Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices 67379

4 17 CFR 200.30–(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 36295

(September 28, 1995), 60 FR 52229.

4 In Amendment No. 1, as discussed more fully

herein, the Exchange proposed certain maintenance

standards for the Automotive Index. See Letter from

Eileen Smith, Director, Product Development,

Research Department, CBOE, to John Ayanian,

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

Continued

Security does not satisfy these

requirements. Additionally, in order to

base certification on Commentary .05 of

Rule 1009, the closing prices of the

Restructure Security on each of the five

or more trading days prior to the

selection date must be at least $7.50.

Finally, as is required for all underlying

securities selected for options trading,

trading volume in the Restructure

Security must be at least 2,400,000

shares during a period of twelve months

or less up to the time the security is so

selected.

The effect of the proposed rule change

is that a Restructure Security issued

pursuant to a public offering or a rights

distribution that is part of a

reorganization will be eligible for

options trading only if it satisfies all of

the existing standards applicable to the

selection of underlying securities

generally, except that (A) the Exchange

may assume the satisfaction of the

minimum public ownership

requirement of 7,000,000 shares and the

minimum 2,000 shareholders

requirement if (i) either the percentage

of value tests of subparagraph (a)(1) of

Commentary .05 are met or the aggregate

market value represented by the

Restructure Security is at least

$500,000,000; and if (ii) the Restructure

Security is listed on an exchange or an

automatic quotation system having

equivalent listing requirements or at

least 40,000,000 shares of the

Restructure Security are issued and

outstanding, and if (iii) after the

Restructure Security has traded ‘‘regular

way’’ for at least five trading days and

after having conducted due diligence in

the matter, the Exchange has no reason

to believe that these requirements are

not met, and (B) subject to the same

percentage of value or aggregate market

value requirements, the Restructure

Security may be deemed to satisfy the

minimum market price per share

requirement if it has a closing market

price per share of at least $7.50 during

each of the five or more trading days

preceding the date of selection, instead

of having to satisfy this requirement

over a majority of days over a period of

three months. (In the event the

Restructure Security has a closing price

that is less than $7.50 on any of the

trading days preceding its selection, it

will have to satisfy this requirement on

a majority of trading days over a period

of three months before it can be certified

as eligible for options trading.) For any

Restructure Security issued in a public

offering or a rights distribution that does

satisfy these requirements, the effect of

the proposed rule change will be to

permit its certification of options

trading to take place as early as on the

sixth day after trading in the stock

commences, instead of having to wait

for three months of trading.

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) of the Securities Exchange

Act of 1934 in general, and furthers the

objectives of Section 6(b)(5) in

particular, by removing impediment to

a free and open market in options

covering securities issued in public

offerings or pursuant to rights

distributions as part of restructuring

transactions and other similar corporate

reorganizations.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any 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

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) by order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

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, 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 in

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Phlx. All submissions

should refer to the File No. SR-Phlx-95-

90 and should be submitted by January

19, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–31504 Filed 12–28–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36623; File No. SR–CBOE–

95–51]

Self-Regulatory Organizations; Order

Approving a Proposed Rule Change

and Notice of Filing and Order

Granting Accelerated Approval of

Amendment No. 1 to the Proposed

Rule Change by the Chicago Board

Options Exchange, Incorporated,

Relating to the Listing of the Trading

of Options and Long-Term Options on

the CBOE Automotive Index and LongTerm Options on a Reduced-Value

CBOE Automotive Index

December 21, 1995.

I. Introduction

On August 31, 1995, 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 Automotive

Index (‘‘Automotive Index’’ or ‘‘Index’’).

Notice of the proposal appeared in the

Federal Register on October 5, 1995.3

No comment letters were received on

the proposed rule change. On December

14, 1995, the Exchange filed with the

Commission Amendment No. 1 to the

proposed change.4 This order approves

the Exchange’s proposal, as amended.
67380 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices

Division of Market Regulation (‘‘Market

Regulation’’), Commission, dated December 14,

1995 (‘‘Amendment No. 1’’).

5The components of the Index are: Chrysler

Corporation Holding Co. (‘‘C’’); Dana Corp.

(‘‘DCN’’); Echlin Inc. (‘‘ECH’’); Eaton Corp. (‘‘ETN’’);

Ford Motor Co. (‘‘F’’); General Motors Corp.

(‘‘GM’’); Genuine Parts Co. (‘‘GPC’’); Goodyear Tire

and Rubber Co. (‘‘GT’’); Magna International Inc.

(‘‘MGA’’); and TRW Inc. (‘‘TRW’’).

6LEAPS 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).

7According to the CBOE, no proxy for the

performance of this industry group is currently

available in the U.S. exchange-traded derivatives

markets, and the Exchange believes that options on

the Index will provide investors with a low-cost

means to participate in the performance of or to

hedge the risk of investments in this sector.

8The Index portfolio is composed of ten

components such that the largest capitalized Index

component (GM) represents 20% of the Index value,

the second largest component (F) represents 17.5%,

the third largest component (C) represents 12.5%,

the fourth largest component (GT) represents 10%,

the fifth (GT), sixth (TRW), and seventh (GPC)

largest components each represent 8.33%, and the

eight (DCN), ninth (ECH), and tenth (MGA) largest

components each represent 5%.

9See Amendment No. 1 supra note 4.

10See supra note 8.

11 In the event that it becomes necessary to

remove General Motors Corp., Ford Motor Co., or

Chrysler Corporation, CBOE would most likely rebalance the Index at the time of the component

change. The weighting of the Index would be

reallocated depending on the market value of the

replacement security. See Amendment No. 1, supra

note 4.

12See Amendment No. 1, supra note 4. According

to CBOE, the Index components will always be

ranked in descending market capitalization order

and the Index portfolio adjusted in accordance with

the maintenance standards set forth herein.

Telephone conversation between Eileen Smith,

Director, Product Development, Research

Department, CBOE, and John Ayanian, Attorney,

OMS, Market Regulation, Commission, on

December 14, 1995.

13See Amendment No. 1, supra note 4.

14The 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.

II. Description of Proposal

A. General

The CBOE proposes to list for trading

options on the Automotive Index, a new

securities index developed by the

CBOE. The Automotive Index consists

of ten companies involved in the design

and manufacture of automobiles and

automotive parts (replacement and

original equipment).5 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 Automotive Index

(‘‘Automotive Index LEAPS’’ or ‘‘Index

LEAPS’’).6 Automotive Index LEAPS

will trade independent of and in

addition to regular Index options traded

on the Exchange,7 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 comprised of ten

companies involved in the design and

manufacture of automobiles and

automotive parts. The share of each of

the components contained in the Index

currently trade in the U.S. on the New

York Stock Exchange (‘‘NYSE’’).

As of the close of trading on July 31,

1995, the Index was valued at 179.93.

As of the same date, the components

comprising the Index ranged in

capitalization from $2.3 billion to $36.4

billion. The total capitalization as of

that date was $112.2 billion; the mean

capitalization was $11.2 billion; and the

median capitalization was $4.8 billion.

The largest component accounted for

20% of the total weighting of the Index,

while the smallest accounted for 5.00%.

The top five components accounted for

68.33% of the total weight of the Index.8

The average trading volume of the

components of the Index, for the period

from February 1, 1995, through July 31,

1995, ranged from a high of 3.53 million

shares per day to a low of 135,738

shares per day.

C. Maintenance

The Index will be maintained by

CBOE. To maintain continuity in the

Index following an adjustment to a

component security, the divisor will be

adjusted. Changes which may result in

divisor changes include, but are not

limited to, certain rights issuances,

quarterly re-balancing, and component

security changes. A component of the

Index may be replaced in the event of

certain events, such as a merger,

consolidation, dissolution, or

liquidation.

The Index is re-balanced after the

close of business on Expiration Friday

on the March Quarterly Cycle. In

addition, the Index will be reviewed on

approximately a monthly basis by the

CBOE staff. The CBOE may change the

composition of the Index at any time to

reflect changes affecting the components

of the Index or the Automotive industry

generally. If it becomes necessary to

remove a component from the Index,

every effort will be made to add a

component that preserves the character

of the Index. Moreover, replacement

securities must be ‘‘reported securities’’

as defined in Rule 11Aa3–1 of the Act.9

In considering securities to be added to

the Index, the CBOE will take into

account the capitalization, liquidity,

volatility, and name recognition of the

proposed replacement component.

CBOE will not decrease the number of

components to less than 9 nor increase

the number of components to more than

13.

If the number of stocks is increased,

the weights will be redistributed such

that the largest stock will never account

for more than 25% of the weight of the

Index and the top three stocks will not

account for more than 50% of the

weight of the Index and the remaining

weight will be distributed among the

remaining components to reflect the

relative market value of those

components. For example, if Stock XYZ

is added and it is in the same market

value range as those stocks with an

8.33% weight in the Index,10 the

following may be the result of the rebalancing: (1) GM—20%; (2) F—17.5%;

(3) C—12.5%; (4) GT—10%; (5) TRW—

6.25%; (6) GPC—6.25%; (7) ETN—

6.25%; (8) XYZ—6.25%; (9) DCN—5%;

(10) ECH—5%; and (11) MGA—5%.

If the number of stocks in the Index

is decreased to 9, the largest stock will

have a weight of no more than 25% of

the Index and the top three stocks will

account for no more than 55% of the

Index. The remaining weight will be

reallocated among the remaining

components.

If it becomes necessary to replace a

component security intra-quarter, the

replacement security will be added at

the same weight as the security being

removed.11 If a stock is replaced at the

time of a quarterly re-balancing, the

components will be ranked according to

market value and the weighting

methodology currently in use at the

time of the replacement will be

applied.12 The number of component

stocks in the Index will only be changed

at the time of a quarterly re-balancing.

Prior to making any of the above

changes to the Automotive Index, CBOE

will notify members and member firms

of the changes. Generally, these changes

are sent by facsimile to member firms

and distributed on the trading floor

approximately one week prior to the

change.13

Additionally, at each quarterly rebalancing, the Exchange will ensure that

at least 80% of the number of

components, and at least 90% of the

weight of the Index satisfies the initial

listing criteria in CBOE Rule 5.3 14 (for

components which are not the subject of
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices 67381

15The 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.

16See CBOE Rule 24.7.

17See CBOE Rule 24.11.

18Telephone conversation between Eileen Smith,

Director, Product Development, Research

Department, CBOE, and John Ayanian, Attorney,

OMS, Market Regulation, Commission, on October

31, 1995.

19Telephone conversation between Eileen Smith,

Director, Product Development, Research

Department, CBOE, and John Ayanian, Attorney,

OMS, Market Regulation, Commission, on October

31, 1995.

20As noted above, each of the component

securities currently trade on the NYSE.

21Telephone conversation between Eileen Smith,

Director, Product Development, Research

Department, CBOE, and John Ayanian, Attorney,

OMS, Market Regulation, Commission, on October

31, 1995.

22A European-style option can be exercised only

during a specified period before the option expires.

23For a description of the strike price intervals for

reduced-value Index options and long-term Index

options, See infra, Section II.G.

standardized options trading) or the

maintenance criteria in CBOE Rule 5.4 15

(for components which are currently the

subject of standardized options trading).

The CBOE will promptly notify the

Commission staff at any time that the

CBOE determines that the Index fails 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.

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,16 and margin treatment.17

E. Calculation of the Index

The Index will be calculated by CBOE

or its designee on a real-time basis using

last-sale prices. The value of 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 last-sale prices of the securities

comprising the Index. OPRA, in turn,

will disseminate the Index value to

other financial vendors such as Reuters,

Telerate, and Quotron.18 If a component

security is not currently being traded on

its primary market, the most recent

price at which the security traded on

such market will be used in the Index

calculation.

The Index is calculated on a

‘‘modified equal-dollar-weighted’’

method. The value of the Index equals

the current combined market value

(based on U.S. primary market prices) of

the assigned number of shares of each

of the components in the Index divided

by the current Index divisor. The Index

divisor was initially calculated to yield

a benchmark value of 150.00 at the close

of trading on December 16, 1994. The

value of the Index at the close on July

31, 1995, was 179.93.

Each of the ten component securities

is represented in dollar amounts that

approximate the relative sizes of the

companies in the Index. The Exchange

believes that this methodology will

present a fair representation of the

automotive industry without assigning

excessive weight to the top three

securities (GM, F, and C), as measured

by market capitalization. The initial

component weights, and the weights at

the time of the last quarterly rebalancing on June 16, 1995, were: GM—

20%, F—17.5%, C—12.5%, GT—10%,

ETN—8.33%, GPC—8.33%, TRW—

8.33%, DCN—5%, ECH—5%, and

MGA—5%.

The number of shares of each

component security in the Index will

remain fixed between quarterly reviews

except in the event of certain types of

corporate actions, such as the payment

of a dividend (other than an ordinary

cash dividend), stock distributions,

stock splits, reverse stock splits, rights

offerings, or a distribution,

reorganization, recapitalization, or some

such similar event with respect to an

Index component. When the Index is

adjusted between quarterly reviews, the

number of shares of the relevant

component in the portfolio will be

adjusted, to the nearest whole share, to

maintain the component’s relative

weight in the Index at the level

immediately prior to the corporate

action. In the event of a replacement,

the average dollar value of the

remaining portfolio components will be

calculated and that amount invested in

the new component stock, to the nearest

whole share. In both cases, the divisor

will be adjusted, if necessary, to ensure

continuity in the value of the Index.19

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 securities

comprising the Index in their primary

market on the last trading day prior to

expiration.20 In the event that a 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 component

securities 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 components of 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 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).21

F. Contract Specifications

The proposed options on the Index

will be cash-settled, European-style

options.22 The trading hours applicable

to the Index options will be from 8:30

a.m. to 3:10 p.m., Chicago time. 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.23 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 near-term

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.

Lastly, the options on the Index will

expire on the Saturday following the

third Friday of the expiration month
67382 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices

24See CBOE Rule 24.9(b).

25Pursuant to CBOE Rule 24.11, the margin

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

short options positions, 100 percent of the current

market value of the options contract plus 20 percent

of the underlying aggregate Index value, less any

out-of-the-money amount, with a minimum

requirement of the options premium plus 10

percent of the underlying Index value; and (2) for

long options positions, 100 percent of the options

premium paid.

26Pursuant to CBOE Rules 24.4A and 24.5,

respectively, the position and exercise limits for the

Index options will be 9,000 contracts, unless the

Exchange determines, pursuant to such rules, that

a lower limit is warranted.

27Pursuant to CBOE rule 24.7, the trading on the

CBOE of Index options and Index LEAPS may be

halted or suspended whenever trading in

component securities whose weighted value

represents more than 20 percent of the Index value

are halted or suspended.

28The 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.

29 15 U.S.C. 78f(b)(5).

30Pursuant 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 automotive industry securities.

31See supra Section II.H.

(‘‘Expiration Friday’’). Accordingly,

because options on the Index will settle

based upon opening prices of the

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

Automotive 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 Automotive Index.

Existing Exchange requirements

applicable to full-value Index options

will apply to full-value and reducedvalue Index LEAPS.24 The current and

closing Index value for reduced-value

Automotive Index LEAPS will be

computed by dividing the value of the

full-value Index by 10 and rounding the

resulting figure to the nearest onehundredth. For example, an Index value

of 179.66 would be 17.97 for the

reduced-value Index LEAPS and an

Index value of 179.64 would be 17.96

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,25 position and exercise

limits,26 and trading halt procedures 27

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

securities comprising the Index.

Further, the Intermarket Surveillance

Group Agreement will be applicable to

the trading of options on the Index.28

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).29

Specifically, the Commission finds that

the trading of Automotive 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

the automotive industry.30 The trading

of options on the Automotive 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 the

Automotive Index is a narrow-based

index, because it is only composed of

ten stocks, all of which are within the

automotive industry. The Commission

also finds that the reduced-value

Automotive Index is also narrow-based

because it is composed of same

component securities as the Automotive

Index and merely dividing the Index

value by ten will not alter that basic

character of the Index. Accordingly the

Commission believes it is appropriate

for the CBOE to apply its rules

governing narrow-based index options

to trading in the Index options and

Index LEAPS.31

The Commission also finds that the

large capitalizations, liquid markets,

and relative weightings of the

individual securities comprising the

Index minimize the potential for

manipulation of the Index. First, the

securities comprising the Index are

actively traded, with an average daily

trading volume for all components for

the period from February 1, 1995

through July 31, 1995, of approximately

10.91 million shares per day. Second,

the market capitalizations of the

components of the Index are large,

ranging from a high of $36.4 billion to

a low of $2.3 billion as of July 31, 1995,

with the mean and median being $11.23

billion and $4.74 billion, respectively.

Third, although the Index is composed

of only 10 securities, no particular

component security or group of

securities dominates the Index.

Specifically, as of June 16, 1995, no

component security contained in the

Index accounted for more than 20% of
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices 67383

32Additionally, the 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. See also supra notes 9–15

and accompanying text discussing certain

requirements involving changes in the Index.

33See Securities Exchange Act Release No. 31243

(September 28, 1992), 57 FR 45849 (October 5,

1992).

34See supra 28.

35See e.q., 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).

36 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

William Speth, CBOE, dated August 30, 1995.

37See supra note III.A.

the Index’s total value and the five

highest weighted securities in the Index

accounted for 68.33% of the Index’s

value.

Fourth, the proposed maintenance

criteria will serve to ensure that: (1) The

Index remains composed substantially

of liquid, highly capitalized securities;

and (2) the Index is not dominated by

any one security that does not satisfy

the Exchange’s options listing criteria.

Specifically, in considering changes to

the composition of the Index, 90% of

the weight of the Index and 80% of the

number of components in the Index

must comply with the listing criteria for

standardized options trading set forth in

CBOE Rule 5.3 (for securities that are

not then the subject of standardized

options trading) and CBOE Rule 5.4 (for

securities that are then the subject of

standardized options trading).32

Additionally, the CBOE is required to

review the composition of the Index at

least quarterly to ensure that the Index

continues to meet this 90%/80%

criterion.

The CBOE will promptly notify the

Commission staff at any time that the

CBOE determines that the Index fails 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) 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

Automotive Index options, including

full-value and reduced-value

Automotive Index LEAPS, can

commence on a national securities

exchange. The Commission notes that

the trading of standardized exchangetraded 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 Automotive

Index options and full-value and

reduced-value Automotive Index

LEAPS.

C. Surveillance

The Commission believes that a

surveillance sharing agreement between

an exchange proposing to list a stock

index derivative product and the

exchange(s) trading the stocks

underlying the derivative product is an

important measure for surveillance of

the derivative and underlying securities

markets. Such agreements ensure the

availability of information necessary to

detect and deter potential

manipulations and other trading abuses,

thereby making the stock index product

less readily susceptible to

manipulation. 33 In this regard, the

Commission notes that the NYSE, which

currently is the primary market for all

of the Index’s component securities, is

a member of the ISG. 34 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. 35

D. Market Impact

The Commission believes that the

listing and trading on the CBOE of

Automotive Index options, including

full-value and reduced-value Index

LEAPS, will not adversely impact the

markets for the securities contained in

the Index. 36 First, because of the

‘‘modified equal-dollar-weighting’’

formula described above, no one

security or group of securities

represented in the Index will dominate

the weight of the Index immediately

following a quarterly re-balancing.

Second, the maintenance criteria for the

Index ensure that the Index will be

substantially comprised of securities

that satisfy the Exchange’s listing

standards for standardized options

trading. Third, because the securities

comprising the Index must be ‘‘reported

securities’’ as defined in Rule 11Aa3–1

of the Act, the components of the Index

generally will be actively-traded and

highly-capitalized. Fourth, the 9,000

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 Automotive Index

options, including full-value and

reduced-value Index LEAPS, based on

the opening prices of the component

securities is consistent with the Act.

The Commission finds good cause for

approving Amendment No. 1 to the

proposal prior to the thirtieth day after

the date of publication of notice of filing

thereof in the Federal Register.

Specifically, Amendment No. 1

provides objective maintenance criteria

which, for the reasons stated above,

minimize the potential for manipulation

of the Index and the 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. 37

Based on the above, the Commission

finds good cause for approving

Amendment No. 1 to the proposed rule

change on an accelerated basis and

believes that the proposal, as amended,

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

19(b)(2) of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1. 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
67384 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Notices

38 15 U.S.C. 78s(b)(2).

39 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3PSE Rule 2.12(a) states: ‘‘Every member

organization which is not a member of another

national securities exchange or registered national

securities association which is the Designated

Examining Authority for that member organization

shall file with the Exchange answers to Financial

Questionnaires, Reports of Income and Expenses

and additional financial information in the type,

form, manner and time prescribed by the

Exchange.’’

The Exchange stated that Rule 2.12(a) does not

encompass the filing with the Exchange of either

periodic or annual FOCUS Reports required by SEC

Rules 17a–5 or 17a–10. Telephone conversation

between Michael D. Pierson, Senior Attorney, PSE,

and Jon Kroeper, Attorney, SEC, on December 19,

1995.

4For a discussion of the Exchange’s

Recommended Fine Schedule, see Securities

Exchange Act Release No. 34322 (July 6, 1994), 59

FR 35958 (July 14, 1994).

5The Exchange’s Plan filed pursuant to Rule 17a–

5(a)(4) under the Act requires PSE member

organizations that are not exempt from Rule 15c3–

1 under the Act (‘‘Net Capital Rule’’) to file periodic

FOCUS Reports with the Exchange if the PSE is

their designated examining authority (‘‘DEA’’). See

17 CFR 240.17a–5(a)(4); Securities Exchange Act

Release No. 11935 (December 17, 1975), 40 FR

59706 (December 30, 1975) (order approving the

PSE’s Plan pursuant to Rule 17a–5). In 1993, the

SEC approved certain changes to the Net Capital

Rule, including the elimination of an exemption for

certain equity exchange specialists, effective as of

April 1, 1994. See Securities Exchange Act Release

No. 32737 (August 11, 1993), 58 FR 43555 (August

17, 1993). Consequently, as of April 1, 1994, a

number of Exchange specialists became obligated to

file FOCUS reports with the Exchange. Prior to

April 1994, no PSE member organizations were

required to file such reports with the Exchange.

6 17 CFR 240.17a–10. The current ‘‘late charge’’

schedule found in PSE Rule 2.12(b)(1) is as follows:

1–30 days later—$200; 31–60 days late—$400; 61–

90 days late—$800. Any failure to file an annual

FOCUS Report longer than 90 days is referred to the

Ethics and Business Conduct Committee for

appropriate disciplinary action.

7 15 U.S.C. 78f(b).

8PSE Rule 10.3 governs the initiation of formal

disciplinary proceedings by the Exchange for

violations within the disciplinary jurisdiction of the

Exchange

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

CBOE. All submissions should refer to

the File Number SR–CBOE–95–51 and

should be submitted by January 19,

1996.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, 38 that the

proposed rule change (SR–CBOE–95–

51), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 39

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–31506 Filed 12–28–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–36622; File No. SR–PSE–

95–27]

Self-Regulatory Organizations; Pacific

Stock Exchange, Incorporated; Order

Granting Approval to Proposed Rule

Change Relating to the Amendment of

Its Minor Rule Plan To Include Certain

Rules on Financial Reporting and

Cooperation in Exchange

Investigations and the Establishment

of a Charge for the Late Filing of

Periodic FOCUS Reports

December 21, 1995.

On October 17, 1995, the Pacific Stock

Exchange, Incorporated (‘‘PSE’’ 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

amend its Minor Rule Plan to include

certain rules on financial reporting and

cooperation in Exchange investigations

and to establish an administrative

charge for the late filing of quarterly

FOCUS Reports.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 36474

(November 9, 1995), 60 FR 57611

(November 16, 1995). No comments

were received on the proposal.

The Exchange’s Minor Rule Plan

(‘‘MRP’’), set forth in PSE Rule 10.13,

provides that the Exchange may impose

a fine not to exceed $5,000 on any

member, member organization, or

person associated with a member or

member organization, for any violation

of an Exchange rule that has been

deemed to be minor in nature and

approved by the Commission for

inclusion in the MRP. PSE Rule 10.13,

subsections (h)–(j), sets forth the

specific Exchange rules deemed to be

minor in nature.

The Exchange is proposing to add the

following provision to the MRP as PSE

Rule 10.13(j)(5): ‘‘Failure to file a

financial report or financial information

in the type, form, manner and time

prescribed by the Exchange. (Rule

2.12(a)).’’ 3 The Exchange is also

proposing to amend its Recommended

Fine Schedule for rules listed in the

MRP to establish the following

recommended fines for violations of

PSE Rule 2.12(a): $100 for a first-time

violation; $250 for a second-time

violation; and $500 for a third-time

violation.4

The Exchange is also proposing to add

the following provision to the MRP as

PSE Rule 10.13(j)(6): ‘‘Delaying,

impeding or failing to cooperate in an

Exchange investigation. (Rule 10.2(b)).’’

The Exchange is also proposing to

amend its Recommended Fine Schedule

for rules listed in the MRP to establish

the following recommended fines for

violations of PSE Rule 10.2(b): $100 for

a first-time violation; $250 for a secondtime violation; and $500 for a third-time

violation.

In addition, the Exchange is

proposing to amend PSE Rule 2.12(b)(1)

to establish an administrative charge for

member organizations that are late in

filing their periodic FOCUS Reports

with the Exchange.5 The proposed rule

change would add a reference to Rule

17a–5 to the text of PSE Rule 2.12(b)(1),

making the late filing of periodic

FOCUS Reports subject to the same

‘‘late charge’’ schedule that currently

applies to the late filing of annual

FOCUS Reports required by Rule 17a–

10 under the Act.6

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, with the

requirements of Section 6(b).7 In

particular, the Commission believes the

proposal is consistent with the Section

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

exchange be designed to promote just

and equitable principles of trade, to

prevent fraudulent and manipulative

acts, and, in general, to protect investors

and the public, and with the Section

6(b)(6) requirement that the rules of an

exchange provide that its members be

appropriately disciplined for violations

of an exchange’s rules and the Act.

Specifically, the Commission believes

that adding the above-listed provisions

to the Exchange’s MRP is consistent

with Sections 6(b)(5) and 6(b)(6) in that

the purpose of the Exchange’s MRP is to

provide for a response to a violation of

Exchange rules when a meaningful

sanction is needed, but when initiation

of a formal disciplinary proceeding

pursuant to PSE Rule 10.3 8 is not

suitable because such a proceeding

would be more costly and timeconsuming than would be warranted