[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5590-5592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3100]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36812; File No. SR-Amex-96-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Options on the
Networking Index
February 6, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 23, 1996, 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. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The American Stock Exchange, Inc. (``Amex'' or the ``Exchange'')
proposes to trade options on the Networking Index (``Index''), a new
index developed by the Amex comprised of 15 computer and
telecommunication networking stocks which are traded on the Amex, the
New York Stock Exchange, Inc. (``NYSE''), or through the facilities of
the National Association of Securities Dealers Automated Quotation
system and are reported national market system securities (``NASDAQ/
NMS''). In addition, the Amex proposes to amend Rule 901C, Commentary
.01, to reflect that 90% of the Index's numerical value will be
accounted for by stocks that meet the current criteria and guidelines
set forth in Rule 915.
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 Exchange proposes to trade standardized options on the
Networking Index (``Index''), a modified equal-dollar weighted index
developed by the Amex, representing a portfolio of large, actively
traded computer and telecommunication networking stocks.
1. Eligibility Standards for Index Components
The Networking Index currently conforms with Exchange Rule 901C,
which specifies criteria for inclusion of stocks in an index on which
standardized options will be traded. In addition, the Index also
currently conforms to all the criteria set forth in Rule 901C,
Commentary .02, which provides for the commencement of trading of
options on an index thirty days after the date of filing, with the
exception that the Index is calculated using a modified version of the
equal-dollar weighting method. Therefore, the component securities all
meet the following eligibility standards: (1) They are traded on the
Amex or NYSE, or are NASDAQ/NMS securities; (2) component stocks
comprising the top 90% of the Index by weight have a minimum market
capitalization of $75 million, and those component stocks constituting
the bottom 10% of the Index by weight have a market capitalization of
at least $50 million; (3) stocks constituting the top 90% of the Index
by weight have minimum monthly volume of 1,000,000 shares over the six
months preceding this filing, and stocks constituting the bottom 10% of
the Index by weight have a minimum monthly volume of at least 500,000
shares over the six months preceding this filing. The Exchange will
assure that upon quarterly rebalancing (1) at least 90% of the index's
numerical index value and at least 80% of the total number of component
securities individually will meet the then current criteria for
standardized option trading set forth in Exchange Rule 915; (2) that no
component security represent more than 25% of the weight of the Index;
and (3) that the five highest weighted component securities in the
index, in the aggregate, account for no more than 60% of the weight of
the Index.
2. Index Calculation
The Index is calculated using a ``modified equal-dollar weighting''
methodology. Four of the fifteen component securities are given higher
weightings to reflect their higher market capitalizations than the rest
of the group, while not allowing them to dominate the Index to the
extent they would in a straight market capitalization weighted Index.
This method of calculation is important given the great disparity in
market value of a few of the Index's components. 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, since the index will tend to represent these few components
and not the industry as a whole. At the same time, the increase in
Index weight for the smaller, less liquid stocks is lower than if the
index had been straight equal-dollar weighted; and the decrease in
Index weight of the larger, more liquid stocks also is less dramatic
than using straight equal-dollar weighting.
The following is a description of how the modified equal-dollar
weighting calculation method works. As of the market close on October
20, 1995, a portfolio of networking stocks was established representing
an investment of $12,000 in each of the four highest capitalized stocks
of the companies in the Index and $4,727.27 in the 11 remaining stocks
(rounded in the nearest whole share). 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 stocks 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 20, 1995. Each quarter thereafter, following the
close of trading on the third Friday of January, April, July and
October, the Index portfolio will be ranked in descending market
capitalization order and the Index portfolio adjusted by changing the
number of whole shares of each component stock so that the four largest
capitalized stocks in the Index each represents 12% of the Index value
for a total of 48%, and the remaining 52% of the Index value is evenly
distributed over the remaining securities. At the inception of the
Index, each of the remaining 11 components had a weight of
approximately 4.73%. 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
[[Page 5591]]
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 stock in the
Index portfolio remain fixed between quarterly \2\ 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 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 replacement, the average dollar value of the remaining
portfolio components in the same weighting tier of the stock being
replaced (i.e., either the top four stocks by market capitalization as
of the last rebalance, or the remaining stocks) 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.
\2\ Telephone Conversation between Claire McGrath, Managing
Director and Special Counsel, Amex, and Francois Mazur, Attorney,
Office of Market Supervision, Division of Market Regulation,
Commission, on February 2, 1996 (``Telephone Conversation'').
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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.
3. Maintenance of the Index \3\
\3\ The Amex has stated that the Index will be maintained so as
to conform with the generic maintenance listing standards for
options on narrow-based indexes (Amex Rule 901C, Commentary .02).
Telephone Conversation between Claire McGrath, Managing Director and
Special Counsel, Amex, and Francois Mazur, Attorney, Office of
Market Supervision, Division of Market Regulation, Commission, on
February 6, 1996.
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The Exchange will review the Index quarterly,\4\ and maintain it 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
Index at the time of its initial listing and in no event will the Index
have fewer than nine components; (2) component stocks constituting the
top 90% of the Index by weight will have a minimum market
capitalization of $75 million and the component stocks constituting the
bottom 10% of the Index by weight will have a minimum market
capitalization of $50 million; (3) the monthly trading volume for each
of the past six months \5\ for each component security shall be at
least 500,000 shares, or for each of the lowest weighted components in
the Index that in the aggregate account for no more than 10% of the
weight of the Index, the monthly trading volume shall be at least
400,000 shares; and (4) no single component will represent more than
25% of the weight of the Index and the five highest weighted components
will represent no more than 60% of the Index at each quarterly
rebalancing.
\4\ Telephone Conversation, supra note 2.
\5\ Id.
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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.
4. Expiration and Settlement
The proposed options on the Index will be European style (i.e.,
exercises permitted at expiration only), 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 Networking 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.
The Exchange plans to list 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 on a full value Index level, the Exchange may
instead list long-term, reduced value put and call options based on
one-tenth (\1/10\) the Index's full value. Ineither event, the interval
between expiration months for either a full value or reduced value
long-term option will be not 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 Networking 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 9,000 contracts on the same side of the
market, then the position limit for the reduced value options will be
90,000 contracts on the same side of the market).
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/NMS, 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.
5. 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 Networking 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 option series on the Index at 2\1/2\ point strike
(exercise) price intervals 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 9,000 contacts with
respect to options on this Index.
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) of the Act 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 regulating, clearing, settling,
processing information with respect to, and
[[Page 5592]]
facilitating transactions in, securities, and in general to protect
investors and the public interest, and to remove impediments to and
perfect the mechanism of a free and open market and a national market
system.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Amex believes that the proposed rule change will not impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
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, NW., Washington, DC 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, NW.,
Washington, DC. 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 File No.
SR-Amex-96-03 and should be submitted by March 5, 1996.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\6\
\6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3100 Filed 2-12-96; 8:45 am]
BILLING CODE 8010-01-M
