[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Notices]
[Pages 2409-2410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-427]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35178; File No. SR-CBOE 94-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Chicago Board 
Options Exchange, Inc. Relating to the Establishment of Uniform Listing 
and Trading Guidelines for Stock Index and Currency Warrants

December 29, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 29, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to adopt rules governing stock index and currency 
warrants.\3\ On December 21, 1994, the CBOE amended certain 
surveillance related matters addressed in the filing. (See footnote 6 
infra.)

    \3\Currency warrants, as used in this filing, may refer to 
warrants on individual currencies (or cross currencies) or to 
warrants on a specific currency index group (``currency index 
warrants.'')
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    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On October 19, 1990, the Commission approved SR-CBOE-90-08 
authorizing the Exchange to list and trade stock, warrants and other 
securities.\4\ This filing proposes rules governing customer protection 
and margin requirements for stock index warrants, currency index 
warrants and currency warrants and position limits for stock index 
warrants. This filing incorporates the results of numerous 
communications with the Commission staff and other exchanges, including 
comments contained in a letter from Sharon Lawson to Joanne Moffic-
Silver dated January 28, 1993 (``Lawson letter''). This filing also 
makes certain changes in the listing criteria for stock index and 
currency warrants and makes clear that certain rules applicable to 
currency warrants would apply equally to currency index warrants.

    \4\Securities Exchange Act Release No. 28556, 55 FR 43233 (Oct. 
26, 1990).
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    Position Limits. The Exchange is proposing position limits for 
stock index warrants that, in general, are approximately 75%, in terms 
of underlying dollar value, of the current position limits for index 
options. Existing Exchange Rule 4.13, Reports Related to Position 
Limits, and Rule 4.14, Liquidation of Positions, are made applicable to 
transactions in stock index warrants.
    Customer Protection. Modifications are proposed to Exchange Rule 
30.50, Doing Business With the Public, to incorporate references to 
proposed new Rule 30.52. In addition, Interpretation .02 is being 
deleted as unnecessary in that, subject to certain ``grandfather'' 
provisions identified below, rules applicable to domestic index 
warrants will apply equally to warrants on foreign indexes.
    Proposed new Rule 30.52, Special Requirements for Stock Index 
Warrants, Currency Index Warrants and Currency Warrants, sets out 
various customer protection rules applicable to stock index, currency 
index and currency warrants. In addition to the rules actually set 
forth therein, Rule 30.52 makes the following existing options customer 
protection rules applicable to stock index, currency and currency index 
warrants.

Rule 9.2  Registration of Options Principals
Rule 9.6  Registration of Branch Offices
Rule 9.7  Account Approval Requirements
Rule 9.8  Supervision Requirements
Rule 9.9  Suitability Requirements
Rule 9.10  Discretionary Account Requirements
Rule 9.21  Requirements for Customer Communications
Rule 9.23  Record-keeping Requirements for Customer Complaints

    Margin. The Exchange's proposed margin requirements for customers 
having positions in index warrants, currency index warrants and 
currency warrants are included in proposed new Rule 30.52. In general, 
the proposed margin requirements for long and short positions in stock 
index warrants and currency index warrants are the same as margin 
requirements for positions in stock index options and the margin 
requirements for long and short positions in currency warrants are the 
same as those for currency options. CBOE believes that such 
requirements are more appropriate than applying stock margin treatment 
to such warrants.
    CBOE's proposed margin rule also follow the proposals of the other 
exchanges in providing spread margin offsets between offsetting 
warrants and between warrants and listed options on the same underlying 
interest and providing special margin treatment for ``covered writing 
positions'' (i.e., ``short'' stock index warrant positions covered by 
positions in all the stocks comprising the index).\5\ Nevertheless, 
CBOE believes that a broker-dealer carrying such positions must bear in 
mind that special characteristics of warrants--such as pricing 
differences, the necessity of borrowing to make [[Page 2410]] delivery 
on short sales, and the issuer credit risk associated with long 
warrants--may cause these margin requirements to be insufficient to 
fully cover the risk of such positions in certain circumstances, and 
broker-dealers must therefore be prepared to call for additional margin 
when appropriate. CBOE further believes that each exchange listing 
stock index, currency index or currency warrants should draw the 
attention of its member firms to this issue in connection with the 
adoption of these margin rules.

    \5\Although the Exchange has conformed its proposed rule to 
those of other exchanges by including these provisions giving 
special margin treatment to covered writing positions, the Exchange 
strongly believes that such provisions should not be approved for 
any exchange unless the Commission concurrently approves the same 
margin treatment for covered writing of stock index call options and 
stock index put options.
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    In accordance with the Lawson letter, the proposed rules would be 
applicable only to warrants issued after the effective date of this 
filing. Warrants issued prior to that date would remain subject to 
rules then in effect.
    Applicability of Other Exchange Rules. Appendix A to Chapter XXX, 
which is a cross-reference table to other rules of the Exchange that 
are applicable to securities otherwise covered in Chapter XXX, is being 
updated to reflect the applicability of certain options rules (i.e., 
customer protection rules including, but not limited to, options 
account approval, suitability, etc.,) to stock index warrants, currency 
index warrants and currency warrants.
    Listing Criteria. The listing criteria for stock index warrants and 
currency warrants are being amended to reflect the comments contained 
in the Lawson letter and to make clear that they apply to currency 
index warrants. In particular, issuers would be required to have a 
minimum tangible net worth in excess of $150 million. In addition, the 
aggregate original issue price of all of a particular issuer's warrant 
offerings (combined with offerings by its affiliates) that are listed 
on a national securities exchange or that are National Market 
securities traded through NASDAQ would not be permitted to exceed 25 
percent of the issuer's net worth. Finally, opening prices for all U.S. 
traded securities will be used to determine an index's settlement value 
where 25 percent or more of the value of the index is represented by 
securities whose primary trading market is in the U.S.
    Trading Halts or Suspensions. Proposed new Rule 30.36 makes the 
provisions in Rule 24.7 concerning trading halts or suspensions in 
stock index options applicable to stock index warrants.
    Specific Warrant Issues. It is the Exchange's understanding that, 
upon approval of the foregoing amendments, no rule filing pursuant to 
Section 19(b) of the Act will be required in order for the Exchange to 
list specific issues of warrants on a board-based index that is the 
underlying index for warrants or standardized options that have 
previously been listed or approved for listing by the Commission on a 
national securities exchange or national securities association.
    Initial and maintenance listing standards for stock index warrants 
will require that no more than 20% of the securities in the underlying 
index, by weight, may be comprised of foreign securities that are not 
subject to comprehensive surveillance sharing agreements between the 
CBOE and the primary exchange on which the foreign security (including 
a foreign security underlying an ADR) is traded.\6\ Prior to trading 
stock index or currency warrants, the Exchange will distribute a 
circular to its membership providing guidance regarding member firm 
compliance responsibilities (including suitability recommendations) 
when handling transactions in index or currency warrants.\7\

    \6\Telephone conversation between James R. McDaniel, Schiff 
Hardin & Waite, and Stephen M. Youhn, SEC, on December 21, 1994 
(``Amendment No. 1''). The Exchange proposes that the ``20% test'' 
be applied in the same manner as that contained in Securities 
Exchange Act Release No. 34157 (June 3, 1994), 59 FR 30062 (June 10, 
1994) (Commission approval order allowing the expedited trading 
approval of certain narrow-based index options).
    \7\Telephone conversation between James R. McDaniel, Schiff 
Hardin & Waite, and Stephen M. Youhn, SEC, on December 22, 1994.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade, and is not designed to permit unfair 
discrimination between customers, issuers, brokers and dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other 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 the 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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the CBOE. All 
submissions should refer to File No. SR-CBOE-94-34 and should be 
submitted by January 30, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\

    \8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-427 Filed 1-6-95; 8:45 am]
BILLING CODE 8010-01-M