[Federal Register Volume 61, Number 65 (Wednesday, April 3, 1996)] [Notices] [Pages 14845-14847] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 96-8170] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-37026; File No. SR-CBOE-96-16] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to the Listing of Options on the CBOE Computer Networking Index March 26, 1996. Pursuant to Section 19(b)(1) of the Securities and Exchange of 1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 13, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the self- regulatory organization. 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 list for trading cash-settled, European-style \1\ options on the CBOE Computer Networking Index (``Computer Networking Index'' or ``Index''), an index comprised of the stocks of 15 widely held companies involved in providing computer networking services, and in the design and manufacture of software and hardware that facilitates computer networking. \1\ A European-style option can be exercised only during a specified period immediately prior to the expiration of the option. --------------------------------------------------------------------------- The text of the proposed rule changes 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 self-regulatory organization 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 self-regulatory organization has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements. (A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change The purpose of the proposed rule change is to permit the Exchange to list and trade cash-settled, European-style options on the Index. According to the CBOE, the Index meets all of the generic criteria for listing options on narrow-based indexes as set forth in CBOE Rule 24.2, ``Designation of the Index,'' and in the Commission's order approving CBOE Rule 24.2.\2\ In accordance with CBOE Rule 24.2, the CBOE proposes to list and trade options on the Index beginning 30 days from the filing date of the proposed rule change. \2\ See Securities Exchange Act Release No. 34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval Order''). --------------------------------------------------------------------------- The Index consists of the stocks of 15 widely held companies involved in providing computer networking services, and in the design and manufacture of software and hardware that facilitates computer networking.\3\ According to the CBOE, no proxy for the performance of this industry group is currently available in the U.S. derivative markets, and options on the Index will provide investors with a low- cost means to participate in the performance of this sector or to hedge against the risk of investing in this sector. \3\ The components of the Index are: Ascend Communications, Inc., Bay Networks Inc.; 3Com Corporation; Cabletron Systems, Inc.; Cascade Communications Corporation; Cisco Systems, Inc.; Digi International, Inc.; Fore Systems, Inc.; FTP Software Inc.; Madge Networks, NV; Network General Corporation; Netmanage, Inc.; Newbridge Networks Corporation; Stratacom, Inc.; and Xircom, Inc. --------------------------------------------------------------------------- Index Design. All of the stocks currently comprising the Index are U.S. securities that trade on the New York Stock Exchange, Inc. (``NYSE'') or through the facilities of the National Association of Securities Dealers Automated Quotation System (``NASDAQ''). Additionally, all of the Index's component stocks are ``reported securities'' as defined in Rule 11Aa3-1 under the Act. According to the CBOE, each of the stocks in the Index has a market capitalization in excess of $200 million. Specifically, as of February 21, 1996, the stocks comprising the Index ranged in capitalization from $204 million to $25.82 billion, and the Index's total capitalization was $68.1 billion. In addition, as of February 21, 1996, the mean capitalization of the Index's component stocks was $4.54 billion and the median capitalization was $2.98 billion. The CBOE represents that all of the Index's component stocks have had [[Page 14846]] monthly trading volume well in excess of 1 million shares over the six- month period through June 1996, and that the average monthly volumes for these stocks over the six-month period ranged from a low of 3.04 million shares to a high of 231.8 million shares. Thus, the 100% of the weight of the Index and 100% of the number of components will be eligible for options trading. According to the CBOE, each of the Index's component stocks is currently the subject of options trading. The Index is an equal dollar-weighted index, with each stock comprising 6.67% of the total Index weight. The top five stocks in the Index account for 33.35% of the Index. Accordingly, the Index meets the Exchange's generic listing standards for narrow-based indexes with respect to market capitalization, weighting constraints, options eligibility, and trading volume. Calculation: The Index will be calculated on a real-time basis using last-sale prices by the CBOE or its designee, and will be disseminated every 15 seconds by the CBOE. If a component stock is not being traded currently, the CBOE will use the most recent price at which the stock traded to calculate the Index. At the close on February 21, 1996, the value of the Index was 220.20. The Index is equal dollar-weighted and reflects changes in the prices of the component stocks relative to the Index base date, December 16, 1994, when the Index was set at 100.00. Specifically, each of the component securities is initially represented in equal dollar amounts, with the level of the Index equal to the combined market value of the assigned number of shares for each of the Index components divided by the current Index divisor. The Index divisor is adjusted to maintain continuity in the Index at the time of certain types of changes, including, but not limited to, quarterly re-balancing, special dividends, spin-offs, certain rights issuances, and mergers and acquisitions. Maintenance: The CBOE will maintain the index. The Index will be re-balanced after the close of business on expiration Fridays on the March quarterly cycle. In addition, the CBOE staff will review the Index on approximately a monthly basis. The CBOE may change the composition of the Index at any time to reflect changes affecting the components of the Index or the computer networking industry generally. If it becomes necessary to remove a stock from the Index (for example, because of a takeover or merger), the CBOE will add only a stock having characteristics that will permit the Index to remain within the maintenance criteria specified in the CBOE's rules and in the Generic Index Approval Order.\4\ The CBOE will take into account the capitalization, liquidity, volatility, and name recognition of any proposed replacement stock. \4\ See note 2, supra. --------------------------------------------------------------------------- Absent prior Commission approval, the CBOE will not increase to more than 20, or decrease to fewer than 10, the number of stocks in the Index. In addition, the CBOE will not make any change in the composition of the Index that would cause fewer than 90% of the stocks by weight, or fewer than 80% of the total number of stocks in the index, to qualify as stocks eligible for equity options trading under CBOE Rule 5.3, ``Criteria for Underlying Securities.'' \5\ \5\ Under the CBOE's rules, the Index must continue to satisfy this requirement. See CBOE Rule 24.2(c)(1). --------------------------------------------------------------------------- If the Index fails at any time to satisfy the maintenance criteria, the Exchange will notify the Commission of that fact immediately and will not open for trading any additional series of options on the Index unless the CBOE determines that such failure is not significant and the Commission concurs in that determination, or unless the Commission approves the continued listing of options on the Index under Section 19(b)(2) of the Act. Index Options Trading: The CBOE proposes to base trading in Index options on the full value of the Index. The CBOE may list full-value long-term index option series (``LEAPS''), as provided in CBOE Rule 24.9, ``Terms of Index Option Contracts.'' 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 be rounded to the nearest one-hundredth after the initial calculation. Exercise and Settlement: Index options will have European-style exercise and will be ``A.M.-settled Index Options'' within the meaning of the rules in Chapter XXIV, ``Index Options,'' of the CBOE's rules, including CBOE Rule 24.9, ``Terms of Index Option Contracts,'' which the CBOE is amending to refer specifically to Index options. 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 the second business day (ordinarily a Thursday) preceding the expiration date. Exchange Rules Applicable: Except as modified herein, the rules in Chapter XXIV of the CBOE's rules will apply to the Index. Options based on the Index will be subject to the position limit requirements of CBOE Rule 24.4A, ``Position Limits for Industry Index Options.'' Currently, the position limit for Index options is 12,000 contracts. Ten reduced- value Index options will equal one full-value Index option for position and exercise limit purposes. The CBOE represents that the Exchange has the necessary systems capacity to support new series that will result from the introduction of Index options. In addition, the Options Price Reporting Authority (``OPRA'') has the capacity to support the new series.\6\ \6\ See Memorandum from Joseph P. Corrigan, Executive Director, OPRA, to William Speth, CBOE, dated March 1, 1996. --------------------------------------------------------------------------- The CBOE believes that the proposal is consistent with Section 6(b) of the Act, in general, and, in particular, with Section 6(b)(5), in that it will permit trading in options based on the Index pursuant to rules designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade, and thereby will provide investors with the ability to invest in options based on the additional index. (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 either solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing rule change complies with the standards set forth in the Generic Index Approval Order,\7\ it has become effective pursuant to Section 19(b)(3)(A) of the Act and subparagraph (e) of Rule 19b-4 thereunder. Pursuant to the Generic Index Approval Order, the Exchange may not list Index options for trading prior to 30 days after March13, 1996, the date of the proposed rule change was filed with the Commission. At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for [[Page 14847]] the protection of investors, or otherwise in furtherance of the purposes of the Act. \7\See note 2, supra. --------------------------------------------------------------------------- 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 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 in the caption above and should be submitted by April 24, 1996. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\ \8\ 17 CFR 200.30-3(a)(12) (1995). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 96-8170 Filed 4-2-96; 8:45 am] BILLING CODE 8010-01-M