[Federal Register Volume 59, Number 231 (Friday, December 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29636]
[[Page Unknown]]
[Federal Register: December 2, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35005; File No. SR-Amex-94-30]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the American Stock Exchange, Inc.,
Relating to the Listing and Trading of Commodity Linked Notes
November 23, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
August 22, 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 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 Amex proposes to approve for listing and trading under Section
107 of the Amex Company Guide intermediate term notes whose value will
be linked in part to changes in the levels of either the J.P. Morgan
Commodity Excess Return Index (``JPMCIX'') or the J.P. Morgan Commodity
Return Index (``JPMCI,'' together with JPMCIX, ``Indexes'').\1\
According to the Amex, both Indexes measure the return from an
investment in the same 11 liquid industrial futures contracts.
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\1\The Amex on November 16, 1994, submitted Amendment Number 1
(``Amendment No. 1'') to the proposal to allow the underwriter to
link the value of the notes to either the JPMCI or JPMCIX, depending
upon market conditions and investor interest at the time of the
offering. Additionally, the Amendment provides that: only options
approved accounts will be permitted to trade the notes; the notes
will provide for a 75% floor; the index value will be calculated at
least once a day; and the Amex has executed the necessary
surveillance sharing agreements with the relevant commodities
exchanges. See Letter from Benjamin Krause, Amex, to Michael
Walinskas, Derivative Products Regulation, SEC, dated November 16,
1994.
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The text of the proposed rule change and Amendment No. 1 is
available at the Office of the Secretary, 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 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
Under Section 107 of the Amex Company Guide (``Section 107''), the
Exchange may approve for listing and trading securities which cannot be
readily categorized under the listing criteria for common and preferred
stocks, bonds, debentures, and warrants. The Amex now proposes to list
for trading under Section 107 intermediate term notes the value of
which can be expected to fluctuate based on changes in the level of an
index consisting of base metals, precious metals and energy related
commodities. These securities will conform to the listing guidelines
under Section 107 which provide that such issues have: (1) A public
distribution of one million trading units; (2) 400 holders; and (3) a
market value of not less than $20 million. The Exchange also will
require that the issuer have a minimum tangible net worth of $150
million. In addition, the Exchange will require that the total original
issue price of the security (when combined with all of the issuer's
commodity linked notes which are listed on a national securities
exchange or traded through the facilities of NASDAQ), shall not be
greater than 25% of the issuer's tangible net worth at the time of
issuance.
Such notes will have a term of one to three years and will not pay
interest. Upon maturity, holders will receive not less than 75% of the
original issue price plus an amount in U.S. dollars equal to a
participation rate (i.e., a specified percentage) multiplied by any
positive difference between the level of the appropriate index at the
time of the offering and the average of the closing index level on the
five business days preceding maturity. The notes may not be redeemed
prior to maturity, and holders of the notes have no claim to the
physical commodities in the linked index.
The proposed notes will be linked to either the J.P. Morgan
Commodity Index or the J.P. Morgan Commodity Excess Return Index. Both
indexes measure the return from an investment in the same 11 liquid
industrial futures contracts.\2\ The Exchange states that the JPMCI and
JPMCIX are identical in all respects except for the incorporation of
``collateral return,'' as more fully described below, into the
JPMCI.\3\ Both Indexes are constructed as an arithmetic average of
commodity returns, and will be rebalanced monthly to maintain constant
dollar weights. Because the Exchange and the underwriter believe the
Indexes are identical in all respects (with the exception of
incorporating collateral return), they desire the flexibility to
determine at the time of offering, based upon investor demand and
market conditions, which of the Indexes it will utilize for valuing the
notes.
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\2\The commodities underlying the Index and their approximate
weightings are: aluminum (9%), copper (8%), nickel (2%), zinc (3%),
heating oil (10%), natural gas (7%), unleaded gas (5%), WTI Light
Sweet Crude (33%), gold (15%), silver (5%) and platinum (3%).
\3\See Amendment No. 1.
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The JPMCIX and JPMCI are designed to capture both ``price'' return
and ``roll'' return from an investment in commodities. Price return, or
``spot'' return, is the component of return that arises from changes in
constant maturity nearby prices. Roll return is the component of return
that arises from rolling a long position through time in a sloping
forward price curve environment. When nearby futures contracts are more
expensive than longer dated contracts, roll return is positive. When
the reverse applies, roll return is negative.
Due to price fluctuations, the relative weights of the Index
components will be rebalanced monthly to maintain the appropriate
dollar weighting. In addition, due to the periodic expiration of the
futures contracts used to compute the Index value, it also is necessary
to ``roll'' out of expiring contracts and into the new nearby
contracts. To minimize possible pricing volatility arising from
conducting the ``roll'' on a single business day, the substitution of
the new contract for the old is accomplished with 20% of the roll
volume transacted on each of the five subsequent business days after
the rebalance date. The futures contract to be used for monthly
rebalancing and rolling of each commodity will be the nearest
designated futures contract to be used in the appropriate Index, with a
termination of trading date not earlier than ten business days into the
following month.\4\
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\4\For energy and base metals, the new and old contracts will be
different. For precious metals, the new and old contracts may be the
same contract because of the absence of a designated contract for
every month. In this instance, rebalancing and rolling will only
involve an adjustment of the amount held of the old contracts.
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The JPMCI is a ``total return'' index based upon the same eleven
commodities as the JPMCIX which, in addition to measuring price return
and roll return, is also comprised of collateral return. The Amex
states that collateral return is the risk free component of commodity
returns afforded by full collateralization of the notional value of
futures positions with Treasury bills. It measures the return that an
investor would receive if the investor were to fully margin a futures
position (i.e., post 100% margin) with Treasury bills. According to the
underwriter, some investors may choose not to fully collateralize
commodity investments, but because stocks and bonds are collateralized
investments, it is useful to treat commodities on the same basis to
compare risk-return performance. Therefore, the underwriter believes
that collateralization permits meaningful comparison with traditional
assets in a portfolio allocation framework.\5\
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\5\The return based upon the Treasury bill rate is calculated
using a 13 week T-bill yield, compounded daily at the decompounded
discount rate of the most recent weekly U.S. Treasury bill auction
as found in the H.15 (519) report published by the Board of
Governors of the Federal Reserve System, on the full (100%) value of
the index. Interest accrues on an actual day basis over weekends and
holidays at the previous day's rate. See Amendment No. 1.
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It is intended that the composition, relative weights and manner of
calculation for both Indexes will remain constant. It is conceivable,
however, that market developments may eventually necessitate changes in
the weighting, composition or calculation methodology of an Index. Such
developments could include, among other things, changing liquidity
conditions or the discontinuation of existing contracts, the emergence
of new contracts on relevant commodities, or major progress in
substitution technology that renders obsolete industrial processes that
make use of a certain commodity.
Decisions relating to changes in index weighting, composition or
calculation methodology will be determined on the basis of advice from
a neutral business committee, the JPMCI Policy Committee. This
committee is composed of senior employees in the commodities and
research areas of J.P. Morgan as well as independent industry and
academic experts. Commodity Group personnel of J.P. Morgan are
restricted to an advisory, non-voting membership on the JPMCI Policy
Committee. The issuer will immediately notify the Exchange and vendors
of financial information that report the Index values in the event that
there is a change in the relative weightings, calculation methodology
or composition.
Prices utilized in the Indexes will be based on New York Mercantile
Exchange (``NYMEX'') prices for platinum and energy related
commodities; Commodity Exchange (``Comex'') prices for other precious
metals (Comex is a wholly-owned subsidiary of NYMEX); and London Metal
Exchange (``LME'') prices for base metals. These prices are widely
reported by vendors of financial information and the press. Index
values will be calculated at least once each trading day by the issuer
or an affiliate of the issuer and disseminated to vendors of financial
information by the issuer.\6\ Members of the JPMCI Policy Committee and
employees of the calculation agent who are involved in the calculation
of, or data collection for, any of the commodities underlying the notes
or the aggregate value of the commodity index underlying the notes will
be expressly prohibited from trading the notes. The calculation agent
will adopt and maintain such reasonable and appropriate procedures as
to ensure that the calculation agent, its agents, affiliates and
employees, do not take advantage of or communicate to any other person
any knowledge concerning changes in the value of the notes or
commodities underlying the note before such information is made
publicly available.
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\6\See Amendment No. 1.
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The Amex is able to obtain market surveillance information,
including customer identity information, with respect to transactions
occurring on the LME pursuant to its information sharing arrangements
with the Securities and Futures Authority through the Intermarket
Surveillance Group. The Exchange also is able to obtain market
surveillance information, including customer identity information, with
respect to transactions occurring on NYMEX and Comex pursuant to its
information sharing agreement with NYMEX.
The notes will provide for payment at maturity of not less than 75%
of the offering price and the Exchange will require that only accounts
approved for options trading under Amex Rule 921 shall be permitted to
engage in the purchase and/or sale of such notes. In addition, the Amex
will require recommendations in the notes to comply with the
suitability standards set forth in Rule 923. Additionally, the Exchange
will distribute a circular to its membership prior to trading such
notes providing guidance with regard to member firm compliance
responsibilities (including suitability recommendations) when handling
transactions in such notes and highlighting the special risks and
characteristics thereof. Specifically, the Exchange will provide an
Information Circular regarding the proposed commodity linked notes that
substantially incorporates the suitability language contained in Rule
923.\7\
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\7\Telephone Conversation between William Floyd-Jones, Jr.,
Assistant General Counsel, Legal & Regulatory Policy Division, Amex,
to Stephen Youhn, Derivative Products Regulation, SEC, on November
23, 1994.
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The notes will be subject to the equity margin and trading rules of
the Exchange.
2. Statutory Basis
The Exchange believes 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 and to promote just and
equitable principles of trade, and is not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
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 other 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, 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. 20549. 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-94-30 and should be
submitted by December 23, 1994.
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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Jonathan G. Katz,
Secretary.
[FR Doc. 94-29636 Filed 12-1-94; 8:45 am]
BILLING CODE 8010-01-M
