Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by Chicago Board Options Exchange, Inc. Relating to Warrants on the Nikkei Stock Index 300

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34854; International Series Release No. 732; File No.

SR-CBOE-94-32]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by Chicago Board Options Exchange, Inc. Relating to Warrants on

the Nikkei Stock Index 300

October 18, 1994.

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

September 2, 1994, the Chicago Board Options Exchange, Inc. (``CBOE''

or ``Exchange'') filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') 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 warrants on the Nikkei Stock

Index 300 (``Nikkei 300'' or ``Index''). The text of the proposed rule

change is 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 self-regulatory organization

included statements concerning the purpose or 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 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 is permitted to list and trade index warrants under

CBOE Rule 31.5(E). The Exchange is now proposing to list and trade

index warrants based on the Nikkei 300. The listing and trading of

index warrants on the Nikkei 300 would comply in all respects with CBOE

Rule 31.5(E). CBOE has received the Commission's approval to list and

trade options on the Nikkei 300.\1\

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\1\See Securities Exchange Act Release No. 34388 (July 15,

1994), 59 FR 37789 (July 25, 1994) (approving File No. SR-CBOE-94-

14).

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Index design. The Nikkei 300 is a broad-based, capitalization-

weighted index designed to be representative of stocks on the Tokyo

Stock Exchange. It was designed by and is maintained by Nihon Keizai

Shimbun, Inc. The Index is fully described in SR-CBOE-94-14, the

Exchange's rule filing relating to the listing and trading of options

on the Nikkei 300.\2\

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\2\See supra, note 1.

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Index warrant trading. The warrants on the Index would be direct

obligations of their issuers and would be cash-settled in U.S. dollars.

The warrants would have either American or European style exercise.

Upon exercise, or at the warrant expiration date in the case of

warrants with European style exercise, 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-stated 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. Warrants that are out-of-the-money at the

time of expiration would expire worthless.

Warrant listing standards and customer safeguards. In SR-CBOE-90-

08,\3\ the Exchange established generic listing standards for index

warrants, which are contained in CBOE Rule 31.5(E). The filing also

established certain sales practice rules for the trading of index

warrants, which are contained in Chapter IX of the Exchange's Rules.

The listing and trading of index warrants on the Nikkei 300 would be

subject to those guidelines and rules.

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\3\See Securities Exchange Act Release No. 28556 (October 19,

1990), 55 FR 43233 (October 26, 1990).

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Under Rule 31.5(E), (i) issuers shall meet the CBOE's size and

earnings criteria for equity issues and have assets in excess of

$100,000,000; (ii) the term of the warrants shall be for a period

ranging from one to five years from the date of issuance; and (iii) 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.

Because index warrants are derivative in nature and closely

resemble index options, CBOE would also require safeguards designed to

meet the investor protection concerns raised by the trading of index

options. The Exchange would require that index warrants on the Nikkei

300 be sold only to customers whose accounts have been approved for

options trading under CBOE Rule 9.7.\4\ CBOE Rule 30.50, Interpretation

.02 also applies the suitability standards of CBOE Rule 9.9 to

recommendations in index warrants.

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\4\Telephone conversation between James R. McDaniel, Schiff

Hardin & Waite, and Beth A. Stekler, Attorney, Division of Market

Regulation, SEC, on October 17, 1994.

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In addition, CBOE Rule 30.50, Interpretation .04 requires that the

standards of Rule 9.10(a) regarding discretionary orders be applied to

index warrants. It requires a branch office manager or registered

options principal to approve and initial a discretionary order in index

warrants on the day entered. Also, prior to commencement of trading,

the Exchange would distribute a circular to its members calling

attention to specific risks associated with warrants calling attention

to specific risks associated with warrants on the Index if the Exchange

is required to do so by Commission policy.

2. Statutory Basis

The listing and trading of warrants on the Nikkei 300 is consistent

with Section 6(b) of the ACt in general and furthers the objectives of

Section 6(b)(5) of the Act in particular because it will help remove

impediments to a free and open securities market and facilitate

transactions in securities because the Index warrants will provide

investors a means by which to hedge investments in the Japanese equity

market and provide a surrogate instrument for trading in the Japanese

securities market.

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

The proposed rule amendments will not impose any burden on

competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants or Others

Comments were neither solicited nor received.

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 other period (i) as the Commission may

designate up to 90 days of such 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, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect at 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 at the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC 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-94-32 and should be

submitted by November 15, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-26351 Filed 10-19-94; 8:45 am]

BILLING CODE 8010-01-M