[Federal Register Volume 60, Number 250 (Friday, December 29, 1995)]
[Notices]
[Pages 67379-67384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31506]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36623; File No. SR-CBOE-95-51]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Chicago Board
Options Exchange, Incorporated, Relating to the Listing of the Trading
of Options and Long-Term Options on the CBOE Automotive Index and Long-
Term Options on a Reduced-Value CBOE Automotive Index
December 21, 1995.
I. Introduction
On August 31, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to provide for the listing and
trading of index options on the CBOE Automotive Index (``Automotive
Index'' or ``Index''). Notice of the proposal appeared in the Federal
Register on October 5, 1995.\3\ No comment letters were received on the
proposed rule change. On December 14, 1995, the Exchange filed with the
Commission Amendment No. 1 to the proposed change.\4\ This order
approves the Exchange's proposal, as amended.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 36295 (September 28,
1995), 60 FR 52229.
\4\ In Amendment No. 1, as discussed more fully herein, the
Exchange proposed certain maintenance standards for the Automotive
Index. See Letter from Eileen Smith, Director, Product Development,
Research Department, CBOE, to John Ayanian, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Market Regulation''), Commission, dated December 14, 1995
(``Amendment No. 1'').
[[Page 67380]]
---------------------------------------------------------------------------
II. Description of Proposal
A. General
The CBOE proposes to list for trading options on the Automotive
Index, a new securities index developed by the CBOE. The Automotive
Index consists of ten companies involved in the design and manufacture
of automobiles and automotive parts (replacement and original
equipment).\5\ The CBOE also proposes to list either long-term options
on the full-value Index or long-term options on a reduced-value Index
that will be computed at one-tenth of the value of the Automotive Index
(``Automotive Index LEAPS'' or ``Index LEAPS'').\6\ Automotive Index
LEAPS will trade independent of and in addition to regular Index
options traded on the Exchange,\7\ however, as discussed below, for
purposes of position and exercise limits, positions in Index LEAPS and
regular Index options will be aggregated.
\5\ The components of the Index are: Chrysler Corporation
Holding Co. (``C''); Dana Corp. (``DCN''); Echlin Inc. (``ECH'');
Eaton Corp. (``ETN''); Ford Motor Co. (``F''); General Motors Corp.
(``GM''); Genuine Parts Co. (``GPC''); Goodyear Tire and Rubber Co.
(``GT''); Magna International Inc. (``MGA''); and TRW Inc.
(``TRW'').
\6\ LEAPS is an acronym for Long-Term Equity Anticipation
Securities. LEAPS are long-term index option series that expire from
12 to 36 months from their date of issuance. See CBOE Rule
24.9(b)(1).
\7\ According to the CBOE, no proxy for the performance of this
industry group is currently available in the U.S. exchange-traded
derivatives markets, and the Exchange believes that options on the
Index will provide investors with a low-cost means to participate in
the performance of or to hedge the risk of investments in this
sector.
---------------------------------------------------------------------------
B. Composition of the Index
The Index was designed by the Exchange and is comprised of ten
companies involved in the design and manufacture of automobiles and
automotive parts. The share of each of the components contained in the
Index currently trade in the U.S. on the New York Stock Exchange
(``NYSE'').
As of the close of trading on July 31, 1995, the Index was valued
at 179.93. As of the same date, the components comprising the Index
ranged in capitalization from $2.3 billion to $36.4 billion. The total
capitalization as of that date was $112.2 billion; the mean
capitalization was $11.2 billion; and the median capitalization was
$4.8 billion. The largest component accounted for 20% of the total
weighting of the Index, while the smallest accounted for 5.00%. The top
five components accounted for 68.33% of the total weight of the
Index.\8\ The average trading volume of the components of the Index,
for the period from February 1, 1995, through July 31, 1995, ranged
from a high of 3.53 million shares per day to a low of 135,738 shares
per day.
\8\ The Index portfolio is composed of ten components such that
the largest capitalized Index component (GM) represents 20% of the
Index value, the second largest component (F) represents 17.5%, the
third largest component (C) represents 12.5%, the fourth largest
component (GT) represents 10%, the fifth (GT), sixth (TRW), and
seventh (GPC) largest components each represent 8.33%, and the eight
(DCN), ninth (ECH), and tenth (MGA) largest components each
represent 5%.
---------------------------------------------------------------------------
C. Maintenance
The Index will be maintained by CBOE. To maintain continuity in the
Index following an adjustment to a component security, the divisor will
be adjusted. Changes which may result in divisor changes include, but
are not limited to, certain rights issuances, quarterly re-balancing,
and component security changes. A component of the Index may be
replaced in the event of certain events, such as a merger,
consolidation, dissolution, or liquidation.
The Index is re-balanced after the close of business on Expiration
Friday on the March Quarterly Cycle. In addition, the Index will be
reviewed on approximately a monthly basis by the CBOE staff. The CBOE
may change the composition of the Index at any time to reflect changes
affecting the components of the Index or the Automotive industry
generally. If it becomes necessary to remove a component from the
Index, every effort will be made to add a component that preserves the
character of the Index. Moreover, replacement securities must be
``reported securities'' as defined in Rule 11Aa3-1 of the Act.\9\ In
considering securities to be added to the Index, the CBOE will take
into account the capitalization, liquidity, volatility, and name
recognition of the proposed replacement component. CBOE will not
decrease the number of components to less than 9 nor increase the
number of components to more than 13.
\9\ See Amendment No. 1 supra note 4.
---------------------------------------------------------------------------
If the number of stocks is increased, the weights will be
redistributed such that the largest stock will never account for more
than 25% of the weight of the Index and the top three stocks will not
account for more than 50% of the weight of the Index and the remaining
weight will be distributed among the remaining components to reflect
the relative market value of those components. For example, if Stock
XYZ is added and it is in the same market value range as those stocks
with an 8.33% weight in the Index,10 the following may be the
result of the re-balancing: (1) GM--20%; (2) F--17.5%; (3) C--12.5%;
(4) GT--10%; (5) TRW--6.25%; (6) GPC--6.25%; (7) ETN--6.25%; (8) XYZ--
6.25%; (9) DCN--5%; (10) ECH--5%; and (11) MGA--5%.
\10\ See supra note 8.
---------------------------------------------------------------------------
If the number of stocks in the Index is decreased to 9, the largest
stock will have a weight of no more than 25% of the Index and the top
three stocks will account for no more than 55% of the Index. The
remaining weight will be reallocated among the remaining components.
If it becomes necessary to replace a component security intra-
quarter, the replacement security will be added at the same weight as
the security being removed.11 If a stock is replaced at the time
of a quarterly re-balancing, the components will be ranked according to
market value and the weighting methodology currently in use at the time
of the replacement will be applied.12 The number of component
stocks in the Index will only be changed at the time of a quarterly re-
balancing.
\11\ In the event that it becomes necessary to remove General
Motors Corp., Ford Motor Co., or Chrysler Corporation, CBOE would
most likely re-balance the Index at the time of the component
change. The weighting of the Index would be reallocated depending on
the market value of the replacement security. See Amendment No. 1,
supra note 4.
\12\ See Amendment No. 1, supra note 4. According to CBOE, the
Index components will always be ranked in descending market
capitalization order and the Index portfolio adjusted in accordance
with the maintenance standards set forth herein. Telephone
conversation between Eileen Smith, Director, Product Development,
Research Department, CBOE, and John Ayanian, Attorney, OMS, Market
Regulation, Commission, on December 14, 1995.
---------------------------------------------------------------------------
Prior to making any of the above changes to the Automotive Index,
CBOE will notify members and member firms of the changes. Generally,
these changes are sent by facsimile to member firms and distributed on
the trading floor approximately one week prior to the change.13
\13\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------
Additionally, at each quarterly re-balancing, the Exchange will
ensure that at least 80% of the number of components, and at least 90%
of the weight of the Index satisfies the initial listing criteria in
CBOE Rule 5.3 14 (for components which are not the subject of
[[Page 67381]]
standardized options trading) or the maintenance criteria in CBOE Rule
5.4 15 (for components which are currently the subject of
standardized options trading).
\14\ The CBOE's options listing standards, which are uniform
among the options exchanges, provide that a security underlying an
option must, among other things, meet the following requirements:
(1) the public float must be at least 7,000,000 shares; (2) there
must be a minimum of 2,000 stockholders; (3) trading volume in the
U.S. must have been at least 2.4 million over the preceding twelve
months; and (4) the U.S. market price must have been at least $7.50
for a majority of the business days during the preceding three
calendar months. See CBOE Rule 5.3, Interpretation and Policy .01.
\15\ The CBOE's options maintenance standards, which are uniform
among the options exchanges, provide that a security underlying an
option must, among other things, meet the following requirements:
(1) The public float must be at least 6,300,000 shares; (2) there
must be a minimum of 1,600 stockholders; (3) trading volume in the
U.S. must have been at least 1.8 million over the preceding twelve
months; and (4) the U.S. market price must have been at least $5.00
for a majority of the business days during the preceding six
calendar months. See CBOE Rule 5.3, Interpretation and Policy .01.
---------------------------------------------------------------------------
The CBOE will promptly notify the Commission staff at any time that
the CBOE determines that the Index fails to satisfy any of the above
maintenance criteria. Further, in such an event, the Exchange will not
open for trading any additional series of Index options or Index LEAPS
unless the Exchange determines that such failure is not significant,
and the Commission staff affirmatively concurs in that determination,
or unless the Commission specifically approves the continued listing of
that class of Index options or Index LEAPS pursuant to a proposal filed
in accordance with Section 19(b)(2) of the Act.
D. Applicability of CBOE Rules Regarding Index Options
Except as modified by this order, the rules in Chapter XXIV of the
CBOE Rules will be applicable to Index options and full-value and
reduced-value Index LEAPS. In accordance with Chapter XXIV of CBOE's
rules, the Index will be treated as a narrow-based index for purposes
of applicable position and exercise limits, policies regarding trading
halts and suspensions,16 and margin treatment.17
\16\ See CBOE Rule 24.7.
\17\ See CBOE Rule 24.11.
---------------------------------------------------------------------------
E. Calculation of the Index
The Index will be calculated by CBOE or its designee on a real-time
basis using last-sale prices. The value of the Index will be calculated
continuously and will be disseminated to the Options Price Reporting
Authority (``OPRA'') every fifteen seconds by the CBOE, based on the
last-sale prices of the securities comprising the Index. OPRA, in turn,
will disseminate the Index value to other financial vendors such as
Reuters, Telerate, and Quotron.18 If a component security is not
currently being traded on its primary market, the most recent price at
which the security traded on such market will be used in the Index
calculation.
\18\ Telephone conversation between Eileen Smith, Director,
Product Development, Research Department, CBOE, and John Ayanian,
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
---------------------------------------------------------------------------
The Index is calculated on a ``modified equal-dollar-weighted''
method. The value of the Index equals the current combined market value
(based on U.S. primary market prices) of the assigned number of shares
of each of the components in the Index divided by the current Index
divisor. The Index divisor was initially calculated to yield a
benchmark value of 150.00 at the close of trading on December 16, 1994.
The value of the Index at the close on July 31, 1995, was 179.93.
Each of the ten component securities is represented in dollar
amounts that approximate the relative sizes of the companies in the
Index. The Exchange believes that this methodology will present a fair
representation of the automotive industry without assigning excessive
weight to the top three securities (GM, F, and C), as measured by
market capitalization. The initial component weights, and the weights
at the time of the last quarterly re-balancing on June 16, 1995, were:
GM--20%, F--17.5%, C--12.5%, GT--10%, ETN--8.33%, GPC--8.33%, TRW--
8.33%, DCN--5%, ECH--5%, and MGA--5%.
The number of shares of each component security in the Index will
remain fixed between quarterly reviews except in the event of certain
types of corporate actions, such as the payment of a dividend (other
than an ordinary cash dividend), stock distributions, stock splits,
reverse stock splits, rights offerings, or a distribution,
reorganization, recapitalization, or some such similar event with
respect to an Index component. When the Index is adjusted between
quarterly reviews, the number of shares of the relevant component in
the portfolio will be adjusted, to the nearest whole share, to maintain
the component's relative weight in the Index at the level immediately
prior to the corporate action. In the event of a replacement, the
average dollar value of the remaining portfolio components will be
calculated and that amount invested in the new component stock, to the
nearest whole share. In both cases, the divisor will be adjusted, if
necessary, to ensure continuity in the value of the Index.\19\
\19\ Telephone conversation between Eileen Smith, Director,
Product Development, Research Department, CBOE, and John Ayanian,
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
---------------------------------------------------------------------------
The Index value for purposes of settling outstanding regular Index
options and full-value and reduced-value Index LEAPS contracts upon
expiration will be calculated based upon the regular way opening sale
prices for each of the securities comprising the Index in their primary
market on the last trading day prior to expiration.\20\ In the event
that a security traded as a Nasdaq/NM security is added to the Index,
the first reported sale price for those shares will be used for
determining a settlement value. Once the shares of all of the component
securities represented in the Index have opened for trading, the value
of the Index will be determined and that value will be used as the
final settlement value for expiring Index options contracts, including
full-value and reduced-value Index LEAPS. If any of the components of
the Index do not open for trading on the last trading day before
expiration, then the prior trading day's (i.e., normally Thursday's)
last sale price will be used in the Index value calculation. In this
regard, before deciding to use Thursday's closing value for a security
contained in the Index for purposes of determining the settlement value
of the Index, the CBOE will wait until the end of the trading day on
Expiration Friday (as defined herein).\21\
\20\ As noted above, each of the component securities currently
trade on the NYSE.
\21\ Telephone conversation between Eileen Smith, Director,
Product Development, Research Department, CBOE, and John Ayanian,
Attorney, OMS, Market Regulation, Commission, on October 31, 1995.
---------------------------------------------------------------------------
F. Contract Specifications
The proposed options on the Index will be cash-settled, European-
style options.\22\ The trading hours applicable to the Index options
will be from 8:30 a.m. to 3:10 p.m., Chicago time. The Index multiplier
will be $100. The strike price interval will be $5.00 for full-value
Index options with a duration of one year or less to expiration.\23\ In
addition, pursuant to CBOE Rule 24.9, there may be up to six expiration
months outstanding at any given time. Specifically, there may be up to
three expiration months from the March, June, September, and December
cycle plus up to three additional near-term months so that the two
nearest term months will always be available. As described in more
detail below, the Exchange also intends to list several Index LEAPS
series that expire from 12 to 36 months from the date of issuance.
\22\ A European-style option can be exercised only during a
specified period before the option expires.
\23\ For a description of the strike price intervals for
reduced-value Index options and long-term Index options, See infra,
Section II.G.
---------------------------------------------------------------------------
Lastly, the options on the Index will expire on the Saturday
following the third Friday of the expiration month
[[Page 67382]]
(``Expiration Friday''). Accordingly, because options on the Index will
settle based upon opening prices of the securities comprising the Index
on the last trading day before expiration (normally Expiration Friday),
the last trading day for an expiring Index option series will normally
be the second to the last business day before expiration (normally a
Thursday).
G. Listing of Long-Term Options on the Full-Value or Reduced-Value
Automotive Index
The proposal provides that the Exchange may list long-term Index
options that expire from 12 to 36 months from listing based on the
full-value Index or a reduced-value Index that will be computed at one-
tenth of the full-value Automotive Index. Existing Exchange
requirements applicable to full-value Index options will apply to full-
value and reduced-value Index LEAPS.\24\ The current and closing Index
value for reduced-value Automotive Index LEAPS will be computed by
dividing the value of the full-value Index by 10 and rounding the
resulting figure to the nearest one-hundredth. For example, an Index
value of 179.66 would be 17.97 for the reduced-value Index LEAPS and an
Index value of 179.64 would be 17.96 for the reduced-value Index LEAPS.
The reduced-value Index LEAPS will also be European-style and will be
subject to the same rules that govern the trading of Index options,
including sales practice rules, margin requirements and floor trading
procedures. Pursuant to CBOE Rule 24.9, the strike price interval for
the reduced-value Index LEAPS will be no less than $2.50 instead of
$5.00.
\24\ See CBOE Rule 24.9(b).
---------------------------------------------------------------------------
H. Position and Exercise Limits, Margin Requirements, and Trading Halts
Exchange rules governing margin requirements,\25\ position and
exercise limits,\26\ and trading halt procedures \27\ that are
applicable to the trading of narrow-based index options will apply to
options traded on the Index. The proposal further provides that, for
purposes of determining whether given positions in full-value and
reduced-value Index LEAPS comply with applicable position and exercise
limits, positions in full-value and reduced-value Index LEAPS will be
aggregated with positions in the regular Index options. For these
purposes, ten reduced-value contracts will equal one full-value
contract.
\25\ Pursuant to CBOE Rule 24.11, the margin requirements for
the Index options will be: (1) For short options positions, 100
percent of the current market value of the options contract plus 20
percent of the underlying aggregate Index value, less any out-of-
the-money amount, with a minimum requirement of the options premium
plus 10 percent of the underlying Index value; and (2) for long
options positions, 100 percent of the options premium paid.
\26\ Pursuant to CBOE Rules 24.4A and 24.5, respectively, the
position and exercise limits for the Index options will be 9,000
contracts, unless the Exchange determines, pursuant to such rules,
that a lower limit is warranted.
\27\ Pursuant to CBOE rule 24.7, the trading on the CBOE of
Index options and Index LEAPS may be halted or suspended whenever
trading in component securities whose weighted value represents more
than 20 percent of the Index value are halted or suspended.
---------------------------------------------------------------------------
I. Surveillance
Surveillance procedures currently used to monitor trading in each
of the Exchange's other index options will also be used to monitor
trading in regular Index options and in full-value and reduced-value
Index LEAPS. These procedures include complete access to trading
activity in the shares of the securities comprising the Index. Further,
the Intermarket Surveillance Group Agreement will be applicable to the
trading of options on the Index.\28\
\28\ The Intermarket Surveillance Group (``ISG'') was formed on
July 14, 1983 to, among other things, coordinate more effectively
surveillance and investigative information sharing arrangements in
the stock and options markets. See Intermarket Surveillance Group
Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members on January 29,
1990. See Second amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990. The members of the ISG are: the Amex;
the Boston Stock Exchange, Inc.; the CBOE; the Chicago Stock
Exchange, Inc.; the National Association of Securities Dealers, Inc.
(``NASD''); the NYSE; the Pacific Stock Exchange, Inc.; and the
Philadelphia Stock Exchange, Inc. Because of potential opportunities
for trading abuses involving stock index futures, stock options, and
the underlying stock and the need for greater sharing of
surveillance information for these potential intermarket trading
abuses, the major stock index futures exchanges (e.g., the Chicago
Mercantile Exchange and the Chicago Board of Trade) joined the ISG
as affiliate members in 1990.
---------------------------------------------------------------------------
III. 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).\29\ Specifically, the
Commission finds that the trading of Automotive Index options,
including full-value and reduced-value Index LEAPS, will serve to
promote the public interest and help to remove impediments to a free
and open securities market by providing investors with a means of
hedging exposure to market risk associated with the automotive
industry.\30\ The trading of options on the Automotive Index, including
full-value and reduced-value Index LEAPS, however, raises several
issues related to index design, customer protection, surveillance, and
market impact. The Commission believes, for the reasons discussed
below, that the CBOE has adequately addressed these issues.
\29\ 15 U.S.C. 78f(b)(5).
\30\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of 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. In this regard, the trading of listed Index
options and full-value and reduced-value Index LEAPS will provide
investors with a hedging vehicle that should reflect the overall
movement of automotive industry securities.
---------------------------------------------------------------------------
A. Index Design and Structure
The Commission finds that the Automotive Index is a narrow-based
index, because it is only composed of ten stocks, all of which are
within the automotive industry. The Commission also finds that the
reduced-value Automotive Index is also narrow-based because it is
composed of same component securities as the Automotive Index and
merely dividing the Index value by ten will not alter that basic
character of the Index. Accordingly the Commission believes it is
appropriate for the CBOE to apply its rules governing narrow-based
index options to trading in the Index options and Index LEAPS.\31\
\31\ See supra Section II.H.
---------------------------------------------------------------------------
The Commission also finds that the large capitalizations, liquid
markets, and relative weightings of the individual securities
comprising the Index minimize the potential for manipulation of the
Index. First, the securities comprising the Index are actively traded,
with an average daily trading volume for all components for the period
from February 1, 1995 through July 31, 1995, of approximately 10.91
million shares per day. Second, the market capitalizations of the
components of the Index are large, ranging from a high of $36.4 billion
to a low of $2.3 billion as of July 31, 1995, with the mean and median
being $11.23 billion and $4.74 billion, respectively. Third, although
the Index is composed of only 10 securities, no particular component
security or group of securities dominates the Index. Specifically, as
of June 16, 1995, no component security contained in the Index
accounted for more than 20% of
[[Page 67383]]
the Index's total value and the five highest weighted securities in the
Index accounted for 68.33% of the Index's value.
Fourth, the proposed maintenance criteria will serve to ensure
that: (1) The Index remains composed substantially of liquid, highly
capitalized securities; and (2) the Index is not dominated by any one
security that does not satisfy the Exchange's options listing criteria.
Specifically, in considering changes to the composition of the Index,
90% of the weight of the Index and 80% of the number of components in
the Index must comply with the listing criteria for standardized
options trading set forth in CBOE Rule 5.3 (for securities that are not
then the subject of standardized options trading) and CBOE Rule 5.4
(for securities that are then the subject of standardized options
trading).\32\ Additionally, the CBOE is required to review the
composition of the Index at least quarterly to ensure that the Index
continues to meet this 90%/80% criterion.
\32\ Additionally, the securities contained in the Index must be
``reported'' securities and must be traded on the Amex or the NYSE
or must be Nasdaq/NM securities. See also supra notes 9-15 and
accompanying text discussing certain requirements involving changes
in the Index.
---------------------------------------------------------------------------
The CBOE will promptly notify the Commission staff at any time that
the CBOE determines that the Index fails to satisfy any of the above
maintenance criteria. Further, in such an event, the Exchange will not
open for trading any additional series of Index options or Index LEAPS
unless the Exchange determines that such failure is not significant,
and the Commission staff affirmatively concurs in that determination,
or unless the Commission specifically approves the continued listing of
that class of Index options or Index LEAPS pursuant to a proposal filed
in accordance with Section 19(b) of the Act.
For the above reasons, the Commission believes that these criteria
minimize the potential for manipulation of the Index and eliminate
domination concerns.
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 Automotive Index options,
including full-value and reduced-value Automotive 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 index options currently traded on the
CBOE, the Commission believes that adequate safeguards are in place to
ensure the protection of investors in Automotive Index options and
full-value and reduced-value Automotive Index LEAPS.
C. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a stock index derivative product
and the exchange(s) trading the stocks underlying the derivative
product is an important measure for surveillance of the derivative and
underlying securities markets. Such agreements ensure the availability
of information necessary to detect and deter potential manipulations
and other trading abuses, thereby making the stock index product less
readily susceptible to manipulation. \33\ In this regard, the
Commission notes that the NYSE, which currently is the primary market
for all of the Index's component securities, is a member of the ISG.
\34\ The Commission believes that this arrangement ensures the
availability of information necessary to detect and deter potential
manipulations and other trading abuses, thereby making the Index
options and full-value and reduced-value Index LEAPS less readily
susceptible to manipulation. \35\
\33\ See Securities Exchange Act Release No. 31243 (September
28, 1992), 57 FR 45849 (October 5, 1992).
\34\ See supra 28.
\35\ See e.q., Securities Exchange Act Release No. 31243
(September 28, 1992), 57 FR 45849 (October 5, 1992) (order approving
the listing of index options and index LEAPS on the CBOE Biotech
Index).
---------------------------------------------------------------------------
D. Market Impact
The Commission believes that the listing and trading on the CBOE of
Automotive Index options, including full-value and reduced-value Index
LEAPS, will not adversely impact the markets for the securities
contained in the Index. \36\ First, because of the ``modified equal-
dollar-weighting'' formula described above, no one security or group of
securities represented in the Index will dominate the weight of the
Index immediately following a quarterly re-balancing. Second, the
maintenance criteria for the Index ensure that the Index will be
substantially comprised of securities that satisfy the Exchange's
listing standards for standardized options trading. Third, because the
securities comprising the Index must be ``reported securities'' as
defined in Rule 11Aa3-1 of the Act, the components of the Index
generally will be actively-traded and highly-capitalized. Fourth, the
9,000 contract position and exercise limits applicable to Index options
and Index LEAPS will serve to minimize potential manipulation and
market impact concerns.
\36\ In addition, the CBOE has represented that the CBOE and the
OPRA have the necessary systems capacity to support those new series
of index options that would result from the introduction of Index
options and Index LEAPS. See Memorandum from Joe Corrigan, Executive
Director, OPRA, to William Speth, CBOE, dated August 30, 1995.
---------------------------------------------------------------------------
Lastly, the Commission believes that settling expiring Automotive
Index options, including full-value and reduced-value Index LEAPS,
based on the opening prices of the component securities is consistent
with the Act.
The Commission finds good cause for approving Amendment No. 1 to
the proposal prior to the thirtieth day after the date of publication
of notice of filing thereof in the Federal Register. Specifically,
Amendment No. 1 provides objective maintenance criteria which, for the
reasons stated above, minimize the potential for manipulation of the
Index and the securities comprising the Index. Further, as discussed
above, the Commission believes that these maintenance criteria
significantly strengthen the customer protection and surveillance
aspects of the proposal, as originally proposed. \37\
\37\ See supra note III.A.
---------------------------------------------------------------------------
Based on the above, the Commission finds good cause for approving
Amendment No. 1 to the proposed rule change on an accelerated basis and
believes that the proposal, as amended, is consistent with sections
6(b)(5) and 19(b)(2) of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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
[[Page 67384]]
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. Copies of
such filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to the File
Number SR-CBOE-95-51 and should be submitted by January 19, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
\38\ that the proposed rule change (SR-CBOE-95-51), as amended, is
approved.
\38\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \39\
\39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31506 Filed 12-28-95; 8:45 am]
BILLING CODE 8010-01-M
