[Federal Register Volume 60, Number 250 (Friday, December 29, 1995)]
[Notices]
[Pages 67379-67384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31506]



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SECURITIES AND EXCHANGE COMMISSION
[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 Long-
Term 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.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See 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''), Division of Market Regulation 
(``Market Regulation''), Commission, dated December 14, 1995 
(``Amendment No. 1''). 

[[Page 67380]]

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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.

    \5\ The 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'').
    \6\ LEAPS 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).
    \7\ According 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.
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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.

    \8\ The 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%.
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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.

    \9\ See Amendment No. 1 supra note 4.
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    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,<SUP>10 the following may be the 
result of the re-balancing: (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%.

    \10\ See supra note 8.
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    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.<SUP>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.<SUP>12 The number of component 
stocks in the Index will only be changed at the time of a quarterly re-
balancing.

    \11\ In the event that it becomes necessary to remove General 
Motors Corp., Ford Motor Co., or Chrysler Corporation, CBOE would 
most likely re-balance 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.
    \12\ See 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.
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    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.<SUP>13

    \13\ See Amendment No. 1, supra note 4.
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    Additionally, at each quarterly re-balancing, 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 <SUP>14 (for components which are not the subject of 

[[Page 67381]]
standardized options trading) or the maintenance criteria in CBOE Rule 
5.4 <SUP>15 (for components which are currently the subject of 
standardized options trading).

    \14\ 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.
    \15\ 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.
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    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 
reduced-value 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,<SUP>16 and margin treatment.<SUP>17

    \16\ See CBOE Rule 24.7.
    \17\ See CBOE Rule 24.11.
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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.<SUP>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.

    \18\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and John Ayanian, 
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
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    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 re-balancing 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\

    \19\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and John Ayanian, 
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
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    The Index value for purposes of settling outstanding regular Index 
options and full-value and reduced-value 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\

    \20\ As noted above, each of the component securities currently 
trade on the NYSE.
    \21\ Telephone conversation between Eileen Smith, Director, 
Product Development, Research Department, CBOE, and John Ayanian, 
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
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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.

    \22\ A European-style option can be exercised only during a 
specified period before the option expires.
    \23\ For a description of the strike price intervals for 
reduced-value Index options and long-term Index options, See infra, 
Section II.G.
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    Lastly, the options on the Index will expire on the Saturday 
following the third Friday of the expiration month 

[[Page 67382]]
(``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 
full-value 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 reduced-value 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 one-hundredth. 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.

    \24\ See CBOE Rule 24.9(b).
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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 
reduced-value Index LEAPS comply with applicable position and exercise 
limits, positions in full-value and reduced-value 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.

    \25\ Pursuant 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.
    \26\ Pursuant 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.
    \27\ Pursuant 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.
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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\

    \28\ The 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.
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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.

    \29\ 15 U.S.C. 78f(b)(5).
    \30\ Pursuant 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 reduced-value Index LEAPS will provide 
investors with a hedging vehicle that should reflect the overall 
movement of automotive industry securities.
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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\

    \31\ See supra Section II.H.
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    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 

[[Page 67383]]
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.

    \32\ Additionally, 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.
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    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 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 
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\

    \33\ See Securities Exchange Act Release No. 31243 (September 
28, 1992), 57 FR 45849 (October 5, 1992).
    \34\ See supra 28.
    \35\ See 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).
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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.

    \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.
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    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\

    \37\ See supra note III.A.
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    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 

[[Page 67384]]
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.

    \38\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \39\

    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31506 Filed 12-28-95; 8:45 am]
BILLING CODE 8010-01-M