[Federal Register Volume 61, Number 15 (Tuesday, January 23, 1996)]
[Notices]
[Pages 1796-1799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-836]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36715; File No. SR-Amex-95-53]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc.
Relating to Options on the Morgan Stanley Healthcare Product Companies
Index, the Morgan Stanley Healthcare Providers Index and the Morgan
Stanley Healthcare Payors Index
January 16, 1996.
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 December
19, 1995, the American Stock Exchange, Inc. (``Amex'' 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 Amex. On January 2, 1996, the Amex
filed Amendment No. 1 to its proposal.\1\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons.
\1\ In Amendment No. 1, the Amex states that for each of the
healthcare sector indexes, if at any time between annual
rebalancings, the top five stocks in an Index by weight represent in
the aggregate more than 60% of the Index's value, the Exchange will
rebalance the Index after the close of trading on Expiration Friday
in the next month in the March cycle. See Letter from Claire P.
McGrath, Managing Director and Special Counsel, Derivatives
Securities, Amex, to Michael Walinskas, Branch Chief, Office of
Market Supervision, Division of Market Regulation, Commission, dated
January 2, 1996 (``Amendment No. 1'').
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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 options on
three new indexes developed by Morgan Stanley & Co. Incorporated
(``Morgan Stanley'') relating to three different subsectors within the
healthcare sector: the Morgan Stanley Healthcare Providers Index
(``Providers Index''); the Morgan Stanley
[[Page 1797]]
Healthcare Payors Index (``Payors Index''); and the Morgan Stanley
Healthcare Product Companies Index (``Product Companies Index'')
(collectively the ``Indexes''). Each Index is comprised of stocks which
are traded on the Amex, the New York Stock Exchange (``NYSE''), or are
National Market securities traded through the facilities of the
National Association of Securities Dealers Automated Quotation system
(``NASDAQ''). In addition, the Amex proposes to amend Rule 902C(d) to
include the Indexes in the disclaimer provisions of the rule.
The text of the proposed rule change is available at the Office of
the Secretary, the Amex, 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 Amex 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 Amex proposes to trade standardized index options on the
Indexes. The Indexes are equal-dollar weighted indexes developed by
Morgan Stanley , each representing a portfolio of large, actively
traded stocks.\2\
\2\ As of December 1, 1995, the Providers Index was comprised of
15 stocks of companies engaged in the hospital management and
medical/nursing services industries, with market capitalizations
ranging from $494 million to $23 billion, and six month average
daily trading volumes ranging from 95,000 to 995,000 shares. The
Payor's Index, as of December 1, 1995, was comprised of 12 stocks of
companies conducting business in the managed health care and health
industry services industries, with market capitalizations ranging
from $622 million to $10 billion and six month average daily trading
volumes ranging from 170,000 to 1,700,000 shares. Finally, as of
this same date, the Product Companies Index was comprised of 25
equity issues of companies engaged in the major pharmaceuticals,
biotechnology, medical specialties, medical electronics, and
medical/dental distributors industries. The market capitalizations
of these 25 companies range from $1.6 billion to $56.1 billion and
the six month average daily trading volumes range from 124,000 to
2,800,000 shares.
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(a) Eligibility Standards for Index Components
The Amex represents that the Indexes conform with Exchange Rule
901C which specifies criteria for inclusion of stocks in an index on
which standardized options will be traded. In addition, for each of the
Indexes, Morgan Stanley will include in the Index only those stocks
that meet the following standards: (1) A minimum price of $7.50 at the
time of announcement of entry into the Index; (2) a minimum market
capitalization of $75 million; (3) average monthly trading volume in
the component security of at least one million shares during the
preceding six months; (4) each component security must be traded on the
Amex, NYSE or must be a National Market Security traded through the
facilities of NASDAQ; and (5) upon annual rebalancing, at least 90% of
the Index numerical value and at least 80% of the total number of
component securities must meet the then current criteria for
standardized option trading set forth in Exchange Rule 915. Also,
because the Indexes are equal-dollar weighted, no component security
will represent more than 25% of the weight of any of the Indexes, nor
will the five highest weighted component securities in any of the
Indexes, in the aggregate, account for more than 60% of the weight of
that Index upon annual rebalancing. The criteria set forth above are
the same as or exceed many of the criteria established for the
expedited listing of options on stock industry indexes pursuant to
Exchange Rule 901C Commentary .02.
(b) Index Calculation
The Indexes are calculated using an ``equal-dollar weighting''
methodology designed to ensure that each of the component securities is
represented in an approximately ``equal'' dollar amount in each Index.
The following is a description of how the equal-dollar weighting
calculation method works. As of the market close on December 16, 1994,
a portfolio of stocks was established for each of the Indexes
representing an investment of $300,000 in the stock (rounded to the
nearest whole share) of each of the companies in each Index. The value
of each Index equals the current market value (i.e., based on U.S.
primary market prices) of the sum of the assigned number of shares of
each of the stocks in the Index portfolio divided by the Index divisor.
The Index divisors were initially determined for each Index to yield
benchmark values of 200.00 at the close of trading on December 16,
1994. Annually thereafter, following the close of trading on the third
Friday of December, each Index portfolio will be adjusted by changing
the number of whole shares of each component stock in that Index so
that each company is again represented in ``equal'' dollar amounts. If
necessary, a divisor adjustment is made at the rebalancing to ensure
continuity of the Index's value. The newly adjusted portfolio becomes
the basis for the Index's value on the first trading day following the
annual adjustment.
As noted above, for each Index the number of shares of each
component stock in the Index portfolio remains fixed between annual
reviews except in the event of certain types of corporate actions such
as the payment of a dividend other than an ordinary cash dividend,
stock distribution, stock split, reverse stock split, rights offering,
distribution, reorganization, recapitalization, or similar event with
respect to the component stocks. In a merger or consolidation of an
issuer of a component stock, if the stock remains in the Index, the
number of shares of that security in the portfolio will be adjusted, if
necessary, to the nearest whole share, to maintain the component's
relative weight in the Index at the level immediately prior to the
corporate action. In the event of a stock replacement, the dollar value
of the security being replaced will be calculated and that amount
invested in the stock of the new component, to the nearest whole share.
In all cases, the divisor will be adjusted, if necessary, to ensure
Index continuity.
Additionally, for each of the Indexes, if at any time between
annual rebalancings, the top five stocks in the Index by weight
represent in the aggregate more than 60% of the Index's value, the
Exchange will rebalance the Index after the close of trading on
expiration Friday in the next month in the March cycle. For example, if
in July it is determined that the top five components in the Morgan
Stanley Healthcare Product Companies Index account for more than 60% of
the Index's weight, then the Index will be rebalanced after the close
of trading on expiration Friday in September.\3\
\3\ See Amendment No. 1, supra note 1.
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Similar to other stock index values published by the Exchange, the
value of each Index will be calculated continuously and disseminated
every 15 seconds over the Consolidated Tape Association's Network B.
[[Page 1798]]
(c) Maintenance of the Indexes
The Indexes will be calculated and maintained by the Amex in
consultation with Morgan Stanley who may, from time to time, suggest
changes in the industry categories represented in any or all of the
Indexes or changes in the number of component stocks in an industry
category to properly reflect the changing conditions in the healthcare
sector. In addition, the Amex will replace component securities in each
Index that fails to meet the following maintenance criteria on
quarterly review: (1) A minimum market capitalization of $75 million;
(2) average monthly trading volume in the component security of at
least 500,000 shares during the preceding six months; (3) at least 90%
of the Index's numerical value and at least 80% of the total number of
component securities meet the then current criteria for standardized
option trading set forth in Exchange Rule 915; and (4) a share price of
$5.00 or greater for a majority of business days during the three
calendar months preceding the date of selection for inclusion in the
Index.
At the beginning of each calendar quarter, Morgan Stanley will
provide the Amex with a current list of replacement stocks for each
Index on which to draw in the event that a component in an Index must
be replaced due to merger, takeover or other similar event. The
Exchange will make these lists publicly available. Stocks in the
replacement lists will be selected and ranked by Morgan Stanley based
on a number of criteria, including conformity to the eligibility
standards described above and to Exchange Rules 915 and 916 which set
forth the criteria for the initial and continued listing of
standardized options of equity securities, trading liquidity, market
capitalization, ability to borrow shares and share price. The
replacement stocks will be categorized by industry within each
healthcare subsector and ranked within their category based on the
aforementioned criteria. The replacement stock for a security leaving
the Index will be selected by the Amex from the replacement list based
on industry category and liquidity. In the event no replacement stocks
are available that meet the eligibility criteria and pass Morgan
Stanley's selection process, then the security leaving the Index will
be removed without replacement and the divisor adjusted to ensure Index
continuity. It is expected that each Index will remain at the current
number of components; however, if the number of components in an Index
shall increase or decrease by more than one third, the Exchange must
obtain prior approval for such index from the Commission pursuant to
Section 19(b) of the Act.
In addition, Morgan Stanley will advise the Exchange regarding the
handling of unusual corporate actions which may arise from time to
time. Routine corporate actions (e.g., stock splits, routine spin-offs,
etc.) which require straightforward index divisor adjustments will be
handled by Exchange staff without consultation with Morgan Stanley. All
stock replacements and unusual divisor adjustments caused by the
occurrence of extraordinary events such as dissolution, merger,
bankruptcy, non-routine spin-offs or extraordinary dividends will be
made by Exchange staff in consultation with Morgan Stanley. All stock
replacements and the handling of non-routine corporate actions will be
announced at least ten business days in advance of such effective
change, whenever practicable. As with all options currently trading on
the Amex, the Exchange will make this information available to the
public through dissemination of an information circular.
(d) Expiration and Settlement
The proposed options on the Indexes will be European style (i.e.,
exercisable only at expiration), and cash settled. Standard option
trading hours (9:30 a.m. to 4:10 p.m. New York time) will apply. The
options on the Index will expire on the Saturday following the third
Friday of the expiration month (``Expiration Friday''). The last
trading day in an expiring option series will normally be the second to
last business day preceding the Saturday following the third Friday of
the expiration month (normally a Thursday). Trading in expiring options
will cease at the close of trading on the last trading day.
For each Index, the Exchange plans to list option series with
expirations in the three near-term calendar months and in the two
additional calendar months in the March cycle. In addition, longer term
option series having up to thirty-six months to expiration may be
traded. In lieu of such long-term options on a full value Index level,
the Exchange may instead list long-term, reduced value put and call
options based on one-tenth (1/10th) the Index's full value. In either
event, the interval between expiration months for either a full value
or reduced value long-term options will not be less than six months.
The trading of any long term options would be subject to the same rules
which govern the trading of all the Exchange's index options, including
sales practice rules, margin requirements and floor trading procedures
and all options will have European style exercise. Position limits on
reduced value long term Index options will be equivalent to the
position limits for regular (full value) Index options and would be
aggregated with such options (for example, if the position limit for
the full value options is 12,000 contracts on the same side of the
market, then the position limit for the reduced value options will be
120,000 contracts on the same side of the market).
For each Index, the exercise settlement value for all of the
Index's expiring options will be calculated based upon the primary
exchange regular way opening sale prices for the component stocks. In
the case of securities traded through the NASDAQ system, the first
reported regular way sale price will be used. If any component stock
does not open for trading on its primary market on the last trading day
before expiration, then the prior day's last sale price will be used in
the calculation.
(e) Exchange Rules Applicable to Stock Index Options
Amex Rules 900C through 980C will apply to the trading of option
contracts based on the Indexes. These Rules cover issues such as
surveillance, exercise prices, and position limits. Surveillance
procedures currently used to monitor trading in each of the Exchange's
other index options will also be used to monitor trading in options on
the Indexes. The Indexes are deemed to be Stock Index Options under
Rule 901C(a) and Stock Index Industry Groups under Rule 900C(b)(1).
With respect to Rule 903C(b), the Exchange proposes to list near-the-
money (i.e. strike prices within ten points above or below the current
index value) option series on an Index at 2\1/2\ point strike price
intervals when the value of that Index is below 200 points. In
addition, the Exchange expects that the review required by Rule 904C(c)
will result in position limits of 12,000 contracts with respect to
options on each of the Indexes.
2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act, in general, and furthers the objectives
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
[[Page 1799]]
mechanism of a free and open market and a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex 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
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 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 self-regulatory organization 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, N.W., Washington, D.C. 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, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-Amex-95-53 and should be
submitted by February 13, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-836 Filed 1-22-96; 8:45 am]
BILLING CODE 8010-01-M
