Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to the Listing and Trading of Options and Long-Term Options on the CBOE Germany 25 Index and Long-Term Options on a Reduced-Value CBOE Germany 25 Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36125; International Series Release No. 841 File No.

SR-CBOE-95-39]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Board Options Exchange, Inc. Relating to the

Listing and Trading of Options and Long-Term Options on the CBOE

Germany 25 Index and Long-Term Options on a Reduced-Value CBOE Germany

25 Index

August 18, 1995.

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 August 4, 1995, 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

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 (1994).

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

of the Proposed Rule Change

The Exchange hereby proposes to amend certain of its rules to

provide for the listing and trading on the Exchange of options on the

CBOE Germany 25 Index (``Germany 25 Index'' 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 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

[[Page 44527]]

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 \3\ stock index options

on the Germany 25 Index. The Index is a capitalization-weighted index

of 25 German blue-chip equities listed on the Frankfurt Stock Exchange

(``FSE''). The Exchange represents that options on the Index will

provide investors with a low-cost means of participating in the German

economy and hedging against the risk of investing in that economy.

\3\ Europen-style options may only be exercised during a

specified period before the options expire.

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Index Design

The 25 stocks comprising the Germany 25 Index were selected by the

CBOE for their high market capitalization and high degree of liquidity.

According to the Exchange, the Index stocks are drawn from a broad base

of industries and are representative of the industrial composition of

the broader German equity market. Specifically, the Index components

are the top 25 German stocks by market capitalization excluding: (1)

Stocks with average daily volume less than 50,000 shares per day over

the past six months; and (2) preferred stock of an issuer if that

issuer also has publicly-traded common stock. The Index will be

reviewed annually by the CBOE at the end of May in each year and any

composition changes resulting from that review will be implemented

after the June expiration in that year.

The Germany 25 Index is weighted by the capitalization (market

vlaue) of the component stocks. The capitalization of a particular

stock in the Index is calculated by multiplying the listed shares

(including common, preferred, and treasury shares) by the price of the

stock.\4\

\4\ The Commission notes that this varies from the method used

to calculate the values of domestic capitalization-weighted indexes,

such as the S&P 100 Index. For such domestic indexes, values are

determined based solely on the outstanding shares of common stock of

each component in the indexes.

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On June 30, 1995, the 25 stocks in the Index ranged in

capitalization from DM 3.656 billion ($2.648 billion) \5\ to DM 51.642

billion ($37.408 billion). The total capitalization of the stocks in

the index on that date was DM 399.1 billion ($289.1 billion); the mean

capitalization was DM 15.96 billion ($11.564 billion) and the median

capitalization was DM 11.144 billion ($8.072) billion). The largest

stock by capitalization (Allianz AG Holdings) accounted for 12.94% of

the total weighting of the Index, while the smallest (Kaufhof)

accounted for 0.92%. The top 5 stocks accounted for 44.56% of the total

weighting on that date.

\5\ The CBO represents that dollar values used herein are based

on a German mark/U.S. dollar exchange rate of 1.3805 marks per U.S.

dollar prevailing on June 30, 1995.

For the period from January 1, 1995 through June 30, 1995, average

daily volume in Germany 25 Index stocks ranged from a low of

approximately 87,629 shares to a high of 2.53 million shares traded per

day, with a mean daily trading volume for all the stocks in the Index

during that period of 523,501 shares traded per day.

The Exchange represents that the Index is composed of ten (10)

broad industry groupings, such as chemicals, automobile and insurance

companies, among others, which reflect the industry composition of the

German equity market.

Calculation

The CBOE states that the Germany 25 Index will reflect changes in

the capitalization of the component stocks relative to the

capitalization on a base date. The base date for the Index is June 30,

1995, at which time the Index was given a value of 200 by the CBOE. The

Index value of 200 was reached by multiplying the price of each stock

by the number of listed shares,\6\ obtaining the sum of these values

for all component stocks, and then dividing by a divisor determined to

give the Index a value of 200. The CBOE states that the German 25 Index

will be calculated by CBOE or its designee based on the most recent

closing prices of the component stocks as reported by the FSE.

\6\ See supra note 4 and accompanying text.

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Maintenance

The Index will be maintained and calculated by the Exchange. To

maintain continuity of the Index, the Exchange will adjust the Index to

reflect certain events relating to the component stocks. For example,

the Exchange will adjust the Index divisor to reflect cash dividends

paid on the component securities. The Exchange will make this

adjustment because German companies usually pay their dividends only

once per year (generally in May or June). If not adjusted, the annual

dividend payment would result in a significant drop in the Index value

at the time when the dividends are paid. The divisor will be adjusted

immediately prior to each ex-dividend date so that the Index level will

not be affected by the dividend payment. A similar adjustment will be

applied when a company issues new shares for which the shareholders

have preemptive rights, or when other intra-year events, such as

mergers and spinoffs, occur.

Index replacements, other than those described above, will only be

made if a component must be removed from the Index because of a merger

or takeover. In that case, the next eligible component will be added,

i.e,, the German security with the highest market capitalization not

then included in the Index that satisfies the criteria set forth above.

Index Option Trading

In addition to regular Index options, the Exchange may provide for

the listing of long-term index option series (``LEAPS'') and reduced-

value LEAPS on the Index (``Index LEAPS'').

For reduced-value Index LEAPS, the underlying value will be

computed at one-tenth of the Index level. 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.

The trading hours for options on the Index will be from 8 a.m. to

3:15 p.m., Chicago time. Currently, the trading hours of the Exchange

and the FSE do not overlap.\7\ The Exchange, therefore, will

disseminate the value of the Index based on the most recent closing

prices of the component stocks as reported by the FSE. After the close

of the FSE, however, trading continues in the 25 stocks comprising the

Index on the FSE's Integrated Stock Exchange Trading and Information

System (``IBIS'').\8\ The trading hours of IBIS and the Exchange

currently overlap for the two hours period between 8:00 a.m. and 10:00

a.m., Chicago time. During this two hour period, the Exchange will

calculate and disseminate an ``indicative'' Germany 25 Index level

based on the most recent prices of the component stocks as reported by

IBIS.\9\

[[Page 44528]]

When trading on IBIS has concluded (10:00 a.m. Chicago time), the

Exchange will disseminate the last ``indicative'' Index level. To avoid

any confusion, the ``indicative'' Index level will have a different

ticker symbol from the actual Index level.

\7\ The FSE's trading hours are from 10:30 a.m. to 1:30 p.m.,

Frankfurt time (3:30 a.m. to 6:30 a.m., Chicago time).

\8\ According to the Exchange, the Deutsche Borse AG, the

holding company for the FSE, states that IBIS is a screenbased

trading and information system that is available for trading from

8:30 a.m. to 5:00 p.m., Frankfurt time (1:30 a.m. to 10:00 a.m.,

Chicago time). The CBOE represents that IBIS, as part of the FSE, is

subject to the same rules and regulations as floor trading on the

FSE. According to the Exchange, IBIS began operating in April, 1991.

\9\ The Exchange intends to calculate the ``indicative'' Index

with the same method of calculation as described above for the

actual Index.

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The option premium values will be quoted in U.S. dollars and,

therefore, trading accounts will be denominated in U.S. dollars. For

strike prices under $200, the Exchange reserves the right to list

series in 2\1/2\ point intervals.

Surveillance

The Exchange expects to apply its existing index options

surveillance procedures to Index options. In addition, the CBOE states

that the German legislature recently adopted new laws regarding insider

trading that also provide for the creation of an independent regulatory

authority.\10\ The Exchange understands that these developments will

facilitate the effective coordination between the Commission and the

appropriate German regulatory authority of option trading on the

Germany 25 Index because they will enhance the surveillance of trading

in the stocks comprising the Index. In addition, the Exchange will

continue to pursue its own independent agreement with the Deutsche

Borse AG (the holding company that owns the FSE) and/or the FSE.\11\

\10\ The Commission notes that this new regulatory body, the

Bundesaufsichtsamt fur den Wertpapierhandel, was established in

January 1995.

\11\ Telephone conversation between Eileen Smith, Director,

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

Senior Counsel, OMS, Division, Commission, on August 8, 1995.

Exercise and Settlement

The proposed options on the Index will expire on the Saturday

following the third Friday of the expiration month. Trading in the

expiring contract month will normally cease at 3:15 p.m. (Chicago time)

on the immediately preceding Thursday, unless a holiday occurs. The

exercise settlement value of the Index at option expiration will be

calculated by the Exchange on the day following the last day of trading

in the expiring contracts. The exercise settlement value of Index

options at expiration will be determined at the close of the regular

Friday trading sessions at the FSE in Germany, ordinarily at 1:30 p.m.,

Frankfurt time (6:30 a.m., Chicago time), i.e., values of component

stocks disseminated through IBIS will not be used in calculating the

settlement values for Index options or Index LEAPS.\12\ If an Index

stock does not open for trading at the FSE, the last available price on

the FSE of the stock will be used in the calculation of the value of

the Index. When expirations are moved in accordance with Exchange

holidays, such as when the CBOE is closed on the Friday before

expiration, the last trading day for expiring options will be Wednesday

and the exercise settlement value of Index options at expiration will

be determined at the close of the regular Thursday trading sessions at

the FSE in Germany even if the FSE is open on Friday. If the FSE will

be closed on the Friday before expiration but the CBOE will not, the

last trading day for expiring Index options and Index LEAPS will be

Wednesday.\13\

\12\ Id.

\13\ In this circumstance, the CBOE will issue a notice to

members informing them that the last trading day for Index options

and Index LEAPS will be on Wednesday even though the CBOE will be

open on expiration Friday. Id.

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Position Limits

The Exchange proposes to establish position limits for options on

the Index of 50,000 contracts on either side of the market, with no

more than 30,000 contracts in the series with the nearest expiration

month. The Exchange represents that these limits are roughly

equivalent, in dollar terms, to the limits applicable to options on

other approved broad-based indexes.

Exchange Rules Applicable

Except as modified herein, the rules in Chapter XXIV of the CBOE's

rules will be applicable to Germany 25 Index options, including Index

LEAPS.

The Exchange states that it has the necessary systems capacity to

support new series that would result from the introduction of Germany

25 Index options. The CBOE also states that it has been informed that

the Options Price Reporting Authority (``OPRA'') has the capacity to

support such new series.\14\

\14\ See Letter from Joe Corrigan, Executive Director, OPRA, to

Eileen Smith, Director, Product Development, Research Department,

CBOE, dated November 21, 1994.

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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,\15\ in particular, in that it is designed

to permit trading in options based on the Germany 25 Index pursuant to

rules 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.

\15\ 15 U.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-95-39 and should be

submitted by September 18, 1995.

[[Page 44529]]

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\16\

\16\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-21273 Filed 8-25-95; 8:45 am]

BILLING CODE 8010-01-M