Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7601

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

2 17 CFR 240.19b–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, the

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. 34553

(August 19, 1994), 59 FR 44205 (August 26, 1994).

5 In Amendment No. 2, the Exchange proposed:

(1) to reduce the number of components in the

Index from 16 to 15; 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 16, 1995

(‘‘Amendment No. 2’’).

6 Id.

7The components of the Index are the: 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 Asian 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 market

securities. The CBOE believes the Index will

provide retail and institutional investors with a

means of benefitting from their forecasts of the

performance of emerging Asian 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 market securities either

directly or through mutual funds that invest

primarily in Asian market securities.

10See Amendment No. 2, supra note 5.

11 Id.

12For example, four of the 15 component funds

held shares of China Light & Power based on these

semiannual reports. By aggregating the positions of

these four mutual funds, China Light & Power

accounted for 0.73% of 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.

[Release No. 34–35304; International Series

Release No. 779; File No. SR–CBOE–94–

20]

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 Asian

Markets Index and Long-Term Options

on a Reduced-Value CBOE Emerging

Asian 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

Asian Markets Index (‘‘Asian 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 Asian Markets Index, a

new securities index developed by the

CBOE. The Asian Markets Index is

composed of the securities issued by 15

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 economies,

excluding Japan.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 Asian Markets Index

(‘‘Asian Markets LEAPS’’ or ‘‘Index

LEAPS’’).8 Asian 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 15 closed-end mutual funds

that invest in the stocks of firms in

emerging Asian economies, excluding

Japan. The shares of each of the closedend funds contained in the Index trade

in the U.S. on the NYSE. The Index is

price-weighted 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 122.35.

Also as of that date the market

capitalizations of the individual closedend fund securities in the Index ranged

from a high of $628.65 million to a low

of $46.36 million, with the mean and

median being $205.05 million and

$172.65 million, respectively. The total

market capitalization of the securities in

the Index on that date was $3.08 billion.

The price per share of the closed-end

fund securities comprising the Index on

January 4, 1995, ranged from a high of

$28.13 to a low of $8.63, with an

average price per share of $14.99.10

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 118,056

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

12.51% of the Index’s total value and

the percentage weighting of the five

largest issues in the Index accounted for

48.80% of the Index’s value. The

percentage weighting of the lowest

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

3.84% of the value of the Index and the

percentage weighting of the five

smallest closed-end fund securities

contained in the Index accounted for

22.29% 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 16.25% (Hong

Kong) nor less than 4.50% (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

1.25% of the weight of the Index.12

Finally, more than 10 emerging Asian

countries are represented through the

holdings of the component funds

comprising the Index.13
7602 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

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 20 or to decrease the

number of components to less than 10, 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

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.

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 securities markets, excluding

Japan. If it becomes necessary to replace

the securities issued 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 ass a change in the

investment objectives of the mutual

fund. The Exchange will most likely

maintain securities representing 15

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

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

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.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 Asian 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
Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7603

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.

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 markets. 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 futures, 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 futures exchanges (e.g., the Chicago

Mercantile Exchange and the Chicago Board of

Trade) joined the ISG as affiliate members in 1990.

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 prices 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., nornally

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

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 Asian

Markets Index

The proposal provides 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 Asian Markets Index.27

Existing Exchange requirements

applicable to full-value Index options

will apply to full-value and reducedvalue Index LEAPS.28 The current and

closing Index value for reduced-value

Asian 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 122.36

would be 12.24 for the reduced-value

Index LEAPS and an Index value of

122.34 would be 12.23 for the reducedvalue Index LEAPS. The reduced-value

Index LEAPS will also be Europeanstyle 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 the national securities

exchange and, in particular, the
7604 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

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 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 reduced-value Asian 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

Asian Markets Index.

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.

requirements of Section 6(b)(5).33

Specifically, the Commission finds that

the trading of Asian 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 market securities.34

The trading of options on the Asian

Markets Index, including full-value 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 Asian 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 180

individual Asian market securities,35

the Asian Markets Index is composed of

securities representing only 15 closedend mutual funds.36 Accordingly, in

light of the limited number of closedend fund securities contained in the

Index, the Commission believes it is

proper to treat the Asian Markets Index

as narrow-based for the regulatory

purposes noted above.

The Commission also finds that the

large capitalizations, liquid markets,

and relative weightings of the closedend fund securities comprising the

Index significantly minimizes the

potential for manipulation of the Index.

First, the overwhelming majority of the

closed-end 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 53,568 shares

per day. Second, the market

capitalizations of the closed-end fund

securities in the Index are large, ranging

from a high of $628.65 million to a low

of $46.36 million as of January 4, 1995,

with the mean and median being

$205.05 million and $172.65 million,

respectively. Third, although the Index

is composed of securities representing

only 15 closed-end mutual funds, no

particular security or group of closedend fund securities dominates the

Index. Specifically, as of January 4,

1995, no closed-end fund security

contained in the Index accounted for

more than 12.51% of the Index’s total

value and the percentage weighting of

the five largest closed-end fund

securities in the Index accounted for

48.80% 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 fund 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 Asian

Markets Index options, including fullvalue and reduced-value Asian Markets

LEAPS, can commence on a national

securities exchange. The Commission

notes that the trading of standardized

exchange-traded 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
Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices 7605

39Options on the securities issued 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.

42 15 U.S.C. 80b–1 et. seq. (1988).

43See August 15 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.

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 Asian Markets

Index options and full-value and

reduced-value Asian 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 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

(‘‘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

15 closed-end mutual funds with those

mutual funds holding positions, in

aggregate, in more than 180 different

stocks from more than 10 emerging

Asian markets.43 The Commission

believes, therefore, that the Index as a

whole achieves the diversity of holds

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

agreements 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

manager. The Advisers 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 adviser 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

Asian 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 of 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
7606 Federal Register / Vol. 60, No. 26 / Wednesday, February 8, 1995 / Notices

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.

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).

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 Asian 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

Commission believes that reducing the

number of component funds in the

Index by one 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, 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. 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–

20 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–

20), 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. 95–3035 Filed 2–7–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35307; File No. SR–CBOE–

95–03]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Chicago Board Options Exchange, Inc.

Relating to Restrictions on the

Exercise on Index Options

January 31, 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 18, 1995,

the Chicago Board Options Exchange,

Inc. (‘‘CBOE’’ or ‘‘Exchange’’) 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 Exchange.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to amend its

Rule 4.16 to limit the time period during

which restrictions on the exercise of

index options may be in effect, making

Rule 4.16 consistent with CBOE

Regulatory Circular RG91–11, dated

January 14, 1991. Rule 4.16 would be

amended to substitute the words

‘‘business day’’ for the words ‘‘trading

day,’’ thereby making Rule 4.16

consistent with CBOE’s stated policy as

set forth in Regulatory Circular RG91–

11. The text of the proposed rule change

is available at the Office of the

Secretary, the 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. The text of these

statements may be examined at the

places specified in Item IV below. The

Exchange has prepared summaries, set

forth in Section (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

The purpose of the proposed rule

change is to revise Rule 4.16 to make it

consistent with CBOE’s stated policy

regarding when restrictions on the

exercise of index options may be in

effect, as set forth in Regulatory Circular

RG91–11. The Exchange represents that

it promulgated the policies regarding

exercise restrictions in Regulatory

Circular RG91–11 to implement a

coordinated approach to which all of

the options exchanges had agreed.

Regulatory Circular RG91–11 provides,

in part, that, except during ‘‘the last

business day prior to expiration, the

(American Stock Exchange, CBOE, New

York Stock Exchange, Pacific Stock

Exchange, and the Philadelphia Stock

Exchange) intend to prohibit exercises

of cash settled index options during any

time when trading in such options are