[Federal Register Volume 66, Number 121 (Friday, June 22, 2001)]
[Notices]
[Pages 33590-33593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15680]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44435; File No. SR-CBOE-2001-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Inc., Relating to the Goldman, Sachs Technology Composite 
Index (``GSTI'') and the GSTI Sub-Indexes

June 15, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 14, 2001, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
The proposed rule change has been filed by the CBOE as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) of the Act.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE currently lists and trades European-style, cash-settled 
options on the Goldman Sachs Technology Composite Index (``GSTI 
Composite Index'' or ``Index'') \4\ and on six GSTI Sub-indexes (``Sub-
Indexes'').\5\ Pursuant to determinations by Goldman, Sachs & Co. 
(``Goldman Sachs''), the CBOE proposes to: (1) Revise the guidelines 
governing the selection of stocks in the GSTI Composite Index to allow 
Goldman Sachs to exclude from the GSTI Composite Index companies that 
Goldman Sachs believes are classified inappropriately as technology 
companies despite their Standard Industrial Classification (``SIC'')/
Russell code; (2) revise the weighting criteria for the six Sub-Indexes 
so that all components will be subject to a maximum weight cap of 8.5% 
of the total capitalization of any Sub-Index; and (3) change the dates 
of the semi-annual rebalancing for the GSTI Composite Index and the six 
Sub-Indexes from the third Friday in January and July of each year to 
the third Friday in December and June of each year. The CBOE seeks 
continued approval to list and trade options on the GSTI Composite 
Index and on the Sub-Indexes after the proposed revisions become 
effective after the close of trading on June 15, 2001. In addition, the 
CBOE proposes to amend CBOE rule 24.14, ``Disclaimers,'' to include a 
specific reference to Goldman Sachs as entitled to the benefit of the 
disclaimer of liability with respect to the GSTI Composite Index and 
the six Sub-Indexes.
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    \4\ See Securities Exchange Act Release No. 37693 (September 17, 
1996), 61 FR 50362 (September 25, 1996) (order approving File No. 
SR-CBOE-96-43).
    \5\ See Securities Exchange Act Release No. 37696 (September 17, 
1996), 61 FR 50358 (September 25, 1996) (order approving File No. 
SR-CBOE-96-44) (``Sub-Index Order''). The six Sub-Indexes include: 
the GSTI Hardware Index, the GSTI Internet Index, the GSTI 
Semiconductor Index, the GSTI Software Index, the GSTI Services 
Index, and the GSTI Multimedia Networking Index.
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    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE, and at the Commission.

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

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

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

1. Purpose
    The CBOE currently lists and trades European-style, cash-settled 
options on

[[Page 33591]]

the GSTI Composite Index and on the six GSTI Sub-Indexes. The GSTI 
Composite Index is a broad-based, modified capitalization-weighted 
index of the universe of technology-related company stocks meeting 
certain objective criteria. The narrow-based Sub-Indexes are also 
calculated using a modified capitalization-weighting methodology. 
Components for each of the six GSTI Sub-Indexes are chosen from the 
GSTI Composite Index.
    Goldman Sachs has informed the CBOE that as of June 15, 2001 (after 
the close of trading), Goldman Sachs will change certain guidelines 
governing the selection of stocks included in the GSTI Composite Index 
to refine the definition of ``technology-related'' companies. Under the 
proposal, the Goldman Sachs Technology Index Committee (``Committee'') 
will have the discretion to exclude companies that, based on its 
knowledge of the technology sector, the Committee believes are 
inappropriately classified as technology companies despite their SIC/
Russell code.\6\
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    \6\ In 1999, a CBOE proposal in which Goldman Sachs added a 
supplemental sector/industry classification method used for 
identifying the universe of technology stocks eligible for inclusion 
in the Index became effective on filing. See Securities Exchange Act 
Release No. 41882 (Sept. 17, 1999), 64 FR 51818 (Sept. 24, 1999) 
(notice of filing and immediate effectiveness of File No. SR-CBOE-
99-54) (``1999 Notice''). In that proposal; Goldman Sachs refined 
the definition of ``technology-related'' to include Internet-related 
companies.
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    Currently, the components of the GSTI Composite Index are drawn 
from a universe of companies that fall within a set of predetermined 
Russell or SIC code classifications. Notwithstanding the Russell and 
SIC classifications, Goldman Sachs may believe that some companies are 
not in actuality technology companies and thus are not proper 
components for inclusion in the GSTI Composite Index. In these limited 
instances, Goldman Sachs seeks the flexibility to remove these 
components from the Index. The Committee, which will make the decision 
to exclude a component, will meet before every scheduled rebalancing 
date to determine whether a GSTI Composite Index constituent meets the 
industry membership criterion. In making the determination, the 
Committee will examine a component company's primary source of revenue 
or, alternatively, its emerging business activity and strategy. If the 
Committee determines that a company's primary source of revenue is from 
sources that are not technology-related, the Committee may determine 
that the company should not be classified as a technology company and, 
therefore, the Committee will remove the component from the GSTI 
Composite Index. Similarly, the Committee may determine to remove a 
company from the GTSI Composite Index if it determines that the 
company's emerging business strategy is not technology-related.\7\
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    \7\ Goldman Sachs views the decision by the Committee regarding 
changes to the Index to be material non-public information. In this 
respect, a Chinese wall has been erected around the personnel at 
Goldman Sachs who have access to information concerning changes and 
adjustments to the Index. Further, upon the completion of any 
addition or deletion of a security from the Index, Goldman will 
review trading in the subject securities for any irregularities. 
Goldman Sachs' revised Chinese wall procedures, which have been 
submitted to CBOE, are closely modeled on existing procedures for 
other Goldman Sachs indexes underlying standardized options. The 
CBOE notes that in the Sub-Index Order the Commission found that 
Goldman Sachs' Chinese wall procedures ``adequately serve to 
minimize the susceptibility to manipulation of the Sub-Indexes and 
the securities in the Sub-Indexes.'' See Sub-Index Order, supra note 
5. Further, in the 1999 Notice, the Exchange represented that 
``Goldman Sachs will not have any informational advantage concerning 
modifications to the composition of the GSTI composite Index and the 
Sub-Indexes due to Goldman Sachs' role in maintaining such indexes, 
including the classification of stocks.'' See 1999 Notice, supra 
note 6. Upon reviewing Goldman Sachs' revised Chinese wall 
procedures, the CBOE again represents that Goldman Sachs will not 
have any informational advantage concerning modifications to the 
composition of the GSTI Composite Index and the Sub-Indexes due to 
Goldman Sachs' role in maintaining the indexes, including the 
classification of the stocks.
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    Goldman Sachs believes that these changes will prevent the 
inclusion in the GSTI Composite Index of stocks that are not commonly 
considered to be part of the universe of technology-related companies, 
even though they may have the proper SIC or Russell code. Goldman Sachs 
expects that the GSTI Composite Index, as a result of the proposed 
change, will more accurately represent the technology sector and will 
be better suited to track future changes in the industry.\8\
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    \8\ See 1999 Notice, supra note 6.
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    Goldman Sachs also intends to revise the weighting criteria for the 
Sub-Indexes, effective June 15, 2001 (after the close of trading). 
Currently, component weights are capped in each of the Sub-Indexes so 
that no component accounts for more than 12.5% of the total 
capitalization of any Sub-Index. Goldman Sachs proposes to revise the 
weighting criteria for the Sub-Indexes so that all components will be 
subject to a maximum weight cap of 8.5%. By reducing the maximum weight 
cap, Goldman Sachs notes that the revised weighting methodology will 
require that each of the Sub-Indexes be comprised of at least 12 
components.\9\ Goldman Sachs expects this revised methodology to 
promote portfolio weight diversification, thereby further limiting the 
domination of the Sub-Indexes by a few large stocks.
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    \9\ A proposal that similarly reduced the maximum weighting 
criteria applicable to the Sub-Indexes became effective on filing 
with the Commission. See 1999 Notice, supra note 6.
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    Goldman Sachs also proposes to change the dates of the semi-annual 
rebalancing for the GSTI Composite Index and the six Sub-Indexes from 
the third Friday in January and July of each year to the third Friday 
in December and June of each year.
    With the exception of the foregoing changes, the Exchange proposes 
no other changes to the GSTI Composite Index and the six Sub-Indexes.
    The CBOE will notify market participants of Goldman Sach's decision 
to alter the guidelines for inclusion in the GSTI Composite Index and 
the revised calculation methodology in the Sub-Indexes through a notice 
to members and member firms in advance of the changeover.
    On the Monday following the expiration Friday when Goldman Sachs 
implements these changes, the CBOE will bring up new series of options 
overlying the GSTI Composite Index and the six Sub-Indexes under the 
current ticker symbols. The outstanding series will be traded under new 
ticker symbols and will continue to settle based on the present 
guidelines and calculation method. No new series will be added to the 
``old'' index classes and when the existing series expire, the ``old'' 
indexes will cease to trade.\10\ The Exchange believes this action will 
be adequate to prevent any problems because, as noted above, the 
Exchange will continue to list outstanding series under a different 
symbol that will settle under the old methodology; thus, there will be 
no change to outstanding contracts. The Exchange previously has 
employed the same system for introducing new series after a change in 
the calculation of the index value or settlement value of an index.\11\
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    \10\ On June 18, 2001, the ``old'' series will be fixed and no 
new series of the ``old'' index will be introduced. As of June 13, 
2001, there was open interest in the September and December 2001 
series for the GSTI Composite Index and/or five of the Sub-Indexes. 
There are no LEAPS trading on any of the ``old'' indexes.
    \11\ See Securities Exchange Act Release Nos. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (order approving File No. SR-
CBOE-92-09) (continued listing and trading of SPX options after a 
change to a.m. settlement); 37089 (April 9, 1996), 61 FR 16660 
(April 16, 1998) (order approving File No. SR-CBOE-96-12) (change in 
the method of determining the settlement value for NDX options); and 
40642 (November 5, 1998), 63 FR 63759 (November 16, 1998) (order 
approving File No. SR-CBOE-98-43) (continued listing and trading of 
NDX options after a change in the weighting methodology of the 
Nasdaq-100 Index).

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[[Page 33592]]

    Combinations of options based on the ``old'' GSTI Composite Index 
and the ``new'' GSTI Composite Index will be aggregated and cannot 
exceed 100,000 contracts. In addition, options based on an ``old'' Sub-
Index will be aggregated with options based on the corresponding 
``new'' Sub-Index and cannot exceed 31,500 contracts.\12\
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    \12\ In its notice to members regarding the revised guidelines 
for inclusion in the GSTI Composite Index and the revised 
calculation methodology for the Sub-Indexes, the CBOE will advise 
members and member organizations that positions in the ``old'' and 
``new'' GSTI Composite Index and in the corresponding ``old'' and 
``new'' Sub-Indexes will be aggregated for the purpose of 
calculating position and exercise limits. Telephone conversation 
between Stephen M. Youhn, Attorney, CBOE, and Yvonne Fraticelli, 
Special Counsel, Office of Market Supervision, Division of Market 
Regulation, Commission, on June 13, 2001 (``June 13 Conversation'').
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    Finally, the Exchange proposes to amend CBOE Rule 24.14 to include 
specific reference to Goldman Sachs as entitled to the benefit of the 
disclaimer of liability with respect to the GSTI Composite Index and 
the Sub-Indexes.
2. Statutory Basis
    The CBOE believes that the proposed changes to the GSTI Composite 
Index will help to ensure that the Index continues to provide an 
accurate representation of the technology sector. Further, by reducing 
the maximum allowable weighting of any single component of the Sub-
Indexes from 12.5% to 8.5% of the total capitalization of the Sub-
Index, the CBOE believes that Goldman Sachs is providing for better 
portfolio weight diversification. For these reasons, the Exchange 
believes that the proposed rule change is consistent with and furthers 
the objectives of section 6(b)(5) of the Act, in that it is designed to 
perfect the mechanism of a free and open market and to protect 
investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act.

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

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

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

    The CBOE has filed the proposed rule change as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\13\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\14\ Because the 
foregoing proposed rule change: (1) Does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) the CBOE provided the 
Commission with written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date, the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \15\ permits the Commission to designate 
a shorter time if such action is consistent with the protection of 
investors and the public interest. The CBOE has requested that the 
Commission designate such shorter time period so that the Exchange may 
continue to list and trade options based on the GSTI Composite and Sub-
Indexes without interruption following the implementation of the new 
guidelines and weighting methodology after the close of trading on June 
15, 2001.
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
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    The CBOE believes that the proposed changes do not present any 
unique or novel questions. In addition, the Exchange believes that the 
proposed revisions will strengthen the GSTI Composite and Sub-Indexes 
by providing for the inclusion of components that better represent the 
current state of the technology sector and will be better suited to 
track future changes in the industry. The Exchange also believes that 
the revisions to the weighting criteria will promote portfolio weight 
diversification, thereby further limiting domination of the Sub-Indexes 
by a few large stocks. The CBOE also notes that the Commission 
previously approved the continued listing of options on the GSTI 
Composite Index after a similar change in its weighting 
methodology.\16\
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    \16\ See Securities Exchange Act Release No. 38852 (July 18, 
1997), 62 FR 40128 (July 25, 1997) (order approving File No. SR-
CBOE-97-30).
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative after the close of trading on June 15, 2001, for the 
following reasons.\17\ As noted above, the proposal will permit Goldman 
Sachs to remove or exclude a component company from the GSTI Composite 
Index regardless of the company's SIC/Russell classification if Goldman 
Sachs determines that the company's primary sources of revenue are not 
technology-related or if the company's emerging business strategy is 
not technology-related. The Commission believes that this limited 
flexibility with regard to the selection of Index components may help 
Goldman Sachs to ensure that the GSTI Composite Index accurately 
reflects the market for technology-related companies.
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    \17\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposal's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission believes that the change in the component weighting 
guidelines for the Sub-Indexes will ensure greater weight 
diversification among the component stocks of the Sub-Indexes and will 
eliminate concentrations in weighting that might cause the Sub-Indexes 
to be dominated by a few highly-capitalized stocks.
    The Commission believes that the proposal to change the dates of 
the semi-annual rebalancing for the GSTI Composite Index and the six 
Sub-Indexes from the third Friday in January and July of each year to 
the third Friday in December and June of each year, and the proposal to 
amend CBOE Rule 24.14 to include a specific reference to Goldman Sachs 
as entitled to the benefit of the disclaimer of liability with respect 
to the GSTI Composite Index and the Sub-Indexes, do not raise new 
regulatory issues.
    The Commission believes that the proposed changes to the GSTI 
Composite Index and the Sub-Indexes are reasonable and that investors 
should be permitted to trade options on he revised GSTI Composite Index 
and the Sub-Indexes on an uninterrupted basis as the old GSTI Composite 
Indexes and the Sub-Indexes are phased out. The Commission notes that 
the CBOE will advise members and member organizations of the changes in 
the guidelines for inclusion in the GSTI Composite Index and in the 
revised calculation methodology for the Sub-Indexes through a notice to 
members and member firms in advance of the changeover. The notice to 
members also will note that positions in the ``old'' and ``new'' GSTI 
Composite Index and the corresponding ``old'' and ``new'' Sub-Indexes 
will be aggregated for purposes

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of calculating position exercise limits.\18\ The different symbols for 
the old and revised indexes also should help to avoid confusion.
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    \18\ See June 13 Conversation, supra note 12.
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    For all of the reasons set forth above, the Commission finds that 
it is consistent with the protection of investors and the public 
interest for the proposal to become operative on June 15, 2001. At any 
time within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it is consistent 
with the Act. Persons making written submissions should file six copies 
thereof with the Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW, Washington, DC 20549., 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 at the Commission's Public 
Reference Section, 450 Fifth Street, NW, Washington, DC. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-2001-34 and should be submitted by July 13, 2001.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-15680 Filed 6-21-01; 8:45 am]
BILLING CODE 8010-01-M