[Federal Register Volume 62, Number 30 (Thursday, February 13, 1997)]
[Notices]
[Pages 6821-6823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3539]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38255; International Series Release No. 1049; File No. 
SR-CBOE-96-60]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated Relating to Listing and Trading of Options on 
the Salomon Brothers BMI World Property Index

February 6, 1997.
    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 October 7, 1996, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change \3\ as described 
in Items I, II, and III below, which Items have been prepared by the 
CBOE. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s (b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 1996, CBOE submitted an amendment to the 
rule change. See letter from Eileen Smith, Director, Product 
Development, Research Department, CBOE to Marianne H. Khawly, Staff 
Attorney, Division of Market Regulation, SEC, dated December 18, 
1996.
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1. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to list and trade cash-settled, European-style 
stock index options on the Salomon Brothers BMI World Property Index 
(``World Property Index'' or ``Index''), a broad-based, float 
capitalization-weighted index comprised of 339 stocks \4\ from eighteen 
countries.\5\
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    \4\ A list of the securities comprising the World Property Index 
was submitted by the Exchange as Exhibit B, and is available at the 
Office of the Secretary, CBOE and at the Commission.
    \5\ The following countries are represented in the Index: 
Australia; Belgium; Canada; Denmark; France; Germany; Hong Kong; 
Ireland; Japan; Malaysia; the Netherlands; Norway; Singapore; Spain; 
Sweden; Switzerland; the United Kingdom; and the United States.
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    The text of the proposed rule change is available at the Office of 
the secretary, CBOE and at the Commission.

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

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
represented it did not receive any comments 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 parts of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to permit the CBOE to 
list and trade cash-settled, European-style stock index options on the 
World Property Index. As discussed further in the Maintenance 
paragraph, the World Property Index is a broad-based float 
capitalization-weighted index (price times available shares 
outstanding). The Index is currently composed of 339 high-
capitalization stocks of real estate and property companies from 18 
countries. The World Property Index is a subset of the Salomon Brothers 
World Equity Index is a subset of the Salomon Brothers World Equity 
Index which is comprised of listed equities from 22 countries.
    Index Design. The World Property Index has been designed to measure 
the performance of certain high capitalization real estate and property 
stocks from various countries. The World Property Index is a broad-
based float capitalization-weighted index calculated as described 
below. The Exchange represents that the Index is broad-based for three 
reasons. First, although the stocks are all involved in real estate and 
property, the types of real estate vary widely. The Index can be 
divided into the following four industry groups: non-U.S. diversified 
property activities group; non-U.S. property development group; non-
U.S. property investment/management group; and the U.S. group.\6\ 
Second, the 339 component stocks are from 18 countries, therefore, CBOE 
asserts that the performance of the various companies is not as closely 
linked as it would generally be in a narrow-based index. On July 31, 
1996, the 339 stocks ranged in capitalization from $75.5 million to 
$12.4 billion. The largest stock accounted for 6.43% of the total 
weighting of the Index, while the smallest accounted for 0.04%. The top 
five stocks in the Index accounted for 22.72 percent of the weight of 
the Index.\7\ The median capitalization of the firms in the Index was 
$247.3 million. And third, the CBOE believes that since each of the 
components from foreign countries are traded in local currencies and 
then translated into U.S. dollars, there is an added component of 
currency conversion which must be factored into the movement of the 
individual securities.
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    \6\ The U.S. group consists of the following 12 industry 
subgroups: apartments; healthcare facilities; hotels; manufactured 
homes; office/industrial buildings; diversified properties; net/
lease properties; REOCs; self-storage facilities; factory outlets; 
regional malls; and shopping centers.
    \7\ The top five stocks were: Sun Hung Kai Properties Ltd. from 
Hong Kong (6.43 percent); Cheung Kong Holdings Ltd. from Hong Kong 
(5.29 percent); Mitsubishi Estate Co. from Japan (5.04 percent); 
Mitsui Fudosan Co. from Japan (3.44 percent); and New World 
Development Company Ltd. from Hong Kong (2.52 percent).
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    Calculation. The Index level is calculated once per day by Salomon 
Brothers and will be disseminated by CBOE prior to the opening the next 
business day over the Options Price Reporting Authority (``OPRA'') or 
the Consolidated Tape Association. Closing prices in each company's 
domestic market are used in the final daily Index calculations.\8\ WM/
Reuters Closing Spot Rates (``WM/Reuters Rates''), taken at 4:00 p.m. 
London time, are midmarket rates (as opposed to bid-side quotations) 
based on Reuters data that are used to calculate the U.S. dollar value 
of the Index. WM/Reuters Rates are calculated by the WM Company 
(``WM'') and appear on Reuters beginning on page WMRA.\9\
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    \8\ Salomon Brothers currently does not calculate intra-day 
values of the Index during the U.S. trading day.
    \9\ WM is a UK-based company that specializes in performance 
measurement. WM is a neutral force, not related to any trading firm 
or broker-dealer. WM/Reuters Rates represent an effort led by WM to 
standardize the closing spot rates used in the global investment 
community for fund valuation, index compilation, and performance 
measurement. WM/Reuters Rates are considered to be an industry 
standard and are used by various firms in index calculation.
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    Shares are adjusted for corporate actions on their ex-dates. These 
actions include splits, scrip and bonus issues, and preemptive rights. 
For actions resulting in no net change to the capitalization of the 
issue, such as stock splits and stock dividends, the Index divisor, 
described below, remains unchanged. The Index divisor is updated at 
each quarter-end for changes in share capital because of share

[[Page 6822]]

issuance or buybacks. This update may include bond and warrant 
conversions or open market share buybacks. There is no replacement of 
de-listed issues, per se, prior to annual reconstitution. However, 
large, newly formed companies, spin-offs from Index constituents and 
privatizations falling within the top half of their country's 
capitalization range enter the Index at the next month-end, following 
their official listing.
    If a company's shares are no longer available because of a cash 
tender offer or bankruptcy, that company will be deleted from the Index 
without replacement. The deletion will occur on the last trading day of 
the month in which the event takes place. If the issue stops pricing, 
it will be maintained in the Index at the final offer price until its 
removal. if a company is acquired by another constituent of the Index 
through a share swap, the acquired company will be deleted from the 
Index on the swap ex-date. The share weight of the acquiring company 
will increase in accordance with the terms of the offer to reflect the 
combined capitalization of both companies.
    If trading in a stock is halted, the last bid or suspension price 
is carried forward. In cases of a prolonged suspension, a dealer market 
or gray market price may be used. A gray market is a market available 
through dealers or banks. In such cases of prolonged suspension, 
Salomon would attempt to obtain a price on the gray market by getting a 
quote from several dealers other than Salomon.
    Maintenance. The World Property Index was originally created using 
all stocks from each country with a market value of at least $100 
million. Stocks are retained in the Index if they maintain a market 
value of at least $75 million, and new stocks are added if they meet a 
$100 million minimum market value at the annual re-balance date on the 
last trading day in May. The individual components are classified into 
sectors based on the breakdown of sales provided by the company in 
financial reports. The primary selection criteria for adding or 
deleting a country is the size of its equity market, the freedom of 
capital movement and the ability to repatriate dividends. Additionally, 
reliable price, share, dividend and corporate action data must also be 
readily available.
    As mentioned above, the World Property Index is float-
capitalization weighted, i.e. the component issues in the Index are 
included at a level that accounts for the price of a share times the 
available shares outstanding. To determine the appropriate weight, all 
issues are assigned an availability factor. The factor is a percentage 
measurement of its float (available capital). There are four categories 
of shares which are excluded in determining availability: corporate 
cross-holdings; private control block holdings (encompassing 10% or 
more of total capital); government holdings; and legally-restricted 
shares.
    Availability factors are updated each year at the same time as the 
annual reconstitution of the Index on July 1 of each year. All listed 
equities in the constituent markets are evaluated by their available 
capital based on their price and total shares outstanding as of the 
last business day in May. Changes to the constituent list, effective 
July 1 each year, are preannounced two weeks prior to the effective 
date and are subject to change due to any major corporate activity 
occurring during the period between May 31 and the effective date of 
July 1.
    The level of the Index reflects the total market value of the 
component stocks relative to a particular base period. The World 
Property Index base date is December 31, 1992, when the Index value was 
set to 100.00. The Index had a closing value of 188.92 on December 31, 
1996. The daily calculation of the World Property Index is computed by 
dividing the total market value of the companies in the Index by the 
Index divisor. The divisor keeps the Index comparable over time and is 
adjusted periodically to maintain the Index. The Index divisor is 
adjusted for all extraordinary dividends, noncash corporate 
distributions, and monies distributed via share buybacks. The Index 
levels are price levels and, therefore, do not account for ordinary 
dividends.
    Index Option Trading. In addition to regular Index options, the 
CBOE may provide for the listing of long-term index option series 
(``LEAPS<Register>'') and reduced-value LEAPS<Register> on the Index. 
For reduced-value LEAPS<Register>, the underlying value would be 
computed at one-tenth of the Index level. The current and closing Index 
value of any such reduced-value LEAP<Register> will, after such initial 
computation, be rounded to the nearest one-hundredth.
    Strike prices will be set to bracket the Index in 2\1/2\ point 
increments for strikes below 200 and 5 point increments above 200. The 
minimum tick size for series trading below $3 will be \1/16\th and for 
series trading above $3 the minimum tick will be \1/8\th. The trading 
hours for options on the Index will be from 8:30 a.m. to 3:15 p.m. 
Chicago time.
    Exhibit C presents proposed contract specifications for World 
Property Index options.
    Exercise and Settlement. The proposed options on the Index will 
expire on the Saturday following the third Friday of the expiration 
month. Trading in the expiring contract month will normally cease at 
3:15 p.m. (Chicago time) on the business day preceding the last day of 
trading in the component securities of the Index (ordinarily the 
Thursday before expiration Saturday, unless there is an intervening 
holiday). The exercise settlement value of the Index at option 
expiration will be based on the closing prices of the component 
securities on the business day prior to expiration. If a stock fails to 
open for trading, the last available price on the stock will be used in 
the calculation of the Index, as is done for currently listed indices. 
When the last trading day is moved because of Exchange holidays (such 
as when the CBOE is closed on the Friday before expiration), the last 
trading day for expiring options will be Wednesday and the exercise 
settlement value of Index options at expiration will be determined at 
the opening of regular Thursday trading.
    Surveillance. As of July 31, 1996, the stocks from the United 
States represented 24.04% of the weight of the Index. In addition, the 
CBOE currently has information sharing agreements with 11 of the 18 
foreign countries representing 63.77% of the weight of the Index.\10\ 
In addition, the Exchange represents that it will use the same 
surveillance procedures currently utilized for each of the Exchange's 
other index options to monitor trading in Index options and Index 
LEAPS<Register> on the world Property Index.
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    \10\ CBOE represents that it has surveillance sharing agreements 
with the following countries: Belgium; Canada; France; Germany; Hong 
Kong; Ireland; Japan; Malaysia; the Netherlands; Spain; and the 
United Kingdom.
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    Position Limits. The CBOE proposes to establish position limits for 
options on the World Property Index at 50,000 contracts on either side 
of the market, and no more than 30,000 of such contracts may be in the 
series in the nearest expiration month. These limits are roughly 
equivalent, in dollar terms, to the limits applicable to options on 
other indices.
    Exchange Rules Applicable. As modified herein, the Rules in Chapter 
XXIV will be applicable to World Property Index options.
    CBOE has also been informed that OPRA recently has added an 
additional outgoing high speed line from the OPRA processor and thus, 
also has the capacity to support the new series.\11\
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    \11\ See memo from Joe Corrigan, Executive Director, OPRA to 
Eileen Smith, Director of Product Research, CBOE, dated June 26, 
1996 (conforming that the traffic generated is within OPRA's 
capacity).

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[[Page 6823]]

2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it will permit trading in options based on the World Property 
Index pursuant to rules designed to prevent fraudulent and manipulative 
acts and practices and to promote just and equitable principles of 
trade, and thereby will provide investors with the ability to invest in 
options based on an additional index.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W. Washington, D.C. 20549. 
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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to the file number in the caption above and 
should be submitted by March 6, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3539 Filed 2-12-97; 8:45 am]
BILLING CODE 8010-01-M