[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31205]
[[Page Unknown]]
[Federal Register: December 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35085; File No. SR-NYSE-94-41]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to Proposed Rule Change by the New York
Stock Exchange, Inc., Relating to the Establishment of Uniform Listing
and Trading Guidelines for Stock Index and Currency Warrants
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 November
9, 1994, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``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 Exchange proposes to: (1) Amend its listing guidelines for
stock index (``stock index'' or ``index'') warrants and currency
warrants (``currency warrants'');\1\ (2) establish various new rules
for the trading of stock index and currency warrants; and (3) establish
special customer margin requirements for positions in stock index and
currency warrants. On Dec. 8, 1994, the NYSE amended certain
surveillance related matters addressed in the filing. See footnote 3,
infra.
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\1\Currency warrants, as used in this filing, may refer to
warrants on individual currencies (or cross currencies) or to
warrants on a specific currency index group (``currency index
warrants'').
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The text of the proposal is available at the Office of the
Secretary, NYSE 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 self-regulatory organization
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 self-regulatory organization
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
The NYSE proposes (1) to add a new Rule 414 (Index and Currency
Warrants) in order (a) to prescribe procedures for approving and
supervising accounts that trade currency warrants, currency index
warrants and stock index warrants and (b) to prescribe stock index
warrant position and exercise limits, (2) to replace Supplementary
Material .30 to Rule 405 (Diligence to Accounts), which contains
provisions that the proposed rule change proposes to supersede, with a
cross reference to proposed Rule 414, (3) to amend existing Rule 431
(Margin Requirements) to modify currency warrant and stock index
warrant margin requirements and to establish currency index warrant
margin requirements, (4) to amend Para. 703.15 (Foreign Currency
Warrants and Currency Index Warrants) of the Exchange's Listed Company
Manual to modify the listing standards for currency warrants and to
establish listing standards for currency index warrants, and (5) to
amend Para. 703.17 (Stock Index Warrants Listing Standards) of the
Exchange's Listed Company manual to modify the listing standards for
stock index warrants.
The provisions of proposed Rule 414 include (a) provisions
governing the approval, supervision and suitability of customers, which
for the most part follow the Rules that the Exchange applies in respect
of trading in stock index options, and (b) stock index warrant position
limits. It also includes a newly added stock index warrant exercise
limit. A more detailed discussion of the provisions of the proposed
rule change follows.
Paragraph (a) of Rule 414 defines relevant terms.
Paragraph (b) of Rule 414 specifies that the Rule applies to
Exchange trading in currency warrants, currency index warrants and
stock index warrants and that other Exchange Rules and the Exchange's
Constitution also so apply.
Paragraph (c) of Rule 414 establishes position limits for stock
index warrants. For a position of stock index warrants with an original
issue price of $10 or less, the position limit is 15 million index
warrants. For a position of stock index warrants with an original issue
price in excess of $10, the number of such warrants is converted to the
equivalent number of warrants that the position would contain if the
issuer had originally priced the issue at $10. Thus, 1 million stock
index warrants with an original issue price of $20 would represent the
equivalent of 2 million stock index warrants with an original issue
price of $10 ($20/$10 x 1 million stock index warrants) and the 15
million stock index warrant position limit would apply to the 2 million
stock index warrant ``equivalents.'' Paragraph (c) also provides
procedures for allowing limited exceptions to those position limits as
circumstances warrant.
Paragraph (d) of Rule 414 imposes exercise limits on stock index
warrants equal to the position limits. The exercise limits are separate
and distinct from any limits the issuer of the stock index warrant may
impose.
Paragraph (e) of Rule 414 applies the options rule counterpart to
stock index warrant trading halts.
Paragraph (f) of Rule 414 requires a member or member organization
to have approved an account for options trading pursuant to the
standards and procedures set forth in Rule 721 (Opening of Accounts)
before the account can trade currency warrants, currency index warrants
and/or stock index warrants. Paragraphs (g), (h), (i) and (j) of Rule
414 apply options rule counterparts to trading in currency warrants,
currency index warrants and stock index warrants in the areas of
supervision of accounts (see Rule 722 (Supervision of Accounts)),
suitability (see Rule 723 (Suitability)), discretionary accounts (see
Rule 724 (Discretionary Accounts)), and customer complaints (see Rule
732 (Customer Complaints)).
Paragraph (k) of Rule 414 applies the options rule counterpart (see
Rule 791 (Communications to Customers)) to communications to customers
relating to currency warrants, currency index warrants and/or stock
index warrants. In addition, Paragraph (k) requires those
communications to state that currency warrants, currency index warrants
and stock index warrants, unlike standardized options, are subject to
issuer's credit risks and warrant terms and conditions that may differ
from those that apply to other warrant issues overlying the same
currency or index. The paragraph also advises that the prospectus
requirements of the Securities Act of 1933 apply to certain
communications.
Paragraph (1) of Rule 414 requires that, where 25 percent or more
of the value of an underlying index stock group is represented by
securities of United States issuers, the calculation of a stock index
warrant's settlement value must use the opening prices of those
securities on the U.S. markets.
Supplementary Material .30 to Rule 405 is amended to cross-
reference Rule 414 and to delete (a) the statement that the suitability
requirements of Rule 723 apply to stock index warrants and (b) the
recommendation that the account approval requirements of Rule 721 be
applied to stock index warrants. Paragraphs (f) and (h) of Rule 414
supersede those notions.
The Exchange proposes to amend those portions of the Rule 431
margin requirements that apply to margin on foreign currency options
and options on broad index stock groups so as to apply the same margin
requirements to currency warrants and stock index warrants,
respectively, and to establish currency index warrant margin
requirements. For example, stock index warrants will follow broad index
options in requiring margin of (A) 100 percent of the current market
value of all ``long'' stock index warrants and (B) in the case of
``short'' positions in stock index warrants, (1) 100 percent of the
current value of the option plus (2) 15 percent of the current value of
the underlying index stock group multiplied by the applicable index
multiplier. The Exchange proposes that its margin requirements be
permitted offset treatment for spread, straddle and covered
positions.\2\
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\2\The Staff of the Commission has indicated to the Exchange
that it must request and obtain appropriate interpretive or no-
action relief from the Commission in order to permit its index and
currency warrant margin requirements to allow offset treatment for
spread, straddle and covered positions.
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The Exchange proposes to amend Para. 703.15 of the Listed Company
Manual, which currently provides listing standards for foreign currency
warrants, to cause it to apply to currency index warrants. The Exchange
also proposes to amend Para 703.15 and Para. 703.17 of the Listed
Company Manual (A) to change the issuer ``substantiality'' requirement
for $100 million in assets to $150 million in tangible net worth, (B)
to specify that the issuer is expected to refrain from issuing warrants
where its aggregate currency and index warrant offerings exceed 25
percent of its net worth and (C) to require in-the-money currency and
index warrants to be automatically exercised at expiration if not
otherwise exercised.
In listing new stock index warrant or currency index warrant issues
for trading on the Exchange, the Exchange would submit a proposed rule
change only where a warrant issue overlies an index on which warrants
or options are not already listed, whether on the Exchange or on
another self-regulatory organization. Thus, an Exchange would list for
trading index warrants on indexes that already underlie listed options
or warrants without further Commission review and approval pursuant to
Section 19(b) of the Act. Both initial and maintenance listing
standards for stock index warrants will require that no more than 20%
of the securities in the underlying index, by weight, may be comprised
of foreign securities that are not subject to comprehensive
surveillance sharing agreements between the NYSE and the primary
exchange on which the foreign security (including a foreign security
underlying an ADR) is traded.\3\ Finally, prior to trading index or
currency warrants, the Exchange will distribute a circular to its
membership providing guidance regarding member firm compliance
responsibilities (including suitability recommendations) when handling
transactions in index or currency warrants.
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\3\Telephone conversation between Vincent Patten, NYSE, and
Stephen M. Youhn, SEC, on December 8, 1994 (``Amendment No. 1'').
The Exchange proposes that the ``20% test'' be applied in the same
manner as that contained in Securities Exchange Act Release No.
34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (Commission
approval order allowing the expedited trading approval of certain
narrow-based index options.)
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The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) that an exchange have rules that are
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 perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The NYSE does not believe that the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the 1934 Act.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on the proposed rule change. The Exchange has not received any
unsolicited written comments from members or other interested parties.
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 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 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 January 10,
1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-31205 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-M
