[Federal Register Volume 65, Number 92 (Thursday, May 11, 2000)]
[Notices]
[Pages 30458-30459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11804]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34- 42750; File No. SR-CBOE-99-60]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Maintenance Standards for the Dow Jones High Yield Select Ten Index

May 2, 2000.

I. Introduction

    On November 9, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ 
thereunder, a proposed rule change. In its proposal, the CBOE seeks to 
clarify certain procedures regarding the maintenance of the Dow Jones 
High Yield Select 10 Index (``Index''). The proposed rule change was 
published for comment in the Federal Register on February 28, 2000.\3\ 
The Commission received no comments on the proposed rule change and 
this order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42439 (Feburary 18, 
2000), 65 FR 10573.
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II. Description of the Proposal

    The CBOE currently lists and trades European-style, cash-settled 
options on the Dow Jones High Yield Select 10 Index, an equal weighted 
index composed of the ten highest yielding stocks from the 30 stocks in 
the Dow Jones Industrial Average (``DJIA''). The Index was designed to 
replicate a popular contrarian strategy that assumes that the ten 
highest yielding stocks in the DJIA are oversold and therefore, 
undervalued relative to the other stocks in the average. The index is 
reconstituted annually and the stocks comprising the index are retained 
for a full year.
    Normally, the Index represents a subset of the DJIA. However, Dow 
Jones can change the components of the DJIA at any time, and in some 
cases remove stocks that also happen to be components of the Index. The 
strategy upon which the Index is based, and the convention followed by 
investors and money managers, calls for the portfolio to be held for a 
full year even if certain components are no longer part of the DJIA.
    The maintenance procedures set forth in SR-CBOE-97-63 state that if 
it

[[Page 30459]]

becomes necessary to remove a stock from the Index, it will be replaced 
by the stock in the DJIA which has the highest yield of the stocks not 
already in the Index.\4\ CBOE intended for this passage to describe the 
actions it would take if the shares of an Index component became 
unavailable for trading, either due to a corporate action such as a 
takeover or merger, or due to bankruptcy. However, CBOE made no 
distinction between this type of component change and a discretionary 
component change in the Dow Jones Industrial Average, in which the 
shares of a company removed from the DJIA continue to trade.\5\
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    \4\ See Securities Exchange Act Release No. 39453 (December 16, 
1997), 62 FR 67101 (December 23, 1997) (order approving SR-CBOE-97-
63).
    \5\ On November 1, 1999, Dow Jones removed four stocks from the 
DJIA and replaced these stocks with new ones. These four stocks also 
happened to be components of the Index, i.e., four of the highest 
yielding stocks in the DJIA. Before this component change in the 
DJIA, CBOE realized that, contrary to industry practice, its 
maintenance rules for the index required it to remove the four 
stocks from the Index. To prevent these Four stocks from being 
removed from the Index until the annual rebalancing of the Index, 
CBOE submitted a rule change under Section 19(b)(3)(A) of the Act. 
See Securities Exchange Act Release No. 42187 (November 30, 1999), 
64 FR 68708 (December 8, 1999).
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    CBOE, therefore, proposes to clarify its maintenance procedures 
under which component changes can be made to the Index. Specifically, 
if it becomes necessary to remove a stock from the Index in the event 
that its shares cease to trade and a proxy for those shares is not 
available, it will be replaced by the stock in the DJIA that has the 
highest yield of the stocks not already in the Index. If a stock is 
removed from the DJIA at the discretion of Dow Jones, but its shares 
continue to trade, that stock will remain in the Index until the time 
of the annual re-balancing.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act.\6\ In 
particular, the Commission finds the proposal is consistent with 
Section 6(b)(5) \7\ of the Act. Section 6(b)(5) requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest.
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    \6\ In addition, pursuant to Section 3(f) of the Act, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal is consistent with the 
Act because it helps protect investors. In the proposal, CBOE sets 
forth its procedures for maintaining the Index when the Dow Jones 
corporation decides to replace a stock in the Dow Jones Industrial 
Average. CBOE's procedures will now be consistent with industry 
practice for maintaining the Index, which should help protect investors 
by eliminating potential confusion about the composition of the Index. 
Further, this clarification helps protect investors because it gives 
investors advance notice about the treatment of the Index and, 
therefore, allows them to make an informed investment decision.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-99-60) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11804 Filed 5-10-00; 8:45 am]
BILLING CODE 8010-01-M