94-2710. Self-Regulatory Organizations; Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a Proposed Rule Change by the New York Stock Exchange, Inc., Relating to the Listing of Options on American ...  

  • [Federal Register Volume 59, Number 25 (Monday, February 7, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-2710]
    
    
    [[Page Unknown]]
    
    [Federal Register: February 7, 1994]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    [Release No. 34-33552; International Series Release No. 631; File No. 
    SR-NYSE-93-43]
    
     
    
    Self-Regulatory Organizations; Filing and Order Granting 
    Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a 
    Proposed Rule Change by the New York Stock Exchange, Inc., Relating to 
    the Listing of Options on American Depositary Receipts
    
    January 31, 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 October 
    28, 1993, the New York Stock Exchange, Inc., (``NYSE'' or ``Exchange'') 
    filed with the Securities and Exchange Commission (``Commission'') the 
    proposed rule change as described in Items I and II 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.\1\
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        \1\The proposal was amended on January 10, 1994 to clarify the 
    procedure the NYSE would use to determine whether 50% or more of the 
    world-wide trading volume of the underlying foreign security occurs 
    in the U.S. ADR market. Letter from James E. Buck, Senior Vice 
    President and Secretary, NYSE, to Richard Zack, Branch Chief, Office 
    of Derivatives Regulation, Division of Market Regulation 
    (``Division''), Commission, dated January 10, 1994 (``Amendment No. 
    1'').
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    I. Self-Regulatory Organization's Statement of the Terms of Substance 
    of the Proposed Rule Change
    
        The NYSE proposes to amend Rules 715 and 716 to provide for the 
    listing and trading of options on American Depositary Receipts 
    (``ADRs'') where 50% or more of the world-wide trading volume of the 
    underlying foreign security occurs in the U.S. ADR market.
        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
    
        On November 27, 1992, the Commission approved a NYSE proposal to 
    list and trade ADR options where the underlying foreign security is 
    subject to a comprehensive surveillance sharing agreement and the 
    underlying ADR meets or exceeds the Exchange's established uniform 
    options listing standards.\2\ First, the ADR Approval Order provides 
    that for ADR options to be eligible for listing and continued trading, 
    the NYSE must have comprehensive surveillance sharing agreements in 
    place with the foreign exchanges that serve as the primary markets for 
    the foreign securities underlying the ADRs, unless the Commission 
    otherwise approves the options' listing without an agreement. Second, 
    the NYSE's initial listing standards require that the ADRs underlying 
    the Exchange-listed options have a ``float'' of 7,000,000 ADRs 
    outstanding, 2,000 shareholders, trading volume of at least 2,400,000 
    over the prior twelve month period, and a minimum price of $7\1/2\ for 
    a majority of the business days during the preceding three month 
    period. Moreover, options on ADRs must meet or exceed the maintenance 
    criteria for continued listing under the NYSE rules. Those criteria 
    require that the ADRs underlying Exchange-listed options maintain a 
    ``float'' of 6,300,000 ADRs, 1,600 shareholders, trading volume of at 
    least 1,800,000 over the prior twelve month period, and a minimum price 
    of $5 on a majority of the business days during the preceding six month 
    period. Additionally, the ADR Approval Order requires the NYSE to make 
    reasonable inquiry to evaluate the securities underlying the ADRs to 
    ensure that these securities are generally consistent with the above-
    noted listing requirements.
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        \2\Securities Exchange Act Release No. 31528 (November 27, 
    1992), 57 FR 57256 (December 3, 1992) (``ADR Approval Order''). A 
    comprehensive surveillance sharing agreement provides, among other 
    things, for the exchange of market trading activity, clearing 
    activity, and the identity of the ultimate purchaser or seller of 
    the securities traded.
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        Furthermore, the NYSE options initial listing standards require 
    that the ADR underlying an ADR option be registered and listed on a 
    national securities exchange or traded through the facilities of a 
    national securities association and be reported as a national market 
    system security. The issuers of the ADRs also must be in compliance 
    with any other applicable requirements of the Act.
        The current proposal would authorize the NYSE to list and trade 
    options on ADRs where 50% or more of the world-wide trading volume in 
    the underlying foreign security occurs in the U.S. ADR market. The 
    proposal also provides that the percentage of the world-wide trading 
    volume that occurs in the U.S. ADR market meet a maintenance standard 
    of 30% for the ADR options to continue to be trading on the Exchange. 
    Under the proposal, if the ADR options meet the above-noted criteria, 
    the options may be listed without the existence of a surveillance 
    sharing agreement between the NYSE and the primary exchange on which 
    the foreign securities underlying the ADRs trade.\3\
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        \3\Under the proposal, should the ADR option not meet this 
    numerical standard, the Exchange could not list the ADR option 
    unless there is a surveillance sharing agreement between the 
    Exchange and the primary exchange on which the foreign securities 
    underlying the ADRs trade or the Commission specifically authorized 
    the listing. The Commission would give such authorization in the 
    context of approving a rule filing submitted under section 19 of the 
    Act and Rule 19b-4, thereunder.
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        The proposal provides that to determine whether 50% or more of the 
    world-wide trading volume in the underlying foreign security occurs in 
    the U.S. ADR market, the NYSE will calculate the trading volume for the 
    previous three months in the related securities which can affect the 
    pricing of the foreign security underlying the ADR option.\4\ Under the 
    proposal, the NYSE will determine that at least 50% of the world-wide 
    trading volume in a particular foreign security occurs in the U.S. ADR 
    market if the combined trading volume for ADRs overlying any class of 
    the foreign issuer's common stock, occurring in the U.S. ADR market, is 
    not less than 50% of the sum of (1) the combined trading volume for all 
    classes of the foreign issuer's common stock, and (2) the combined 
    trading volume for all ADRs overlying any of these classes of stock. 
    The above-noted calculation also will be used to determine if the 
    trading volume in the U.S. ADR market falls below 30% of the world-wide 
    trading volume for the underlying foreign security.\5\
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        \4\Under the proposal, such related securities include all 
    classes of common stock issued by the foreign issuer and ADRs that 
    overlie any one of these classes of common stock. See Letter from 
    James E. Buck, Senior Vice President and Secretary, NYSE, to Richard 
    Zack, Branch Chief, Office of Derivatives Regulation, Division of 
    Market Regulation (``Division''), Commission, dated January 10, 1994 
    (``ADR Letter'').
        \5\See ADR Letter, supra note 4. Under this calculation, the 
    trading volume for any U.S. ADR trading on an exchange that is not 
    part of the U.S. ADR market will be included in the determination of 
    world-wide trading volume, but not in the determination of U.S. ADR 
    market trading volume. The NYSE also represents that it will use its 
    best efforts to discover all markets (foreign and U.S.) on which the 
    foreign security (and any related securities) underlying the ADR 
    options trades.
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        The proposal also defines the U.S. ADR market as the U.S. self-
    regulatory organizations that are members of the Intermarket 
    Surveillance Group (``ISG'')\6\ and whose markets are linked together 
    by the Intermarket Trading System (``ITS'').\7\ The U.S. self-
    regulatory organizations that currently make up the U.S. ADR market are 
    the Amex, the BSE, the CBOE, the CHX, the CSE, the NASD, the NYSE, the 
    PSE, and the Phlx.\8\
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        \6\ISG was formed on July 14, 1983 to, among other things, 
    coordinate more effectively surveillance and investigative 
    information sharing arrangements in the stock and options markets. 
    See Intermarket Surveillance Group Agreement, July 14, 1983. The 
    most recent amendment to the ISG Agreement, which incorporates the 
    original agreement and all amendments made thereafter, was signed by 
    ISG members on January 29, 1990. See Second Amendment to the 
    Intermarket Surveillance Group Agreement, January 29, 1990. The 
    members of the ISG are: The American Stock Exchange, Inc. 
    (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
    Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange, 
    Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the 
    National Association of Securities Dealers, Inc. (``NASD''), the 
    NYSE, the Pacific Stock Exchange, Inc. (``PSE''), and the 
    Philadelphia Stock Exchange, Inc. (``Phlx'').
        \7\ITS is a communications system designed to facilitate trading 
    among competing markets by providing each market with order routing 
    capabilities based on current quotation information. The system 
    links the participant markets and provides facilities and procedures 
    for: (1) The display of composite quotation information at each 
    participant market, so that brokers are able to determine readily 
    the best bid and offer available from any participant for multiply 
    trading securities; (2) efficient routing of orders and sending 
    administrative messages (on the functioning of the system) to all 
    participating markets; (3) participation, under certain conditions, 
    by members of all participating markets in opening transactions in 
    those markets; and (4) routing orders from a participating market to 
    a participating market with a better price. The exchanges on which 
    Empresas ADRs trade are ITS participant markets. The NASD's Computer 
    Assisted Execution System links NASD market makers, for order 
    routing and execution purposes, to ITS for ADRs.
        \8\See ADR letter, supra note 4.
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        The Exchange believes that the proposed rule change is consistent 
    with section 6(b) of the Act,\9\ 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 to remove impediments to and 
    perfect the mechanism of a free and open market and a national market 
    system.
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        \9\15 U.S.C. 78f(b) (1988).
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    (B) Self-Regulatory Organization's Statement on Burden on Competition
    
        The NYSE believes that the proposed rule change will not impose a 
    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
    
        The Exchange has requested that the proposed rule change be given 
    accelerated effectiveness pursuant to section 19(b)(2) of the Act.\10\
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        \10\15 U.S.C. 78s(b)(2) (1988).
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        The Commission finds 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, the 
    requirements of section 6(b)(5).\11\ Specifically, the Commission finds 
    that allowing options to trade on ADRs, among other things, gives 
    investors a better means to hedge their positions in the ADRs, as well 
    as enhanced market timing opportunities.\12\ Further, the pricing of 
    the ADRs underlying ADR options may become more efficient and market 
    makers in these ADRs, by virtue of enhanced hedging opportunities, may 
    be able to provide deeper and more liquid markets.\13\ In sum, options 
    on ADRs likely engender the same benefits to investors and the market 
    place that exist with respect to options on common stock.\14\
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        \11\15 U.S.C. 78f(b)(5) (1988).
        \12\For example, if an investor wants to invest in ADRs but does 
    not have sufficient cash available until a future date, he can 
    purchase an ADR option now for less money and exercise the option to 
    purchase the ADRs at a later date.
        \13\See e.g., Report of the Special Study of the Options Markets 
    to the Securities and Exchange Commission, 96th Cong., lst Sess. 
    (Comm. Print No. 96-IFC3, December 22, 1978).
        \14\Pursuant to section 6(b)(5) of the Act, the Commission must 
    predicate approval of any new securities product upon a finding that 
    the introduction of such new product is in the public interest. Such 
    a finding would be difficult for a derivative instrument that served 
    no hedging or other economic function, because any benefits that 
    might be derived by market participants likely would be outweighed 
    by the potential for manipulation, diminished public confidence in 
    the integrity of the markets, and other valid regulatory concerns.
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        The Commission also believes that it is appropriate to permit the 
    NYSE to list and trade options on ADRs given that these options will be 
    subject to specific requirements related to the protection of 
    investors. First, NYSE rules require that the ADRs underlying these 
    options meet the NYSE's uniform options listing standards in all 
    respects. As described above, this would include the initial and 
    maintenance criteria. These criteria ensure, among other things, that 
    the underlying ADRs will maintain adequate price and float to prevent 
    the ADR options from being readily susceptible to manipulation.
        Second, the ADR Approval Order requires that the NYSE make a 
    reasonable inquiry to evaluate foreign securities underlying the ADR 
    options to ensure that these securities are generally consistent with 
    the requirements set forth in the Exchange's options listing standards. 
    In the ADR Approval Order, the Commission recognized that in some 
    cases, an ADR underlying an option could meet the options listing 
    standards while the foreign security on which the ADR is based may not 
    meet these standards in every respect. For example, in the case of ADRs 
    overlying certain foreign securities, one ADR could represent several 
    shares of a specific stock. For this reason, it is possible that the 
    price of the ADR will meet exchange listing standards even though the 
    market price of the foreign security underlying the ADR may be less 
    than the NYSE standard. The Commission believes, however, that 
    requiring the NYSE to review the foreign securities underlying the ADR 
    options to ensure that they are generally consistent with the 
    Exchange's options listing standards, along with other market 
    safeguards, will adequately protect investors from the possibility that 
    these ADR options can be potentially manipulated.\15\
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        \15\For example, we would expect the Exchange to consider 
    delisting an option on an ADR if the price and public float of the 
    underlying security did not meet trading or size maintenance 
    standards, or if the security underlying the ADR failed to meet 
    other standards that raised manipulative concerns.
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        Third, the NYSE has in place an adequate mechanism for providing 
    for the exchange of the surveillance information necessary to 
    adequately detect and deter market manipulation or trading abuses 
    involving ADR options. Although the proposal does not require the NYSE 
    to have a comprehensive surveillance sharing agreement in place with 
    the foreign exchange on which the security underlying the ADR options 
    trade, the Commission believes that this does not impair the ability of 
    the NYSE to detect or deter manipulation because the proposal requires 
    that 50% or more of the trading activity in the underlying foreign 
    securities occur in the U.S. ADR market. The Commission notes the 
    proposal requires the U.S. self-regulatory organizations that 
    constitute the U.S. ADR market to be members of the ISG, which will 
    provide for the exchange of necessary surveillance information 
    concerning trading activity in the ADR options, and the respective 
    underlying ADR market.\16\
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        \16\See ADR Letter, supra note 4.
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        As a general matter, the Commission believes that the existence of 
    a surveillance sharing agreement that effectively permits the sharing 
    of information between an exchange proposing to list an equity option 
    and the exchange trading the stock underlying the equity option is 
    necessary to detect and deter market manipulation and other trading 
    abuses. In particular, the Commission notes that surveillance sharing 
    agreements provide an important deterrent to manipulation because they 
    facilitate the availability of information needed to fully investigate 
    a potential manipulation if it were to occur. These agreements are 
    especially important in the context of derivative products based on 
    foreign securities because they facilitate the collection of necessary 
    regulatory, surveillance and other information from foreign 
    jurisdictions.
        In the context of ADRs, the Commission believes that, in most 
    cases, the relevant underlying equity market is the primary market on 
    which the security underlying the ADR trades. This is because, in most 
    cases, the market for the security underlying the ADR generally is 
    larger in comparison to the ADR market, both in terms of share volume 
    and the value of trading. Because of the additional leverage provided 
    by an option on an ADR, the Commission generally believes that having a 
    comprehensive surveillance sharing agreement in place, between the 
    exchange where the ADR option trades and the exchange where the foreign 
    security underlying the ADR primarily trades, will ensure the integrity 
    of the marketplace.\17\ The Commission further believes that the 
    ability to obtain relevant surveillance information, including, among 
    other things, the identity of the ultimate purchasers and sellers of 
    securities, is an essential and necessary component of a comprehensive 
    surveillance sharing agreement.
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        \17\See also Securities Exchange Act Release No. 26653 (March 
    21, 1989), 54 FR 12705 (order approving the trading of options on 
    the International Market Index (``IMI''), an index comprised of ADRs 
    traded in the United States based on foreign securities). In this 
    approval order, the Commission specifically required that there be 
    comprehensive surveillance sharing agreements in place between the 
    Amex and the foreign exchanges on which the securities underlying 
    the ADRs trade so that a substantial percentage of the index was 
    covered by comprehensive surveillance sharing agreements.
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        Under the current proposal, however, the Commission believes that 
    it is appropriate to permit the listing of options on an ADR without 
    the existence of a comprehensive surveillance sharing agreement with 
    the foreign market where the underlying security trades, as long as, 
    the U.S. market for the underlying ADRs is at least as large as the 
    market for the underlying foreign security. Specifically, the proposed 
    listing standards require that at least 50% of the world-wide trading 
    volume in the underlying foreign security occur in the U.S. ADR market, 
    which consists of the Amex, the BSE, the CBOE, the CHX, the CSE, the 
    NASD, the NYSE, the PSE, and the Phlx. The proposal further requires 
    that for the continued trading of the ADR options the percentage of the 
    world-wide trading volume occurring in the U.S. ADR market must not 
    fall below 30%. The Commission believes these standards will ensure 
    that the relevant pricing market for the options on ADRs is the U.S. 
    market rather than the foreign market where the security underlying the 
    ADR trades.
        Moreover, the Commission believes that the proposed method for 
    determining whether the trading volume in the U.S. ADR market meets the 
    required percentages is adequate to ensure that the U.S. ADR market is 
    and continues to be the price discovery market for the foreign security 
    underlying the ADR option. Specifically, the NYSE has represented that 
    it will calculate the trading volume for the previous three months in 
    the underlying ADR, the underlying foreign security, and other related 
    securities which can affect the pricing of the underlying foreign 
    security.\18\ To list an ADR option without the existence of a 
    comprehensive surveillance sharing agreement, the proposal requires the 
    combined training volume for ADRs overlying any class of the foreign 
    issuer's stock, occurring in the U.S. ADR market, to be not less than 
    50% of the combined world-wide trading volume for all classes of the 
    issuer's stock and all ADRs that overlie any of these classes.\19\
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        \18\See supra note 4, and accompanying text.
        \19\Id.
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        In summary, the Commission believes that in cases where a 
    substantial percentage of the world-wide trading volume for the 
    underlying ADR, the underlying foreign security, and other securities 
    relevant to the pricing of these securities occurs in the U.S. ADR 
    market,\20\ the U.S. ADR market operates as the price discovery market 
    for the foreign securities (i.e., stocks and ADRs) underlying the ADR 
    options. In these cases, the Commission believes that the U.S. ADR 
    market is the instrumental market for purposes of deterring and 
    detecting potential manipulation or other abusive trading strategies in 
    conjunction with transactions in the overlying ADR options market. 
    Therefore, because the NYSE, and all the other U.S. self-regulatory 
    agencies which make up the U.S. ADR market are members of the ISG, the 
    Commission believes that there is an effective surveillance sharing 
    arrangement to permit the exchanges and the NASD to adequately 
    investigate any potential manipulations of the ADR options or their 
    underlying securities.
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        \20\We note that it is appropriate to view the U.S. ADR market 
    as a single market even though it is made up of several national 
    securities exchanges and the NASD. The Commission notes that all of 
    the markets on which or through which these ADRs could trade are 
    linked together by ITS. The Commission further notes that one 
    market, the NYSE, typically operates as the primary exchange on 
    which trades in U.S. ADRs are executed.
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        The Commission finds good cause for approving the proposed rule 
    change, including Amendments No. 1, to the proposed rule change, prior 
    to the thirtieth day after the date of publication of notice of filing 
    thereof in the Federal Register.
        The NYSE proposal to list and trade ADR options where at least 50% 
    of the world-wide trading volume of the underlying foreign security 
    occurs in the U.S. ADR market is identical to proposals by the Amex, 
    CBOE, and Phlx to provide for the listing of ADR options that meet this 
    uniform standard.\21\ The Amex, CBOE, and Phlx proposals were subject 
    to a full notice and comment period and no comments were received.\22\
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        \21\Securities Exchange Act Release Nos. 33102 (October 25, 
    1993), 58 FR 58356 (November 1, 1993) (SR-CBOE-93-38), 33103 
    (October 25, 1993), 58 FR 58357 (November 1, 1993) (SR-Amex-93-28), 
    and 33252 (November 26, 1993), 58 FR 63604 (December 2, 1993) (SR-
    Phlx-93-54).
        \22\Although Amendment No. 1 to the proposal was not part of the 
    Amex, CBOE, and Phlx proposals when they were noticed for comment, 
    the Commission notes that Amendment No. 1 merely clarifies how the 
    NYSE will determine whether not less than 50% (or less than 30%, in 
    the case of the maintenance standard) of the world-wide trading 
    volume in the underlying foreign security (as represented by ADRs, 
    common stock and any other related securities) occurs in the U.S. 
    ADR market. The Commission believes that this amendment does not 
    make a substantive change to the proposal and, thus, raises no new 
    issues. Further, the Commission believes that the Amendment 
    strengthens the proposal by ensuring that the standard will be 
    applied consistently by all the markets seeking to list ADR options.
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        The Commission further notes that approving the current proposal, 
    including Amendment No. 1, on an accelerated basis will permit the NYSE 
    to compete on an equal basis with the other options exchanges for 
    orders in ADR options. Accordingly, since the Commission finds that the 
    current proposal involves the exact same issues as the above-noted 
    proposals, the Commission believes it is consistent with sections 
    19(b)(2) and 6(b)(5) of the Act\23\ to approve the NYSE's proposal on 
    an accelerated basis.
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        \23\15 U.S.C. 78s(b)(2) and 78f(b)(5) (1988).
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    IV. Solicitation of Comments
    
        Interested persons are invited to submit written data, views and 
    arguments concerning the proposed rule change, including Amendment No. 
    1 to the proposed rule change. 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 the file 
    number in the caption above and should be submitted by February 28, 
    1994.
        It is therefore ordered, Pursuant to section 19(b)(2) of the 
    Act,\24\ that the proposed rule change (SR-NYSE-93-43) is approved, 
    effective February 7, 1994. Accordingly, the Exchange may submit 
    listing certificates for ADR options as specified herein on February 7, 
    1994 pursuant to Rule 12d1-3 under the Act and commence trading in the 
    options according to the time parameters established in the Joint 
    Options Listing Procedures Plan.
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        \24\15 U.S.C. 78s(b)(2) (1988).
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\25\
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        \25\17 CFR 200.30-3(a)(12) (1993).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 94-2710 Filed 2-4-94; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
02/07/1994
Department:
Securities and Exchange Commission
Entry Type:
Uncategorized Document
Document Number:
94-2710
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: February 7, 1994, Release No. 34-33552, International Series Release No. 631, File No. SR-NYSE-93-43