[Federal Register Volume 60, Number 214 (Monday, November 6, 1995)]
[Notices]
[Pages 56071-56075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36434; File Nos. SR-Amex-95-41; SR-CBOE-95-32; SR-NYSE-
95-30; SR-PHLX-95-65; and SR-PSE-95-21]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Chicago Board
Options Exchange, Inc., and Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Changes by the American Stock
Exchange, Inc., the New York Stock Exchange, Inc., the Philadelphia
Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. and
Amendment No. 1 to the Pacific Stock Exchange's Proposal, Relating to
the Listing and Maintenance Criteria for Options on American Depository
Receipts
October 30, 1995.
I. Introduction
On July 12, 1995, the Chicago Board Options Exchange, Inc.
(``CBOE'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposal to amend Interpretation and Policy .03 to CBOE Rule 5.3,
``Criteria for Underlying Securities,'' and Interpretation and Policy
.09 to CBOE Rule 5.4, ``Withdrawal of Approval of Underlying
Securities,'' to revise the listing and maintenance criteria for
options on American Depository Receipts (``ADRs'').
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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Notice of the proposed rule change appeared in the Federal Register
on August 8, 1995.\3\ No comments were received on the proposed rule
change.
\3\ See Securities Exchange Act Release No. 36049 (August 2,
1995), 60 FR 40401. The CBOE amended the proposed maintenance
criteria to provide that if an ADR was initially deemed appropriate
for options trading on the grounds that 50% or more of the worldwide
trading volume in the ADR and other related ADRs and securities
takes place in U.S. markets or in markets with which the CBOE has an
effective surveillance sharing agreement, or if an ADR was initially
deemed appropriate for options trading based on the daily trading
volume in U.S. markets, as provided in the proposal, then the CBOE
may not open for trading additional series of options on that ADR
unless the percentage of worldwide trading volume in the ADR and
other related securities that takes place in the U.S. and in markets
with which the CBOE has in place surveillance sharing agreements for
any consecutive three month period is either (1) at least 30%
without regard to the average daily trading volume in the ADR, or
(2) at least 15% when the average U.S. daily trading volume in the
ADR for the previous three months is at least 70,000 shares. See
Letter from Timothy Thompson, CBOE, to Jim McHale, Division of
Market Regulation (``Division''), Commission, dated September 7,
1995 (``Amendment No. 1'').
[[Page 56072]]
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The Commission thereafter received identical proposals from the
American Stock Exchange, Inc. (``Amex''),\4\ the New York Stock
Exchange, Inc. (``NYSE''),\5\ the Philadelphia Stock Exchange, Inc.
(``PHLX''),\6\ and the Pacific Stock Exchange, Inc. (``PSE''),\7\
(hereafter referred to collectively with the CBOE as the ``Exchanges''
and each individually referred to as an ``Exchange'').
\4\ See File No. SR-Amex-95-41, submitted on October 11, 1995.
\5\ See File No. SR-NYSE-95-30, submitted on September 26, 1995.
\6\ See File No. SR-PHLX-95-65, submitted on September 19, 1995.
\7\ See File No. SR-PSE-95-21, submitted on September 7, 1995.
The PSE amended its proposal to conform its maintenance standards to
the maintenance standards proposed by the CBOE. See Letter from
Michael D. Pierson, Senior Attorney, Market Regulation, to Yvonne
Fraticelli, Attorney, Office of Market Supervision, Division,
Commission, dated October 13, 1995 (``Amendment No. 1'').
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II. Description of the Proposals
Listing Criteria for Options on ADRs
Currently, the Exchanges' rules allow the Exchanges to list options
on an ADR that meets or exceeds the Exchanges' established uniform
options listing standards if the ADR also satisfies any of the
following conditions: (1) The Exchange has in place an effective
surveillance agreement \8\ with the primary exchange in the home
country where the security underlying the ADR is traded; (2) the
combined trading volume of the ADR, the security underlying the ADR,
other classes of common stock related to the security underlying the
ADR, and ADRs overlying such other classes of common stock
(collectively, ``other related ADRs and securities'') occurring in the
U.S. ADR market \9\ represents (on a share equivalent basis) at least
50% of the combined world-wide trading volume in the ADR and other
related ADRs and securities over the three month period preceding the
date of selection of the ADR for options trading (``50% Test''); or (3)
the Commission otherwise authorizes the listing.\10\
\8\ The Commission defines an effective (i.e., comprehensive)
surveillance agreement as one pursuant to which the Exchange can
obtain relevant surveillance information, including, among other
things, the identity of the customers of securities transactions.
The term ``effective'' surveillance sharing agreement is
interchangeable with ``comprehensive'' surveillance sharing
agreement.
\9\ The U.S. ADR market includes the U.S. self-regulatory
organizations that are members of the Intermarket Surveillance Group
(``ISG'') and whose members are linked together by the Intermarket
Trading System (``ITS''). The ISG, which is comprised of the Amex,
the Boston Stock Exchange, Inc., the CBOE, the Chicago Stock
Exchange, Inc., the Cincinnati Stock Exchange, Inc., the National
Association of Securities Dealers, Inc. (``NASD''), the NYSE, the
PSE, and the PHLX, was formed on July 14, 1983, to, among other
things, coordinate more effectively surveillance and investigative
information sharing arrangements in the stock and options markets.
ITS is a communications system designed to facilitate trading among
competing markets by providing each market with order routing
capabilities based on current quotation information. See Securities
Exchange Act Release No. 33554 (January 31, 1994), 59 FR 5622
(February 7, 1994), (order approving File No. SR-CBOE-93-81).
\10\ The Commission generally would only provide such
authorization in the context of approving a rule filing submitted
under Section 19 of the Act and Rule 19b-4 thereunder.
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The Exchanges propose to amend their ADR listing criteria by (1)
revising the manner in which the applicable percentage of world-wide
trading volume is calculated under the 50% Test; and (2) adding new
criteria for the listing of options on ADRs, based on daily trading in
the U.S. Specifically, the Exchanges proposes to revise the 50% Test so
that trading in ADRs and other related ADRs and securities in any
market with which the applicable Exchange has in place a comprehensive/
effective surveillance sharing agreement will be added to U.S. ADR
market volume for the purpose of determining whether the 50% test has
been met. Currently, only trading in the U.S. ADR market counts towards
satisfying the 50% Test.
In addition, the Exchanges propose to add a fourth alternative set
of criteria under which the Exchanges may list options on ADRs. The new
standard (the ``Daily Trading Volume Standard'') will permit the
Exchanges to list options on ADRs if each of the following three
conditions is satisfied: (1) The combined trading volume for the ADR
and other related ADRs and securities occurring in the U.S. ADR market
or in any market with which the Exchange has in place a comprehensive/
effective surveillance agreement represents (on a share equivalent
basis) at least 20% of the combined world-wide trading volume in the
ADR and other related ADRs and securities over the three month period
preceding the date of selection of the ADR for options trading; (2) the
average trading volume for the ADR in the U.S. ADR market over the
three months preceding the date of selection of the ADR for options
trading is at least 100,000 shares per day; and (3) the trading volume
for the ADR in the U.S. ADR market is at least 60,000 shares per day
for a majority of the trading days for the three months preceding the
date of selection of the ADR for options trading.
The Exchanges note that, like the 50% Test, the Daily Trading
Volume Standard will allow the listing of options on ADRs in the
absence of a comprehensive/effective surveillance sharing agreement
between the applicable Exchange and the home country where the security
underlying the ADR is traded. The Exchanges believe that the Daily
Trading Volume Standard is justified because it will enable the
Exchanges to list options on ADRs that are widely followed by U.S.
investors but that do not meet the 50% Test. The Exchanges note that
although the Daily Trading Volume Standard reduces from 50% to 20% the
percentage of world-wide trading that must occur in the U.S. ADR market
and in markets with which an Exchange has a comprehensive/effective
surveillance sharing agreement, it also requires the ADRs to have
trading volume in the U.S. ADR market. The Exchanges believe that the
Daily Trading Volume Standard's requirement of observable, high trading
volume should ameliorate regulatory concerns regarding investor
protection.
Maintenance Criteria for Options on ADRs
The proposals also revise the maintenance criteria for listing
additional series of options on ADRs. Currently, the Exchanges' rules
prohibit the Exchanges from opening trading on any additional series of
options on an ADR that was listed initially under the 50% Test if the
U.S. trading volume over a subsequent three month period is less than
30% of worldwide trading volume, unless either (1) the Exchange has in
place a comprehensive/effective surveillance agreement with the primary
exchange in the home country where the security underlying the ADR is
traded, or (2) the Commission has otherwise authorized the listing.
The Exchanges propose to amend the maintenance criteria to prohibit
an Exchange from opening trading in any additional series of options on
an ADR that was listed initially pursuant to the 50% test or the Daily
Trading Volume standard unless the percentage of worldwide trading
volume in the ADR and other related securities takes place in U.S.
markets and in markets with which the applicable Exchange has in place
a comprehensive/effective surveillance sharing agreements for any
consecutive three month period is either (1) at least 30% without
regard to the average daily trading volume in the ADR, or (2) at least
15% when the average U.S. daily trading volume in the ADR for the
previous three months is at
[[Page 56073]]
least 70,000 shares.\11\ The Exchanges believe that the proposed 15%
requirement, together with the significant average daily trading volume
requirement (70,000 shares) should be adequate to address concerns
regarding the Exchanges' ability to investigate possible options
manipulation involving the underlying ADRs without being so high as to
unduly interfere with the continued trading of option products that
have become established on an Exchange.
\11\ Consistent with the proposed amendments to the listing
standards, the Exchanges propose to modify the calculation of world-
wide trading volume in the maintenance standards to include the
trading of the ADR and other related ADRs and securities in markets
with which the applicable Exchange has in place an effective
surveillance sharing agreement.
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The Exchanges believe that the proposed rule changes are consistent
with Section 6(b) of the Act, in general, and further the objectives of
Section 6(b)(5), in particular, in that they are designed to remove
impediments to and perfect the mechanism of a free and open market and
a national market system by enabling the Exchanges to list options on
widely followed ADRs without compromising investor protection concerns.
III. Discussion
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5).\12\ The Commission
believes, as it has concluded previously,\13\ that the listing of
options on ADRs, among other things, provides investors with a better
means to hedge their positions in the underlying ADRs, as well as
enhanced market timing opportunities.\14\ Further, the pricing of the
ADRs underlying ADR options may become more efficient and market makers
in these ADRs, by virtue of enhanced hedging opportunities, may be able
to provide deeper and more liquid markets.\15\ In sum, options on ADRs
likely engender the same benefits to investors and the marketplace that
exist with respect to options on common stock.\16\
\12\ 15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
\13\ See Securities Exchange Act Release Nos. 33555 (January 31,
1994), 59 FR 5619 (February 7, 1994) (order approving File No. SR-
Amex-95-38); 33554 (January 31, 1994), 59 FR 5622 (February 7, 1994)
(order approving File No. SR-CBOE-93-38); 33552 (January 31, 1994),
59 FR 5626 (February 7, 1994), (order approving File No. SR-NYSE-93-
43); 33553 (January 31, 1994), 59 FR 5634 (February 7, 1994) (order
approving File No. SR-PHLX-93-54); and 33551 (January 31, 1994), 59
FR 5631 (February 7, 1994) (order approving File No. SR-PSE-93-33)
(``1994 ADR Approval Orders'').
\14\ For example, if an investor wants to invest in ADRs but
does not have sufficient cash available until a future date, he can
purchase an ADR option now for less money and exercise the option to
purchase the ADRs at a later date.
\15\ See e.g., Report of the Special Study of the Options
Markets to the Securities and Exchange Commission, 96th Cong., 1st
Sess. (Comm. Print No. 96-IFC3, December 22, 1978).
\16\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new securities product upon a finding that
the introduction of such new product is in the public interest. Such
a finding would be difficult for a derivative instrument that served
no hedging or other economic function, because any benefits that
might be derived by market participants likely would be outweighed
by the potential for manipulation, diminished public confidence in
the integrity of the market, and other valid regulatory concerns.
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The Commission believes that the proposed amendments to the listing
and maintenance standards for options on ADRs will benefit investors by
effectively increasing the number of available options-eligible ADRs.
At the same time, the proposals provide safeguards designed to prevent
manipulations and other abusive trading strategies in connection with
the trading of ADR options and their underlying securities.
Accordingly, the Commission believes that the proposals will extend the
benefits associated with ADR options to additional ADRs and provide
market participants with opportunities to trade a greater number of ADR
options without compromising the effectiveness of the Exchanges'
listing and maintenance standards for options on ADRs.
Currently, the 50% Test allows an Exchange to list options on an
ADR in the absence of a comprehensive/effective surveillance sharing
agreement with the primary exchange where the security underlying the
ADR trades if the combined trading volume of the ADR and other related
ADRs occurring in the U.S. ADR market during the three month period
preceding the selection of the ADR for options trading represents (on a
share equivalent basis) at least 50% of the combined worldwide trading
volume in the ADR and other related ADRs.
In its orders approving the 50% Test, the Commission concluded that
the 50% Test helped to ensure that the relevant pricing market for the
options on ADRs is the U.S. ADR market rather than the market where the
security underlying the ADR trades. In such cases, the Commission found
that the U.S. ADR market is the instrumental market for purposes of
deterring and detecting potential manipulations or other abusive
trading strategies in conjunction with transactions in the overlying
ADR options market. Because the U.S. self-regulatory organizations
which comprise the U.S. ADR market are members of the ISG, the
Commission concluded that there exists an effective surveillance
sharing arrangement to permit the exchanges and the NASD to adequately
investigate any potential manipulations of the ADR options or their
underlying securities.\17\
\17\ See 1994 ADR Approval Orders, supra note 14.
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The Exchanges propose to modify the 50% Test to include in the U.S.
ADR market volume calculation the trading volume in ADRs and other
related securities that occurs in any market with which the applicable
Exchange has in place a comprehensive/effective surveillance sharing
agreement. The Commission believes that this proposed modification of
the 50% Test is consistent with the Act and with the Commission's
approach in the 1994 ADR Approval Orders because it will continue to
ensure that the majority of world-wide trading volume in the ADR and
other related ADRs and securities occurs in trading markets with which
the applicable Exchange has in place a comprehensive/effective
surveillance sharing agreement. The existence of such agreements should
function as a deterrent in preventing manipulations or other abusive
trading strategies and also provide an adequate mechanism for obtaining
market and trading information from the ADR markets underlying the
Exchanges' options. As a result, the Exchanges should continue to be
able to adequately investigate any potential manipulations of ADR
options or their underlying securities.
In addition, the Commission finds that the proposed Daily Trading
Volume Standard is consistent with the Act and with the 1994 ADR
Approval Orders. As noted above, the Daily Trading Volume Standard will
allow the Exchanges to list options on an ADR if, over the three month
period preceding the date of selection of the ADR for options trading
(1) the combined trading volume of the ADR and other related ADRs and
securities occurring in the U.S. ADR market, and in markets where the
applicable Exchange has in place a comprehensive/effective surveillance
agreement, represents (on a share equivalent basis) at least 20% of the
combined world-wide trading volume in the ADR and other related ADRs
and securities; (2) the average daily trading volume for the security
in U.S. markets is 100,000 or more shares; and (3) the trading volume
is at least 60,000 shares per day in U.S. markets on a majority of the
trading days.
The Commission believes that these requirements present a
reasonable
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alternative to the 50% Test by limiting the listing of options on ADRs
to only those ADRs that have both (1) a significant amount of U.S.
market trading volume and (2) a substantial (albeit not majority)
volume of trading covered by a comprehensive/effective surveillance
sharing agreement. This will ensure that, if a majority of trading
volume in the ADR occurs in markets with a comprehensive/effective
surveillance agreement, the U.S. ADR market is sufficiently active to
serve as a relevant pricing market for the ADR.
Accordingly, the Daily Trading Volume Standard should help to
ensure that the U.S. markets (and the markets with which the applicable
Exchange has in place a comprehensive/effective surveillance sharing
agreement) serve a significant role in the price discovery of the
applicable ADR and are generally deep, liquid markets.
The Commission also believes that the proposed maintenance criteria
(which will apply to an ADR option regardless of whether the option was
listed under the 50% Test or the Daily Trading Volume Standard) will
provide for continued trading of ADR options that have become
established on an Exchange while ensuring that the U.S. markets (and
the markets with which the applicable Exchange has in place a
comprehensive/effective surveillance sharing agreement) remain a
significant price discovery market for options on the ADRs.
The Commission also notes that the existing ADR option listing
requirements related to the protection of investors will continue to
apply. Specifically, the ADRs underlying the options must meet the
Exchanges' uniform options listing standards, including initial and
maintenance criteria, in all respects.\18\ These criteria ensure, among
other things, that the underlying ADRs will maintain adequate price and
float to prevent the ADR options from being readily susceptible to
manipulation.
\18\ The Exchanges' initial listing standards require, among
other things, that the ADRs underlying the Exchange-listed options
are registered securities, have a ``float'' of 7,000,000 ADRs
outstanding, 2,000 shareholders, trading volume of at least
2,400,000 over the prior twelve month period, and a minimum price of
$7\1/2\ for a majority of the business days during the preceding
three month period. The Exchanges' maintenance criteria require that
the ADRs underlying Exchange-listed options maintain a ``float'' of
6,300,000 ADRs, 1,600 shareholders, trading volume of at least
1,800,000 over the prior twelve month period, and a minimum price of
$5 on a majority of the business days during the preceding six month
period.
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In addition, the Exchanges are required to make a reasonable
inquiry to evaluate foreign securities underlying the ADR options to
ensure that these securities are generally consistent with the
requirements set forth in each Exchange's options listing
standards.\19\ In the ADR Approval Orders, the Commission recognized
that in some cases, an ADR underlying an option could meet the options
listing standards while the foreign security on which the ADR is based
may not meet those standards in every respect. For example, in the case
of ADRs overlying certain foreign securities, one ADR could represent
several shares of a specific stock. For this reason, it is possible
that the price of the ADR will meet exchange listing standards even
though the market price of the foreign security underlying the ADR may
be less than the Exchange's standard. The Commission continues to
believe, however, that requiring the Exchanges to review the foreign
securities underlying the ADR options to ensure that they are generally
consistent with the Exchanges' options listing standards, along with
other market safeguards, will adequately protect investors from the
possibility that the ADR options will be listed on illiquid or narrowly
held securities.\20\
\19\ See Securities Exchange Act Release Nos. 31529 (November
27, 1992), 57 FR 57248 (December 3, 1992) (order approving File No.
SR-Amex-91-26); 31531 (November 27, 1992), 57 FR 57250 (December 3,
1992) (order approving File No. SR-CBOE-91-34); 31528 (November 27,
1992), 57 FR 57256 (December 3, 1992) (order approving File No. SR-
NYSE-92-25); 31532 (November 27, 1992), 57 FR 57264 (December 3,
1992) (order approving File No. SR-PHLX-91-40); and 31530 (November
27, 1992), 57 FR 57262 (December 3, 1992) (order approving File No.
SR-PSE-91-33) (``ADR Approval Orders''). See also 1994 ADR Approval
Orders, supra note 14.
\20\ For example, the Commission would expect the exchanges to
consider delisting an option on an ADR if the price and public float
of the underlying security did not meet trading or size maintenance
standards, or if the security underlying the ADR failed to meet
other standards that raised manipulative concerns. See ADR Approval
Orders, supra note 20.
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IV. Conclusion
The Commission notes that the Exchanges have not reported any
problems associated with the trading of options on ADRs. Based on the
Exchanges' experience trading ADR options, on the safeguards provided
in the proposals, and on the requirement that ADR options comply with
the Exchanges' uniform options listing standards, the Commission
believes that the proposed amendments to the listing and maintenance
standards for options on ADRs will allow the Exchanges to list options
on widely followed ADRs while providing adequate mechanisms to ensure
investor protection.
The Commission finds good cause for approving Amendment No. 1 to
the CBOE's proposal and Amendment No. 1 to the PSE's proposal prior to
the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. CBOE Amendment No. 1 and PSE Amendment
No. 1 strengthens the Exchange's proposals by providing a single
maintenance standard that applies to ADR options listed under both the
50% Test and the Daily Trading Volume Standard. The Commission believes
that it is reasonable for the Exchanges to apply this maintenance
standard to ADR options listed under either the 50% Test or Daily
Trading Volume Standard.
In addition, the Commission finds good cause for approving the
proposals submitted by the Amex, the NYSE, the PSE, and the PHLX prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register because their proposals are consistent
with the CBOE's proposal, which, with the exception of Amendment No. 1,
was subject to the full notice and comment period. As noted above, the
Commission received no comment letters concerning the CBOE's proposal.
Accordingly, the Commission finds that it is consistent with Sections
19(b)(2) and 6(b)(5) of the Act \21\ to approve Amendment No. 1 to the
CBOE's proposal, and the proposals submitted by the Amex, the NYSE, the
PHLX, and the PSE, on an accelerated basis.
\21\ 15 U.S.C. 78s(b)(2) and 78f(b)(5) (1988).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the CBOE's proposal and
Amendment No. 1 to the PSE's proposal and concerning the proposals by
the Amex, the NYSE, the PHLX, and the PSE. 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 at 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
[[Page 56075]]
copying at the principal office of the above-mentioned self-regulatory
organization. All submissions should refer to the file number in the
caption above and should be submitted by November 27, 1995.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule changes (File Nos. SR-Amex-95-41; SR-
CBOE-95-32; SR-NYSE-95-30; SR-PHLX-95-65; and SR-PSE-95-21) are
approved.
\22\ 15 U.S.C. Sec. 78s(b)(2) (1982).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
\23\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27385 Filed 11-3-95; 8:45 am]
BILLING CODE 8010-01-M
