[Federal Register Volume 68, Number 172 (Friday, September 5, 2003)]
[Notices]
[Pages 52804-52806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22599]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48416; File No. SR-CBOE-2003-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Relating to Options on a Reduced Value NYSE 
Composite Index

August 27, 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 March 25, 2003, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, the Exchange has prepared. On August 6, 
2003, the CBOE filed Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing 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 Jim Flynn, Attorney II, CBOE, to Nancy 
Sanow, Assistant Director, Division of Market Regulation, Commission 
dated August 5, 2003 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE is proposing to trade options on the reduced-value, 
revised NYSE Composite Index (``Reduced Value NYSE Composite Index'' or 
``Reduced Value Index'') based on levels imposed by the New York Stock 
Exchange (``NYSE'') itself. Options traded on the ``old'' NYSE 
Composite Index will no longer trade on the CBOE. The text of the 
proposed rule change is available at the Office of the Secretary, the 
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 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 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

Index Design

    Currently, the CBOE lists and trades European-style, cash-settled 
options on the NYSE Composite Index. The NYSE Composite Index, prior to 
January 9, 2003, was a full-market capitalization-weighted index 
comprised of all of the securities that are listed on the NYSE.\4\ 
Recently, the NYSE announced that, as of January 9, 2003, it would 
replace the NYSE Composite Index (``Old Index'') with a new version 
that features a revised methodology and composition. The revised index 
contains 700 fewer components and will carry a new value around 5,000, 
as opposed to the year-end closing level of around 500, as of December 
31, 2002.
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    \4\ Excluding preferred stock issues.
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    The revised index will continue to measure the performance of all 
NYSE-listed common stock, American Depositary Receipts (``ADR''), 
tracking stocks, and real estate investment trusts (``REIT''), but will 
exclude closed-end investment companies, exchange traded funds 
(``ETF''), and derivatives. Additionally, the revised NYSE Composite 
Index (``Revised Index'') will use a float-adjusted market 
capitalization weighting method instead of the previous full-market 
capitalization weighting.\5\ Float-adjusted

[[Page 52805]]

market capitalization, as opposed to full market capitalization, is 
used to reflect only the number of shares that are actually available 
to investors.
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    \5\ CBOE has indicated that according to the NYSE, these 
revisions will create an index that is more representative of the 
investable equity securities and those securities that are better 
suited to track future changes in the U.S. stock market.
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    In calculating the market capitalization of each underlying issuer, 
the Float-adjusted market capitalization methodology reduces each 
underlying issuer's market share by the market capitalization value 
represented by those shares held through block ownership. The following 
are considered block ownership for the purposes of float-adjusted 
market capitalization: (1) Cross ownership--shares that are owned by 
other companies; (2) government ownership--shares that are owned by 
governments or their agencies; (3) private ownership--shares that 
closely held by individuals, families or charitable trusts and 
foundations; and, (4) restricted shares--shares that are not allowed to 
be traded during a certain period of time.
    The following chart illustrates the pertinent differences between 
the old index methodology and the Revised Index methodology.

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Security class eligible for inclusion         Old methodology                       New methodology
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Common Stocks........................  Yes..........................  Yes.
ADRs.................................  Yes..........................  Yes.
Tracking Stocks......................  Yes..........................  Yes.
REITs................................  Yes..........................  Yes.
Closed-end funds.....................  Yes..........................  No.
ETFs.................................  Yes..........................  No.
Preferred stocks.....................  No...........................  No.
Derivatives..........................  Yes..........................  No.
Shares of beneficial interest........  Yes..........................  No.
Trust units..........................  Yes..........................  No.
Limited partnerships.................  Yes..........................  No.
Weighting............................  Full market capitalization...  Float-adjusted market cap.
Base Date............................  December 31, 1965............  December 31, 2002.
Base Value...........................  50...........................  5,000.
Maintained/Calculated by.............  Securities Industry            Dow Jones Indexes.
                                        Automation Corp. (SIAC).
Reconstitution/Rebalancing...........  Ongoing......................  Ongoing.
Share Updates (<10%).................  Daily........................  Quarterly.
Available Indexes....................  Price return index...........  Price and total return indexes.
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Index Calculation

    The NYSE has calculated the Revised Index to a base value of 5,000 
as of December 31, 2002. Due to the extremely large contract size 
($500,000) that would result from pairing the standard contract 
multiplier ($100) with such a high underlying index level, the CBOE 
proposes to list and trade options based on one-tenth (1/10th) of the 
value of the Revised Index. Options on the Reduced Value NYSE Composite 
will provide investors with product offerings consistent with those 
available for the Old Index.
    All option series on the old NYSE Composite Index have expired and 
no new series in old NYSE Composite Index options have been added or 
will be added. Options on the Reduced Value Index will trade under a 
new root ticker symbol.
    In order to avoid confusion, the CBOE will notify market 
participants of both the Revised Index and the details of the new 
options series that the CBOE will list on the Reduced-Value Index. In 
its notification, the CBOE will include a discussion of the float 
adjusted market capitalization method. The Reduced-Value Index levels 
will be disseminated throughout the trading day at 15-second intervals 
through OPRA.

Index Option Trading

    The Exchange believes that listing options on the Reduced Value 
Index will attract a greater source of customer business than if 
options were based on the full value of the Revised Index. The Exchange 
also believes that options on the Reduced Value Index will provide an 
opportunity for investors to hedge, or speculate on, the market risk 
associated with the stocks comprising this broad-based Index. Further, 
by reducing the value of the Revised Index, such investors will be able 
to utilize this trading vehicle, while extending a smaller outlay of 
capital. The CBOE believes that this should attract additional 
investors, and, in turn, create a more active and liquid trading 
environment.
    In addition to regular index options, the Exchange has the 
authority to list long-term index option series (``LEAPS[reg]''), as 
well as reduced-value LEAPS,\6\ in accordance with CBOE Rule 
24.9(b)(1). The CBOE's rules specifically permitted the listing of 
reduced-value LEAPS on the ``old'' NYSE Composite Index.\7\ The 
Exchange similarly intends to allow for the listing of LEAPS or 
reduced-value LEAPS on the Reduced Value Index in order to provide 
investors with product offerings consistent with those that were 
available for the ``old'' NYSE Composite index. The Exchange will make 
a timely determination, based on contemporaneous market factors, as to 
when and if either LEAPS or reduced-value LEAPS shall be listed. In 
deciding whether to list LEAPS or reduced-value LEAPS, the Exchange 
will consider which type of series provides the most appropriate 
vehicle for customers to use as a long-term hedge.
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    \6\ CBOE Rule 24.1(g) provides that the current index value for 
a reduced-value LEAP is one-tenth ( 1/10th) of the current index 
value of the related index option. The ``closing index value'' shall 
be the last index value reported on a business day.
    \7\ See CBOE Rule 24.9(b)(2) (Reduced-Value LEAPS).
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    The option settlement value on the Reduced Value Index will be 
based on the opening prices of the component securities as reported by 
the NYSE. For options on the Reduced Value Index, strike prices will be 
set to bracket the Reduced Value Index in 2.5-point increments for 
strikes below $200 and 5-point increments above $200, as will be 
reflected in CBOE Rule 24.9. The trading hours for options on the 
Reduced Value Index will be from 8:30 a.m. to 3:15 p.m. Chicago time.
    Options shall be European-style exercise and A.M.-settled, as 
currently reflected in CBOE Rule 24.9(a)(3), and position limits will 
remain the same for options traded on the Reduced Value Index as those 
established on the old Index; 45,000 contracts on either side of

[[Page 52806]]

the market. This is consistent with CBOE Rule 24.4.
    For purposes of calculating customer margin requirements, the 
Revised Index, just like the Old Index, is considered a broad-based 
index for purposes of calculating customer margin requirements.

Surveillance

    The Exchange represents that its surveillance procedures are 
adequate to monitor the trading in options and LEAPS on the Reduced 
Value Index. The CBOE does not believe that there are any material 
differences in the manner in which options on the Reduced Value Index 
will trade. The Exchange also believes that reducing the value of the 
Revised Index, as well as the other changes to the index's design and 
calculation, does not raise any new concerns about manipulation or 
adverse market impact. As a result, the Exchange believes that the 
existing surveillance procedures as they applied to the Old Index 
options should be adequate to detect or deter manipulation.\8\ The CBOE 
also shall provide to members a formal notice which will describe the 
Revised Index, the Reduced Value Index, the new options root ticker 
symbol, and the options series to be listed on the Reduced Value Index.
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    \8\ Telephone conversation between Jim Flynn, Attorney II, CBOE, 
and Ian K. Patel, Attorney, Division of Market Regulation, 
Commission on August 26, 2003.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act,\9\ in 
that it is designed to perfect the mechanisms of a free and open market 
and to protect investors and the public interest.
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    \9\ 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.

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 Exchange consents, the Commission will:
    A. By order approve such proposed rule change; or
    B. 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 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 
number SR-CBOE-2003-14 and should be submitted by September 26, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-22599 Filed 9-4-03; 8:45 am]
BILLING CODE 8010-01-P