[Federal Register Volume 68, Number 24 (Wednesday, February 5, 2003)]
[Notices]
[Pages 5942-5945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2672]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47287; File No. SR-CBOE-2002-40]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Relating to Options on the CBOE Asian 25 Index and 
Options on the CBOE Euro 25 Index

January 30, 2003.
    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 July 22, 2003, 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 CBOE. On January 
13, 2003, CBOE filed an amendment to the proposed rule change.\3\ The 
Commission is publishing

[[Page 5943]]

this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from James Flynn, Legal Division, CBOE, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated January 10, 2003 (``Amendment No. 1'') (replacing 
the original filing in its entirety). Amendment No. 1, among other 
things: (1) Clarifies the initial and maintenance criteria for the 
underlying component securities of the indices, including further 
detail on the component securities that are ADRs and not subject to 
comprehensive surveillance agreements; (2) clarifies that options on 
both indices will be A.M. settled; (3) provides more recent market 
capitalization and weighting figures; and (4) specifies that CBOE's 
surveillance procedures are adequate to monitor the trading of these 
products.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to provide for the listing and trading of options on 
the CBOE Euro 25 Index and the CBOE Asian 25 Index, both broad-based 
indexes. Options on the CBOE Euro 25 Index and the CBOE Asian 25 Index 
would be cash-settled and would have European-style exercise 
provisions. 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, 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 those statements may be examined at the places specified in 
Item IV below and is set forth in Sections A, B, and C below.

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

1. Purpose
    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 CBOE Euro 25 Index and the CBOE Asian 25 Index. Both the CBOE Euro 
25 Index and the CBOE Asian 25 Index are capitalization-weighted 
indexes of twenty-five (25) American Depository Receipts (``ADR''), New 
York Registered Shares (``NYS''), or NYSE Global Shares'' (``NGS''), 
which are traded on the New York Stock Exchange, Inc. (``NYSE''), the 
American Stock Exchange LLC (``AMEX''), or the NASDAQ.
Index Design
    The CBOE Euro 25 Index and the CBOE Asian 25 Index have each been 
designed to measure the performance of large market capitalization 
companies in their respective regions. Both are market-capitalization 
weighted indices composed of twenty-five ADRs, NYSs or NGSs, which are 
traded on the NYSE, NASDAQ or the AMEX.\4\ Options on both indexes 
shall be A.M. settled.
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    \4\ The Exchange will make an updated list of the components 
underlying each index available to the public on the internet by 
accessing the following URL: http://www.cboe.com/optprod/index/indexoptions.asp.
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    The component securities included in each index are based on market 
capitalization and the trading volume on the NYSE, NASDAQ, or AMEX over 
the past six months. Specifically, each component security must have a 
minimum market capitalization of $250 million and a trading volume of 
at least 500,000 shares in each of the previous six months to be 
included in the index. In the case of depository receipts, the market 
capitalization is determined based on the shares outstanding in the 
``home'' market and the price in U.S. Dollars of the ADRs, NYSs, and 
NGSs.
    Unless otherwise specified herein, both indexes shall satisfy the 
following general initial and maintenance criteria. (1) At least 75% of 
the index, in terms of market capitalization weighting, must meet 
CBOE's listing criteria for equity options as set forth in CBOE Rule 
5.3. (2) Any non-U.S. component security (common stock or ADR) that is 
not subject to a comprehensive surveillance agreement shall not in the 
aggregate represent more than 20% weight of the index's aggregate 
market capitalization, unless those non-U.S. components satisfy the 
alternative criteria under Interpretation and Policy .03 to Rule 5.3, 
as further discussed below. (3) No single component security will 
represent more than 30% of the weight of the index. (4) Finally, the 
five highest weighted component security, in the aggregate, shall not 
account for more than 60% of the total weight of the index.
    CBOE represents that it will review each index quarterly following 
the expiration of the respective index option contract to ensure that 
the above criteria are satisfied, and to make quarterly share changes 
as appropriate.
CBOE Euro 25 Index
    According to CBOE, the pool of index components from which CBOE may 
choose consists of 161 ADRs, NYSs, and NGSs that are traded on the NYSE 
or NASDAQ, and issued on behalf of companies domiciled in one of eleven 
member nations of the European Union.\5\ Exhibit B to the proposed rule 
change \6\ illustrates the capitalization and weighting of the 25 
component securities that constitute the current CBOE Euro 25 index, as 
well as the listed shares outstanding and prices for each respective 
security as of December 20, 2002. On that date, the twenty-five 
components ranged in capitalization from $5.37 billion to $97.208 
billion. The largest component accounted for 11.64% of the total 
weighting of the index, while the smallest accounted for 0.64%. The 
mean capitalization of the firms in the index was $30.326 billion.
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    \5\ The components that make up the CBOE Euro 25 Index include 
securities of companies domiciled in France, Finland, Ireland, 
Italy, Germany, the Netherlands, Spain, Belgium, Portugal, Greece, 
and Austria.
    \6\ Exhibits to the proposed rule change discussed herein are 
available at the Office of the Secretary, CBOE, and at the 
Commission.
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    CBOE believes that the CBOE Euro 25 Index satisfies the index 
criteria provided above. (1) 23 of the 25 stocks in the CBOE Euro 25 
Index meet CBOE's listing criteria for equity options as set forth in 
CBOE Rule 5.3. This represents 92.59% of the index by market 
capitalization weight and 92% by number. (2) 23 of the 24 ADR or NYS 
components that underlie the index are subject to comprehensive 
surveillance agreements.\7\ (3) No single component represents greater 
than 30% of the aggregate weight of the CBOE Euro 25 Index. (4) 
Finally, the five highest weighted component securities in the 
aggregate do not account for more than 60% of the weight of the 
Index.\8\ Exhibit C to the proposed rule change specifically 
illustrates the manner by which each respective index component 
satisfies, or fails to satisfy, the underlying component listing 
criteria.
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    \7\ 24 of the 25 Euro 25 Index components are either ADRs or 
NYSs and all are subject to comprehensive surveillance agreements or 
memoranda of understanding. One of the components, DaimlerChrysler, 
is a common stock. There is only one ADR in the Euro 25 Index, Nokia 
OYJ, in which the CBOE does not have in place a comprehensive 
surveillance agreement.
    \8\ The top five components of the CBOE Euro 25 Index represent 
39.68% of the Index in terms of market capitalization.
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CBOE Asian 25 Index
    The pool of index components from which CBOE may choose consists of 
107 ADRs, NYSs, and NGSs that are traded on the NYSE, NASDAQ, or AMEX 
and are issued on behalf of companies domiciled in one of eight Asian-
Pacific countries.\9\ Exhibit D to the proposed rule change illustrates 
the capitalization and weighting of the CBOE Asian 25 Index component 
securities, as well as listed shares outstanding and prices on

[[Page 5944]]

December 20, 2002. On that date, the 25 components ranged in 
capitalization from $382.722 million to $49.140 billion. The largest 
component accounted for 18.38% of the total weighting of the index, 
while the smallest accounted for 0.14%. The mean capitalization of the 
firms in the index was $10.696 billion.
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    \9\ The components that make up the CBOE Asian 25 Index include 
securities of companies domiciled in Australia, China, India, 
Indonesia, Philippines, Singapore, South Korea and Taiwan.
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    CBOE believes that the CBOE Asian 25 Index satisfies the index 
criteria noted above. (1) 18 of the 25 stocks in the CBOE Asia Index 
meet CBOE's listing criteria for equity options as set forth in CBOE 
Rule 5.3. This represents 77.73% of the index by market capitalization 
weight and 72% by number. (2) 13 of the 25 stocks, representing 68.71% 
of the index by market capitalization weight, in the CBOE Asia Index 
are either subject to comprehensive surveillance agreements or are 
common stocks that are not required to have comprehensive surveillance 
agreements. Although this seemingly would mean that greater than 20% of 
the aggregate index capitalization is comprised of components without 
comprehensive surveillance agreements, CBOE notes that the Commission 
has specified in the past that a non-U.S. security need not be 
considered in calculating the 20% threshold if at least 50% of the 
worldwide trading volume in that particular security occurs within the 
U.S. market.\10\ CBOE notes that this is consistent with Interpretation 
and Policy .03(ii) to CBOE Rule 5.3. Thus, CBOE plans to apply 
Interpretation and Policy .03 to CBOE Rule 5.3 to any non-U.S. 
component that exceeds the 20% threshold for non-U.S. components that 
are not subject to comprehensive surveillance sharing agreements.
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    \10\ For further details, see CBOE Mexico Index filing, 
Securities Exchange Act Release No. 34241 (June 22, 1994), 59 FR 
33557 (June 29, 1994) (SR-CBOE-94-18), citing Securities Exchange 
Act Release No. 33554, 59 FR 5622 (January 31, 1994) (stating by 
reference to the proposal that it is appropriate to permit the 
listing of options on an ADR without the existence of a 
comprehensive surveillance agreement with the foreign market where 
the underlying trades, as long as the U.S. market for the underlying 
ADR is at least 50% or more of the worldwide trading volume).
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    Thus, as provided in Interpretation and Policy .03(iii) to CBOE 
Rule 5.3, an individual ADR without a comprehensive surveillance 
agreement is deemed to satisfy CBOE's listing criteria if: (a) At least 
20% of the worldwide trading volume in that foreign security occurs 
within the U.S. market and a market for which CBOE has a comprehensive 
surveillance agreement; (b) the average daily trading volume of the ADR 
over the past 3 months is 100,000 shares or more; and, (c) the trading 
volume is at least 60,000 shares per day in U.S. markets on a majority 
of trading days during the past months. As of December 20, 2002, CBOE 
represent that the applicable component securities meet these criteria. 
In light of these standards, 21 of the 25 stocks, or 89.39% of the 
aggregate index market capitalization do satisfy acceptable listing 
standards. (3) No single component represents greater than 30% of the 
aggregate weight of the CBOE Asian 25 Index. (4) Finally, the five 
highest weighted component securities, in the aggregate, do not account 
for more than 60% of the total weight of the Index.\11\ Exhibit E to 
the proposed rule change illustrates the manner by which each 
respective index component satisfies, or fails to satisfy, the 
underlying component criteria.
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    \11\ The top five components of the CBOE Asian 25 Index 
represent 55.20% of the weight of the index in terms of market 
capitalization.
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Calculation
    The methodology used to calculate the value of the indices is 
similar to the methodology used to calculate the value of other well-
known broad-based indices. The level of each index reflects the total 
market value of the component stocks relative to a particular base 
period. The indices base date is January 2, 2002, when the respective 
index values were set to 100. On April 16, 2002, the CBOE Euro 25 Index 
had a closing value of 95.99 and the CBOE Asian 25 Index had a closing 
value of 95.64. The daily calculation of each index is computed by 
dividing the total market value of the companies in the respective 
Index by the index divisor. The divisor is adjusted periodically to 
maintain consistent measurement of the index. The values of each Index 
will be calculated by CBOE and disseminated at 15-second intervals 
during regular CBOE trading hours to market information vendors via 
Options Price Reporting Authority.
Index Option Trading
    In addition to regular Index options, CBOE proposes to provide for 
the listing of long-term index option series 
(``LEAPS[reg]'') in accordance with CBOE Rule 24.9.
    For options on each index, strike prices will be set to bracket the 
respective index in 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 0.05 and for series trading above $3 the minimum tick 
will be 0.10. The trading hours for options on both indexes will be 
from 8:30 a.m. to 3:02 p.m. Chicago time. Exhibits F and G to proposed 
rule change present proposed contract specifications for CBOE Euro 25 
Index options and CBOE Asian 25 Index options.
Maintenance
    Both the CBOE Euro 25 Index and the CBOE Asian 25 Index will be 
monitored and maintained by CBOE. The CBOE will make all necessary 
adjustments to the indexes to reflect component additions and 
deletions, share changes, stock splits, stock dividends (other than an 
ordinary cash dividend), and stock price adjustments due to 
restructuring, mergers, or spin-offs involving the underlying 
components. Some corporate actions, such as stock splits and stock 
dividends, require simple changes to the common shares outstanding and 
the stock prices of the underlying components. Other corporate actions, 
such as share issuances, change the market value of the Index and 
require the use of an index divisor to effect adjustments. Over time 
the number of component securities in the Index may change, but at no 
time will the number of underlying components drop to less than twenty. 
In the event of a stock replacement, the divisor will be adjusted 
accordingly to provide continuity in index values.\12\
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    \12\ As noted in the section regarding ``Index Design,'' each 
index will be re-balanced quarterly following the expiration of the 
index option contract.
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    Absent prior Commission approval, the component securities in 
either index will not exceed 40 nor be lower than 20 and shall satisfy 
the criteria as provided above. If the Index fails at any time to 
satisfy the maintenance criteria, CBOE will immediately notify the 
Commission of that fact and will not open for trading any additional 
series of options on the Index unless such failure is determined by the 
Exchange not to be significant and the Commission concurs in that 
determination, or unless the continued listing of options on each 
respective Index has been approved by the Commission under Section 
19(b)(2) of the Exchange Act.
Surveillance
    CBOE will use the same surveillance procedures currently utilized 
for each of the Exchange's other index options to monitor trading in 
options and LEAPS. For surveillance purposes, CBOE will make all 
reasonable efforts to monitor the trading activity and other pertinent 
information relating to the underlying components. CBOE represents that 
its surveillance procedures are adequate to monitor the trading of 
these products.

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Exercise and Settlement
    The proposed 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 CBOE based on the opening prices of the component securities on the 
business day prior to expiration. If a component security fails to open 
for trading, the last available price on the security will be used in 
the calculation of the index, as is done for currently listed indices. 
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.
Position Limits
    CBOE proposes to establish position limits for options on the CBOE 
Euro 25 Index and the CBOE Asian 25 Index at 50,000 contracts on either 
side of the market, and no more than 30,000 of such contracts may be in 
the series in the nearest expiration month. These limits are roughly 
equivalent to the limits applicable to options on other broad-based 
indices under CBOE Rule 24.4(a).\13\
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    \13\ Specifically, CBOE Rule 24.4(a) imposes a standard position 
limit of 50,000 contracts on the same side of the market for CBOE's 
Mexico 30 Index and CBOE's Germany 25 Index.
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Exchange Rules Applicable
    Except as modified herein, the Rules in Chapter XXIV will be 
applicable to both CBOE Euro 25 Index options and CBOE Asian 25 Index 
options. Index option contracts based on both the CBOE Euro 25 Index 
and the CBOE Asian 25 Index will be subject to the position limit 
requirements of CBOE Rule 24.4(a).
    Additionally, CBOE affirms that it possesses the necessary systems 
capacity to support new series that would result from the introduction 
of both CBOE Euro 25 Index options and CBOE Asian 25 Index options. 
CBOE has also been informed that OPRA has the capacity to support such 
new series (see Exhibit H to the proposed rule change).
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\14\ in general and furthers the objectives of Section 6(b)(5) of the 
Act \15\ in particular in that it will permit trading in options based 
on the Internet 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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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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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. 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 (i) 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 (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (A) 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 proposed rule 
change, as amended, 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 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 the File No. SR-CBOE-2002-40 and should be 
submitted by February 26, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2672 Filed 2-4-03; 8:45 am]
BILLING CODE 8010-01-P