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 CBOE Emerging Latin American Markets Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34724; International Series Release No. 718; File No.

SR-CBOE-94-25]

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 CBOE Emerging Latin American Markets Index

September 27, 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 July 20, 1994, 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 CBOE. The Exchange

filed Amendment No. 1 to the proposed rule change on August 18,

1994,\3\ and Amendment No. 2 on September 26, 1994.\4\ 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) (1988).

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

\3\In Amendment No. 1, the Exchange proposes to treat the CBOE

Emerging Latin American Markets Index as a narrow-based index for

purposes of margin and position limit treatment. Pursuant to CBOE

Rule 24.4A, the position limits for the CBOE Emerging Latin American

Markets Index would initially be set at 7,500 contracts. See Letter

from Eileen Smith, Director, Product Development, Research

Department, CBOE, to Brad Ritter, Senior Counsel, Office of Market

Supervision (``OMS''), Division of Market Regulation (``Division''),

Commission, dated August 18, 1994 (``Amendment No. 1'').

\4\In Amendment No. 2, the CBOE proposes to expand the CBOE

Emerging Latin American Markets Index to ten securities by adding

the Emerging Mexico Fund as a component security. See Letter from

Scott Lyden, Senior Research Analyst, Research Department, CBOE, to

Brad Ritter, Senior Counsel, OMS, Division, Commission, dated

September 26, 1994 (``Amendment No. 2'').

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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,''\5\

the CBOE proposes to list for trading options on the CBOE Emerging

Latin American Markets Index (``Emerging Latin American Markets Index''

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

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

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\5\Exchange Rule 24.2 provides, in part, that the Commission

must approve a particular index upon which options are traded.

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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 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\6\ index options on the

Emerging Latin American Markets Index. The Index will initially consist

of ten\7\ closed-end funds which invest in the stocks of firms in the

emerging Latin American economies. According to the Exchange, no proxy

for the performance of these emerging economies is currently available

in the U.S derivatives markets. The Exchange believes, therefore, that

options on the Index will provide investors with a low-cost means of

participating in the performance of these markets and/or hedging

against the risk of investing in the Latin American emerging markets.

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\6\European-style options can only be exercised during a

specified period before the options expire.

\7\See Amendment No. 2, supra note 4.

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Index Design

The Emerging Latin American Markets Index will initially consist of

ten closed-end funds.\8\ All of the closed-end fund components of the

Index currently trade on the New York Stock Exchange.

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\8\The components of the Index are the: Latin American Discovery

Fund Inc.; Latin American Equity Fund Inc.; Latin America Investment

Fund Inc.; Argentina Fund Inc.; Brazilian Emerging Mexico Fund;

Mexico Equity and Income Fund Inc.; and Mexico Fund Inc. Id.

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As of September 15, 1994, the closed-end funds comprising the Index

ranged in market capitalization from a low of $118.63 million to a high

of $1.294 billion. The average capitalization as of that date was

$313.35 million. The closed-end fund accounting for the largest

percentage of the total weighting of the Index on that date was the

Chile Fund Inc. (16.64%), while the smallest was the Argentina Fund

Inc. (5.65%).

Calculation

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

the components relative to the base date of December 31, 1991. 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 value of the Index at the close on

September 15, 1994, was 168.07.

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

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

by the Exchange. If a component closed-end fund is not currently being

traded, the most recent price at which the closed-end fund 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, certain rights

issuances.

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

emerging Latin American markets generally. If it becomes necessary to

remove a component from the Index, every effort will be made to add a

closed-end fund that preserves the character of the Index. In such

circumstances, the CBOE will take into account the capitalization,

liquidity, volatility, and name recognition of the proposed replacement

closed-end fund. The Exchange will most likely maintain nine closed-end

funds in the Index at all times.

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.\9\ The CBOE proposes to amend Rule 24.9 to

refer specifically to Emerging Latin American Markets 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.

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\9\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.

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Exchange Rules Applicable

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

the Exchange's Rules regarding narrow-based indexes will be applicable

to Index options.\10\ Pursuant to Exchange Rule 24.4A, Index option

contracts based on the Emerging Latin American Markets Index will be

subject to position limits of 7,500 contracts.\11\ 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

LEAP 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 Index options an

Index LEAPS.

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\10\See Amendment No. 1, supra note 3.

\11\Id.

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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,\12\ in particular, in that it will provide

investors with an opportunity to invest in options based upon the

Emerging Latin American Markets Index pursuant to rules designed to

prevent fraudulent and manipulative acts and practices, promote just

and equitable principles of trade, foster cooperation and coordination

with persons facilitating transactions in securities, remove

impediments to and perfect the mechanism of a free and open market, and

protect investors and the public interest.

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\12\15U.S.C. 78f(b)(5) (1988).

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(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-94-25 and should be

submitted by October 25, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\13\

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\13\17 CFR 200.30-3(a)(12) (1933).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-24516 Filed 10-3-94; 8:45 am]

BILLING CODE 8010-01-M