[Federal Register Volume 62, Number 37 (Tuesday, February 25, 1997)]
[Notices]
[Pages 8467-8469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4611]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38308; File No. SR-Amex-96-44]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 Thereto by the American Stock
Exchange, Inc. Relating to the Listing and Trading of Options on
Exchange-Traded Fund Shares
February 19, 1997.
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
21, 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. On January 16, 1997, the Exchange
filed Amendment No. 1 to the proposal.\1\ On February 19, 1997, the
Exchange filed Amendment No. 2 to the proposed rule change.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change and Amendment Nos. 1 and 2 from interested
persons.
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\1\ In Amendment No. 1, the Exchange states: (1) that the
proposal is limited to the listing and trading of options on those
exchange-traded fund shares that have received approval from the
Commission; and (2) the Exchange will list and trade options on
exchange-traded funds shares that hold foreign country securities
only if: (i) the Exchange has a market information sharing agreement
with the primary exchange for each of the securities held by the
fund, or (ii) the fund is classified as a diversified fund as that
term is defined by Section 5(b) of the Investment Company Act of
1940 and the securities held in the fund are issued by issuers based
in five or more countries. See letter from Claire P. McGrath,
Managing Director and Special Counsel, Derivative Securities, Amex,
to Ivette Lopez, Assistant Director, Office of Market Supervision
(``OMS'', Division of Market Regulation (``Division''), Commission,
dated January 15, 1997. (``Amendment No. 1'').
\2\ Amendment No. 2 supersedes and replaces Amendment No. 1 to
the extent that it modifies proposed Commentary .06(4) to state that
the Amex will list and trade options on exchange-traded fund shares
that hold foreign country securities only if: (i) the exchange has
an effective surveillance sharing agreement with the primary
exchange for each of the securities held by the fund, or (ii) the
fund is classified as a diversified fund as that term is defined by
Section 5(b) of the Investment Company Act of 1940 and the
securities held in the fund are issued by issuers based in five or
more countries. The Exchange defines an ``effective surveillance
sharing agreement'' as an agreement that would permit the Exchange
to obtain trading information relating to the securities held by the
fund including the identity of the customers transacting in those
securities. See letter from Claire P. McGrath, Managing Director and
Special Counsel, Amex, to Ivette Lopez, Assistant Director, OMS,
Division, Commission, dated February 18, 1997 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes the adoption of rules to permit the trading of
options on securities representing interests in open-end, exchange-
listed investment companies that hold securities constituting or based
on an index or a portfolio of securities.
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 Exchange 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
The purpose of the proposed rule change is to provide for the
trading of options on exchange-listed securities representing interests
in open-end unit investment trusts or open-end management investment
companies that hold securities based on an index or a portfolio of
securities (referred to hereinafter as ``Exchange-Traded Fund Shares''
or ``Fund Shares'').\3\
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\3\ Currently, the Exchange trades unit investment trust
securities known as Portfolio Depositary Receipts SM (``PDRs'')
based on the Standard & Poor's 500 Composite Stock Price
Index and the Standard & Poor's MidCap 400 Index TM. In
addition, the Exchange trades Index Fund Shares which are issued by
an open-end management investment company consisting of seventeen
separate series known as World Equity Benchmark Shares SM
(``WEBS'') based on seventeen foreign equity market indexes. PDRs
and WEBS are listed on the Amex pursuant to Rule 1000, et seq. and
Rule 1000A et seq., respectively, and trade like shares of common
stock.
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As noted above, a characteristic of all Exchange-Traded Fund Shares
is that they are open-ended, and new shares may be created on any
business day at a cost related to the net asset value in a transaction
with the fund itself. The ability of the seller of a call on any of
these Fund Shares to deliver upon exercise will thus be a function of
the
[[Page 8468]]
availability of shares from the fund itself (which is itself a function
of the creation mechanism and the shares underlying the index or
portfolio) and not of the bid/ask spread, trading volume, or the
portfolio size of the fund. Exchange-Traded Fund Shares are also
redeemable on any business day, at a price related to the net asset
value. Consequently, the ability to liquidate shares received on the
exercise of a put will be a function of the ability to redeem the
shares from the fund (which is itself a function of the creation
mechanism and the shares underlying the index or portfolio), not the
bid/ask spread, trading volume, or the portfolio size of the fund.
Options on Exchange-Traded Fund Shares are proposed to be traded on
the Exchange pursuant to the same rules and procedures that apply
generally to trading in options on equity securities or indexes of
equity securities. However, the Exchange proposes some different
listing criteria for options on Exchange-Traded Fund Shares and intends
to have each option contract cover 1000 Exchange-Traded Fund Shares.
Also, reflecting the open-ended nature of the Fund Shares, the Exchange
is not proposing any position or exercise limits to apply to options on
Exchange-Traded Fund Shares.
The listing standards proposed for options on Exchange-Traded Fund
Shares are set forth in proposed Commentary .06 under Exchange Rule 915
and in proposed Commentary .08 under Exchange Rule 916. These
standards, which provide for the listing of European-style options
only, are substantially the same as those that apply to the initial and
continued listing of the Fund Shares pursuant to Exchange Rules 1002
and 1002A. Conforming the listing standards for options on Exchange-
Traded Fund Shares to the listing standards that apply to Fund Shares
themselves will assure that whenever there is trading in the underlying
Fund Shares, options on these same Fund Shares will also be available.
The Exchange believes that the contemporaneous availability of both
options and Fund Shares is particularly necessary for Fund Shares on
indexes or portfolios of securities when there already exist Fund
Shares based on the same or a similar index or portfolio of securities.
It is expected that Fund Shares with underlying options will be more
useful to investors seeking to modify their risk in such Fund Shares,
the underlying indices, markets or market segments. Demand for and
creation of Fund Shares with overlying options is likely to exceed
demand for and creation of Fund Shares without overlying options on the
same or a similar index or portfolio of securities. Correspondingly, a
new fund without options will have a difficult time competing with an
established fund with overlying options. A new fund based on a Japanese
index, for example, would encounter major obstacles in achieving a
reasonable size when in competition with an established fund that has
overlying options if the new fund does not have options. The Exchange's
proposed listing standards provide that if a particular series of
Exchange-Traded Fund Shares should cease to trade on an exchange or as
national market securities in the over-the-counter market, there will
be no opening transactions in the options on the Fund Shares, and all
such options will trade on a liquidation-only basis.
The Amex believes the availability of these options will be
beneficial to investors, since options will permit investors to adjust
the risks and rewards of investing in the unit investment trust or fund
to their individual needs. Options also will add depth and liquidity to
the market for Exchange-Traded Fund Shares by permitting market makers
in that market to hedge the risks of their market-making activities
efficiently. Options traders and market makers, in turn, will obtain
liquidity from the market in Fund Shares and the market in the
underlying securities represented in the portfolio.
Reflecting the open-ended nature of Exchange-Traded Fund Shares,
maintenance or continued listing standards for these Fund Shares do not
include criteria based on either the number of Fund Shares outstanding
or trading volume.\4\ Similarly, the Exchange believes it is neither
necessary nor appropriate to apply traditional position or exercise
limits to Fund Share options, and it is proposing to amend Rules 904
and 905 to provide that these limits shall not ordinarily apply. Since
it should always be possible to create more Fund Shares at a cost
related to their net asset value by tendering a specified in-kind
deposit of the securities that constitute the underlying index or
portfolio and/or cash, there is no meaningful limit on the available
supply underlying Fund Shares. The diversification inherent in the
satisfaction of regulated investment company requirements for pass-
through tax treatment of dividends and other income insures that the
market value of the shares underlying any fund will be very large.
Accordingly, the Exchange believes there is no need for option position
and exercise limits to protect the underlying market against squeezes
and other attempts at manipulation, or inadvertent market disruption
stemming from temporary supply and demands imbalances. The Amex
believes the proposed Exchange-Traded Fund Shares options' European-
style exercise (which gives the option seller ample advance knowledge
of the time and size of any possible exercise transaction), physical
settlement of the option, Creation Unit size share and/or cash
deposits, and a substantial underlying market in the securities held by
the Fund, combine to insure against successful attempts at manipulation
or material market disruptions stemming from trading activity in the
Fund Shares, multiple Creation Unit sized baskets of portfolio
securities, or options on Fund Shares. Furthermore, in the absence of
any maintenance or continued listing requirements in the underlying
market that call for a minimum number of outstanding Exchange-Traded
Fund Shares or for minimum trading volume, the Exchange believes that
position and exercise limits would not be meaningful or useful as a
percentage of any of these measures. For these reasons, and to assure
that as long as there is trading in the underlying Fund Shares there
can also be trading in the related options, the Exchange is not
proposing any position or exercise limits for Fund Shares options. The
Exchange reserves the right, however, to impose position and exercise
limits if, for reasons not now conceivable, such limits should ever be
needed in the interest of fair and orderly markets in the options, the
underlying Fund Shares, or the portfolio securities underlying the Fund
Shares.
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\4\ As set forth in Rules 1002 and 1002A, the Exchange
establishes a minimum number of units to be outstanding before
trading in a series of Exchange-Traded Fund Shares may commence.
Although there is no comparable maintenance standard, as a practical
matter there can never be trading in a series of Fund Shares in
which there is less than one Creation Unit outstanding, since Fund
Shares may only be created and redeemed in Creation Unit size, and
if the last outstanding Creation Unit should ever be redeemed, the
series (and options on that series) will cease to trade.
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Reflecting that the underlying portfolios of Exchange-Traded Fund
Shares are diversified and generally less volatile than a typical
component of the portfolios, it is also proposed that each option
contract cover 1000 Exchange-Traded Fund Shares and that the minimum
strike price intervals for options on Exchange-Traded Fund Shares will
be $2.50 where the strike price is $200 or less, and $5.00 where the
strike price is over $200. These are comparable to the strike price
intervals applicable to index options having strike prices at about the
level expected for Fund Share options.
The proposed margin requirements for options on Exchange-Traded
Fund
[[Page 8469]]
Shares are at the same levels that apply to options generally under
Exchange Rule 462, except, reflecting the diversified nature of the
underlying portfolios represented by the Fund Shares, minimum margin
must be deposited and maintained equal to 100% of the current market
value of the option plus 15% of the market value of equivalent units of
the underlying security value. In this respect, the margin requirements
proposed for options on Exchange-Traded Fund Shares are comparable to
margin requirements that currently apply to broad-based index options
under Exchange Rule 462.
The Exchange believes it has the necessary systems capacity to
support the additional series of options that would result from the
introduction of Fund options, and it has been advised that the Options
Price Reporting Authority (``OPRA'') also will have the capacity to
support these additional series now that it has implemented an
additional outgoing high speed line from the OPRA processor.\5\
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\5\ See letter from Joseph P. Corrigan, Executive Director,
OPRA, to Ivette Lopez, Assistant Director, OMS, Division,
Commission, dated November 8, 1996.
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2. Basis
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) in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and is not designed to permit unfair
discrimination between customers, issuers, brokers or dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any inappropriate 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
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 filled
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,
N.W., Washington, D.C. 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-96-44 and should be
submitted by March 18, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4611 Filed 2-24-97; 8:45 am]
BILLING CODE 8010-01-M
