[Federal Register Volume 61, Number 33 (Friday, February 16, 1996)]
[Notices]
[Pages 6274-6276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3579]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36826; International Series Release No. 931; File No.
SR-CBOE-95-54]
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, Inc. Relating to Currency Warrants Based on the Value
of the U.S. Dollar in Relation to the Brazilian Real
February 9, 1996.
On September 13, 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 currency
warrants based upon the value of the U.S. dollar in relation to the
Brazilian Real (``Real warrants''). Notice of the proposal was
published for comment and appeared in the Federal Register on November
16, 1995.\3\ No comment letters were received on the proposal. On
January 5, 1996, the Exchange filed Amendment No. 1 to the proposed
rule change.\4\ This order approves the CBOE'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. 36464 (November 8,
1995), 60 FR 57607 (November 16, 1995).
\4\ In Amendment No. 1, the Exchange proposes to increase the
minimum add-on margin for out-of-the-money Real warrants from 2% to
7%. Additionally, the Exchange clarifies that for purposes of
determining the settlement value of the Real warrants, the Exchange
will require the issuer or issuer's designee to use the Federal
Reserve Board noon buying rate (``Fed noon buying rate'') which is
published by the Federal Reserve Bank of New York. Alternatively, in
the event the Federal Reserve Bank were to discontinue publishing
this figure, the Exchange would require the issuer to use the
exchange rate published by the Central Bank of Brazil. See Letter
from Timothy Thompson, Senior Attorney, CBOE, to James McHale,
Attorney, Office of Market Supervision, Division of Market
Regulation, Commission, dated January 4, 1996 (``Amendment No. 1'').
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I. Description of the Proposal
CBOE Rule 31.5(e) permits the exchange to list and trade currency
warrants. The listing and trading of Real warrants will comply in all
respects with CBOE Rule 31.5(E).
A. Currency Warrant Trading
Real warrants will be unsecured obligations of their issuers and
will be cash-settled in U.S. dollars.\5\ The warrants will be either
exercisable throughout their life (i.e., American style) or exercisable
only on their expiration date (i.e., European style). Upon exercise,
the holder of a Real warrant structured as a ``put'' would receive
payment in U.S. dollars to the extent that the value of the Brazilian
Real has declined in relation to the U.S. dollar below a pre-stated
base price. Conversely, holders of a Real warrant structured as a
``call'' would, upon exercise, receive payment in U.S. dollars to the
extent that the value of the Brazilian Real in relation to the U.S.
dollar has increased above the pre-stated base price. Warrants that are
``out-of-the-money'' at the time of expiration will expire worthless.
\5\ As stated in note 4 supra, the CBOE will require the issuer
or issuer's designee to use the Fed noon buying rate for determining
settlement value, but if the Fed noon buying rate is unavailable,
the Exchange will require the use of the exchange rate published by
the Central Bank of Brazil (``Brazil rate''). The Brazil rate is
disseminated daily by the Central Bank of Brazil through the
SISBACEN, which is a large foreign-currency-exchange computer
network linking the Central Bank to the interbank market. See
Memorandum from the Division of Economic Analysis, Commodity Futures
Trading Commission (``CFTC''), to Commissioners, CFTC, dated October
10, 1995 (regarding the application of the Chicago Mercantile
Exchange for designation as a contract market in Brazilian Real
futures and futures options).
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B. Warrant Listing Standards and Customer Safeguards
The Exchange has established revised generic listing standards for
currency warrants, which are contained in CBOE Rule 31.5(E).\6\ Any
issue of Real warrants will conform to the listing criteria under Rule
31.5(E) which provide that: (1) The issuer shall have minimum tangible
net worth in excess of $150,000,000 and otherwise substantially exceed
the size and earnings requirements in Rule 31.5(A); (2) the term of the
warrants shall be for a period ranging from one to five years from date
of issuance; and (3) the minimum public distribution of such issues
shall be 1,000,000 warrants, together with a minimum of 400 public
holders, and have a minimum aggregate market value of $4,000,000. In
addition, where an issuer has a minimum tangible net worth in excess of
$150,000,000 but less than $250,000,000, the Exchange shall not list
Real warrants of the issuer if the value of such warrants plus the
aggregate value, based upon the original issuing price, of all
outstanding stock index, currency index and currency warrants of the
issuer (and its affiliates) that are listed for trading on a national
securities exchange or traded through the facilities of the National
Association of Securities Dealers Automated Quotation System
(``NASDAQ'') exceeds 25% of the issuer's net worth.
\6\ See Securities Exchange Act Release No. 36169 (August 29,
1995), 60 FR 46644 (September 7, 1995) (``generic warrant listing
order'').
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Moreover, pursuant to the generic warrant listing order, Real
warrants may be sold only to customers whose accounts have been
approved for options trading pursuant to Exchange Rule 9.7. Moreover,
the suitability standards of Exchange Rule 9.9, and the standards of
Rule 9.10(a), regarding discretionary orders, will be applicable.
Pursuant to CBOE Rule 30.53(d), the Exchange will require members and
member organizations to report to the CBOE any positions of 100,000 or
more Real warrants on the same side of the market.\7\ Finally, prior to
the commencement of trading of Real warrants, the Exchange will
distribute a circular to its membership calling attention to certain of
these compliance responsibilities when handling transactions in Real
warrants.\8\
\7\ See generic warrant listing order, supra note 6.
\8\ The circular should highlight: (1) That Real warrants may be
sold only to customers with options approved accounts; (2) the
applicable suitability requirements; (3) the standards regarding
discretionary orders; (4) the reporting requirements for positions
of 100,000 or more Real warrants on the same side of the market; and
(5) the applicable customer margin requirements.
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C. Margin Requirements
The new listing standards also set forth the applicable margin
requirements for currency warrants. New Exchange Rule 30.53 requires
minimum margin on any currency warrant carried ``short'' in a
customer's account to be 100% of the current market value of each such
warrant plus an ``add-on'' percentage of the product of the units of
underlying currency per warrant and the spot price for such currency.
The Exchange has calculated frequency distributions reflecting
percentage price returns for all one (1) and five (5) day periods for
the Brazilian Real for the period of September 1, 1992 through August
30, 1995. These distributions demonstrate that more than 97.5% of all
five (5) day returns for the three (3) year period would have been
covered by 10.0% of the underlying Real value.
Based upon these results, the Exchange is proposing to set the
margin ``add-on'' percentage for Brazilian Real warrants at 10% for
both initial and maintenance margin, with a minimum add-on for out-of-
the money warrants of 7%.\9\ Additionally, the Exchange will conduct
periodic reviews of the volatility in the Brazilian Real. Pursuant to
Rule 30.53(a), if the Exchange determines that a higher customer
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margin level would be appropriate, the CBOE will take immediate steps
to implement the change. If, on the other hand, the Exchange determines
that a lower margin percentage would be appropriate, the Exchange must
file a proposal with the Commission pursuant to Section 19(b) of the
Act to modify the margin add-on percentages applicable to Real
warrants. Should the customer margin levels for Real warrants be
changed, the Exchange will promptly notify the Exchange's membership
and the public.
\9\ See Amendment No. 1, supra note 4.
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II. Discussion
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) \10\ in that it will
help remove impediments to a free and open securities market and
facilitate transactions in securities by providing investors with a
low-cost means to participate in the performance of the Brazilian
economy or to hedge against the risk of investing in that economy.
Specifically, the Commission believes that the trading of listed
warrants on the Brazilian Real should provide investors with a hedging
and risk transfer vehicle that will reflect the overall movement of the
Brazilian Real in relation to the U.S. dollar. In this regard, Real
warrants should provide investors with an efficient and effective means
of managing risk associated with the Brazilian Real.
\10\ 15 U.S.C. 78f(b)(5).
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Moreover, Real warrants will conform to the listing standards in
Rule 31.5(E), and the other provisions of the generic warrant listing
order. These rules provide a regulatory framework for trading currency
warrants, and should help to provide for fair and orderly markets in
Real warrants. Under these rules, the Exchange will limit transactions
in Real warrants to customers with options approved accounts and impose
the CBOE's options suitability standards and discretionary accounts
standards to transactions in Real warrants. Additionally, the
requirements established by the Exchange for reporting positions of
100,000 or more Real warrants on the same side of the market should
assist the CBOE in detecting and deterring attempts at manipulation.
Furthermore, the CBOE has proposed adequate customer margin
requirements. The proposed add-on margin (i.e. 10% with a minimum add-
on for out-of-the-money warrants of 7%) provides sufficient coverage to
account for historical and potential volatility in the Brazilian Real
in relation to the U.S. dollar. The Exchange will conduct periodic
reviews of the volatility in the Brazilian Real and must take immediate
steps to increase the existing customer margin levels if the Exchange
determines that the existing levels are no longer adequate. As a
result, the Commission believes that the proposed customer margin
levels and the review and maintenance criteria for those margin levels
will result in adequate coverage of contract obligations and are
designed to reduce risks arising from inadequate margin levels.
Finally, the Exchange will prepare and distribute to its membership
a circular describing each issue of Real warrants listed by the CBOE,
calling attention to certain compliance responsibilities when handling
transactions in Real warrants.\11\
\11\ See supra note 8.
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of the notice thereof in the Federal Register.
Specifically, Amendment No. 1 increases the minimum add-on margin for
out-of-the-money Real warrants from 2% to 7%, to protect against
greater fluctuations in the value of the Real. In addition, Amendment
No. 1 clarifies that the Exchange will require any issuer of Real
warrants to use a reliable, widely disseminated, and unbiased source
for determining settlement value of the Real warrants. The Exchange
will require the issuer or issuer's designee to use the Fed noon buying
rate, published by the Federal Reserve Bank of New York for settlement
purposes. Alternatively, in the event the Fed noon buying rate is
unavailable, the Exchange will require the issuer to use the exchange
rate published by the Central Bank of Brazil.\12\ Based on the above,
the Commission finds good cause to accelerate approval of Amendment No.
1.
\12\ See notes 4 and 5 supra.
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III. 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, 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
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,
NW., Washington, DC 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-95-54 and should be
submitted by March 8, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-95-54), as amended, is
approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3579 Filed 2-15-96; 8:45 am]
BILLING CODE 8010-01-M
