Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Currency Warrants Based on the Value of the U.S. Dollar in Relation to the Brazilian Real

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36464; International Series Release No. 879; File No.

SR-CBOE-95-54]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

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

Warrants Based on the Value of the U.S. Dollar in Relation to the

Brazilian Real

November 8, 1995

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

September 13, 1995, the Chicago Board Options Exchange, Inc. (``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 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 Exchange proposes to approve for listing and trading currency

warrants based upon the value of the U.S. dollar in relation to the

Brazilian Real. 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, CBOE 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 Exchange is permitted to list and trade currency warrants under

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

currency warrants based upon the value of the U.S. dollar in relation

to the Brazilian Real (``Brazilian Real warrants''). The listing and

trading of currency warrants relating to the Brazil Real will comply in

all respects with CBOE Rule 31.5(E).

1. Currency Warrant Trading

Brazilian Real warrants will be unsecured obligations of their

issuers and will be cash-settled in U.S. dollars. The warrants will be

either exercisable throughout their life (i.e., American style) or

exercisable only on their expiration date (i.e., European style). Upon

exercise, the holder of a warrant structured as a ``put'' would receive

payment in U.S. dollars to the extent that the value of the Brazilian

Real has declined in relation to the U.S. dollar below a pre-stated

base price. Conversely, holders of a warrant structured as a ``call''

would, upon exercise, receive payment in U.S. dollars to the extent

that the value of the Brazilian Real in relation to the U.S. dollar has

increased above the pre-stated base price. Warrants that are out-of-

the-money at the time of expiration will expire worthless.

2. Warrant Listing Standards and Customer Safeguards

In SR-CBOE-90-08,\1\ the Exchange established generic listing

standards for currency warrants, which are contained in CBOE Rule

31.5(E). On August 29, 1995, the Commission approved SR-CBOE-94-34,\2\

which amended Rule 31.5(E) and established customer protection and

margin requirements for currency warrants.

\1\ See Securities Exchange Act Release No. 28556 (October 19,

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

\2\ See Securities Exchange Act Release No. 36169 (August 29,

1995), 60 FR 46644 (September 7, 1995).

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CBOE Rule 31.5(E) sets forth the criteria applicable to listing

currency warrants. Any issue of Brazilian Real warrants will conform to

the listing criteria under Rule 31.5(E) which provide that: (1) The

issuer shall have minimum tangible net worth in excess of $150,000,000

and otherwise substantially exceed the size and earnings requirements

in Rule 31.5(A); (2) the term of the warrants shall be for a period

ranging from one to five years from date of issuance; and (3) the

minimum public distribution of such issues shall be 1,000,000 warrants,

together with a minimum of 400 public holders, and have a minimum

aggregate market value of $4,000,000. In addition, where an issuer has

a minimum tangible net worth in excess of $150,000,000 but less than

$250,000,000, the Exchange shall not list Brazilian Real warrants of

the issuer if the value of such warrants plus the aggregate value,

based upon the original issuing price, of all outstanding stock index,

currency index and currency warrants of the issuer (and its affiliates)

that are listed for trading on a national securities exchange or traded

through the facilities of the National Association of Securities

Dealers Automated Quotation System (``NASDAQ'') exceeds 25% of the

issuer's net worth.

Among the consequences of the recently approved rule amendments,

Brazilian Real warrants may be sold only to customers whose accounts

have been approved for options trading pursuant to Exchange Rule 9.7.

Moreover, the suitability standards of Exchange Rule 9.9 apply to

recommendations in currency warrants. Also, the standards of Rule

9.10(a), regarding discretionary orders, will be applicable to currency

warrants.

3. Margin Requirements

Recently approved SR-CBOE-94-34 also establishes margin

requirements for currency warrants. New Exchange Rule 30.53 requires

minimum margin on any currency warrant carried ``short'' in a

customer's account to be 100% of the current market value of each such

warrant plus an ``add-on'' percentage of the produce of the units of

underlying currency per warrant and the spot price for such currency.

The Exchange has calculated frequency distributions reflecting

percentage price returns for all one (1) and five (5) day periods for

the Brazilian Real for the period of September 1, 1992 through August

30, 1995. These distributions demonstrate that more than 97.5% of all

five (5) day

[[Page 57608]]

returns for the three (3) year period would have been covered by 10.0%

of the underlying Real value. Based upon these results, the Exchange is

proposing to set the margin ``add-on'' percentage for Brazilian Real

warrants at 10% for both initial and maintenance margin, with a minimum

add-on for out-of-the money warrants of 2%. If as the result of the

Exchange's routine monitoring of margin adequacy, the Exchange

determines that a different percentage would be appropriate, CBOE will

file a proposal with the Commission to modify the add-on percentages.

The Exchange believes that the listing and trading of Brazilian

Real warrants is consistent with Section 6(b) of the Act in general,

and with Section 6(b)(5) in particular, because it will help remove

impediments to a free and open securities market and facilitate

transactions in securities by providing investors with a low-cost means

to participate in the performance of the Brazilian economy or to hedge

against the risk of investing in that economy.

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

The Exchange believes the proposed rule change will impose no

inappropriate burden on competition.

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

Rule Change Received From Members, Participants or Others

The Exchange has neither solicited nor received written comments on

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 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 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 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

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-95-54 and should be

submitted by December 7, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\3\

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-28249 Filed 11-15-95; 8:45 am]

BILLING CODE 8010-01-M