[Federal Register Volume 65, Number 232 (Friday, December 1, 2000)]
[Notices]
[Pages 75326-75327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43611; File No. SR-CBOE-99-14]


Self Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving a Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval to Amendment Nos. 1 and 2 to the 
Proposed Rule Change Relating to Listing Criteria for Index Warrants

November 22, 2000.

I. Introduction

    On April 6, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with 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 
thereunder,\2\ a proposed rule change to amend its Rule 31.5.E to add 
an alternative set of distribution criteria for stock index warrants. 
Notice of the proposed rule change was published in the Federal 
Register on May 13, 1999.\3\ On August 2, 1999, and September 20, 2000, 
the CBOE filed Amendment Nos. 1 and 2 to the proposal, respectively.\4\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change, accelerates approval of Amendments 
Nos. 1 and 2, and solicits comments from interested persons on the 
amendments.
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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. 41376 (May 6, 1999), 
64 FR 25937.
    \4\ Amendment No. 1 elaborates upon the rationale for the 
proposal and how liquidity may be insured when the current, 400-
holder requirement is deleted. See Letter from Stephanie C. Mullins, 
Attorney, the CBOE, to Mandy Cohen, Special Counsel, Division of 
Market Regulation (``Division''), the Commission, dated July 29, 
1999. Amendment No. 2 clarifies the intent of the CBOE to apply the 
proposed rule change to apply to narrow-based index warrants, in 
addition to broad-based index warrants. See Letter from Angelo 
Evangelou, Attorney, the CBOE, to Ira Brandriss, Attorney, Division 
of Market Regulation, the Commission, dated September 19, 2000. See 
also Section III below.
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II. Description of the Proposal

    Currently, before a stock index warrant may be listed for trading 
on the CBOE, certain public distribution requirements must be met. 
These criteria are enumerated in CBOE Rule 31.5.E(2):
    1. The issue must include at least one million warrants 
outstanding.
    2. The principal amount/aggregate market value must be at least 
$4,000,000.
    3. There must be at least 400 public holders.
    In addition, according to the CBOE, industry practice has been to 
discourage the listing of instruments of this kind that are priced 
below $4 per unit. The CBOE states that it finds this practice 
appropriate, although Rule 31.5E does not specifically impose this 
restriction.
    The proposed rule change would establish an alternative set of 
distribution criteria, eliminating the minimum public holder 
requirement. To list a stock index warrant under this alternative, the 
following requirements would need to be satisfied:
    1. The issue would need to include at least two million warrants 
outstanding--double the current requirement.
    2. The principal amount/aggregate market value would need to be at 
least $12,000,000--triple the current requirement.
    3. The minimum initial price would need to be set at $6 per 
warrant--one and one-half times the minimum initial price as would be 
required under current informal guidelines.
    4. A minimum number of public holders would be required as 
determined on a case by case basis.
    The CBOE states that it is seeking to eliminate the 400-holder 
requirement so that it can be more competitive with the overseas and 
over-the-counter (OTC) derivatives markets in the listing of index 
warrants.
    As explained by the Exchange, offerings of stock index warrants--
unlike offerings of common stock and common stock warrants--are limited 
to options-approved accounts and are primarily directed to 
institutional and high net worth clients. Finding 400 initial holders 
thus may entail an extensive and time-consuming marketing effort. As a 
result, member firms have told the Exchange that they often find it 
considerably more cost effective to offer stock index warrants either 
offshore or in the OTC derivatives market.
    The proposed rule change would create an alternative set of public 
distribution criteria under which no minimum number of public holders 
would be defined, but would be determined by the Exchange on a case-by-
case basis. At the same time, this alternative set of criteria would 
require the issue to be significantly larger in terms of number of 
warrants outstanding and their aggregate market value, besides imposing 
a minimum initial price for each warrant that reflects a substantial 
increase from the minimum initial price currently required for listing 
on the CBOE.

III. Discussion

    After careful review, the Commission finds the proposed rule change 
to be consistent with the provisions of the Act applicable to a 
national securities exchange, particularly those of section 6(b)(5) \5\ 
of the Act, and with the rules and regulations thereunder.\6\ The 
Commission believes that the proposal is reasonably designed to enable 
the CBOE to better compete with the overseas and OTC derivatives 
markets for the trading of stock index warrants, while raising no 
significant investor protection issues.
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    \5\ 15 U.S.C. 78f(b)(5). Section 6(b)(5) requires that the rules 
of a national securities exchange be designed, among other things, 
to promote just and equitable principles of trade and protect 
investors and the public interest.
    \6\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    In lieu of the requirement that there be 400 public holders, the 
Exchange proposes to double to two million the minimum number of 
warrants that must be outstanding for the CBOE to list and trade a 
stock index warrant. In addition, the Exchange proposes to triple to 
$12 million the principal amount/aggregate market value of the warrants 
and increase to $6 the minimum initial price for listing the warrant. 
In addition, the Exchange on a case by case basis will specify a 
minimum number of public holders of the warrant.
    These additional protections should serve to assure that there are 
adequate thresholds for the Exchange to list and trade a particular 
stock index warrant that does not otherwise satisfy the requirement of 
400 public holders. Thus, the Commission believes the ability of market 
makers to maintain markets in such instruments should not be 
impaired.\7\
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    \7\ The Commission notes that for new narrow-based stock index 
warrants that it lists for trading, the CBOE may be able to file a 
Form 19b-4(e) pursuant to the provisions of Rule 19b-4(e) under the 
Act, 17 CFR 240.19b-4(e), in fulfillment of its rule change filing 
requirements. See CBOE Rule 24.2(b), which has been made applicable 
to narrow-based index warrants by CBOE Rule 31.5E, Interpretation 
.01.

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[[Page 75327]]

    The Commission finds good cause for approving Amendment Nos. 1 and 
2 to the proposal prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 merely elaborates on the rationale for the proposal. 
Amendment No. 2 makes clear that the proposed rule change will apply to 
narrow-based index warrants as well as broad-based index warrants. 
Although the descriptive section of the original filing referred to 
broad-based index warrants, the actual text of the proposed rule change 
in that filing made no distinction between the two. The purpose of the 
proposal as it relates to broad-based index warrants relates equally to 
narrow-based index warrants: to enable the CBOE to compete with the 
overseas and OTC derivative markets in the trading of these 
instruments. The Commission's belief that elimination of the 400 public 
holder requirement would not significantly impact investors also 
applies equally to narrow-based index warrants. Acceleration of the 
amendment will allow the Exchange to implement the proposed rule change 
to all stock index warrants at once.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 and 2, including whether Amendment 
Nos. 1 and 2 are consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-99-14 and should be submitted by December 22, 2000.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-CBOE-99-14), as amended, be and 
hereby is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30670 Filed 11-30-00; 8:45 am]
BILLING CODE 8010-01-M