Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to the Listing and Trading Options on the Israeli Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34132; File No. SR-CBOE-93-55]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the

Chicago Board Options Exchange, Inc. Relating to the Listing and

Trading Options on the Israeli Index

May 31, 1994.

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 8, 1993, the Chicago Board Options Exchange (``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 Exchange filed Amendment No. 1 to the proposed rule

change on April 29, 1994, and Amendment No. 2 on May 12, 1994.\3\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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

\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1991).

\3\Amendment No. 2, which supersedes Amendment No. 1, proposes

to: (1) reduce the number of components of the proposed Israeli

Index (``Index'') from 20 to 15; (2) require that the Index be

maintained such that at least 85% of the Index, by weight, and at

least 80% of the number of components of the Index be eligible for

standardized options trading pursuant to CBOE Rule 5.3; (3) classify

the Index as a narrow-based index for purposes of CBOE's rules; (4)

provide position and exercise limits of 7,500 contracts on the same

side of the market for Index options pursuant to CBOE Rule 24.4A;

and (5) provide that the Exchange shall submit a proposed rule

change pursuant to Section 19 of the Act and Rule 19b-4 thereunder

prior to increasing the number of components of the Index to greater

than 20 or fewer than 10. See Letter from Eileen Smith, Director,

Product Development, Research Department, CBOE, to Brad Ritter,

Attorney, Office of Derivatives and Exchange Oversight, Division of

Market Regulation, Commission, dated May 12, 1994 (``Amendment No.

2'').

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

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

As provided in Exchange Rule 24.2, ``Designation of the Index,''\4\

the CBOE proposes to list for trading options on the Israeli Index

(``Index''). The text of the proposed rule change is available at the

Office of the Secretary, CBOE, and at the Commission.

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

\4\Exchange Rule 24.2 provides, in part, that the Commission

must approve a particular index upon which options are traded.

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

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 Exchange 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

The purpose of the proposed rule change is to permit the Exchange

to list and trade cash-settled, European-style\5\ index options on the

Israeli Index (``Index''). The Index will initially consist of fourteen

stocks issued by Israeli companies, and one American Depositary Receipt

(``ADR'')\6\ overlying an Israeli company.\7\ According to the

Exchange, no proxy for the performance of the Israeli economy is

currently available in the U.S. derivative markets. Therefore, the

Exchange believes, options on the Index will provide investors with a

low-cost means of participating in the performance of the Israeli

economy or to hedge against the risk of investing in that economy.

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

\5\European-style options can only be exercised during a

specified period before the options expire.

\6\An American Depositary Receipt is a negotiable receipt which

is issued by a depositary, generally a bank, representing shares of

a foreign issuer that have been deposited and are held, on behalf of

holders of the ADRs, at a custodian bank in the foreign issuer's

home country.

\7\The component securities of the Index are: Biotechnology

General Corp.; Comverse Technology Inc.; Fourth Dimension Software

Ltd.; ECI Telecom Ltd.; Elbit Ltd.; Elron Electronic Industries

Ltd.; Geotek Industries Inc.; IIS Intelligent Information Systems

Ltd.; Lannet Data Communications Ltd.; Orbotech Ltd.; Scitex Corp.

Ltd.; Sapiens International Corp.; Tadiran Ltd.; Teva Pharmaceutical

Industries Ltd. (ADR); and Teledata Communication Ltd.

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

Index Design

One of the components of the Index currently trades on the New York

Stock Exchange and fourteen (including one ADR representing 11.37% of

the weight of the Index as of March 31, 1994) currently are National

Market securities traded through the facilities of the National

Association of Securities Dealers, Inc. Automated Quotation System

(``NASDAQ''). The 14 non-ADR components of the Index are listed for

trading only in the United States, and for the ADR component, more than

50% of the combined world-wide trading volume for the ADR and the

underlying security occurs in the U.S. through NASDAQ.\8\ Accordingly,

the Exchange believes that options on the Index should not raise the

types of surveillance concerns that may be raised by options on an

index of non-U.S. traded stocks.

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

\8\See Amendment No. 2, supra note 3.

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

As of March 31, 1994, the securities comprising the Index ranged in

market capitalization from a low of $124.11 million to a high of $2.08

billion. The average capitalization as of that date was $566.83

million. The component accounting for the largest percentage of the

total weighting of the Index on that date was Elbit Ltd. (13.12%),

while the smallest was Biotechnology General Corp. (1.92%).

Calculation

The Index is price-weighted and reflects changes in the prices of

the component stocks relative to the base date of January 2, 1992. The

Index value is calculated by summing the prices of the component

securities and then dividing by a divisor that yielded an index value

of 100.00 as of that date.

The Index will be calculated by CBOE or its designee on a real-time

basis using last-sale prices and will be disseminated every 15 seconds

by the Exchange. If a component stock of the Index is not currently

being traded, the most recent price at which the stock traded will be

used in the Index calculation.

Maintenance

The Index will be maintained by the Exchange. To maintain

continuity in the Index following an adjustment to a component

security, the divisor will be adjusted. Changes which may result in

divisor changes include, but are not limited to, spin-offs, certain

rights issuances, and mergers and acquisitions.

The Exchange states that the Index will be reviewed on

approximately a monthly basis by the CBOE staff. The Exchange may

change the composition of the Index at any time or from time to time to

reflect the changes affecting the components of the Index or the

Israeli economy generally. If it becomes necessary to remove a stock

from the Index (generally due to a takeover or merger), every effort

will be made to add to the Index an Israeli stock that is traded in the

U.S. and not in Israel. (According to the Exchange, there are currently

46 Israeli stocks trading in the United States, of which five are also

traded in Israel.) In such circumstances, CBOE will take into account

the capitalization, liquidity, volatility, and name recognition of the

proposed replacement stock. The Exchange will most likely maintain

fifteen stocks in the Index at all times.\9\

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

\9\The Exchange will notify the Commission of changes in the

number of components in the Index. Prior to increasing the number of

components of the Index to more than 20 or decreasing the number of

components to less than 10, the Exchange will be required to submit

a rule filing pursuant to Section 19 of the Act and Rule 19b-4

thereunder. Id.

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

Long-Term Index Options

In addition to Index options on the full-value of the Index, the

Exchange also proposes to list long-term Index option series

(``LEAPS'') as provided in CBOE Rule 24.9, and reduced-value Index

LEAPS for which the underlying value would be computed at one-tenth

(\1/10\th) of the value of the Index. The current and closing index

value of any such reduced-value Index LEAPS will, after such initial

computation, be rounded to the nearest one-hundredth. Other than the

reduced value, all other specifications and calculations for the

reduced-value Index LEAPS will remain the same.

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

of the Exchange's rules.\10\ The CBOE proposes to amend Rule 24.9 to

refer specifically to Israeli Index options. The Exchange states that

the proposed Index options would 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.

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

\10\Under CBOE Rule 24.9, A.M.-settled index options are settled

based on an index value derived from opening prices on the last day

of trading prior to expiration.

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

Exchange Rules Applicable

Except as modified in the proposal, the Rules in Chapter XXIV of

the Exchange's rules regarding narrow-based or industry indexes will be

applicable to Index options. Index option contracts based on the

Israeli Index will be subject to position limits on 7,500 contracts on

the same side of the market pursuant to CBOE Rule 24.4A. For purposes

of position and exercise limits Index LEAPS will be aggregated with

Index options on a one for one basis. Under the proposal, ten reduced-

value Index LEAPS contracts will equal one full-value Index option or

Index LEAPS for purposes of aggregating positions. The Exchange

represents that it has the necessary systems capacity to support new

options series that would result from the introduction of Israeli Index

options and Index LEAPS.

The Exchange 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 the Act,\11\in particular, in that it is 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.

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

\11\15 U.S.C. 78f(b)(5) (1988).

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

(B) Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will

impose any inappropriate burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments on the proposed rule change were neither solicited

nor received.

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

Commission Action

Within 35 days of the date of 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 Exchange 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. 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 in 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 CBOE.

All submissions should refer to File No. SR-CBOE-93-55 and should

be submitted by June 27, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\12\

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

\12\17 CFR 200.30-3(a)(12) (1993).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-13604 Filed 6-3-94; 8:45 am]

BILLING CODE 8010-01-M