Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Chicago Board Options Exchange, Incorporated To Revise the Component Selection and Weighting Guidelines That Govern the GSTI Composite Index and Sub-Indexes

[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51818-51819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24916]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41882; File No. SR-CBOE-99-54]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Board Options 
Exchange, Incorporated To Revise the Component Selection and Weighting 
Guidelines That Govern the GSTI Composite Index and Sub-Indexes

September 17, 1999.
    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 September 9, 1999, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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 
Exchange. 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).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange seeks to revise the component selection and weighting 
guidelines that currently govern the Goldman Sachs Technology Composite 
Index (``GSTI TM Composite Index'') and GSTI Sub-Indexes 
(``Sub-Indexes'') (collectively, the ``GSTI Indexes''). The proposed 
revisions are based on new criteria that Goldman, Sachs & Co. will use 
to maintain the GSTI Indexes. The Exchange seeks approval to continue 
to list and trade options on the GSTI Indexes after the proposed 
revisions become effective following the close of trading on September 
17, 1999.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, 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 Exchange 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 currently lists and trades European-style, cash-
settled options on the GSTI Indexes pursuant to prior Commission 
approval.\3\ The GSTI Composite Index is a modified capitalization-
weighted index that reflects the universe of technology-related company 
stocks meeting certain objective criteria. The Sub-Indexes are likewise 
calculated using a modified capitalization-weighting methodology. The 
components for each of the six Sub-Indexes are selected exclusively 
from the GSTI Composite Index.\4\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release Nos. 37693 (Sept. 17, 
1996), 61 FR 50362 (Sept. 25, 1996); and 37696 (Sept. 17, 1996), 61 
FR 50358 (Sept. 25, 1996).
    \4\ The six Sub-Indexes include: GSTI Hardware Index, GSTI 
Internet Index, GSTI Semiconductor Index, GSTI Software Index, GSTI 
Services Index, and GSTI Multimedia Networking Index.
---------------------------------------------------------------------------

    Goldman Sachs recently informed the Exchange that following the 
close of trading on September 17, 1999, certain guidelines governing 
the selection of stocks included in the GSTI Composite Index will be 
modified to clarify the definition of ``technology-related'' and 
explicitly include Internet-related companies. Specifically, Goldman 
Sachs intends to introduce a supplemental sector/industry 
classification method to better identify the universe of technology and 
Internet-related stocks eligible for inclusion in the GSTI Composite 
Index. This supplemental classification method, developed and 
maintained by Goldman Sachs Investment Research, will supplement the 
current use of SIC and Russell codes to identify technology stocks.\5\ 
Goldman Sachs believes that the supplemental sector/industry 
classification method will capture those stocks that are commonly 
considered to be part of the universe of technology-related companies, 
but lack the appropriate SIC or Russell code. Goldman Sachs expects 
that the revised GSTI Composite Index will more accurately reflect the 
technology sector and will be better suited to track future changes in 
the industry.
---------------------------------------------------------------------------

    \5\ The Exchange represents that Goldman Sachs will not have any 
informational advantage concerning modifications to the composition 
of the GSTI Composite Index and the Sub-Indexes due to Goldman 
Sachs' role in maintaining such indexes, including the 
classification of stocks. Goldman Sachs has separately represented 
that it will make its list of the technology and Internet-related 
stocks available to interested parties upon request.
---------------------------------------------------------------------------

    In addition, Goldman Sachs informed the Exchange that following the 
close of trading on September 17, 1999, the weighting criteria for the 
Sub-Indexes will be revised. Currently, the component weightings for 
each of the six Sub-Indexes are capped such that the largest stock in a 
Sub-Index may account for no more than 25% of the index by weight, the 
second-largest stock may account for no more than 20%, and the third 
through fifth largest stocks may account for no more than 15% each. 
Goldman Sachs will revise the weighting criteria for the Sub-Indexes so 
that all components will be subject to a maximum weight cap of 12.5%. 
Goldman Sachs expects that this revised weighting methodology will 
promote portfolio weight diversification and prevent concentration of 
weighting in the Sub-Indexes in a few large stocks. In particular, 
Goldman Sachs notes that the revised weighting methodology requires 
each of the Sub-Indexes to be comprised of at least eight components. 
Goldman Sachs intends to implement the new weighting criteria after the 
close of trading on September 17, 1999, rather than at the next semi-
annual rebalancing in January 2000.
    The Exchange proposes no other changes to the GSTI Indexes at this 
time and represents that the GSTI Indexes will continue to conform to 
all conditions and restrictions set forth in the relevant approval 
orders.\6\
---------------------------------------------------------------------------

    \6\ See note 3 supra.
---------------------------------------------------------------------------

    On the Monday following September 17, 1999, the Exchange will 
introduce a new series of options overlying the GSTI Composite Index 
and the Sub-Indexes; these new option series will be listed under the 
ticker symbols currently assigned to options overlying the GSTI 
Indexes. Those options overlying the

[[Page 51819]]

GSTI Indexes that are still outstanding as of the close of trading on 
September 17, 1999, will continue to settle based on the present 
guidelines and calculation methodology, but will be listed under new 
ticker symbols.
    The Exchange will notify market participants of the revisions to 
the GSTI Indexes through a notice to members and member firms, which 
notice will be disseminated in advance of a changeover. Because the 
Exchange will provide advance notice of the revisions, and the 
outstanding option series contracts will not be materially changed 
(i.e., the outstanding option series contracts will continue to trade 
and settle under the old methodology, albeit under a new ticker 
symbol), the Exchange believes that transition problems should not 
arise. Moreover, the Exchange has successfully used the same procedures 
for new option series introduced after revisions to index settlement 
and weighting methodologies.\7\
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release Nos. 30944 (July 21, 
1992), 57 FR 33376 (July 28, 1992) (order permitting the continued 
listing and trading of Nasdaq 100 options after a change in the 
exercise settlement value for the Nasdaq 100 index); and 40642 (Nov. 
9, 1998), 63 FR 63759 (Nov. 16, 1998) (order permitting the 
continued listing and trading of Nasdaq 100 options after a change 
in the weighting methodology for the Nasdaq 100 index).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act \8\ in 
that it is designed to perfect the mechanisms of a free and open 
market, and protect investors and the public interest.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange believes that the proposed rule change 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

    The Exchange did not solicit or receive comments with respect to 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change: (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) the Exchange provided the Commission with written notice of 
its intent to file the proposed rule change at least five business days 
prior to the filing date; the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) 
\10\ thereunder.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \11\ permits the Commission to designate 
such shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission designate such shorter time period so that the proposed rule 
change may become operative on September 17, 1999. By accelerating the 
operative date of the proposal to September 17, 1999, the Commission 
will enable the Exchange to promptly offer market participants options 
based on the revised GSTI Composite Index and the Sub-Indexes.
---------------------------------------------------------------------------

    \11\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------

    The Commission, consistent with the protection of investors and the 
public interest, has determined to make the proposed rule change 
operative on September 17, 1999, for the following reasons. The 
Commission believes that the revisions to the component selection 
guidelines governing the GSTI Composite Index and Sub-Indexes will 
strengthen the GSTI Indexes by including components that better reflect 
the current state of technology. In addition, the changes will help the 
GSTI Composite Index and Sub-Indexes to better track future changes in 
the technology industry. Finally, the changes in the component 
weighting guidelines will ensure greater weight diversification among 
the component stocks of the Sub-Indexes and will eliminate 
concentrations in weighting that might cause the Sub-Indexes to be 
dominated by a few highly-capitalized stocks. The Commission believes 
that these improvements to the GSTI Composite Index and Sub-Indexes are 
important and that investors should be permitted to trade options on 
the improved GSTI Indexes as soon as practicable.
    For all of the reasons set forth above, the Commission finds that 
it is consistent with the protection of investors and the public 
interest for the proposed rule change to become operative on September 
17, 1999. At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in the furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. 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 persons, 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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CBOE-99-54 and should be 
submitted by October 15, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24916 Filed 9-23-99; 8:45 am]
BILLING CODE 8010-01-M