[Federal Register Volume 62, Number 116 (Tuesday, June 17, 1997)]
[Notices]
[Pages 32846-32848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15772]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38730; File No. SR-CBOE-97-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Chicago Board Options Exchange, Incorporated Relating to the
Listing of Options on Mutual Fund Indexes
June 10, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on June 4, 1997,
the Chicago Board Options Exchange, Incorporated (``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 CBOE. 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 to trade options on mutual fund indexes.
Specifically, CBOE plans to list options on two mutual fund indexes
designed by Lipper Analytical Services, Inc. in conjunction with
Salomon Brothers Inc. 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, 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, Proposed Rule Change
The purpose of the proposed rule change is to enable the CBOE to
list options based on mutual fund indexes. CBOE proposes to list
options on two mutual fund indexes designed by Lipper Analytical
Services, Inc. (``Lipper Analytical'' or LAS) in
conjunction with Salomon Brothers Inc.--the Lipper Analytical/Salomon
Brothers Growth Fund Index (``Growth Fund Index'') and the Lipper
Analytical/Salomon Brothers Growth & Income Fund Index (``Growth &
Income Fund Index''). Options on the Indexes will allow investors to
hedge their risk in mutual funds as well as provide a low-cost means
for investors to participate in the mutual fund market. Lipper
analytical is a major provider of mutual fund information and currently
calculates approximately 100 other mutual fund indexes designed to
track specific investment objectives.
Index Design. The Indexes are composed of the 30 largest U.S. funds
in each investment objective, based on their total net assets as of the
close on the last trading day of December. The Indexes include only
those funds that report net asset values (``NAV'') through the
facilities of the National Association of Securities Dealers Automated
quotation System (``NASDAQ''). Some mutual funds are composed of more
than one class which have different fees and expenses. If there is more
than one class of a specific mutual fund, only the class with the
highest total net assets will be included. As of December 31, 1996, the
Growth Fund Index had total net assets (``TNA'') of $218.6 billion, an
average TNA per component of $7.3 billion and a median TNA per
component of $4.2 billion. The TNAs ranged from $2.5 billion to $54.0
billion. As of the same date, the Growth & Income Fund Index had a TNA
of $241.2 billion, an average TNA per component of $8.0 billion and a
median TNA per component of $5.0 billion. The TNAs ranged from $2.5
billion to $30.9 billion.
Lipper Analytical determines the investment objective of each fund
by reviewing both the language in the prospectus and the fund's
investment characteristics as shown in the Lipper-Equity Analysis
Report on the Weighted Average Holdings of Large Investment Companies.
A Growth Fund is described as a fund that normally invests in companies
whose long-term earnings are expected to grow significantly faster
[[Page 32847]]
than earnings of the stocks represented in the major unmanaged stock
indexes. A Growth & Income Fund is described as a fund that combines a
growth of earnings orientation and an income requirement for level and/
or rising dividends.
Calculation. The Indexes are equal-weighted and re-balanced
quarterly after the close on expiration Fridays in March, June,
September, and December. The Index value is calculated in essentially
the same manner as other equal-weighted indexes. The total number of
shares for each component is calculated by dividing $1,000 by the
closing NAV, adjusted for distributions, of the component on the re-
balancing date and rounding to two decimal places. The share amount is
held constant throughout the quarter. The Indexes are calculated by
summing the product of the current NAV adjusted for distributions and
the share amount for each component and then dividing by the index
divisor. The divisors were calculated to produce a value of 150.00 for
the Growth Fund Index and 250.00 for the Growth and Income Fund Index
as of December 31, 1996, the base date. The Indexes are calculated once
per day as soon as the NAVs for each of the components are
available.\1\ The Index values will be disseminated by CBOE through the
facilities of the Options Price Reporting Authority (``OPRA'') prior to
the opening on the next business day.
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\1\ Index values are updated only at the close of trading each
day because that is the only time when the fund net asset values
comprising the Indexes are determined and disseminated. The Exchange
believes that this should not pose an obstacle to options trading,
any more than it prevents investors from entering intra-day orders
to purchase or redeem shares of the funds themselves at closing net
asset values that are unknown at the time the orders are entered.
Further, insofar as options trading is concerned, this would not be
the only example of options on indexes that are available only one
time per day, albeit for different reasons. Options on the AMEX
Japan Index and the AMEX Hong Kong 30 Index are traded in the United
States when the underlying markets are closed, and the trading of
these options has amply demonstrated that options markets can
function effectively when only one index value is available during
the trading day. Indeed, because the U.S. stock markets in which the
component funds of the Lipper Analytical Indexes invest will be
trading at the same time as the options are traded, the Exchange
feels that conditions for options trading on the Lipper Analytical
Indexes would be more favorable than for options trading on foreign
indexes when the underlying markets are closed. In the cases of the
Lipper Analytical Indexes, investors will be able to base their
trading decisions on the observation of real-time movements in the
value of market indexes and individual securities that have tended
to move in regular relationship with the Indexes. This is the basis
on which funds themselves are traded, and we see no reason why
options on indexes of funds should not be available to investors on
the same basis.
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Lipper has informed the Exchange that it has not had any difficulty
in obtaining net asset values for the funds in the Indexes. The funds
comprising the Indexes are among the largest funds in existence. In the
unlikely event that any of these funds do not comply with Rule 22c-1
under the Investment Company Act of 1940, which requires daily
computation of a fund's current net asset value, the Exchange would
follow the same procedure it uses for dissemination of standard indexes
when a component price is unavailable; it will use the last available
price.
Maintenance. Lipper Analytical has the sole responsibility of
maintaining the Indexes. Salomon Brothers acted as an adviser to
provide technical support, including advice on index design and the
methodology of index construction. Lipper Analytical reviews the
components annually after the close on the last trading day of December
to include the thirty largest funds by total net assets. Any component
changes resulting from the annual review will be announced by LAS and
CBOE at least two weeks prior to implementation which will occur after
the close on expiration in March. The index calculation reflects
reinvestment of all distributions of component funds. Generally, there
will be no need for any other adjustments intra-quarter.
Index Option Trading. The Exchange proposes to base trading in
options on the Lipper Analytical Indexes on the full-value of each
Index. The Exchange may list full-value long-term index option series
(``LEAPS''), as provided in Rule 24.9. The Exchange also
may provide for the listing of reduced-value LEAPS, for which the
underlying value would be computed at one-tenth of the value of the
Index. The current and closing index value of any such reduced-value
LEAP will, after such initial computation, be rounded to the nearest
one-hundredth.
Exercise and Settlement. Options on the Indexes will be European-
style and settle based on the closing NAVs of the component funds two
business days prior to expiration. The proposed options will expire on
the Saturday following the third Friday of the expiration month. Thus,
the last day for trading in an expiring series will be two business
days (ordinarily a Thursday) preceding the expiration date. The
settlement value (which is the same as Thursday's closing value) will
be disseminated prior to the opening on Friday.
Exchange Rules Applicable. Except as modified herein, the Rules in
Chapter XXIV will be applicable to mutual fund index options. Index
option contracts based on the Lipper Analytical Indexes will be subject
to a position limit of 75,000 contracts on the same side of the market.
Ten reduced-value options will equal one full-value contract for such
purposes. The Exchange believes that the proposed position limits are
reasonable and appropriate for this product, and are consistent with
the position limits that apply to other index options.
Rule 24.9 Interpretation and Policy .01(a) is being amended to
include 2\1/2\ point strike price intervals for mutual fund indexes
with strike prices less than $200. Broad-based margins will apply to
mutual fund index options. CBOE is amending Rule 24.1(e) to reflect the
fact that mutual funds can underlie indexes.
Surveillance. As with any other option product, the CBOE will
closely monitor activity in these options and therefore, should be able
to identify any potentially unusual activity in the options. It should
be noted that with respect to the component funds that comprise the
Indexes, trading in the funds themselves has no effect on the value of
the Indexes. Instead, the value of the Indexes depends entirely on the
net asset values of the component funds, which in turn depends on the
values of the stocks held in the portfolios of the various funds. With
this in mind, there are a few reasons why the concerns with
manipulative activity are not as great with respect to options on these
Indexes as they are on other index options. First, the Indexes are
equal-weighted, thus no single component dominates the Index. Therefore
any person attempting to manipulate the Indexes would have to
manipulate the NAVs of a majority of the Index components. Second, in
order to manipulate the NAVs of the component funds, a persons would
have to have knowledge of the component securities held by the funds.
This information is not disseminated to the public until after the fact
(generally only quarterly), thus it would be nearly impossible for any
individual to know, with any degree of certainty, the components of
enough of the funds to make any manipulative efforts worthwhile. If it
became necessary to examine activity in the underlying stocks, the CBOE
could use the information available for the time period that was being
examined.
Miscellaneous. The Exchange is aware of Commission concerns with
respect to the degree in which fund portfolio managers should be
allowed to trade options on the Lipper Analytical Indexes. CBOE
believes that question of permissible trading activities of fund
managers are properly to be answered by each fund's management,
consistent
[[Page 32848]]
with guidance provided by the Commission. We do point out, However,
that because the Indexes will be re-balanced each quarter to ensure
that no single fund makes up more than 3.33% of an Index, there is
little likelihood that any one fund will ever have a significant
influence over the value of the Index of which it is a part. Thus the
conflict of interest that may be thought to exist when a portfolio
manager trades the same securities in which his or her fund may be
interested should not exist in respect of the portfolio manager's
activities in options on the Lipper Analytical Indexes.
CBOE has the necessary systems capacity to support new series that
would result from the introduction of the Lipper Analytical/Salomon
Brothers Index options. CBOE has also been informed that OPRA has the
capacity to support such new series.
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Securities Exchange Act of 1934 in general and
Section 6(b)(5) in particular in that it is designed to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities and to protect investors and the public
interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The 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 of 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
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, 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 in 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 CBOE. All submissions
should refer to File No. SR-CBOE-97-25 and should be submitted by July
8, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\2\
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\2\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15772 Filed 6-16-97; 8:45 am]
BILLING CODE 8010-02-M
