Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices 24979

27The 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. The

members of the ISG are: the Amex; the Boston Stock

Exchange, Inc.; the Chicago Board Options

Exchange, Inc.; the Chicago Stock Exchange, Inc.;

the NASD; the NYSE; the Pacific Stock Exchange,

Inc.; and the Philadelphia Stock Exchange, Inc. Due

to the potential opportunities for trading abuses

involving stock index futures, stock options, and

the underlying stock, as well as for 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) have also joined the ISG as affiliate

members.

28The Commission notes that position limits for

narrow-based stock index warrants are set at a level

roughly equivalent to 75 percent of narrow-based

index options. As a result, position limits for

warrants based on the Index will be nine million.

See Securities Exchange Act Release No. 37007

(March 21, 1996), 61 FR 14165 (March 29, 1996)

(order approving establishment of uniform listing

and trading guidelines for narrow-based stock index

warrants) (SR–Amex–95–39).

29 15 U.S.C. § 78s (b)(2) (1988).

30 17 CFR 200.30–3(a)(12).

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

2On April 15, 1996, the Exchange amended its

proposal to indicate that, in connection with the

narrow-based index hedge exemption, the CBOE’s

Department of Market Regulation will monitor daily

to determine that each exempted option contract is

hedged by the equivalent dollar amount of

component securities and for unusual option and

stock activity. In addition, the CBOE notes that the

hedge exemption account must promptly notify the

Exchange of material changes in the portfolio. See

Continued

C. Surveillance

The Commission believes that a

surveillance sharing agreement between

an exchange proposing to list a security

index derivative product and the

exchange(s) trading the securities

underlying the derivative product is an

important measure for the surveillance

of the derivative and underlying

securities markets. Such agreements

ensure the availability of the

information necessary to detect and

deter potential manipulations and other

trading abuses, thereby making the

security index product less readily

susceptible to manipulation. In this

regard, the Amex, and the NYSE and the

NASD (where the component securities

of the Index are currently listed) are all

members of the Intermarket

Surveillance Group (‘‘ISG’’), which

provides for the exchange of all

necessary surveillance information.27

D. Market Impact

The Commission believes that the

listing and trading of warrants on the

Index will not adversely impact the

underlying securities. First, the Amex’s

existing index warrants surveillance

procedures will apply to warrants on

the Index. Second, the Index is

comprised of highly-capitalized

securities that are actively-traded.

Lastly, the Amex has established

reasonable position and exercise limits

for narrow-based stock index

warrants,28 which will serve to

minimize potential manipulation and

other stock market concerns.

The Commission finds good cause to

approve the proposed rule filing,

including Amendment Nos. 1 and 2,

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. The

Commission notes that to date no

comments were received on the

proposal. The Commission also notes

that accelerated approval of this rule

filing is based, in part, on the following

facts: (i) The Amex is presently seeking

authority to list and trade only a single

issuance of warrants on the Index which

have a term of two-years; (ii) the Index’s

component securities are highlycapitalized and actively-traded; and (iii)

the Amex has represented that the

warrants on the Index will comply in all

respects with the Exchange rules

governing the listing and trading of

narrow-based warrants, including Amex

Rules 1100 through 1110, Amex Rule

462, and Section 106 of the Amex

Company Guide. Moreover, Amendment

No. 1 to the Amex’s proposal describes

details of certain Index maintenance

procedures and the Index calculation

methodology. In this regard, the

Commission believes that the

Exchange’s monthly review of the

Index’s component securities for

options eligibility, percentage weight,

and trading volume, as described above,

will help to ensure that the Index

maintains its intended market character

as well as remains an appropriate

trading vehicle for public customers. In

addition, the equal-dollar methodology

is a well-established index calculation

method and therefore does not present

any new or novel regulatory issues.

Lastly, although Amendment Nos. 1 and

2 change the Index’s component

securities, these modifications are minor

and consistent with the Index’s general

objective. In this context, the Index

continues to be comprised of activelytraded and highly-capitalized securities.

Accordingly, the Commission believes

that it is consistent with Section 6(b)(5)

of the Act to approve the proposed rule

change, including Amendment Nos. 1

and 2, on an accelerated basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

1 and 2. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Copies of the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. § 552, will be

available for inspection and copying at

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of the Amex. All submissions

should refer to File No. SR–Amex–96–

12 and should be submitted by June 7,

1996.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the Amex’s

proposal to list and trade warrants based

on the Select Technology Stock Index is

consistent with the requirements of the

Act and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,29 that the

proposed rule change (SR–Amex–96–

12), as amended, is approved on an

accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.30

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12383 Filed 5–16–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37196; File No. SR–CBOE–

96–18]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change and Amendment No. 1 to

the Proposed Rule Change by the

Chicago Board Options Exchange,

Inc., Relating to a Hedge Exemption for

Industry (Narrow-Based) Index Options

May 10, 1996.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

March 18, 1996, the Chicago Board

Options Exchange, Inc. (‘‘CBOE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items I and II

below, which Items have been prepared

by the self-regulatory organization.2 The
24980 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices

Letter from Margaret G. Abrams, Senior Attorney,

CBOE, to Yvonne Fraticelli, Attorney, Commission,

dated April 10, 1996 (‘‘Amendment No. 1’’).

3Position limits impose a ceiling on the number

of option contracts which an investor or group of

investors acting in concert may hold or write in

each class of options on the same side of the market

(i.e., aggregating long calls and short puts or long

puts and short calls). Exercise limits prohibit an

investor or group of investors acting in concert from

exercising more than a specified number of puts or

calls in a particular class within five consecutive

business days.

4See Securities Exchange Act Release Nos. 36858

(February 16, 1996), 61 FR 7295 (February 27, 1996)

(order approving File No. SR–PHLX–95–45)

(‘‘PHLX Approval Order’’); and 36981 (March 15,

1996), 61 FR 11929 (March 22, 1996) (order

approving File No. SR–PSE–95–28) (‘‘PSE Approval

Order’’).

5See PHLX Approval Order and PSE Approval

Order, supra note 4.

6The CBOE uses the term ‘‘underlying market

value,’’ instead of the equivalent term ‘‘notional

value,’’ which the PHLX uses in its proposal, for

consistency with a pending CBOE proposal to

amend the CBOE’s broad-based index hedge

exemption. See Securities Exchange Act Release

No. 36738 (January 19, 1996), 61 FR 2324 (January

25, 1996) (notice of filing of File No. SR–CBOE–96–

01) (‘‘Broad-Based Index Option Proposal’’).

7See Broad-Based Index Option Proposal, supra

note 6.

1See Broad-Based Index Option Proposal, supra

note 6.

Commission is approving this proposal

on an accelerated basis.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to amend CBOE

Rule 24.4A, ‘‘Position Limits for

Industry Index Options,’’ to establish a

hedge exemption from industry

(narrow-based) index option position

and exercise limits.3 The Commission

previously has approved similar

proposals by the Philadelphia Stock

Exchange, Inc. (‘‘PHLX’’) and the Pacific

Stock Exchange, Inc. (‘‘PSE’’).4

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

self-regulatory organization 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 self-regulatory organization 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

The CBOE proposes to adopt new

Interpretation and Policies .01 and .02

to CBOE Rule 24.4A to establish an

industry hedge exemption based on the

industry index hedge exemptions filed

by the PHLX and the PSE, which were

approved recently by the Commission.5

Interpretation and Policy .02 establishes

certain compliance requirements for

industry index hedge exemption

accounts.

Currently, the Exchange has an equity

option hedge exemption and a broadbased option index hedge exemption,

but no hedge exemption for positions in

CBOE industry index options. The

CBOE states that its proposal will adopt

the same formula used by the PHLX and

the PSE for their industry index hedge

exemptions, with minor modifications.

The proposed narrow-based hedge

exemption will be available to both

broker-dealers and customers.

In order to qualify for the proposed

hedge exemption, a position must be

‘‘hedged’’ by share positions in at least

75% of the number of component stocks

of the index, or securities convertible

into such stock. The proposed

exemption is in addition to the standard

limit and other exemptions and may not

exceed twice the standard limit

established under CBOE Rule 24.4A.

The underlying value of the option

position may not exceed the value of the

underlying portfolio. The value of the

underlying portfolio is determined as

follows: (1) The total market value of the

net stock position; and (2) for positions

in excess of the standard limit, subtract

the underlying market value 6 of (a) any

offsetting calls and puts in the

respective index option class; (b) any

offsetting positions in stock index

futures; and (c) any economically

equivalent position (assuming no other

hedges for these contracts exist).

Further, the proposal requires that

both the options and stock positions be

initiated and liquidated in an orderly

manner. Specifically, a reduction of the

options position must occur at or before

the corresponding reduction in the stock

portfolio position.

The CBOE notes that its proposal

makes minor modifications to the

PHLX’s narrow-based index hedge

exemption requirements to conform the

CBOE’s language to a pending CBOE

proposal to amend broad-based index

options position limits and

exemptions.7 According to the CBOE,

the Exchange’s modifications do not

affect the hedge exemption definition or

the calculation of the value of the

portfolio, but will impose uniform

CBOE Department of market Regulation

monitoring requirements for both the

proposed narrow-based and broad-based

index hedge exemptions.

Under the proposal, exercise limits

will continue to correstpond to position

limits, so that investors may exercise the

number of contracts set forth as the

position limit, as well as those contracts

exempted by this proposal, during five

consecutive business days.

As of March 1, 1996, the CBOE trades

the following industry index options,

with limits as shown:

(1) S&P Banking Index—12,000

contracts;

(2) S&P Chemical Index—9,000

contracts;

(3) S&P Health Care Index—9,000

contracts;

(4) S&P Insurance Index—9,000

contracts;

(5) S&P Retail Index—9,000 contracts;

(6) S&P Transportation Index—9,000

contracts;

(7) CBOE Software Index—9,000

contracts;

(8) CBOE Environmental Index—

9,000 contracts;

(9) CBOE Gaming Index—9,000

contracts;

(10) CBOE Global

Telecommunications Index—12,000

contracts;

(11) CBOE Israel Index—9,000

contracts;

(12) CBOE Mexico Index—12,000

contracts;

(13) CBOE REIT Index—12,000

contracts;

(14) CBOE Telecommunications

Index—12,000 contracts;

(15) CBOE Biotech Index—9,000

contracts;

(16) CBOE Latin 15 Index—12,000

contracts; and

(17) CBOE High Technology Index—

12,000 contracts.

The CBOE will require that

documentation regarding the qualified

stock portfolio be filed with the CBOE’s

Department of Market Regulation on

behalf of a hedge exemption account

seeking an exemption. Proposed

Interpretation and Policy .02 contains

compliance requirements for industry

hedge exemption accounts which are

identical to the compliance

requirements proposed in a pending

CBOE proposal for broad-based index

hedge exemption accounts.8 The

Exchange states that its Department of

Market Regulation will continue to

monitor trading activity in industry

index options to detect potential abuses,

and review to ensure that closing

positions subject to an exemption is
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices 24981

2See Amendment No. 1, supra note 2.

10 Id.

11See PHLX Approval Order and PSE Approval

Order, supra note 4.

12 15 U.S.C. 78f(b) (1988 & Supp. V 1993).

13See PHLX Approval Order and PSE Approval

Order, supra note 4.

14 If a hedge position ceases to exist, this would

be viewed as a material change which must be

reported promptly to the CBOE. In such a case, the

value of the stock portfolio would be reduced

accordingly and therefore the hedged options

position must also be reduced. As noted above, a

reduction of the options position must occur at or

before the corresponding reduction in the stock

portfolio position.

15See Amendment No. 1, supra note 2.

16See Amendment No. 1, supra note 2. Market

participants granted a hedge exemption must

promptly notify the Exchange of material changes

in the portfolio.

17The Commission notes that broker-dealers and

public customers may utilize the CBOE’s equity

hedge exemption. See CBOE Rule 4.11,

Interpretation and Policy .04, and Securities

Exchange Act Release No. 35738 (May 18, 1995), 60

FR 27573 (May 24, 1995) (order approving File Nos.

SR–Amex–95–13, SR–CBOE–95–13, SR–NYSE–95–

04, SR–PSE–95–05, and SR–PHLX–95–10)

(permanently approving hedge exemption pilot

programs).

conducted in a fair and orderly manner.

In addition, the CBOE’s Department of

Market Regulation will monitor daily to

determine that each exempted option

contract is hedged by the equivalent

dollar amount of component securities

and for unusual option and stock

activity.9

The CBOE notes that the proposed

industry index hedge exemption

contains build-in safeguards.

Specifically, the ‘‘basket’’ of stocks

constituting the hedge must be

comprised of at least 75% of the stocks

underlying the index. The hedge

exemption account must promptly

notify the Exchange of any material

changes in the value of the portfolio.10

Further, both the options and stock

positions must be initiated and

liquidated in an orderly manner, so that

a reduction of the options position must

occur at or before the corresponding

reduction in the stock portfolio position.

Finally, the aggregate underlying value

of the industry index option position

cannot exceed the market value of the

underlying hedging portfolio, to ensure

that stock transactions are not used to

manipulate the market in a manner

benefiting the option position.

The Exchange believes that the

proposal is consistent with Section 6 of

this Act, in general, and, in particular,

with Section 6(b)(5), in the narrowbased hedge exemption should increase

the depth and liquidity of narrow-based

index options markets and allow more

effective hedging by investors without

increasing the potential for market

disruption, thereby removing

impediments to and perfecting the

mechanism of a free and open market

and a national market system in a

manner consistent with the protection

of investors and the public interest.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE 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. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The CBOE has requested that the

proposed rule change be given

accelerated effectiveness pursuant to

Section 19(b)(2) of the Act. The CBOE

believes that approval on an accelerated

basis would promote fair competition

among exchanges and eliminate the risk,

in a multiple-exchange trading

environment, of investor confusion

respecting hedge exemptions for

industry index options. As noted above,

the Commission has previously

approved similar proposals submitted

by the PHLX and the PSE.11 The CBOE

believes that the proposal presents no

significant new issues.

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).12 The

Commission concludes, as it has found

previously,13 that providing for

increased position and exercise limits

for narrow-based index options in

circumstances where those excess

positions are fully hedged with

offsetting stock positions will provide

greater depth and liquidity to the market

and will allow investors to hedge their

stock portfolios more effectively,

without significantly increasing

concerns regarding inter-market

manipulations or disruptions of either

the options market or the underlying

stock market.

Specifically, the CBOE proposal

contains safeguards that should make it

difficult to use the exempted positions

to disrupt or manipulate the market.

First, requests for the exemption must

be approved by the CBOE, which should

ensure that the hedges are appropriate

for the position being taken and are in

compliance with CBOE rules. Second,

the stock portfolio must consist of at

least 75% of the number of component

securities underlying the index, and

must correspond in value to the value

of the options position hedged, so that

the increased positions are less likely to

be used in a leveraged manner in any

manipulative scheme. As noted above,

the value of the hedging portfolio is

equal to (1) the total market value of the

net stock position; less (2) the value of

(a) any offsetting calls and puts in the

respective index option class; (b) any

offsetting positions in stock index

futures; and (c) any economically

equivalent positions (assuming no other

hedges for these contracts exist).14

Third, both the options and the stock

positions must be initiated and

liquidated in an orderly manner.

Moreover, a reduction of the options

position must occur at or before the

corresponding reduction in the stock

portfolio position, thereby helping to

ensure that the stock transactions are

not used to impact the market so as to

benefit the options positions. Fourth,

the CBOE must be notified of any

material change in the portfolio.15 Fifth,

the maximum hedge exemption position

is two times the existing limit. The ‘‘two

times the limit’’ is not automatic and the

CBOE has the authority to approve a

hedge limit for less than that amount.

The Commission notes that the

CBOE’s survelliance procedures are

designed to detect as well as deter

manipulation and market disruptions.

In particular, the CBOE’s Department of

Market Regulation will monitor the

options position of a person utilizing

the hedge exemption on a daily basis to

determine that each option contract is

hedged by the equivalent dollar amount

of component securities.16 In addition,

the CBOE’s Department of Market

Regulation will continue to monitor

trading activity in industry index

options to detect potential abuses, and

will review such activity and ensure

that closing positions subject to an

exemption is conducted in a fair and

orderly manner. Violation of any of the

provisions of CBOE Rule 24.4A and the

interpretations and policies thereunder,

absent reasonable justification or

excuse, will result in the withdrawal of

the hedge exemption and subsequent

denial of an application for a hedge

exemption thereunder.

The Commission believes that it is

reasonable for the CBOE to allow

broker-dealers, as well as public

customers, to utilize the proposed hedge

exemption.17 The Commission believes

that extending the narrow-based index

option hedge exemption to broker-
24982 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Notices

18See PHLX Approval Order and PSE Approval

Order, supra note 4.

19 15 U.S.C. 78f(b)(2) (1988).

20 17 CFR 200.30–3(a)(12) (1995).

1 15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).

2 17 CFR § 240.19b–4 (1994).

3See Securities Exchange Act Release No. 36902

(March 5, 1996), 61 FR 10043.

4See Letter from Joseph Levin, CBOE, to Howard

Kramer, SEC, dated March 29, 1996.

5See Letter from Joseph Levin, CBOE, to Howard

Kramer, SEC, dated April 8, 1996.

6See Letter from Eileen Smith, CBOE, to Stephen

Youhn, SEC, dated May 6, 1996.

7A European-style option may only be exercised

during a specified period before expiration.

8The Commission notes that Hylsamex SA–BCP

is 82% owned by Alfa SA–A and that Tolmex SA–

B2 is 99% owned by Cemex Sa.

dealers may help to increase the depth

and liquidity of the market for industry

index options and may help to ensure

that public customers receive the full

benefit of the exemption. Moreover, the

CBOE’s monitoring procedures, as

described above, should be able to

detect any abuses and ensure that the

options position, whether broker-dealer

or customer, is properly hedged.

The Commission finds good cause for

approving the proposed rule change and

Amendment No. 1 to the proposed rule

change prior to the thirtieth day after

the date of publication of notice of filing

thereof in the Federal Register. As

noted above, the Commission

previously has approved similar

proposals submitted by the PHLX and

the PSE.18 The PHLX’s and PSE’s

proposals were published for the full

notice and comment period and the

Commission received no comments on

their proposals. The CBOE’s proposal

raises no new regulatory issues.

Amendment No. 1 strengthens the

CBOE’s proposal by indicating that the

CBOE’s Department of Market

Regulation will monitor hedge

exemption accounts daily to determine

that each exempted option contract is

hedged by the equivalent dollar amount

of component securities. Accordingly,

the Commission believes it is consistent

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

Act to approve the proposed rule change

and Amendment No. 1 to the proposed

rule change on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning 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 at

the Commission’s Public Reference

Section, 450 Fifth Street, NW.,

Washington, D.C. Copies of such filing

will also be available for inspection and

copying at the principal office of the

above-mentioned self-regulatory

organization. All submissions should

refer to the file number in the caption

above and should be submitted by

[insert date 21 days after the date of this

publication].

It is therefore ordered, pursuant to

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

proposed rule change (SR–CBOE–96–

18), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.20

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12382 Filed 5–16–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37189; International Series

Release No. 977; File No. SR–CBOE–96–

09]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Approving Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendments Thereto Relating to the

Listing and Trading of Options on the

Mexican Indice de Precios y

Cotizaciones

May 9, 1996.

On February 27, 1996, the Chicago

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

or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Section 19(b) of the Securities Exchange

Act of 1934 (‘‘Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

list and trade options on the Indice de

Precios y Cotizaciones (‘‘IPC’’ or

‘‘Index’’), a cash-settled, broad-based

index designed to represent the overall

Mexican equity market. The IPC was

created, and is maintained, by the

Mexican Stock Exchange (‘‘Bolsa’’) and

is widely recognized as the benchmark

equity index for Mexico. Notice of the

proposed rule change appeared in the

Federal Register on March 12, 1996.3

No comments were received on the

proposal.

On March 29, 1996, CBOE submitted

Amendment No. 1 (‘‘Amendment No.

1’’) to the proposal to address issues

related to Index maintenance criteria.4

On April 11, 1996, CBOE submitted

Amendment No. 2 (‘‘Amendment No.

2’’) to the proposal to clarify certain

Index maintenance criteria and to

address issues relating to the reduction

and aggregation of position limits.5 On

May 7, 1996, CBOE submitted

Amendment No. 3 (‘‘Amendment No.

3,’’ together with Amendments No. 1

and 2, ‘‘Amendments’’) to the proposal

to clarify CBOE’s procedures for

reducing position limits if the Index is

subsequently reclassified as narrowbased.6 This order approves the

proposal, as amended, and solicits

comments on the Amendments.

I. Description of the Proposal

The purpose of the proposed rule

change is to permit the Exchange to list

and trade cash-settled, European-style 7

stock index options on the IPC, a broadbased, capitalization-weighted index

comprised of 35 of the largest and most

liquid stocks (issued by 28 issuers) on

the Bolsa.8 The Exchange believes that

options on the Index will provide

investors with a low-cost means of

participating in the performance of the

Mexican economy and hedging against

the risk of investing in that economy.

Index Design

The Index was designed by and is

maintained by the Bolsa. These stocks

selected for inclusion in the IPC were

chosen based upon a combination of

criteria relating to their trading volume

and market capitalization. The Bolsa

reviews a component’s compliance with

these criteria every two months. There

are three criteria which could keep a

potential replacement component stock

from being added to the Index. First,

suspended issues or those which have a

material possibility of being suspended

will not be included in the Index.

Second, if the combined weight of two

or more series of an index represented

company were to exceed 15% of the

weight of the Index, then only the series

with the highest trading volume will be

allowed to remain in the Index. Third,

if a company is a subsidiary of another

company that is in the Index and it

represents more than 75% of the assets

of the holding company it will not be

included.

The IPC is composed of stocks from

eighteen (18) industry groups including:

Telecommunications, Diversified

Holding Companies, Banks,

Broadcasting, Building Materials,

Mining, and Financial Services. The