[Federal Register Volume 60, Number 17 (Thursday, January 26, 1995)]
[Notices]
[Pages 5233-5235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1979]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35247; International Series Release No. 774 File No.
SR-CBOE-95-01]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to the
Listing of Warrants on the Deutscher Aktien Index (``DAX Index'')
January 19, 1995.
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 January 5, 1995, 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 Exchange. 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 list and trade warrants based on the Deutscher
Aktien Index (``DAX Index'' or ``Index''), a broad-based index.\3\ The
Exchange represents that the listing and trading of warrants on the
Exchange is permitted by CBOE Rule 31.5(E). The text of the proposed
rule change is available at the Office of the Secretary, CBOE, and at
the Commission.
\3\The Exchange previously submitted a rule filing to permit the
listing and trading of index options on a reduced-value DAX Index.
See Securities Exchange Act Release No. 35130 (December 20, 1994),
59 FR 66985 (December 28, 1994) (notice of File No. SR-CBOE-94-47).
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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 Exchange 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
The Exchange represents that it is permitted to list and trade
index warrants under CBOE Rule 31.5(E). The Exchange is now proposing
to list and trade index warrants based upon the DAX Index. The Exchange
further represents that the listing and trading of Index warrants will
comply in all respects with CBOE Rule 31.5(E), as discussed below.
Index Design\4\
The DAX Index is a capitalization-weighted index of 30 German blue-
chip equity securities listed on the Frankfurt Stock Exchange
(``FSE'').\5\ The Exchange represents that warrants on the DAX Index
will provide investors with a low-cost means of participating in the
German economy and hedging against the risk of investing in that
economy.
\4\The Commission notes that the Exchange incorporates by
reference to its proposal to list Index options, most of the
information and representations contained in this section and in the
following sections on Index calculation and maintenance. Id. For
convenience, the Commission has adapted the text of that filing for
inclusion herein.
\5\The components of the Index are as follows: Allianz AG
Holdings, BASF AG, Bayer AG, Bayer Hypo/Wech, BMW, Bayer Vereinsbank
AG, Commerzbank AG, Continental AG, Daimler-Benz AG; Deutsche
Babcock AG; Deutsche Bank AG; Degussa AG; Dresdner Bank AB; Henkel
KGAA-Pfd; Hoechst AG; Karstadt AG; Kaufhof Holdings AG; Lufthansa
AG; Linde AG; Man AG; Metallgesellsch; Mannesmann AG; Preussag AG;
RWE AG; Schering AG; Siemens AG; Thyssen AG; Veba AG; Viag AG; and
Volkswagen AG.
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The 30 stocks comprising the DAX Index were selected by the FSE for
their high market capitalization and high degree of liquidity. The DAX
Index stocks are drawn from a broad base of industries and are
representative of the industrial composition of the broader German
equity market. The CBOE represents that the stocks contained in the
Index account for 70% of the trading volume on the FSE.
The DAX Index is weighted by the market capitalization of the
component stocks. The capitalization of a particular stock in the Index
is calculated by multiplying the listed capital\6\ by the price of the
stock and a multiple determined by the FSE.
\6\Listed capital is determined based on the issuer's preferred
and common shares registered for trading on the FSE. The CBOE notes
that domestic indexes, such as the S&P 500 Index, are calculated
based on the shares of common stock only.
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As of August 31, 1994, the CBOE represents that the 30 stocks
contained in the Index range in market capitalization from DM 1.8
billion (US$1.14 billion)\7\ to DM 50.1 billion (US$31.7 billion) with
the median capitalization of the firms in the Index of DM 9.9 billion
(US$6.3 billion). Also as of that date, the largest 13 stocks in the
Index accounted for approximately 75% of the total weight of the Index
with no single security accounting for more than 10.87% or less than
0.37% of the total weight of the Index. Average daily trading volume in
the components of the Index for the period from March 1, 1994, through
August 31, 1994, ranged from a low of 50,981 shares to a high of
820,738 shares, with an average daily trading volume for all components
during that period of approximately 295,000 shares. The Index is
composed of ten broad industry groups, including, among others,
chemicals, automobile, and insurance companies which, the CBOE
represents, reflect the industry composition of the German equity
market.
\7\Based on the exchange rate of DM 1.5815/US$1 prevailing on
August 31, 1994.
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Calculation
The DAX Index reflects changes in the capitalization of the
component stocks relative to the base value of 1,000 on December 30,
1987. The base value was reached by multiplying the price of each stock
by the number of listed shares of that stock, obtaining the sum for all
components, and then dividing by a divisor determined to give the Index
an initial value of 1,000. The Index had a closing value of 2,212.85 on
August 31, 1994.
The value of the DAX Index is calculated every minute by the FSE
from 9:30 a.m. to 1:30 p.m., Frankfurt time (3:30 a.m. to 7:30 a.m.
Eastern time), based on last sale prices of the component stocks. The
value of the Index is not disseminated by the FSE until opening prices
are avilable for at least 15 components of the Index representing at
least 70 percent of the capitalization of the Index. Thereafter, with
respect to any stock that has not yet opened for trading, the Index
value is calculated using the previous day's closing price for those
components. [[Page 5234]]
Maintenance
The Index is maintained by the FSE. The value of the Index is
calculated by the FSE and disseminated over Reuters News Service, among
others.
In order to maintain continuity of the value of the Index, the FSE
adjusts the Index to reflect certain events relating to the component
stocks. For example, the FSE adjusts the Index value to reflect cash
dividends paid on the component securities.\8\ An adjustment is also
applied by the FSE whenever a company issues new shares for which the
shareholders have preemptive rights, or when other intra-year events,
such as mergers and spinoffs, occur.
\8\The CBOE represents that the FSE makes this adjustment
because German companies usually pay their dividends only once per
year (generally in June or July). If not adjusted, the annual
dividend payment would result in a significant drop in the value of
the Index at the time when the dividends are paid. As a result, the
CBOE represents that the FSE calculates the dividend adjustment such
that share prices reflect full dividend reinvestment. As calculated
by the FSE, adjustments are made by multiplying each stock's
capitalization by an adjustment factor (related to the amount of the
dividend) that is particular to each stock. The resulting
``adjusted'' capitalization for each of the 30 stocks is summed and
divided by the base date capitalization.
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The number of listed shares of each stock used in the calculation
of the value of the Index is updated by the FSE annually in September.
At that time, the adjustment factors mentioned above, which reflect the
dividend payments and/or intra-year adjustments, as rescaled to one,
with an additional adjustment made to maintain continuity in the value
of the Index.\9\
\9\The FSE also multiplies the ratio of capitalization (current
capitalization divided by base date capitalization) by the ``chain
index factor.'' The FSE employs the ``chain index factor'' to
reflect all previous dividend and capitalization adjustments made
during the year. In this manner, continuity in the value of the
Index is maintained despite changes in the shares and rescaling of
the individual adjustment factors back to one.
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In addition, the composition of the Index is reviewed periodically
by the FSE. It is the FSE's policy not to alter the composition of the
DAX Index unless a stock fails to meet certain criteria, e.g., market
capitalization and trading volume. Replacements are usually made from a
list of substitute stocks. If it is not possible to substitute a stock
from the same industry group, a stock from another industry may be
substituted.
Index Warrant Trading
The proposed 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
immediately prior to their expiration date (i.e., European-style). Upon
exercise, the holder of a warrant structured as a ``put'' will receive
payment in U.S. dollars to the extent that the DAX Index has declined
below a cash settlement value specified at the time of issuance.
Conversely, upon exercise, holders of an Index warrant structured as a
``call'' will receive payment in U.S. dollars to the extent that the
DAX Index has increased above a cash settlement value specified at the
time of issuance. Index warrants that are ``out-of-the-money'' at the
time of expiration will expire worthless.
Warrant Listing Standards and Customer Safeguards
CBOE Rule 31.5(E) sets forth the guidelines applicable to listing
index warrants based on established foreign and domestic stock indexes.
The warrant issues based on the DAX Index will conform to the listing
guidelines under Rule 31.5(E) which provide that: (1) The issuer shall
have assets in excess of $100,000,000 and otherwise substantially
exceed the size and earnings requirements in Rule 31.5(A); (2) the term
of the warrants shall be for a period ranging from one to five years
from date of issuance; and (3) the minimum public distribution of such
issues shall be one million warrants, together with a minimum of 400
public holders and have an aggregate market value of at least $4
million.
Because index warrants are derivative in nature and closely
resemble index options, the CBOE will also require that DAX Index
warrants be sold only to customers whose accounts have been approved
for options trading pursuant to Exchange Rule 9.7. The suitability
standards of Exchange Rule 9.9 apply to recommendations in Index
warrants. Further, the Exchange will require that customer positions in
DAX Index warrants be subject to the margin requirements applicable to
options.\10\
\10\See CBOE Rule 12.3.
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In addition, Exchange Rule 30.50, Interpretation .04 requires that
the standards of Rule 9.10(a) regarding discretionary orders be applied
to Index warrants. This rule requires a branch office manager or
registered options principal to approve and initial a discretionary
order in Index warrants on the day entered. Prior to the commencement
of trading of Index warrants, the Exchange will distribute a circular
to its membership calling attention to certain compliance
responsibilities when handling transactions in Index warrants. The
Exchange will submit a draft of the circular to the Commission staff
for approval prior to distribution to members.
On September 28, 1994, the Exchange submitted for Commission
approval, proposed rule changes governing customer protection and
margin requirements for stock index warrants, currency index warrants,
and currency warrants, and position limits for stock index
warrants.\11\ The Exchange represents that DAX Index warrants issued
subsequent to approval of those proposals will be subject to the new
rules.
\11\See Securities Exchange Act Release No. 35178 (December 29,
1994), 60 FR 2409 (January 9, 1994) (notice of File No. SR-CBOE-94-
34).
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Surveillance
The Exchange expects to apply its existing index warrant
surveillance procedures to DAX Index warrants. The Exchange has a
market surveillance agreement with the FSE. The Exchange represents
that this agreement will enable the Exchange to carry out its
regulatory responsibilities with respect to the surveillance of trading
in the stocks comprising the Index.
In addition, the German legislature recently adopted new laws that
criminalize insider trading and provide for the creation, on or around
January 1995, of an independent securities regulatory authority. The
Exchange believes that these developments will facilitate Commission
approval of warrant trading based on the DAX Index because they will
enhance the surveillance of trading in the stocks comprising the Index.
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act, in general, and furthers the objectives of
Section 6(b)(5) of the Act,\12\ 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, or
dealers.
\12\15 U.S.C. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received. [[Page 5235]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interest 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 in 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 File No. SR-CBOE-95-01 and should be
submitted by February 16, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
\13\17 CFR 200.30-3(a)(12) (1994).
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FR Doc. 95-1979 Filed 1-25-95; 8:45 am]
BILLING CODE 8010-01-M
