[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17520]
[[Page Unknown]]
[Federal Register: July 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34370; International Series Release No. 685; File No.
SR-CBOE-93-55]
Self-Regulatory Organizations; Order Approving and Notice of
Filing and Order Granting Accelerated Approval of Amendment Nos. 3 and
4 to a Proposed Rule Change by the Chicago Board Options Exchange,
Inc., Relating to the Listing of Options and Long-Term Options on the
CBOE Israeli Index and Long-Term Options on a Reduced-Value CBOE
Israeli Index
July 13, 1994.
I. Introduction
On December 8, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``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 Israeli Index (``Israeli Index''
or ``Index''). The Exchange filed Amendment No. 1 to the proposed rule
change on April 29, 1994, and Amendment No. 2 on May 12, 1994.\3\
Notice of the proposal appeared in the Federal Register on June 6,
1994.\4\ No comment letters were received on the proposed rule change.
The Exchange subsequently filed Amendment No. 3 to the proposed rule
change on June 27, 1994,\5\ and Amendment No. 4 to the proposed rule
change on July 11, 1994.\6\ This order approves the Exchange's
proposal, as amended.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\Amendment No. 2, which supersedes Amendment No. 1, proposes
to: (1) reduce the number of components of the proposed Israeli
Index (``Index'') from 20 to 15; (2) require that the Index be
maintained such that at least 85% of the Index, by weight, and at
least 80% of the number of components of the Index are eligible for
standardized options trading pursuant to CBOE Rule 5.3; (3) classify
the Index as a narrow-based index for purposes of CBOE's rules; (4)
provide position and exercise limits of 7,500 contracts on the same
side of the market for Index options pursuant to CBOE Rule 24.4A;
and (5) provide that the Exchange shall submit a proposed rule
change pursuant to Section 19 of the Act and Rule 19b-4 thereunder
prior to increasing the number of components of the Index to greater
than 20 or fewer than 10. See Letter from Eileen Smith, Director,
Product Development, Research Department, CBOE, to Brad Ritter,
Attorney, Office of Market Supervision (``Office''), Division of
Market Regulation (``Division''), Commission, dated May 12, 1994.
\4\See Securities Exchange Act Release No. 34132 (May 31, 1994),
59 FR 29314 (June 6, 1994).
\5\In Amendment No. 3, the Exchange provides that: (1) any time
that a replacement security is chosen for the Index, the security
will be traded either on a U.S. securities exchange or as a National
Market security traded through the facilities of NASDAQ (as defined
herein); and (2) all components of the Index shall be ``reported
securities'' under Rule 11Aa3-1 of the Act. See Letter from Eileen
Smith, Director, Product Development, Research Department, CBOE, to
Brad Ritter, Attorney, Office, Division, Commission, dated June 27,
1994 (``Amendment No. 3'').
\6\In Amendment No. 4, the CBOE proposed to alter the
composition of the Index by removing Elbit Ltd. and Elron Electronic
Industries as components of the Index, and replacing them with (1)
Ampal-American Israel, and (2) Electronics for Imaging. See Letter
from Eileen Smith, Director, Product Development, Research
Department, CBOE, to Brad Ritter, Attorney, Office Division,
Commission, dated July 11, 1994.
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II. Description of Proposal
A. General
The CBOE proposes to list for trading options on the CBOE Israeli
Index, a new securities index developed by the CBOE and based on
Israeli stocks and ADRs\7\ that are traded on the American Stock
Exchange (``Amex''), the New York Stock Exchange (``NYSE''), or are
National Market (``NM'') securities traded through the facilities of
the National Association of Securities Dealers Automated Quotation
system (``NASDAQ''). 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 Israeli
Index (``Israeli LEAPS'' or ``Index LEAPS'').\8\ Israeli LEAPS will
trade independent of and in addition to regular Israeli Index options
traded on the Exchange,\9\ however, as discussed below, position and
exercise limits of Index LEAPS and regular Index options will be
aggregated.
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\7\An ADR is a negotiable receipt which is issued by a
depositary, generally a bank, representing shares of a foreign
issuer that have been deposited and are held, on behalf of holders
of the ADRs, at a custodian bank in the foreign issuer's home
country. See discussion of standards for ADR components, infra notes
11 and 29.
\8\LEAPS is an acronym for Long-Term Equity Anticipation
Securities. LEAPS are long-term index option series that expire from
twelve to thirty-six months from their date of issuance. See CBOE
Rule 24.9(b)(1).
\9\According to the CBOE, the Israeli Index represents a segment
of the U.S. equity market that is not currently represented in the
derivative markets and, as much, the CBOE concludes, should offer
investors a low-cost means of achieving diversification of their
portfolios toward or away from Israeli securities. The CBOE believes
the Index will provide retail and institutional investors with a
means of benefitting from their forecasts of the performance of
Israeli securities. Options on the Index also can be utilized by
portfolio managers and investors as a means of hedging the risks of
investing in Israeli securities.
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B. Composition of the Index
The Index was designed by the Exchange and is presently based on
securities representing fifteen Israeli companies that the Exchange
believes are representative of the Israeli economy, all of which trade
in the U.S. as either stocks or ADRs. Fourteen of these securities
currently trade through NASDAQ as NM securities, and one trades on the
NYSE. The Index is price-weighted and will be calculated on a real-time
basis using last sale prices.
As of the close of trading on June 28, 1994, the Index was valued
at 100.37. As of March 31, 1994, the market capitalizations of the
individual securities in the Index ranged from a high of $2.08 billion
to a low of $124.11 million, with the mean and median being $566.83
million and $324.83 million, respectively. The market capitalization of
all the securities in the Index was $8.50 billion. The total number of
shares outstanding for the stocks and ADRs in the Index ranged from a
high of 76.07 million shares to a low of 10.38 million shares. The
average price per share in the U.S. of the securities in the Index, for
the six-month period between October 1, 1993, and March 31, 1994,
ranged from a high of $39.75 to a low of $5.34. In addition, the
average daily trading volume in the U.S. of the stocks and ADRs in the
Index, for the same six-month period, ranged from a high of 750,492
shares per day to a low of 28,444 shares per day. Lastly, no one
component accounted for more than 13.12% of the Index's total value and
the percentage weighting of the five largest issues in the Index
accounted for 51.25% of the Index's value. The percentage weighting of
the lowest weighted component was 1.92% of the Index and the percentage
weighting of the five smallest issues in the Index accounted for 19.03%
of the Index's value.
C. Maintenance
The Index will be maintained by the CBOE. The CBOE may change the
composition of the Index at any time, subject to compliance with the
maintenance criteria discussed herein, to reflect the conditions in the
market for Israeli securities. If it becomes necessary to replace a
security in the Index, the Exchange represents that it will only add
new Israeli stocks and/or ADRs that are traded in the U.S. securities
markets\10\ and will take into account a security's capitalization,
liquidity, volatility, and name recognition of the proposed
replacement. Further, securities may be replaced in the event of
certain corporate events, such as takeovers or mergers, that change the
nature of the security. If, however, the Exchange determines to
increase the number of Index component securities to greater than
twenty or reduce the number of Index component securities to fewer than
ten, the proposal provides that the CBOE will submit a rule filing with
the Commission pursuant to Section 19(b) of the Act. In addition, in
choosing replacement securities for the Index, the CBOE will be
required to ensure that at least 85% of the weight of the Index and at
least 80% of the number of components continues to be made up of stocks
and ADRs that are eligible for standardized options trading.\11\
Finally, the CBOE will be required to ensure that each component of the
Index is subject to last sale reporting pursuant to Rule 11Aa3-1 of the
Act.\12\
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\10\See Amendment No. 3, supra note 5.
\11\The CBOE's options listing standards, which are uniform
among the options exchanges, provides 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. With respect to ADRs, in
addition to the above standards: (1) the Exchange must have in place
a comprehensive surveillance agreement with the primary exchange in
the home country where the security underlying the ADR is traded; or
(2) the trading volume for the three month period preceding the date
of listing in the U.S. markets for ADRs overlying any class of the
foreign issuer's common stock (on a share-equivalent basis) is at
least 50% of the sum of the (i) combined world-wide trading volume
for all classes of the foreign issuer's common stock, and (ii)
combined trading volume for all ADRs overlying any of these classes
of stock; or (3) the SEC must otherwise authorize the listing. In
addition, the percentage of the world-wide trading volume for the
security underlying an ADR that occurs in the U.S. ADR market must
meet a maintenance standard of 30% or more in order for options on
that particular ADR to continue to be traded on the CBOE. See
Securities Exchange Act Release No. 33554 (January 31, 1994), 59 FR
5622 (February 7, 1994).
\12\See Amendment No. 3, supra note 5.
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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 Israeli Index options and full-value
and reduced-value Index LEAPS. Those rules address, among other things,
the applicable position and exercise limits, policies regarding trading
halts and suspensions, and margin treatment for narrow-based index
options.
E. Calculation of the Index
The CBOE Israeli Index is a price-weighted index and reflects
changes in the prices of the Index component securities relative to the
Index's base date of January 2, 1992. Specifically, the Index value is
calculated by adding the prices of the component stocks and ADRs and
then dividing this summation by a divisor that is equal to the number
of the components of the Index to get the average price. To maintain
the continuity of the Index, the divisor will be adjusted to reflect
non-market changes in the prices of the component securities as well as
changes in the composition of the Index. Changes that may result in
divisor adjustments include, but are not limited to, stock splits and
dividends, spin-offs, certain rights issuances, and mergers and
acquisitions.
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 component
stocks and ADRs.\13\ OPRA, in turn, will disseminate the Index value to
other financial vendors such as Reuters, Telerate, and Quotron.
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\13\For purposes of the daily dissemination of the Index value,
if a stock included in the Index has not opened for trading, the
CBOE will use the closing value of that stock on the prior trading
day when calculating the value of the Index, until the stock opens
for trading.
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The Index value for purposes of settling outstanding regular Index
options and Index LEAPS contracts upon expiration will be calculated
based upon the regular way opening sale prices for each of the Index's
component securities in their primary market on the last trading day
prior to expiration. In the case of securities traded on and through
NASDAQ, the first reported sale price will be used. Once all of the
component stocks and ADRs have opened, the value of the Index will be
determined and that value will be used as the final settlement value
for expiring Index options contracts. If any of the component stocks or
ADRs 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 calculation. In this regard, before
deciding to use Thursday's closing value of a component security for
purposes of determining the settlement value of the Index, the CBOE
will wait until the end of the trading pay on expiration Friday.
F. Contract Specifications
The proposed options on the Index will be cash-settled, European-
style options.\14\ Standard options trading hours (8:30 a.m. to 3:15
p.m. Central Standard time) will apply to the contracts. 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.\15\ 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 twelve to thirty-
six months from the date of issuance.
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\14\A European-style option can be exercised only during a
specified period before the option expires.
\15\For a description of the strike price intervals for reduced-
value Index options and long-term Index options, See infra, Section
II.G.
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Lastly, the options on the Index will expire on the Saturday
following the third Friday of the expiration month (``Expiration
Friday''). Accordingly, since options on the Index will settle based
upon opening prices of the component securities on the last trading day
before expiration (normally a 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
Israeli 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 Israeli Index or a reduced-value Israeli Index that will be
computed at one-tenth the value of the full-value Index. Existing
Exchange requirements applicable to full-value and reduced-value LEAPS
will apply to full-value and reduced-value Index LEAPS.\16\ The current
and closing Index value for reduced-value Israeli 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 100.76 would be 10.08 for the Index LEAPS
and 100.74 would become 10.07. The reduced-value Index LEAPS will have
a European-style exercise and will be subject to the same rules that
govern the trading of all the Exchange's 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
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\16\See CBOE Rule 24.9(b).
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H. Position and Exercise Limits, Margin Requirements, and Trading Halts
Because the Index is classified as an ``industry index'' under CBOE
rules,\17\ Exchange rules that are applicable to the trading of options
on narrow-based indexes will apply to the trading of Israeli Index
options and Israeli Index LEAPS. Specifically, Exchange rules governing
margin requirements,\18\ position and exercise limits,\19\ and trading
halt procedures\20\ 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 a given
position in reduced-value Index LEAPS complies with applicable position
and exercise limits, positions in reduced-value Index LEAPS will be
aggregated with positions in the full-value Index options. For these
purposes, ten reduced-value contracts will equal one full-value
contract.
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\17\See CBOE Rule 24.1(i).
\18\Pursuant to CBOE Rule 24.11, the margin requirements for the
Index options will be: (1) for short options positions, 100% of the
current market value of the options contract plus 20% of the
underlying aggregate Index value, less any out-of-the-money amount,
with a minimum requirement of the options premium plus 10% of the
underlying Index value; and (2) for long options positions, 100% of
the options premium paid.
\19\Pursuant to CBOE Rules 24.4A and 24.5, respectively, the
position and exercise limits for the Index options will be 7,500
contracts, unless the Exchange determines, pursuant to Rules 24.4A
and 24.5 that a lower limit is warranted.
\20\Pursuant to CBOE Rule 24.7, the trading on the CBOE of Index
options may be halted or suspended whenever trading in underlying
securities whose weighted value represents more than 20% of the
Index value are halted or suspended.
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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 underlying securities. Further, the Intermarket
Surveillance Group Agreement, dated July 14, 1983, as amended on
January 29, 1990, will be applicable to the trading of options on the
Index.\21\
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\21\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.
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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).\22\ Specifically, the
Commission finds that the trading of Israeli 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 Israeli securities.\23\
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\22\15 U.S.C. 78f(b)(5)(1988).
\23\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 Index LEAPS will provide
investors with a hedging vehicle that should reflect the overall
movement of Israeli stocks and ADRs in the U.S. securities markets.
The Commission also believes that these Index options will provide
investors with a means by which to make investment decisions
regarding Israeli securities traded in the U.S. securities markets,
allowing them to establish positions or increase existing positions
in such markets in a cost effective manner. Moreover, the Commission
believes that the reduced-value Index LEAPS, which will be traded on
an index computed at one-tenth the value of the Israel Index, will
serve the needs of retail investors by providing them with the
opportunity to use a long-term option to hedge their portfolios from
long-term market moves at a reduced cost.
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The trading of options on the Israeli Index, including full-value
and reduced-value Index LEAPS, however, raises several concerns, namely
issues related to index design, customer protection, surveillance, and
market impact. The Commission believes, for the reasons discussed
below, that the CBOE adequately has addressed these concerns.
A. Index-Design and Structure
The Commission finds that the Israeli Index is a narrow-based
index. The Israeli Index is composed of only fifteen securities, all of
which represent Israeli companies.\24\ Accordingly, in light of the
limited number of stocks in the Index, the Commission believes it is
proper to classify the Israeli Index as narrow-based and apply CBOE's
rules governing narrow-based index options to trading in the Index
options.\25\
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\24\The reduced-value Israeli Index, which is imposed of the
same component securities as the Index and calculated by dividing
the Index value by ten, is identical to the Israeli Index.
\25\See supra notes 17 through 20, and accompanying text.
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The Commission also finds that the large capitalizations, liquid
markets, and relative weightings of the Index's component securities
significantly minimize the potential for manipulation of the Index.
First, the overwhelming majority of the components that comprise the
Index are actively traded, with an average daily trading volume for the
period from October 1, 1993 through March 31, 1994, ranging from a high
of 750,492 shares per day to a low of 28,444 shares per day. Second,
the market capitalizations of the securities in the Index are very
large, ranging from a high of $2.08 billion to a low of $124.11 million
as of March 31, 1994, with the mean and median being $566.83 million
and $324.83 million, respectively. Third, although the Index is only
comprised of fifteen component securities, no one particular security
or group of securities dominates the Index. Specifically, no one stock
or ADR comprises more than 13.12% of the Index's total value and the
percentage weighting of the five largest issues in the Index account
for 51.25% of the Index's value.\26\ Fourth, at least 85% of the
securities in the Index, by weight, and at least 80% of the number of
components of the Index, must be eligible for standardized options
trading. This proposed maintenance requirement will ensure that the
Index is substantially comprised of options eligible securities. Fifth,
if the CBOE increases the number of component securities to more than
twenty or decreases that number to less than ten, the CBOE will be
required to seek Commission approval pursuant to Section 19(b)(2) of
the Act before listing new strike price or expiration month series of
Israeli Index options and Index LEAPS. This will help protect against
material changes in the composition and design of the Index that might
adversely affect the CBOE's obligations to protect investors and to
maintain fair and orderly markets in Israeli Index options and Index
LEAPS. Sixth, the CBOE will be required to ensure that each component
of the Index is subject to last sale reporting pursuant to Rule 11Aa3-1
of the Act.\27\ This will further reduce the potential for manipulation
of the value of the Index. Finally, the Commission believes that the
expense of attempting to manipulate the value of the Israeli Index in
any significant way through trading in component stocks, ADRs, or
securities underlying ADRs (options on those securities) coupled with,
as discussed below, existing mechanisms to monitor trading activity in
those securities, will help deter such illegal activity.
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\26\For an index with a significantly greater number of
securities than fifteen components, the Commission might come to a
different conclusion if only a few securities accounted for a
significant portion of the index's weighting. Further, if an index
contained only a few stocks, the Commission might question whether
it can be traded as an index product.
\27\See Amendment No. 3, supra note 5.
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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 Israeli Index options
(including full-value and reduced-value Israeli 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 options currently traded on the CBOE, the Commission
believes that adequate safeguards are in place to ensure the protection
of investors in Israeli Index options and full-value and reduced-value
Israeli Index LEAPS.
C. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a security index derivative
product and the exchange(s) trading the securities 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 security
index product less readily susceptible to manipulation.\28\ In this
regard, the CBOE, NYSE, Amex, and NASD are all members of the ISG,
which provides for the exchange of all necessary surveillance
information.\29\ Further, as to present and future ADR components of
the Index,\30\ either the Exchange will have comprehensive surveillance
sharing agreements with the primary foreign markets for the securities
underlying the ADRs or the U.S. will be the relevant market for
surveillance purposes.\31\
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\28\Securities Exchange Act Release No. 31243 (September 28,
1992), 57 FR 45849 (October 5, 1992).
\29\See note 21, supra. If the prices of the ADR components, or
the composition of the Index, should change so that greater than 20%
of the weight of the Index would be represented by ADRs whose
underlying securities were not the subject of a comprehensive
surveillance sharing agreement with the CBOE, then it would be
difficult for the Commission to reach the conclusions reached in
this order and the Commission would have to determine whether it
would be suitable for the Exchange to continue to trade options on
this Index. The CBOE should, accordingly, notify the Commission
immediately if more than 20% of the numerical value of the Index is
represented by ADRs whose underlying securities are not subject to a
comprehensive surveillance sharing agreement. Such a change in the
current relative weights of the Index or in the composition of the
Index may warrant the submission of a rule filing pursuant to
Section 19 of the Act. In determining whether a particular ADR is
subject to a comprehensive surveillance sharing agreement see, e.g.,
Securities Exchange Act Release Nos. 31531 (November 27, 1992), 57
FR 57250 (December 3, 1992); and 33554 (January 31, 1994), 59 FR
5622 (February 7, 1994).
\30\Presently, Teva Pharmaceuticals is the only ADR component of
the Index.
\31\See Securities Exchange Act Release Nos. 31531 (November 27,
1992), 57 FR 57250 (December 3, 1992); and 33554 (January 31, 1994),
59 FR 5622 (February 7, 1994).
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D. Market Impact
The Commission believes that the listing and trading of Israeli
Index options, including full-value and reduced-value Index LEAPS, on
the CBOE will not adversely impact the underlying securities
markets.\32\ First, as described above, for the most part, no one
security or group of securities dominates the Index. Second, because at
least 85% of the numerical value of the Index and at least 80% of the
components of the Index must be accounted for by securities that meet
the Exchange's options listing standards, and because each of the
component securities must be subject to last sale reporting pursuant to
Rule 11Aa3-1 of the Act,\33\ the component securities generally will be
actively-traded, highly-capitalized securities. Third, the 7,500
contract position and exercise limits applicable to Index options and
Index LEAPS will serve to minimize potential manipulation and market
impact concerns.
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\32\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 Eileen Smith, Director, Product Development,
Research Department, CBOE, dated February 14, 1994.
\33\See Amendment No. 3, supra note 5.
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Lastly, the Commission believes that settling expiring Israeli
Index options (including full-value and reduced-value Index LEAPS)
based on the opening prices of component securities is consistent with
the Act. As noted in other contexts, valuing options for exercise
settlement on expiration based on opening prices rather than closing
prices may help reduce adverse effects on markets for securities
underlying options on the Index.\34\
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\34\See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376 (July 28, 1992).
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The Commission finds good cause for approving Amendment Nos. 3 and
4 prior to the thirtieth day after the date of publication of notice of
filing thereof in the Federal Register. Specifically, Amendment No. 3
provides that only securities that are subject to last sale reporting
pursuant to Rule 11Aa3-1 of the Act and that are traded in the U.S.
either on an exchange or through NASDAQ as NM securities may be added
to the Index. The Commission believes that these requirements
strengthen the customer protection and surveillance aspects of the
proposal by ensuring that the value of the Index that is disseminated
is based on the most current component pricing information and that
surveillance will be facilitated through the ISG.\35\ Amendment No. 4
merely substitutes two of the originally proposed components of the
Index with two new components that satisfy the eligibility and
maintenance criteria discussed above. As a result, the Commission
believes that good cause exists for approving Amendment Nos. 3 and 4 on
an accelerated basis.
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\35\See supra note 21.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 3 and 4. 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. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the File
Number SR-CBOE-93-55 and should be submitted by [insert date 21 days
after the date of this publication].
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\36\ that the proposed rule change (SR-CBOE-93-55), as amended, is
approved.
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\36\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
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\37\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17520 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M
