[Federal Register Volume 64, Number 47 (Thursday, March 11, 1999)]
[Notices]
[Pages 12194-12196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6046]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41135; File No. SR-AMEX-99-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the American Stock Exchange LLC Relating
to Bond Indexed Securities
March 3, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 12, 1999, the American Stock Exchange LLC (``Amex'' 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 Amex.
On February 16, 1999, the Exchange filed Amendment No. 1.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 provided additional details regarding the
securities, including the principal factors that will affect the
rate of return on the securities and the formula for determining the
value of the securities at settlement. See Letter from Scott G. Van
Hatten, Legal Counsel, Amex, to Richard Strasser, Assistant
Director, Division of Market Regulation, Commission, dated February
16, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Amex proposes to approve for listing and trading under Section 107
of the Amex Company Guide seven bond indexed preferred or debt
securities.
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 Amex 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
I. Purpose
Under Section 107A of the Amex Company Guide, the Exchange may
approve for listing and trading securities that cannot be readily
categorized under the listing criteria for common and preferred stocks,
bonds, debentures and warrants. The Amex now proposes to list for
trading under Section 107A of the Company Guide seven different bond
index linked term notes, each linked to a different bond index. Each
issue of the proposed securities will meet the size and distribution
requirements of Section 107A. The issuers of such securities also will
be qualified under Section 107A.
Holders of the securities generally will receive interest on the
face value of their securities in an amount to be determined at the
time of issuance of the securities and disclosed to investors. The
frequency and rate of the interest payment will vary from issue to
issue based upon prevailing interest rates and other factors, such as a
discount factor and interest payments made on the underlying bonds and
credit spreads.\4\
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\4\ See Amendment No. 1. The discount factor may reflect
prevailing interest rates, commissions and such other amounts as
will be disclosed in the prospectus provided to investors.
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In addition, investors will receive at maturity an amount based on
the value
[[Page 12195]]
of the linked bond index at maturity of the securities, which may be
more or less than the original principal amount thereof. The securities
will be valued at settlement based upon the following formula:
principal amount x (ending index value/beginning index value) less a
discount factor, which may reflect interest rates, commissions and
other such amounts as will be disclosed in the prospectus provided to
investors.\5\ Returns to investors in the proposed securities are
unleveraged with neither a cap nor a floor.
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\5\ See Amendment No. 1.
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Bond index values for the purpose of determining the payment to
holders at maturity will be determined by reference to prices for a
linked index on a business day shortly prior to maturity. The
securities will provide for maturity within a period of not less than
one nor more than ten years from the date of issues.\6\ The securities
will not be callable or redeemable prior to maturity and will be cash
settled in U.S. currency.\7\ Holders of the securities will have no
claim to the bonds included in the indices. The Exchange anticipates
that the issuer will link distinct issues of such securities to the
following seven bond indices sponsored and calculated by Merrill Lynch,
Pierce, Fenner & Smith Incorporated (``MLPF&S''): the U.S. Domestic
Master, Mortgage Master, U.S. Corporate/Government Master, U.S.
Corporate Master, U.S. Treasury/Agency Master, U.S. Treasury Master and
U.S. Agency Master Indices. The Mortgage Master, U.S. Corporate/
Government Master, U.S. Corporate Master, U.S. Treasury/Agency Master,
U.S. Treasury Master and U.S. Agency Master Indices are all subindices
of the U.S. Domestic Master Index.
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\6\ Id.
\7\ Id.
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In structure, the proposed bond indexed debt securities are, in
part, similar to previously approved commodity preferred securities \8\
and stock index linked term notes,\9\ however, the proposed linked
indices comprise bond indices as opposed to commodity futures or equity
securities indices. Accordingly, the Exchange proposes to provide for
the listing and trading of the bond index linked term notes where the
bonds included in each of the seven indices meet the Exchange's Bond
and Debenture Listing Standards set forth in Section 104 of the Amex
Company Guide.\10\
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\8\ See Securities Exchange Act Release No. 39402 (December 4,
1997), 62 FR 65459 (December 12, 1997), granting immediate
effectiveness to an Exchange proposal to list and trade commodity
preferred securities (ComPS).
\9\ See Securities Exchange Act Release No. 38940 (August 15,
1997), 62 FR 44735 (August 22, 1997), approving an Exchange proposal
to list and trade indexed term notes linked to the Major 11
International Index.
\10\ The Exchange's Bond and Debenture Listing Standards provide
for the listing of individual bond or debenture issuances provided
the issue has an aggregate market value or principal amount of at
least $5 million and either: the issuer of the debt security has
equity securities listed on the Exchange (or on the New York Stock
Exchange); an issuer of equity securities listed on the Exchange (or
on the New York Stock Exchange) directly or indirectly owns a
majority interest in, or is under common control with, the issuer of
the debt security; an issuer of equity securities listed on the
Exchange (or on the New York Stock Exchange) has guaranteed the debt
security; a nationally recognized statistical rating organization
(an ``NRSRO'') has assigned a current rating to the debt security
that is no lower than an S&P Corporation ``B'' rating or equivalent
rating by another NRSRO; or if no NRSRO has assigned a rating to the
issue, an NRSRO has currently assigned; (i) an investment grade
rating to an immediately senior issue; or (ii) a rating that is no
lower than an S&P Corporation ``B'' rating, or an equivalent rating
by another NRSRO, to a pari passu or junior issue. All of the
underlying bonds in each of the proposed indices exceed these
listing standards.
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Each index is rebalanced on the last calendar day of the month. For
a bond to qualify for inclusion in an index, it must meet the pre-
established and defined list of objective criteria. Bonds meeting the
index's inclusion criteria on the last calendar day of the month are
included in such index for the following month. Issues that no longer
meet the criteria during the course of the month remain in the index
until the next month-end rebalancing at which point they are dropped
from the index. Bonds included in the indices are held constant
throughout the month until the following monthly rebalancing. Bond
eligibility criteria for each of the subindices is set forth below.
U.S. Domestic Master Index. The U.S. Domestic Master Index,\11\
established in 1975, is MLPF&S's indicator of the performance of the
investment grade U.S. domestic bond market. The index currently
captures over $5 trillion of the outstanding debt of the U.S. Treasury
Note and Bond, U.S. Agency, Mortgage Pass-through and U.S. Investment
Grade Corporate Bond markets. Current bond criteria for the Domestic
Master Index include all of the criteria set forth below for each of
the subindices.
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\11\ As of December 31, 1998, the U.S. Domestic Master Index is
comprised of 6,911 issues with a market value of $5.52 trillion--
Bloomberg L.P.
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U.S. Treasury Master Index. As of December 31, 1998, the U.S.
Treasury Master Index, established in 1977, was comprised of 163 issues
with a market value equal to $2.32 trillion.\12\ U.S. Treasury Notes
and Bonds included in the U.S. Treasury Master Index have a remaining
term to maturity equal to or greater than one year with at least $1
billion face value outstanding. U.S. Treasury STRIPS are not included
in the index, however, the outstanding face value of the underlying
notes and bonds from which these securities are created are not reduced
by the amount stripped. The U.S. Treasury Master Index contains no
inflation-indexed securities.
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\12\ Data as of December 31, 1998--Bloomberg L.P.
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U.S. Agency Master Index. As of December 31, 1998, the U.S. Agency
Master Index, established in 1977, contained 1,628 issues with a market
value equal to $429 billion.\13\ U.S. agency issues included in the
U.S. Agency Master Index have a remaining term to final maturity equal
to or greater than one year, including medium term notes, with at least
$100 million face value outstanding. The issues are payable in U.S.
Dollars. The index contains no inflation-indexed securities, structured
notes or other forms of variable coupon securities. Securities must
have a fixed coupon schedule. Step-up coupons are included in the index
provided the coupon schedule is fixed at the time of issuance.
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\13\ Data as of December 31, 1998--Bloomberg L.P.
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U.S. Corporate Master Index. As of December 31, 1998, the U.S.
Corporate Master Index, established in 1972, was comprised of 4,670
issues with a market value equal to $1.16 trillion.\14\ U.S. corporate
issues included in the U.S. Corporate Master Index are limited to
securities that are issued in the U.S. domestic markets, including
yankees, global bonds and medium term notes, with remaining terms to
maturity equal to or greater than one year and at least $100 million
face value outstanding. The issuances are payable in U.S. Dollars.
Securities must have a fixed coupon schedule. Step-up coupons are
included in the index provided the coupon schedule is fixed at the time
of issuance. Rule 144A securities issued with registration rights are
included in the index only after they are exchanged for registered
securities. Taxable securities issued by municipalities are included in
the index. Issues included in the index must have a credit rating of
investment grade (BBB3 or above) based on a composite of Moody's and
S&P. The calculation of composite rating is based on an averaging that
is biased to the lower of the two ratings. For example.
\14\ Data as of December 31, 1998--Bloomberg L.P.
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Baa3/BB+=BB1 composite rating
Baa2/BB+=BBB3 composite rating
Baa3/BB-=BB2 composite rating
If an issue is rated by only one of the services, the rating will equal
that individual rating. Issues that are not rated by either Moody's or
S&P are
[[Page 12196]]
excluded. Capital trust preferred securities are included in the index
Mortgage Master Index.
As of December 31, 1998, the Mortgage Master-Index, established in
1975, comprised 450 issues with a market value equal to $1.60
trillion.\15\ Mortgage-backed securities in the Mortgage Master Index
include single-family 30-year, 15-year and balloon mortgages. GNMA II,
mobile home and GPM mortgages are excluded in the index must have at
least $600 million current face outstanding. Individual pools are
aggregated into generic securities based on issuer, type (30-year, 15-
year, etc.), coupon and production year. Asset-backed securities (other
than MBS) are not included in this index or any of the Domestic Master
sub-indices.
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\15\ Data as of December 31, 1998-Bloomberg L.P.
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U.S. Corporate/Government Master Index. The U.S. Corporate/
Government Master Index,\16\ established in 1972, comprises a
combination of the U.S. Corporate Master, U.S. Treasury Master and U.S.
Agency Master Indices.
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\16\ As of December 31, 1998, the U.S. Corporate and Government
Master Index contained 6,461 issues with a market value equal to
$3.92 trillion--Bloomberg L.P.
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U.S. Treasury/Agency Master Index. The U.S. Treasury/Agency
Index,\17\ established in 1972, comprises a combination of the U.S.
Treasury Master and U.S. Agency Master Indices.
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\17\ As of December 31, 1998, the U.S. Treasury/Agency Master
Index contained 1,791 issues with a market value equal to $2.75
trillion--Bloomberg L.P.
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Each of the above indices are calculated by Merrill Lynch
Research's Portfolio Strategy Group based on the prices of the
underlying bonds determined each business day. All securities in the
indices are priced at approximately 3:00 p.m. New York time each
business day. The vast majority of the prices of the underlying
securities comprising the indices are determined by the Merrill Lynch
desks. These prices are determined in accordance with all applicable
statutory rules, self-regulatory organization rules and generally
accepted accounting principles regarding valuation of security
positions. In addition to using these prices in calculating the indices
and valuing client portfolios, MLPF&S simultaneously distributes these
prices electronically to hundreds of mutual fund customers who use
these prices to determine the value of their positions in accordance
with applicable regulations. When a security price is not available,
the Portfolio Strategy Group will use a security price from a third
party vendor that, in its best judgment, will provide the most accurate
market price thereof. The resulting index values are disseminated to,
and published by Bloomberg L.P. and Reuters at the end of each business
day. MLPF&S, in its rule as calculation agent for the bond index linked
term notes, will use the index values as published on Bloomberg L.P. In
conjunction with the issuance of the bond index linked term notes, the
Exchange intends to publish the index value associated with the
previous day's close.
Bond weightings for each of the indices are based on a bond's total
outstanding capitalization (total face value currently outstanding
times price plus accrued interest). Returns and weighted average
characteristics are published daily.
The Exchange will require members, member organizations and
employees thereof recommending a transaction in the securities: (1) To
determine that such transaction is suitable for the customer and (2) to
have a reasonable basis for believing that the customer can evaluate
the special characteristics of, and is able to bear the financial risks
of, such transaction. The Exchange will distribute a circular to its
membership prior to trading such securities providing guidance with
regard to member firm compliance responsibilities (including
suitability recommendations) when handling transactions in such
securities and highlighting the special risks and characteristics
thereof.
The securities will be subject to the equity margin and trading
rules of the Exchange except that, where the securities are traded in
thousand dollar denominations as debt, they will be traded subject to
the Exchange's debt trading rules.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act, in general, and further the objectives of Section 6(b)(5),\18\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system and, in general,
protect investors and the public interest.
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\18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex 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 Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
No written comments were either 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 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 Exchange consents, the Commission will:
(A) by order approve the 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, including whether the proposal is
consistent with the Act. Persons making written submission 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 Room. 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-99-03 and should be
submitted by April 1, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6046 Filed 3-10-99; 8:45 am]
BILLING CODE 8010-01-M
