[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
