[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Pages 25937-25939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12068]



[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.

    * * *
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
  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 

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]