[Federal Register Volume 62, Number 143 (Friday, July 25, 1997)]
[Notices]
[Pages 40128-40129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19589]
[[Page 40128]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38852; File No. SR-CBOE-97-30]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Board Options Exchange, Inc. Relating to a Change to a Modified
Capitalization-Weighted Index for the Goldman Sachs Technology
Composite Index
July 18, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder, \2\ notice is hereby given
that on July 9, 1997, 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 and II below, which Items have been prepared by the self-
regulatory organization. The Exchange subsequently filed Amendment No.
1 to the proposed rule change.\3\ The Exchange has requested
accelerated approval for the proposal, as amended. This order approves
the Exchange's proposal, as amended, on an accelerated basis and
solicits comments from interested persons.
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\1\ 15 U.S.C. 78s(b)(1)(1988).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Eileen Smith, Exchange, to Janice Mitnick,
Commission, dated July 18, 1997 (``Amendment No. 1''). In Amendment
No. 1, the Exchange amended its proposal to clarify how the Exchange
would notify market participants of the change and also states that
the impact of the change should be limited because as of July 14,
1997, there were only seven contracts of open interest expiring
after the July expiration date. amendment No. 1 also makes a
technical correction to the rule filing regarding the basis of
summary effectiveness of the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing, pursuant to a determination by Goldman,
Sachs & Co. (``Goldman Sachs''), to change the weighting methodology of
its Goldman Sachs Technology Composite Index (``Composite Index'') from
a capitalization-weighted index to a modified capitalization-weighted
index, limiting components to a maximum of 8.5% of the Composite index
weight.\4\ The Exchange seeks continued approval to list and trade
options on these indexes after Goldman Sachs has instituted these
changes.
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\4\ The Composite Index is a capitalization-weighted index
designed to measure the performance of the universe of high
capitalization technology stocks. See Release No. 34-37693
(September 17, 1996), 61 FR 50362 (September 25, 1996) (order
approving the Exchange's propsal to trade options on the Composite
Index (SR-CBOE-96-43)).
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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 an 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 III 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
1. Purpose
The Exchange currently lists and trades European-style, cash-
settled options on the Composite Index pursuant to approval by the
Commission.\5\ The Composite Index is a capitalization-weighted index
of the universe of technology-related company stocks which meet certain
objective criteria.\6\ The Composite Index is re-balanced semi-
annually, in January and July.
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\5\ See id., supra n. 4.
\6\ See id., supra n. 4.
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The Exchange has been informed by Goldman Sachs that as of the July
1997 re-balancing (effective as of July 18, 1997), Goldman Sachs will
be revising its weighting criteria for the Composite Index to a
modified capitalization-weighted index. Under the new criteria, no
stock can account for more than 8.5% of the weight of the Composite
Index at each semi-annual re-balancing. This weighting methodology will
be implemented in the same manner as the weighting methodology for the
sub-indexes to the Composite Index which were previously approved for
options trading by the Commission.\7\ The Exchange is requesting that
the Commission approve the continued listing and trading of options on
the Composite Index after this change is instituted by Goldman Sachs.
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\7\ See Release No. 34-37696 (September 17, 1996), 61 FR 50358
(September 25, 1996) (order approving the Exchange's proposal to
trade options on six sub-indexes to the Composite Index (SR-CBOE-96-
44).
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act, in that
it is designed to perfect the mechanisms of a free and open market, and
to protect investors and the public interest.
B. Self-Regulatory Organization's Statement of Burden on Competition
The Exchange 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
The Exchange states that no written comments were solicited or
received with respect to the proposed rule change.
III. 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 changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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 Room. Copies of such
filings also will be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-CBOE-97-30 and should be submitted by August 14, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, and, in particular, the requirements of
Section 6(b)(5) thereunder.\8\ Specifically, the Commission finds that
the Exchange's proposal to modify the weighting methodology of the
Composite Index from a capitalization-weighted index to a modified
capitalization-weighted
[[Page 40129]]
index, which will limit components to a maximum of 8.5% of the
Composite Index weight, will contribute to the maintenance of fair and
orderly markets consistent with investor protection by ensuring that no
one stock or group of stocks dominate the Composite Index.
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\8\ In approving this proposal, the Commission notes that it has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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The Exchange states that approving the proposed change will allow
the continued listing and trading of options on the Composite Index
without interruption. As noted above, the change will alter the
weighting methodology for the Composite Index from a capitalization-
weighted index to a modified capitalization-weighted index, limiting
components to a maximum weight of 8.5% of the Composite Index.\9\
Currently, two components each comprise more than 8.5% of the Composite
Index.\10\ The revision to a modified capitalization-weighted index
will reduce the impact that those two components have on the index,
thereby reducing the opportunity for the Composite Index to be
dominated by a few component stocks.
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\9\ Under a modified capitalization-weighted index, the number
of index shares of a component stock which is not capped will equal
the company's outstanding common shares. The umber of index shares
for a stock which is capped will equal its maximum weight,
multiplied by the adjusted total market capitalization of the
Composite Index, and divided by the component stock's closing price
on the rebalancing date. The Composite Index's adjusted total market
capitalization is the total outstanding market capitalization,
adjusted to reflect the number of capped stocks.
\10\ As of July 2, 1997, Intel comprised 10.06% of the Composite
Index, and Microsoft comprised 13.05% of the Composite Index. Phone
conversation between Eileen Smith, Exchange and Janice Mitnick,
Commission, on July 11, 1997.
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The Commission believes that the proposed weighting method does not
present any new or novel regulatory issues as the Exchange's proposal
adopts a weighting method which was previously approved by the
Commission for sub-indices to the Composite Index.\11\ The Composite
Index will be calculated through a modified capitalization-weighted
method, which is a hybrid between equal weighting (which may impose
liquidity concerns for smaller-cap stocks) and capitalization weighting
(which may result in two or three stocks dominating an index's
performance). Under the method, the maximum weight for each component
in the Composite Index will be capped at 8.5%, as of the semiannual
rebalancing date. The weight of each component below 8.5% will be
market capitalization weighted, and therefore will not be capped. At
the time of semi-annual rebalancing, component stocks with weights in
excess of their capped weight in the Composite Index will be restored
to the appropriate capped weight. In approving this change, the
Commission believes that the new methodology should be beneficial by
preventing one or a few stocks from dominating the index and having an
undue effect on the index value.
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\11\ See supra n. 7.
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The Exchange proposes to implement the change in calculating the
Composite Index after the July expiration, at the close on July 18,
1997. This coincides with the semi-annual rebalancing of the Composite
Index. The Commission notes that as of July 14, there were only seven
contracts of open interest which expired after the July expiration.
While the change to a modified capitalization-weighted index will be
applied to these open contracts, the Commission believes that the
potential impact on those seven contracts is de minimis and that, in
any case, any impact will be outweighed by the anticipated benefits
from the alteration of the weighting mechanism.
The Exchange has notified market participants of its proposal to
alter the weighting methodology through a notice to members and member
firms.\12\ The Exchange has also stated it will inform its members and
member firms upon approval of the proposal by the Commission.\13\ The
Commission believes that this will ensure investors have been
adequately notified about the impending change prior to its
implementation, and should provide them with sufficient time to make
any desired adjustments to their positions.
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\12\ See Amendment No. 1. supra n.3.
\13\ Phone conversation between Eileen Smith, Exchange and
Janice Mitnick, Commission, on July 16, 1997.
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The Commission finds good cause to approve the proposal prior to
the thirtieth day after the date of publication of notice of filing in
the Federal Register. By accelerating the effectiveness of the
Exchange's rule proposal, the Commission will enable the new weighting
methodology to become effective concurrent with the effective date for
the semi-annual rebalancing, subsequent to the July expiration. In
addition, the Commission believes that the proposed weighting method
does not present any new or novel regulatory issues as the Exchange's
proposal adopts a weighting method which will assist in ensuring that
one or a few components will not dominate the Composite Index. Further,
as noted above, the modified-capitalization weighted method being
adopted for the Composite Index is the same method approved by the
Commission for the sub-indices to the Composite Index.\14\ Accordingly,
the Commission believes that it is consistent with Sections 6(b)(5) and
19(b)(2) of the Act to approve the proposed rule change on an
accelerated basis.
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\14\ See supra n.7.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-CBOE-97-30), as amended, is
hereby approved on an accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-19589 Filed 7-24-97; 8:45 am]
BILLING CODE 8010-01-M