[Federal Register Volume 63, Number 245 (Tuesday, December 22, 1998)]
[Notices]
[Pages 70816-70818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33815]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40794; File No. SR-CBOE-98-49]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Related to
Trading and Listing Options on the Dow Jones Equity REIT Index
December 15, 1998.
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 November 5, 1998 the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') a proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the CBOE. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend certain of its rules to provide for
the listing and trading of options on the Dow Jones Equity Real Estate
Investment Trust Index (``Index''), a broad-based index. Options on the
Index will be cash-settled and will have European-style exercise
provisions. The text of the proposed rule change is available at the
Office of the Secretary, CBOE and at the Commission.
[[Page 70817]]
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
(a) Purpose
The purpose of the proposed rule change is to permit the Exchange
to list and trade cash-settled, European-style, A.M.-settled stock
index options on the Dow Jones Equity Real Estate Investment Trust
(REIT) Index. The Index is a capitalization-weighted index currently
composed of 116 equity REITs.
Index Design. The Index has been designed to measure the
performance of REITs that comprise 95% of the market capitalization of
the equity REIT investable universe. The equity REIT investable
universe includes equity REITs that are listed on the New York Stock
Exchange (``NYSE''), the American Stock Exchange (``AMEX'') and the
NASDAQ National Market, and are subject to a screening process that:
(1) eliminates REITs that have more than 10 no-trading days over the
past quarter; (2) eliminates REITs that comprise the bottom 1% of the
aggregate REIT market capitalization; and (3) eliminates REITs that
comprise the bottom 0.01% of the average dollar-trading volume. All of
the component REITs are ``reported securities,'' as that term is
defined in Rule 11Aa3-1 under the Act. The Index is a capitalization-
weighted index with each REIT affecting the Index in proportion to its
market capitalization. All but one REIT in the Index is eligible for
options trading.
On October 20, 1998, the 116 equity REITs ranged in capitalization
from $207 million to $6.13 billion. The largest REIT accounted for
5.08% of the total weighting of the Index, while the smallest accounted
for 0.17%. The total capitalization of the REITs in the Index was
$120.4 billion. The average capitalization was $1.04 billion, and the
median capitalization was $655 million.
As of October 20, 1998, the Index components represented eleven
distinct property classifications: office property (21.01%), apartments
(19.31%), shopping centers (12.27%), hotels/restaurants (9.33%),
regional malls (9.17%), diversified (8.56%), warehouses/industrial
(7.53%), healthcare (5.35%), self-storage (4.99%), manufactured homes
(1.65%) and outlet centers (0.83%). In addition, the Index components
are diversified by geographical region, representing real estate
investments throughout much of the United States.
Calculation. The methodology used to calculate the value of the
Index is similar to the methodology used to calculate the value of
other well-known broad-based indices. The level of the Index reflects
the total market value of the component REITs relative to a particular
base period. The Index base date is January 2, 1990, when the Index
value was set to 100. The Index had a closing value of 131.44 on
October 19, 1998. The daily calculation of the Index is computed by
dividing the total market value of the companies in the Index by the
Index divisor. The divisor keeps the Index comparable over time and is
adjusted periodically to maintain the Index. The values of the Index
will be calculated by Dow Jones or its designee and disseminated at 15-
second intervals during regular CBOE trading hours to market
information vendors via the Options Price Reporting Authority
(``OPRA'').
Maintenance. Dow Jones or its designee is responsible for the
maintenance of the Index. Index maintenance includes monitoring and
completing the adjustments for company additions and deletions, share
changes, stock splits, stock dividends (other than an ordinary cash
dividend), and stock price adjustments due to company restructuring or
spin-offs. Some corporate actions, such as stock splits and stock
dividends, require simple changes in the common shares outstanding and
the stock prices of the companies in the Index. Other corporate
actions, such as share issuances or component changes, may change the
market value of the Index and require an index divisor adjustment as
well.
The Index is reviewed on a quarterly basis by adding or deleting
REITs using end-of-quarter market capitalization values. If any
component REIT fails to meet the targeted threshold or the investable
universe cutoff rules, it will be deleted from the Index. Non-component
REITs that become eligible for inclusion are added, largest to
smallest, until the 95% threshold is attained. In order to preserve the
continuity of the Index, the actual threshold may be slightly higher or
lower than the targeted 95%. An annual review is performed to update
any changes in an issue's investment structure and/or property type. As
a result of these periodic reviews, over time the number of component
securities in the Index may change. The Exchange will notify the
Commission if the number of securities in the Index drops by 40 or
more.
In addition, the Exchange will notify the Commission if any of the
following occurs: 10% or more of the weight of the Index is represented
by REITs having a market value less than $75 million; less than 80% of
the Index is represented by component REITs that are eligible for
options trading; 10% or more of the weight of the Index is represented
by component REITs trading less than 20,000 shares per day; the largest
component REIT accounts for more than 15% of the weight of the Index or
the largest five components in the aggregate account for more than 50%
of the weight of the Index.
Index Option Trading. In addition to regular Index options, the
Exchange may provide for the listing of long-term index option series
(``LEAPs'') and reduced-value LEAP on the Index. For reduced-value
LEAPs, the underlying value would be computed at one-tenth of the Index
level. The current and closing index value of any such reduced-value
LEAP will, after such initial computation, be rounded to the nearest
one-hundredth.
Strike prices will be set to bracket the Index in 2\1/2\ point
increments for strikes below 200 and 5 point increments above 200. The
minimum tick size for series trading below $3 will be \1/16\th and for
series above $3 the minimum tick will be \1/8\th. The trading hours for
options on the Index will be from 8:30 a.m. to 3:02 p.m. (Chicago
time).
Exercise and Settlement. The proposed options on the Index will
expire on the Saturday following the third Friday of the expiration
month. Trading in the expiring contract month will normally cease at
3:02 p.m. (Chicago time) on the business day preceding the last day of
trading in the component securities of the Index (ordinarily the
Thursday before expiration Saturday, unless there is an intervening
holiday). The exercise settlement value of the Index at option
expiration will be calculated by Dow Jones or its designee based on the
opening prices of the component securities on the business day prior to
expiration. If a REIT fails to open for trading, the last available
price of the REIT will be used in the calculation of the Index, as is
done for currently listed indexes. When the last trading day is
[[Page 70818]]
moved because of Exchange holidays (such as when the CBOE is closed on
the Friday before expiration), the last trading day for expiring
options will be Wednesday and the exercise settlement value of Index
options at expiration will be determined at the opening of regular
Thursday trading.
Surveillance. The Exchange will use the same surveillance
procedures currently utilized for each of the Exchange's other index
options to monitor trading on options and LEAPs on the Index. For
surveillance purposes, the Exchange will complete access to information
regarding activity in the under securities.
Position Limits. The Exchange proposes to establish position limits
for options on the Index at 250,000 contracts on either side of the
market. These limits are roughly equivalent, in dollar terms, to the
limits applicable to options on other indices.
Exchange Rules Applicable. As modified herein, the Rules in Chapter
XXIV will be applicable to the Index options. Broad-based margin rules
will apply to the Index. In addition, the Index will have a broad-based
index hedge exemption of 625,000 contracts.
Disclaimer Language. CBOE is proposing to amend Rule 24.14 in order
to include specific reference to Dow Jones & Company, Inc., as being
entitled to the benefit of the disclaimer of liability in respect of
the Index. CBOE believes it has the necessary systems capacity to
support new series that would result from the introduction of the Index
options. CBOE also has been assured that the OPRA also has the capacity
to support the new series.
(b) Basis
The proposed rule change is consistent with Section 6(b) of the Act
\3\ in general and furthers the objectives of Section 6(b)(5) \4\ In
particular in that it will permit trading in options based on the Dow
Jones Equity REIT Index pursuant to rules designed to prevent
fraudulent and manipulative acts and practices and to promote just and
equitable principles of trade, and thereby will provide investors with
the ability to invest in options based on an additional index.
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\3\ 15 U.S.C. 78f(b).
\4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
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. Date 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 self-regulatory organization 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
Interesed persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of CBOE.
All submissions should refer to File No. SR-CBOE-98-49 and should be
submitted by January 12, 1999.
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. 98-33815 Filed 12-21-98; 8:45 am]
BILLING CODE 8010-01-M
