[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Notices]
[Pages 15213-15215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8074]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38431; file No. SR-CBOE-97-13]
Self Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Notice of Filing and Order Granting Accelerated Approval of
Proposed Rule Change Relating to Short Sales of S&P 500 Index Bear
Market Warrants
March 21, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(11Act''),\1\ notice is hereby given that on February 26, 1997, 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 primarily by CBOE. The Commission is
publishing this notice and order to solicit comments on the proposed
rule change from interested persons and to grant accelerated approval
of the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE is proposing to amend Rule 30.20 relating to short sales, to
reflect an exemption granted by the Commission pursuant to Exchange Act
Rule 10a-1 \2\ for S&P 500 Index Bear Market Warrants
(``Warrants'').\3\
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\2\ 17 CFR 240.10a-1 (1993).
\3\ The text of the proposed rule change is available for review
in the Office of the Secretary, at CBOE and in the Public Reference
Room of the Commission.
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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. 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
CBOE is proposing to amend Rule 30.20 regarding short sales, to
reflect an exemption granted by the Commission pursuant to Exchange Act
Rule 10a-1 for S&P 500 Index Bear Market Warrants.
Description of S&P 500 Warrants
The CBOE is currently trading S&P 500 Index \4\ Bear Market
Warrants with 3-month Reset, expiring November 20, 1997, issued by the
International Finance Corporation (``IFC'' or ``Corporation'').\5\ The
Warrants constitute direct, unconditional, general and unsecured
obligations of the Corporation. There were 1,250,000 warrants
originally offered, and the trading symbol is OPT.WS. The Warrants
trade on the New York Stock Exchange (``NYSE'') and CBOE. The Warrants
are quoted and traded like other equity securities, generally in round
lots of one hundred. Odd lots (less than 100 Warrants) also may be
traded.
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\4\ The Index is maintained and published by Standard & Poor's,
Inc. and is intended to provide a performance benchmark for the U.S.
equity markets. The Index is a capitalization weighted measure of
the aggregate market value of 500 common stocks. The Index includes
105 individual groups and 11 economic sectors.
\5\ The International Finance Corporation is an international
organization that was established in 1956 to further economic growth
in its developing member countries by promoting private sector
development. The Corporation, together with private investors,
assists in financing the establishment, improvement and expansion of
private sector enterprises by making investments where sufficient
private capital is not otherwise available on reasonable terms. The
Corporation's share capital is provided by its member countries. It
raises most of the funds for its investment activities through the
issuance of notes, bonds and other debt securities in the
international capital markets.
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The Warrants are exercisable immediately upon purchase, subject to
postponement for certain extraordinary events and subject to maximum or
minimum exercise amounts, and may be exercised at any time until 3:00
p.m., New York City time, on the fourth Index Calculation Day
immediately preceding November 20, 1997 (``Expiration Date'') or any
earlier Delisting Date. The Warrants will expire on the Expiration
Date.
No fewer than 500 Warrants may be exercised by or on behalf of a
Warrant holder at any one time, except in the case of automatic
exercise of the Warrants or exercise upon cancellation of the Warrants.
All exercises of Warrants (other than on automatic exercise or upon
cancellation) are subject, at the Corporation's option, to the
limitation that on any exercise date, not more than 1,000,000 Warrants
in total may be exercised and not more than 250,000 Warrants on behalf
of any person or entity may be exercised.
The holder of the Warrants will be entitled to receive the product,
if positive of U.S. $50 multiplied by (i) the amount, if any, by which
the Index Strike Price for the applicable Valuation Date exceeds the
Index Spot Price, divided by (ii) the Index Strike price, as described
in the following formula:
[[Page 15214]]
[GRAPHIC] [TIFF OMITTED] TN31MR97.018
The Index Strike price is 743.95, which is the closing level of the
Index on the date of the Prospectus, and the Index Spot Price will be
determined upon exercise. If the closing level of the Index on February
20, 1997 (``Reset Date Closing Level'') is above 743.95, then the Index
Strike Price with respect to the Warrants will be increased to the
Reset Date Closing Value on the Reset Date.
The ``Valuation Date'' for a Warrant will be the first Index
Calculation Day immediately succeeding the applicable Exercise Date,
subject to postponement upon the occurrence of certain extraordinary
events or exercise limitation events, as described in the prospectus.
Exemption From Rule 30.20
Exchange Act Rule 3b-3 \6\ defines the term ``short sale,'' and
Exchange Act Rule 10a-1 \7\ governs short sales generally. Paragraph
(a) of Rule 10a-1 covers transactions in any security registered on a
national securities exchange, if trades in such security are reported
in the consolidated transaction reporting systems, and prohibits short
sales with respect to these securities unless such sales occur on a
``plus tick'' (i.e., at a price above the price at which the
immediately preceding sale was effected), or a ``zero-plus tick''
(i.e., at the last sale price if it was higher than the last different
price). The CBOE has adopted a similar provision applicable to certain
CBOE securities than is set forth in paragraph (b) of Rule 30.20.
Exchange Act Rule 10a-1 and CBOE Rule 30.20 are designed to prevent the
market price of a stock (or other reported security, as that term is
defined in paragraph (a)(4) of Rule 11Aa3-1 under the Exchange Act) \8\
from being manipulated downward by unrestricted short selling.
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\6\ 17 CFR 240.3b-3.
\7\ 17 CFR 240.10a-1.
\8\ 17 CFR 240.11Aa3-1(a)(4).
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CBOE Rule 30.20(b) sets forth that securities exempted from the
requirements of Exchange Act Rule 10a-1 will likewise be exempt from
the parallel provisions of 30.20(b) which applies to the trading of
stock, warrants, unit investment trust interests, and other securities
subject to Chapter XXX of the rules of the Exchange. By letter dated
March 21, 1997, in response to a request previously submitted by
CBOE,\9\ the Commission exempted short sales of S&P 500 Index Bear
Market Warrants from the requirements of Rule 10a-1, subject to the
condition that any such transactions must not be made for the purpose
of creating actual or apparent active trading in, or raising or
otherwise affecting the price of the Warrants or any related
security.\10\ In order to give effect to the exemption, it is necessary
that short sales of Warrants also be exempt from CBOE Rule 30.20(b),
subject to the same condition. CBOE proposes to add an interpretation
to Exchange Rule 30.20 (1) describing the exemption for Warrants from
Rule 10a-1 contained in the no-action letter; and (2) stating that so
long as that exemption remains in force, short sales of Warrants would
be exempt from the tick requirements of paragraph (b) of CBOE Rule
30.20.
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\9\ See Letter from Timothy Thompson, Senior Attorney, CBOE, to
Blair Corkran, Senior Special Counsel, Division of Market
Regulation, Commission, dated February 27, 1997.
\10\ See Letter from Nancy J. Sanow, Assistant Director,
Division of Market Regulation, Commission, to Timothy Thompson,
Senior Attorney, CBOE, dated March 21, 1997.
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The CBOE believes that secondary market transactions in S&P 500
Index Bear Market Warrants (``Warrants'') can appropriately be exempted
from paragraph (b) of Rule 30.20.\11\ The CBOE can not conceive of
circumstances in which a person would sell the Warrants in an effort to
affect the price of a single component stock or security. First, the
prices of the Warrants are not dependent upon the price of any one
stock. Rather, the prices are based upon the relationship of the value
of the S&P 500 Index to the Valuation Data Amount as defined in the
prospectus. The CBOE therefore does not believe that a person seeking
to manipulate the market price of any one of the stocks that make up
the S&P 500 Index would seek to sell the Warrants as a means of
accomplishing that result.
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\11\ The Exchange believes that the situation presented is very
analogous to the case of SuperShares, which were interests in a unit
investment trust which had the objective of providing investment
results corresponding to the price and yield performance of stocks
in the Standard & Poor's 500 Composite Stock Index. The Commission
approved an interpretation exempting SuperShares from paragraph (b)
of Rule 30.20. See Securities Exchange Act Release No. 33015
(October 5, 1993), 58 FR 53006 (October 13, 1993).
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Second, CBOE believes that any temporary disparities in relative
market values between the Warrants and the underlying Index would tend
to be corrected immediately by arbitrage activity. The arbitrage
opportunity is created as a result of the ability of the Warrants to be
exercised according to the formula described above. Under these
circumstances, it seems unlikely that short sales of the Warrants could
be used to depress the price of the underlying securities.
Moreover, the short sale rule does not apply to analogous
derivative products such as index options and futures contracts.
Because the Warrants will be used to offset or hedge positions in the
related futures or options contracts, application of the short sale
rule to the Warrants when it is not applicable to futures or options
contracts would increase risks to investors seeking to engage in
trading activities which might involve short sales of the Warrants and
detract from the ability of market participants to insure fair
valuation of the Warrants.
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act, in that
it is designed to perfect the mechanisms of a free and open market and
to protect investors and the public interest.
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 relating to the proposed rule change have been
solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
CBOE requests that the Commission find good cause pursuant to
Section 19(b)(2) of the Act \12\ for approving the proposed rule change
prior to the 30th day after publication in the Federal Register.
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\12\ 15 U.S.C. Sec. 78s(b)(2).
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IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that CBOE's proposal to amend Rule 30.20 to
reflect the exemption granted by the Commission pursuant to Exchange
Act Rule 10a-1 for S&P 500 Index Bear Market Warrants is consistent
with the
[[Page 15215]]
Act and the rules and regulations promulgated thereunder. Specifically,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) \13\ which requires that the CBOE's rules be designed,
among other things, to promote just and equitable principles of trade.
The Commission believes that by adding interpretive language to CBOE
Rule 30.20, CBOE effectively clarifies the exemption of S&P 500 Index
Bear Market Warrants from the requirements of Exchange Act Rule 10a-1
regarding short sales and the exemption from application of Rule
30.20(b). The Commission believes that the interpretation to Rule 30.20
appropriately reflects the exemption and conditions thereto as set
forth in the No-Action Letter issued by the Commission, and that the
proposed rule change does not raise any regulatory concerns because, as
noted above, the Commission has previously exempted such short sales.
The Commission notes that the Warrants will be exempt from the
requirements of CBOE Rule 30.20(b) so long as the Commission's
exemption remains in effect.
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\13\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing in the Federal Register because the proposal
accurately codifies the position previously taken by the Commission in
the Warrant No-Action Letter. Accordingly, the Commission believes it
is consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve
the proposed rule change on an accelerated basis.
V. 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 in
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 CBOE. All
submissions should refer to File No. SR-CBOE-97-13 and should be
submitted by April 21, 1997.
Conclusion
For the reasons discussed above, the Commission finds that the
proposed rule change is consistent with the Act, and in particular with
Section 6 of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\14\ that the proposed rule change (SR-CBOE-97-13) is hereby approved.
\14\ 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.\15\
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\15\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8074 Filed 3-28-97; 8:45 am]
BILLING CODE 8010-01-M
