[Federal Register Volume 63, Number 23 (Wednesday, February 4, 1998)]
[Notices]
[Pages 5825-5828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2689]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39584; International Series Release No. 1112; File No.
SR-CBOE-97-64]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Chicago Board Options Exchange, Incorporated, Relating to
Listing and Trading of Warrants on the Asia Tiger 100 Index
January 27, 1998.
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 December 5, 1997, the Chicago Board Options Exchange, Incorporated
(``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 CBOE. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to list and trade warrants on the CBOE Asia Tiger
100 Index (``Asia 100'' or ``Index''), a broad-based index comprised of
the 100 highest capitalized stocks from eight major Asian markets.\3\
The text of the proposed rule change is available at the Office of the
Secretary, CBOE and at the Commission.\4\
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\3\ The eight Asian markets included in the Index are: Hong
Kong; Indonesia; Malaysia; the Philippines; Singapore; South Korea;
Taiwan; and Thailand.
\4\ The text of the proposed rule change contains a list of the
component securities including the countries they represent, the
individual component security weights, the country Index weights,
average daily trading value for each security and country and market
capitalization for each security and country.
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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 CBOE included statements
concerning the purpose of and basis for the proposed rule change and
represented that it did not receive any comments 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to permit the CBOE to
list and trade warrants on the Index. The Exchange is permitted to list
and trade index warrants under CBOE Rule 31.5(E). The listing and
trading of index warrants on the Asia 100 Index will comply in all
aspects with CBOE Rule 31.5(E), except that the percentage of foreign
country securities that are not subject to an effective comprehensive
surveillance sharing agreement (``CSSA''), as defined below, will be
greater than the 20% prescribed by Rule 31.5(E)(7).
Rule 31.5(E) requires, among other things, that: (1) the issuer has
a tangible net worth in excess of $250,000,000 and otherwise
substantially exceeds earnings requirements in Rule 31.5(A) or meet the
alternate guideline in paragraph (4) of Rule 31.5(E); (2) the term of
the warrants shall be for a period ranging from one to five years from
date of issuance; (3) the minimum public distribution of such issues
shall be 1,000,000 warrants, together with a minimum of 400 public
holders, and have an aggregate market value of $4,000,000; and (4)
foreign country securities or American Depositary Receipts (``ADRs'')
that are not subject to an effective CSSA and have less than 50% of
their global trading volume in dollar value in the United States, shall
not, in the aggregate, represent more than 20% of the weight of an
index, unless such index is otherwise approved for warrant or option
trading.
Index design. The Index was designed, and will be maintained, by
the Exchange. The CBOE represents that the Index is a broad based index
currently composed of the 100 highest capitalized stocks from Hong
Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea,
Taiwan and Thailand. These stocks were selected for their market
capitalization and liquidity. The CBOE believes that they are
representative of the composition of the broader equity markets in each
of the eight countries. The component securities represent several
industry groups including: airlines; financial institutions; high
technology; real estate; telecommunications; and utilities.
The total capitalization of the component securities in the Index
on November 17, 1997 was $517 billion.\5\ The average capitalization on
that date was $5.17 billion. The individual market capitalization of
these component securities ranged from $598 million to $41.76 billion
on November 17, 1997. The components in the Index had average U.S.
dollar volume of $20.56 million per day and ranged from $600,000 to
$227.6 million per day during 1997 through October 31. As of November
17, 1997, the highest weighted component security (HSBC Holdings, PLC
of Hong Kong) comprised approximately 4.98% of the index weight while
the lowest weighted component security (Hang Lung Development, Co. of
Hong Kong) comprised approximately 0.22% of the Index weight. The five
highest weighted securities comprised approximately 19.82% of the index
weight.
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\5\ All values are expressed in U.S. dollars at the prevailing
rates on November 17, 1997.
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The Asia 100 is a modified capitalization-weighted index. Each of
the stocks from a particular country will be adjusted annually to
reflect its relative market value compared to the other stocks from
that country. In addition, each country is weighted based on the
relative size of its stock market in relation to that of other Asia 100
countries. The CBOE believes this design gives the Index significant
coverage of the countries' largest and most liquid stocks and a proxy
for the stock portfolios held by foreign investors in these countries.
The CBOE also believes that warrants on the Index will provide
investors with a low-cost means of participating in the performance of
the Asian economy and hedging against the risk of investing in those
economies.
[[Page 5826]]
Country weights will be based upon the relative size of each
country's stock market at the time the Index is established. Country
weights will be rounded to the nearest 2% based on the Internation
Federation of Stock Exchange month-end market values used in the
country rebalancing. For example, a country with an Asia 100 market
share of 28.67% will have a country weight of 28%. Once a country's
weight is determined, the individual stocks within a country will be
selected based on the Stock Selection Criteria, as defined below.
When required to make the country weights sum up to 100% due to
rounding, the country weight whose weight would normally be rounded up
(down) will be rounded down (up) if the weight is the closest to the
midpoint between two weights. Country weights are capped at 40% for the
largest country and at 20% for a country with which there is an
effective comprehensive surveillance sharing agreement, as defined
below. Currently, the Exchange has effective CSSAs, as defined below,
with Hong Kong and Taiwan and is in discussion with Malaysia to
finalize an agreement.
Initial listing and maintenance criteria and rebalancing. To be
included in the Index a stock must meet the following minimum stock
selection criteria: (1) The minimum market value of the company during
the past year must have been greater than $50 million; (2) the minimum
dollar trading value of turnover of the stock must have been $100
million in the past year; (3) the minimum monthly trading volume of the
stock in any month during the past year must have been greater than $5
million; (4) the stock must have traded on at least 95% of the
country's trading days; and (5) at least 20% of a company's stock must
be available to foreign investors.
The Index will be rebalanced annually (most likely in March) in the
event that a country's stock market expands or contracts in relation to
the markets of the other countries represented in the Index. There will
be a 4% limit on the change that will be made to a country's weight at
the rebalancing so that a single year aberration for a particular
market does not improperly affect the Index. The weights of other
countries will be adjusted accordingly. A country's whose weight falls
below 1% may be retained in the Index based on the Exchange's
determination of foreign investment in the country and other factors.
CBOE staff may determine to retain a country's weight in the Asia 100
Index at the 2% level after its weight has fallen below 1% of the
market value of the countries represented in the Index. Weights of the
other countries will be adjusted accordingly.
Stock weights within a country will be rebalanced twice annually
(most likely in March and September) of each year based on the
capitalization of stocks and the country weights determined at the
annual country weighting rebalancing as of the last business day of the
previous year. Each stock's price on the day of the rebalancing will be
multiplied by the number of shares (rounded to the fourth decimal
place) so that the stock weight in the Index represents its share of
the market value of the stocks selected within the country. Stock
weights will be capped such that the weight of the largest stock in a
country may not be greater than 50% of that country's weight at
rebalancing. Weights of the other stocks of the country will be
adjusted accordingly. For example, if a stock represents 30% of the
market value within a country, its weight within the country will be
30%. Further, if the stock represents 30% of the market value in a
country with an Asia 100 country weight of 28%, the stock's weight in
the entire Asia 100 Index will be 8.4%, i.e. 30% share within the
country x 28% country weight=8.4%. The weight of each selected stock
will remain constant until the next stock rebalancing, except for
adjustments due to circumstances described below.
Stocks in the Asia 100 Index may need to be replaced between
rebalancings due to corporate, governmental or regulatory actions or
when the stock no longer meets the eligibility criteria. In these
cases, Exchange staff will replace the stock with a stock from a
replacement list of stocks maintained by Exchange staff. Eligible
stocks will be ranked by market capitalization on the date of the
rebalancing. Also, the Exchange staff will, where the circumstances
permit, endeavor to provide at least three business days notice prior
to making such changes. To maintain continuity of the Index, the
divisor of the Index will be adjusted to reflect certain events
relating to the component stocks. These events include, but are not
limited to, spin-offs, certain rights issuances, and mergers and
acquisitions.
Calculation and dissemination of Index value. The CBOE asserts that
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 Index base value was established at 200 on November
17, 1997. The level of the Index reflects the total market value of all
100 component stocks relative to a particular base period. The daily
calculation of the Asia 100 Index is computed by dividing the total
market value of the 100 companies in the Index by the Index divisor.
The divisor keeps the Index comparable over time and is adjusted
periodically to maintain the Index. Similar to other stock index values
based on Asian markets, the value of the Index will be calculated by
CBOE and disseminated once per day prior to the opening in the U.S. via
the Options Price Reporting Authority or the Consolidated Tape
Association.\6\
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\6\ None of the Asian markets represented in the Index are open
for trading during U.S. market trading hours.
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In the event that a security does not trade on a given day, the
previous day's last sale price is used for purposes of calculating the
Index. Prices used to value the stocks will be based upon the closing
prices for the stocks at the primary exchanges for the respective
stocks. Primary and backup pricing sources, including Bloomberg, will
be used to get the closing price for the stocks. Stocks in the Asia 100
Index will be valued in U.S. dollars using each country's cross-rate to
the U.S. dollar. Bloomberg's Composite New York rates, or comparable
rates, quoted at 7:00 a.m. Chicago time will be used to convert the
stock prices from the respective countries to U.S. dollars. If there
are several quotes at 7:00 a.m. for the currency, the first quoted rate
in that minute will be used to calculate the Asia 100 Index. In the
event that there is no Bloomberg exchange rate for a country's currency
at 7:00 a.m., stocks will be valued at the first U.S. dollar cross-
rated quoted prior to 7:00 a.m.
Index warrant trading (exercise and settlement. The proposed
warrants will be direct obligations of their issuer subject to cash-
settlement in U.S. dollars, and either exercisable throughout their
life (i.e., American style) or exercisable only on their expiration
date (i.e., European style). Upon exercise, or at the warrant
expiration date (if not exercisable prior to such date), the holder of
a warrant structured as a ``put'' would receive payment in U.S. dollars
to the extent that the index value has declined below a pre-state cash
settlement value. Conversely, holders of a warrant structured as a
``call'' would, upon exercise or at expiration, receive payment in U.S.
dollars to the extent that the index value has increased above the pre-
stated cash settlement value. If ``out-of-the-money'' at the time of
[[Page 5827]]
expiration, the warrants would expire worthless.
The procedures for determining the cash settlement value for the
warrants have not yet been determined by the CBOE. Once those
procedures have been determined by the CBOE, they will be fully set
forth in the prospectus and in the Information Circular distributed by
the Exchange to its membership prior to the commencement of trading the
warrant.\7\
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\7\Phone conversation between Timothy Thompson, CBOE and
Marianne H. Duffy, Special Counsel, Division of Market Regulation,
Commission on January 22, 1998.
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Warrant listing standards and customer safeguards. Sales practice
rules applicable to the trading of index warrants are provided for in
Exchange Rule 30.50 and to the extent provided by Rule 30.52 they are
also contained in Chapter IX of the Exchange's Rules. Rule 30.50
governs, among other things, communications with the public. Rule 30.52
subjects the transaction of customer business in stock index warrants
to many of the requirements of Chapter IX of the Exchange's rules
dealing with public customer business, including suitability. For
example, no member organization may accept an order from a customer to
purchase a stock index warrant unless that customer's account has been
approved for options transactions. The listing and trading of index
warrants on the Asia 100 Index will be subject to these guidelines and
rules.
Other exchange rules. The margin requirement for a short Index
warrant will be 100% of the premium plus 15% of the underlying value,
less out-of-the-money dollar amount, if any, to a minimum of 10% of the
Index Value. A long Index warrant position must be paid for in full.
Straddles will be permitted for call and put Index warrants covering
the same underlying value. The margin requirements are provided for
under Exchange Rules 30.53 and 12.3.
The applicable position and exercise limit will be determined
pursuant to Exchange Rule 30.35(a). Pursuant to Exchange Rules 4.13(a)
and 30.35(e) each member will be required to file a report with the
Department of Market Regulation of the Exchange identifying those
customer accounts with an aggregate position in excess of 100,000 Index
warrants overlying the same stock index.
Surveillance. In evaluating new derivative instruments, the
Commission, consistent with the protection of investors, considers the
degree to which the derivative instrument is susceptible to
manipulation. The ability to obtain information necessary to detect and
deter market manipulation and other trading abuses is a critical factor
in the Commission's evaluation. It is for this reason that the
Commission requires that there be a CSSA in place between an exchange
listing or trading a derivative product and the exchanges trading the
stocks underlying the derivative contract that specifically enables
officials to survey trading in the derivative product and its
underlying stocks.\8\ Such agreements provide a necessary deterrent to
manipulation because they facilitate the availability of information
needed to fully investigate a potential manipulation if it were to
occur. For foreign stock index derivative products, these agreements
are especially important to facilitate the collection of necessary
regulatory, surveillance and other information from foreign
jurisdictions.
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\8\ The Commission believes that the ability to obtain relevant
surveillance information, including, among other things, the
identity of the ultimate purchasers and sellers of securities, is an
essential and necessary component of a CSSA. A CSSA should provide
the parties thereto with the ability to obtain information necessary
to detect and deter market manipulation and other trading abuses.
Consequently, the Commission generally requires that a CSSA require
that the parties to the agreement provide each other, upon request,
information about market trading activity, clearing activity and
customer identity. See Securities Exchange Act Release No. 31529
(November 27, 1992).
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In order to address the above noted concerns, the CBOE entered into
an effective CSSA agreement with the Stock Exchange of Hong Kong
(``HKSE'') on October 1, 1992, pursuant to which the CBOE will be able
to obtain market surveillance information from the HKSE. The CBOE also
entered into an effective CSSA with the Taiwan Stock Exchange in
October 1997. In addition, the CBOE entered into a sharing agreement
with the Kuala Lumpur (Malaysia) Stock Exchange on January 6, 1995
which is currently being reviewed by the Commission to determine its
effectiveness. In addition, the CBOE notes that no single uncovered
country in the Index may represent more than 20% of the Index weight.
As of November 17, 1997, stocks from Hong Kong (28% Index weight),
Malaysia (20% Index weight) and Taiwan (18% Index weight) represent 66%
of the Index weight. As a result, no single uncovered country
represents more than 10% (Singapore) of the Index weight and no two
uncovered countries represent more than 18% (Singapore and South Korea)
of the Index weight. Although the Asia 100 does not comply with CBOE
Rule 31.5(E)(7), because foreign country securities or ADRs that are
not subject to a CSSA and have less that 50% of their global trading
volume in dollar value in the United States, do not, in the aggregate,
represent more than 20% of the weight of an index, the CBOE believes
that its existing effective CSSAs along with the fact that the Index
contains 100 component securities from eight countries effectively
eliminates the possibility of manipulation.
2. Basis
The CBOE believes that the proposed rule change is consistent with
Section 6 of the Act in general and furthers the objectives of Section
6(b)(5) of that Act in particular, in that it will permit investors to
trade warrants on the Asia 100 Index pursuant to Exchange rules
designed to prevent fraudulent and manipulative acts and practices,
thereby promoting just and equitable principles of trade, removing
impediments to and perfecting the mechanism of a free and open market
and a national market system, and protecting investors and the public
interest.
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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of the 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 such 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the
[[Page 5828]]
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. 552, will be
available for inspection and copying in the Commission's Public
Reference Room, 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 CBOE. All submissions should refer to File No. SR-
CBOE-97-64 and should be submitted by February 25, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-2689 Filed 2-3-98; 8:45 am]
BILLING CODE 8010-01-M