[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Notices]
[Pages 13545-13547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7341]
[[Page 13545]]
[Release No. 34-36990; International Series Release No. 952; File No.
SR-Amex-95-44]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the American Stock
Exchange, Inc., Relating to the Listing and Trading of Equity Linked
Term Notes on Non-U.S. Securities
March 20, 1996.
I. Introduction
On November 9, 1995, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed a proposed rule change 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\ to amend Section 107B of the Amex Company Guide to
provide alternate criteria for the listing and trading of hybrid debt
securities whose value is linked to the performance of a non-U.S.
company which is traded in the U.S. market as sponsored American
Depositary Shares ordinary shares or otherwise.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on December 7, 1995.\3\ The Exchange filed with
the Commission Amendment No. 1 to the proposed rule change on January
5, 1996.\4\ No comment letters were received on the proposed rule
change. This order approves the Exchange's proposal, as amended.
\3\ See Securities Exchange Act Release No. 36538 (November 30,
1995), 60 FR 62914.
\4\ The Exchange submitted Amendment No. 1 to the Commission to
make certain technical changes, as further described herein, to the
listing standards regarding Equity Linked Term Notes on non-U.S.
securities. See Letter from Claire McGrath, Special Counsel, Amex,
to Michael Walinskas, Branch Chief, Office of Market Supervision
(``OMS''), Division of Market Regulation (``Market Regulation''),
Commission, dated January 5, 1996 (``Amendment No. 1'').
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II. Background
On May 20, 1993 and December 13, 1993, the Commission approved
amendments to Section 107 of the Amex Company Guide to provide for the
listing and trading of Equity Linked Term Notes (``ELNs'').\5\ ELNs are
intermediate term (two to seven years), non-convertible, hybrid debt
instruments, the value of which is linked to the performance of a
highly capitalized, actively traded U.S. and non-U.S. companies.
\5\ See Securities Exchange Act Release Nos. 32345 (May 20,
1993), 58 FR 30833 (May 27, 1993), and 33328 (December 13, 1993), 58
FR 66041 (December 20, 1993).
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In August 1994, the Exchange amended Section 107B of the Amex
Company Guide to permit the listing and trading of ELNs linked to
actively traded non-U.S. companies which are traded in the U.S. market
as sponsored American Depositary Shares, ordinary shares or otherwise
(``non-U.S. securities''), provided that (1) the Exchange has in place
a comprehensive surveillance sharing agreement with the primary
exchange on which the non-U.S. security trades; the trading volume of
the non-U.S. security in the U.S. market represents at least 50% of the
world-wide trading volume in the non-U.S. security (``50% Test''); and
(2) the ELNs issuance does not exceed (i) 2% of the total shares of the
underlying security outstanding provided at least 30% of the worldwide
trading volume for the security for the six-months prior to the listing
occurred in the U.S. market, (ii) 3% of the total shares of the
underlying outstanding provided at least 50% of the worldwide trading
volume for the security for the six-months prior to listing occurred in
the U.S. market, or (iii) 5% of the total shares of the underlying
security outstanding provided at least 70% of the worldwide trading
volume for the security for the six-months prior to listing occurred in
the U.S. market. No ELN may be listed if the U.S. market for the
underlying security accounted for less than 30% of the worldwide
trading volume for the security and related securities during the prior
six months.\6\
\6\ See Securities Exchange Act Release No. 34549 (August 18,
1994), 59 FR 43873 (August 25, 1994).
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III. Description of the Proposal
The Exchange proposes to amend its ELNs on non-U.S. security
listing criteria by (1) revising the manner in which the applicable
percentage of world-wide trading volume is calculated under the 50%
Test; (2) adding new criteria for the listing of ELNs on non-U.S.
securities, based on the daily trading volume in the U.S.; and (3)
revising the current restrictions on the size of ELN issuances linked
to non-U.S. securities to reflect the amendments to the listing
criteria noted above.\7\ Specifically, the Exchange proposes to revise
the 50% Test so that trading in non-U.S. securities and other related
non-U.S. securities in any market with which the Exchange has in place
a comprehensive/effective surveillance sharing agreement will be added
to U.S. market volume for the purpose of determining whether the 50%
Test has been met. Currently, only trading in the U.S. market counts
toward satisfying the 50% Test.
\7\ See Amendment No. 1, supra note 4.
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Additionally, the Exchange proposes to add an alternate set of
criteria under which the Exchange may list ELNs on non-U.S. securities
(``20% Test + Daily Trading Volume Standards''). The new standard will
permit the Exchange to list ELNs on non-U.S. securities if all of the
following conditions are satisfied: (1) The combined world-wide trading
volume for the non-U.S. security in the U.S. market represents (on a
share equivalent basis) at least 20% of the combined world-wide trading
volume in the non-U.S. security and other related non-U.S. securities
over the six month period preceding the date of selection of the non-
U.S. security for an ELN listing; \8\ (2) the average daily trading
volume for the non-U.S. security in the U.S. market over the six months
preceding the date of selection of the non-U.S. security for an ELN
listing is at least 100,000 shares; and (3) the trading volume for the
non-U.S. security in the U.S. market is at least 60,000 shares per day
for a majority of the trading days for the six months preceding the
date of selection of the non-U.S. security for an ELN listing.
\8\ The calculation for the 20% Test + Daily Trading Volume
Standard does not include foreign markets with which the Exchange
has in place a comprehensive surveillance sharing agreement. See
Amendment No. 1, supra note 4.
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Moreover, the Exchange proposes to amend the size limitations of
ELN issuances linked to non-U.S. securities. Specifically, the Exchange
proposes to require that the size of ELN issuances linked to non-U.S.
securities will be limited to 2% of the total shares of the underlying
security for the underlying security outstanding provided at least 20%
of the worldwide trading volume for the security for the six-months
prior to the listing occurred in the U.S. market. Additionally, under
the proposed rule change, the 30% floor would be lowered to 20% \9\ so
that an ELN would be permitted on a non-U.S. security if U.S. trading
volume accounted for at least 20% of the world-wide trading volume
during the six months prior to listing.\10\ As noted
[[Page 13546]]
above, the current rule requires at least 30% of the trading volume to
occur in the U.S. to issue an ELN linked to up to 2% of the outstanding
shares of a non-U.S. security.\11\
\9\ As with the 20% Test + Daily Trading Volume Standard,
foreign markets with which the Exchange has in place a comprehensive
surveillance sharing agreement are not included in the calculation
for purposes of determining the size of eligible ELN issuances. See
Amendment No. 1, supra note 4.
\10\ The other size limitations in Amex's rule remains
unchanged. Accordingly, the size of ELN issuances linked to non-U.S.
securities will be limited to 3% of the total shares of the
underlying security outstanding provided at least 50% of the
worldwide trading volume for the security for the six-months prior
to listing occurred in the U.S. market, or 5% of the total shares of
the underlying security outstanding provided at least 70% of the
worldwide trading volume for the security for the six-months prior
to listing occurred in the U.S. market.
\11\ This 30% requirement is also currently the minimum volume
that must have occurred in the U.S. market in order for the Exchange
to list an ELN linked to any non-U.S. security.
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The Exchange believes that the proposed rule change is appropriate
in that it limits the listing of ELNs linked to non-U.S. securities to
those that have both a significant amount of U.S. market trading volume
and a substantial volume of trading covered by a comprehensive/
effective surveillance sharing agreement, which provides reasonable
assurances that the underlying non-U.S. securities are deliverable upon
exercise of the ELNs, and gives the Exchange the ability to inquire
into potential trading problems or irregularities in a market place
that serves as a significant price discovery market for the non-U.S.
security.
The Exchange also believes that the proposed amendment will benefit
investors by expanding the number of non-U.S. securities that may be
linked to ELNs, thereby providing investors with enhanced investment
flexibility. The Exchange believes that it is appropriate to now
include additional non-U.S. securities within the existing ELNs
regulatory framework because of the significant level of U.S. investor
interest in both U.S. and non-U.S. highly capitalized and actively
traded reporting companies.
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 change, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and percent the mechanism of a free and open
market and a national market system.
IV. Commission Finding and Conclusions
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, the requirements of Section 6(b)(5) of the Act.\12\
Specifically, the Commission finds that the Exchange's proposal to
provide alternate criteria for the listing and trading of ELNs on non-
U.S. securities strikes a reasonable balance between the Commission's
mandates under Section 6(b)(5) to remove impediments to and perfect the
mechanism of a free and open market and a national market system, while
protecting investors and the public interest.
\12\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed amendments to the listing
standards for ELNs on non-U.S. securities will benefit investors by
effectively increasing the number of available ELNs-eligible non-U.S.
securities. At the same time, as described below, the proposal provides
safeguards designed to reduce the potential for manipulation and other
abusive trading strategies in connection with the trading of non-U.S.
security ELNs and their underlying securities. Accordingly, the
Commission believes that the proposal will extend the benefits
associated with ELNs on non-U.S. securities to additional non-U.S.
securities and provide market participants with opportunities to trade
a greater number of ELNs on non-U.S. securities without compromising
the effectiveness of the Exchange's listing standards for such
securities.
Currently, the 50% Test allows the Exchange to list ELNs on a non-
U.S. security in the absence of a comprehensive/effective surveillance
sharing agreement with the primary exchange where the non-U.S. security
trades if the combined trading volume of the non-U.S. security and
other related non-U.S. securities occurring in the U.S. market during
the six month period preceding the selection of the non-U.S. security
for ELN listing represents (on a share equivalent basis) at least 50%
of the combined world-wide trading volume in such securities.
The Commission has previously concluded that the 50% Test helps to
ensure that the relevant pricing market for non-U.S. securities
underlying ELNs occurs in the U.S. market.\13\ In such cases, the
Commission has previously found that the U.S. market is the
instrumental market for purposes of deterring and detecting potential
manipulations or other abusive trading strategies in conjunction with
transactions in the overlying non-U.S. security ELN market. Because the
U.S. self-regulatory organizations which comprise the U.S. market for
non-U.S. securities are members of the Intermarket Surveillance
Group,\14\ the Commission has concluded that there exists an effective
surveillance sharing agreement to permit the exchanges and the NASD to
adequately investigate any potential manipulations of the non-U.S.
security ELNs or their underlying securities.
\13\ See Securities Exchange Act Release Nos. 34549 (August 18,
1994), 59 FR 43873 (August 25, 1994) (SR-Amex-93-46); 34759
(September 30, 1994), 59 FR 50939 (October 6, 1994) (SR-CBOE-94-04);
34758 (September 30, 1994), 59 FR 50943 (October 6, 1994) (SR-NASD-
94-49); 34985 (November 18, 1994), 59 FR 60860 (November 28, 1994)
(SR-NYSE-94-37); and 35479 (March 13, 1995), 60 FR 14993 (March 21,
1995) (SR-Phlx-95-09) (``ELN Approval Orders'').
\14\ The Intermarket Surveillance Group (``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 Amex;
the Boston Stock Exchange, Inc.; the Chicago Board Options Exchange,
Inc.; the Chicago Stock Exchange, Inc.; the National Association of
Securities Dealers, Inc. (``NASD''); the New York Stock Exchange,
Inc.; the Pacific Stock Exchange, Inc.; and the Philadelphia Stock
Exchange, Inc. Because of potential opportunities for trading abuses
involving stock index futures, stock options, and the underlying
stock and the need for greater sharing of surveillance information
for these potential intermarket trading abuses, the major stock
index futures exchanges (e.g., the Chicago Mercantile Exchange and
the Chicago Board of Trade) joined the ISG as affiliate members in
1990.
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The Exchange proposes to modify the 50% Test to include in the U.S.
market volume calculation, the trading volume in non-U.S. securities
and other related non-U.S. securities that occurs in any market with
which the Exchange has in place a comprehensive/effective surveillance
sharing agreement. The Commission believes that this proposed
modification of the 50% Test is consistent with the Act and with the
Commission's approach in the ELN Approval Orders because it will
continue to ensure that the majority of world-wide trading volume in
the non-U.S. security and other related non-U.S. securities occurs in
trading markets with which the Exchange has in place a comprehensive/
effective surveillance sharing agreement. The existence of such
agreements should deter as well as detect manipulations or other
abusive trading strategies and also provide an adequate mechanism for
obtaining market and trading information from the non-U.S. markets that
list the non-U.S. security underlying the Exchange's ELNs in order to
adequately investigate any potential abuse or manipulation.
Additionally, the Commission finds that the proposed 20% Test +
Daily
[[Page 13547]]
Trading Volume Standard is consistent with the Act and with the ELN
Approval Orders. As noted above, the 20% Test + Daily Trading Volume
Standard will allow the Exchange to list ELNs on a non-U.S. security
if, over the six month period preceding the date of selection of the
non-U.S. security for ELNs trading (1) the combined world-wide trading
volume for the non-U.S. security in the U.S. market represents (on a
share equivalent basis) at least 20% of the combined world-wide trading
volume in the non-U.S. security and other related non-U.S. securities;
\15\ (2) the average daily trading volume for the non-U.S. security in
the U.S. market is at least 100,000 shares; and (3) the trading volume
for the non-U.S. security in the U.S. market is at least 60,000 shares
per day for a majority of the trading days.
\15\ See supra note 8. The Commission notes that the 20% Test +
Daily Trading Volume Standard does not include worldwide trading
volume in the non-U.S. security that takes place in a foreign market
regardless of the existence of a comprehensive surveillance sharing
agreement with the listing exchange. The 20% Test is a minimum U.S.
market share trading test intended to permit the listing of ELNs
only on non-U.S. securities that have active and liquid markets in
the U.S.
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The Commission believes that these requirements present a
reasonable alternative to the 50% Test by limiting the actual listing
of ELNs on non-U.S. securities to only those non-U.S. securities that
have a significant amount of U.S. market trading volume. This will
ensure that the U.S. market is sufficiently active to serve as a
relevant pricing market for the non-U.S. security and that the
underlying foreign security is readily available to meet the delivery
requirements upon exercise of the ELN. Accordingly, the Commission
believes that the 20% Test + Daily Trading Volume Standard should help
to ensure that the U.S. markets serve a significant role in the price
discovery of the applicable non-U.S. security and are generally deep,
liquid markets.
Finally, the Exchange believes, for similar reasons, that it is
appropriate to reduce the minimum U.S. trading volume requirements for
ELNs issuances from 30% to 20%. As noted above, the Commission believes
that the 20% Test + Daily Trading Volume Standard will ensure that an
underlying non-U.S. security has deep and liquid markets to sustain an
ELNs listing. The Commission believes that it is appropriate to adjust
the limitations on the size of the ELNs issuance to correspond to this
requirement. Accordingly, where the trading volume in the U.S. market
for the underlying non-U.S. security is between 20% and 50% of the
worldwide trading volume, the issuance will be limited to 2% of the
total outstanding shares of the underlying security. The 20% minimum
U.S. trading volume requirement should continue to ensure that the U.S.
market is significant enough to accommodate ELNs trading. In this
regard, the Commission believes that these restrictions will minimize
the possibility that trading in such issuances will adversely impact
the market for the security to which it is linked.
The Commission notes that other existing ELNs listing requirements
relating to the protection of investors will continue to apply. Among
other things, these rules set forth issuer standards as well as minimum
market capitalization and trading volume requirements that must be met
prior to listing an ELN.\16\
\16\ The Commission recently approved the Exchange's proposed
rule change amending some of the initial listing standards regarding
such structured notes. The Exchange's amended initial listing
standards require, among other things, that the linked stock
underlying the Exchange-listed ELNs either: (i) has a minimum market
capitalization of $3 billion and during the 12 months preceding
listing is shown to have traded at least 2.5 million shares, (ii)
has a minimum market capitalization of $1.5 billion and during the
12 months preceding listing is shown to have traded at least 10
million shares; or (iii) has a minimum market capitalization of $500
million and during the 12 months preceding listing is shown to have
traded at least 15 million shares. See Securities Exchange Act
Release No. 36989 (March 20, 1996).
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The Commission finds good cause for approving Amendment 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.
Specifically, Amendment No. 1 to the proposal makes certain technical
clarifications, and revises paragraph (f) of Section 107B of the Amex
Company Guide to reflect the amendments to the listing criteria in
paragraph (e) as set forth herein. Accordingly, the Commission believes
it is consistent with Section 6(b)(5) of the Act to approve Amendment
No. 1 to the proposal on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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
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 Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to SR-Amex-95-44 and should be
submitted by April 17, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (File No. SR-Amex-95-44), as
amended, is approved.
\17\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
\18\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7341 Filed 3-26-96; 8:45 am]
BILLING CODE 8010-01-M
