[Federal Register Volume 65, Number 146 (Friday, July 28, 2000)]
[Notices]
[Pages 46520-46524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19054]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43043; File No. SR-CBOE-00-25]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. To Trade Standardized Equity Options on 
Trust Issued Receipts

July 17, 2000.
    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 June 23, 2000, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange

[[Page 46521]]

Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II 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 and to 
approve the proposed rule change on an accelerated basis.
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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 CBOE proposes to adopt new listing and maintenance standards to 
allow the Exchange to trade standardized equity options on trust issued 
receipts. The text of the proposed rule change follows. Italics 
indicate text to be added.
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *
Rule 5.3  Criteria for Underlying Securities
    (a)-(b) Unchanged.

* * * Interpretations and Policies

    .01-.06  Unchanged.
    .07  Securities deemed appropriate for options trading shall 
include shares or other securities (``Trust Issued Receipts'') that are 
principally traded on a national securities exchange or through the 
facilities of a national securities association and reported as a 
national market security, and that represent ownership of the specific 
deposited securities held by a trust, provided:
    (a)(i) the Trust Issued Receipts meet the criteria and guidelines 
for underlying securities set forth in Interpretation and Policy .01 to 
this Rule 5.3; or
    (ii) the Trust Issued Receipts must be available for issuance or 
cancellation each business day from the Trust in exchange for the 
underlying deposited securities; and
    (b) not more than 20% of the weight of the Trust Issued Receipt is 
represented by ADRs on securities for which the primary market is not 
subject to a comprehensive surveillance agreement.
* * * * *
Rule 5.4  Withdrawal of Approval of Underlying Securities
    Unchanged.

* * * Interpretations and Policies

    .01-.08  Unchanged.
    .09  Absent exceptional circumstances, securities initially 
approved for options trading pursuant to Interpretation and Policy .07 
under Rule 5.3 (such securities are defined and referred to in that 
Interpretation and Policy as ``Trust Issued Receipts'') shall not be 
deemed to meet the Exchange's requirements for continued approval, and 
the Exchange shall not open for trading any additional series of option 
contracts of the class covering such Trust Issued Receipts, whenever 
the Trust Issued Receipts are delisted and trading in the Receipts is 
suspended on a national securities exchange, or the Trust Issued 
Receipts are no longer traded as national market securities through the 
facilities of a national securities association. In addition, the 
Exchange shall consider the suspension of opening transactions in any 
series of options of the class covering Trust Issued Receipts in any of 
the following circumstances:
    (1) In accordance with the terms of paragraphs (a) through (g) of 
Interpretation and Policy .01 of this Rule 5.4 in the case of options 
covering Trust Issued Receipts when such options were approved pursuant 
to paragraph (a)(i) of Interpretation and Policy .07 under Rule 5.3;
    (2) The Trust has more than 60 days remaining until termination and 
there are fewer than 50 record and/or beneficial holders of Trust 
Issued Receipts for 30 or more consecutive trading days;
    (3) The Trust has fewer than 50,000 receipts issued and 
outstanding, \3\
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    \3\ The Exchange has confirmed that ``Trust'' should be 
capitalized in the proposed rule text. Telephone conversation 
between Angelo Evangelou, Attorney, Legal Division, CBOE, and 
Heather Traeger, Attorney, Division of Market Regulation, SEC, on 
July 12, 2000.
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    (4) The market value of all receipts issued and outstanding is less 
than $1,000,000; or
    (5) Such other event shall occur or condition exist that in the 
opinion of the Exchange makes further dealing in such options on the 
Exchange inadvisable.
    .10 For Holding Company Depositary Receipts (HOLDRs), the Exchange 
will not open additional series of options overlying HOLDRs (without 
prior Commission approval) if: (1) the proportion of securities 
underlying standardized equity options to all securities held in a 
HOLDRs trust is less than 80% (as measured by their relative weightings 
in the HOLDRs trust); or (2) less than 80% of the total number of 
securities held in a HOLDRs trust underlie standardized equity options.
* * * * *

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 III 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

1. Purpose
    The purpose of the proposed rule change is to provide for the 
trading of options, including FLEX equity options, \4\ on exchange-
listed trust issued receipts. The Exchange believes that the listing 
and maintenance criteria proposed in its new rule are consistent with 
the options listing and maintenance criteria for trust issued receipts 
currently used by the American Stock Exchange LLC (``Amex'').\5\ Trust 
issued receipts are exchange-listed securities representing beneficial 
ownership of the specific deposited securities represented by the 
receipts. They are negotiable receipts issued by a trust representing 
securities of issuers that have been deposited and are held on behalf 
of the holders of the trust issued receipts. Trust issued receipts, 
which trade in round-lots of 100, and multiples thereof, may be issued 
after their initial offering through a deposit with the trustee of the 
required number of shares of common stock of the underlying issuers. 
This characteristic of trust issued receipts is similar to that of 
exchange-traded fund shares, which also may be created on any business 
day upon deposit of the requisite securities comprising a creation 
unit.\6\ The trust will only issue receipts upon the deposit of the 
shares of underlying securities that are represented by a round-lot of 
100 receipts. Likewise, the trust will cancel, and an investor may

[[Page 46522]]

obtain, hold, trade or surrender trust issued receipts in a round-lot 
and round-lot multiples of 100 receipts.
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    \4\ FLEX equity options provide investors with the ability to 
customize basic option features including size, expiration date, 
exercise style and certain exercise prices.
    \5\ The Amex provisions were approved by the Commission on June 
15, 2000. See Securities Exchange Act Release No. 42947 (June 15, 
2000), 65 FR 39211 (June 23, 2000) (SR-Amex-99-37).
    \6\ The Exchange received approval to trade options on exchange-
traded fund shares on July 2, 1998. See Securities Exchange Act 
Release No. 40166 (July 2, 1998), 63 FR 37430 (July 10, 1998).
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    Generally, options (including FLEX equity options) on trust issued 
receipts are proposed to be traded on the Exchange pursuant to the same 
rules and procedures that apply to trading in options on equity 
securities or indexes of equity securities. The Exchange will list 
option contracts covering 100 trust issued receipts, the minimum 
required round-lot trading size for the underlying receipts. Strike 
prices for the non-FLEX contracts will be set to bracket the trust 
issued receipts at the same intervals that apply to other equity 
options under CBOE Rule 5.5 (i.e., 2\1/2\ point intervals for 
underlying equity values up to $25; 5 point intervals for underlying 
equity values greater than $25 up to $200; and 10 point intervals for 
underlying equity values greater than $200). The proposed position and 
exercise limits for non-FLEX options on trust issued receipts would be 
the same as those established for other non-FLEX equity options, as set 
forth in CBOE Rule 4.11. The Exchange anticipates that most options on 
trust issued receipts will initially qualify for the lowest position 
limit. However, as with other equity options, applicable position 
limits will be increased for options if the volume of trading in the 
trust issued receipts increases to the extent needed to permit a higher 
limit. As is the case of all FLEX equity options, no position and 
exercise limits will be applicable to FLEX equity options overlying 
trust issued receipts.
    The listing and maintenance standards proposed for options on trust 
issued receipts are set forth respectively in proposed Interpretation 
and Policy .07 under CBOE Rule 5.3, and in proposed Interpretation and 
Policy .09 under CBOE Rule 5.4. Pursuant to the proposed initial 
listing standards, the Exchange will list only trust issued receipts 
that are principally traded on a national securities exchange or 
through the facilities of a national securities association and 
reported as national market securities. In addition, the initial 
listing standards require that either: (i) The trust issued receipts 
meet the uniform options listing standards in Interpretation and Policy 
.01 of CBOE Rule 5.3, which include criteria covering the minimum 
public float, trading volume, and share price of the underlying 
security in order to list the option; \7\ or (ii) the trust issued 
receipts must be available for issuance or cancellation each business 
day from the trust in exchange for the underlying deposited securities.
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    \7\ Specifically, Interpretation and Policy .01 of CBOE Rule 5.3 
requires the underlying security to have a public float of 7,000,000 
shares, 2,000 holders, trading volume of 2,400,000 shares in the 
preceding 12 months, a share price of $7.50 for the majority of the 
business days during the three calendar months preceding the date of 
the selection, and that the issuer of the underlying security is in 
compliance with the Act.
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    In addition, listing standards for options on trust issued receipts 
will require that any American Depositary Receipts (ADRs) in the 
portfolio on which the Trust is based for which the securities 
underlying the ADRs' primary markets are in countries that are not 
subject to comprehensive surveillance agreements will not in the 
aggregate represent more than 20 percent of the weight of the 
portfolio.
    The Exchange's proposed maintenance standards provide that if a 
particular series of trust issued receipts should cease to trade on an 
exchange or as national market securities in the over-the-counter 
market, there will be no opening transactions in the options on the 
trust issued receipts, and all such options will trade on a 
liquidation-only basis (i.e., only closing transactions to permit the 
closing of outstanding open options positions will be permitted). In 
addition, the Exchange will consider the suspension of opening 
transactions in any series of options of the class covering trust 
issued receipts if: (i) For options on trust issued receipts that were 
listed pursuant to the equity option listing standards of 
Interpretation and Policy .01 of CBOE Rule 5.3, the options fail to 
meet the option maintenance standards in Interpretation and Policy .01 
of CBOE Rule 5.4; \8\ (ii) the trust has more than 60 days remaining 
until termination and there are fewer than 50 record and/or beneficial 
holders of trust issued receipts for 30 or more consecutive trading 
days; (iii) the trust has fewer than 50,000 receipts issued and 
outstanding; (iv) the market value of all receipts issued and 
outstanding is less than $1,000,000; or (v) such other event shall 
occur or condition exists that, in the opinion of the Exchange, makes 
further dealing in such options on the Exchange inadvisable. 
Furthermore, the Exchange will not open additional series of options on 
any Holding Company Depositary Receipts (``HOLDRs'') a type of trust 
issued receipt, without prior Commission approval, if: (1) The 
proportion of securities underlying standardized equity options to all 
securities held in a HOLDRs trust is less than 80 percent (as measured 
by the relative weightings in the HOLDRs trust); \9\ or (2) less than 
80 percent of the number of securities held by a HOLDR trust underlie 
standardized options.
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    \8\ Specifically, Interpretation and Policy .01 of CBOE Rule 5.4 
provides that an underlying security will not meet the Exchange's 
requirements for continued listing when, among other things: (i) 
There are fewer than 6,300,000 publicly held shares; (ii) there are 
fewer than 1,600 holders; (iii) trading volume was less than 
1,800,000 shares in the preceding twelve months; and (iv) the share 
price of the underlying security closed below $5 on a majority of 
the business days during the preceding six months.
    \9\ The Exchange represents that the weight of each security in 
a HOLDR trust will be determined by calculating the sum of the 
number of shares of each security (represented in a single HOLDR) 
and underlying options multiplied by its respective share price 
divided by the sum of the number of shares of all securities 
(represented in a single HOLDR) multiplied by their respective share 
prices.
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    Options on trust issued receipts will be physically settled and 
will have the American-style exercise feature used on all non-FLEX 
equity options, and not the European-style feature. The Exchange, 
however, also proposes to trade FLEX equity options which will be 
available with both the American-style and European-style exercise 
feature, as well as other FLEX equity features.\10\
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    \10\ An American-style option may be exercised at any time prior 
to its expiration, while a European-style option may be exercised 
only at its expiration date.
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    The proposed margin requirements for options on trust issued 
receipts are at the same levels that apply to options generally under 
CBOE Chapter 12, except, with respect to trust issued receipts based on 
a broad-based portfolio, minimum margin must be deposited and 
maintained equal to 100 percent of the current market value of the 
option plus 15 percent of the market value of equivalent units of the 
underlying security value. Trust issued receipts that hold securities 
based upon a narrow-based portfolio must have options margin that 
equals at least 100 percent of the current market value of the contract 
plus 20 percent of the market value of equivalent units of the 
underlying security value. In this respect, the margin requirements 
proposed for options on trust issued receipts are comparable to margin 
requirements that currently apply to broad-based and narrow-based index 
options. Also, holders of options on trust issued receipts who exercise 
and receive the underlying trust issued receipts must receive a product 
description or prospectus, as appropriate.
    Lastly, the Exchange believes it has the necessary systems capacity 
to support the additional series of options that would result from the 
trading of options on HOLDRS.

[[Page 46523]]

2. Statutory Basis
    The CBOE believes that, by providing investors with a better means 
to hedge their positions in the underlying trust issued receipts, as 
well as an alternative market center in which to trade these products, 
thereby increasing competition, the proposed rule change is consistent 
with Section 6(b)(5) of the Act.\11\ Section 6(b)(5) requires that 
exchange rules be designed to promote just and equitable principles of 
trade, 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.
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    \11\ 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 burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

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 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. CBOE-00-25 and should be 
submitted by August 18, 2000.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of Section 6(b)(5).\12\ The 
Commission notes that is has previously approved similar listing 
standards proposed by the Amex for options on trust issued receipts, 
and believes that the CBOE's proposal contains adequate safeguards, 
matching those previously approved.\13\ As the Commission found in its 
previous approval of the listing standards proposed by the Amex, the 
listing and trading of options, including FLEX equity options on 
exchange-traded trust issued receipts, should give investors a better 
means to hedge their positions in the underlying trust issued receipts. 
The Commission also believes that pricing of the underlying trust 
issued receipts may become more efficient, and market makers in these 
shares, by virtue of enhanced hedging opportunities, may be able to 
provide deeper and more liquid markets. In sum, the Commission believes 
that options on trust issued receipts likely will engender the same 
benefits to investors and the marketplace that exist with respect to 
options on common stock, thereby serving to promote the public 
interest, to remove impediments to a free and open securities market, 
and to promote efficiency, competition, and capital formation.\14\
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    \12\ Id.
    \13\ See supra note 5.
    \14\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that the Exchange's listing and delisting 
criteria for options on trust issued receipts are adequate. The 
proposed listing and maintenance requirements should ensure that there 
exist adequate supplies of the underlying trust issued receipts in case 
of the exercise of an option, and a minimum level of liquidity to 
control against manipulation and to allow for the maintenance of fair 
and orderly markets. The CBOE's additional requirements for opening 
additional series or options on HOLDRs will also ensure that the 
underlying securities are options eligible, and for the most part will 
satisfy minimum thresholds previously approved by the Commission.
    The Commission also believes that the surveillance standards 
developed by the CBOE for options on trust issued receipts are adequate 
to address the concerns associated with the listing and trading of such 
securities. The CBOE's proposal to limit the weight of the portfolio 
that may be composed of ADRs whose primary markets are in countries 
that are not subject to comprehensive surveillance agreements is 
similar to that previously approved by the Commission.\15\ As to 
domestically traded trust issued receipts themselves and the domestic 
stocks in the underlying portfolio, the Intermarket Surveillance Group 
(``ISG'') Agreement will be applicable to the trading of options on 
trust issued receipts.\16\
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    \15\ See supra note 5.
    \16\ ISG was formed on July 14, 1983, to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets.
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    Finally, the Commission believes that the CBOE's proposed margin 
requirements are appropriate. The Commission notes that they are 
comparable to margin requirements that currently apply to broad-based 
and narrow-based index options, and to those previously approved for 
use at the Amex.\17\
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    \17\ See supra note 5.
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    The Commission finds good cause for approving the proposed rule 
change (SR-CBOE-00-25) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register under Section 
19(b)(2) of the Act.\18\ As noted above, the trading requirements for 
options on trust issued receipts at the CBOE will be substantially 
similar to those at the Amex, which the Commission has approved.\19\ 
The Commission does not believe that the proposed rule change raises 
novel regulatory issues that were not already addressed and should 
benefit holders of trust issued receipts by permitting them to use 
options to manage the risks of their positions in the receipts. 
Accordingly, the Commission finds that there is good cause, consistent 
with Section 6(b)(5) of the Act,\20\ to approve the proposal on an 
accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ See supra note 5.
    \20\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-CBOE-00-25) is hereby 
approved on an accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).


[[Page 46524]]


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-19054 Filed 7-27-00; 8:45 am]
BILLING CODE 8010-01-M