[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50362-50366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24494]
[[Page 50362]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37693; File No. SR-CBOE-96-43]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change, and Notice of Filing and
Order Granting Accelerated Approval of Amendments No. 1, No. 2 and No.
3 Thereto Relating to the Listing and Trading of Options on the Goldman
Sachs Technology Composite Index
September 17, 1996.
On July 2, 1996, 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 provide for the listing and
trading on the Exchange of options on the Goldman Sachs Technology
Composite Index (``GSTI Composite Index'' or ``Index''), a cash-
settled, broad-based index designed to measure the performance of high
capitalization technology stocks. Notice of the proposed rule change
was published for comment and appeared in the Federal Register on
August 9, 1996.\3\ No comments were received on the proposal. On August
13, 1996, the Exchange filed Amendment No. 1 to the proposed rule
change.\4\ On September 10, 1996, CBOE submitted Amendment No. 2 to the
proposed rule change.\5\ On September 16, 1996, CBOE submitted
Amendment No. 3 to the proposed rule change \6\ (together with
Amendments No. 1 and No. 2, the ``Amendments''). This order approves
the proposal, as amended, and solicits comments on Amendment No. 1,
Amendment No. 2, and Amendment No. 3.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR Sec. 240.19b-4.
\3\ See Securities Exchange Act Release No. 37519 (August 2,
1996), 61 FR 41671.
\4\ See letter from Eileen Smith, Director, Product Development,
CBOE to Stephen Youhn, Special Counsel, Office of Market
Supervision, Division of Market Regulation, SEC, dated August 13,
1996. Amendment No. 1 primarily addresses issues related to Index
maintenance criteria.
\5\ See letter from Eileen Smith, CBOE to Stephen Youhn, SEC,
dated September 10, 1996. Amendment No. 2 institutes a minimum
market capitalization requirement for Index components.
\6\ See letter from Eileen Smith, CBOE to Stephen Youhn, SEC,
dated September 16, 1996. Amendment No. 3 clarifies Amendments No. 1
and No. 2.
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I. Description of the Proposal
A. Composition of the Index
The GSTI Composite Index has been designed to measure the
performance of the universe of high capitalization technology
stocks.\7\ The GSTI Composite Index is a capitalization-weighted index
with each stock affecting the Index in proportion to its market
capitalization. All securities that meet the following criteria (the
``GSTI Index Rules'') will automatically be included in the Index,
either at the time of the semiannual rebalancing or when the ``fast-
add'' criteria, as defined below, are met.\8\
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\7\ A list of the securities comprising the GSTI Composite
Index, as well as listed shares outstanding and prices as of April
30, 1996, was submitted by the Exchange as Exhibit B, and is
available at the Office of the Secretary, CBOE and at the
Commission.
\8\ Amendment No. 1. All the securities to be added to or
deleted from the Index, whether at the semi-annual rebalancing or by
``fast-add'' or ``fast-delete,'' will be identified and selected
solely by the CBOE staff. The GSTI Committee, which is responsible
for maintaining the GSTI Sub-Indexes (as discussed in SR-CBOE-96-
44), is not involved in any decisions on adding or deleting
securities from the Composite Index. Id.
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First, the company's stock must trade on the New York Stock
Exchange, the American Stock Exchange or through the facilities of the
Nasdaq, and be ``reported securities'' under Rule 11Aa3-1. Only
outstanding common shares are eligible for inclusion. Additionally,
only foreign companies whose primary market is in the United States
will be eligible for the Index,\9\ American Depositary Receipts are not
eligible. Second, the total market capitalization of the company's
stock must be equal to or greater than the capitalization ``cutoff''
value. The initial base period ``cutoff'' value will be $600 million,
but this value will be adjusted on each semiannual rebalancing date (as
described below) to reflect the price performance of the Index since
the base period and rounded up to the nearest $50 million. Third,
company stocks with a public float below 20% of shares issued and
outstanding are not eligible for inclusion in the Index.\10\ Fourth,
the company stock must have annualized share turnover of 30% or more,
based on its average daily share volume for the six calendar months
prior to inclusion in the Index. Fifth, the components must be from a
delineated group of Standard Industrial Classification codes or Russell
Industry codes.\11\ Sixth, at least 75% of the weight of the Index must
be options eligible pursuant to CBOE Rule 5.3.\12\
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\9\ Amendment No. 1.
\10\ The public float is determined by dividing the number of
shares which are owned by persons other than those required to
report their stock holdings under Section 16(a) of the Act by the
total number of shares outstanding. With respect to options on
underlying individual components, CBOE Rule 5.3, Interpretations and
Policies .01(a)(1) requires a minimum of 7,000,000 shares of the
underlying security which are owned by persons other than those
required to report their stock holdings under Section 16(a) of the
Act. Telephone conversation with Eileen Smith, CBOE and Janice
Mitnick, Attorney, Office of Market Supervision, Division of Market
Regulation, SEC, on July 30, 1996.
\11\ Amendment No. 1. Included in the delineated list are 14
categories under the SIC Code and 6 categories under the Russell
Code.
\12\ Amendment No. 3. As of April 30, 1996, 100% of the Index
was options eligible. See note 25, infra, which discusses CBOE
options eligibility standards.
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As of April 30, 1996, the Index was comprised of 177 stocks ranging
in capitalization from $604 million to $67.3 billion. The largest stock
accounted for 8.5% of the total weighting of the Index, while the
smallest accounted for 0.08%. The median capitalization of the firms in
the Index was $1.5 billion.
B. Calculation
The methodology used to calculate the value of the Index is similar
to the methodology used to calculate the value of other well-known
broad-based indices. The level of the Index reflects the total market
value of all the component stocks relative to a particular base period.
The GSTI Composite Index base date is April 30, 1996, when the Index
value was set to 100. The daily calculation of the GSTI Composite Index
is computed by dividing the total market value of the components in the
Index by the Index Divisor. The divisor is adjusted as needed to ensure
continuity in the Index whenever there are additions and deletions from
the Index, share changes, or adjustments to a component's price to
reflect offerings, spinoffs, or extraordinary cash dividends. The
values of the Index will be calculated by CBOE on a real-time basis,
and disseminated at 15-second intervals during regular CBOE trading
hours to market information vendors via the Options Price Reporting
Authority (``OPRA'').\13\
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\13\ Telephone conversation between Eileen Smith, CBOE and
Sharon Lawson, Senior Special Counsel, Office of Market Supervision,
Division of Market Regulation, SEC, on September 17, 1996. The
original filing proposed that the Sub-Index values be calculated by
CBOE or a designee of Goldman Sachs.
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C. Maintenance
The GSTI Composite Index will be maintained by the Exchange. Index
maintenance includes monitoring Index criteria and completing the
adjustments for company additions and deletions, share changes, stock
splits, stock dividends, and stock price adjustments due to such events
as company restructurings or spinoffs, as well as the semiannual
rebalancing. Any changes CBOE makes to the Index must be in
[[Page 50363]]
compliance with the inclusion and maintenance criteria.
The Index will be rebalanced by CBOE for additions and deletions on
a semiannual basis. Stocks will be added or deleted from the Index at
the semiannual rebalancing in accordance with CBOE's application of the
GSTI Index Rules,\14\ as well as compliance with the market
capitalization cut-off value, component options eligibility
percentages, trading volume requirements and weighting limitations
noted below. In particular, Index constituents with capitalization
below 50% of the ``cutoff'' value on a semiannual rebalancing date
shall be removed after the close on the effective date of the
rebalancing. Further, at the semiannual rebalancing, CBOE will consult
with the Commission staff if any component's market capitalization
drops below $75 million at the time of the semiannual rebalancing and
that component is not options eligible,\15\ less than 75% of the
capitalization of the Index is represented by stocks eligible for
options trading,\16\ and/or 10% or more of the weight of the Index is
composed of stocks with average daily volume for the previous six-month
period of less than 20,000 shares.\17\ If any of these situations
occur, the CBOE will discuss with Commission staff what action should
be taken, including whether the Index should be reclassified as narrow-
based, opening transactions should be prohibited and/or new Index
series should not continue to be listed. Additionally, CBOE will notify
Commission staff if the largest component of the Index is greater than
15% of the weight of the Index, or the top five components are greater
than 50% of the weight of the Index.\18\
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\14\ The GSTI Index is based on pre-determined criteria (the
GSTI Index Rules) which have been publicly disseminated. See Section
I(A), supra.
\15\ Amendment No. 3.
\16\ Amendment No. 3.
\17\ Amendment No. 3.
\18\ Amendment No. 1. After notification of Commission staff,
CBOE will monitor the Index for the following three month period. At
the end of that time period, CBOE, in conjunction with Commission
staff, will determine if the Index should be reclassified as narrow-
based.
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At the rebalancing, Index share changes will be made to reflect the
outstanding shares and closing prices of all Index constituents on the
``rebalancing'' date. The changes will be implemented after the close
on the ``effective'' date. The effective dates shall be the third
Friday of January and July. The rebalancing date shall be seven (7)
business days inclusive prior to the effective date. Notice of the new
component list will be disseminated by the Exchange to the public at
least five trading days before the effective date, unless unforeseen
circumstances require a shorter period.
Stocks may be added or deleted from the Index at a time other than
at the rebalancing according to the ``Fast Add and Delete'' rule. All
Index constituent changes made in accordance with this rule will be
announced by the Exchange at least three to five trading days prior to
the effective date of the Fast Add or Delete, unless unforeseen
circumstances require a shorter period.
Any technology-related company whose shares start trading between
semiannual rebalancings is eligible to be Fast Added to the Index if
all the inclusion criteria described above are met, excluding the
requirement for minimum share turnover ratio.\19\ Further, the stock
must rank in the top quartile of market capitalization of the GSTI
Composite Index based on the previous month-end closing prices.
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\19\ As noted above, CBOE will ensure 75% of the Index is
options eligible at each semiannual rebalancing. These standards
contain minimum trade volume requirements. See note 25, infra.
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If two companies in the Index merge, or if an Index constituent
merges with a company not currently in the Index, the merged company
shall remain in the Index if it meets all the Index inclusion criteria.
If the company to be merged into another company (``target company'')
is currently in the Index, it will be Fast Deleted after the close on
the date the merger is completed.
If a GSTI Composite Index constituent is acquired by a non-Index
company, the acquiring company may be added to the Index if it meets
the inclusion criteria; otherwise, the target company will be Fast
Deleted. Any such additions or deletions will be effective after the
close on the date the acquisition is completed.
If a company in the Index spins off another company, the parent and
the spinoff will remain in the Index provided that each meets the Index
inclusion criteria. If either the parent or the spinoff fails to meet
the inclusion criteria, it will be removed from the Index.
In the event that a company represented in the Index files for
bankruptcy, its stock will be removed from the Index effective after
the close on the date of the filing. In the event that trading in an
Index constituent is suspended for thirty (30) trading days, CBOE will
remove the company from the Index unless an announcement has been made
that the stock will commence trading within the next ten days.\20\ Any
such removal will be preannounced and, for purposes of minimizing
impact to be Index, the stock to be removed will be removed at the
value at which it last traded.
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\20\ Amendment No. 1.
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Except for stocks which meet the criteria for Fast Add or Delete
(as described above), stocks can only be added or deleted by CBOE from
the Index at the time of the semiannual rebalancing.
D. Index Option Trading
In addition to regular Index options, the Exchange may provide for
the listing of long-term index option series (``LEAPS'') and
reduced-value LEAPS on the Index. For reduced-value LEAPS, the
underlying value would be computed at one-tenth of the Index level. The
current and closing Index value of any such reduced-value LEAP will,
after such initial computation, be rounded to the nearest one-
hundredth.
Strike prices will be set to bracket the Index in a minimum of 2\1/
2\ point increments for strikes below 200 and in 5 point increments
above 200. The minimum tick size for series trading below $3 will be 1/
16th and for series trading above $3 the minimum tick will be 1/18th.
The trading hours for options on the Index will be from 8:30 a.m. to
3:10 p.m. Chicago time.
E. Exercise and Settlement
The proposed options on the Index will expire on the Saturday
following the third Friday of the expiration month. Trading in the
expiring contract month will normally cease at 3:10 p.m. (Chicago time)
on the business day preceding the last day of trading in the component
securities of the Index (ordinarily the Thursday before expiration
Saturday, unless there is an intervening holiday). The exercise
settlement value of the Index at option expiration will be calculated
based on the opening prices of the component securities on the business
day prior to expiration. If a stock fails to open for trading, the last
available price on the stock will be used in the calculation of the
Index, as is done for currently listed indexes.\21\ When the last
trading day is moved because of Exchange holidays (such as when CBOE is
closed on the
[[Page 50364]]
Friday before expiration), the last trading day for expiring options
will be Wednesday and the exercise settlement value of Index options at
expiration will be determined at the opening of regular Thursday
trading.
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\21\ The Commission notes, however, that pursuant to Article
XVII, Section 4 of OCC's by-laws, OCC is empowered to fix an
exercise settlement amount in the event that OCC determines that the
current index value is unreported or otherwise unavailable. Further,
OCC has authority to fix an exercise settlement amount whenever the
primary market for the securities representing a substantial part of
the value of an underlying index is not open for trading at the time
when the current index value (i.e., the value used for exercise
settlement purposes) ordinarily would be determined. See Securities
Exchange Act Release No. 37315 (June 17, 1996, 61 FR 42671 (August
16, 1996) (order approving SR-OCC-95-19).
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F. Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options of monitor
trading in Index options and Index LEAPS on the GSTI Composite Index.
G. Position Limits
The Exchange proposes to establish position limits for options on
the Index at 100,000 contracts on either side of the market, with no
more than 60,000 of such contracts permitted to be in the series in the
nearest expiration month. These limits are roughly equivalent, in
dollar terms, to the limits applicable to options on other similar
indices.
H. Exchange Rules Applicable and Systems Capacity.
As modified herein, the Rules in Chapter XXIV will be applicable to
the trading of GSTI Composite Index options.
CBOE has stated that it has the necessary systems capacity to
support new series that would result from the introduction of GSTI
Composite Index options. CBOE has also been informed that the OPRA has
the capacity to support new series.\22\
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\22\ See memo from Joe Corrigan, Executive Director, OPRA, to
Eileen Smith, Director of Product Research, CBOE, dated June 26,
1996 (confirming that the traffic generated is within the OPRA's
capacity).
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II. Discussion
The Commission finds that the proposed rule change is consistent
with the requirement 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).\23\ The Commission
finds that the trading of options on the Index will permit investors to
participate in the price movement of the securities on which the Index
is based. The Commission also believes that the trading of options on
the Index is allow investors holding positions in some of all of the
securities underlying the Index to hedge the risks associated with
their portfolios. Accordingly, the Commission believes GSTI Composite
Index options will provide investors with an important trading and
hedging mechanism that should reflect accurately the overall movement
of the securities contained in the Index. By broadening the hedging and
investment opportunities of investors, the Commission believes that the
trading of options on the GSTI Composite Index will serve to protect
investors, promote the public interest, and contribute to the
maintenance of fair and orderly markets.\24\
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\23\ 15 U.S.C. Sec. 78f(b)(5).
\24\ Pursuant to section 6(b)95) of the Act, the Commission must
predicate approval of any new option or warrant 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 options on the GSTI Index will provide investors
with a hedging vehicle that should reflect the overall movement of
the universe of highly capitalized technology stocks primarily
traded on U.S. markets.
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The trading of Goldman Sachs Technology Composite Index options,
however, raised several issues, including issues related to index
design, customer protection, surveillance, and market impact. For the
reasons discussed below, the Commission believes that the CBEO has
adequately addressed these issues.
A. Index Design and Structure
The Commission finds that it is appropriate and consistent with the
Act to classify the Index as broad-based, and therefore to permit
Exchange rules applicable to the trading of broad-based index options
to apply to the Index options. Specifically, the Commission believes
the Index is broad-based because it reflects a substantial segment of
the U.S. equities market, in general, and high capitalization
technology securities, in particular. First, the high technology sector
is a substantial segment of the U.S. equities market, the GSTI Index
Rules ensure that the Index continues to reflect that segment. Second,
the Index includes multiple industries within the high technology
segment of the securities market, such as computer and office
equipment, industry machinery, radio and television broadcasting and
communications equipment, and telephone and telegraph apparatus, and
does not rely solely on computer-related companies. Third, the Index
consists of 177 actively traded securities (all options eligible as of
April 30, 1996 \25\), all of which trade on the New York Stock
Exchange, the American Stock Exchange or through the facilities of the
Nasdaq. Fourth, the market capitalization of the stocks comprising the
Index is very large. Specifically, the total capitalization of the
Index as of April 30, 1996 was approximately $791.7 billion. Market
capitalization of the individual stocks ranges from $604 million to
$67.3 billion, with an average capitalization of $4.47 billion. Fifth,
no stock or group of stocks dominates the weight of the Index.
Specifically, no single stock accounted for more than 8.5% of the total
weighting of the Index, and the five highest weighted securities
accounted for only 35% of the Index value.\26\ Accordingly, the
Commission believes it is appropriate to classify the Index as broad-
based.
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\25\ The standards for options eligibility, 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; (2) there must be a
minimum of 2,000 stockholders; (3) trading volume must have been at
least 2.4 million over the preceding twelve months; and (4) the
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 .01.
\26\ Amendment No. 1. If the largest component of the Index is
greater than 15% of the weight of the Index, or the top five
components are greater than 50% of the weight of the Index, CBOE
will notify Commission staff. After notification of Commission
staff, CBOE will monitor the Index for the following three month
period. At the end of that time period, CBOE, in conjunction with
Commission staff, will determine if the Index should be reclassified
as narrow-based. This standard regarding the weight of Index
components should ensure that if the Index becomes dominated by one
or a few securities, the Commission and CBOE will re-review the
Index's broad-based status.
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The Commission also believes that the general broad
diversification, capitalization, and relatively liquid markets of the
Index's component stocks significantly minimize the potential for
manipulation of the Index. First, as discussed above, the Index
represents a broad cross-section of domestically traded high
capitalization technology stocks, with no single industry group or
stock dominating the Index. Second, the majority of the stocks that
comprise the Index are actively traded.\27\ Third, the Commission
believes that the Index selection and maintenance criteria will serve
to ensure that the Index will not be dominated by low priced stocks
with small capitalizations, floats and trading volumes.\28\ Fourth, the
CBOE has represented that it will monitor the Index semiannually and
will consult with staff of the Commission when: (A)
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less than 75% of the weight of the Index is options eligible \29\ (B)
10% or more of the weight of the Index is composed of stocks with
average daily volume of less than 20,000 shares for the previous six
month period; \30\ (C) the market capitalization of any component falls
below $75 million at a time the component is not options eligible; \31\
or (D) the largest component of the Index is greater than 15% of the
weight of the Index, or the top five components are greater than 50% of
the weight of the Index \32\. In the event the Index fails to satisfy
any of the criteria in A, B and C above, CBOE will consult with the
Commission to determine the appropriate regulatory response, including
but not limited to the reclassification of the Index as narrow-based,
prohibiting opening transactions and/or discontinuing the listing of
new series of Index options.\33\ As noted above, as to component
weight, CBOE will monitor the Index for a three month period and, in
conjunction with Commission staff, will determine whether the Index
should be reclassified as narrow-based.\34\
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\27\ As stated above, in order to qualify for inclusion in the
Index, a company must have annualized share turnover of 30% or more
based on its average daily share volume for the six calendar months
prior to inclusion into the Index.
\28\ In this regard, the Commission notes that the GSTI
Composite Index is comprised of the universe of technology stocks
that meet the GSTI Index Rules criteria. There are no subjective
criteria in determining the components of the Index. See Amendment
No. 1.
\29\ Amendment No. 3.
\30\ Amendment No. 3.
\31\ Amendment No. 3.
\32\ Amendment No. 1.
\33\ Amendment No. 3.
\34\ Amendment No. 1.
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Fifth, the Exchange has proposed reasonable position and exercise
limits for the Index options that will serve to minimize potential
manipulation and other market impact concerns. The position limits, at
100,000 contracts on either side of the market, with no more than
60,000 of such contracts permitted to be in the series in the nearest
expiration month, are roughly equivalent in dollar terms to the limits
applicable to options on other similar indices. Accordingly, the
Commission believes these factors minimize the potential for
manipulation because it is unlikely that attempted manipulations of the
prices of the Index components would affect significantly the Index's
value. Moreover, the surveillance procedures discussed below should
detect as well as deter potential manipulation and other trading
abuses.
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 Index options, 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 risk of options
trading are engaged in such trading; and (3) special compliance
procedures are applicable to options accounts. Accordingly, because the
Index options will be subject to the same regulatory regime as the
other standardized options traded on the CBOE, the commission believes
that adequate safeguards are in place to ensure the protection of
investors in Index options.
C. Surveillance
The Commission generally 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.\35\ In this regard,
the New York Stock Exchange, Inc., American Stock Exchange, Inc. and
the National Association of Securities Dealers, Inc., on whose markets
the component securities of the Index trade, are all members of the
Intermarket Surveillance Group (``ISG'').\36\
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\35\ See Securities Exchange Act Release No. 31243 (October 5,
1992), 57 FR 45849.
\36\ The 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, dated July 14, 1983,
amended January 29, 1990. The members of the ISG are the following:
American Stock Exchange; Boston Stock Exchange, Inc.; CBOE; Chicago
Stock Exchange, Inc.; National Association of Securities Dealers,
Inc.; New York Stock Exchange, Inc.; Pacific Stock Exchange Inc.;
and Philadelphia Stock Exchange, Inc. The major stock index futures
exchanges (including the Chicago Mercantile Exchange and the Chicago
Board of Trade) joined the ISG as affiliate members in 1990.
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Options on the individual component securities also trade on
markets which are ISB members. In addition, the CBOE will apply the
same surveillance procedures as those used for existing broad based
index, options trading on the CBOE.
D. Market Impact
The Commission believes that the listing and trading of GSTI
Composite Index options on the CBOE will not adversely affect the
underlying securities markets.\37\ First, as described above, the Index
is broad-based and comprised of 177 stocks. No one stock or industry
group dominates the Index and the maintenance standards will help to
ensure this continues even if some of the Index components change.\38\
Second, as noted above, the stocks contained in the Index have large
capitalizations and are actively traded. Should 10% or more of the
weight of the Index be composed of stocks with an average daily volume
of less than 20,000 for the previous six months, CBOE will consult with
Commission staff.\39\
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\37\ The CBOE has stated that it has the necessary systems
capacity to support new series that would result from the
introduction of the GSTI Index options. As stated above, OPRA has
represented that additional traffic generated by options and LEAPS
on the Index is within OPRA's capacity. See note 22, supra.
\38\See note 18, supra, and accompanying text.
\39\ Amendment No. 3. CBOE's consultation with Commission staff
will address whether the Index should be reclassified as narrow-
based, whether opening transactions should be prohibited and whether
listing of new series should be discontinued if the Index does not
meet the market value criteria. Id.
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Third, as of April 30, 1996, all stocks comprising the Index were
options eligible\40\ and the maintenance standards ensure that, at
least, 75% of the weight of the Index will continue to be eligible for
options trading.\41\ Fourth, existing CBOE stock index options rules
and surveillance procedures will apply to Index options. Fifth, the
position limits of 100,000 contracts on either side of the market, with
no more than 60,000 of such contracts in a series in the nearest month
expiration month, will serve to minimize potential manipulation and
market impact concerns. Sixth, the risk to investors of contra-party
non-performance will be minimized because the Index options will be
issued and guaranteed by the Options Clearing Corporation just like any
other standardized option traded in the United States.
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\40\ Telephone conversation with Eileen Smith, CBOE and Janice
Mitnick, SEC, on July 30, 1996.
\41\ See notes 16-18, supra, and accompanying text.
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Finally, the Commission believes that settling expiring GSTI
Composite Index options (including full-value and reduced-value Index
LEAPS) based on the opening prices of component securities is
reasonable and consistent with the Act. As noted in other contexts,
valuing expiring index options for exercise settlement purposes based
on opening prices rather than closing prices may help reduce adverse
effects on the securities underlying options on the Index.\42\
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\42\ Securities Exchange Act Release No. 30944 (July 28, 1992),
57 FR 33376.
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[[Page 50366]]
The Commission finds good cause for approving the Amendments prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Specifically, the Amendments clarify
issues related to foreign securities, public float and suspension of
trading of component securities. In addition, the Amendments establish
maintenance criteria and provide that the CBOE will monitor the Index,
and will notify Commission staff in the event that certain Index
component levels fall below these designated thresholds. The Commission
believes that these monitoring provisions ensure that the Index
continues to be comprised of highly capitalized, actively traded
securities. In addition, the maintenance criteria will ensure that the
Index does not become dominated by one or a few securities.
Accordingly, the Commission believes it is consistent with Sections
6(b)(5) and 19(b)(2) of the Act to find that good cause exists to
approve the Amendments to the proposal on an accelerated basis.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the Amendments. 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room. 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-96-43 and should
be submitted by October 16, 1996.
IV. Conclusion
For the reasons discussed above, the Commission finds that the
amended proposal is consistent with the Act, and, in particular,
Section 6 of the Act.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\43\ that the proposed rule change (SR-CBOE-96-43), as amended, is
approved.
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\43\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\44\
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\44\ 17 CFR Sec. 200.30-3(a)(12).
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[FR Doc. 96-24494 Filed 9-24-96; 8:45 am]
BILLING CODE 8010-01-M
