[Federal Register Volume 69, Number 129 (Wednesday, July 7, 2004)]
[Notices]
[Pages 40994-41003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15329]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49932; File No. SR-CBOE-2002-24]


Self-Regulatory Organizations; Order Granting Approval of the 
Proposed Rule Change and Amendment Nos. 1 and 2 by the Chicago Board 
Options Exchange, Inc., and Notice of Filing and Order Granting 
Accelerated Approval to Amendment Nos. 3 and 4 Relating to Listing 
Standards for Options on Micro Narrow-Based Security Indexes

June 28, 2004.

I. Introduction

    On May 7, 2002, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to adopt criteria for 
a new classification of narrow-based indexes, classified as ``Micro 
Narrow-Based'' indexes and adopt initial listing standards and 
maintenance standards for options on Micro Narrow-Based security 
indexes. The CBOE filed Amendment Nos. 1 and 2 to the proposed rule 
change on August 6, 2002 \3\ and August 29, 2002,\4\ respectively. On 
October 16, 2002, the proposed rule change, as modified by Amendment 
Nos. 1 and 2, was published in the Federal Register.\5\ The Commission 
received no comment letters with respect to the proposal. The CBOE 
filed Amendment Nos. 3 and 4 on July 15, 2003 \6\ and May 17, 2004,\7\ 
respectively. This order approves the proposed rule change, as modified 
by Amendment Nos. 1 and 2, and grants accelerated approval to Amendment 
Nos. 3 and 4. For the complete text of the proposed rule change, see 
Exhibit A, attached hereto.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter dated August 6, 2002 from Madge Hamilton, Legal 
Division, CBOE, to Kelly Riley, Senior Special Counsel, Division of 
Market Regulation (``Division''), Commission (``Amendment No. 1''). 
Amendment No. 1 makes certain technical corrections to the proposed 
rule change.
    \4\ See Letter dated August 29, 2002 from Madge Hamilton, Legal 
Division, CBOE, to Florence Harmon, Senior Special Counsel, 
Division, Commission (``Amendment No. 2''). Amendment No. 2 makes 
certain technical corrections to the proposed rule text and adds a 
requirement that component securities be registered under Section 12 
of the Act. Amendment No. 2 also adds a requirement that the total 
number of securities in an index may not increase or decrease by 
more than 33\1/3\% from the number of component securities in the 
index at the time of its initial listing. Finally, Amendment No. 2 
adds a requirement that cash settled index options be designated as 
AM-settled index options.
    \5\ See Securities Exchange Act Release No. 46629 (October 9, 
2002), 67 FR 63949.
    \6\ See Letter dated July 14, 2003 from James Flynn, Legal 
Division, CBOE, to Nancy Sanow, Assistant Director, Division, 
Commission (``Amendment No. 3''). In Amendment No. 3, CBOE submitted 
a new Form 19b-4, which replaces and supersedes the original filing 
in its entirety.
    \7\ See Letter dated May 14, 2003 from James Flynn, Legal 
Division, CBOE, to Nancy Sanow, Assistant Director, Division, 
Commission (``Amendment No. 4''). In Amendment No. 4, CBOE submitted 
a new Form 19b-4, which replaces and supersedes the original filing 
in its entirety.
---------------------------------------------------------------------------

II. Description of the Proposal

    In the Notice, the Exchange proposes to amend CBOE Rule 24.2 
(Designation of the Index) by adopting criteria for a new 
classification of narrow-based indexes, classified as ``Micro Narrow-
Based'' indexes, that is consistent with the definition of ``Narrow-
Based'' indexes under the Commodity Futures Modernization Act of 2000 
(``CFMA'').\8\ The Exchange proposes to adopt initial listing standards 
and maintenance standards for options on Micro Narrow-Based security 
indexes that are consistent with listing standards for futures on a 
narrow-based security index.\9\ CBOE proposes the use of the term 
``Micro Narrow-Based'' to distinguish this classification of narrow-
based indexes from the existing ``narrow-based'' security indexes, as 
currently defined under CBOE Rule 24.2(b),\10\ which are also referred 
to as ``Industry Indexes'' under some provisions of CBOE's rules.\11\
---------------------------------------------------------------------------

    \8\ Section 201 of the CFMA; 15 U.S.C. 78c(a)(55)(B).
    \9\ See Securities Exchange Act Release No. 34-48191 (July 17, 
2003), 68 FR 43555 (SR-OC-2003-06). The Exchange states that these 
listing and maintenance standards are consistent with the 
Commission's Staff Legal Bulletin No. 15: Listing Standards for 
Trading Security Futures Products (September 5, 2001) (``Division 
Bulletin'').
    \10\ CBOE Rule 24.2(b) will remain unchanged.
    \11\ See e.g. CBOE Rule 24.1(i)(2) and CBOE Rule 24.4A.
---------------------------------------------------------------------------

    Specifically, under proposed Rule 24.2(d), the Exchange proposes to 
list and trade options on a Micro Narrow-Based security index, pursuant 
to Rule 19b-4(e) under the Act, if the index is a Micro Narrow-Based 
security index:
    (1) That has 9 or fewer component securities; or
    (2) in which a component security comprises more than 30% of the 
index's weighting; or
    (3) in which the 5 highest weighted component securities in the 
aggregate comprise more than 60% of the index's weighting; or
    (4) in which the lowest weighted component securities comprising, 
in the aggregate, 25% of the index's weighting, have an aggregate 
dollar value of average daily trading volume of less than $50 million 
(or in the case of an index with 15 or more component securities, $30 
million), except that if there are 2 or more securities with equal 
weighting that could be included in the calculation of the lowest 
weighted component securities comprising, in the aggregate, 25% of the 
index's weighting, such securities shall be ranked from lowest to 
highest dollar value of average daily trading volume and shall be 
included in the calculation based on their ranking starting with the 
lowest ranked security.
    According to the Exchange, the proposed rule change also makes 
other modifications that are consistent with the standards for futures 
on narrow-based indices. For example, the proposed rule change requires 
that all component securities of a narrow-based security index be 
registered pursuant to Section 12 of the Act.
    The proposed rule change also permits a Micro Narrow-Based index to 
be a modified capitalization-weighted index.\12\ The CBOE also proposes 
three

[[Page 40995]]

additional index weighting methodologies for Micro Narrow-Based 
indexes--modified equal-dollar weighted, approximate equal-dollar 
weighted, and share-weighted. According to CBOE, the Commission has 
previously granted the CBOE approval to list options on a modified 
equal-dollar weighted index \13\ and the Commission has not abrogated 
the rule filing submitted by OneChicago for products overlying indexes 
that utilize an approximate equal dollar-weighted methodology.
---------------------------------------------------------------------------

    \12\ See III.A.(ii)(a) of the Division: Staff Legal Bulletin No. 
15, supra note 9. See also Securities Exchange Act Release No. 
42787, 65 FR 33598 (May 24, 2000)(amending Amex Rule 1000A to permit 
the index underlying a series of Index Fund Shares to be calculated 
based on modified market capitalization weighting methodology, among 
others); Securities Exchange Act Release No. 43912, 66 FR 9401 
(February 7, 2001) (permitting an index underlying a series of Index 
Fund Shares to be calculated on modified market capitalization); 
Philadelphia Stock Exchange, Inc. Rule 1009A(b)(2), which permits a 
narrow-based index to be modified capitalization-weighted.
    \13\ Securities Exchange Act Release No. 36623 (December 21, 
1995), 60 FR 67379 (December 29, 1995) (approving options on the 
CBOE Automotive Index, which is modified equal-dollar weighting). In 
the Commission's release adopting final rules regarding new 
derivative securities products, it noted that ``[t]he index 
underlying a new derivative securities product should be constructed 
according to established criteria for initial inclusion of new 
component securities. SROs seeking to rely on the proposed amendment 
should employ objective index construction standards that include a 
minimum number of component securities and a fixed and objective 
weighting methodology (e.g., capitalization weighted, price 
weighted, equal-dollar weighted or modified equal-dollar weighted.'' 
(footnote omitted.) Securities Exchange Act Release No. 40761 File 
No. S7-13-98; 63 FR 70952, 70961 (December 22, 1998). See also 
Securities Exchange Act Release No. 42787, 65 FR 33598 (May 24, 
2000)(amending Rule 1000A to permit the index underlying a series of 
Index Fund Shares to be calculated based on modified equal-dollar 
weighting methodology, among others.)
---------------------------------------------------------------------------

    A modified equal-dollar weighted methodology is designed to be a 
fair measurement of the particular industry or sector represented by 
the index, but without assigning an excessive weight to one or more 
index components that have a large market capitalization relative to 
other index components. Under this methodology, each component is 
assigned a weight that takes into account the relative market 
capitalization of the securities comprising the index. The index is 
subsequently rebalanced to maintain these pre-established weighting 
levels. In the case of an index with 9 components or less, the weight 
assigned to the largest component will not exceed 50% of the entire 
index weight. Like equal-dollar weighted indexes, the value of a 
modified equal-dollar weighted index will equal the current combined 
market value (based on U.S. primary market prices) of the assigned 
number of shares of each of the underlying components divided by the 
appropriate index divisor. A modified equal-dollar weighted index will 
be balanced quarterly.
    An approximate equal-dollar weighted index is composed of one or 
more securities in which each component security will be weighted 
equally based on its market price on the index's selection date. The 
index must be reconstituted and rebalanced if the notional value of the 
largest component is at least twice the notional volume of the smallest 
component for fifty percent or more of the trading days in the three 
months prior to December 31 of each year. For purposes of this 
provision, the Exchange defines ``notional value'' as the market price 
of the component times the number of shares of the underlying component 
in the index. The Exchange also states that the reconstitution and 
rebalancing are also mandatory if the number of components in the index 
changes. The Exchange also states that it will reserve the right to 
rebalance quarterly at its discretion. Exhibit B, attached hereto, 
contains a table that illustrates the appropriate maintenance 
procedures that must be taken upon the occurrence of certain types of 
corporate actions that may affect the components that underlie an 
approximate equal-dollar weighted index.
    A share-weighted index is designed to mimic the value of a 
portfolio consisting of two or more securities. The weight of each 
component security is calculated by multiplying the price of the 
component security by an adjustment factor. Adjustment factors are 
chosen to reflect the investment objective deemed appropriate by the 
designer of the index and will be published by the Exchange as part of 
the contract specifications.\14\ The value of the index is calculated 
by adding the weight of each component security and dividing the total 
by an index divisor.\15\ If a share-weighted Micro Narrow-Based index 
fails to meet the maintenance listing standards under CBOE Rule 
24.2(e), the index would not be rebalanced by the Exchange. Instead, 
the Exchange would restrict options transactions to ``closing-only'' 
transactions and would not issue any additional series for that 
index.\16\ Upon the expiration of the last series on that index, the 
Exchange will no longer calculate that index and no additional series 
would be listed.
---------------------------------------------------------------------------

    \14\ For example, an index designer might want to apply an 
adjustment factor in order to prevent one or a few components from 
dominating the weight of the index. This is similar to an adjustment 
factor in other types of weighting methods such as modified 
capitalization weighted indexes.
    \15\ The index ``divisor'' is calculated to yield a benchmark 
index level (50, 100, 200, etc.) as of a particular date.
    \16\ When option series are restricted to ``closing-only'' 
status, the only opening transactions allowed in such a series are 
(i) opening transactions by market-makers executed to accommodate 
closing transactions of other market participants and (ii) opening 
transactions by CBOE member organizations to facilitate the closing 
transactions of public customers executed as crosses pursuant to and 
in accordance with CBOE Rule 6.74(b) or (d). CBOE will issue a 
regulatory circular to notify members and member organizations of 
such a situation.
---------------------------------------------------------------------------

    Unlike other indexes currently available, share-weighted indexes do 
not require divisor changes in order to adjust for corporate actions. 
Rather, a change is made to the adjustment factor for a particular 
stock undergoing the corporate action. Thus, only the stock undergoing 
the corporate action is affected, which mimics the impact on a 
replicating portfolio. For example, the index is adjusted for a stock 
split by multiplying the adjustment factor of the affected stock by its 
split ratio. The index is adjusted for spin-offs and other 
distributions, excluding regular cash dividends, by taking the value of 
the property being distributed and then changing the adjustment factor 
to reflect the purchase of additional shares of the index component. 
Unlike a capitalization-weighted index, share-weighted indexes are not 
adjusted to reflect changes in the number of outstanding shares of its 
constituents. So, the issuance of additional shares by a company whose 
stock underlies the index would not impact a share-weighted index. The 
Exchange has provided the following examples for the share-weighted 
index.
    Example: Adjusting a share-weighted index to reflect a 2-for-1 
stock split in the shares of one of its components.
    Consider the following share-weighted index. A company (Stock 2) 
has declared a 2-for-1 split and the prices listed below represent the 
closing prices for each index component on the business day immediately 
prior to the ex-distribution date. The index divisor, which was chosen 
to yield a benchmark level of 100, is 1.00. Therefore, the closing 
index level prior to the ex-date is 91.00.

----------------------------------------------------------------------------------------------------------------
                                                                                                     Component
                    Component                       Price (Pi)      Adjustment        Pi x Ai         weight
                                                                   factor (A\i\)                     (percent)
----------------------------------------------------------------------------------------------------------------
Stock 1.........................................             $23            1.25           28.75           31.59

[[Page 40996]]

 
Stock 2.........................................              92            0.5            46              50.55
Stock 3.........................................               5            1.25            6.25            6.87
Stock 4.........................................               8            1.25           10              10.99
                                                 -----------------
    Total.......................................  ..............  ..............           91             100.00
----------------------------------------------------------------------------------------------------------------

    As shown in the table below, the adjustment to reflect the 2-for-1 
split would require that the Adjustment Factor for Stock 2 be 
multiplied by the split ratio (2), thereby changing it from 0.5 to 1.0. 
The post-split price of Stock 2 ($46) is adjusted by dividing the pre-
split price ($92) by the split ratio. The product of the new Adjustment 
Factor and the post-split price of Stock 2 is exactly the same as 
product of the old Adjustment Factor and pre-split price of Stock 2. 
Furthermore, the sum of the products (Pi x Ai) 
and individual component weights are exactly the same as before the 
split, and the index divisor remains unchanged at 1.00.

----------------------------------------------------------------------------------------------------------------
                                                                                                     Component
                    Component                       Price (Pi)      Adjustment        Pi x Ai         weight
                                                                    factor (Ai)                      (percent)
----------------------------------------------------------------------------------------------------------------
Stock 1.........................................             $23            1.25           28.75           31.59
Stock 2.........................................              46            1.0            46              50.55
Stock 3.........................................               5            1.25            6.25            6.87
Stock 4.........................................               8            1.25           10              10.99
                                                 -----------------
    Total.......................................  ..............  ..............           91             100.00
----------------------------------------------------------------------------------------------------------------

    Exhibit C, attached hereto, contains a table that illustrates the 
appropriate maintenance procedures that must be taken upon the 
occurrence of certain types of corporate actions that may effect the 
components that underlie a share-weighted index.
    Regardless of the weighting methodology, the Exchange represents 
that it will also reserves the right to rebalance any Micro Narrow-
Based index on an interim basis if warranted as a result of 
extraordinary changes in the relative values of the component 
securities. Proposed CBOE Rule 24.2(d)(2)(iv) shall provide that, to 
the extent investors with open positions must rely upon the continuity 
of the options contract on the index, CBOE listing standards will 
clarify that outstanding contracts are unaffected by rebalancings. The 
Exchange believes that these provisions are consistent with previous 
rule changes approved by the Commission.\17\
---------------------------------------------------------------------------

    \17\ Securities Exchange Act Release No. 42787, supra note 4 
(citing to Commentary .03 to AMEX Rule 1000, Commentary .02 to AMEX 
Rule 1000A, Commentary .01 to AMEX Rule 1202).
---------------------------------------------------------------------------

    Proposed CBOE Rule 24.2(e) contains the maintenance standards that 
will apply to Micro Narrow-Based security indexes. The Exchange 
believes that the maintenance standards generally adhere to the 
Division's Bulletin and those standards applicable to futures in a 
narrow-based security index. The Exchange represents that CBOE's 
surveillance procedures are adequate to monitor the trading in options 
on Micro Narrow-Based Indexes as defined under CBOE Rule 24.2(d).\18\
---------------------------------------------------------------------------

    \18\ The Exchange removed from this proposed rule change any 
reference to the trading of LEAPs in Micro Narrow-Based Indexes. 
Telephone conversation between James Flynn, Attorney, CBOE, and 
Florence Harmon, Senior Special Counsel, Commission, Division on 
June 25, 2004.
---------------------------------------------------------------------------

Position Limits and Exercise Limits

    CBOE also proposes to establish a new method for determining the 
applicable position limits for options on any Micro Narrow-Based Index 
that meets the generic listing standards under proposed CBOE Rule 
24.2(d). CBOE represents that it will utilize a formulaic approach as 
provided in proposed CBOE Rule, 24.4B, ``Position Limits for Options on 
Micro Narrow-Based Indexes as Defined Under Rule 24.2(d).''
    This new methodology is a departure from the manner in which 
position limits are assigned for index options under existing CBOE 
rules. Under CBOE Rule 24.4 (``Position Limits for Broad-Based Index 
Options'') and CBOE Rule 24.4A (``Position Limits for Industry Index 
Options''), position limits are assigned from pre-determined tiers 
based on an analysis of the respective index's underlying components. 
Under the proposed methodology, position limits would be determined in 
accordance with a formula that considers a Micro Narrow-Based Index's 
market capitalization and contract size in relation to the market 
capitalization of the S&P 500 index and the contract size and position 
limit of a futures contract on the S&P 500 index.
    In determining compliance with CBOE Rule 4.12 (Exercise Limits), 
the applicable exercise limit for option contracts on any Micro Narrow-
Based Index, as defined under proposed CBOE Rule 24.2(b), shall be a 
limit equivalent to the applicable position limits for options on that 
Micro Narrow-Based Index, as calculated under CBOE Rule 24.4B(a)(1)-
(7).

Margin

    CBOE Rule 12.3 governs the determination of the applicable margin 
treatment for options traded on the exchange, including options that 
overlie Narrow-Based indexes. The existing applicable margin for 
options on narrow-based indexes, as provided under CBOE Rule 12.3, also 
shall apply to Micro Narrow-Based indexes.

Strikes Prices

    The interval between strike prices for options on indexes that meet 
the criteria under CBOE Rule 24.4(d) will be no less than $2.50.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

[[Page 40997]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2002-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2002-24. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be 
available for inspection and copying at the principal office of the 
CBOE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
CBOE-2002-24 and should be submitted on or before July 28, 2004.

IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change and 
finds that the proposed rule change, as amended, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange. In particular, the 
Commission finds that the proposed rule change is consistent with Rule 
6(b)(5) \19\ of the Act, which requires that the rules of an exchange 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\20\ Specifically, the Commission notes that the 
proposed rule change would permit the Exchange to list and trade, 
pursuant to Section 19b-4(e) of the Act, options on Micro Narrow-Based 
security indexes that meet the listing criteria of CBOE Rule 24.2.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78f(b)(5).
    \20\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed initial listing and 
maintenance standards are consistent with the listing standards for 
futures on a narrow-based security index.\21\ The Commission also 
believes that the proposed generic standards covering, among other 
things, minimum capitalization, monthly trading volume, and relative 
weightings of component stocks are reasonably designed to ensure that 
the trading market for component stocks are adequately capitalized and 
sufficiently liquid. In addition, the Commission notes position limits 
for options on any Micro-Narrow-Based index that meets the generic 
listing standards of proposed CBOE Rule 24.2(d) would be determined in 
accordance with a proposed new formula that considers the index's 
market capitalization and contract size in relation to the market 
capitalization of the S&P 500 index and the contract size and position 
limit of a futures contract on the S&P 500 index. The Commission 
believes that the proposed formula for determining position limits is 
appropriate to deter manipulation of the index. In addition, the 
Commission finds that the weighting methodologies, employed by CBOE, 
including the modified equal-dollar weighted, approximate equal-dollar 
weighted, and share-weighted methodologies, are appropriate index 
construction standards. The Commission believes that the applicable 
margin standards for options on narrow-based indexes, as provided under 
CBOE Rule 12.3, are adequate standards for Micro Narrow-Based indexes. 
The Commission notes that the Exchange represents that the Options 
Price Reporting Authority (``OPRA'') has provided CBOE with assurances 
that it has sufficient operational capacity to accommodate CBOE's 
listing and trading of Micro Narrow-Based security indexes.
---------------------------------------------------------------------------

    \21\ See Release No. 34-48191, supra note 9. This definition in 
CBOE Rule 24.2(d)(1) is consistent with the definition of narrow-
based security index established by the CFMA for purposes of 
determining whether futures on security indexes are security futures 
subject to the jurisdiction of the Commission and the Commodity 
Futures Trading Commission (``CFTC'').
---------------------------------------------------------------------------

    The Exchange is also charged with surveillance for the product 
class, options on Micro Narrow-Based security indices. The Exchange 
represents that its surveillance procedures are adequate to monitor the 
trading in options in Micro Narrow-Based Indices. The Exchange will 
have complete access to information regarding trading activity in the 
underlying securities. The Exchange has developed new surveillance 
procedures specific to this new derivative product that the Commission 
finds adequate to monitor for manipulation in the Micro Narrow Based 
Indexes.
    The Commission's approval of the proposed generic listing standards 
for options on Micro Narrow-Based security indexes will allow those 
options that satisfy these standards to start trading under Rule 19b-
4(e), without constituting a proposed rule change within the meaning of 
section 19(b) of the Act \22\ and Rule 19b-4,\23\ for which notice and 
comment and Commission approval is necessary. Rule 19b-4(e) \24\ states 
that the listing and trading of a new derivative securities product by 
[an SRO] shall not be deemed a proposed rule change, pursuant to 
paragraph (c)(1) of [Rule 19b-4], if the Commission has approved, 
pursuant to Section 19(b) of the Act, such [SRO's] trading rules, 
procedures and listing standards for the product class that would 
include the new derivative securities product, and the SRO has a 
surveillance program for the product class. The Exchange's ability to 
rely on Rule 19b-4(e) for these products potentially reduces the time 
frame for bringing these securities to the market, promoting 
competition and providing investors with derivative securities products 
to meet their needs more quickly. As stated above, the Commission 
believes that the Exchange has adequate trading rules, procedures, 
listing standards, and a surveillance program for the Micro Narrow-
Based indexes, and thus the Commission is approving generic listing 
standards pursuant to Rule 19b-4(e) for this product class.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b).
    \23\ 17 CFR 240.19b-4.
    \24\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    The Commission finds good cause for approving Amendment Nos. 3 and 
4 to the proposed rule change prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
section 19(b)(2) of

[[Page 40998]]

the Act.\25\ The Commission believes that the adoption of the proposed 
rule change will enable CBOE to act expeditiously in listing options on 
new Micro Narrow-Based security indexes in the same manner currently 
afforded to narrow-based indexes as defined under CBOE Rule 24.2(b). In 
addition, the Commission believes that the proposed rule change would 
remove impediments to a free and open market place by providing 
competition for new products. Accordingly, the Commission finds good 
cause for accelerating approval of Amendment Nos. 3 and 4 to the 
proposed rule change.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, section 6(b)(5) of the Act.\26\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-CBOE-2002-24), as amended by 
Amendment Nos. 1 and 2, be, and hereby is, approved and that Amendment 
Nos. 3 and 4 to the proposed rule change be, and hereby are, approved 
on an accelerated basis.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.

EXHIBIT A

    (Additions are italicized; deletions are [bracketed])

Chicago Board Options Exchange, Incorporated

Rules

CHAPTER XII

Margins

    Rule 12.1-Rule 12.2 No Change.

Rule 12.3--Margin Requirements

    Rule 12.3(a)-(b) No Change.
    Rule 12.3(c) Customer Margin Account--Exception. The foregoing 
requirements are subject to the following exceptions. Nothing in 
this paragraph (c) shall prevent a broker-dealer from requiring 
margin from any account in excess of the amounts specified in these 
provisions.
    (1)-(4) No Change.
    (5) Initial and Maintenance Requirements on Short Options, Stock 
Index Warrants, Currency Index Warrants and Currency Warrants.
    (A) Listed. General Rule. The initial and maintenance margin 
required on any listed put, call, stock index warrant, currency 
index warrant or currency warrant carried ``short'' in a customer's 
account shall be 100% of the current market value of the option or 
warrant plus the percentage of the current ``underlying component 
value'' (as described in Column IV of the table below) specified in 
column II of the table below reduced by any ``out-of-the-money'' 
amount as defined in this subparagraph (c)(5)(A) below.
    Notwithstanding the margin required above, the minimum margin 
for each such call option or call warrant shall not be less than 
100% of the current market value of the option or warrant plus the 
percentage of the current market value of the underlying component 
specified in column III of the table below, and for each such put 
option or put warrant, shall not be less than 100% of the current 
market value of the option or warrant plus the percentage of the 
option or warrant's aggregate exercise price amount specified in 
column III of the table below.

----------------------------------------------------------------------------------------------------------------
                                           II. Initial and/
                                            or maintenance     III. Minimum
            I. Type of option               margin required   margin required    IV. Underlying component value
                                               (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
1. Stock.................................                20                10  The equivalent number of shares
                                                                                at current market prices.
2. Narrow based index as defined in Rule                 20                10  The product of the current index
 24.1 and Micro Narrow-Based Index as                                           group value and the applicable
 defined in Rule 24.2(d).                                                       index multiplier.
3. Broad-based index (including Capped-              \1\ 15            \2\ 10  The product of the current index
 style options (CAPS & QCAPS) Packaged                                          group value and the applicable
 Vertical Spreads and Packaged Butterfly                                        index multiplier.
 Spreads) as defined in Rule 24.1 15%.
4. Interest Rate Contracts...............                10                 5  The product of the index value
                                                                                and the applicable index
                                                                                multiplier.
5. U.S. Treasury bills-95 days or less to                10                 5  The underlying principal amount.
 maturity.
6. U.S. Treasury notes...................                 3             \1/2\  The underlying principal amount.
7. U.S. Treasury bonds...................               3.5             \1/2\  The underlying principal amount.
8. Foreign Currency Options Warrants.....  ................  ................  The product of units per foreign
                                                                                currency contract and the
                                                                                closing spot price.\3\
    Australian Dollar....................                 4             \3/4\
    British Pound........................                 4             \3/4\
    Canadian Dollar......................                 4             \3/4\
    German Mark..........................                 4             \3/4\
    European Currency Unit...............                 4             \3/4\
    French Franc.........................                 4             \3/4\
    Japanese Yen.........................                 4             \3/4\
    Swiss Franc..........................                 4             \3/4\
9. Currency Index Warrants...............                 3             (\4\)  The product of the index value
                                                                                and the applicable index
                                                                                multiplier.
10. Stock Index Warrants (broad-based)...                15                10  The product of the index value
                                                                                and the applicable index
                                                                                multiplier.
11. Stock Index Warrants (narrow-based)..                20                10  The product of the index value
                                                                                and the applicable index
                                                                                multiplier.
12. Registered investment companies based                15                10  The equivalent number of shares
 on a broad-based index or portfolio of                                         at current market prices.
 securities.

[[Page 40999]]

 
13. Registered investment companies based                20                10  The equivalent number of shares
 on a narrow-based index or portfolio of                                        at current market prices.
 securities.
----------------------------------------------------------------------------------------------------------------
\1\ In any event, the maximum margin required on a capped style index option (CAPS and Q-CAPS), Packaged
  Vertical Spread and Packaged Butterfly Spread as qdefined in Rule 24.1 need not exceed the aggregate cap
  interval, vertical spread interval and butterfly spread interval, respectively. Cap interval, vertical spread
  interval and butterfly spread interval shall have the meanings defined in Rule 24.1.
\2\ In respect of a capped-style index option, Packaged Vertical Spread and Packaged Butterfly Spread as defined
  in Rule 24.1 which is out-of-the-money, the minimum margin required is as follows: CALLS--the lesser of (a)
  100% of the current market value of the option plus 10% of the underlying index value or (b) the aggregate
  cap, vertical spread or butterfly spread interval, respectively, PUTS--the lesser of (a) 100% of the current
  market value of the option plus 10% of the aggregate put exercise price or (b) the aggregate cap, vertical
  spread or butterfly spread interval, respectively. Cap interval, vertical spread interval and butterfly spread
  interval shall have the meanings defined in Rule 24.1.
\3\ The term ``spot price'' in respect of a currency warrant on a particular business day means the noon buying
  rate in U.S. dollars on such day in New York City for cable transfers of the particular underlying currency as
  certified for customs purposes by the Federal Reserve Bank of New York.
\4\ A percentage of the aggregate exercise price as specified by the exchange and approved by the SEC.

    For purposes of this subparagraph (c)(5)(A), ``out-of-the-
money'' amounts are determined as follows:

----------------------------------------------------------------------------------------------------------------
         Option or warrant issue                        Call                               Put
-------------------------------------------------------------------------------------------------------------
Stock Options, Registered Investment      Any excess of the aggregate       Any excess of the current market
 Company Options.                          exercise price of the option      value of the equivalent number
                                           over the current market value     of shares of the underlying
                                           of the equivalent number of       security over the aggregate
                                           shares of the underlying          exercise price of the option.
                                           security.
U.S. Treasury Options...................  Any excess of the aggregate       Any excess of the current market
                                           exercise price of the option      value of the underlying
                                           over the current market value     principal amount over the
                                           of the underlying principal       aggregate exercise price of the
                                           amount.                           option.
Index stock options, currency index       Any excess of the aggregate       Any excess of the product of the
 warrants and stock index warrants.        exercise price of the option or   current index value and the
                                           warrant over the product of the   applicable multiplier over the
                                           current index value and the       aggregate exercise price of the
                                           applicable multiplier.            option or warrant.
Foreign currency options and warrants...  Any excess of the aggregate       Any excess of the product of
                                           exercise price of the option or   units per foreign currency
                                           warrant over the product of       contract and the closing spot
                                           units per foreign currency        prices over the aggregate price
                                           contract and the closing spot     of the option or warrant.
                                           prices.
Interest rate options...................  Any excess of the aggregate       Any excess of the product of the
                                           exercise price of the option      current interest rate measure
                                           over the product of the current   value and the applicable
                                           interest rate measure value and   multiplier over the aggregate
                                           the applicable multiplier.        exercise price of the option.
----------------------------------------------------------------------------------------------------------------

    (B) OTC Option. General Rule. (No Change).

----------------------------------------------------------------------------------------------------------------
                                           II. Initial and/
                                            or maintenance     III. Minimum
            I. Type of option               margin required   margin required    IV. Underlying aggregate value
                                               (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
1. Stock and Convertible Corporate Debt..                30                10  The equivalent number of shares
                                                                                times current market price per
                                                                                share for stocks or the
                                                                                underlying principal amount for
                                                                                convertible securities.
2. Narrow based index and Micro Narrow-                  30                10  The product of the current index
 Based index as defined in Rule 24.2(d).                                        value and the applicable index
                                                                                multiplier.
3. (No changes).
4. (No changes).
5. (No changes).
6. (No changes).
----------------------------------------------------------------------------------------------------------------
\1\ Options contracts under category (4) must be for a principal amount of not less than $500,000. If the
  principal amount is less than $500,000, category (6) will apply.
\2\ Option transactions on all other OTC margin bonds as defined in paragraph 12.3(a) are not eligible for the
  margin requirements contained in this provision. Margin requirements for such securities are to be computed
  pursuant to category (6).


[[Page 41000]]

    (c) No Change.
    (d)-(k) No Change.
    Interpretations and Policies . . . .01-.19 No Change.

CHAPTER XXIV

Index Options

Rule 24.1 Definitions--

Rule 24.1

    (a)-(h) No Change.
    (i)(1)The terms ``market index'' and ``broad-based index'' mean 
an index designed to be representative of a stock market as a whole 
or of a range of companies in unrelated industries.
    (2) The terms ``industry index'' and ``narrow-based'' index mean 
an index designed to be representative of a particular industry or a 
group of related industries.
    (3) The term ``Micro Narrow-Based Index'' means an industry or 
narrow-based index that meets the specific criteria provided under 
Rule 24.2(d).
    (j)-(x) No Change.

Rule 24.2. Designation of the Index

    (a) The component securities of an index underlying an index 
option contract need not meet the requirements of Rule 5.3. Except 
as set forth in subparagraph (b) and (d) below, the listing of a 
class of index options on a new underlying index will be treated by 
the Exchange as a proposed rule change subject to filing with and 
approval by the Securities and Exchange Commission (``Commission'') 
under Section 19(b) of the Exchange Act.
    (b)-(c) No Change.
    (d) Notwithstanding paragraph (a) above, the Exchange may trade 
options on a Micro Narrow-Based security index pursuant to Rule 19b-
4(e) of the Securities Exchange Act of 1934, if each of the 
following conditions is satisfied:
    (1) The Index is a security index:
    (i) That has 9 or fewer component securities; or
    (ii) In which a component security comprises more than 30 
percent of the index's weighting; or
    (iii) In which the 5 highest weighted component securities in 
the aggregate comprise more than 60 percent of the index's 
weighting; or
    (iv) In which the lowest weighted component securities 
comprising, in the aggregate, 25 percent of the index's weighting 
have an aggregate dollar value of average daily trading volume of 
less than $50,000,000 (or in the case of an index with 15 or more 
component securities, $30,000,000) except that if there are two or 
more securities with equal weighting that could be included in the 
calculation of the lowest weighted component securities comprising, 
in the aggregate, 25 percent of the index's weighting, such 
securities shall be ranked from lowest to highest dollar value of 
average daily trading volume and shall be included in the 
calculation based on their ranking starting with the lowest ranked 
security;
    (2) The index is capitalization-weighted, modified 
capitalization-weighted, price-weighted, share weighted, equal 
dollar-weighted, approximate equal-dollar weighted, or modified 
equal-dollar weighted;
    (i) For the purposes of this Rule 24.2(d), an approximate equal-
dollar weighted index is composed of one or more securities in which 
each component security will be weighted equally based on its market 
price on the index's selection date and the index must be 
reconstituted and rebalanced if the notional value of the largest 
component is at least twice the notional volume of the smallest 
component for fifty percent or more of the trading days in the three 
months prior to December 31 of each year. For purposes of this 
provision the ``notional value'' is the market price of the 
component times the number of shares of the underlying component in 
the index. Reconstitution and rebalancing are also mandatory if the 
number of components in the index is greater than five at the time 
of rebalancing. The Exchange reserves the right to rebalance 
quarterly at its discretion.
    (ii) For the purposes of this Rule 24.2(d), a modified equal-
dollar weighted index is an index in which each underlying component 
represents a pre-determined weighting percentage of the entire 
index. Each component is assigned a weight that takes into account 
the relative market capitalization of the securities comprising the 
index. A modified equal-dollar weighted index will be balanced 
quarterly.
    (iii) For the purposes of this Rule 24.4(d), a share-weighted 
index is calculated by multiplying the price of the component 
security by an adjustment factor. Adjustment factors are chosen to 
reflect the investment objective deemed appropriate by the designer 
of the index and will be published by the Exchange as part of the 
contract specifications. The value of the index is calculated by 
adding the weight of each component security and dividing the total 
by an index divisor, calculated to yield a benchmark index level as 
of a particular date. A share-weighted index is not adjusted to 
reflect changes in the number of outstanding shares of its 
components. A share-weighted Micro Narrow-Based index will not be 
re-balanced. If a share-weighted Micro Narrow-Based Index fails to 
meet the maintenance listing standards under Rule 24.2(e), the 
Exchange will restrict trading in existing option series to closing 
transactions and will not issue additional series for that index.
    (iv) The Exchange may rebalance any Micro Narrow-Based index on 
an interim basis if warranted as a result of extraordinary changes 
in the relative values of the component securities. To the extent 
investors with open positions must rely upon the continuity of the 
options contract on the index, outstanding contracts are unaffected 
by rebalancings.
    (3) Each component security in the index has a minimum market 
capitalization of at least $75 million, except that each of the 
lowest weighted securities in the index that in the aggregate 
account for no more than 10% of the weight of the index may have a 
minimum market capitalization of only $50 million;
    (4) The average daily trading volume in each of the preceding 
six months for each component security in the index is at least 
45,500 shares, except that each of the lowest weighted component 
securities in the index that in the aggregate account for no more 
than 10% of the weight of the index may have an average daily 
trading volume of only 22,750 shares for each of the last six 
months;
    (5) In a capitalization-weighted index, the lesser of: (1) The 
five highest weighted component securities in the index each have 
had an average daily trading volume of at least 90,000 shares over 
the past six months; or (2) the highest weighted component 
securities in the index that in the aggregate represent at least 30% 
of the total number of component securities in the index each have 
had an average daily trading volume of at least 90,000 shares over 
the past six months;
    (6) Subject to subparagraphs (4) and (5) above, the component 
securities that account for at least 90% of the total index weight 
and at least 80% of the total number of component securities in the 
index must meet the requirements of Rule 5.3 applicable to 
individual underlying securities;
    (7)(i) Each component security in the index is a ``reported 
security'' as defined in Rule 11Aa3-1 under the Exchange Act; and
    (ii) Foreign securities or ADRs that are not subject to 
comprehensive surveillance sharing agreements do not represent more 
than 20% of the weight of the index;
    (8) The current underlying index value will be reported at least 
once every fifteen seconds during the time the index options are 
traded on the Exchange;
    (9) An equal dollar-weighted index will be rebalanced at least 
once every quarter;
    (10) If the underlying index is maintained by a broker-dealer, 
the index is calculated by a third party who is not a broker-dealer, 
and the broker-dealer has in place an information barrier around its 
personnel who have access to information concerning changes in and 
adjustments to the index;
    (11) Each component security in the index is registered pursuant 
to Section 12 of the Exchange Act; and
    (12) Cash settled index options are designated as A.M.-settled 
options.
    (e) The following maintenance listing standards shall apply to 
each class of index options originally listed pursuant to paragraph 
(d) above:
    (1) The index meets the criteria of paragraph (d)(1) of this 
Rule;
    (2) Subject to subparagraphs (4) and (9) below, the component 
securities that account for at least 90% of the total index weight 
and at least 80% of the total number of component securities in the 
index must meet the requirements of Rule 5.3;
    (3) Each component security in the index has a market 
capitalization of at least $75 million, except that each of the 
lowest weighted component securities that in the aggregate account 
for no more than 10% of the weight of the index may have a market 
capitalization of only $50 million;
    (4) The average daily trading volume in each of the preceding 
six months for each component security in the index is at least 
22,750 shares, except that each of the lowest weighted component 
securities in the index that in the aggregate account for no more 
than 10% of the weight of the index may have an average daily 
trading volume of at least 18,200 shares for each of the last six 
months;

[[Page 41001]]

    (5) Each component security in the index is a ``reported 
security'' as defined in Rule 11Aa3-1 under the Exchange Act; and
    (6) Foreign securities or ADRs thereon that are not subject to 
comprehensive surveillance sharing agreements do not represent more 
than 20% of the weight of the index;
    (7) The current underlying index value will be reported at least 
once every fifteen seconds during the time the index options are 
traded on the Exchange;
    (8) If the underlying index is maintained by a broker-dealer, 
the index is calculated by a third party who is not a broker-dealer, 
and the broker-dealer has in place an information barrier around its 
personnel who have access to information concerning changes in and 
adjustments to the index;
    (9) In a capitalization-weighted index the lesser of: (1) the 
five highest weighted component securities in the index each have 
had an average daily trading volume of at least 45,500 shares over 
the past six months; or (2) the highest weighted component 
securities in the index that in the aggregate represent at least 30% 
of the total number of stocks in the index each have had an average 
daily trading volume of at least 45,500 shares over the past six 
months;
    (10) The total number of component securities in the index may 
not increase or decrease by more than 33\1/3\% from the number of 
component securities in the index at the time of its initial 
listing;
    (11) Trading volume of each component security in the index must 
be at least 500,000 shares for each of the last six months, except 
that for each of the lowest weighted component securities in the 
index that in the aggregate account for no more than 10% of the 
weight of the index, trading volume must be at least 400,000 shares 
for each of the last six months;
    (12) In a capitalization-weighted index, the lesser of the five 
highest weighted component securities in the index or the highest 
weighted component securities in the index that in the aggregate 
represent at least 30% of the total number of stocks in the index 
each have had an average monthly trading volume of at least 
1,000,000 shares over the past six months;
    (13) Each component security in the index is registered pursuant 
to Section 12 of the Exchange Act;
    (14) In an approximate equal-dollar weighted index, the index 
must be reconstituted and rebalanced if the notional value of the 
largest component is at least twice the notional volume of the 
smallest component for fifty percent or more of the trading days in 
the three months prior to December 31 of each year. For purposes of 
this provision the ``notional value'' is the market price of the 
component times the number of shares of the underlying component in 
the index. Reconstitution and rebalancing are also mandatory if the 
number of components in the index is greater than five at the time 
of rebalancing. The Exchange reserves the right to rebalance 
quarterly at its discretion;
    (15) In a modified equal-dollar weighted index the Exchange will 
re-balance the index quarterly;
    (16) In a share-weighted index, if a share-weighted Micro 
Narrow-Based Index fails to meet the maintenance listing standards 
under Rule 24.2(e), the Exchange will not re-balance the index, will 
restrict trading in existing option series to closing transactions, 
and will not issue additional series for that index; and
    (17) In the event a class of index options listed on the 
Exchange fails to satisfy the maintenance listing standards set 
forth herein, the Exchange shall not open for trading any additional 
series of options of that class 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 that class of 
index options has been approved by the Commission under Section 
19(b)(2) of the Exchange Act.

Rule 24.4B--Position Limits for Options on Micro Narrow-Based Indexes 
As Defined Under Rule 24.2(d)

    Rule 24.4B. In determining compliance with Rule 4.11, cash-
settled option contracts on any Micro Narrow-Based Index, as defined 
and determined under Rule 24.2(d), shall be subject to the following 
methodologies for determining the applicable position limits:
    (a) Methodology for Establishing Position Limits on Cash-Settled 
Options on Micro Narrow-Based Indexes as defined under Rule 24.2(d). 
The position limit for a cash-settled option on a Micro Narrow-Based 
Index that meets the criteria under Rule 24.2(d) shall be calculated 
in accordance with the following methodology:
    (1) Determine the Market Capitalization of the S&P 500 Index.
    (2) Calculate the Notional Value of a position at the limit in 
the Chicago Mercantile Exchange's (``CME'') S&P 500 futures 
contract. The position limit for that contract is 20,000 (in all 
months combined) and the Index Multiplier is $250.
    Notional Value for the purposes of this Rule 24.4B(a)(1) = Index 
Level * Index Multiplier. Therefore,
    Notional Value of 20,000 S&P 500 futures contracts = 20,000 * 
S&P 500 Index Level * 250.
    (3) Calculate the Market Capitalization Ratio of the S&P 500 
Index Market Capitalization to the Notional Value of a position 
limit at the limit.
    Market Capitalization Ratio = Market Capitalization of the S&P 
500 / Notional Value of 20,000 S&P 500 futures contract positions.
    (4) Determine the Market Capitalization of the Micro Narrow-
Based Index by adding together the market capitalization of each 
underlying security component.
    (5) Determine the Notional Value of the Micro Narrow-Based Index 
Option (Index Level * Contract Multiplier).
    (6) Calculate the Position Limit of the Micro Narrow-Based Index 
using the following formula: Contract Position Limit on the Micro 
Narrow-Based Index = Market Capitalization of Micro Narrow-Based 
Index / (Notional Value of Micro Narrow-Based Index Option * Market 
Capitalization Ratio).
    (7) Establishing the Position Limit. After the applicable 
position limit has been determined pursuant to section 24.4B(a)(1)-
(6), round the calculated position limit to the nearest 1,000 
contracts using standard rounding procedures. For position limits 
that are 400 or greater, but less than 1000 contracts, round up to 
1,000 contracts.
    Rule 24.2(d) shall not apply to any Micro Narrow-Based Index in 
which the applicable position limit, as calculated using Rule 
24.4B(a)(1)-(6), for that Micro Narrow-Based Index is less than 400 
contracts.

Exhibit B

                            Maintenance of Approximate Equal-Dollar Weighted Indexes
----------------------------------------------------------------------------------------------------------------
                       Type                                      Adjustments
-----------------------------------------------------------------------------------------
                                                       Close price/                                Notes
             Action                   Company             action           Share lot
----------------------------------------------------------------------------------------------------------------
Special Cash Dividend..........  Component of       Adj. Close =       Adj. Share Lot =
                                  Index.             Prev. Close -      (Share Lot *
                                                     Dividend.          Prev Close)/Adj.
                                                                        Close.
Stock Split or Dividend........  Component of       Adj. Close =       Adj. Share Lot =   Adjustment Factor =
                                  Index.             Prev. Close/       Prev. Share Lot    number of new shares
                                                     Adjustment         * Adjustment       for one old share.
                                                     Factor.            Factor.
Spin Off.......................  Component of       Adj. Close =       .................  Ratio = number of
                                  Index (A).         Close - (Ratio *                      shares of spun-off
                                                     Spun off                              company received for
                                                     company's Price).                     every share of parent
                                                                                           company owned. Spun-
                                                                                           off company be added
                                                                                           at a weight such that
                                                                                           the market
                                                                                           capitalization of the
                                                                                           two companies after
                                                                                           the event is equal to
                                                                                           the market
                                                                                           capitalization of the
                                                                                           parent prior to the
                                                                                           event.

[[Page 41002]]

 
                                 Spun Off Company   ADDED............  Share Lot =
                                  (B).                                  ((Share Lot A *
                                                                        Prev. Close A) =
                                                                        (Adj. Share Lot
                                                                        A*Adj. Close A))/
                                                                        Close B.
Two Components Merge in an All   Remaining          .................  Adj. Share Lot =   All remaining
 Stock, Cash or Combination       Companies (A).                        Share Lot + B's    companies will be
 Deal.                                                                  Share Lot)/        adjusted using the
                                                                        number of          formula to the left.
                                                                        remaining          Their shares will
                                                                        components)/A's    increase based on
                                                                        Close.             their price so as to
                                                                                           distribute the weight
                                                                                           of the acquired
                                                                                           company evenly.
                                 Acquired Company   DELETED..........
                                  (B).
A Non-Component Takes Over a     Acquirer (A).....  ADDED............  Adj. Share Lot =   The acquiring company
 Component.                                                             (B's Share Lot *   will replace the
                                                                        B's Close)/A's     acquired company in
                                                                        Close.             the index and the
                                                                                           share lot will be
                                                                                           adjusted.
                                 Acquried           DELETED..........
                                  Component of
                                  Index (B).
Rights Issue...................  Component of       Adj Close =        Adj. Share Lot =   Ratio = number of
                                  Index (A).         (Close + (Ratio    (Close * Share     rights received for 1
                                                     * Subscription     Lot)/Adj. Close.   share of A.
                                                     Price))/(1 +
                                                     Ratio).
Extraordinary Removal..........  Replacement        ADDED............  Adj. Share Lot =   Component B may be
                                  Company (A).                          (B's Share Lot *   removed for:
                                                                        B's Close)/A's     bankruptcy
                                                                        Close.             proceedings,
                                                                                           financial distress
                                                                                           (as determined by Dow
                                                                                           Jones), delisting
                                                                                           from a primary
                                                                                           exchange (NYSE,
                                                                                           Nasdaq, Amex), or
                                                                                           illiquidity (10
                                                                                           consecutive no-trade
                                                                                           days). Replacement A
                                                                                           would be the highest
                                                                                           ranked (as of the
                                                                                           most recent Selection
                                                                                           Date) of the
                                                                                           remaining securities
                                                                                           in the industry group
                                                                                           which qualify for
                                                                                           inclusion.
                                 Component of       DELETED..........
                                  Index (B).
----------------------------------------------------------------------------------------------------------------

EXHIBIT C

                                      Maintenance of Share-Weighted Indexes
----------------------------------------------------------------------------------------------------------------
                       Type                                      Adjustments
-----------------------------------------------------------------------------------------
                                                     Component price   Adjustment factor           Notes
        Corporate action              Company             change             change
----------------------------------------------------------------------------------------------------------------
Special Cash Dividend..........  Component of       New Close = Prev   New Adj. Factor =
                                  Index.             Close - Dividend.  (Prev. Adj.
                                                                        Factor * Prev.
                                                                        Close)/New Close.
Stock Split or Dividend........  Component of       New Close = Prev.  New Adj. Factor =  For example, in the
                                  Index.             Close/Split        Prev. Adj.         case of a 2-for-1
                                                     Ratio.             Factor * Split     split, the Split
                                                                        Ratio.             Ratio would be 2. In
                                                                                           the case of a 5%
                                                                                           stock dividend, the
                                                                                           split ratio would be
                                                                                           1.05.
Spin Off.......................  Component of       New Close = Prev.  New Adj. Factor =  Price Adjustment due
                                  Index.             Close - (Price     (Prev. Adj.        to value of spun-off
                                                     Adjustment due     Factor * Prev.     company = (market
                                                     value of spun-     Close)/New Close.  capitalization of
                                                     off company).                         parent company -
                                                                                           market capitalization
                                                                                           of spun-off company)/
                                                                                           number of outstanding
                                                                                           shares of the parent
                                                                                           company. Spun-off
                                                                                           Company is not added.
Two Index Components Merge in    Acquiring Company  .................  New Adj. Factor =  The weight of the
 an All Stock, Cash or                                                  Prev. Adj.         Acquired Company is
 Combination Deal.                                                      Factor +           added to the weight
                                                                        ((Acquired         of the Acquiring
                                                                        Company's Close    Company.
                                                                        * Acquired
                                                                        Company's Adj.
                                                                        Factor)/
                                                                        Acquiring
                                                                        Company's Close).
                                 Acquired Company.  COMPONENT DELETED

[[Page 41003]]

 
A Non-Component Takes Over a     Non-Component      ADDED............  New Adj. Factor =  Non-Component
 Component.                       Acquiring                             ((Acquired         Acquiring Company
                                  Company.                              Company's Close    added to index at
                                                                        * Acquired         Acquired Company's
                                                                        Company's Adj.     weight.
                                                                        Factor)/
                                                                        Acquiring
                                                                        Company's Close).
                                 Acquired           DELETED..........
                                  Component of
                                  Index.
Rights Offering................  Component of       New Close = Prev.  New Adj. Factor =  Price Adjustment due
                                  Index.             Close - Price      (Prev. Adj.        to value of rights
                                                     Adjustment due     Factor * Prev.     offering = (market
                                                     to value of        Close)/New Close.  capitalization of
                                                     offering.                             parent company -
                                                                                           market capitalization
                                                                                           of rights)/number of
                                                                                           outstanding shares of
                                                                                           the parent company.
Extraordinary Removal..........  Index Component..  DELETED..........  The Adjustment     An Index Component
                                                                        Factors for each   will be removed for:
                                                                        remaining          bankruptcy
                                                                        component will     proceedings,
                                                                        be increased to    financial distress,
                                                                        reflect an equal   or delisting from a
                                                                        distribution of    national market
                                                                        the weight of a    (NYSE, Nasdaq, Amex).
                                                                        deleted
                                                                        component..
----------------------------------------------------------------------------------------------------------------

[FR Doc. 04-15329 Filed 7-6-04; 8:45 am]
BILLING CODE 8010-01-P