[Federal Register Volume 65, Number 155 (Thursday, August 10, 2000)]
[Notices]
[Pages 49041-49043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20261]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43114; File No. SR-CBOE-00-31]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., to Amend its Rules to Allow for the Trading of Options 
on Securities that Represent Interests in Registered Investment 
Companies Based on Narrow-Based Indices or Portfolios of Securities

August 3, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ 19b-4 thereunder,\2\ notice is hereby given that on July 
24, 2000, the Chicago Board Options Exchange Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The proposed rule change has been filed by the CBOE as a 
``non-controversial'' rule

[[Page 49042]]

change effective upon filing under Section 19(b)(3)(A) of the Act \3\ 
and Rule 19b-4(f)(6) \4\ thereunder. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend its rules to allow for the trading of 
options on securities that represent interests in registered investment 
companies based on narrow-based indices or portfolios of securities.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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 aspects of such 
statements.

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

1. Purpose
    On July 2, 1998, the Commission approved a proposed rule change to 
permit the trading of options on exchange-listed securities 
representing interest in open-end investment companies that hold 
securities comprising or based on stock indices or portfolios of 
securities (``Fund Shares'').\5\ However, that rule change was limited 
to trading options on Fund Shares comprising or based on broad-based 
indices or portfolios. Accordingly, the Exchange now proposes to amend 
its rules to allow for the trading of options on exchange-listed 
securities representing interest in open-end investment companies that 
hold securities comprising or based on non-broad-based, or narrow-
based, stock indices or portfolios of securities. The Exchange believes 
that the ability to trade options on Fund Shares based on narrow-based 
indices or portfolios is consistent with the options listing criteria 
for Fund Shares currently used by the American Stock Exchange, LLC 
(``Amex'').\6\
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    \5\ See Securities Exchange Act Release No. 40166 (July 2, 
1998), 63 FR 37430 (July 10, 1998) (File No. SR-CBOE-97-03).
    \6\ The Amex listing criteria were approved by the Commission on 
July 1, 1998. See Securities Exchange Act Release No. 40157 (July 1, 
1998) 63 FR 37426 (July 10, 1998) (File No. SR-Amex-96-44).
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    Fund shares are issued in exchange for an ``in-kind'' deposit of a 
specified portfolio of securities, together with a cash payment, in 
minimum size aggregations or multiples thereof (``Creation Units''). 
The size of the applicable Creation Unit size aggregation is set forth 
in the fund's prospectus, and varies from one series of Fund Shares to 
another, but generally is substantial. A fund generally will issue and 
sell Fund Shares in Creation Unit size through a principal underwriter 
on a continuous basis at the net asset value per share next determined 
after an order to purchase Fund Shares and the appropriate securities 
are received. Following issuance, Fund Shares are traded on an exchange 
like other equity securities, and equity trading rules apply. Likewise, 
redemption of Fund Shares is made in Creation Unit size and ``in-
kind,'' with a portfolio of securities and cash exchanged for Fund 
Shares that have been tendered for redemption.
    The CBOE trades options on Fund Shares pursuant to the same rules 
and procedures that apply generally to trading in options on equity 
securities, except that some special listing criteria are, under 
certain circumstances, applied to this category of options. The listing 
and maintenance standards for options on Fund Shares are set forth in 
Interpretation and Policy .06 under CBOE Rule 5.3 and in Interpretation 
and Policy .08 under CBOE Rule. 5.4, respectively. CBOE only lists 
options on Fund Shares 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: (1) The Fund Shares 
meet the uniform options listing standards in Interpretation and Policy 
.01 under CBOE Rule 5.3, which include minimum public float, trading 
volume, and share price of the underlying security in order to list the 
option; or (2) the Fund Shares must be available for creation or 
redemption each business day in cash or in kind from the fund at a 
price related to the net asset value. In this event the Exchange will 
require that the fund is obligated to issue Fund Shares in a specified 
aggregate number even though some or all of the securities needed to be 
deposited have not been received by the fund, subject to the fund, 
subject to the condition that the person obligated to deposit the 
securities has undertaken to deliver the securities as soon as possible 
and such undertaking is secured by the delivery and maintenance of 
collateral consisting of cash or cash equivalents satisfactory to the 
fund, all as described in the fund prospectus.
    In addition, the initial listing standards require that: (1) Any 
Fund Share with non-U.S. stocks in the underlying index or portfolio 
that are not subject to comprehensive surveillance agreements do not in 
the aggregate represent more than 50% of the weight of the index or 
portfolio; (2) stocks for which the primary market is in any one 
country that is not subject to a comprehensive surveillance agreement 
do not represent 20% or more of the weight of the index; and (3) stocks 
for which the primary market is in any two countries that are not 
subject to comprehensive surveillance agreements do not represent 33% 
or more of the weight of the index.
    The Exchange's maintenance standards provide that if a particular 
series of Fund Shares 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 Fund Shares, and all 
such options will trade on a liquidation-only basis. In addition, the 
CBOE will consider the suspension of opening transactions in any series 
of options of the class covering Fund Shares if: (1) The options fail 
to meet the uniform equity option maintenance standards in paragraphs 
(a), (b), (c), and (d) of Interpretation and Policy .01 under CBOE Rule 
5.4, when the options were listed pursuant to the equity option listing 
standards of Interpretation and Policy .01 under CBOE Rule 5.3; (2) 
following the initial twelve-month period beginning upon the 
commencement of trading of the Fund Shares on a national securities 
exchange or as national market securities through the facilities of a 
national securities association there are fewer than 50 record and/or 
beneficial holders of Fund Shares for 30 or more consecutive trading 
days, when options on Fund Shares were listed pursuant to clause D(y) 
under Interpretation and Policy .06, under CBOE Rule 5.3; or (3) the 
value of the index or portfolio of securities on which the Fund Shares 
are based is no longer calculated or available.
    Margin requirements for Fund Shares are comparable to margin 
requirements

[[Page 49043]]

that apply to index options under CBOE Chapter 12. Thus, the margin 
requirements for options on Fund Shares that represent interest in 
funds that hold securities based upon a narrow-based index or 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.
    Lastly, the CBOE believes it has the necessary systems capacity to 
support the additional series of options that would result from the 
introduction of Fund Shares representing narrow-based indices or 
portfolios, and it has been advised that the Options Price Reporting 
Authority (``OPRA'') also has the capacity to support these additional 
series.\7\
2. Statutory Basis
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    \7\ See Letter from Joe Corrigan, Executive Director, OPRA, to 
William Speth, Director of Research, CBOE, dated July 14, 2000.
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    By providing investors with a better means to hedge their positions 
in the underlying units within the framework of CBOE's regulated market 
place and providing investors with an alternative market center in 
which to trade these products, thereby increasing competition, the 
Exchange believes the proposed rule change is consistent with Section 
6(b)(5) of the Act \8\ in that is it 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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    \8\ 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 that is 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. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing proposed rule change has become effective pursuant to 
Section19(b)(3)(A) of the Act \9\ and Rule 19(b)-4(f)(6) thereunder 
because the proposed rule change has been properly designated by the 
CBOE as effecting a change that: (1) Does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for 30 days from the date of filing, or such shorter time that the 
Commission may designate if consistent with the protection of investors 
and the public interest.\10\ At any time within 60 days of the filing 
of the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in the furtherance of the purposes of the 
Act.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ As required under Rule 19b-4(f)(6)(iii), the CBOE provided 
the Commission with written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date.
    \11\ 15 U.S.C. 78s(b)(3)(C).
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    The Exchange has requested that the rule change be accelerated to 
become operative immediately upon filing of the proposal to 
expeditiously provide investors with the a better means to hedge their 
positions in the underlying Fund Shares based on narrow-based indexes 
or portfolios, as well as an alternative market center in which to 
trade these products, thereby increasing competition.\12\ In addition, 
the Exchange noted that options on narrow-based indexes are currently 
trading on the Amex.\13\ The Commission finds that accelerating the 
operative date of the rule change is consistent with the protection of 
investors and the public interest, and thus designates July 24, 2000 as 
the operative date of this filing.\14\
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    \12\ Telephone conversation between Angelo Evangelou, Attorney, 
Legal Division, CBOE, and Heather Traeger, Attorney, Division of 
Market Regulation, SEC, on July 28, 2000.
    \13\ See supra note 6.
    \14\ 17 CFR 240.19b-4(f)(6). For purposes only of accelerating 
the operative date of this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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IV. 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, NW, Washington, DC 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-00-31 and 
should be submitted by August 31, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-20261 Filed 8-9-00; 8:45 am]
BILLING CODE 8010-01-M