33742 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

2 ‘‘Gas Related Activities’’ include purchasing,

pooling, transporting, exchanging, storing and

selling gas supplies from competitively priced

sources, including the spot markets, independent

producers and brokers, and Producing Company.

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Stephanie C. Mullins, Attorney,

CBOE to Martianne H. Duffy, Special Counsel,

Division of Market Regulation (‘‘Division’’), SEC,

dated April 30, 1998. Amendment No. 1 clarifies,

among other things, that the Index, as defined

above, is narrow-based and will comply with the

smaller companies developing new

technologies to enhance the supply,

transportation and utilization of natural

gas. CNG Technologies is currently a

subsidiary of Products and Services.

Applicants propose that the outstanding

common stock of CNG Technologies be

declared as a dividend by Products and

Services to CNG, and subsequently be

transferred by CNG as a capital

contribution to Power Company after

Power Company becomes a direct

subsidiary of CNG.

Main Pass and Oil Gathering Each

Become a Subsidiary of Producing

Company

Producing Company is a wholly

owned subsidiary of CNG which

engages in gas and oil exploration and

production primarily in the Gulf of

Mexico, the southern and western

United States, the Appalachian region

and in Canada.

By order dated July 26, 1995, HCAR

No. 26341 (‘‘July 1995 Order’’), Energy

Services was authorized, without

further Commission approval, through

December 31, 1997, to invest an

aggregate amount up to at least $150

million to acquire direct or indirect

interests in entities engaged in Gas

Related Activities.2

As of December 31, 1997, Energy

Services had invested $24,235,000 and

$14,323,000 and acquired a partnership

interest in the Main Pass Gathering

Company and the Main Pass Oil

Gathering Company, respectively, under

the July 1995 Order. Energy Services

owns the interests in these partnerships

through Main Pass and Oil Gathering,

respectively.

The July 1995 Order was extended

through December 31, 2002 by

Commission order dated December 30,

1997, HCAR No. 26807 (‘‘December

1976 Order’’). The December 1997 Order

also increased the amount Energy

Services may invest and the amount of

guarantees which could be made to

$200 million in each case.

Applicants propose the transfer of

ownership of all of the outstanding

common stock of Main pass and Oil

Gathering to be held by CNG after

completion of Phase One to Producing

Company. The transfer would occur

through a transfer by CNG of the stock

to Producing Company as a capital

contribution.

Producing Company Succeeds to

Certain Authorizations

As indicated above, Applicants

propose that Producing Company

succeed to Energy Services’ interests in

Main Pass and Oil Gathering, which are

acquired by Energy Services under the

July 1995 Order. Producing Company

will also continue to engage in all

aspects of the business of a gas

producing company which substantially

encompasses all of the activities defined

as ‘‘Gas Related Activities’’ in the July

1995 Order. Applicants propose that

Producing Company succeed to and be

substituted for Energy Services as the

authorized party under the July 1995

Order and the December 1997 Order.

Source and Form of Declaration and

Payment of Dividends

Applicants propose that dividends

declared and paid in connection with

the restructuring be paid out of capital

or unearned surplus, to the extent

permitted under applicable corporate

law, in the event the payer does not

have sufficient earned surplus on its

books to cover the amount of the

dividend. Applicants represent that the

payment of dividends out of capital or

unearned surplus in connection with

the restructuring would not in any way

adversely affect the financial integrity of

any company in the CNG system or the

working capital of any public utility

company in the CNG system.

The Application states that the form

of distributions to CNG in Phase One of

the restructuring and the timing,

manner and extent of the redistributions by CNG in Phase Two of

the restructuring will depend on the

CNG system’s business needs as well as

the ultimate tax impact of the

restruturing transactions.

Atlantic City Electric Company (70–

9307)

Atlantic City Electric Company

(‘‘ACE’’), 6801 Blackhorse Pike, Egg

Harbor Township, New Jersey 08234, a

wholly owned electric utility subsidiary

of Conectiv, Inc., a public utility

holding company to be registered under

the Act, has filed an application under

sections 9(a) and 10 of the Act and rule

41 under the Act.

By order dated February 25, 1998

(HCAR No. 26832), Conectiv was

authorized to acquire all of the

outstanding voting securities of ACE,

Delmarva Power & Light Company, a

public utility company (‘‘Delmarva’’),

and various nonutility subsidiaries of

Delmarva and ACE.

ACE now requests authority to

purchase two 39.3 megawatt

combustion turbine generating units and

accessory equipment (‘‘Units’’) for a

purchase price of $8 million. ACE states

that the Units were previously leased by

ACE under a December 1, 1972

Indenture of Lease (‘‘Lease’’) among

ACE, Frank B. Smith and Ben

Maushardt, as lessors (‘‘Lessor’’), and

United States Leasing Corporation, as

agent for the Lessor. ACE has used the

Units, located in Upper Deerfield

Township. Cumberland County, New

Jersey, for the generation of electricity

for twenty five years. The Lease

terminates on July 11, 1998 and ACE

wishes to purchase the Units and

continue them in service.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Jonathan G. Katz,

Secretary.

[FR Doc. 98–16348 Filed 6–18–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40085; International Series

Release No. 1140; file No. SR–CBOE–98–

17]

Self-Regulatory Organizations; Order

Granting Approval of Proposed Rule

Change and Amendment No. 1

Thereto, and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 2 Thereto, by the

Chicago Board Options Exchange,

Incorporated Relating to Listing and

Trading Warrants on a Narrow-Based

Index

June 12, 1998.

I. Introduction

On April 23, 1998, the Chicago Board

Options Exchange, Incorporated

(‘‘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’’),1 and

Rule 19b–4 thereunder,2 the proposed

rule change to list and trade warrants on

an equal dollar-weighted, narrow-based

index (‘‘Index’’), comprised of 15 to 20

actively traded common stocks. The

Exchange submitted Amendment No. 1

to the filing on April 30, 1998.3 Notice
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices 33743

generic narrow-based margin requirements (CBOE

Rule 30.53) and position limit requirements (CBOE

Rule 30.35) of the Exchange.

4Securities Exchange Act Release No. 39965 (May

6, 1998) 63 FR 26658.

5See Letter from Staphanie C. Mullins, Attorney,

CBOE to Marianne H. Duffy, Special Counsel,

Division, SEC, dated June 11, 1998. Amendment

No. 2 clarifies that the Index value will be

disseminated every 15 seconds and will be

calculated based on real-time prices, for all of the

component stocks, including those foreign stocks

that are traded during CBOE trading hours. With

respect to foreign stock components that trade

during CBOE trading hours, each Index calculation

will use the most recent last sale price from the

appropriate home market. For foreign stocks that do

not trade during CBOE trading hours, the closing

price will be used to calculate the Index value. In

addition, Amendment No. 2 clarifies that

component securities will be replaced or

supplemented only under the events discussed

below. Absent unusual circumstances involving a

merger or consolidation, conversion into another

class of securities, a spin-off, or the termination of

a depository receipt program, the Exchange will

adhere to the following procedures; (1) in the event

of a merger or consolidation (whether between

component stocks or between one component stock

and one non-component stock), the original

component stock will be replaced by the new

security; (2) in the event of a conversion into

another class of security, the original component

stock will be replaced by the new security; (3) in

the event of a spin-off of a subsidiary, both the

subsidiary issue and the original parent security

will be included in the Index, unless the subsidiary

is an insignificant percentage of the original

security, in which case the CBOE will consult with

the SEC prior to omitting the subsidiary issuer from

the Index; and (4) should a depositary receipt

program be terminated, for any reason, after an

American Depositary Receipt (‘‘ADR’’) has already

been included in the Index, the CBOE in

consultation with the SEC staff will evaluate the

appropriate procedure to be employed to ensure

continuity of the Index.

6Rule 31.5A requires that an issuer’s total assets

less total liabilities are at least $4,000,000, that pretax income earnings of at least than $750,000 in the

issuer’s last fiscal year or in two of the last three

fiscal years and net income of at least $400,000.

7Paragraph (4) of CBOE Rule 31.5E states that

where an issuer has a minimum tangible net worth

in excess of $150,000,000, but less than

$250,000,000, the Exchange shall not list stock

index warrants of the issuer if the value of such

warrants plus the aggregate value, based upon the

original issue price, of all outstanding stock index,

currency index and currency warrants of the issuer

and its affiliates combined that are listed for trading

on a national securities exchange or traded through

the facilities of Nasdaq exceeds 25% of the issuer’s

net worth.

8CBOE Rule 5.3 describes, among other things,

the options eligibility requirements for individual

equity securities.

9The Commission notes that the requirement of

paragraph (7) may not be maintained in the

following limited circumstances. The CBOE has

represented that 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.

of the filing and Amendment No. 1

appeared in the Federal Register on

May 13, 1998.4 No comments were

received concerning the proposed rule

change. On June 11, 1998, the Exchange

submitted Amendment No. 2.5 This

order approves the CBOE’s proposal, as

amended.

II. Description of the Proposal

The purpose of the proposed rule

change is to permit the Exchange to list

and trade warrants based on the 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 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,

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 CBOE Rule 31.5E as well as the

specific generic criteria for narrowbased index warrants discussed below.

Rule 31.5E requires, among other

things, that: (1) the issuer has a tangible

net worth in excess of $150,000,000 and

otherwise substantially exceeds

earnings requirements in Rule 31.5(A) 6

or meet the alternate guideline in

paragraph (4) of Rule 31.5E; 7 (2) 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; (3) the term of the

warrants shall be for a period ranging

from one to five years from date of

issuance; (4) if 25% or more of the value

of the underlying index is represented

by securities that are traded primarily in

the United States, the terms of the

warrants provide that the opening prices

of the stocks comprising the index will

be used to determine (i) the final

settlement value (i.e. the settlement

value at expiration); and (ii) the

settlement value for the warrants as

valued on either of the two business

days preceding the day on which the

final settlement value is to be

determined; (5) all stock index warrants

must include in their terms provisions

specifying the time by which all

exercise notices must be submitted and

that all unexercised warrants that are in

the money (or in the money by a stated

amount) will be automatically exercised

on their expiration date or on or

promptly following the date on which

such warrants are delisted by the

Exchange; (6) foreign country securities

or ADRs 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; and (7) the issuer of

the warrants will make arrangements to

advise the Exchange immediately of any

change in the number of warrants

outstanding due to the early exercise of

such warrants or will provide this

information itself. If any change in the

number of warrants occurs, notice will

be filed with the Exchange by 3:30 p.m.

Chicago time, on the date when the

settlement value for the Warrants is

determined.

The generic criteria for narrow-based

index warrants include, among other

things, initial listing standards which

state that: (1) each component security

have a market capitalization of at least

$75 million, except that for 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, the market capitalization is at

least $50 million; (2) the trading volume

of each component security has been at

least one million shares for each of the

last six months, except that for 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, trading volume has been at least

500,000 shares for each of the last six

months; (3) no single component

security represents more than 25% of

the weight of the Index, and the five

highest weighted component securities

in the Index do not in the aggregate

account for more than 60%, for an index

consisting of fewer than 25 component

securities, of the weight of the Index; (4)

at least 80% of the total number of

component securities in an index satisfy

the requirements of CBOE Rule 5.3 8

applicable to individual underlying

securities; (5) U.S. component securities

are ‘‘reported securities’’ as defined in

Rule 11Aa3–1 under the Act; (6) the

current underlying Index value will be

reported at least once every fifteen

seconds during the time the Index

warrants are traded on the exchange;

and (7) for maintenance purposes, the

total number of component securities in

the Index may not increase or decrease

by more than 331⁄3% from the number

of component securities in the Index at

the time of its initial listing, and in no

event may be less than nine component

securities.9
33744 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

10No attempt will be made to find a replacement

stock or to otherwise compensate for a stock which

is extinguished due to a bankruptcy or similar

circumstances, supra note 9.

11See Amendment No. 2, supra footnote 5.

12Telephone conversation between Stephanie C.

Mullins, Attorney, CBOE and Marianne H. Duffy,

Special Counsel, June 12, 1998.

A. Index Design and Stock Selection

Criteria

The Exchange represents that the

Index will be categorized as narrowbased. 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 Exchange

represents that the Index and its

component stocks will meet all the

criteria of CBOE Rule 31.5E and the

generic criteria for narrow-based index

warrants, discussed above, prior to

trading of the warrants. Particularly, the

CBOE notes that with regard to

paragraph (1) of CBOE Rule 31.5E, the

net worth and earnings of the issuer

substantially exceeds the criteria for

equity issues of CBOE Rule 31.5A (i.e.,

total assets less total liabilities are

greater than $4,000,000; pre-tax income

earnings were greater than $750,000 in

its last fiscal year; and the issuer’s net

income was greater than $400,000), and

the issuer has a minimum tangible net

worth in excess of $250,000,000. As a

result, the CBOE notes that paragraph

(4) of CBOE Rule 31.5E regarding

limitations on issuance is not

applicable. In addition, the CBOE

represents that with regard to paragraph

(3) of CBOE Rule 31.5E, the warrants

will mature between two to three years

from the date of issuance. With regard

to the generic criteria for narrow-based

index warrants discussed above, the

Exchange represents that each

component security of the Index will

have a minimum market capitalization

of $150 million except that two

component stocks that do not in the

aggregate account for more than 10% of

the Index weight, may have a market

capitalization of not less than $50

million.

B. 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 sale 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.

The Exchange represents, that

component securities will be replaced

or supplemented only under the events

discussed below. Absent unusual

circumstances involving a merger or

consolidation, conversion into another

class of securities, a spin-off, or the

termination of a depositary receipt

program, the Exchange will adhere to

the following procedures: (1) in the

event of a merger or consolidation

(whether between component stocks or

between one component stock and one

non-component stock), the original

component stock will be replaced by the

new security; (2) in the event of a

conversion into another class of

security, the original component stock

will be replaced by the new security; (3)

in the event of a spin-off of a subsidiary,

both the subsidiary issue and the

original parent security will be included

in the Index, unless the subsidiary is an

insignificant percentage of the original

security, in which case the CBOE will

consult with the SEC prior to omitting

the subsidiary issuer from the Index;

and (4) should a depositary receipt

program be terminated, for any reason,

after an ADR had already been included

in the Index, the CBOE in consultation

with the SEC staff will evaluate the

appropriate procedure to be employed

to ensure continuity of the Index.10 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.

The CBOE also represents that after

the selection of the initial securities has

been made, the CBOE, not the brokerdealer that initially will select the

stocks, will decide all subsequent issues

relating to the composition of the Index

and/or the component securities.

Primary and backup pricing sources

will be used to obtain prices for foreign

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.

As previously stated, the Index value

will be calculated and disseminated

every 15 seconds and will be calculated

based on real-time prices, for all of the

component stocks, including those

foreign stocks that are traded during

CBOE trading hours. With respect to

foreign stock components that trade

during CBOE trading hours, each Index

calculation will use the most recent last

sale price from the appropriate home

market. For foreign stocks that do not

trade during CBOE trading hours, the

closing price will be used to calculate

the Index value.11

C. 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).12 Upon 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-
Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices 33745

13See Amendment No. 1, supra note 3.

14 15 U.S.C. 78f(b)(5).

15Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

securities product upon a finding that the

introduction of such product is in the public

interest. Such a finding would be difficult with

respect to a warrant that served no hedging or other

economic function, because any benefits that might

be derived by market participants likely would be

outweighed by the potential for manipulation,

diminished public confidence in the integrity of the

markets, and other valid regulatory concerns.

16 15 U.S.C. 78c(f).

17The Commission notes that the proposal does

not contain a list of the actual components of the

Index. The CBOE has committed to provide the list

to the Commission, when it becomes publicly

available, prior to the trading of the Index warrants.

See Amendment No. 2, supra note 5.

18The Commission believes that the ability to

obtain relevant surveillance information, including,

among other things, the identity of the ultimate

purchasers and sellers of securities, is an essential

and necessary component of a comprehensive

surveillance agreement. A comprehensive

surveillance agreement should provide the parties

thereto with the ability to obtain information

necessary to detect and deter market manipulation

and other trading abuses. Consequently, the

Commission generally requires that a

Continued

of-the-money’’ at the time of expiration

will expire worthless.

D. 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.

E. Other Applicable Exchange Rules

As previously stated, the CBOE

represents that the Index will be

categorized as narrow-based. As such,

the generic narrow-based warrant

standards regarding margin

requirements provided for under

Exchange rule 30.53 will apply. The

applicable generic narrow-based

position and exercise limits will be

determined pursuant to Exchange rule

30.35.13

III. Commission Findings and

Conclusions

The Commission finds that the

proposed rule change by the Exchange

is consistent with the requirements of

the Act and the rules and regulations

thereunder applicable to a national

securities exchange, and in particular,

the requirements of Section 6(b)(5) of

the Act.14 Specifically, the Commission

finds that the listing and trading of

warrants based on the Index will serve

to promote the public interest and help

to remove impediments to a free and

open securities market by providing

investors with a means to hedge

exposure to market risk associated with

a portion of the equity markets 15 and

promote efficiency, competition and

capital formation.16

Nevertheless, the trading of warrants

on the Index raises several concerns

related to the design and maintenance of

the Index, customer protection,

surveillance and market impact. The

Commission believes, however, for the

reasons discussed below, that the CBOE

has adequately addressed these

concerns.

A. Design and Maintenance of the Index

The Commission finds that it is

appropriate and consistent with the Act

for the CBOE to apply its narrow-based

index warrant listing standards and

trading rules to the Index. First, the

Index will be composed 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 Amex, NYSE or

through the facilities of Nasdaq and are

reported Nasdaq/NMS securities.

The Commission notes that with

respect to the maintenance of the Index,

the CBOE has implemented several

safeguards in connection with the

listing and trading of Index warrants

that will serve to ensure that the Index

component securities are relatively

highly capitalized and actively traded.

In this regard, the CBOE represents that

the Index and its component stocks will

meet all the criteria of CBOE Rule 31.5E

and the generic criteria for narrow-based

index warrants, discussed above, prior

to trading of the warrants. Particularly,

the CBOE notes that with regard to

paragraph (1) of CBOE Rule 31.5E, the

net worth and earnings of the issuer

substantially exceeds the criteria for

equity issues of CBOE Rule 31.5A (i.e.,

total assets less total liabilities are

greater than $4,000,000; pre-tax income

earnings were greater than $750,000 in

its last fiscal year; and the issuer’s net

income was greater than $400,000), and

the issuer has a minimum tangible net

worth in excess of $250,000,000. As a

result, the CBOE notes that paragraph

(4) of CBOE Rule 31.5E regarding

limitations on issuance is not

applicable. In addition, the CBOE

represents that with regard to paragraph

(3) of CBOE Rule 31.5E, the warrants

will mature between two to three years

from the date of issuance. With regard

to the generic criteria for narrow-based

index warrants discussed above, the

Exchange represents that each

component security of the Index will

have a minimum market capitalization

of $150 million except that two

component stocks that do not in the

aggregate account for more than 10% of

the Index weight, may have a market

capitalization of not less than $50

million.17

B. Customer Protection

The Commission notes that the rules

and procedures of the Exchange

adequately address the special concerns

attendant to the trading of Index

warrants. Specifically, the applicable

suitability, account approval, disclosure

and compliance requirements of the

CBOE warrant listing standards

satisfactorily address potential

concerns. Moreover, the CBOE plans to

distribute a circular to its membership

calling attention to specific risks

associated with warrants on the Index.

Further, pursuant to the Exchange’s

listing guidelines, only companies

capable of meeting the CBOE’s index

warrant issuer standards will be eligible

to issue Index warrants. These

standards, among other things, help to

ensure that the issuer is sufficiently

creditworthy to be able to meet its

obligations at the expiration of the Index

warrants.

C. Surveillance

In evaluating new derivative

instruments, the Commission consistent

with the protection of investors,

considers the degree to which the

derivative exchange has the ability to

obtain information necessary to detect

and deter market manipulation and

other trading abuses. It is for this reason

that the Commission requires that there

be a comprehensive surveillance

agreement in place between an

exchange listing or trading a derivative

product and the exchanges trading the

stocks underlying the derivative

contract that specifically enables

officials to survey trading in the

derivative product and its underlying

stocks.18 Such agreements facilitate the
33746 Federal Register / Vol. 63, No. 118 / Friday, June 19, 1998 / Notices

comprehensive surveillance agreement require that

the parties to the agreement provide each other,

upon request, information about market trading

activity, clearing activity and customer identity. See

Securities Exchange Act Release No. 31529

(November 27, 1992). 19 15 U.S.C. 78s(b)(2).

20 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3See Letter to Katherine A. England, Assistant

Director, Division of Market Regulation,

Commission, from John M. Ramsay, Vice President

and Deputy General Counsel, NASD Regulation,

dated April 29, 1998 (‘‘Amendment No. 1’’).

Amendment No. 1 makes certain technical

corrections to the text of the proposed rule change.

availability of information needed to

fully investigate a potential

manipulation if it were to occur. For

foreign stock index derivative products,

these agreements are especially

important to facilitate the collection of

necessary regulatory, surveillance and

other information from foreign

jurisdictions. In order to address the

above concerns, the Commission notes

that the Index will be maintained in

accordance with CBOE Rule 31.5(E)(7),

which states that foreign country

securities or ADRs 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, cannot, in

the aggregate, represent more than 20%

of the weight of an index.

For the reasons discussed above, the

Commission finds good cause to

approve Amendment No. 2 prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Specifically,

Amendment No. 2 provides that the

Index value will be disseminated every

15 seconds and will be calculated based

on real-time prices, for all of the

component stocks, including those

foreign stocks that are traded during

CBOE trading hours. With respect to

foreign stock components that trade

during CBOE trading hours, each Index

calculation will use the most recent last

sale price from the appropriate home

market. For foreign stocks that do not

trade during CBOE trading hours, the

closing price will be used to calculate

the Index value. In addition,

Amendment No. 2 clarifies that

component securities will be replaced

or supplemented only under the events

discussed below. Absent unusual

circumstances involving a merger or

consolidation, conversion into another

class of securities, a spin-off, or the

termination of a depositary receipt

program, the Exchange will adhere to

the following procedures: (1) in the

event of a merger or consolidation

(whether between component stocks or

between one component stock and one

non-component stock), the original

component stock will be replaced by the

new security; (2) in the event of a

conversion into another class of

security, the original component stock

will be replaced by the new security; (3)

in the event of a spin-off of a subsidiary,

both the subsidiary issue and the

original parent security will be included

in the Index, unless the subsidiary is an

insignificant percentage of the original

security, in which case the CBOE will

consult with the SEC prior to omitting

the subsidiary issuer from the Index;

and (4) should a depositary receipt

program be terminated, for any reason,

after an ADR had already been included

in the Index, the CBOE in consultation

with the SEC staff will evaluate the

appropriate procedure to be employed

to ensure continuity of the Index. The

Commission notes that no comments

were received when the original notice

of the proposed rule change was

published and that no new regulatory

issues are presented in Amendment No.

2.

Accordingly, the Commission believes

that it is consistent with Sections 6(b)(5)

and 19(b)(2)19 of the Act, to find good

cause exists to approve Amendment No.

2 on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2, including whether the proposed rule

change 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

Room, 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 No. SR–CBOE–98–17 and

should be submitted by July 10, 1998.

For the foregoing reasons, the

Commission finds that the CBOE’s

proposal to list and trade warrants based

on the Index is consistent with the

requirements of 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–98–

17), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Jonathan G. Katz,

Secretary.

[FR Doc. 98–16349 Filed 6–18–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40087; File No. SR–NASD–

98–23]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc; Order Granting Approval

and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 1 and Amendment No.

2 to Proposed Rule Change Relating to

an Amendment to the NASD’s Options

Position Limit Rule

June 12, 1998.

I. Introduction

On March 10, 1998, NASD

Regulation, Inc. (‘‘NASD Regulation’’)

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Exchange Act’’ or ‘‘Act’’) 1 and

Rule 19b–4 thereunder,2 a proposed rule

change to amend Rule 2860(b) of the

National Association of Securities

Dealers, Inc. (‘‘NASD’’) or

‘‘Association’’) to: (1) increase the

position limits on conventional equity

options to three times the basic position

limits for standardized equity options

on the same security; (2) disaggregate

conventional equity options from

standardized equity options and FLEX

Equity Options for position limit

purposes; and (3) provide that the OTC

Collar Aggregation Exemption shall be

available with respect to an entire

conventional equity options position,

not just that portion of the position that

is established pursuant to the NASD’s

Equity Option Hedge Exemption.

The proposed rule change was

published for comment in Exchange Act

Release No. 39893 (April 21, 1998), 63

FR 23317 (April 28, 1998) NASD

Regulations submitted an amendment to

the proposed rule change on April 29,

1998.3 A second amendment to the