[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31039]
[[Page Unknown]]
[Federal Register: December 19, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35084; International Series Release No. 756; File No.
SR-Amex-94-54]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the American Stock Exchange,
Inc. Relating to the Listing of Options on the Amex Airline Index
December 12, 1994.
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
7, 1994, 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 Exchange. 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 trade options on The Amex Airline Index
(``Index''), a new stock index developed by the Amex based on airline
industry stocks (or ADRs thereon) which are traded on the Amex, the New
York Stock Exchange, Inc. (``NYSE''), or are national market system
(``Nasdaq/NMS'') securities traded through Nasdaq. In addition, the
Amex proposes to amend Rule 901C, Commentary .01 to reflect that 90% of
the Index's numerical index value will be accounted for by stocks that
meet the current criteria and guidelines set forth in Rule 915. 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 Amex included statements
concerning the purpose of and basis for 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
Section (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 Amex has developed a new industry-specific index called The
Amex Airline Index, based entirely on shares of widely-held airline
industry stocks or American Depository Receipts (``ADRs'') which are
exchange listed or are Nasdaq/NMS securities.1 It is intended that
the Amex list standardized option contracts on the newly developed
Index. The Exchange is filing this proposal pursuant to Rule 901C,
Commentary .02, which provides for the commencement of trading of
options on the Index thirty days after the filing date, i.e., 30 days
after December 7, 1994. The Exchange represents that the proposal
satisfies all the criteria set forth in Commentary .02 to Rule 901C and
the Commission's order approving that rule as outlined below.2
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\1\The component securities of the Index are AMR Corp., British
Airways PLC (ADR), Southwest Airlines; UAL Corporation, Delta Air
Lines Inc., KLM Royal Dutch Air, Alaska Airgroup Inc., Continental
Airlines Inc. (Class B), Northwest Airlines Corporation, and USAir
Group.
2See Securities Exchange Act Release No. 34157 (June 3,
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval
Order'').
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Eligibility Standards for Index Components
Pursuant to Commentary .02 to Amex Rule 901C, the Amex represents
that all of the component securities of the Index are listed on the
NYSE or are Nasdaq/NMS securities, each of the component securities has
a minimum market capitalization of at least $75 million,3 and each
has a monthly trading volume of at least one million shares per month
over each of the six months preceding the filing of this proposal. In
addition, all of the component securities in the Index have
standardized options traded on them and thus have met the initial
eligibility criteria for standardized options trading set forth in Amex
Rule 915. One component (USAir Group), however, has traded below $5
during two of the last six months. While it is not known at this point
whether options on USAir Group will eventually be delisted, the Index
would still satisfy the criteria set forth in Commentary .02 to Rule
901C because as a result of each quarterly rebalancing, at least 90% of
the value of the Index and at least 80% of the total number of
components will meet the standards set forth in Rule 915.
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\3\In the case of ADRs, this represents market value as measured
by total world-wide shares outstanding.
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As a result of the ``equal dollar-weighting'' calculation
methodology,\4\ no individual component stock in the Index represents
more than 25% of the weight of the Index following each quarterly
rebalancing. Additionally, the top five highest weighted stocks in the
Index do not constitute more than 60% of the weight of the Index.
Finally, because the sole ADR component of the Index (British Airways
PLC) has standardized options trading on it, the Index also satisfies
the criteria that no more than 20% of the weight of the Index can be
composed of non-options eligible foreign securities (including ADRs).
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\4\See discussion of Index calculation, infra.
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Maintenance of the Index
The Exchange will maintain the Index so that (1) the total number
of component securities will not increase or decrease by more than
33\1/3\% from the number of components in the proposed Index (i.e., 10)
and in no event will the Index have less than nine components; (2)
component stocks constituting the top 90% of the Index by weight, must
have a minimum market capitalization of $75 million and the component
stocks constituting the bottom 10% of the Index, by weight, must have a
minimum market capitalization of $50 million; (3) the monthly trading
volume of each component security shall be at least 500,000 shares,
provided, however, that components accounting in aggregate for no more
than 10% of the Index, by weight, shall have a monthly trading volume
of at least 400,000 shares; and (4) the Index shall satisfy the
criteria that no single component will represent more than 25% of the
weight of the Index and that the five highest weighted component shall
represent no more than 60% of the weight of the Index, as of each
quarterly rebalancing.
The Exchange shall not open for trading any additional option
series should the Index fail to satisfy any of the maintenance criteria
set forth above unless such failure is determined by the Exchange not
to be significant and the Commission concurs in that determination.
Index Calculation
The Index is 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 the Index.
The Exchange believes that this method of calculation is important
since even among the largest companies in the airline industry there is
great disparity in market value. For example, although the stocks
included in the Index represent many of the most highly capitalized
companies in the airline industry, the five most highly capitalized
companies in the airline industry currently represent approximately 80%
of the aggregate market value of the Index. It has been the Exchange's
experience that options on market value weighted indexes dominated by
relatively few component stocks are less useful to investors because
the index will tend to represent those few components and not the
broader target sector that the index is designed to represent.
The following is a description of how the equal dollar-weighting
calculation method works. As of the market close on October 21, 1994, a
portfolio of airline securities was established representing an
investment of $10,000 in the stock (or ADR) (rounded to the nearest
whole share) of each of the companies in the Index. The value of the
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 securities in the Index portfolio divided by the Index divisor. The
Index divisor was initially determined to yield the benchmark value of
200.00 at the close of trading on October 21, 1994. Each quarter
thereafter, following the close of trading on the third Friday of
January, April, July, and October, the Index portfolio will be adjusted
by changing the number of whole shares of each component security so
that each company is again represented in ``equal'' dollar amounts. The
Exchange has chosen to rebalance following the close of trading on the
quarterly expiration cycle because it allows an option contract to be
held for up to three months without a change in the Index portfolio
while at the same time, maintaining the equal dollar-weighting feature
of the Index. 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 quarterly adjustment.
As noted above, the number of shares of each component security in
the Index portfolio remains fixed between quarterly reviews except in
the event of certain types of corporate actions such as the payment of
a dividend other than an ordinary cash dividend, a stock distribution,
stock split, reverse stock split, rights offering, distribution,
reorganization, recapitalization, or similar event with respect to the
component securities. In a merger or consolidation of an issuer of a
component security, if the stock or ADR remains in the Index, the
number of shares of that security in the portfolio may be adjusted, 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 or ADR replacement, the average dollar value of
the remaining portfolio components will be calculated and that amount
invested in the security of the new component, to the nearest whole
share. In all cases, the divisor will be adjusted, if necessary, to
ensure Index continuity.
The Amex will calculate and maintain the Index, and pursuant to
Exchange Rule 901C(b) may at any time or from time to time substitute
securities, or adjust the number of securities included in the Index
based on changing conditions in the airline industry. In the event,
however, that the Exchange determines to increase the number of Index
components to greater than thirteen or to reduce the number of
components to fewer than nine, the Exchange will submit a 19b-4 filing
to the Commission. In selecting securities to be included in the Index,
the Exchange will be guided by a number of factors including market
value of outstanding shares, trading activity, and adherence to Rule
901C, Commentary .02. Similar to other stock index values published by
the Exchange, the value of the Index will be calculated continuously
and disseminated every 15 seconds over the Consolidated Tape
Association's Network B.
Expiration and Settlement
The proposed options on the Index are European-style,\5\ and cash-
settled. The Exchange's standard option trading hours (9:30 a.m. to
4:10 p.m. Eastern Standard Time) will apply to Index options. 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 Index option series will normally be the second to
last business day preceding the Saturday following Expiration Friday
(normally a Thursday). Trading in expiring Index options will cease at
the close of trading on the last trading day.
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\5\European-style options may only be exercised during a
specified time period immediately prior to expiration.
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The Exchange plans to list Index options series with expirations in
the three near-term calendar months and in the two additional calendar
months in the January 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 based on the full-value of the Index, the
Exchange may instead list long-term, reduced-value put and call options
based on one tenth (\1/10\th) of the Index's full value. In either
event, the interval between expiration months for either a full-value
of reduced-value long-term Index option will not be less than six
months. The trading of any long-term Index 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. 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 on the Index
is 10,500 contracts on the same side of the market, then the position
limit for the reduced-value options will be 105,000 contracts on the
same side of the market and positions in reduced-value Index options
will be aggregated with positions in full-value Index options.
The exercise settlement value for all of the expiring Index options
will be calculated based upon the primary exchange regular way opening
sale prices for the component securities. In the case of Nasdaq/NMS
securities, the first reported sale price will be used. If any
component security does not open for trading on its primary market on
the last day before expiration, then the prior day's last sale price
will be used in the exercise settlement value calculation.
Exchange Rules Applicable to Stock Index Options
Amex Rules 900C through 980C will apply to the trading of option
contracts based on the Index. 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 Index. The Index is deemed to be a Stock Index Option under Rule
901C(a) and a Stock Index Industry Group 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 the Index at 2\1/2\ intervals only when the
value of the Index is below 200 points. In addition, the Exchange
expects that the review required by Rule 904C(c) will result in a
position limit of 10,500 contracts with respect to options on this
Index.
The Amex represents 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)\6\ in particular in that it will permit trading in
options based on the Amex Airline Index pursuant to rules 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 mechanism of a
free and open market and a national market system.
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\6\15 U.S.C. Sec. 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 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
Because the foregoing proposed rule change complies with the
standards set forth in the Generic Index Approval Order, it has become
effective pursuant to Section 19(b)(3)(A) of the Act. Pursuant to the
Generic Index Approval Order,7 the Exchange may not list Amex
Airline Index options for trading prior to 30 days after December 7,
1994, the date the proposed rule change was filed with the Commission.
At any time within 60 days of the filing of the proposed rule change,
the Commission may summarily abrogate the 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
furtherance of the purposes of the Act.
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\7\See supra note 2.
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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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. All submissions should refer to File No. SR-
Amex-94-54 and should be submitted by January 9, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.8
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31039 Filed 12-16-94; 8:45 am]
BILLING CODE 8010-01-M
