2616 Federal Register / Vol. 60, No. 6 / Tuesday, January 10, 1995 / Notices

1 15 U.S.C. 78s(b)(1) (1982).

2 17 CFR 240.19b–4 (1993).

3See letter from James R. McDaniel, Schiff,

Hardin & Waite, to Michael Walinskas, Branch

Chief, Division of Market Regulation, SEC, dated

December 8, 1994 (‘‘Amendment No. 1’’). In

amendment No. 1, the CBOE represents that (1) it

will require that Nikkei 300 Index warrants be sold

only to customers whose accounts have been

approved for options trading pursuant to Exchange

Rule 9.7; (2) customers with positions in Index

warrants will be subject to the margin requirements

applicable to options; (3) the CBOE will employ the

same surveillance procedures that it currently has

in place for index warrants listed and traded on the

Exchange to surveil trading in warrants on the

Index; (4) the Exchange will continue its efforts to

enter into a comprehensive surveillance sharing

agreement with the Tokyo Stock Exchange covering

Nikkei 300 Index warrants; and (5) the CBOE, prior

to the commencement of trading, will distribute to

its membership a circular calling attention to

certain compliance responsibilities when handling

orders in Index warrants.

4See Securities Exchange Act Release No. 34854

(October 18, 1994), 59 FR 53691 (October 25, 1994).

5First section stocks are distinguished from

second section stocks by more stringent listing

standards.

6See Securities Exchange Act Release No. 34388

(July 15, 1994), 59 FR 37789 (July 25, 1994) (File

No. SR–CBOE–94–14).

7Based on the December 8, 1994 exchange rate of

¥100.46 per US$1.00.

8See supra Section II.A The Index divisor was set

to give the Index a value of 100 on its base date.

9 In File No. SR–CBOE–94–34, the CBOE has

proposed to adopt new listing criteria and customer

exchange their shares for shares of

MidAmerican.

Pursuant to 10 CFR 50.80 the

Commission may approve the transfer of

control of a license, after notice to

interested persons, upon the

Commission’s determination that the

holder of the license following the

transfer of control is qualified to have

the control of the license and the

transfer of the control is otherwise

consistent with applicable provisions of

law, regulations and orders of the

Commission. Iowa-Illinois has requested

consent under 10 CFR 50.80 for transfer

of the licenses to reflect the effective

change in control of such ownership

interest in the Quad Cities Nuclear

Power Station, Units 1 and 2.

For further details with respect to this

action, see the November 21, 1994,

letter, which is available for public

inspection at the Commission’s Public

Document Room, the Gelman Building,

2120 L Street, NW., Washington, DC,

and at the local public document room

located at the Dixon Public Library, 221

Hennepin Avenue, Dixon, Illinois

61021.

Dated at Rockville, Maryland this 4th day

of January 1995.

For the Nuclear Regulatory Commission.

Robert A. Capra,

Director, Project Directorate III–2, Division

of Reactor Projects—III/IV, Office of Nuclear

Reactor Regulation.

[FR Doc. 95–540 Filed 1–9–95; 8:45 am]

BILLING CODE 7590–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–35184; International Series

Release No. 766; File No. SR–CBOE–94–

32]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 1 to Proposed Rule Change by the

Chicago Board Options Exchange, Inc.

Relating to the Listing and Trading of

Warrants on the Nikkei Stock Index 300

December 30, 1994.

I. Introduction

On September 2, 1994, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with 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

list and trade warrants on the Nikkei

Stock Index 300 (‘‘Nikkei 300 Index’’ or

‘‘Index’’). On December 12, 1994, the

Exchange Filed Amendment No. 1 to the

proposed rule change.3

Notice of the proposed rule change

appeared in the Federal Register on

October 25, 1994.4 No comments were

received on the proposed rule change.

This order approves the proposed rule

change, including Amendment No. 1 on

an accelerated basis.

II. Description of the Proposal

The CBOE proposes to list index

warrants based on the Nikkei 300 Index,

an index comprised of 300

representative stocks of the first

section 5 of the Tokyo Stock Exchange

(‘‘TSE’’). On July 15, 1994, the

Commission approved a proposal by the

Exchange to list and trade options and

full-value and reduced-value long-term

options on the Index.6

A. Composition and Maintenance of the

Index

The Nikkei 300 Index was designed

by Nihon Keizai Shimbun, Inc. (‘‘NKS’’).

The CBOE represents that Index

component stocks were selected by NKS

for their high market capitalizations,

and their high degree of liquidity, and

are representative of the relative

distribution of industries within the

broader Japanese equity market.

As of December 8, 1994, the total

capitalization of the Index was

approximately US$2.24 trillion.7 Market

capitalizations of the individual stocks

in the Index ranged from a high of

US$76.99 billion to a low of US$0.69

billion, with a median of US$3.36

billion and a mean of US$7.46 billion.

In addition, the average daily trading

volume of the stocks in the Index, for

the six-month period ending June 30,

1994, ranged from a high of 4,740,000

shares to a low of 6,000 shares, with a

mean and median of approximately

676,000 and 417,000 shares,

respectively. As of December 8, 1994,

the highest weighted component stock

in the Index accounted for 3.438 percent

of the Index. The five largest Index

components accounted for

approximately 14.495 percent of the

Index’s value. The lowest weighted

component stock comprised 0.013

percent of the Index, and the five

smallest Index components accounted

for approximately 0.203 percent of the

Index’s value.

The Index is maintained by NKS. To

maintain the continuity of the Index,

NKS will adjust the Index divisor to

reflect certain events relating to the

component stocks. These events

include, but are not limited to, changes

in the number of shares outstanding,

spin-offs, certain rights issuances, and

mergers and acquisitions. The CBOE

represents that NKS reviews the

composition of the Index periodically.

B. Calculation of the Index

The Nikkei 300 Index is

capitalization-weighted and reflects

changes in the prices of the Index

component securities relative to the

base date of the Index (October 1, 1982).

The value of the Index is calculated by

multiplying the price of each

component security by the number of

shares outstanding of each such

security, adding the products, and

dividing by the current Index divisor.

The Index divisor is adjusted to reflect

certain events relating to the component

stocks.8 The Index had a closing value

of 280.5 on December 8, 1994.

Because trading does not occur on the

TSE during the CBOE’s trading hours,

the daily dissemination of the Index

value is calculated by the CBOE once

each day based on the most recent

official closing price of each Index

component security as reported by the

TSE. This closing value is disseminated

throughout the trading day on the

CBOE.

C. Warrant Listing Standards and

Customer Safeguards

The Exchange proposes to trade

Nikkei 300 Index warrants pursuant to

CBOE Rule 31.5(E).9 Under that rule, the
Federal Register / Vol. 60, No. 6 / Tuesday, January 10, 1995 / Notices 2617

protection and margin requirements for stock index

warrants, currency index warrants and currency

warrants. As proposed, these standards will apply

only to warrants issued after the new framework

goes into effect.

10See Securities Exchange Act Release No. 28627

(November 19, 1990), 55 FR 49357 (November 27,

1990) (File No. SR–CBOE–90–17).

11See Securities Exchange Act Release No. 30462

(March 11, 1992), 57 FR 9290 (March 17, 1992) (File

No. SR–CBOE–91–13).

12See Securities Exchange Act Release No. 28587

(October 30, 1990), 55 FR 46595 (November 5, 1990)

(File No. SR–CBOE–90–16).

13Rule 31.5(A) requires the issuer to have net

worth of at least $4,000,000 and pre-tax income of

at least $750,000 in its last fiscal year, or in two of

its last three fiscal years and net income of

$400,000.

14See Amendment No. 1, supra, note 3.

15See Amendment No. 1, supra, note 3.

16See Amendment No. 1, supra, note 3.

17 15 U.S.C. 78f(b)(5) (1988).

18Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

securities product upon a finding that the

introduction of such product is in the public

interest. Such a finding would be difficult with

respect to a warrant 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.

19The CBOE has agreed to submit a draft of the

circular to the Commission staff for approval prior

to distribution. See Amendment No. 1, supra, note

3.

CBOE may approve for listing warrants

on established foreign and domestic

market indexes. The Commission

previously has approved the listing and

trading on the CBOE of certain foreign

index warrants based on the FT–SE 100

Index,10 the FT–SE Eurotrack 200

Index,11 and the CAC–40 Index,12 all

listed in accordance with Rule 31.5(E).

The CBOE represents that the Index

warrant issues will conform to the index

warrant listing guidelines contained in

Rule 31.5(E). Specifically, the listing

guidelines of the CBOE will require that

(1) the issuer thereof shall have assets in

excess of $100,000,000 and otherwise

substantially exceed the size and

earnings requirements of CBOE Rule

31.5(A); 13 (2) the term of warrants shall

be for a period ranging from one to five

years from the date of issuance; and (3)

the minimum public distribution of

such issues shall be 1,000,000 warrants,

together with a minimum of 400 public

holders, and a minimum aggregate

market value of $4,000,000. The CBOE

has proposed applying the same margin

treatment as it requires for CBOE-listed

options to the purchase of Index

warrants.14

The CBOE also proposes that Nikkei

300 Index warrants will be direct

obligations of their issuer, subject to

cash settlement in U.S. dollars, and

either exercisable throughout their life

(i.e., American style) or exercisable only

on their expiration date (i.e., European

style). Upon exercise, or at the warrant

expiration date (if not exercisable prior

to such date), the holder of a warrant

structured as a ‘‘put’’ would receive

payment in U.S. dollars to the extent

that the Index has declined below a prestated cash settlement value.

Conversely, holders of a warrant

structured as a ‘‘call’’ would, upon

exercise or at expiration, receive

payment in U.S. dollars to the extent

that the Index has increased above the

pre-stated cash settlement value. If ‘‘outof-the-money’’ at the time of expiration,

the warrants would expire worthless.

Because warrants are derivative in

nature and closely resemble index

options, the CBOE has proposed

safeguards that are designed to meet the

investor protection concerns raised by

the trading of index options. First, the

Exchange represents that it will require

that Index warrants only be sold to

investors whose accounts have been

approved for options trading pursuant

to CBOE Rule 9.7.15 Second, pursuant to

CBOE Rule 30.50, Interpretation .02, the

Exchange’s options suitability standards

contained in Rule 9.9 shall apply to

recommendations in Index warrants.

Third, pursuant to Rule 30.50,

Interpretation .04 and Rule 9.10(a),

discretionary orders in Index warrants

must be approved and initialled on the

day entered by a Senior Registered

Options Principal or a Registered

Options Principal. Finally, the CBOE,

prior to commencement of trading in

Index warrants, will distribute a circular

to its membership to call attention to

certain compliance responsibilities

when handling transactions in Index

warrants.16

D. Surveillance

The Exchange will use the same

surveillance procedures currently

utilized for each of the Exchange’s other

index warrants to monitor trading in

Index warrants.

III. Commission 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) of the

Act.17 Specifically, the Commission

finds that the trading of warrants based

on the Nikkei 300 Index will serve to

protect investors, promote the public

interest, and help to remove

impediments to a free and open

securities market by providing investors

with a means to hedge exposure to

market risk associated with the Japanese

equity market and provide a surrogate

instrument for trading in the Japanese

securities market.18 The trading of

warrants based on the Nikkei 300 Index

should provide investors with a

valuable hedging vehicle that should

reflect accurately the overall movement

of the Japanese equity market.

In addition, the Commission believes,

for the reasons discussed below, that the

CBOE has adequately addressed issues

related to customer protection, index

design, surveillance, and market impact

of Nikkei 300 Index warrants.

A. Customer Protection

Due to the derivative nature of index

warrants, the Commission believes that

Nikkei 300 Index warrants should only

be sold to investors capable of

evaluating and bearing the risks

associated with trading in such

instruments and that adequate risk

disclosure be made to investors. In this

regard, the Commission notes that the

rules and procedures of the Exchange

that address the special concerns

attendant to the secondary market

trading of index warrants will be

applicable to the Nikkei 300 Index

warrants. In particular, by imposing the

special suitability, account approval,

disclosure, and compliance

requirements noted above, the CBOE

has adequately addressed potential

public customer problems that could

arise from the derivative nature of

Nikkei 300 Index warrants. Moreover,

the CBOE will distribute a circular to its

members identifying the specific risks

associated with warrants on the Nikkei

300 Index.19 Pursuant to the CBOE’s

listing guidelines, only substantial

companies capable of meeting their

warrant obligations will be eligible to

issue Nikkei 300 Index warrants.

B. Index Design and Structure

The Commission finds, as it did in

approving Nikkei 300 Index options,

that it is appropriate and consistent

with the Act to classify the Index as a

broad-based index. Specifically, the

Commission believes the Index is broadbased because it reflects a substantial

segment of the Japanese equity market,

and, among other things, contains a

large number of stocks that trade in that

market. First, the Index consists of 300

actively-traded stocks traded on the first

section of the TSE, representing 36

different industry groups in Japan.

Second, the market capitalizations of

the stocks comprising the Index are very
2618 Federal Register / Vol. 60, No. 6 / Tuesday, January 10, 1995 / Notices

20 In evaluating the manipulative potential of a

proposed index derivative product, as it relates to

the securities that comprise the index and the index

product itself, the Commission has considered

several factors, including (1) the number of

securities comprising the index or group; (2) the

capitalizations of those securities; (3) the depth and

liquidity of the group or index; (4) the

diversification of the group or index; (5) the manner

in which the index or group is weighted; and (6)

the ability to conduct surveillance on the product.

See Securities Exchange Act Release No. 31016

(August 11, 1992), 57 FR 37012 (August 17, 1992).

21See Memorandum of United States Securities

and Exchange Commission and the Securities

Bureau of the Japanese Ministry of Finance on the

Sharing of Information, dated May 23, 1986.

22 It is the Commission’s expectation that this

information would include transaction, clearing,

and customer information necessary to conduct an

investigation.

23 15 U.S.C. 78s(b)(2) (1988).

24 17 CFR 200.30–3(a)(12) (1993).

large. Specifically, the total

capitalization of the Index, as of

December 8, 1994, was US$2.24 trillion,

with the market capitalizations of the

individual stocks in the Index ranging

from a high of US$76.99 billion to a low

of US$0.69 billion, with a median value

of US$3.36 billion and a mean of

US$7.46 billion. Third, no one

particular stock or group of stocks

dominates the Index. Specifically, no

single stock comprises more than 3.438

percent of the Index’s total value, and

the percentage weighting of the five

largest issues in the Index accounts for

14.495 percent of the Index’s value.

Accordingly, the Commission believes it

is appropriate to classify the Index as

broad-based.

C. Surveillance

As a general matter, the Commission

believes that comprehensive

surveillance sharing agreements

between the relevant foreign and

domestic exchanges are important

where an index product comprised of

foreign securities is to be traded in the

United States. In most cases, in the

absence of such a comprehensive

surveillance sharing agreement, the

Commission believes that it would not

be possible to conclude that a derivative

product, such as a Nikkei 300 Index

warrant, was not readily susceptible to

manipulation.

Although the CBOE and the TSE do

not yet have a written comprehensive

surveillance sharing agreement that

covers the trading of Nikkei 300 Index

warrants, a number of factors support

approval of the proposal at this time.

First, while the size of an underlying

market is not determinative of whether

a particular derivative product based on

that market is readily susceptible to

manipulation, the size of the market for

the securities underlying the Nikkei 300

Index makes it less likely that the

proposed Index warrants are readily

susceptible to manipulation.20 In

addition, the Commission notes that the

TSE is under the regulatory oversight of

the Japanese Ministry of Finance

(‘‘MOF’’). The MOF has responsibility

for both the Japanese securities and

derivatives markets. Accordingly, the

Commission believes that the ongoing

oversight of the trading activities on the

TSE by the MOF will help to ensure that

the trading of Nikkei 300 Index warrants

will be carefully monitored with a view

toward preventing unnecessary market

disruptions.

Finally, the Commission and the MOF

have concluded a Memorandum of

Understanding (‘‘MOU’’) that provides a

framework for mutual assistance in

investigatory and regulatory matters.21

Moreover, the Commission also has a

longstanding working relationship with

the MOF on these matters. Based on the

longstanding relationship between the

Commission and the MOF and the

existence of the MOU, the Commission

is confident that it and the MOF could

acquire information from one another

similar to that which would be available

in the event that a comprehensive

surveillance sharing agreement were

executed between the CBOE and the

TSE with respect to transactions in TSEtraded stocks related to Nikkei 300

Index warrant transactions on the

CBOE.22

Nevertheless, the Commission

continues to believe strongly that a

comprehensive surveillance sharing

agreement between the TSE and the

CBOE covering Nikkei 300 Index

warrants would be an important

measure to deter and detect potential

manipulations or other improper or

illegal trading involving Nikkei 300

Index warrants. Accordingly, the

Commission believes it is critical that

the TSE and the CBOE continue to work

together to consummate a formal

comprehensive surveillance sharing

agreement to cover Nikkei 300 Index

warrants and the component securities

as soon as practicable.

D. Market Impact

The Commission believes that the

listing and trading of Nikkei 300 Index

warrants on the CBOE will not

adversely impact the securities markets

in the United States or in Japan. First,

the existing index warrant surveillance

procedures of the CBOE will apply to

warrants on the Index. In addition, the

Commission notes that the Index is

broad-based and diversified and

includes highly capitalized securities

that are actively traded on the TSE.

IV. Accelerated Approval of

Amendments No. 1

The Commission finds good cause for

approving Amendment No. 1 to the

proposed rule change prior to the

thirtieth day after the date of

publication on notice of filing thereof in

the Federal Register. Amendment No. 1

is consistent with Section 6(b)(5), in that

it contains representations by the

Exchange, concerning margin, options

approved accounts, and surveillance,

which serve to protect investors and the

public interest, promote just and

equitable principles of trade, and

prevent fraudulent and manipulative

acts and practices. Therefore, the

Commission finds that no new

regulatory issues are raised by

Amendment No. 1. Accordingly, the

Commission believes it is consistent

with Sections 19(b(2) and 6(b)(5) of the

Act to approve Amendment No. 1 on an

accelerated basis.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1 to the proposed rule change. 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 foregoing

that are filed with Commission, and all

written communications relating to the

foregoing 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,

N.W. Washington, D.C. Copies of such

filings also will be available for

inspection and copying at the principal

office of the above-mentioned selfregulatory organization. All submissions

should refer to File No. SR–CBOE–94–

32, and should be submitted by January

31, 1995.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,23 that the

proposed rule change (SR–CBOE–94–

32), as amended, is hereby approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.24

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–484 Filed 1–9–95; 8:45 am]

BILLING CODE 8010–01–M