[Federal Register Volume 60, Number 112 (Monday, June 12, 1995)]
[Notices]
[Pages 30911-30912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14256]
[[Page 30911]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35806; International Series Release No. 817; File No.
SR-CBOE-95-12]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment Nos. 2 and 3 to the Proposed Rule Change by the Chicago Board
Options Exchange, Inc. Relating to the Listing of Currency Warrants
Based on the Mexican Peso
June 5, 1995.
On January 27, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change to permit the listing of
foreign currency warrants based on the value of the U.S. dollar in
relation to the Mexican peso (``Peso Warrants''). Notice of the
proposal appeared in the Federal Register on February 8, 1995.\3\ The
Exchange subsequently filed Amendment No. 1 to the proposal on March 6,
1995. Notice of Amendment No. 1 to the proposal appeared in the Federal
Register on March 15, 1995.\4\ No comment letters were received on the
original proposed rule change or on Amendment No. 1. The Exchange then
filed Amendment No. 2 to the proposal on May 1, 1995,\5\ and Amendment
No. 3 on May 24, 1995.\6\ This order approves the CBOE proposal, as
amended by Amendment Nos. 2 and 3.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 35324 (February 2,
1995), 60 FR 7599.
\4\ In Amendment No. 1, the Exchange amended the proposal to
specify customer margin levels for the proposed currency warrants.
See Securities Exchange Act Release No. 35463 (March 9, 1995), 60 FR
14042.
\5\ Amendment No. 2, as discussed herein, effectively supersedes
Amendment No. 1 by specifying higher minimum customer margin levels
than those proposed in Amendment No. 1. See Letter from Mary Bender,
Senior Vice President, Division of Regulatory Services, CBOE, to
Sharon Lawson, Assistant Director, Office of Market Supervision
(``OMS''), Division of Market Regulation (``Division''), Commission,
dated April 27, 1995 (``Amendment No. 2'').
\6\ In Amendment No. 3, as discussed herein, the Exchange: (1)
Specified the standards the CBOE will use to ensure continued
adequate customer margin levels for short positions in Peso
Warrants; and (2) imposed reporting requirements for certain
positions in Peso Warrants. See Letter from Mary Bender, Senior Vice
President, Division of Regulatory Services, CBOE, to Brad Ritter,
Senior Counsel, OMS, Division, Commission, dated May 24, 1995
(``Amendment No. 3'').
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Pursuant to CBOE Rule 31.5(E), the Exchange is now proposing to
list and trade currency warrants based upon the value of the U.S.
dollar in relation to the Mexican peso. Peso Warrants will be unsecured
obligations of their issuers and will be cash-settled in U.S. dollars.
Peso Warrants will be exercisable either throughout their life (i.e.,
American-style) or only immediately prior to their expiration date
(i.e., European-style). Upon exercise, the holder of Peso Warrant
structured as a ``put'' will receive payment in U.S. dollars to the
extent that the value of the Mexican peso in relation to the U.S.
dollar has declined below a pre-stated base level. Conversely, upon
exercise, holders of a Peso Warrant structured as a ``call'' will
receive payment in U.S. dollars to the extent that the value of the
Mexican peso in relation to the U.S. dollar has increased above a pre-
stated level. Peso Warrants that are ``out-of-the-money'' at the time
of expiration will expire worthless.
Any issue of Peso Warrants will conform to the listing guidelines
under CBOE Rule 31.5(E) which provide that: (1) The issuer will have
assets in excess of $100,000,000 and otherwise substantially exceed the
size and earnings requirements in CBOE Rule 31.5(A); (2) the term of
the warrants will be from one to five years from the date of issuance;
and (3) the minimum public distribution of such issues will be one
million warrants, with a minimum of 400 public holders, and an
aggregate market value of at least $4 million.\7\
\7\ On September 28, 1994, the Exchange submitted for Commission
approval, proposed rules governing listing requirements, and
customer protection and margin requirements for stock index
warrants, currency index warrants, and currency warrants. See
Securities Exchange Act Release No. 35178 (December 29, 1994), 60 FR
2409 (January 9, 1995) (notice of File No. SR-CBOE-94-34) (``Generic
Warrant Listing Proposal''). If ultimately approved by the
Commission, Peso Warrants issued subsequent to that approval will be
subject to these rules. These rules, however, will not change the
customer margin requirements specified herein. See Amendment No. 2,
supra note 5.
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The CBOE will also require that Peso Warrants be sold only to
customers whose accounts have been approved for options trading
pursuant to Exchange Rule 9.7. The suitability standards of Exchange
Rule 9.9 will apply to recommendations for opening transactions in Peso
Warrants. Additionally, the standards of Rule 9.10(a), regarding
discretionary orders, will also be applied to Peso Warrants. Moreover,
the Exchange will require members and member organizations to report to
the CBOE any positions of 100,000 or more Peso Warrants on the same
side of the market.\8\
\8\ See Amendment No. 3, supra note 6. In connection with the
Generic Warrant Listing Proposal, the CBOE intends to impose similar
reporting requirements for all currency warrants listed by the
Exchange. See Generic Warrant Listing Proposal, supra note 7.
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For customer margin purposes, the Exchange will set the customer
margin ``add-on'' \9\ percentage for Peso Warrants at 18% for both
initial and maintenance margin, with a minimum add-on for out-of-the-
money Peso Warrants of 15%.\10\ If, as a result of the Exchange's
routine monitoring of margin adequacy (i.e., at least quarterly
reviews), the CBOE determines that a higher customer margin level would
be appropriate, the CBOE will take immediate steps to implement the
change.\11\ If, on the other hand, the Exchange determines that a lower
margin percentage would be appropriate as a result of the Exchange's
periodic reviews, the Exchange will file a proposal with the Commission
pursuant to Section 19(b) of the Act to modify the margin add-on
percentages applicable to Peso Warrants.\12\ Anytime that the customer
margin levels for Peso Warrants are changed, the Exchange will promptly
notify the Exchange's membership and the public.
\9\ For these purposes, ``add-on'' is the percentage of the
current market value of the Mexican pesos underlying each Peso
Warrant that the holder of a ``short'' position must pay in addition
to the current market value of each Peso Warrant.
\10\ See Amendment No. 2, supra note 5.
\11\ Prior to increasing the customer margin levels, the
Exchange should immediately contact the Commission for a
determination as to whether a rule filing pursuant to Section 19(b)
of the Act will be required.
\12\ Specifically, the Exchange will review, on at least a
quarterly basis, the frequently distributions reflecting the
percentage price returns for the Mexican peso in relation to the
U.S. dollar for all seven day periods during the preceding two year
period. If the current margin add-on is not sufficient to cover at
least 97.5% of all such seven day price returns, the Exchange will
take steps to increase the margin level to one that will cover at
least 97.5% of all such instances. See Amendment No. 3, supra note
6. In no event, however, will the Exchange reduce the margin levels
provided in Amendment No. 2 without the prior approval of the
Commission. See Amendment No. 2, supra note 5.
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Prior to the commencement of trading of Peso Warrants, the Exchange
will distribute a circular to its membership calling attention to
certain compliance responsibilities when handling transactions in Peso
Warrants.\13\
\13\ The circular should highlight: (1) That Peso Warrants may
be sold only to customers with options approved accounts; (2) the
applicable suitability requirements; (3) the standards regarding
discretionary orders; (4) the reporting requirements for positions
of 100,000 or more Peso Warrants on the same side of the market; and
(5) the applicable customer margin requirements.
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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) \14\ in that
[[Page 30912]] it is designed to protect investors and the public
interest. First, the Commission believes that the trading of listed
warrants on the Mexican peso should provide investors with a hedging
and risk transfer vehicle that will reflect the overall movement of the
Mexican peso in relation to the U.S. dollar. In this regard, Peso
Warrants should provide investors with an efficient and effective means
of managing risk associated with the Mexican peso.
\14\ 15 U.S.C. 78f(b)(5) (1988).
Second, the Exchange has proposed listing standards to provide for
fair and orderly markets in Peso Warrants. Peso Warrants will conform
to the listing standards in CBOE Rule 31.5(E), which are similar to the
standards pursuant to which currency warrants have been listed by other
securities exchanges.\15\ In addition, the Exchange will limit
transactions in Peso Warrants to customers with options approved
accounts and impose the CBOE's suitability standards and discretionary
account standards to transactions in Peso Warrants. Moreover, the
requirements established by the Exchange for reporting positions in
Peso Warrants on the same side of the market will assist the CBOE in
detecting and deterring attempts at manipulation.
\15\ For example, the American Stock Exchange (``Amex'')
currently lists currency warrants on the Japanese yen and the German
mark pursuant to Section 106 of the Amex Company Guide. If the
Commission approves the Exchange's Generic Warrant Listing Proposal,
Peso Warrants listed subsequent to that approval will be subject to
the revised listing standards. See Generic Warrant Listing Proposal,
supra note 7. The Commission notes that to the extent the customer
margin requirements contained in the Generic Warrant Listing
Proposal differ from those discussed herein for Peso Warrants, the
customer margin levels specified above will be applied.
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Third, the Exchange has proposed adequate customer margin
requirements. The proposed add-on margin (i.e., 18%) provides
sufficient coverage to account for historical and potential volatility
in the Mexican peso in relation to the U.S. dollar. In addition, the
Exchange must conduct periodic reviews of the volatility in the Mexican
peso and must take immediate steps to increase the existing customer
margin levels if the Exchange determines that the existing levels are
no longer adequate.\16\ As a result, the Commission believes that the
proposed customer margin levels and the review and maintenance criteria
for those margin levels will result in adequate coverage of contract
obligations and are designed to reduce risks arising from inadequate
margin levels.
\16\ See supra note 12.
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Finally, the Exchange will prepare and distribute to its membership
a circular describing each issue of Peso Warrants listed by the CBOE,
calling attention to certain compliance responsibilities when handling
transactions in Peso Warrants.\17\
\17\ See supra note 13.
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Based on the foregoing, the Commission believes that the listing
and trading of Peso Warrants, within the framework described above, is
appropriate and consistent with the Act.
The Commission finds good cause for approving Amendment Nos. 2 and
3 to the proposed rule change prior to the thirtieth day after the date
of publication of notice of filing thereof in the Federal Register.
Specifically, Amendment No. 2 realigns the customer margin requirements
to reflect more accurately the recent volatility of the Mexican peso in
relation to the U.S. dollar. Moreover, the Commission notes that the
original proposal and Amendment No. 1 to the proposal were published in
the Federal Register for the full 21-day comment period and that no
comments were received by the Commission regarding either the original
proposal or the lower customer margin levels proposed in Amendment No.
1.
Amendment No. 3 also provides that the CBOE will review the
volatility of the Mexican peso in relation to the U.S. dollar on at
least a quarterly basis and increase the applicable customer margin
levels if appropriate. Moreover, as provided in Amendment No. 2, the
CBOE cannot lower the customer margin levels from the 18% and 15%
levels provided above without Commission approval pursuant to Section
19(b) of the Act. As discussed above, the Commission believes these
procedures will ensure that the customer margin requirements for Peso
Warrants are maintained at levels adequate to cover present and future
volatility of the Mexican peso in relation to the U.S. dollar.
Amendment No. 3 also imposes reporting requirements for certain
large positions (i.e., over 100,000 contracts on the same side of the
market) in Peso Warrants. Because there currently are no position
limits for positions in Peso Warrants, the Commission believes this is
a reasonable approach by the CBOE for acquiring information that may be
helpful in the Exchange's efforts to detect and deter attempted
manipulation.
Based on the above and in order to allow the CBOE to begin listing
Peso Warrants without delay, the Commission believes it is consistent
with Section 6(b)(5) of the Act to approve Amendment Nos. 2 and 3 to
the CBOE's proposal on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 2 and 3. 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
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,
N.W., Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the CBOE. All
submissions should refer to the File No. SR-CBOE-95-12 and should be
submitted by July 3, 1995.
It Is therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (File No. SR-CBOE-95-12), as
amended by Amendment Nos. 2 and 3, is approved.
\18\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
\19\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14256 Filed 6-9-95; 8:45 am]
BILLING CODE 8010-01-M