, there is no distribution whatsoever when the contract is first listed. When interest develops subsequently, market-makers are expected to provide liquidity and produce quotes based on market variables even without customer order flow.\3\ The Exchange believes that this is equally true for broad-based stock index warrant contracts. A minimum original distribution should not impair the ability of market-makers to maintain fair and orderly markets.\4\ --------------------------------------------------------------------------- \3\ The Exchange argues that the underlying cash price as well as any related futures contracts are of prime importance. \4\ For example, on most broad-based stock indexes, such as the S&P 500, Dow Jones Industrial Average, Nikkei 225 and FT-SE 100, there are a number of domestic, as well as international derivative instruments, including options, futures, options on futures, and a variety of other structured products. --------------------------------------------------------------------------- The Exchange asserts that neither CBOE nor any of the other registered exchanges require a minimum number of holders as a precondition to listing and trading stock index options, because investor interest and liquidity in these instruments--as in the case of standard options and LEAPS--are derived from the availability of other products. The Exchange believes that stock index warrants--being economically equivalent to index options and available only to customers with options-approved accounts--can be expected to be an equally attractive and liquid security. 2. Statutory Basis The proposed rule changes are designed to enable the CBOE to compete effectively with the overseas and OTC markets for these types of securities. As such, the Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5),\5\ in particular, in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest. --------------------------------------------------------------------------- \5\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 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. 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- 0609. 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 [[Page 25939]] 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 the CBOE. All submissions should refer to File No. SR-CBOE-99-14, and should be submitted by June 3, 1999. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\6\ --------------------------------------------------------------------------- \6\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 99-12068 Filed 5-12-99; 8:45 am] BILLING CODE 8010-01-M