[Federal Register Volume 60, Number 211 (Wednesday, November 1, 1995)]
[Notices]
[Pages 55620-55623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27003]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36415; International Series Release No. 877; File No.
SR-CBOE-95-45]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change Relating to the Listing and
Trading of Options on the CBOE Mexico 30 Index
October 25, 1995.
On August 21, 1995, 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
CBOE Mexico 30 Index (``Mexico 30 Index'' or ``Index''), a broad-based,
modified capitalization weighted index comprised of thirty Mexican
stocks. On August 25, 1995, the CBOE submitted Amendment No. 1 to the
proposal to establish additional Index maintenance criteria.\3\ Notice
of the proposed rule change and Amendment No. 1 thereto appeared in the
Federal Register on September 1, 1995.\4\ No comments were received on
the proposal. This order approves the proposal, as amended.
\1\15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).
\2\17 CFR 240.19b-4 (1994).
\3\See Letter from Eileen Smith, CBOE, to Steve Youhn, SEC,
dated August 25, 1995.
\4\See Securities Exchange Act Release No. 36160 (Aug. 28,
1995), 60 FR 45755.
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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 stock index options on
the Mexico 30 Index.\5\ The Index is comprised of 30 representative
stocks traded on the Mexican Stock Exchange (``Bolsa'').\6\ The CBOE
represents that the Index is deemed to be a broad-based index under
Rule 24.1(i)(1).
\5\A European-style option may only be exercised during a
specified period before expiration.
\6\The components of the Index are Alfa SA-A; Apasco SA; Grupo
Casa Autrey; Banacci-B; Grupo Carso-A1; Controla Com M-B; Cemex SA-
B; Cifra SA-C; Desc SA-B; Empresas Moderna-A; Fomento Econ M-B;
Grupo Embotelladoro Mexico; Grupo Financiero Bancomer-B; Grupo
Financiero Serfin-B; Grupo Gigante; Grupo Modelo-C; Grupo Mexico-B;
Grupo Tribasa-CPO; Hylsamex SA-BCP; Empresas ICA; Iusacell;
Kimberly-Clark M-A; Coca-Cola Femsa; Grupo Industrial Maseca-B;
Grupo Sidek-B; Tubos de Acero; Telefonos de Mexico-L; Tolmex SA-B2;
Grupo Telev-CPO; and Vitro SA.
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A. Index Design
The Index was designed by and is maintained by the CBOE and the
Chicago Mercantile Exchange (``CME''). CBOE represents that the 30
stocks comprising the Index were selected for their high market
capitalization and their high degree of liquidity, and further believes
that they are representative of the industrial composition of the
broader Mexican equity market. The Mexico 30 Index is composed of 15
broad industry groups, including building materials, diversified
holding companies, telecommunications, mining and beverages.
The Index is weighted by the market capitalization of the component
stocks. However, the CBOE will adjust the Index on a semi-annual basis
(occurring after the close on expiration Fridays in December and June),
if necessary, to ensure that no single component shall have a weight in
the Index greater than 25%, and that the top three weighted component
stocks in the Index do not account for more than 45% of the weight of
the Index.\7\ For example, on June 16, 1995, the most recent review
date, Telefonos de Mexico (``TMX'') would have had a weight of 30.41%
of the Index. To reduce TMX's weight, the Exchange reduced the number
of outstanding TMX shares used in the calculation of the Index from
8.0375 billion to 6.1303 billion. As of July 31, 1995, TMX represented
23.61% of the Index value.
\7\See Amendment No. 1. As of July 31, 1995, the top three
stocks represented 43.6% of the weight of the Index.
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The average daily capitalization of the Index for the year ended
July 31, 1995 was $58.2 billion.\8\ The median capitalization of the
stocks in the Index on July 31, 1995, was 4.507 billion pesos ($737
million at the exchange rate of 6.115 pesos per dollar prevailing on
July 31, 1995). The average market capitalization of these stocks was
$1.54 billion on the same date (using the same rate of exchange). The
individual market capitalization of these stocks ranged from $156
million (Grupo Sidek-B) to $13.3 billion (TMX) on the same date. The
largest stock accounted for 23.61% of the Index, while the smallest
accounted for 0.36%. The top five stocks in the Index by weight
accounted for 55.02% of the Index. The average daily trading volume in
the component securities for the period from February 1995 through July
1995, ranged from a low of approximately 9,270 shares to a high of
14,123,392 shares, with an average daily trading volume for all
components of the Index of approximately 1,479,390 shares per day.
\8\On July 31, 1995, the total capitalization of the Index was
$46.21 billion, which represented 49.35% of the overall
capitalization of the Mexican Bolsa.
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B. Calculation and Maintenance of Index
The value of the Index is determined by multiplying the price of
each stock times the number of shares outstanding, adding those sums
and dividing by a divisor which gives the Index a value of 200 on its
base date of January 3, 1995. The Index had a closing value of 203.07
on July 31, 1995. The Index will be maintained by the CBOE and CME and,
in order to maintain continuity of the Index, the divisor of the Index
will be adjusted 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. In addition, as noted above, CBOE will
maintain the Index to ensure that no one component, or the top three
components, represent more than 25% or 45% of the weight of the Index,
respectively. Any changes to the composition of the Index which are
made as a result of these maintenance standards will be done on a semi-
annual
[[Page 55621]]
basis in December and June of each year.
The composition of the Index will be reviewed periodically and the
CBOE and CME may make component changes at any time to ensure that the
Index continues to represent the overall character of the Mexican
equity market. When considering replacement stocks, CBOE and CME will
choose from among the most heavily capitalized and actively traded
stocks on the Bolsa.\9\ In addition, CBOE and CME will consider other
factors including industry grouping, level of foreign accessibility
(i.e., whether foreigners may purchase the stock), name recognition,
and volatility.
\9\See Letter from William M. Speth, Jr., CBOE, to Steve Youhn,
SEC, dated October 23, 1995.
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C. Index Option Trading
The Exchange also proposes to base trading in options on the Index
on the full value of the Index as expressed in U.S. dollars. The
Exchange also may provide for the listing of full-value long-term index
option series (``LEAPS'') and reduced-value LEAPS on the
Index. For reduced-value LEAPS, the underlying value would be computed
at one-tenth of the value of the Index. The current and closing index
value of any such reduced-value LEAP will, after such initial
computation, be rounded to the nearest one-hundredth. The Exchange will
list expiration months for Mexico 30 Index options and Index LEAPS in
accordance with CBOE Rule 24.9.
The trading hours for options on the Index will be from 8:30 a.m.
Chicago time to 3:15 Chicago time. Bridge Information Systems
(``Bridge'') will calculate the value of the Index every fifteen
seconds throughout the trading day and disseminate the Index value
through the Options Price Reporting Authority (``OPRA'').\10\ Bridge
obtains quotes and trade information on a real-time basis directly from
the Bolsa through an electronic feed. The trading hours of the Bolsa
are the same as those of the New York Stock Exchange, 8:30 a.m. through
3:00 p.m. Chicago time. Accordingly, the value of the Index will be
based upon the prices of the components as traded or quoted on the
Bolsa.\11\
\10\See Amendment No. 1.
\11\As noted above Mexico Index options will continue to trade
for 15 minutes after the Bolsa closes. This is consistent with
trading times for other index options and also gives market
participants the opportunity to adjust their positions after the
Bolsa closes.
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The Exchange is proposing to establish position limits for Mexico
30 Index options equal to 50,000 contracts on the same side of the
market, with no more than 30,000 contracts in the series with the
nearest expiration date. According to the Exchange, these limits are
roughly equivalent, in dollar terms, to the limits applicable to
options on other indices. Ten reduced-value options will equal one
full-value contract for such purposes. Furthermore, the hedge exemption
rule applicable to broad-based index options, Commentary .01 to CBOE
Rule 24.4, will apply to Mexico 30 Index options.\12\
\12\Telephone Conversation between Patricia Cerny, Market
Surveillance, CBOE, and Stephen M. Youhn, SEC, on October 18, 1995.
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CBOE also represents that it has the necessary systems capacity to
support new series that would result from the introduction of Mexico 3
0 Index options. CBOE has been informed that OPRA has the capacity to
support such new series.\13\
\12\See Letter from Joe Corrigan, OPRA, to Eileen Smith, CBOE,
dated August 1, 1995.
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D. Exercise and Settlement
The proposed options on the Index will expire on the Saturday
following the third Friday of the expiration month and trading in the
expiring contract month on CBOE will normally cease on Friday at 3:15
p.m. (Chicago time) unless a holiday occurs. The exercise settlement
value of Index options at expiration will be determined from closing
prices established at the close of the regular Friday trading sessions
in Mexico. If a stock does not trade during this interval or if it
fails to open for trading, the last available price of the stock will
be used in the calculation of the Index. When expirations are removed
in accordance with Exchange holidays, such as when the CBOE is closed
on the Friday before expiration, the last trading day for expiring
options will be Thursday and the exercise settlement value of Index
options at expiration will be determined at the close of the regular
Thursday trading sessions in Mexico even if the Mexican markets are
open on Friday. If the Mexican markets are closed on the Friday before
expiration but the CBOE is open for trading, the last trading day for
expiring options will similarly be Thursday, with the exercise
settlement value being determined from Thursday closing prices on the
Bolsa.
E. Surveillance
The Exchange will apply its existing index option surveillance
procedures to Index options. In addition, the Exchange is aware of a
Memorandum of Understanding (``MOU'') between the Commission and the
Mexican Comision Nacional Bancaria y de Valores (``CNBV''). As
discussed below, this MOU will enable the Commission to obtain
information concerning the trading of the component stocks of the
Mexico 30 Index. As discussed below, the Exchange will seek to enter
into an effective surveillance agreement with the Bolsa.
II. 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).\14\ The Commission
finds that the trading of options based on the Mexico 30 Index,
including long-term options based on either the full or a reduced value
of the 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 Mexican equity market and provide a risk
management instrument for positions in the Mexican securities
market.\15\ The trading of options on the Index will permit investors
to participate in the price movements of the 30 Mexican equity
securities underlying the Index. As a result, the trading of options on
the Index will allow investors holding some or all of the securities
underlying the Index to hedge the risks associated with those
positions. Thus, the trading of options based on the Mexico 30 Index
will provide investors with a valuable hedging vehicle that should
reflect accurately the overall movement of the Mexican equity market.
\14\15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
\15\Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of rule changes pertaining to any new option
proposal upon a finding that the introduction of such new derivative
instrument is in the public interest. Such a finding would be
difficult for a derivative instrument 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.
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The trading of Index options and Index LEAPS on the Mexico 30
Index, however, raises several issues related to index design and
structure, customer protection, and surveillance. The Commission
believes, however, for the reasons discussed below, that the CBOE has
adequately addressed these issues.
A. Index Design and Structure
The Commission finds that it is appropriate and consistent with the
Act to apply the Exchange rules applicable
[[Page 55622]]
to broad-based index options to the Index options.\16\ First, the Index
consists of 30 of the most actively traded stocks on the Bolsa.\17\
Second, stocks in the Index are among the most highly capitalized
stocks on the Bolsa. For example, on July 31, 1995, the market
capitalization of the individual stocks in the Index ranged from a high
of $13.3 billion to a low of $156 million, with a mean value of U.S.
$1.54 billion. Third, the average daily capitalization of the Index,
for the year-ended July 31, 1995, was U.S. $58.2 billion.\18\ While
this figure is smaller than other previously approved broad-based
indexes on U.S. securities, it is nonetheless a substantial
capitalization for a foreign market and represents almost half of the
total capitalization of the Bolsa.\19\ Fourth, the Index includes
stocks of companies from fifteen separate industries, with no industry
segment comprising more than 25% of the Index's total value. Fifth,
CBOE maintenance criteria require that no single index component shall
comprise more than 25% of the Index's total value and that the
percentage weighting of the three largest issues in the Index shall not
exceed 45% of the Index's value. This will help to ensure that a single
stock or small group of stocks does not dominate the Index. Sixth, the
Index component stock listing and maintenance criteria will serve to
ensure that the Index maintains its broad representative sample of
stocks on the Bolsa. In addition, the maintenance criteria will ensure
that the Index continues to be comprised of component stocks that are
among the most highly capitalized and actively traded stocks on the
Bolsa. Accordingly, the Commission believes it is appropriate to
classify the Index as broad-based.
\16\In addition, the reduced value Mexico 30 Index, which is
comprised of the same component securities as the Index, and
calculated by dividing the Index by ten, is essentially identical to
the Mexico 30 Index.
\17\While some of the stocks in the Index have relatively low
trading volume, they account for a small percentage of the Index
weighting.
\18\In the event the aggregate capitalization of the Index falls
below $30 billion, the CBOE will consult with the Commission
regarding appropriate regulatory responses.
\19\A foreign index capitalization that is smaller than that of
the Mexico Index would raise questions regarding whether that
particular index warranted broad-based index options treatment.
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Furthermore, the Commission believes that the general broad
diversification of the Index component stocks, as well as their high
capitalizations and trading activity, minimize the potential for
manipulation of the Index. First, as discussed above, the Index
represents a broad cross-section of highly-capitalized Mexican stocks,
with no single industry group or stock dominating the Index. Second,
the stocks that comprise the Index are relatively actively traded.
Third, the Commission believes that the index selection and maintenance
criteria will serve to ensure that the Index continues to represent
stocks with the highest capitalizations and trading volumes on the
Bolsa. In addition, the Exchange has proposed position and exercise
limits for the Index options that are consistent with other broad-based
index options.
B. Customer Protection
The Commission believes that a regulatory system designed to
protect public customers must be in place before the trading of
sophisticated financial instruments, such as Mexico 30 Index options
and Index LEAPS, can commence on a national securities exchange. The
Commission notes that the trading of standardized exchange-traded
options occurs in an environment that is designed to ensure, among
other things, that: (1) The special risks of options are disclosed to
public customers; (2) only investors capable of evaluating and bearing
the risks of options trading are engaged in such trading; and (3)
special compliance procedures are applicable to options accounts.
Accordingly, because the Index options and Index LEAPS will be subject
to the same regulatory regime as the other standardized options
currently traded on the CBOE, the Commission believes that adequate
safeguards are in place to ensure the protection of investors in Mexico
30 Index options and Index LEAPS.\20\
\20\In addition, CBOE has represented that it and OPRA have the
necessary systems capacity to support those new series of options
that would result from the introduction of Index options and Index
LEAPS. See Memorandum from Joe Corrigan, Executive Director, OPRA,
to Eileen Smith, CBOE, dated August 1, 1995.
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C. Surveillance
In evaluating derivative instruments, the Commission, consistent
with the protection of investors, considers the degree to which the
derivative instrument is susceptible to manipulation. The ability to
obtain information necessary to detect and deter market manipulation
and other trading abuses is a critical factor in the Commission's
evaluation. It is for this reason that it is important that the SEC
determine that there is an adequate mechanism in place to provide for
the exchange of information between the market trading the derivative
product and the market on which the securities underlying the
derivative product are traded. Such mechanisms enable officials to
surveil trading in both the derivative product and the underlying
securities.\21\ For foreign stock index derivative products, such
mechanisms are especially important for the relevant foreign and
domestic exchanges to facilitate the collection of necessary
regulatory, surveillance and other information.
\21\The Commission believes that a comprehensive surveillance
sharing agreement should provide the parties thereto with the
ability to obtain information necessary to detect and deter market
manipulation and other trading abuses. Consequently, the Commission
generally requires that such agreements require that the parties
provide each other, upon request, with information about market
trading activity, clearing activity, and the identity of the
purchasers and sellers of securities underlying the derivative
product. See, e.g., Securities Exchange Act Release No. 31529 (Nov.
27, 1992), 57 FR 574248.
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With respect to the CBOE proposal, CBOE and the Bolsa do not have a
written surveillance sharing agreement that covers the trading of
Mexico 30 Index options at this time.\22\ Moreover, it is the
Commission's understanding that the Bolsa currently is not able to
provide the requisite information for a comprehensive surveillance
sharing instrument. Thus it would be impossible for the CBOE to secure
a comprehensive agreement. In such cases, the Commission has relied in
the past on surveillance sharing arrangements between the relevant
regulators. In regard to the Index, first, the Commission notes that
the Bolsa is under the regulatory oversight of the CNBV, which has
responsibility for both the Mexican securities and derivatives markets.
The Commission and the CNBV have concluded a Memorandum of
Understanding, dated October 18, 1990, that provides a framework for
mutual assistance in investigatory and regulatory issues.\23\ Based on
the relationship between the SEC and CNBV and the terms of the MOU, the
Commission understands that both it and the CNBV could acquire
information from and provide information to the other similar to that
which would be required in a comprehensive surveillance sharing
agreement between exchanges.\24\ Moreover, the agencies could make a
request for information under the MOU
[[Page 55623]]
on behalf of an SRO that needed the information for regulatory
purposes. Thus, should the CBOE need information on Mexican trading in
the Index component securities to investigate incidents involving
trading of Index options, the SEC could request such information from
the CNBV under the MOU. While this arrangement certainly would be
enhanced by the existence of direct exchange to exchange surveillance
sharing agreements, it is nonetheless consistent with other instances
where the Commission has explored alternatives when the relevant
foreign exchange was unwilling or unable to enter into a comprehensive
surveillance sharing agreement.\25\
\22\The CBOE has committed to make every effort to enter into a
comprehensive surveillance sharing agreement with the Bolsa.
\23\The CNBV is the successor to the Comision Nacional de
Valores of Mexico, which was merged with the Mexican Ranking
Commission in April 1995 to form the CNBV. See National Banking and
Securities Commission Act, Mexico, dated April 24, 1995.
\24\This information could include transaction, clearing, and
customer identity information necessary to conduct an investigation.
\25\See, e.g., Securities Exchange Act Release No. 36070 (Aug.
9, 1995), 60 FR 42205 (Aug. 15, 1995) (Order Approving Proposed Rule
Changes Relating to the Listing and Trading of Warrants on the
Deutscher Aktienindex).
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Accordingly, the Commission believes the MOU provides sufficient
basis for the exchange of necessary surveillance information. The
Commission continues to believe strongly, however, that the Bolsa and
the CBOE should continue to work together to consummate a formal
surveillance sharing agreement to cover Mexico 30 Index options as soon
as practicable.
It therefore is ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-CBOE-95-45) is approved, as
amended.
\26\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
\27\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27003 Filed 10-31-95; 8:45 am]
BILLING CODE 8010-01-M
