Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 to Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to the Rules for the Listing and Trading of Stock Index and Currency Warrants

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35087; File No. SR-CHX-94-21]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 to Proposed Rule Change by the Chicago Stock

Exchange, Incorporated Relating to the Rules for the Listing and

Trading of Stock Index and Currency Warrants

December 12, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November

3, 1994, the Chicago Stock Exchange, Incorporated (``CHX'' 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 Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

I. Self-Regulatory Organizations Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to (1) amend Article XXVIII, Rule 8 to revise

the listing criteria for stock index (``stock index'' or ``index'')

warrants and currency warrants (``currency warrants''),\1\ (2) add a

new Part V to the Rules of the Exchange to provide rules for the

trading of index warrants, and (3) amend Article X, Rule 3 of the

Exchange's rules to specify the customer margin requirements for the

purchase or short sale of index warrants. On Dec. 5, 1994, the CHX

amended certain surveillance related matters addressed in the filing.

See footnote 3, infra.

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\1\Currency warrants, as used in this filing, may refer to

warrants on individual currencies (or cross currencies) or to

warrants on a specific currency index group (``currency index

warrants'').

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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, 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 section (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

Purpose

The Exchange proposes to: (1) amend its listing guidelines for

stock index and currency warrants, (2) establish various new rules for

the trading of stock index and currency warrants, and (3) establish

special customer margin requirements for positions in stock index and

currency warrants.

Description of the Proposed Rules

CHX seeks to amend Article XXVIII, Rule 8 of the Exchange's rules

to provide a higher standard for warrant issuers than currently exists.

Specifically, future warrant issuers would be expected to have a

minimum tangible net worth in excess of $150,000,000. Moreover, the

aggregate original issue price of all of a particular issuer's warrant

offerings (combined with offerings by its affiliates) that are listed

on a national securities exchange or on NASDAQ would not be permitted

to exceed 25% of the issuer's net worth. The proposed amendment will

require that each warrant issue will be automatically exercised on

either the delisting date (if the issue is not listed upon another

organized securities market) or upon expiration. Article XXVIII, Rule 8

also will be amended to provide that, for stock index warrants where 25

percent or more of the value of the underlying index is represented by

securities that are traded primarily in the U.S., the opening prices of

the U.S. traded securities in the index will be used to determine the

settlement value of the underlying index.

Article X, Rule 3 is being amended to apply the customer margin

requirements used for broad based index and currency options to index

warrants and currency warrants, respectively. Thus, purchases of stock

index and currency warrants will require payment in full, and short

sales of stock index warrants will require initial margin of: (i) 100

percent of the current value of the warrant plus (ii) 15 percent of the

current value of the underlying broad stock index less the amount by

which the warrant is out of the money up to a maximum of five percent

of the index value. Short sales of currency warrants similarly will

follow the margin requirements applicable to listed currency options.

The Exchange proposes that the index and currency warrant margin

requirements be permitted offset treatment for spread, straddle and

covered positions.\2\

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\2\The staff of the Commission has indicated to the Exchange

that it must request and obtain appropriate interpretive or no-

action relief from the Commission in order to permit its index and

currency warrant margin requirements to allow offset treatment for

spread, straddle and covered positions.

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Article LI is being amended to add definitions related to the

listing, trading, and margin requirements of stock index, currency, and

currency index warrants.

Proposed Part V of the Exchange rules applies to the trading of

index warrants and currency warrants. Proposed Article LIII, Rule 1

provides that, unless the context otherwise requires or a specific rule

in Part V applies, the provisions of the Constitution and all other

rules and policies of the Exchange apply to trading of such securities.

Proposed Article LIII, Rule 2 states that no member or member

organization shall accept an order from a customer for the purchase or

sale of an index or currency warrant unless the customer's account has

been approved for options trading pursuant to Exchange Article XXVIII,

Rule 3.

Proposed Article LIII, Rules 3, 4, 5, and 6 require that the

options rules for suitability, discretionary account trading,

supervision of accounts and customer complaints be applied to stock

index and currency warrants.

Proposed Article LIII, Rule 7 requires approval by a Compliance

Registered Options Principal of all advertisements, sales literature

and educational material issued by a member organization pertaining to

stock index and currency warrants. The rule further requires Exchange

approval of all advertisements and educational materials pertaining to

stock index and currency warrants.

Proposed Article LIII, Rule 8 provides that position limits for

stock index warrants on the same index with original issue prices of

ten dollars or less will be fifteen million warrants covering all such

issues. In addition, with respect to warrants on the Standard & Poor's

MidCap 400 Index, the position limit will be seven and one half million

warrants covering all such issues, provided the original issue prices

of the warrants are not greater than $10. Further, with respect to

warrants on the Russell 2000 Index, the position limit will be twelve

and one half million warrants. The rule provides that warrants with an

original issue price of ten dollars or more will be weighted more

heavily than warrants with an original issue price of ten dollars or

less in calculating position limits. The rule gives the Exchange the

authority to require the liquidation of a position in stock index

warrants that is in excess of the position limits set forth in the

rule, and commentary to the rule provides procedures for allowing

limited exceptions to the position limits.

Proposed Article LIII, Rule 9 provides for exercise limits on stock

index warrants analogous to those found in stock index options and

states that such limits are separate and distinct from any exercise

limits that may be imposed by the issuers of stock index warrants.

Proposed Article LIII, Rule 10, requires that the trading halt

provisions in Article IX, Rule 10A shall be applied to the trading of

stock index warrants.

Upon SEC approval of the foregoing amendments, the Exchange

proposes that it will only file rule changes for specific warrant

issues where there is no corresponding option or warrant on the same

underlying index already listed on a national securities exchange or

NASDAQ. Accordingly, when a listed option or warrant overlies a

particular broad based index, the Exchange proposes it be able to list

warrants on that index without further SEC review and approval pursuant

to Section 19(b) of the Act.

Both initial and maintenance listing standards for stock index

warrants will require that no more than 20% of the securities in the

underlying index, by weight, may be comprised of foreign securities or

American depositary receipts (``ADRs'') overlying foreign securities

that are not subject to comprehensive surveillance sharing agreements

between the CHX and the primary exchange on which the foreign security

(including a foreign security underlying an ADR) is traded.\3\ Finally,

prior to trading index or currency warrants, the Exchange will

distribute a circular to its membership providing guidance regarding

member firm compliance responsibilities (including suitability

recommendations) when handling transactions in index or currency

warrants.

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\3\Telephone conversation between David T. Rusoff, Foley &

Lardner, and Stephen M. Youhn, SEC, on December 5, 1994 (``Amendment

No. 1''). The Exchange proposes that the ``20% test'' be applied in

the same manner as that contained in Securities Exchange Act Release

No. 34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (Commission

approval order allowing the expedited trading approval of certain

narrow-based index options).

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The Exchange believes the proposed rule change is consistent with

Section 6(b) of the Act in general and furthers the goals of Section

6(b)(5) in particular in that it is designed to prevent fraudulent and

manipulative acts and practices, to promote just and equitable

principles of trade, to foster cooperation and coordination with

persons engaged in facilitating transactions in securities, and to

remove impediments to and perfect the mechanism of a free and open

market and a national market system.

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

The Exchange does not believe that the proposed rule change will

impose a 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 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 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 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 submission

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the submissions, 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 at the

principal office of the above-referenced self-regulatory organization.

All submissions should refer to file number in the caption above and

should be submitted by January 10, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-31204 Filed 12-19-94; 8:45 am]

BILLING CODE 8010-01-M