[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Notices]
[Pages 56587-56588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28002]
[[Page 56587]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37873; File No. SR-CBOE-96-52]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to Options
on Interests in Exchange-Listed, Open-End Investment Companies
October 25, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
July 29, 1996, 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.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes the adoption of rules to permit the trading of
options on interest in open-end, exchange-listed investment companies
that hold securities comprising or based on an index or portfolio of
securities designed to replicate substantially a specific component of
a designated stock index.
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, 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
The purpose of the proposed rule change is to provide for the
trading of options on shares or units of open-end, exchange-listed
investment companies that hold securities comprising or based on an
index or portfolio of securities that is designed to provide investment
results that substantially correspond to the price and yield
performance of a designated stock index. Specifically, the Exchange
intends to trade options on interests in investment companies such as
CountryBasketsTM, which are shares issued by series of an open-end
investment company approved for listing on the New York Stock Exchange
(``NYSE'') and, in the case of the initial nine series CountryBaskets,
are designed to replicate substantially the performance of specific
components of the FT/S&P-Actuaries World IndexTM (``FT/S&P-
AWITM'').\1\
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\1\ CountryBasketsTM'' is a servicemark of Deutsche Morgan
Grenfell/C.J. Lawrence Inc. (``DMG''). ``FT/S&P-Actuaries World
IndexTM'' and ``FT/S&P-AWITM'' are trademarks of The
Financial Times Limited and Standard & Poor's (``S&P''), and are
licensed for use by DMG.
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CountryBaskets are structured either as shares issued by a series
of an open-end management investment company that invests in an indexed
portfolio of securities, or as interests in unit investment trusts
(``UITs'') that have as their assets shares of an open-end investment
company that holds the underlying indexed portfolio. In either case,
CountryBasket securities will be continually distributed through
``Creation Transactions.'' To effect a Creation Transaction, a person
would buy shares of the open-end investment company in exchange for an
in-kind deposit of the indexed portfolio of securities and a specified
amount of cash to make the deposit equal the net asset value of the
fund shares being purchased. Creation Transactions may occur only in
``Creation Unit'' size, which is either 100,000 or 250,000 fund shares,
depending on the fund. In the case of CountryBaskets structured as
UITs, the trust would issue a creation unit-size aggregation of
redeemable units of beneficial interest in exchange for shares of the
underlying fund. Thus it will always be possible for a person to
acquire additional CountryBaskets by means of a Creation Transaction.
Nine series of CountryBaskets were authorized for trading on the
NYSE earlier this year.\2\ These initial nine series are based on FT-
Actuaries World Indices for Australia, France, Germany, Hong Kong,
Italy, Japan, South Africa, United Kingdom and the United States.
Options on these same nine series of CountryBaskets are proposed to be
traded on the CBOE pursuant to the same rules and procedures that apply
generally to trading in options on equity securities or indexes of
equity securities, except that special listing criteria are proposed to
apply to options on CountryBaskets. Also, reflecting the open-ended
nature of CountryBaskets, the Exchange is not proposing any position or
exercise limits to apply to options on CountryBaskets.
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\2\ See Securities Exchange Act Release No. 36923 (March 5,
1996), 61 FR 10410 (March 13, 1996).
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The listing standards proposed for options on CountryBaskets are
set forth in proposed Interpretation and Policy .06 under CBOE Rule 5.3
and in Interpretation .10 under CBOE Rule 5.4. These standards, which
provide for the listing of European-style options only, are
substantially the same as those that apply to the initial and continued
listing of CountryBaskets on the NYSE under the recently approved rules
of that exchange.\3\ Conforming the listing standards for options on
CountryBaskets to the listing standards that apply to CountryBaskets
themselves will assure that whenever there is trading in the underlying
CountryBaskets, options on these same CountryBaskets may also be
available. Similarly, CBOE's proposed listing standards provide that
there will be no opening transactions in CountryBasket options, and all
such options will trade on a liquidation-only basis, if CountryBaskets
should cease to trade on an exchange or as national market securities
in the over-the-counter market. The availability of options on
CountryBaskets should be beneficial to investors in CountryBaskets,
since it will permit these investors to utilize options to adjust the
risks and rewards of CountryBasket investing to their individual needs.
It should also add to the depth and liquidity of the market for
CountryBaskets by permitting market makers in that market to hedge the
risks of their market-making activities.
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\3\ See NYSE Listed Company Manual, Paragraph 703.16.
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Reflecting the open-ended nature of CountryBaskets, the NYSE's
maintenance listing standards for CountryBaskets do not include
criteria based on either the number of Units outstanding or on their
trading volume.\4\ Similarly, the CBOE believes it is neither necessary
nor appropriate to apply traditional position or exercise limits to
CountryBasket options, and it is proposing to amend Rules 4.11 and 4.12
to provide that these limits shall not ordinarily apply. Since it
should always be possible to create more CountryBaskets at their net
asset value
[[Page 56588]]
by making an in-kind deposit of the securities that comprise the
underlying index or portfolio, there is no limit on the available
supply of underlying CountryBaskets. Accordingly, the Exchange believes
that there is not the same need for option position and exercise limits
to protect the underlying market against squeezes and other types of
manipulation that applies to options on securities that are not open-
ended. Furthermore, the CBOE believes that in the absence of any
maintenance listing requirements in the underlying market that call for
a minimum number of Units or for minimum trading volume, position and
exercise limits would not be meaningful as a percentage of either of
these measures. For these reasons, and to assure that so long as there
is trading in the underlying CountryBaskets there can also be trading
in the related options, the CBOE is not proposing any position or
exercise limits for CountryBasket options. The CBOE reserves the right,
however, to impose position and exercise limits if, for reasons not now
foreseeable, such limits should ever be needed in the interest of fair
and orderly markets in the options or the underlying CountryBaskets.
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\4\ NYSE requires at least 300,000 Units to be outstanding
before trading in a series of CountryBaskets may commence. Although
there is no comparable maintenance standard, as a practical matter
there can never be trading in a series of CountryBaskets in which
there is less than one Creation Unit (100,000 or 250,000 shares,
depending on the series) outstanding, since CountryBaskets may only
be created and redeemed in Creation Unit size, and if the last
outstanding Creation Unit should ever be redeemed, the series (and
options on that series) will cease to trade.
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Reflecting that the underlying portfolios of CountryBaskets are
indexed, it is proposed to amend Interpretation and Policy .01 under
Exchange Rule 5.5 to provide that the minimum strike price intervals
for options on CountryBaskets will be $2.50 where the strike price is
$200 or less, and $5.00 where the strike price is over $200. These are
comparable to the strike price intervals provided in Interpretation and
Policy .01 under Exchange Rule 24.9, as applicable to broad-based index
options having strike prices at about the level expected for
CountryBasket options.
Margin requirements are proposed for options on CountryBaskets at
the same levels that apply to options generally under Exchange Rule
12.3, except that, reflecting the indexed nature of underlying
portfolios of CountryBaskets, minimum margin must be deposited and
maintained equal to 100% of the current market value of the option plus
15% (instead of 20%) of the market value of equivalent units of the
underlying security value. In this respect, the margin requirements
proposed for options on CountryBaskets are comparable to margin
requirements that currently apply to market index options under
Exchange Rule 24.11(b)(i).
The CBOE believes it has the necessary systems capacity to support
the additional series of options that would result from the
introduction of CountryBaskets options, and it has been advised that
the Options Price Reporting Authority (``OPRA'') also will have the
capacity to support these additional series upon implementation of an
additional outgoing high speed line from the OPRA processor.
The Exchange represents that 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, because, by providing for the trading
of options on CountryBaskets within the framework of the CBOE's
regulated market place while there is trading in the underlying
CountryBaskets in other exchange markets, the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
inappropriate 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 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 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. Sec. 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-96-52 and should be
submitted by November 22, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28002 Filed 10-31-96; 8:45 am]
BILLING CODE 8010-01-M
