Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices 46637

1 15 U.S.C. § 78s(b)(1) (1988 & Supp. V 1993).

2 17 CFR § 240.19b–4 (1994).

3See Securities Exchange Act Release No. 35086

(Dec. 12, 1994), 59 FR 65561.

4See Letter from Paul M. Gottlieb, Seward &

Kissel, to Jonathan G. Katz, Secretary, Commission,

dated January 10, 1995 (‘‘Comment Letter’’ or

‘‘Seward & Kissel Letter’’).

5See Letters from William Floyd-Jones, Assistant

General Counsel, Amex, to Michael Walinskas, SEC,

dated May 12, 1995 (‘‘Amendment No. 1’’), May 12,

1995 (‘‘Amendment No. 2’’), June 26, 1995

(‘‘Amendment No. 3’’), July 28, 1995 (‘‘Amendment

No. 4’’) and August 16, 1995 (‘‘Amendment No. 5’’).

6The proposed rules would apply to both

American-style warrants (which may be exercised

at any time prior to expiration) and European-style

warrants (which may only be exercised during a

specified period before expiration).

7Sections 106 (b)–(d), which require issuances of

warrants to: have a term of one to five years; have

a minimum public distribution of 1,000,000

warrants together with a minimum of 400 public

holders and an aggregate market value of $4,000,000

and; be cash-settled in U.S. dollars would remain

unchanged.

8See Amendment No. 1. The Exchange amended

this provision in response to the Seward & Kissell

Letter.

9See Amendment No. 3. The Exchange amended

its proposal in response to the Seward & Kissell

Letter and notes that a warrant based upon a

domestic U.S. stock index may be settled using

closing prices (‘‘p.m. settlement’’) for the

underlying stocks at all times except for the

warrant’s valuation date and the two business days

immediately preceding the valuation date.

10See Amendment No. 1.

11See Amendment No. 2.

Note: In both announcements, the

reallocation amount is zero for the ten

minimum quota-holding countries including:

Congo, Cote d’Ivoire, Gabon, Haiti,

Madagascar, Mexico, Papua New Guinea,

Paraguay, St. Kitts & Nevis, and Uruguay,

since the previously announced minimum

allocation for these countries already exceeds

the base import quota plus any reallocation

adjustment.

Both reallocations apply to the period

ending September 30, 1995, only.

Jennifer A. Hillman,

Acting United States Trade Representative.

[FR Doc. 95–21945 Filed 9–6–95; 8:45 am]

BILLING CODE 3190–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–36168; File No. SR–Amex–

94–38]

Self-Regulatory Organizations;

American Stock Exchange, Inc.; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendments

No. 1, 2, 3, 4 and 5 to Proposed Rule

Change Relating to the Establishment

of Uniform Listing and Trading

Guidelines for Stock Index, Currency

and Currency Index Warrants

August 29, 1995.

I. Introduction

On September 12, 1994, the American

Stock Exchange, Inc. (‘‘Amex’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b) (‘‘Section 19(b)’’) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder,2 a proposed rule

change to establish uniform rules for the

listing and trading of broad-based stock

index (‘‘index’’ or ‘‘stock index’’),

currency (‘‘currency’’) and currency

index (‘‘currency index’’) warrants

(collectively ‘‘warrants’’). Notice of the

proposed rule change appeared in the

Federal Register on December 20,

1994.3 One comment letter was received

in response to the proposal.4

The Exchange subsequently filed five

Amendments to the proposal.5

Amendment No. 1 brought several of

Amex’s proposed rules and policies into

conformity with those previously filed

by other markets. Amendment No. 2

primarily addressed surveillance and

margin issues related to the trading of

warrants. Amendment No. 3 addressed

the issues of settlement methodology,

currency index warrant margin and

reporting requirements. Amendment

No. 4 deletes a transaction reporting

requirement which will be revised and

incorporated into the Exchange’s

surveillance procedures and also makes

minor changes requested by the staff.

Amendment No. 5 clarifies the

settlement procedures for index

warrants which are exercised at or prior

to expiration. This order approves the

proposal, as amended.

II. Description of the Proposal

The Amex proposes to establish

uniform rules for the listing and trading

of stock index, currency and currency

index warrants.6 Section 106 of the

Amex Company Guide, Currency and

Index Warrants, would be amended to

provide uniform listing criteria for

broad-based stock index, currency, and

currency index warrants.7 First, issuers

would be expected to exceed minimum

issuer listing standards. In particular,

the Exchange proposes that issuers be

required to have a minimum tangible

net worth in excess of $250 million or,

in the alternative, have a minimum

tangible net worth in excess of $150

million and provided that the issuer

does not have (including as a result of

the proposed issuance) issued

outstanding warrants where the

aggregate original issue price of such

warrant offerings (combined with

offerings by its affiliates) listed on a

national securities exchange or that are

National Market securities traded

through NASDAQ exceeds 25% of the

issuer’s net worth.8

Second, the proposal, as amended

requires that unexercised in-the-money

warrants provide for automatic exercise

on their expiration date or on or

promptly following their delisting date

(if the issue is not listed upon another

organized securities market). Third, the

proposal provides that for warrant

offerings where U.S. stocks constitute

25% or more of the index value

(‘‘domestic index’’), issuers shall use

opening prices (‘‘a.m. settlement’’) for

U.S. stocks to determine index warrant

settlement values on the final

determination of settlement value date

(‘‘valuation date’’) for the warrants as

well as during the two business days

prior to the valuation date.9 Fourth,

Section 106 has been amended to

provide that foreign country securities

or American Depositary Receipts

(‘‘ADRs’’) thereon that are not subject to

a comprehensive surveillance sharing

agreement with the Exchange and that

have less than 50% of their global

trading volume (in dollar value) within

the U.S., shall not represent more than

20% of the weight of the index.10

The Exchange also proposes adding a

provision to Section 106 which is

designed to assist in the surveillance of

index warrant trading. Specifically, the

Exchange will require issuers of stock

index warrants to notify the Exchange of

any early exercises. For domestic index

warrants, this notice must occur no later

than 4:30 p.m. (New York time) on the

day that the settlement value for the

warrants is determined.11

Rule 462 (‘‘Rule 462’’), the Amex

margin rule, is being amended to apply

the current customer margin

requirements for broad based stock

index and currency options to stock

index, currency and currency index

warrants. Thus, all purchases of

warrants will require payment in full,

and short sales of stock index warrants

will require initial margin of: (i) 100

percent of the current value of the

warrant plus (ii) 15 percent of the

current value of the underlying broad

stock index less the amount by which

the warrant is out of the money, but

with a minimum of ten percent of the

index value. Short sales of currency

warrants will follow the margin

requirements currently applicable to

listed currency options. Specifically, the

Exchange proposes that short sales of

warrants on the German Mark, French

Franc, Swiss Franc, Japanese Yen,

British Pound, Australian Dollar and

European Currency Unit shall be subject

to a margin level of 100% of the current
46638 Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices

12See Amendment No. 3. Consistent with the

treatment of options on foreign currencies, warrants

on the Canadian Dollar will be subject to a one

percent ‘‘add-on’’. The margin required on any

other foreign currency would be subject to approval

by the Commission. See infra note 28.

13See infra note 28.

14Three months prior to the expiration of the

pilot program, the Exchange will submit a report to

SEC staff analyzing the price relationship between

listed warrants and options on similar stock

indexes. See Amendment No. 1. The Exchange has

also requested no action relief from the Commission

in order to permit certain short positions in stock

index call and put warrants to be treated as covered

for margin purposes.

15See Amendment No. 1. The Exchange notes

that this treatment is consistent with the rules that

allow for the use of escrow receipts to cover a short

call position in broad-based stock index options.

16For example, if an investor held 100,000

warrants based upon the Standard & Poor’s 500

Index offered originally at $20 per warrant, the size

of this position for the purpose of calculating

position limits would be 200,000.

17See Amendment Nos. 1 and 3.

18See infra note 28.

19See supra note 4. The Seward & Kissel Letter

was submitted on behalf of PaineWebber Inc., Bear,

Stearns & Co. Inc., Lehman Brothers Inc., Smith

Barney Inc., Salomon Brothers Inc., Morgan Stanley

& Co. Inc., and Hambrecht & Quist Inc. (collectively

the ‘‘Firms’’).

market value of each such warrant plus

a four percent ‘‘add-on.’’ 12 The margin

required on currency index warrants

would be an amount as determined by

the Exchange and approved by the

Commission.13 The Exchange also

proposes that its stock index, currency

and currency index warrant customer

margin requirements be permitted offset

treatment for spread and straddle

positions. In this regard, the Exchange

proposes that index, currency and

currency index warrants may be offset

with either warrants or Options Clearing

Corporation (‘‘OCC’’) issued options on

the same index, currency or currency

index, respectively. Furthermore, the

Exchange has proposed that Rules

462(d)(2) (F) and (G), to the extent that

such rules concern spread and straddle

positions in warrants, be subject to a

one year pilot basis.14 Finally, proposed

Rule 462 will also permit the use of

escrow receipts to cover a short call

position in a broad-based stock index

warrant.15

The Exchange proposes that Part VI of

its rules, Trading of Stock Index and

Currency Warrants, be applicable solely

to the trading of warrants. Proposed

Rule 1100 provides that, unless the

context otherwise requires or a specific

rule in Part VI applies, the provisions of

the Constitution and all other rules and

policies of the Exchange apply to

trading of such securities. Furthermore,

proposed Rule 1100 provides that

warrants listed on the Exchange prior to

SEC approval of this filing shall

continue to be governed by those

provisions of the Exchange’s rules that

were applicable to such warrants at the

time of their listing. Finally, prior to

trading index, currency or currency

index warrants, the Exchange will

distribute circulars to its membership

providing guidance regarding member

firm compliance responsibilities

(including suitability recommendations)

when handling transactions in warrants.

Proposed Rule 1101 states that no

member or member organization shall

accept an order from a customer for the

purchase or sale of warrants unless the

customer’s account has been approved

for options trading pursuant to

Exchange Rule 921. Accordingly, the

Exchange will rescind Commentaries

.01 and .02 to Rule 411, its current

suitability standard applicable to

warrants, which currently provide that

the Exchange ‘‘recommends’’ that index

and currency warrants only be sold to

investors whose accounts have been

approved for options trading.

Furthermore, proposed Rules 1102–

1105 require that the option rules

pertaining to suitability, discretionary

account trading, supervision of accounts

and customer complaints be applied to

warrants.

Proposed Rule 1106 requires approval

by a Compliance Registered Options

Principal of all advertisements, sales

literature and educational material

issued by a member organization

pertaining to warrants. The rule further

requires Exchange approval of all

advertisements and educational

materials pertaining to warrants.

Proposed Rule 1107 provides that

position limits for stock index warrants

on the same index with original issue

prices of ten dollars or less will be

fifteen million warrants covering all

such issues. In addition, with respect to

warrants on the Standard & Poor’s

MidCap 400 Index, the position limit

will be seven and one half million

warrants covering all such issues,

provided the original issue prices of the

warrants are not greater than ten dollars.

The rule provides that warrants with an

original issue price of greater than ten

dollars will be weighted more heavily

than warrants with an original issue

price of ten dollars or less in calculating

position limits.16 The rule also gives the

Exchange the authority to require the

liquidation of a position in stock index

warrants that is in excess of the position

limits set forth in the rule, and

Commentary V to the rule provides

procedures for allowing limited

exceptions to the position limits.

Proposed Rule 1108 provides for

exercise limits on stock index warrants

analogous to those found in stock index

options and states that such limits are

distinct from any exercise limits that

may be imposed by the issuers of stock

index warrants. Accordingly, no

member may exercise a long position in

warrants over a five consecutive day

period in excess of the permissible

position limit.

In order to facilitate its review of

compliance with position and exercise

limits, the Exchange has proposed Rule

1110 which establishes reporting

requirements for large warrant

positions. Under the terms of the Rule,

members will be required to file a report

with the Exchange whenever any

account in which the member has an

interest has established an aggregate

position of 100,000 warrants overlying

the same index, currency or currency

index. For purposes of this rule, the

Exchange proposes that long positions

inputs be combined with short positions

in call warrants, and that short positions

inputs be combined with long positions

in call warrants.17 Finally, proposed

Rule 1109 requires that the trading halt

provisions in Rule 918C(b) shall be

applied to the trading of stock index

warrants.

Upon Commission approval of the

foregoing rule amendments, the

Exchange proposes that it will only file

rule changes for specific stock index

warrant issuances where there is no

corresponding option or warrant on the

same underlying stock index already

listed on a national securities exchange

or included for quotation on NASDAQ.

Accordingly, when a listed option

overlies a particular broad based index,

the Exchange proposes it be allowed to

list warrants on that index without

further Commission review and

approval pursuant to Section 19(b) of

the Act, as long as the listing complies

with the warrant listing standards as

approved in this Order.18

III. Comments Received

The Commission received one letter

in response to its request for comments

on the Amex proposal.19 The Comment

Letter was generally supportive of the

Amex’s proposal, however, it

recommended several changes in the

proposed regulatory structure applicable

to stock index, currency and currency

index warrants. The Comment Letter

was submitted on behalf of the Firms,

all of whom are represented to be major

participants in the issuance,

underwriting and trading of warrants.

Because the proposed regulatory regime

applicable to warrants will, to some

extent, be based upon the rules

governing standardized options, the
Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices 46639

20The Comment Letter lists several differences

which it perceives exist between warrants and

standardized options. Chief among these are: (1)

Warrants are separately registered, unsecured

obligations of their issuer while options are issued

and guaranteed by the Options Clearing Corp.

(‘‘OCC’’); (2) during the prospectus delivery period,

warrant purchasers receive a product-specific

prospectus while options customers receive an

options disclosure document (‘‘ODD’’) at the time

the account is opened; (3) each warrant creates a

fixed number of outstanding warrants while there

is theoretically no limit to the number of options

that may be issued by OCC; and (4) warrants are

traded on an exchange in a manner similar to stocks

which, therefore, translates into superior price

transparency than for listed options.

21As originally proposed, an issuer would have

been required to have a tangible net worth of at

least $150 million and the aggregate original issue

price of all of a particular issuer’s warrant offerings

(combined with such offerings by its affiliates) that

are listed on a national securities exchange or that

are national market securities traded through

NASDAQ may not exceed 25% of the issuer’s net

worth (‘‘25% test).

22See Amendment No. 1. 23See Amendments No. 3 and 5.

24See Amendment No. 1.

25 15 U.S.C. § 78f(b)(5) (1982).

Comment Letter states that the Firms’

comments are driven, in part, by the fact

that fundamental differences exist

between warrants and standardized

options which necessitate disparate

regulatory treatment in certain

situations.20

First, the Comment Letter suggested

amending the Issuer Listing Standards

to eliminate the 25% test or, in the

alternative, to adopt hedging and/or

netting standards designed to more

accurately reflect issuer-specific risk.21

Because warrants are sold by means of

a registration statement, the Firms

believe that adequate disclosure of the

amount of an issuer’s outstanding

securities could be included in the

prospectus. Furthermore, the Comment

Letter points out that issuers of warrants

are traditionally subject to outside

evaluation by certain credit rating

agencies, which should assist investors

in determining undue issuer credit risk.

Finally, the Firms do not believe the

25% test bears any resemblance to an

issuer’s risk exposure since exposure

fluctuates with market changes at any

given time and also because the

proposal provides no recognition for

offsetting hedges or for warrants subject

to netting.

In response to the Seward & Kissel

Letter’s comments respecting issuer

listings standards, the Amex amended

the filing to add an alternative issuer

qualification criteria.22 Under the new

criteria, an issuer will be required to

either: (a) have a minimum tangible net

worth of $250 million; or (b) meet the

existing criteria (i.e., tangible net worth

of $150 million and meet the 25% test).

The Comment Letter also

recommended allowing the use of p.m.

settlement for all American-style

warrants exercised anytime except 48

hours prior to expiration, at which time

a.m. settlement would be required.

According to the Comment Letter,

unlike with listed options (where OCC

is the issuer and runs a balanced book),

a warrant issuer must hedge its

exposure to maintain offsetting

positions. Upon early exercise of the

warrants, the issuer that has hedged its

exposure will have to take action to

‘‘unwind’’ the portion of its hedge

relating to the exercised warrants. The

Firms believe that requiring a.m.

settlement on the first day after an

investor exercises the warrant will place

additional market risk upon them due to

the difficulty in managing the hedge.

This increased hedging cost, the Firm’s

argue, could result in a higher issuance

price for the warrant or could require

that the warrant settlement value date

be postponed an additional day, with

warrant holders bearing additional

market risk during this period.

In response to the Comment Letter,

the Amex amended its filing to include

a provision permitting p.m. settlement

for stock index warrants except for a

short period before expiration.23 Under

the terms of the amendment, stock

index warrants for which 25% or more

of the value of the underlying index is

represented by securities that are traded

primarily in the U.S. shall, by their

terms, provide that, on valuation date,

as well as for the two business days

prior to valuation date, the value of the

stocks traded primarily in the U.S.

which underlie such warrants shall be

determined by reference to the opening

prices of such underlying U.S.

securities. For example, if the valuation

date for an issuance of index warrants

occurs on a Friday, a.m. settlement must

be utilized for warrants that are valued

on the preceding Wednesday or

Thursday, as well as on the valuation

date.

Third, the Comment Letter

recommended creating a special

category of ‘‘warrant eligible’’ customers

(separate and distinct from options

eligibility criteria), who are authorized

to trade warrants even if not approved

to trade options. The Firms believe it is

inappropriate to apply an options

regulatory regime to warrants and that

doing so may prevent institutional

customers who are not permitted to

purchase options products, yet who

nevertheless meet all of the options

eligibility criteria, from purchasing

warrants. In this regard, the Firms

propose to create a ‘‘warrant eligible’’

category with standards mimicking

those currently required for options

approved accounts. As such, ‘‘warrantapproved’’ accounts could purchase

warrants, however, they could not

purchase options or other products

requiring options account approval. The

Amex did not amend its filing in

response to this comment.

Fourth, the Comment Letter urges the

adoption of a rule permitting firms to

approve for warrant trading those

accounts managed by an investment

adviser (‘‘IA’’) based upon the IA’s

representation concerning the eligibility

status of its customers to engage in

warrant trading, even if the underlying

documentation relating to the managed

accounts is not provided to the

brokerage firms. The Amex has

amended its proposal to allow member

firms to accept the representation of an

investment adviser registered under the

Investment Advisers Act of 1940

concerning the eligibility status of its

customers to engage in warrant trading,

even if the underlying documentation

relating to the managed accounts is not

provided to the member firm, where the

managed account is for an institutional

customer or the investment advisor

account represents the collective

investment of a number of persons. The

Amex states that this will conform the

handling of warrant accounts to the

current practice with respect to listed

options accounts.24

Finally, the Comment Letter

addressed the proposed position limits

applicable to warrants. Specifically, the

Comment Letter noted that position

limits for warrants would be set at levels

that are approximately 75% of that

allowed for similar broad-based indexes.

The Comment Letter recommended

establishing position limits for warrants

that were equivalent to those

established for listed options, allowing

a hedge exemption similar to listed

option procedures and providing a

mechanism for specific waivers or

exemptions of warrant position limits

for hedgers, market-makers and brokerdealers comparable to the procedures in

place for listed options. The Amex did

not amend its filing in response to this

comment.

IV. Discussion

The Commission finds that the

proposed rule change 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).25

Specifically, the Commission finds that

the Exchange’s proposal to establish

uniform listing standards for broad-
46640 Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices

26The Commission notes that warrants issued

prior to this approval order will continue to be

governed by the rules applicable to them at the time

of their listing.

27Pursuant to Section 6(b)(5) of the Act, the

Commission is required to find, among other things,

that trading in warrants will serve to protect

investors and contribute to the maintenance of fair

and orderly markets. In this regard, the Commission

must predicate approval of any new derivative

product upon a finding that the introduction of

such derivative instrument is in the public interest.

Such a finding would be difficult for a derivative

instrument 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. As

discussed below, the Commission believes warrants

will serve an economic purpose by providing an

alternative product that will allow investors to

participate in the price movements of the

underlying securities in addition to allowing

investors holding positions in some or all of such

securities to hedge the risks associated with their

portfolios.

28 Issuances of warrants overlying a single

currency may currently be listed for trading without

a rule filing provided that the underlying currency

is one of the original seven foreign currencies

approved for options trading: the Australian Dollar,

British Pound, Canadian Dollar, French Franc,

German Mark, Japanese Yen, Swiss Franc and

European Currency Unit. Issuances of currency

warrants overlying any other foreign currency

would require a rule filing pursuant to Section 19(b)

of the Act. The Commission notes that currency

index warrants may only be established without a

further rule filing upon an index that has been

previously approved by the Commission pursuant

to a Section 19(b) filing. To date, the only currency

index approved pursuant to Section 19(b) is an

equal-weighted index comprised of the British

Pound, Japanese Yen and German Deutsche Mark.

See Securities Exchange Act Release No. 31627

(Dec. 21, 1992), 57 FR 62399 (Dec. 30, 1992).

Accordingly, any other currency index (as well as

a broad-based stock index) not previously approved

by the Commission would require approval

pursuant to Section 19(b).

29Currency and currency index warrants are not

limited to a.m. or p.m. settlement.

30Foreign stock market based index warrants may

utilize p.m. settlement throughout their duration.

based stock index, currency and

currency index warrants strikes a

reasonable balance between the

Commission’s mandates under Section

6(b)(5) to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, while protecting investors and

the public interest. In addition, the

Amex’s proposed listing standards for

warrants are consistent with the Section

6(b)(5) requirements that rules of an

exchange be designed to prevent

fraudulent and manipulative acts, to

promote just and equitable principles of

trade, and are not designed to permit

unfair discrimination among issuers.

The Amex’s proposed generic listing

standards for broadbased stock index

warrants, currency and currency

indexes set forth a regulatory framework

for the listing of such products.26

Generally, listing standards serve as a

means for an exchange to screen issuers

and to provide listed status only to bona

fide issuances that will have sufficient

public float, investor base, and trading

interest to ensure that the market has

the depth and liquidity necessary to

maintain fair and orderly markets.

Adequate standards are especially

important for warrant issuances given

the leveraged and contingent liability

they represent. Once a security has been

approved for initial listing, maintenance

criteria allow an exchange to monitor

the status and trading characteristics of

that issue to ensure that it continues to

meet the exchange’s standards for

market depth and liquidity so that fair

and orderly markets can be maintained.

In reviewing listing standards for

derivative-based products, the

Commission also must ensure that the

regulatory requirements provide for

adequate trading rules, sales practice

requirements, margin requirements,

position and exercise limits and

surveillance procedures. These rules

minimize the potential for manipulation

and help to ensure that derivativelypriced products will not have a negative

market impact. In addition, these

standards should address the special

risks to customers arising from the

derivative products.27 For the reasons

discussed below, the Commission

believes the Amex’s proposal will

provide it with significant flexibility to

list index, currency and currency index

warrants, without compromising the

effectiveness of the Exchange’s listing

standards or regulatory program for

such products.28

A. Issuer Listing Standards and Product

Design

As a general matter, the Commission

believes that the trading of warrants on

a stock index, currency or currency

index permits investors to participate in

the price movements of the underlying

assets, and allows investors holding

positions in some or all of such assets

to hedge the risks associated with their

portfolios. The Commission further

believes that trading warrants on a stock

index, currency or currency index

provides investors with an important

trading and hedging mechanism that is

designed to reflect accurately the overall

movement of the component securities.

Warrants, unlike standardized

options, however, do not have a

clearinghouse guarantee but are instead

dependent upon the individual credit of

the issuer. This heightens the possibility

that an exerciser of warrants may not be

able to receive full cash settlement upon

exercise. This additional credit risk, to

some extent, is reduced by the

Exchange’s issuer listing standards that

require an issuer to have either; (a) a

minimum tangible net worth of $250

million; or (b) a minimum tangible net

worth of $150 million, provided that the

issuer does not have (including as a

result of the proposed issuance) issued

outstanding warrants where the

aggregate original issue price of all such

stock index, currency and currency

index warrant offerings (or affiliates)

that are listed on a national securities

exchange or traded through the facilities

of NASDAQ is in excess of 25% of the

warrant issuer’s net worth. Furthermore,

financial information regarding the

issuers of warrants will be disclosed or

incorporated in the prospectus

accompanying the offering of the

warrants. Moreover, the alternative test

addresses the Comment Letter’s

concerns on the 25% standard.

The Amex’s proposal will provide

issuers flexibility by allowing them to

utilize either a.m. or p.m. settlement,

provided, however, domestic index

warrants (i.e., warrants based on

indexes for which 25% or more of the

index value is represented by securities

traded primarily in the U.S.) (‘‘domestic

index warrants’’) are required to utilize

a.m. settlement for expiring warrants as

well as during the last two business

days prior to valuation date.29 The

Commission continues to believe that

a.m. settlement significantly improves

the ability of the market to alleviate and

accommodate large and potentially

destabilizing order imbalances

associated with the unwinding of indexrelated positions. Nevertheless, in

accordance with the Comment Letter’s

suggestions, the use of p.m. settlement

except during the last two business days

prior to a domestic index warrant’s

valuation date, as well as the valuation

date, strikes a reasonable balance

between ameliorating the price effects

associated with expirations of derivative

index products and providing issuers

with flexibility in designing their

products.30 In this context, the

Commission notes that unlike

standardized index options whose

settlement times are relatively uniform,

index warrants are issuer-based

products, whose terms are individually

set by the issuer. In addition, while

options may have unlimited open

interest, the number of warrants on a

given index is fixed at the time of

issuance. Accordingly, it is not certain

that there will be a significant number

of warrants in indexes with similar

components expiring on the same day.

This may reduce the pressure from

liquidation of warrant hedges at
Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices 46641

31Pursuant to Amex Rule 921, all options

approved accounts must receive an ODD, which

discusses the characteristic and risks of

standardized options.

32See Securities Exchange Act Release No. 24555

(June 5, 1987), 52 FR 22570 (June 12, 1987), and

Securities Exchange Act Release No. 26152 (Oct. 3,

1988), 53 FR 39832 (Oct. 12, 1988). The

Commission notes that these surveillance

procedures only apply to the issuance of warrants

overlying one of the approved foreign currencies.

See supra note 28. The issuance of warrants upon

any other foreign currency would necessitate a

Section 19(b) rule filing which, among other things,

details applicable surveillance procedures.

33 In addition, the Commission notes that issuers

will be required to report to the Exchange all trades

to unwind a warrant hedge that are effected as a

result of the early exercise of domestic index

warrants. This will enable the Exchange to monitor

the unwinding activity to determine if it was

effected in a manner that violates Exchange or

Commission rules.

34Each prior issuance of a foreign stock market

based index warrant is subject to specific

surveillance procedures. These procedures are

generally tailored to the individual warrant

issuance and are based upon several factors

involving the primary foreign market, including the

existence of surveillance or information sharing

agreements.

35The Commission believes that a surveillance

sharing agreement should provide the parties with

the ability to obtain information necessary to detect

and deter market manipulation and other trading

abuses. Consequently, the Commission generally

requires that a surveillance sharing agreement

require that the parties to the agreement provide

each other, upon request, information about market

trading activity, clearing activity, and the identity

of the ultimate purchasers for securities. See e.g.,

Securities Exchange Act Release No. 31529 (Nov.

27, 1992).

36The 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 sharing agreement.

settlement. Nevertheless, the

Commission expects the Exchange to

monitor this issue and, should

significant market effects occur as a

result of early exercises from p.m.

settled index warrants, would expect it

to make appropriate changes including

potentially limiting the number of index

warrants with p.m. settlement.

B. Customer Protection

Due to their derivative and leveraged

nature, and the fact that they are a

wasting asset, many of the risks of

trading in warrants are similar to the

risks of trading standardized options.

Accordingly, the Amex has proposed to

apply its options customer protection

rules to warrants. In particular, the

Commission notes that warrants may

only be sold to options approved

accounts capable of evaluating and

bearing the risks associated with trading

in these instruments, in accordance

with Amex Rule 921, and that adequate

disclosure of the risks of these products

must be made to investors.31 In

addition, the Amex will apply the

options rules for suitability,

discretionary accounts, supervision of

accounts and customer complaints to

transactions in warrants. By imposing

the special suitability and disclosure

requirements noted above, the

Commission believes the Amex has

addressed adequately several of the

potential customer protection concerns

that could arise from the options-like

nature of warrants.

The ODD, which all options approved

accounts must receive, generally

explains the characteristics and risks of

standardized options products.

Although many of the risks to the holder

of an index warrant and option are

substantially similar, however, because

warrants are issuer-based products,

some of the risks, such as the lack of a

clearinghouse guarantee and certain

terms for index warrants, are different.

The Amex has adequately addressed

this issue by proposing to distribute a

circular to its members that will call

attention to the specific risks associated

with stock index, currency and currency

index warrants that should be

highlighted to potential investors. In

addition, the issuer listing guidelines

described above will ensure that only

substantial companies capable of

meeting their warrant obligations will

be eligible to issue warrants. These

requirements will help to address, to a

certain extent, the lack of a

clearinghouse guarantee for index

warrants. Finally, warrant purchasers

will receive a prospectus during the

prospectus delivery period. The

Commission believes that this will

ensure that certain information about

the particular issuance and issuer is

publicly available.

As noted above, the Comment Letter

indicates that applying the options

disclosure framework to warrants is

inappropriate. However, the

Commission believes that the combined

approach of making available general

derivative product information (the

ODD), product specific information (the

Exchange circular), and issuer specific

information (the prospectus) should

provide an effective disclosure

mechanism for these products.

At this time, the Commission does not

agree with the proposal contained in the

Comment Letter to create a special

‘‘warrant eligible’’ classification of

purchasers. As noted above, index,

currency and currency index warrants

are very similar to standardized options.

They are so similar that a customer

precluded from trading options should

not avoid the restriction indirectly by

being designated by Exchange rules as

eligible for stock index, currency or

currency index warrants. Nevertheless,

as the range of exchange-traded

derivative products increases, the SROs

might consider in the future as to

whether a new derivatives eligibility

classification is appropriate.

C. Surveillance

In evaluating proposed rule changes

to list derivative instruments, the

Commission considers the degree to

which the market listing the derivative

product has the ability to conduct

adequate surveillance. In this regard the

Commission notes that the Exchange

has developed adequate surveillance

procedures for the trading of index and

currency warrants. First, new issues of

currency warrants will be subject to the

Amex’s existing surveillance procedures

applicable to foreign currency warrants,

which the Commission previously has

found to be adequate to surveil for

manipulation and other abuses

involving the warrant market and the

underlying foreign currencies.32

Second, the Exchange has developed

enhanced surveillance procedures to

apply to domestic stock index warrants

which the Commission believes are

adequate to surveil for manipulation

and other abuses involving the warrant

market and component securities.33

Among these enhanced surveillance

procedures, the Commission notes that

issuers will be required to report to the

Exchange on settlement date the number

and value of domestic index warrants

subject to early exercise the previous

day. The Commission believes that this

information will aid the Amex in its

surveillance capacity and help it to

detect and deter market manipulation

and other trading abuses.

Third, the Exchange has developed

adequate surveillance procedures to

apply to foreign stock index warrants

(i.e., less than 25% of the index value

is derived from stocks traded primarily

in the U.S.).34 The Commission believes

that the ability to obtain information

regarding trading in the stocks

underlying an index warrant is

important to detect and deter market

manipulation and other trading abuses.

Accordingly, the Commission generally

requires that there be a surveillance

sharing agreement 35 in place between

an exchange listing or trading a

derivative product and the exchange(s)

trading the stocks underlying the

derivative contract that specifically

enables the relevant markets to surveil

trading in the derivative product and its

underlying stocks.36 Such agreements

provide a necessary deterrent to

manipulation because they facilitate the
46642 Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices

37 In the context of domestic index warrants, the

Commission notes that the U.S. exchanges are

members of the Intermarket Surveillance Group

(‘‘ISG’’), which was formed to, among other things,

coordinate more effectively surveillance and

investigative information sharing arrangements in

the stock and options markets. See Intermarket

Surveillance Group Agreement, July 14, 1983. The

most recent amendment to the ISG Agreement,

which incorporates the original agreement and all

the amendments made thereafter, was signed by ISG

members on January 29, 1990. See Second

Amendment to the ISG Agreement.

38See supra note 35.

39See Securities Exchange Act Release Nos.

31529, 57 FR 57248 (Dec. 3, 1992) and 33555, 59

FR 5619 (Feb. 7, 1994).

40The Commission notes that the margin levels

for currency index warrants will be set at a level

determined by the Exchange and approved by the

SEC. See Amendment No. 4. Issuances of warrants

listed prior to the approval of this order will

continue to apply the margin level applicable to

them at the time of their listing.

41The Commission notes that there are no

position or exercise limits applicable to currency or

currency index warrants, although reporting

requirements do apply. Nevertheless, the

Commission may review the need to establish

foreign currency position limits if the size of the

currency or currency index warrant market

increases significantly.

42With respect to the Comment Letter’s

suggestion that a hedge exemption rule be

established in order to allow participants to readily

acquire exemptions from the Exchange as needed,

the Commission does not believe that such an

approach is appropriate at this time. The hedge

exemption for index options was adopted after

several years experience with index options trading.

Until the SROs gain some experience with domestic

index warrant trading, it is difficult to determine

the need for a hedge exemption (i.e., that

speculative limits are insufficient to meet hedging

needs).

availability of information needed to

fully investigate a potential

manipulation if it were to occur.37 In

this regard, the Amex will require that

no more than 20% of an Index’s weight

may be comprised (upon issuance and

thereafter) of foreign securities (or ADRs

thereon) that do not satisfy one of the

following tests: (1) The Exchange has in

place an effective surveillance

agreement 38 with the primary exchange

in the home country in which the

security underlying the ADR is traded;

or (2) meets an existing alternative

standard available for standardized

options trading (e.g., satisfy the 50%

U.S. trading volume test).39 The

Commission believes that this standard

will ensure that index warrants are not

listed upon foreign indexes whose

underlying securities trade on

exchanges with whom the Amex has no

surveillance sharing agreement.

D. Market Impact

The Commission believes that the

listing and trading of index warrants,

currency warrants and currency index

warrants will not adversely affect the

U.S. securities markets or foreign

currency markets. First, with respect to

currency and currency index warrants,

the Commission notes that the interbank

foreign currency spot market is an

extremely large, diverse market

comprised of banks and other financial

institutions worldwide. That market is

supplemented by equally deep and

liquid markets for standardized options

and futures on foreign currencies and

options on those futures. An active overthe-counter market also exists in

options, forwards and swaps for foreign

currencies. This minimizes the

possibility that Exchange listed warrants

would be used to manipulate the spot

currency markets. In addition, the

surveillance procedures for these

products should allow the Exchange to

detect and deter potential manipulation

involving currency warrants and

currency index warrants.

Second, with respect to index

warrants, the Commission notes that

warrants may only be established upon

indexes the Commission has previously

determined to be broad-based in the

context of index options or warrant

trading. As part of its review of a

proposal to list an index derivative

product, the Commission must find that

the trading of index options or warrants

will serve to protect investors, promote

the public interest, and contribute to the

maintenance of fair and orderly markets.

Accordingly, the Commission does not

believe that the issuance of index

warrants upon previously approved

broad based stock index options or

warrants will adversely impact the

underlying component securities. In

addition, because index warrants are

issued by various individual issuers

who set their own terms, it is likely that

expirations among similar index

products will be varied, thereby

reducing the likelihood that unwinding

hedge activities would adversely affect

the underlying cash market. Finally, as

discussed above, the Commission

believes the Amex’s enhanced

surveillance procedures applicable to

stock index warrants are adequate to

surveil for manipulation and other

abuses involving the warrant market,

component securities and issuer hedge

unwinding transactions.

Third, the Exchange has proposed

margin levels for stock index and

currency warrants equivalent to those in

place for stock index and currency

options. The Commission believes these

requirements will provide adequate

customer margin levels sufficient to

account for the potential volatility of

these products. In addition, options

margin treatment is appropriate given

the options-like market risk posed by

warrants. The Commission notes that

the customer spread margin treatment

applicable to warrants is subject to a one

year pilot program. This will allow the

Exchange to analyze the pricing

relationships between listed options and

warrants on the same index in order to

determine whether to revise or approve

on a permanent basis the proposed

spread margin rules.40

Fourth, the Amex has established

reasonable position and exercise limits

for stock index warrants, which will

serve to minimize potential

manipulation and other market impact

concerns.41 Contrary to the views

expressed in the Comment Letter, the

Commission believes that in the absence

of trading experience with domestic

index warrants, it would be imprudent

to establish position limits for positions

greater than those currently applicable

to domestic stock index options on the

same index.42

V. Conclusion

The Commission believes that the

adoption of these uniform listing and

trading standards covering index,

currency and currency index warrants

will provide an appropriate regulatory

framework for these products. These

standards will also benefit the Exchange

by providing them with greater

flexibility in structuring warrant

issuances and a more expedient process

for listing warrants without further

Commission review pursuant to Section

19(b) of the Act. As noted above,

additional Commission review of

specific warrant issuances will generally

only be required for warrants overlying

any non-approved broad-based index or

a non-approved currency or currency

index. If Commission review of a

particular warrant issuance is required,

the Commission expects that, to the

extent that the warrant issuance

complies with the uniform criteria

adopted herein, its review should

generally be limited to issues

concerning the newly proposed index.

This should help ensure that such

additional Commission review could be

completed in a prompt manner without

causing any unnecessary delay in listing

new warrant products.

The Commission finds good cause for

approving Amendments No. 1, 2, 3, 4

and 5 to the proposed rule change prior

to the thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register for the following

reasons. As discussed below, the

changes are either (1) minor and

technical in nature; (2) responsive to the

Comment Letter; (3) designed to

conform to warrant proposals from other
Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices 46643

43The Commission notes that Amendment No. 4

removes this transaction reporting requirement

which will be incorporated into the Exchange’s

surveillance procedures.

44Amendment No. 5 subsequently changes the

language of this provision to require a.m. settlement

be used during the two business days prior to

valuation date.

markets; or (4) modifications to

Exchange surveillance procedures.

Accordingly, the amendments do not

raise new significant regulatory issues

or are responsive to prior comments. In

order to enable the Exchange to list new

index, currency or currency index

warrants as soon as possible, the

Commission believes it is necessary and

appropriate to approve the amendments

on an accelerated basis.

Amendment No. 1 makes several

changes to the filing which are designed

to bring it into conformity with the

other options exchanges. It also revises

Section 106 of the Company Guide,

Currency and Index Warrants, in several

respects to provide uniform issuer

listing standards. The first two changes

permit the use of p.m. settlement for

domestic index warrants (except during

the last 48 hours preceding valuation

date) and provide an alternative issuer

listing qualification criteria (as

discussed above under Issuer Listing

Standards and Product Design). The

Commission notes that these changes

were made in response to comments

received from the Seward & Kissell

Letter and further believes these

changes provide added flexibility to

issuers without compromising investor

protection concerns.

Amendment No. 1 also revises

Section 106 in two other respects: by

limiting the number of foreign securities

that may comprise an underlying stock

index and by adding a provision

requiring an issuer to notify the listing

Exchange of early exercises of domestic

index warrants. Taken together, the

Commission believes these changes

further strengthen the issuer listing

standards and the Exchange’s

surveillance procedures to the benefit of

warrant investors.

Amendment No. 1 also revises Rule

462 to provide that the proposed spread

and straddle margin treatment for stock

index warrants will be effected as part

of a one year pilot program, and to

provide that escrow receipts will be

accepted to cover short positions in

stock index warrants. The Commission

notes that these changes conform the

margin treatment afforded options and

warrants and provide a basis for

evaluating pricing correlations between

warrants and options overlying the same

index, currency or currency index.

Finally, Amendment No. 1 provides

that the Exchange will distribute an

information circular to its members

upon new warrant listings and that it

will permit member firms to accept an

IA’s representation concerning the

options eligibility status of its

customers, as described above. The

Commission notes that both of these

practices are consistent with the

treatment of options and, therefore, raise

no new or unique regulatory issues.

Accordingly for the reasons discussed

above relating to each proposed revision

of the Amendment, the Commission

believes it is appropriate to approve

amendment No. 1 to the Exchange’s

proposal on an accelerated basis.

Amendment No. 2 primarily

addresses surveillance related matters.

In particular, it provides that issuers

must report all hedge unwinding

transactions related to the early exercise

of domestic index warrants to the listing

exchange by the business day following

trade date (‘‘T+1’’).43 Also, the

Amendment requires issuers to notify

the listing exchange of any early

exercises of index warrants by 4:30 p.m.

(New York time) on settlement date for

the warrants. Amendment No. 2 also

makes minor changes to Rule 462 to

clarify which currencies are subject to a

four percent ‘‘add-on’’ for margin

purposes. The Commission believes

these changes to the Amex’s

surveillance procedures strengthen the

Exchange’s monitoring of index

warrants. Furthermore, the Commission

believes this change to Rule 462 is

minor and that it does not raise any new

or unique regulatory issues.

Accordingly, the Commission believes it

is appropriate to approve Amendment

No. 2 on an accelerated basis.

Amendment No. 3 to the proposal

clarifies several issues relating to a.m.

settlement, currency index warrant

margin, previously issued warrants and

position reporting for currency

warrants. First, the Amendment clarifies

in Amex Rule 106(e) that a.m.

settlement will be used during the 48

hour period prior to expiration of index

warrants. The Commission notes that

this change simply codifies a provision

the Amex previously agreed to in

Amendment No. 2.44 Second, the

Amendment clarifies that the applicable

margin level for currency index

warrants will be a percentage as

specified by the exchange and approved

by the Commission. The Commission

notes that this revision is consistent

with the treatment afforded currency

index options, where margin levels are

established on a case by case basis.

Third, the Amendment clarifies that

warrants issued prior to the approval of

these uniform listing and trading

guidelines will continue to be subject to

the rules applicable to them at the time

of their listing. The Commission

believes this ‘‘grandfather clause’’

ensures that the rules applicable to

previously issued warrants will not

change prior to their expiration, and

therefore, that the establishment of

uniform rules will have little impact on

their pricing. Finally, the Amendment

establishes that currency and currency

index warrants will be subject to the

same reporting levels as stock index

warrants. The Commission notes that

this revision helps to provide

uniformity in the regulatory treatment of

warrants. Furthermore, because

currency and currency index warrants

are not subject to position and exercise

limits, the Commission believes that

requiring investors to report to the

Exchange when their holdings exceed

specified levels should aid the Exchange

in its monitoring for potential trading

abuses involving currency and currency

index warrants. Accordingly, the

Commission believes it is appropriate to

approve Amendment No. 3 on an

accelerated basis.

Amendment No. 4 deletes a

transaction reporting requirement which

will be revised and incorporated into

the Exchange’s surveillance procedures

and also makes other minor changes. As

such, the Commission does not believe

the Amendment raises any new or

unique regulatory issues. Accordingly,

the Commission believes it is

appropriate to approve Amendment No.

4 on an accelerated basis.

Amendment No. 5 clarifies the

settlement procedures for index

warrants which are exercised prior to

expiration. Specifically, the

Amendment clarifies that a.m.

settlement will be required on valuation

date as well as during the last two

business days prior to an index

warrant’s valuation date. As discussed

above, the Commission believes that the

use of a.m. settlement during this period

will help to ameliorate any potential

price effects associated with expirations

of derivative index products.

Accordingly, the Commission believes it

is appropriate to approve Amendment

No. 5 on an accelerated basis. Therefore,

the Commission believes it is consistent

with Sections 6(b)(5) and 19(b)(2) of the

Act to approve Amendments No. 1, 2, 3,

4 and 5 to the Amex’s proposal on an

accelerated basis.

VI. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendments No.

1, 2, 3, 4 and 5. Persons making written

submissions should file six copies
46644 Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Notices

45 15 U.S.C. § 78s(b)(2) (1988).

46 17 CFR 200.30–3(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).

2 17 CFR 240.19b-4 (1994).

3Securities Exchange Act Release No. 35178 (Dec.

29, 1994), 60 FR 2409.

4See Letter from Paul M. Gottlieb, Seward &

Kissel, to Jonathan G. Katz, Secretary, Commission,

dated January 10, 1995 (‘‘Comment Letter’’ or

‘‘Seward & Kissel Letter’’).

5Letter from Janet Angstadt, Schiff Hardin &

Waite, to Michael Walinskas, SEC, dated March 2,

1995.

6Letter from Timothy Thompson, CBOE, to

Michael Walinskas, SEC, dated May 8, 1995.

7Letter from James R. McDaniel, Schiff Hardin &

Waite, to Michael Walinskas, SEC, dated June 23,

1995.

8Letter from Janet Angstadt, Schiff Hardin &

Waite, to Michael Walinskas, SEC, dated August 4,

1995.

9Letter from Janet Angstadt, Schiff Hardin &

Waite, to Michael Walinskas, SEC, dated August 18,

1995.

10The proposed rules would apply to both

American-style warrants (which may be exercised

at any time prior to expiration) and European-style

warrants (which may be exercised only during a

specified period before expiration).

11See infra note 47.

12For example, if an investor held 100,000

warrants based upon the Standard & Poor’s 500

Index offered originally at $20 per warrant, the size

of this position for the purpose of calculating

position limits would be 200,000.

13Proposed Rule 30.35(d) makes Rule 4.14

(Liquidation of Positions) applicable to index

warrants.

14See Amendment No. 2. In the original filing,

the CBOE proposed establishing a reportable limit

for stock index warrants at 20,000 warrants.

Amendment No. 2 extended the reporting

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. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to the file number in the caption

above and should be submitted by

September 28, 1995.

It therefore is ordered, pursuant to

Section 19(b)(2) of the Act,45 that the

proposed rule change (SR–Amex–94–

38) is approved, as amended, with the

portion of the rule change relating to

spread margin treatment being approved

on a one year pilot program basis ending

August 29, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.46

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95– 22107 Filed 9–6–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36169; File No. SR–CBOE–

94–34]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Approving Proposed Rule

and Notice of Filing and Order

Granting Accelerated Approval of

Amendments No. 1, 2, 3, 4 and 5 to

Proposed Rule Change Relating to the

Establishment of Uniform Listing and

Trading Guidelines for Stock Index,

Currency and Currency Index Warrants

August 29, 1995.

I. Introduction

On September 29, 1994, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Section 19(b) of the Securities Exchange

Act of 1934 (‘‘Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

establish uniform rules for the listing

and trading of broad-based stock index

(‘‘stock index’’ or ‘‘index’’), currency

(‘‘currency’’) and currency index

(‘‘currency index’’) warrants

(collectively ‘‘warrants’’). Notice of the

proposed rule change appeared in the

Federal Register on January 9, 1995.3

One comment letter was received in

response to the proposal.4

The Exchange subsequently filed five

Amendments to the proposal.

Amendment No. 1 (‘‘Amendment No.

1’’) brought several of CBOE’s proposed

rules and policies into conformity with

those previously filed by other markets.5

Amendment No. 2 (‘‘Amendment No.

2’’) imposes a reporting requirement for

positions in currency and currency

index warrants.6 Amendment No. 3

(‘‘Amendment No. 3’’) addresses issues

relating to settlement methodology,

surveillance of issuer hedge

transactions, early exercise notification

and reporting requirements for index

warrants.7 Amendment No. 4

(‘‘Amendment No. 4’’) addresses

surveillance issues related to the trading

of index warrants.8 Amendment No. 5

clarifies the settlement procedures for

index warrant which are exercised at or

prior to expiration.9 This order approves

the proposal, as amended.

II. Description of the Proposal

The CBOE proposes to establish

uniform rules for the listing and trading

of stock index, currency and currency

index warrants.10 This filing

incorporates the results of numerous

communications with the Commission

staff and other exchanges, including

comments contained in a letter from

Sharon Lawson to Joanne Moffic-Silver

dated January 28, 1993 (‘‘Lawson

letter’’). This filing also makes certain

changes in the listing criteria for stock

index and currency warrants and makes

clear that certain rules applicable to

currency warrants would apply equally

to currency index warrants.

Exercise and Position Limits

The Exchange is proposing position

limits for stock index warrants that, in

general, are approximately 75%, in

terms of underlying dollar value, of the

current position limits for index

options. Accordingly, proposed Rule

30.35(a) provides that position limits for

stock index warrants on the same index

with original issue prices of ten dollars

or less will be fifteen million warrants

covering all such issues.11 In addition,

with respect to warrants on the Russell

2000 Index, the position limit will be

twelve and one half million warrants

covering all such issues, provided the

original issue prices of the warrants are

not greater than ten dollars. The rule

provides that warrants with an original

issue price of greater than ten dollars

will be weighted more heavily than

warrants with an original issue price of

ten dollars or less in calculating

position limits.12

Proposed Rule 30.35(d) also gives the

Exchange the authority to require the

liquidation of a position in stock index

warrants that is in excess of the position

limits set forth in the rule.13

Proposed Rule 30.35(b) also

establishes exercise limits on stock

index warrants which are analogous to

those found in stock index options. The

rule prohibits holders from exercising,

within any five consecutive business

days, long positions in warrants in

excess of the base position limit

established in Rule 30.35(a).

In order to facilitate its review of

compliance with position and exercise

limits, proposed rule 30.35(d)

establishes reporting requirements for

large warrant positions. Under the terms

of the Rule, members will be required to

file a report with the Exchange

whenever any account in which the

member has an interest has established

an aggregate position of 100,000

warrants overlying the same index,

currency or currency index.14 For