[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Notices]
[Pages 5327-5328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2537]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40985; File No. SR-AMEX-98-45]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Approval to Proposed Rule Change Relating to Margin Treatment
of Grand Exchange-Traded Fund Share Options Contracts
January 27, 1999.
I. Introduction
On November 25, 1998, The American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit each ``Grand''
Exchange-Traded Fund Share (Fund Share) \3\ option contract to be
recognized to the same extent that 10 ordinary Fund Share option
contracts would be recognized under Amex Rule 462--Minimum Margins.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The term Exchange-Traded Fund Share includes securities
representing interests in unit investment trusts or open-end
management investment companies that hold securities based on an
index or portfolio of securities. 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, the Standard & Poor's
MidCap 400 Index, and the Dow Jones Industrial Average. In addition,
the Exchange trades Fund Shares which are issued by an open-end
management investment company consisting of seventeen separate
series known as World Equity Benchmark SharesSM (WEBs)
based on seventeen foreign equity market indexes. The Exchange also
trades nine Fund Shares known as Select Sector SPDRsSM,
each of which is offered by the Select Sector SPDRSM
Trust, an open-end management investment company. 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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The proposed rule change was published for comment in the Federal
Register on December 24, 1998.\4\ No comments were received on the
proposal. This order approves the proposal.
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\4\ Securities Exchange Act Release No. 40803 (December 17,
1998), 63 FR 71310 (File No. SR-AMEX-98-45).
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II. Description of the Proposal
The rule proposal clarifies that the margin requirements set forth
in Amex Rule 462--Minimum Margins \5\ apply to an option contract
overlying 1000 Exchange-Traded Fund Shares (the ``Grand option
contract'').\6\ The Amex represents that the Grand option contract is
the economic equivalent of holding 10 ordinary Fund Share option
contracts, each of which overlies 100 shares of an underlying Fund
Share. The Exchange notes that, specifically, the provisions of Amex
Rule 462(d)(2)(D)(ii) have applicability to an
[[Page 5328]]
account holding a ``straddle'' or a ``spread'' position, as discussed
below.
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\5\ Amex Rule 462 states: ``In the case of a put or call dealt
in on a registered national securities exchange or a registered
securities association and issued by The Options Clearing
Corporation, and representing options on equity securities, 100% of
the option premium plus 20% of the market value of the equivalent
number of shares of the underlying security, reduced by any excess
of the exercise price over the current market price of the
underlying security in the case of a call, or any excess of the
current market price of the underlying security over the exercise
price in the case of a put, (except that in the case of such options
on Exchange-Traded Fund Shares or other securities that represent an
interest in a registered investment company that satisfies the
criteria set forth in Rule 915; Commentary .06, margin must equal at
least 100% of the current market value of the contract plus (1) 15%
of the market value of equivalent units of the underlying security
value if the Exchange-Traded Fund Share holds securities based upon
a broad-based index or portfolio; or (2) 20% of the market value of
equivalent units of the underlying security value if the Exchange-
Traded Fund Share holds securities based upon a narrow-based index
or portfolio).'' Amex Rule 462(d)(2)(D)(ii); Securities Exchange Act
Release No. 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998)
(``July 1998 Release'').
\6\ On July 1, 1998, the Exchange received approval to trade
both options overlying Exchange-Traded Fund Share and Grand option
contract. See July 1998 Release, supra note 5.
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Amex Rules 462(d)(2)(F) and (G) recognize the reduced risk
associated with an account holding a ``straddle'' or a ``spread''
position by providing for margin requirements specific to the
particular strategy (straddle or spread). For example, in the case of a
spread strategy (i.e., where an account holding a short call also holds
a long call, or where an account holding a short put also holds a long
put (provided the long positions expire on or after the expiration of
the short positions)), Amex Rule 462(d)(2)(G) requires margin for a
call spread equal to the lesser of (1) 100% of the option premium plus
15% of the market value of the equivalent number of shares of the
underlying security value if the Exchange-Traded Fund Share holds
securities based upon a broad-based index or portfolio; or 20% of the
market value of the equivalent number of shares of the underlying
security value if the Exchange-Traded Fund Share holds securities based
upon a narrow-based index or portfolio, reduced by any excess of the
exercise price over the current market price of the underlying security
in the case of a call, or any excess of the current market price of the
underlying security over the exercise price in the case of a put or (2)
the amount, if any, by which the exercise price of the ``long'' call
exceeds the exercise price of the ``short'' call. In the case of a put
spread, Amex Rule 462(d)(2)(G) requires margin equal to the lesser of
(1) 100% of the option premium plus 15% of the market value of the
equivalent number of shares of the underlying security value if the
Exchange-Traded Fund Share holds securities based upon a broad-based
index or portfolio; or 20% of the market value of the equivalent number
of shares of the underlying security value if the Exchange-Traded Fund
Share holds securities based upon a narrow-based index or portfolio,
reduced by any excess of the exercise price over the current market
price of the underlying security in the case of a call, or any excess
of the current market price of the underlying security over the
exercise price in the case of a put or (2) the amount, if any, by which
the exercise price of the ``short'' put exceeds the exercise price of
the ``long'' put. In these contexts, the Exchange proposes that the
required margin under Amex Rule 462(d)(2)(G) be applicable for each
short Grand Fund Share call (put) option contract offset by 10 long
ordinary Fund Share call (put) option contracts.
In the case of a straddle (i.e., where an account holding both a
put and a call for the same number of shares of the same equity
security), guaranteed or carried ``short'' for a customer, the amount
of margin required under Amex Rule 462(d)(2)(F) is the margin on the
put or the call whichever is greater (under Amex Rule 462(d)(2)(D)),
plus 100% of the premium on the other option. In this context, the
Exchange proposes that the reduced margin under Amex Rule 462(d)(2)(D)
be applicable for each Grand Fund Share call (put) option contract
offset by 10 ordinary Fund Share put (call) option contracts. The
Exchange believes the proposed margin offsets are appropriate given
that the Grand contract is the economic equivalent of 10 ordinary Fund
Share option contracts. In addition, the Exchange believes that by
providing the same margin treatment for Grand Fund Share option
contracts and 10 ordinary Fund Share option contracts, any potential
investor confusion concerning the margin treatment of Grand contracts
will be eliminated.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with the Section 6(b)(5) \7\ requirements that the
rules of an exchange be 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, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system and, in general, to protect investors and the public
interest.\8\
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\7\ 15 U.S.C. 78f(b)(5).
\8\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission believes that it is reasonable and appropriate for
the Exchange to apply the margin requirements of Amex Rule 462 to a
Grand option contract.\9\ Specifically, the Commission believes it is
appropriate to require minimum margin of 100% of the current market
value of the option plus 15% of the market value of the underlying
security value (``broad-based margin'') for Grand option contracts
based on a broad-based index or portfolio. In this respect, the margin
requirements for Grand option contracts are comparable to those that
currently apply to broad-based index options.\10\
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\9\ The Commission notes that the Exchange currently applies the
margin requirements of Amex Rule 462 to the economic equivalent of a
Grand option contract (i.e., 10 ordinary Fund Share option
contracts). See July 1998 release, supra note 5.
\10\ The Commission notes that the portfolios or indexes
comprising WEBS Have not been designated as broad-based by the
Commission. In this order, the Commission is only determining that
board-based margin treatment for these WEBS is appropriate, without
addressing the issue of whether such WEBS are based. See July 1998
Release, supra note 5.
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Further, the Commission believes that requiring minimum margin of
100% of the current market value of the option plus 20% of the market
value of the underlying security value (``narrow-based margin'') for
Grand option contracts based on a narrow-based index or portfolio is
also appropriate. In this respect, the margin requirements for Grand
option contracts are comparable to those that currently apply to
narrow-based index options. In addition, this requirement should help
to ensure that purchasers of Grand option contracts based on a narrow-
based index or portfolio post sufficient margin to address any concerns
associated with the potentially increased volatility inherent in a
narrow-based index product.
For the foregoing reasons, the Commission finds that the Exchange's
proposal to apply Amex Rule 462 regarding margin treatment to Grand
Fund Share option contracts is consistent with the requirements of the
Act and the rules and regulations thereunder.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-AMEX-98-45) is approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(2).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2537 Filed 2-2-99; 8:45 am]
BILLING CODE 8010-01-M
