[Federal Register Volume 63, Number 92 (Wednesday, May 13, 1998)]
[Notices]
[Pages 26658-26660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12708]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39965; International Series Release No. 1133; File No. 
SR-CBOE-98-17]


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 Warrants on a 
Narrow-Based Index

May 6, 1998.
    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 April 23, 1998, the Chicago Board Options Exchange, 
incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the CBOE. The Exchange also submitted an amendment to 
the filing dated April 30, 1998.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change and Amendment 
No. 1 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Stephanie C. Mullins, Attorney, CBOE to 
Marianne H. Duffy, Special Counsel, Division of Market Regulation, 
SEC, dated April 30, 1998 (``Amendment No. 1''). Amendment No. 1 
clarifies, among other things, that the Index, as defined above, is 
narrow-based and will comply with the generic narrow-based margin 
requirements (CBOE Rule 30.53) and position limited requirements 
(CBOE Rule 30.35) of the Exchange.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to list and trade warrants on an equal dollar-
weighted, narrow-based index (``Index''), comprised of 15 to 20 
actively traded common stocks, no more than four of which will be 
foreign issued and traded. The remaining stocks will be listed on the 
American Stock Exchange, Incorporated (``Amex''), New York Stock 
Exchange, Incorporated (``NYSE'') or through the facilities of the 
National Association of Securities Dealers Automated Quotation 
(``Nasdaq'') system and are reported national market system securities 
(``Nasdaq/NMS''). 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 that it did not receive any comments on the proposed rule 
change. The text of those statements may be examined at the places 
specified in Item IV below and is set forth in Sections A, B and C 
below.

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

1. Purpose
    The Exchange is permitted to list and trade stock index warrants 
under CBOE Rule 31.5E. The Exchange now is proposing to list and trade 
cash-settled,

[[Page 26659]]

stock index warrants linked to the Index. At the time of listing and 
trading, the warrants will meet all of the generic criteria for stock 
index warrants as set forth in Exchange Rule 31.5E.
    Rule 31.5E requires, among other things, that: (1) the issuer has a 
tangible net worth in excess of $250,000,000 and otherwise 
substantially exceeds earnings requirements in Rule 31.5(A) or meet the 
alternate guidelines in paragraph (4) of Rule 31.5E; (2) the term of 
the warrants shall be for a period ranging from one to five years from 
date of issuance; (3) the minimum public distribution of such issues 
shall be 1,000,000 warrants, together with a minimum of 400 public 
holders, and have an aggregate market value of $4,000,000; and (4) 
foreign country securities or American Depositary Receipts that are not 
subject to a comprehensive surveillance agreement and have less than 
50% of their global trading volume in dollar value in the United 
States, shall not, in the aggregate, represent more than 20% of the 
weight of an index, unless such index is otherwise approved for warrant 
or option trading.
    Index Design and Stock Selection Criteria. The Exchange represents 
that the Index will be categorized as narrow-based. The stocks to be 
included in the Index will be selected by a member firm of the Exchange 
and will be announced at or as close as possible to the time of the 
offering, and included in the Issuer's offering materials. The 
component stocks in the Index will meet the following criteria prior to 
trading of the warrants: (1) minimum market capitalization of $150 
million, except that two component stocks may have a market 
capitalization of not less than $50 million; (2) trading volume during 
each of the six months prior to the offering of the warrants of not 
less than one million shares, except that two of the component 
securities may have a trading volume during each of the six months 
prior to the offering of the warrants of not less than 500,000 shares; 
(3) at least 80 percent of the component stocks will meet the then 
current criteria for standardized options trading set forth in CBOE 
Rule 5.3 and; (4) at least 80% of the Index components will be listed 
on the Amex, NYSE, or will be Nasdaq/NMS securities.
    Calculation and Dissemination of the Index Value. The Index will be 
calculated using an equal dollar-weighting methodology designed to 
ensure that each of the component securities is represented in an 
approximately equal dollar amount in the Index. To create the Index, a 
portfolio of equity securities will be established by a member firm of 
the Exchange representing an investment of $10,000 in each component 
security (rounded to the nearest whole share). The value of the Index 
will equal the market value of the sum of the assigned number of shares 
of each of the component securities divided by an Index divisor. The 
Index divisor initially will be set to provide a benchmark value of 100 
at the time that the warrants are priced for sales to the investing 
public.
    The number of shares of each component stock in the Index will 
remain fixed except in the event of certain types of corporate actions 
such as the payment of a dividend (other than an ordinary cash 
dividend), a stock distribution, stock split, reverse stock split, 
rights offering, distribution, reorganization, recapitalization, or 
similar event with respect to the component securities. The number of 
shares of each component security also may be adjusted, if necessary, 
in the event of a merger, consolidation, dissolution, or liquidation of 
an issuer or in certain other events such as the distribution of 
property by an issuer to shareholders, the expropriation or 
nationalization of a foreign issuer, or the imposition of certain 
foreign taxes on shareholders of a foreign issuer. Shares of a 
component security may be replaced (or supplemented) with another 
security only under certain circumstances, such as in the event of a 
merger or consolidation, the conversion of a component security into 
another class of security, the termination of a depositary receipt 
program, or the spin-off of a subsidiary.\4\ If the security remains in 
the Index, the number of shares of the security may be adjusted to the 
nearest whole share to maintain the component's relative weight in the 
Index at the level immediately prior to the corporate action. In all 
cases, the divisor will be adjusted, if necessary, to ensure continuity 
of the value of the Index.
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    \4\ No attempt will be made to find a replacement stock or to 
otherwise compensate for a stock which is extinguished due to 
bankruptcy or similar circumstances.
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    Prices for any non-U.S. traded stock included in the Index will be 
based upon prevailing prices for such stock(s) at their primary 
exchange(s). Primary and backup pricing sources will be used to obtain 
prices for such stocks. All non-U.S. traded stocks will be valued in 
U.S. dollars using each country's cross-rate to the U.S. dollar. 
Bloomberg's composite New York rates, or comparable rates, quoted at 
2:00 p.m. Chicago time the previous day, will be used to convert any 
non-U.S. traded stock price from the respective countries to U.S. 
dollars. If there are several quotes, the first quoted rate in that 
minute will be used to calculate the Index. In the event that there is 
no Bloomberg exchange rate for a country's currency at 2:00 p.m. the 
previous day, stocks will be valued at the first U.S. dollar cross-rate 
quoted before 2:00 p.m. Chicago time the previous day.
    The value of the Index will be calculated and disseminated by CBOE 
every 15 seconds.
    Index Warrant Trading (Exercise and Settlement). The warrants will 
be direct obligations of their issuer, subject to cash settlement in 
U.S. dollars and will be exercisable throughout their life (i.e., 
American-Style) or exercisable at expiration (i.e., European-Style). 
Upon exercise (or at the warrant expiration date in the case of 
warrants with European-Style exercise), the holder of a Warrant 
structured as a ``put'' will receive payment in U.S. dollars to the 
extent that the value of the Index has declined below a pre-stated cash 
settlement value. Conversely, upon exercise (or at the warrant 
expiration date in the case of warrants with European-Style exercise), 
the holder of a Warrant structured as a ``call'' will receive payment 
in U.S. dollars to the extent that the value of the Index has increased 
above the pre-stated cash settlement value. Warrants that are ``out-of-
the-money'' at the time of expiration will expire worthless.
    Warrant Listing Standards and Customer Safeguards. Sales practice 
rules applicable to the trading of index warrants are provided for in 
Exchange Rule 30.50 and to the extent provided by Rule 30.52 they are 
also contained in Chapter IX of the Exchange's Rules. Rule 30.50 
governs, among other things, communications with the public. Rule 30.52 
subjects the transaction of customer business in stock index warrants 
to many of the requirements of Chapter IX of the Exchange's rules 
dealing with public customer business, including suitability. For 
example, no member organization may accept an order from a customer to 
purchase a stock index warrant unless that customer's account has been 
approved for options transactions. The same suitability and use of 
discretion provisions that are applicable to transactions in options 
will be equally applicable to the warrants pursuant to CBOE rules. The 
listing and trading of index warrants on the Index will be subject to 
these guidelines and rules.
    Other Applicable Exchange Rules. As previously stated, the CBOE 
represents that the Index will be categorized as narrow-based. As such, 
the generic

[[Page 26660]]

narrow-based standards regarding margin requirements provided for under 
Exchange Rules 30.53 and 12.3 will apply. The applicable generic 
narrow-based position and exercise limits will be determined pursuant 
to Exchange Rule 30.35.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \5\ in general, and furthers the 
objectives of Section 6(b)(5) \6\ in particular, in that it will permit 
trading in warrants based on the Index pursuant to Exchange rules 
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 of a free and open market and a national 
market system, and to protect investors and the public interest.
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

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

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, and Amendment No. 1 thereto, is consistent with the Act. 
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 CBOE. All submissions should refer to file 
number SR-CBOE-98-17 and should be submitted by June 3, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12708 Filed 5-12-98; 8:45 am]
BILLING CODE 8010-01-M