[Federal Register Volume 61, Number 154 (Thursday, August 8, 1996)]
[Notices]
[Pages 41434-41436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20183]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37509; File No. SR-CBOE-96-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Listing and Trading of Options on the Goldman Sachs Technology 
Composite Sub-Indexes

July 31, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on 
July 2, 1996, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the 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 and trade options on six different 
narrow-based indexes, each of which is composed of components from the 
GSTI Composite Index (``GSTI Composite Index'').\1\ The six sub-indexes 
are: the GSTI Internet Index (``Internet Index''), the GSTI Software 
Index (``Software Index''), the GSTI Semiconductor Index 
(``Semiconductor Index''), the GSTI Hardware Index (``Hardware 
Index''), the GSTI Services Index (``Services Index''), and the GSTI 
Multimedia Networking Index (``Multimedia Index'') (collectively ``GSTI 
Sub-Indexes''). Each of the GSTI Sub-Indexes are cash-settled, modified 
capitalization-weighted indexes with European-style exercise.
---------------------------------------------------------------------------

    \1\ Concurrent with this proposal, CBOE has filed for approval 
to list and trade options on the Goldman Sachs Technology Composite 
Index, a broad-based, capitalization weighted index composed of the 
universe of technology-related company stocks meeting certain 
objective criteria. See SR-CBOE-96-43. A list of components for the 
Composite Index or any of the Sub-Indexes is available at the 
Commission or CBOE.
---------------------------------------------------------------------------

    The text of the proposed rule change in available at the Office of 
the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style index options on six 
sub-indexes of the GSTI Composite Index. Each of the GSTI Sub-Indexes 
is modified-capitalization weighted and is composed of components of 
the GSTI Composite Index. Goldman, Sachs & Co. has designated a GSTI 
Committee (``Committee'') to oversee the selection of components for 
the GSTI Sub-Indexes, as discussed below.
    Index Design. The Committee selects and assigns stocks to a sub-
index based upon relevant qualitative criteria. Any stock in a sub-
index must appear in the Composite Index. Stocks may be represented in 
one or more GSTI Sub-Indexes, however, not all GSTI Composite Index 
components necessarily will be assigned to a GSTI Sub-Index. All of the 
components of the index currently trade on the New York Stock Exchange 
(``NYSE''), the American Stock Exchange (``NYSE''), the American Stock 
Exchange or are National Market System securities traded on Nasdaq.
    Calculation. The Index will be calculated by CBOE or a designee of 
Goldman Sachs on a real-time basis using last-sale prices and will be 
disseminated every 15 seconds by CBOE. If a component security is not 
currently being traded on its primary market, the most recent price at 
which the security traded on such market will be used in the Index 
calculation.
    The Index is calculated on a ``modified capitalization-weighted'' 
method. This method is a hybrid between equal weighting (which may

[[Page 41435]]

pose liquidity concerns for smaller-cap stocks) and normal 
capitalization weighting (which may result in two or three stocks 
dominating the index's performance). Under the method employed for each 
of the sub-indexes, the maximum weight for the largest stock in the 
sub-index will be set to 25% on the semiannual rebalancing date. The 
maximum weight for the second largest stock will be set to 20% and the 
maximum weight for the third largest stock and any stock thereafter 
will be set to 15% on the rebalancing date. The weight of all the 
remaining sub-index stocks shall be market capitalization weighted. 
Thus, the weights of these remaining stocks are not ``capped''.
    For stocks which are not ``capped,'' index shares will equal the 
company's outstanding common shares. For stocks which are capped, index 
shares will equal its maximum weight, multiplied by the adjusted total 
market capitalization of the sub-index, divided by the stock's closing 
price on the rebalancing date. THe index's adjusted total market 
capitalization is the total outstanding market capitalization adjusted 
to reflect the number of ``capped'' stocks.
    The divisor for each Sub-Index was initially calculated to yield a 
benchmark value of 100.00 at the close of trading on April 30, 1996. 
The divisor for each Sub-Index will be adjusted as needed to ensure 
continuity in each index whenever there are additions or deletions from 
an index, share changes, or adjustments to a component's price to 
reflect rights offerings, spinoffs, and special cash dividends.
    Maintenance. The Indexes will be maintained by CBOE and the GSTI 
Committee. On each semi-annual rebalancing date, the GSTI Composite 
Index will be adjusted by adding or deleting stocks according to the 
inclusion criteria detailed in SR-CBOE-96-43. All changes to the GSTI 
Composite Index will be implemented after the close of trading on the 
effective date. The effective dates will be the third Friday of January 
and July. The rebalancing date will be 7 business days inclusive prior 
to the effective date.
    As soon after the close of trading on the day following the 
rebalancing date for the GSTI Composite Index, the Exchange will 
provide to the Committee a list of all constituent changes to the GSTI 
Composite Index. Upon receipt of this list from the Exchange, the 
Committee will meet to determine any changes to the GSTI Sub-Indexes.
    The Committee will notify CBOE of any change in composition for any 
of GSTI Sub-Indexes before trading starts on the trading day after the 
Exchange has provided the Composite Index component list to the 
Committee.\2\ The Exchange, in turn, will disseminate the information 
concerning the components of the GSTI Sub-Indexes to the public. The 
Committee retains discretion to add or delete stocks from the GSTI Sub-
Indexes at the rebalancing or to change a stock's industry 
classification. At the discretion of the Committee, a stock may also be 
removed from a Sub-Index due to lack of industry representation in the 
Sub-Index. At no time will a Sub-Index fall to less than 6 stocks.
---------------------------------------------------------------------------

    \2\ For example, if CBOE provides to the Committee a list of 
composition changes to the GSTI Composite Index after the close of 
trading on Friday, the Committee would in turn inform CBOE of any 
corresponding changes to the GSTI Sub-Indexes before trading 
commences on Monday. CBOE would then disseminate such changes to the 
public prior to the commencement of trading. Telephone Conversation 
between Eileen Smith, CBOE, and Steve Youhn, SEC, on July 24, 1996.
---------------------------------------------------------------------------

    Additionally, at the semi-annual rebalancing, stocks with Sub-Index 
weights which exceed their cap in that SUb-Index, will be restored to 
the appropriate capped weight.
    When a stock is ``Fast Added'' to the GSTI Composite Index, as 
described in SR-CBOE-96-43, the stock may be ``Fast Added'' to one or 
more GSTI Sub-Indexes at the same time. If added to a sub-index, the 
stock's weight cannot exceed the appropriate cap for that sub-index. If 
a stock is ``Fast Deleted'' from the GSTI Composite Index, it will be 
removed from all GSTI Sub-Indexes at the same time.
    In the case of a merger, the Committee will decide the Sub-Index 
classification of the merged company. If the weight of the merged 
company would exceed the relevant cap for the Sub-Index to which it is 
assigned, the weight of the company will be capped at the time that the 
merger is completed. The index shares of all other stocks in the 
effected Sub-Index will remain unchanged.
    Index Option Trading. The Exchange proposes to base trading in 
options on the GSTI Sub-Indexes on the full value of the relevant Sub-
Index. The Exchange may list full-value long-term index option series 
(``LEAPS''), as provided in Rule 24.9. The Exchange also may 
provide for the listing of reduced-value LEAPS, for which the 
underlying value would be computed at one-tenth of the value of the 
appropriate Sub-Index. The current and closing index value of any such 
reduced-value LEAPS 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 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 1/8th. The 
trading hours for options on the Index will be from 8:30 a.m. to 3:10 
p.m. Chicago time.
    Exercise and Settlement. GSTI Sub-Index options will have European-
style exercise and will be ``A.M.-settled index options'' within the 
meaning of the Rules in Chapter XXIV, including Rule 24.9, which is 
being amended to refer specifically to GSTI Sub-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 will be applicable to GSTI Sub-Index options. Index option 
contracts based on the GSTI Sub-Indexes will be subject to the position 
limit requirements of Rule 24.4A. Ten reduced-value options will equal 
one full-value contract for such purposes.
    CBOE represents that it has the necessary systems capacity to 
support new series that would result from the introduction of the GSTI 
Sub-Index options. CBOE has also been informed that the Options Price 
Reporting Authority (``OPRA'') has the capacity to support such new 
series.
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) in particular in that it will permit trading in options 
based on the GSTI Sub-Indexes pursuant to rules designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade. The rule proposal will also serve to 
further these objectives by providing investors with the ability to 
invest in options based on additional indexes.
2. Statutory Basis
    CBOE believes the proposed rule change is consistent with Section 
6(b) of the Act in general and furthers the objectives of Section 
6(b)(5) in particular in that it will permit trading in options based 
on the IPC 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 an additional index.

[[Page 41436]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change will impose no 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, 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 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 at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. 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-96-44 and should be 
submitted by August 29, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 200.30-3(a)(12) (1994 
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 96-20183 Filed 8-7-96; 8:45 am]
BILLING CODE 8010-01-M