Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7607

1 15 U.S.C. 78f(b)(5) (1988). 2 17 CFR 200.30–3(a)(12) (1994).

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

2 17 CFR 24.19b–4 (1992).

3 In Amendment No. 1, the Exchange proposed to

treat the Asian Markets Index as a narrow-based

index for purposes of margin, position limits, and

exercise limits. Pursuant to CBOE Rule 24.4A, the

position limits for the Index will initially be set at

10,500 contracts. See Letter from Eileen Smith,

Director, Product Development, Research

Department, CBOE, to Brad Ritter, Senior Counsel,

Office of Market Supervision (‘‘OMS’’), Division of

Market Regulation (‘‘Division’’), Commission, dated

August 18, 1994.

4See Securities Exchange Act Release No. 34552

(August 19, 1994), 59 FR 44203 (August 26, 1994).

5 In Amendment No. 2, the Exchange proposed:

(1) to reduce the number of components in the

Index from 25 to 23; and (2) several amendments,

as discussed more fully herein, regarding the

maintenance criteria for the Index. See Letter from

Joseph Levin, Vice President, Research Department,

CBOE, to Brad Ritter, Senior Counsel, OMS,

Division, Commission, dated January 26, 1995

(‘‘Amendment No. 2’’).

delayed, halted or suspended.’’

(Emphasis in original). The Exchange

represents that by purporting to restrict

exercises of these index options except

on the last business day prior to

expiration, RG91–11 conflicts with Rule

4.16, which provides that exercise

restrictions on index options are only

allowed until ‘‘the opening of business

on the last trading day before the

expiration date.’’ (Emphasis added).

The Exchange believes that this

terminology creates a problem in the

case of A.M.-settled index options. The

‘‘last business day prior to expiration’’

is, for both A.M.-settled and P.M.-settled

index options, the Friday before

expiration. For P.M.-settled options, that

Friday is also the ‘‘last trading day

before the expiration date.’’ Pursuant to

CBOE Rule 24.9(a)(4), however, the ‘‘last

trading day’’ before the expiration date

of A.M.-settled index options is ‘‘the

business day preceding the last day of

trading in the underlying securities

prior to expiration’’—i.e., Thursday

before expiration. (Emphasis added).

The present form of Rule 4.16 therefore

would prohibit restrictions on the

exercise of A.M.-settled index options

on expiration Thursday, as well as

expiration Friday, even when trading in

such options ‘‘had been delayed, halted

or suspended.’’ This, the Exchange

believes, is contrary to the policy

articulated in Regulatory Circular RG–

11, which would only prohibit

restrictions on exercise of any index

option on expiration Friday.

To eliminate this inconsistency, and

to implement the policy of Regulatory

Circular RG91–11 that index option

exercise restrictions may be in effect

until the opening of business on

expiration Friday (i.e., the ‘‘last business

day’’ before expiration), the proposed

rule change would amend Rule 4.16 to

substitute the words ‘‘business day’’ for

the words ‘‘trading day.’’

The CBOE represents that the

proposed rule change is consistent with

Section 6(b) of the Act in general and

furthers the objectives of Section

6(b)(5) 1 in particular in that it is

designed to prevent fraudulent and

manipulative acts and practices and to

promote just and equitable principles of

trade.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

and burden on competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing rule change

constitutes a stated policy, practice, or

interpretation with respect to the

meaning, administration, or

enforcement of an existing rule of the

Exchange, it is has become effective

pursuant to Section 19(b)(3)(A) of the

Act and subparagraph (e)(1) of Rule

19b–4 thereunder. At any time within

60 days of the filing of the 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.

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 at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the CBOE. All submissions

should refer to File No.SR–CBOE–95–03

and should be submitted by March 1,

1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.2

[FR Doc. 95–3034 Filed 2–7–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35303; International Series

Release No. 778; File No. SR–CBOE–94–

19]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change

and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 2 to the Proposed

Rule Change by the Chicago Board

Options Exchange, Inc., Relating to the

Listing of Options and Long-Term

Options on the CBOE Emerging

Markets Index and Long-Term Options

on a Reduced-Value CBOE Emerging

Markets Index

January 31, 1995.

I. Introduction

On June 30, 1994, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission

(‘‘Commission’’), pursuant to Section

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

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

provide for the listing and trading of

index options on the CBOE Emerging

Markets Index (‘‘Emerging Markets

Index’’ or ‘‘Index’’). The Exchange filed

Amendment No. 1 to the proposed rule

change on August 18, 1994.3 Notice of

the proposal, as amended, appeared in

the Federal Register on August 26,

1994.4 The Exchange subsequently filed

Amendment No. 2 to the proposed rule

change on January 26, 1995.5 No

comment letters were received on the

proposed rule change. This order

approves the Exchange’s proposal, as

amended.

II. Description of Proposal

A. General

The CBOE proposes to list for trading

options on the Emerging Markets Index,

a new securities index developed by the
7608 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

6 Id.

7The components of the Index are: the Latin

America Discovery Fund; Argentina Fund; Brazilian

Equity Fund; Brazil Fund; Chile Fund; Emerging

Mexico Fund; Mexico Equity and Income Fund;

Mexico Fund; Asia Pacific Fund; Asia Tigers Fund

Inc.; China Fund Inc.; Greater China Fund Inc.;

Jardine Fleming China Region Fund Inc.; Morgan

Stanley India Fund; Jakarta Growth Fund Inc.;

Korea Fund Inc.; Korea Equity Fund Inc.; Malaysia

Fund Inc.; First Philippine Fund Inc.; Singapore

Fund Inc.; ROC Taiwan Fund; Taiwan Fund Inc.;

and Thai Fund Inc.

8LEAPS is an acronym for Long-Term Equity

Anticipation Securities. LEAPS are long-term index

option series that expire from 12 to 36 months from

their date of issuance. See CBOE Rule 24.9(b)(1).

The Commission notes that the Exchange has

submitted a proposed rule change to allow the

CBOE to list Index LEAPS that expire up to 60

months from their date of issuance and to allow up

to 10 expiration months to be outstanding at any

one time. See Securities Exchange Act Release No.

35278 (January 25, 1995).

9According to the CBOE, the Emerging Markets

Index represents a segment of the U.S. equity

market that is not currently represented in the

derivative markets and as such, the CBOE

concludes, should offer investors a low-cost means

of achieving diversification of their portfolios

toward or away from emerging Asian and Latin

American market securities. The CBOE believes the

Index will provide retail and institutional investors

with a means of benefiting from their forecasts of

the performance of emerging Asian and Latin

American market securities. The Exchange further

believes that options on the Index also can be

utilized by portfolio managers and investors as a

means of hedging the risks of investing in emerging

Asian and Latin American market securities either

directly or through mutual funds that invest

primarily in Asian and Latin American market

securities.

10See Amendment No. 2, supra note 5.

11 Id.

12For example, three of the 23 component funds

held shares of Coteminas based on these

semiannual reports. By aggregating the positions of

these three mutual funds, Coteminas accounted for

0.25% of the weight of the Index. See Letter from

Eileen Smith, Director, Product Development,

Research Department, CBOE, to Brad Ritter, Senior

Counsel, OMS, Division, Commission, dated August

16, 1994 (‘‘August 16 Letter’’).

13 Id.

14Additionally, the CBOE will be required to

ensure that each closed-end fund security

comprising the Index is a ‘‘reported security’’ as

defined in Rule 11Aa3–1 of the Act. See

Amendment No. 2, supra note 5.

15 If the CBOE determines to increase the number

of components to greater than 30 or to decrease the

number of components to less than 16, the

Exchange will be required to submit a rule filing

pursuant to Section 19(b) of the Act. Id.

16 Id. The CBOE’s options listing standards,

which are uniform among the options exchanges,

provide that a security underlying an option must,

among other things, meet the following

requirements; (1) the public float must be at least

7,000,000 shares; (2) there must be a minimum of

2,000 stockholders; (3) trading volume in the U.S.

must have been at least 2.4 million over the

CBOE. The Emerging Markets Index is

composed of the securities issued by 23

closed-end mutual funds 6 that are

traded on the New York Stock Exchange

(‘‘NYSE’’) and that invest in the stocks

of firms in emerging Asian (excluding

Japan) and Latin American economies.7

The CBOE also proposes to list either

long-term options on the full-value

Index or long-term options on a

reduced-value Index that will be

computed at one-tenth of the value of

the Emerging Markets Index (‘‘Emerging

Markets LEAPS’’ or ‘‘Index LEAPS’’).8

Emerging Markets LEAPS will trade

independent of and in addition to

regular Index options traded on the

Exchange,9 however, as discussed

below, for purposes of position and

exercise limits, positions in Index

LEAPS and regular Index options will

be aggregated.

B. Composition of the Index

The Index was designed by the

Exchange and is based on the securities

issued by 23 closed-end mutual funds

that invest in the stocks of firms in

emerging Asian (excluding Japan) and

Latin American economies. The shares

of each of the closed-end funds

contained in the Index trade in the U.S.

on the NYSE. The Index is priceweighted and will be calculated on a

real-time basis using last sale prices of

the shares of the closed-end funds

comprising the Index.

As of the close of trading on January

4, 1995, the Index was valued at 125.49.

Also as of that date the market

capitalizations of the individual closedend fund securities in the Index ranged

from a high of $824.31 million to a low

of $46.36 million, with the mean and

median being $224 million and $155

million, respectively. The total market

capitalization of the securities in the

Index on that date was $5.2 billion. The

price per share of the closed-end fund

securities comprising the Index on

January 4, 1995, ranged from a high of

$45.88 to a low of $8.63, with an

average price per share of $17.35.10

The average daily trading volume of

the shares of the closed-end funds

contained in the Index, for the period

from July 1, 1994, through December 31,

1994, ranged from a high of 284,048

shares per day to a low of 9,984 shares

per day. As of January 4, 1995, no single

closed-end fund security contained in

the Index accounted for more than

11.50% of the Index’s total value and

the percentage weighting of the five

largest issues in the Index accounted for

37.56% of the Index’s value. The

percentage weighting of the lowest

weighted securities issued by a closedend fund contained in the Index was

2.16% of the value of the Index and the

percentage weighting of the five

smallest closed-end fund securities

contained in the Index accounted for

12.53% of the Index’s value.11 Based on

the aggregate holdings of the mutual

funds represented in the Index, as

disclosed in the most recent semiannual

reports of the component closed-end

funds filed with the Commission prior

to August 16, 1994, the CBOE represents

that securities from no single country

accounted for more than 15.18%

(Mexico) nor less than 2.47% (China) of

the weight of the Index. Based on the

same semiannual reports, by aggregating

the holdings of the closed-end funds

comprising the Index, the CBOE

represents that no single security held

by one or more of the component

mutual funds accounted for more than

1.57% of the weight of the Index.12

Finally, more than 14 emerging Asian

and Latin American countries are

represented through the holdings of the

component funds comprising the

Index.13

C. Maintenance

The Index will be maintained by the

CBOE. The CBOE may change the

composition of the Index at any time,

subject to compliance with the

maintenance criteria discussed below,

to reflect the conditions in the emerging

Asian (excluding Japan) and Latin

American securities markets. If it

becomes necessary to replace the

securities issues by a closed-end fund

contained in the Index, the Exchange

represents that every effort will be made

to add only replacement securities

issued by closed-end mutual funds that

preserve the character of the Index and

that are listed on either the American

Stock Exchange (‘‘Amex’’) or the NYSE,

or that are Nasdaq National Market

(‘‘Nasdaq/NM’’) securities.14 In

considering securities of closed-end

mutual funds to be added to the Index,

the CBOE will take into account the

capitalization, liquidity, volatility, and

name recognition of the particular

closed-end funds and the securities

issued by those mutual funds. Further,

a closed-end fund represented in the

Index may be replaced in the event of

certain events, such as a change in the

investment objectives of the mutual

fund. The Exchange will most likely

maintain securities representing 23

closed-end funds in the Index.15 In

addition, in choosing securities issued

by closed-end funds as replacements for

or additions to the Index, the CBOE will

not make a composition change that

would result in less than 75% of the

weight of the Index or 75% of the

number of closed-end funds represented

in the Index satisfying the listing criteria

for standardized options trading set

forth in CBOE Rule 5.3, Interpretation

and Policy .01 (for mutual fund

securities that are not then the subject

of standardized options trading) 16 and
Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7609

preceding twelve months; and (4) the U.S. market

price must have been at least $7.50 for a majority

of the business days during the preceding three

calendar months. See CBOE Rule 5.3, Interpretation

and Policy .01.

17See Amendment No. 2, supra note 5. The

CBOE’s options maintenance standards, which are

uniform among the options exchanges, provide that

a security underlying an option must, among other

things, meet the following requirements: (1) the

public float must be at least 6,300,000 shares; (2)

there must be a minimum of 1,600 stockholders; (3)

trading volume in the U.S. must have been at least

1.8 million over the preceding twelve months; and

(4) the U.S. market price must have been at least

$5.00 for a majority of the business days during the

preceding six calendar months. See CBOE Rule 5.3,

Interpretation and Policy .01.

18See Amendment No. 2, supra note 5.

19 Id.

20See infra Section II.H.

21For purposes of dissemination of the Index

value, if the shares of a mutual fund included in

the Index have not opened for trading, the CBOE

will use the closing value of those shares on the

prior trading day when calculating the value of the

Index, until the shares of the mutual fund open for

trading.

22As noted above, the current primary market for

each of the closed-end fund securities comprising

the Index is the NYSE.

23A European-style option can be exercised only

during a specified period before the option expires.

24Telephone conversation between Eileen Smith,

Director, Product Development, Research

Department, CBOE, and Brad Ritter, Senior

Counsel, OMS, Division, Commission, on January

27, 1995.

25For a description of the strike price intervals for

reduced-value Index options and long-term Index

options, see infra, Section II.G.

CBOE Rule 5.4, Interpretation and

Policy .01 (for mutual fund securities

that are then the subject of standardized

options trading).17 Additionally, at least

twice each year the CBOE will review

the Index to ensure that not less than

75% of the weight of the Index and 75%

of the number of closed-end funds

represented in the Index continue to

satisfy the criteria for standardized

options trading set forth in CBOE Rule

5.3, Interpretation and Policy .01 (for

mutual fund securities that are not then

the subject of standardized options

trading) and CBOE Rule 5.4,

Interpretation and Policy .01 (for mutual

fund securities that are then the subject

of standardized options trading).

Moreover, at least twice each year,

based on the most recent Commission

filings by the closed-end funds

represented in the Index, the CBOE will

review the holdings of each of the

closed-end funds and will promptly

notify the Commission if it becomes

aware that: (1) Any security held by one

or more mutual funds represented in the

Index, in aggregate, accounts for more

than 5% of the weight of the Index; or

(2) securities from any one country held

by one or more mutual funds

represented in the Index, in aggregate,

account for more than 25% of the

weight of the Index.

Finally, the CBOE will promptly

notify the Commission staff at any time

that the CBOE determines that the

securities of a closed-end fund

contained in the Index account for more

than 15% of the weight of the Index if:

(1) The shares of the mutual fund do not

satisfy the listing eligibility

requirements in CBOE Rule 5.3,

Interpretation and Policy .01 (if the

mutual fund does not then have

standardized options trading on its

shares); or (2) the shares of the mutual

fund do not satisfy the maintenance

eligibility requirements in CBOE Rule

5.4, Interpretation and Policy .01 (if the

mutual fund has standardized options

trading on its shares).18

The CBOE will promptly notify the

Commission staff at any time that the

CBOE determines that either the Index

or the securities issued by the closedend funds comprising the Index fail to

satisfy any of the above maintenance

criteria. Further, in such an event, the

Exchange will not open for trading any

additional series of Index options or

Index LEAPS unless the Exchange

determines that such failure is not

significant, and the Commission staff

affirmative concurs in that

determination, or unless the

Commission specifically approves the

continued listing of that class of Index

options or Index LEAPS pursuant to a

proposal filed in accordance with

Section 19(b)(2) of the Act.19

D. Applicability of CBOE Rules

Regarding Index Options

Except as modified by this order, the

rules in Chapter XXIV of the CBOE

Rules will be applicable to Index

options and full-value and reducedvalue Index LEAPS. In accordance with

Chapter XXIV of CBOE’s rules, the

Index will be treated as a narrow-based

index for purposes of applicable

position and exercise limits, policies

regarding trading halts and suspensions,

and margin treatment.20

E. Calculation of the Index

The CBOE Emerging Markets Index is

a price-weighted index and reflects

changes in the prices of the closed-end

mutual fund securities comprising the

Index relative to the Index’s base date of

December 31, 1991. Specifically, the

Index value is calculated by adding the

prices of the mutual fund securities

comprising the Index and then dividing

this summation by a divisor that is

equal to the number of the closed-end

funds represented in the Index in order

to obtain an average price. To maintain

the continuity of the Index, the divisor

will be adjusted to reflect non-market

changes in the prices of the closed-end

fund securities comprising the Index as

well as changes in the composition of

the Index. Changes that may result in

divisor adjustments include, but are not

limited to, certain rights issuances.

The Index will be calculated

continuously and will be disseminated

to the Options Price Reporting

Authority (‘‘OPRA’’) every fifteen

seconds by the CBOE, based on the lastsale prices of the closed-end fund

securities comprising the Index.21

OPRA, in turn, will disseminate the

Index value to other financial vendors

such as Reuters, Telerate, and Quotron.

The Index value for purposes of

settling outstanding regular Index

options and full-value and reducedvalue Index LEAPS contracts upon

expiration will be calculated based

upon the regular way opening sale

prices for each of the closed-end fund

securities comprising the Index in their

primary market on the last trading day

prior to expiration.22 In the event that a

closed-end fund security traded as a

Nasdaq/NM security is added to the

Index, the first reported sale price for

those shares will be used for

determining a settlement value. Once

the shares of all of the mutual funds

represented in the Index have opened

for trading, the value of the Index will

be determined and that value will be

used as the final settlement value for

expiring Index options contracts,

including full-value and reduced-value

Index LEAPS. If any of the closed-end

fund securities contained in the Index

do not open for trading on the last

trading day before expiration, then the

prior trading day’s (i.e., normally

Thursday’s) last sale price will be used

in the Index value calculation. In this

regard, before deciding to use

Thursday’s closing value for a closedend fund security contained in the

Index for purposes of determining the

settlement value of the Index, the CBOE

will wait until the end of the trading

day on Expiration Friday (as defined

herein).

F. Contract Specifications

The proposed options on the Index

will be cash-settled, European-style

options.23 Standard options trading

hours (8:30 a.m. to 3:15 p.m.24 Central

Standard time) will apply to the

contracts. The Index multiplier will be

100. The strike price interval will be

$5.00 for full-value Index options with

a duration of one year or less to

expiration.25 In addition, pursuant to

CBOE Rule 24.9, there may be up to six

expiration months outstanding at any
7610 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

26See supra note 8.

27 Id.

28See CBOE Rule 24.9(b).

29Pursuant to CBOE Rule 24.11, the margin

requirements for the Index options will be: (1) for

short options positions, 100% of the current market

value of the options contract plus 20% of the

underlying aggregate Index value, less any out-ofthe-money amount, with a minimum requirement of

the options premium plus 10% of the underlying

Index value; and (2) for long options positions,

100% of the options premium paid.

30Pursuant to CBOE Rules 24.4A and 24.5,

respectively, the position and exercise limits for the

Index options will be 10,500 contracts, unless the

Exchange determines, pursuant to such rules, that

a lower limit is warranted.

31Pursuant to CBOE Rule 24.7, the trading on the

CBOE of Index options and Index LEAPS may be

halted or suspended whenever trading in

underlying mutual fund shares whose weighted

value represents more than 20% of the Index value

are halted or suspended.

32The Intermarket Surveillance Group (‘‘ISG’’)

was formed on July 14, 1983 to, among other things,

coordinate more effectively surveillance and

investigative information sharing arrangements in

the stock and options market. See Intermarket

Surveillance Group Agreement, July 14, 1983. The

most recent amendment to the ISG Agreement,

which incorporates the original agreement and all

amendments made thereafter, was signed by ISG

members on January 29, 1990. See Second

Amendment to the Intermarket Surveillance Group

Agreement, January 29, 1990. The members of the

ISG are: the Amex; the Boston Stock Exchange, Inc.;

the CBOE; the Chicago Stock Exchange, Inc.; the

National Association of Securities Dealers, Inc.

(‘‘NASD’’); the NYSE; the Pacific Stock Exchange,

Inc.; and the Philadelphia Stock Exchange, Inc.

Because of potential opportunities for trading

abuses involving stock index features, stock

options, and the underlying stock and the need for

greater sharing of surveillance information for these

potential intermarket trading abuses, the major

stock index features exchanges (e.g., the Chicago

Mercantile Exchange and the Chicago Board of

Trade) joined the ISG as affiliate members in 1990.

33 15 U.S.C. 78f(b)(5) (1988).

34Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

option proposal upon a finding that the

introduction of such new 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. In this regard, the trading

of listed Index options and full-value and reducedvalue Index LEAPS will provide investors with a

hedging vehicle that should reflect the overall

movement of Asian and Latin American market

securities, excluding Japanese securities,

represented through the holdings of closed-end

mutual funds traded in the U.S.

35See August 16 Letter, supra note 12.

36The narrow-based Emerging Markets Index,

which consists of the same component mutual fund

components as the Index and is calculated by

dividing the Index value by ten, is identical to the

Emerging Markets Index.

given time. Specifically, there may be

up to three expiration months from the

March, June, September, and December

cycle plus up to three additional nearterm months so that the two nearest

term months will always be available.

As described in more detail below, the

Exchange also intends to list several

Index LEAPS series that expire from 12

to 36 months from the date of

issuance.26

Lastly, the options on the Index will

expire on the Saturday following the

third Friday of the expiration month

(‘‘Expiration Friday’’). Accordingly,

because options on the Index will settle

based upon opening prices of the

closed-end fund securities comprising

the Index on the last trading day before

expiration (normally Expiration Friday),

the last trading day for an expiring

Index option series will normally be the

second to the last business day before

expiration (normally a Thursday).

G. Listing of Long-Term Options on the

Full-Value or Reduced-Value Emerging

Markets Index

The proposal proves that the

Exchange may list long-term Index

options that expire from 12 to 36

months from listing based on the fullvalue Index or a reduced-value Index

that will be computed at one-tenth of

the full-value Emerging Markets

Index.27 Existing Exchange

requirements applicable to full-value

Index options will apply to full-value

and reduced-value Index LEAPS.28 The

current and closing Index value for

reduced-value Emerging Markets LEAPS

will be computed by dividing the value

of the full-value Index by 10 and

rounding the resulting figure to the

nearest one-hundredth. For example, an

Index value of 125.46 would be 12.55

for the reduced-value Index LEAPS and

an Index value of 125.44 would be 12.54

for the reduced-value Index LEAPS. The

reduced-value Index LEAPS will also be

European-style and will be subject to

the same rules that govern the trading of

Index options, including sales practice

rules, margin requirements and floor

trading procedures. Pursuant to CBOE

Rule 24.9, the strike price interval for

the reduced-value Index LEAPS will be

no less than $2.50 instead of $5.00.

H. Position and Exercise Limits, Margin

Requirements, and Trading Halts

Exchange rules governing margin

requirements,29 position and exercise

limits,30 and trading halt procedures 31

that are applicable to the trading of

narrow-based index options will apply

to options traded on the Index. The

proposal further provides that, for

purposes of determining whether given

positions in full-value and reducedvalue Index LEAPS comply with

applicable position and exercise limits,

positions in full-value and reducedvalue Index LEAPS will be aggregated

with positions in the regular Index

options. For these purposes, ten

reduced-value contracts will equal one

full-value contract.

I. Surveillance

Surveillance procedures currently

used to monitor trading in each of the

Exchange’s other index options will also

be used to monitor trading in regular

Index options and in full-value and

reduced-value Index LEAPS. These

procedures include complete access to

trading activity in the shares of the

mutual funds comprising the Index.

Further, the Intermarket Surveillance

Group Agreement will be applicable to

the trading of options on the Index.32

III. Findings and Conclusions

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).33

Specifically, the Commission finds that

the trading of Emerging Markets Index

options, including full-value and

reduced-value Index LEAPS, 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 of hedging

exposure to market risk associated with

emerging Asian and Latin American

market securities.34

The trading of options on the

Emerging Markets Index, including fullvalue and reduced-value Index LEAPS,

however raises several issues related to

index design, customer protection,

surveillance, and market impact. The

Commission believes, for the reasons

discussed below, that the CBOE has

adequately addressed these issues.

A. Index Design and Structure

The Commission finds that it is

appropriate to treat the Emerging

Markets Index as a narrow-based index

under CBOE rules for purposes of

applicable position and exercise limits,

trading halt and suspension procedures,

and margin treatment. Although the

closed-end funds represented in the

Index, in aggregate, hold in excess of

270 individual Asian and Latin

American market securities,35 the

Emerging Markets Index is composed of

securities representing only 23 closedend mutual funds.36 Accordingly, in

light of the number of closed-end fund

securities contained in the Index, the

Commission believes it is proper to treat

the Emerging Markets Index as narrow-
Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7611

37Additionally, mutual fund securities contained

in the Index must be ‘‘reported’’ securities and must

be traded on the Amex or the NYSE or must be

Nasdaq/NM securities. The CBOE is also limited in

the number of mutual funds that can be represented

in the Index without having to obtain Commission

approval. See supra notes 14 and 15.

38See supra notes 16 and 17.

39Options on the securities by international funds

are eligible for standardized options trading where

those securities meet or exceed the Exchange’s

established uniform options listing standards (see

supra note 16) and (1) the Exchange has a market

information sharing agreement with the primary

home exchange on which each of the foreign

securities comprising the fund’s portfolio trade, (2)

the fund is classified as a diversified fund, as that

term is defined by Section 5(b) of the Investment

Company Act, 15 U.S.C. § 80a–5(b), and the fund’s

portfolio is composed of securities from five or

more countries, or (3) the listing of a particular

international fund option is specifically approved

by the Commission. See Securities Exchange Act

Release No. 33068 (October 19, 1993), 58 FR 55093

(October 25, 1993) (‘‘Country Fund Approval

Order’’).

40 Id.

41See supra Section III.A.

based for the regulatory purposes noted

above.

The Commission also finds that the

large capitalizations, liquid markets,

and relative weightings of the close-end

fund securities comprising the Index

significantly minimizes the potential for

manipulation of the Index. First, the

overwhelming majority of the closedend fund securities comprising the

Index are actively traded, with an

average daily trading volume for all

such mutual fund shares for the period

from July 1, 1994 through December 31,

1994, of approximately 64,335 shares

per day. Second, the market

capitalizations of the closed-end fund

securities in the Index are large, ranging

from a high of $824.31 million to a low

of $46.36 million as of January 4, 1995,

with the mean and median being $224

million and $155 million, respectively.

Third, although the Index is composed

of securities representing only 23

closed-end mutual funds, no particular

security or group of closed-end fund

securities dominates the Index.

Specifically, as of January 4, 1995, no

closed-end fund security contained in

the Index accounted for more than

11.50% of the Index’s total value and

the percentage weighting of the five

largest closed-end fund securities in the

Index accounted for 37.56% of the

Index’s value.

Fourth, the proposed maintenance

criteria will serve to ensure that: (1) The

Index remains comprised substantially

of closed-end mutual funds that are

highly capitalized and that have liquid

markets for their issued securities; and

(2) the Index is not dominated by any

one mutual security that does not satisfy

the Exchange’s options listing criteria,

any one security held by one or more of

the mutual funds represented in the

Index, or securities from any one

country held by one or more of the

mutual funds represented in the Index.

Specifically, in considering changes to

the composition of the Index, 75% of

the weight of the Index and 75% of the

number of closed-end mutual funds

represented in the Index must comply

with the listing criteria for standardized

options trading set forth in CBOE Rule

5.3, Interpretation and Policy .01 (for

mutual fund securities that are not then

the subject of standardized options

trading) and CBOE Rule 5.4,

Interpretation and Policy .01 (for mutual

fund securities that are then the subject

of standardized options trading).37

Additionally, the CBOE is required to

review the composition of the Index at

least semiannually to ensure that the

Index continues to meet these ‘‘75%’’

requirements.

Further, at least semiannually, based

on the most recent Commission filings

by the closed-end funds represented in

the Index, the CBOE will review the

holdings of each closed-end fund and

will promptly notify the Commission if:

(1) Any security held by one or more of

the closed-end funds represented in the

Index, in aggregate, accounts for more

than 5% of the weight of the Index; or

(2) securities from any one country held

by one or more of the closed-end funds

represented in the Index, in aggregate,

account for more than 25% of the

weight of the Index. Similarly, the

CBOE will promptly notify the

Commission staff at any time that it

determines that the shares of a closedend fund contained in the Index

account for more than 15% of the

weight of the Index if the shares of the

mutual fund do not satisfy the listing

eligibility requirements in CBOE’s

rules.38

Finally, the CBOE will promptly

notify the Commission staff at any time

that it determines that either the Index

or the shares of one or more of the

closed-end funds comprising the Index

fail to satisfy any of the above

maintenance criteria. In such an event,

the Exchange will not open for trading

any additional series of Index options or

LEAPS unless the Exchange determines

that such failure is not significant, and

the Commission staff affirmatively

concurs in that determination, or unless

the Commission specifically approves

the continued listing of that class of

Index options or Index LEAPS pursuant

to a proposal filed in accordance with

Section 19(b)(2) of the Act.

For the above reasons, the

Commission believes that these criteria

minimize the potential for manipulation

of the Index and eliminate domination

concerns.

B. Customer Protection

The Commission believes that a

regulatory system designed to protect

public customers must be in place

before the trading of sophisticated

financial instruments, such as Emerging

Markets Index options, including fullvalue and reduced-value Emerging

Markets LEAPS, can commence on a

national securities exchange. The

Commission notes that the trading of

standardized exchange-trading options

occurs in an environment that is

designed to ensure, among other things,

that: (1) the special risks of options are

disclosed to public customers; (2) only

investors capable of evaluating and

bearing the risks of options trading are

engaged in such trading; and (3) special

compliance procedures are applicable to

options accounts. Accordingly, because

the Index options and Index LEAPS will

be subject to the same regulatory regime

as the other standardized index options

currently traded on the CBOE, the

Commission believes that adequate

safeguards are in place to ensure the

protection of investors in Emerging

Markets Index options and full-value

and reduced-value Emerging Markets

Index LEAPS.

C. Surveillance

The Commission notes that

predominantly because of the lack of

relevant market information sharing

agreements, the shares of only one of the

closed-end funds contained in the Index

(Asia Pacific Fund) are eligible for

standardized options trading.39

The Commission believes, however,

that based on the maintenance criteria

discussed above, the CBOE has

addressed the concerns that the

Commission expressed in approving the

listing of options on individual country

funds.40 These maintenance criteria,

among other things, ensure that the

Index will not become a surrogate for

trading options on either the closed-end

mutual funds represented in the Index

or individual Asian or Latin American

market securities held by those

component mutual funds for which

standardized options could not

otherwise be traded and minimize the

potential for manipulation of the value

of the Index.41

Second, in approving the listing of

options on individual country funds,

the Commission determined that if a

fund is ‘‘diversified,’’ as defined in the

Investment Advisers Act of 1940
7612 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

42 15 U.S.C. 80b–1 et seq. (1988).

43See August 16 Letter, supra note 12.

44See Country Fund Approval Order, supra note

39.

45 Id.

46See supra note 32.

47See, e.g., Securities Exchange Act Release No.

31243 (September 28, 1992), 57 FR 45849 (October

5, 1992) (order approving the listing of index

options and index LEAPS on the CBOE Biotech

Index).

48 In addition, the CBOE has represented that the

CBOE and the OPRA have the necessary systems

capacity to support those new series of index

options that would result from the introduction of

Index options and Index LEAPS. See Memorandum

from Joe Corrigan, Executive Director, OPRA, to

Scott Lyden, CBOE, dated June 27, 1994.

49See supra Section III.A.

50See Securities Exchange Act Release No. 30944

(July 21, 1992), 57 FR 33376 (July 28, 1992).

51See supra Section III.A.

(‘‘Advisers Act’’),42 and holds securities

from five or more countries, a

surveillance sharing agreement is not

required between the Exchange and the

primary foreign markets for the

securities held by the closed-end fund.

In that case, it was determined that the

portfolio of such a closed-end fund

would be significantly diverse so as to

reduce the likelihood that the price of

the securities issued by the closed-end

fund could be manipulated. Even

though the shares of only one of the

closed-end funds contained in the Index

is classified as ‘‘diversified,’’ the

Commission believes that by combining

the securities of these mutual funds

together in the Index, the Index, as a

whole, replicates essentially a

‘‘diversified’’ fund. Specifically, the

Index consists of securities representing

23 closed-end mutual funds with those

mutual funds holding positions, in

aggregate, in more than 270 different

stocks from more than 14 emerging

Asian and Latin American markets.43

The Commission believes, therefore,

that the Index as a whole achieves the

diversity of holdings that the

Commission found to be sufficient in

the Country Fund Approval Order to

minimize the Commission’s concerns

about potential manipulation. As a

result, for the reasons stated herein and

in the Country Fund Approval Order,44

the Commission believes that the lack of

market surveillance sharing agreement

does not raise substantial regulatory

concerns.

Third, because the Index is composed

solely of the securities issued by closedend mutual funds, the Commission’s

concerns regarding potential

manipulation of the Index are further

reduced. As discussed in the Country

Fund Approval Order, in contrast to

other foreign securities products,

international closed-end mutual funds

hold portfolios of securities chosen by

portfolio managers.45 Although the

composition of the portfolio of each

mutual fund represented in the Index is

published on a semiannual basis, the

securities held by each mutual fund

represented in the Index can be changed

at any time at the discretion of the

portfolio managers, as long as their

investment decisions are consistent

with the stated investment objectives

and policies of the particular closed-end

fund. For these reasons, the Commission

believes that it generally would be

difficult for someone to use options on

the Index to attempt a manipulation of

the market for any particular security

issued by a closed-end fund represented

in the Index or to attempt a

manipulation of the Index through a

manipulation of the shares of the

mutual funds comprising the Index.

The Commission notes that generally

the only people who could attempt such

a manipulation would be people who

have access to ‘‘inside’’ information

about the composition of the portfolio of

a closed-end fund and the trading

activities of the mutual fund’s portfolio

manger. The Advisors Act, and the rules

promulgated thereunder, contain

provisions designed to detect and deter

certain advisory employees and

affiliates from trading in any securities

based on ‘‘inside’’ information about the

investment decisions of a closed-end

fund. Rule 204–2(a)(12) under the

Advisers Act requires an investment

adviser to make and keep accurate

records of every transaction in a security

in which the investment advisor or any

advisory representative has a beneficial

interest. Accordingly, the Commission

believes that the Advisers Act gives it

the authority to review the trading

activities of anyone who is likely to

have access to the information necessary

to use options on the Index to attempt

a manipulation of the relevant markets.

Finally, even though the CBOE does

not in this case have market information

sharing agreements with each of the

relevant foreign markets, the CBOE,

NYSE, Amex, and NASD are all

members of the ISG, which provides for

the exchange of all necessary

surveillance information regarding the

trading of the mutual fund securities

comprising the Index.46 The

Commission believes that this

arrangement ensures the availability of

information necessary to detect and

deter potential manipulations and other

trading abuses, thereby making the

Index options and full-value and

reduced-value Index LEAPS less readily

susceptible to manipulation.47

D. Market Impact

The Commission believes that the

listing and trading on the CBOE of

Emerging Markets Index options,

including full-value and reduced-value

Index LEAPS, will not adversely impact

the markets, for the securities issued by

the closed-end funds represented in the

Index.48 First, as described above, the

securities or no one closed-end fund or

group of closed-end funds represented

in the Index dominates the weight of the

Index. Second, the maintenance criteria

for the Index ensure that: (1) The Index

will be substantially comprised of

closed-end fund securities that satisfy

the Exchange’s listing standards for

standardized options trading; and (2) no

individual security held by one or more

of the mutual funds represented in the

Index and no individual country

represented by those holdings will

dominate the Index.49 Third, because

the securities issued by each of the

closed-end funds comprising the Index

must be ‘‘reported securities’’ as defined

in Rule 11Aa3–1 of the Act, the

securities issued by these closed-end

funds generally will be actively-traded,

highly-capitalized securities. Fourth, the

10,500 contract position and exercise

limits applicable to Index options and

Index LEAPS will serve to minimize

potential manipulation and market

impact concerns.

Lastly, the Commission believes that

settling expiring Emerging Markets

Index options, including full-value and

reduced-value Index LEAPS, based on

the opening prices of the closed-end

fund securities comprising the Index is

consistent with the Act. As noted in

other contexts, valuing options for

exercise settlement on expiration based

on opening prices rather than closing

prices may help reduce adverse effects

on markets for the closed-end fund

securities underlying options on the

Index.50

The Commission finds good cause for

approving 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 objective

maintenance criteria which, for the

reasons stated above, should minimize

the potential for manipulation of the

Index and the closed-end mutual fund

securities comprising the Index.

Further, as discussed above, the

Commission believes that these

maintenance criteria significantly

strengthen the customer protection and

surveillance aspects of the proposal, as

originally proposed.51 Moreover, the
Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7613

52 15 U.S.C. 78s(b)(2) (1988).

53The Commission notes that prior to listing

Index options or Index LEAPS, the CBOE will be

required to review the then most recent semiannual

reports filed with the Commission by each of the

closed-end funds represented in the Index to ensure

that the closed-end fund securities comprising the

Index, as well as the holdings of each of the closedend funds represented in the Index, satisfy, at the

time of listing, the listing criteria discussed above.

54 17 CFR 200.30–3(a)(12) (1994).

1Securities Exchange Act Release No. 27975 (May

1, 1990), 55 FR 19124 (May 8, 1990).

2With the Commission’s January 1994 approval

of File No. SR–NASD–93–24, the universe of

securities eligible for quotation in the OTCBB now

includes certain equities listed on regional stock

exchanges that do not qualify for dissemination of

transaction reports via the facilities of the

Consolidated Tape Association. Securities

Exchange Act Release No. 33507 (January 24, 1994),

59 FR 4300 (order approving File No. SR–NASD–

93–24).

3Securities Exchange Act Release No. 35172

(December 28, 1994), 60 FR 1820.

4The Commission notes that the NASD has filed

with the Commission Amendment Nos. 1 and 2 to

File No. SR–NASD–92–07, concerning the

eligibility of unregistered foreign securities and

American Depositary Receipts for inclusion in the

OTCBB. The amendments were published in the

Federal Register for comment on November 18,

1994. See Securities Exchange Act Release No.

34956 (November 9, 1994), 59 FR 59808.

Commission believes that reducing the

number of component funds in the

Index by two is not a material change

that raises regulatory concerns not

already addressed by the proposal.

Accordingly, the Commission believes it

is consistent with Sections 6(b)(5) and

19(b)(2) of the Act to approve

Amendment No. 2 to the proposed rule

change on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2. Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street NW.,

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 at

the Commission’s Public Reference

Section, 450 Fifth Street NW.,

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 SR–CBOE–94–

19 and should be submitted by March

1, 1995.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,52 that the

proposed rule change (SR–CBOE–94–

19), as amended, is approved.53

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.54

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–3037 Filed 2–7–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35316; File No. SR–NASD–

95–03]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.,

Relating to an Interim Extension of the

OTC Bulletin Board  Service Through

April 28, 1995

February 1, 1995.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on January 25, 1995,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by the NASD. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons and is

simultaneously approving the proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

On June 1, 1990, the NASD, through

a subsidiary corporation, initiated

operation of the OTC Bulletin Board

Service (‘‘OTCBB Service’’ or ‘‘Service’’)

in accord with the Commission’s

approval of File No. SR–NASD–88–19,

as amended.1 The OTCBB Service

provides a real-time quotation medium

that NASD member firms can elect to

use to enter, update, and retrieve

quotation information (including

unpriced indications of interest) for

securities traded over-the-counter that

are neither listed on The Nasdaq Stock

Market SM nor on a primary national

securities exchange (collectively

referred to as ‘‘OTC Equities’’).2

Essentially, the Service supports NASD

members’ market making in OTC

Equities through authorized Nasdaq

Workstation units. Real-time access to

quotation information captured in the

Service is available to subscribers of

Level 2⁄3 Nasdaq service as well as

subscribers of vendor-sponsored

services that now carry OTCBB Service

data. The Service is currently operating

under interim approval that was

scheduled to expire on January 31,

1995.3

The NASD hereby files this proposed

rule change, pursuant to Section

19(b)(1) of the Act and Rule 19b–4

thereunder, to obtain authorization for

an interim extension of the Service

through April 28, 1995. During this

interval, there will be no material

change in the OTCBB Service’s

operational features, absent Commission

approval of a corresponding Rule 19b–

4 filing.

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

NASD included statements concerning

the purpose of and basis for the

proposed rule change and discussed and

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 NASD 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 purpose of this filing is to ensure

continuity in the operation of the

OTCBB Service while the Commission

considers an earlier NASD rule filing

(File No. SR–NASD–92–7) that

requested permanent approval of the

Service.4 For the month ending

November 30, 1994, the Service

reflected the market making positions of

411 NASD member firms displaying

quotations/indications of interest in

approximately 5,229 OTC Equities.

During the proposed extension,

foreign securities and American

Depositary Receipts (collectively,

‘‘foreign/ADR issues’’) will remain

subject to the twice-daily, update

limitation that traces back to the

Commission’s original approval of the

OTCBB Service’s operation. As a result,

all priced bids/offers displayed in the