[Federal Register Volume 62, Number 79 (Thursday, April 24, 1997)]
[Notices]
[Pages 20043-20046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10616]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38526; International Series Release No. 1074 File No.
SR-AMEX-97-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc.
Relating to Options on the NatWest Energy Index
April 18, 1997.
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 March 20, 1997, the American Stock Exchange, Inc.
(``Amex'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change. On April 16,
1997, the Exchange filed Amendment No. 1 3 to the proposed
rule change as described in Items I, II and III 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.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Claire P. McGrath, Amex to Ivette Lopez,
SEC, dated April 16, 1997 (``Amendment No. 1''). Amendment No. 1
corrects language in the filing indicating that the list of
replacement stocks will be furnished quarterly. Because the NatWest
Energy Index will be rebalanced annually, NatWest will provide the
Amex with a current list of replacement stocks annually.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Amex proposes to trade options on The NatWest Energy Index (``the
Index''), a narrow based index developed by the Amex and NatWest
Securities Corporation based on stocks (or ADRs thereon) of companies
whose business is in various segments of the energy industry. In
addition, the Amex proposes to amend (1) Rule 901C,
[[Page 20044]]
Commentary .01 to reflect that 90% of the Index's numerical index value
will be accounted for by stocks that meet the current criteria and
guidelines set forth in Rule 915; and (2) Rule 902C to include the
NatWest Energy Index in the disclaimer provisions of the rule.
The text of the proposed rule change is available at the Office of
the Secretary, 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 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
1. Purpose
The Amex and NatWest Securities Corporation (``NatWest'') have
developed a new index called The NatWest Energy Index (``Index''),
based entirely on shares of widely held companies involved in producing
and providing different types of energy products. The industries
represented by these companies are domestic and international oil
producers, refiners and transmitters, oil equipment manufacturers and
drillers, and natural gas producers.
Eligibility Standards for Index Components
The NatWest Energy Index conforms with Exchange Rule 901C which
specifies criteria for inclusion of stocks in an index on which
standardized options will be traded. In addition, the Index has met the
following standards: (1) Each of the component securities are traded on
the Amex, the New York Stock Exchange or through Nasdaq and are
reported national market system securities; (2) each of the component
securities has a minimum market capitalization of at least $75 million;
\4\ (3) each of the components have had a monthly trading volume of at
least one million shares during each of the previous six months; (4)
each of the component securities in the Index has met the initial
eligibility criteria for standardized options trading set forth in rule
915; (5) foreign country securities or ADRs thereon that are not
subject to comprehensive surveillance sharing agreements do not in the
aggregate represent more than 20% of the weight of the Index; and (6)
no individual component stock in the Index represents more than 25
percent of the weight of the Index, and the top five highest weighted
stocks do not constitute more than 50 percent of the weight of the
Index. The criteria set forth above are identical to the criteria
established for the expedited listing of options on stock industry
indexes pursuant to Exchange Rule 901C, Commentary .02.\5\ In fact,
this Index would have been filed pursuant to that expedited process if
it were not for its annual rather than quarterly rebalancing feature
which is discussed in the section entitled Index Calculation.
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\4\ In the case of ADRs, this represents market value as
measured by total world-wide shares outstanding.
\5\ See Securities Exchange Act Release No. 34157 (June 3,
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval
Order'') (File No. SR-Amex-92-35). As required, the Exchange has
provided the Commission with written representations that the
Options Price Reporting Authority has the necessary systems capacity
to support the new series of options. See Letter from Joe Corrigan,
OPRA to Ivette Lopez, SEC, dated April 15, 1997. In addition, a
letter representing that the Amex has the necessary systems capacity
to support the new series of options has been received by the
Commission. See Letter from Edward Cook Jr., Amex to Ivette Lopez,
SEC, dated April 7, 1997.
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Maintenance of the Index
The Index will be maintained in accordance with Rule 901C,
Commentary .02 which provides that the Index continues to meet the
Eligibility Standards set forth above, except that, (1) The total
number of component securities will not increase or decrease by more
than 33\1/3\% from the number of components in the Index at the time of
its initial listing and in no event will the Index have less than nine
components; (2) component stocks constituting the top 90% of the Index
by weight, will have a minimum market capitalization of $75 million and
the component stocks constituting the bottom 10% of the Index, by
weight, will have a minimum market capitalization of $50 million; \6\
(3) the monthly trading volume of each component security shall be at
least 500,000 shares, or for each of the lowest weighted components in
the Index that in the aggregate account for no more than 10% of the
weight of the Index, the monthly trading volume shall be at least
400,000 shares; (4) no single components will represent more than 25%
of the weight of the Index and the five highest weighted component will
represent no more than 50% of the Index as of the first day of January
and July in each year; and (5) 90% of the Index's numerical index value
and at least 80% of the total number of component securities will meet
the then current criteria for standardized option trading set forth in
Exchange Rule 915.
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\6\ In the case of ADRs, this represents market value as
measured by total world-wide shares outstanding.
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Should the Index fail to satisfy any of the maintenance criteria
set forth above, the Amex will notify Commission staff to determine the
appropriate regulatory response. Such responses could include, but are
not limited to, prohibiting opening transactions or allowing only
closing transactions. In addition, the Exchange shall not open for
trading any additional option series unless such failure is determined
by the Exchange not to be significant and the Commission concurs in
that determination.
The Index will be maintained by the Amex in consultation with
NatWest who may, from time to time, suggest changes in the Index's
components, in the industry categories represented or in the number of
component stocks in an industry category to properly reflect the
changing conditions in the energy sector. At the beginning of each
calendar year, NatWest will provide the Amex with a current list of
replacement stocks on which to draw in the event that a component in
the Index is to be replaced. The stocks in the replacement list will be
selected and ranked by NatWest based on a number of criteria, including
conformity to the initial eligibility standards set forth above,
trading liquidity, market capitalization, the ability to borrow shares
and share price. The replacement stocks will be categorized by industry
within the energy sector and ranked within their category based on the
aforementioned criteria. The replacement stock for a security leaving
the Index will be selected by the Amex from the replacement list based
on industry category and liquidity.
In addition, NatWest will advise the Exchange regarding the
handling of unusual corporate actions which may arise from time to
time. Routine corporate actions (e.g., stock splits, routine spin-offs,
etc.) which require straightforward index divisor adjustments will be
handled by Exchange staff without consultation with NatWest. All stock
replacements and unusual divisor adjustments caused by the occurrence
of extraordinary events such as dissolution, merger,
[[Page 20045]]
bankruptcy, non-routine spin-offs or extraordinary dividends will be
made by Exchange staff in consultation with NatWest. All stock
replacements and the handling of non-routine corporate actions will be
announced at least ten business days in advance of such effective
change, whenever practicable. As with all options currently trading on
the Amex, the Exchange will make this information available to the
public through dissemination of an information circular.
Since this Index is being maintained, in part, by a broker/dealer
(NatWest Securities Corporation), a ``chinese wall'' shall be erected
by NatWest around the personnel who have access to information
concerning changes and adjustments to the Index. A letter discussing
those ``chinese wall'' procedures has been sent to the Commission under
separate cover.
Index Calculation
The Index shall be calculated by the Amex using an ``equal-dollar
weighting'' methodology designed to ensure that each of the component
securities is represented in an approximately ``equal'' dollar amount
in the Index. The following is a description of how the equal-dollar
weighting calculation method works. As of the market close on December
20, 1996, a portfolio of stocks was established representing an
investment of $100,000 in the stock (rounded to the nearest whole
share) of each of the companies in the Index. The value of the Index
equals the current market value (i.e., based on U.S. primary market
prices) of the sum of the assigned number of shares of each of the
stocks in the Index portfolio divided by the Index divisor. The Index
divisor was initially determined to yield a benchmark value of 250.00
at the close of trading on December 20, 1996. Annually thereafter,
following the close of trading on the third Friday of December, the
Index portfolio will be adjusted by changing the number of whole shares
of each component stock so that each company is again represented in
``equal'' dollar amounts. If necessary, a divisor adjustment is made at
the rebalancing to ensure continuity of the Index's value. The newly
adjusted portfolio becomes the basis for the Index's value on the first
trading day following the annual adjustment. While the Index is to be
rebalanced annually, the Exchange will, if at any time between annual
rebalancings the top five stock in the Index by weight represent in the
aggregate more than one-third of the Index's value, rebalance the Index
after the close of trading on expiration Friday in the next month on
the March cycle. For example, if in July it is determined that the top
five components in the Index account for more than one-third of the
Index's weight, then the Index will be rebalanced after the close of
trading on expiration Friday in September.
As noted above, the number of shares of each component stock in the
Index portfolio remains fixed between annual reviews except in the
event of certain types of corporate actions such as the payment of a
dividend other than an ordinary cash dividend, stock distribution,
stock split, reverse stock split, rights offering, distribution,
reorganization, recapitalization, or similar event with respect to the
component stocks. In a merger or consolidation of an issuer of a
component stock, if the stock remains in the Index, the number of
shares of that security in the portfolio will be adjusted, if
necessary, to the nearest whole share, to maintain the component's
relative weight in the Index at the level immediately prior to the
corporate action. In the event of a stock replacement, the dollar value
of the security being replaced will be calculated and that amount
invested in the stock of the new component, to the nearest whole share.
In all cases, the divisor will be adjusted, if necessary, to ensure
Index continuity.
Similar to other stock index values published by the Exchange, the
value of each Index will be calculated continuously and disseminated
every 15 seconds over the Consolidated Tape Association's Network B.
Expiration and Settlement
The proposed options on the Index will be European style (i.e.,
exercises are permitted at expiration only), and cash settled. Standard
option trading hours (9:30 a.m. to 4:10 p.m. New York time) will apply.
The options on The NatWest Energy Index will expire on the Saturday
following the third Friday of the expiration month (``Expiration
Friday''). The last trading day in an expiring option series will
normally be the second to last business day preceding the Saturday
following the third Friday of the expiration month (normally a
Thursday). Trading in expiring options will cease at the close of
trading on the last trading day.
The Exchange plans to list option series with expirations in the
three near-term calendar months and in the two additional calendar
months in the March cycle. In addition, longer term option series
having up to thirty-six months to expiration may be traded. In lieu of
such long-term options on a full value Index level, the Exchange may
instead list long-term, reduced value put and call options based on
one-tenth (\1/10\th) the Index's full value. In either event, the
interval between expiration months for either a full value or reduced
value long-term option will not be less than six months. The trading of
any long term options would be subject to the same rules which govern
the trading of all the Exchange's index options, including sales
practice rules, margin requirements and floor trading procedures and
all options will have European style exercise. Position limits on
reduced value long term NatWest Energy Index options will be equivalent
to the position limits for regular (full value) Index options and would
be aggregated with such options (for example, if the position limit for
the full value options is 15,000 contracts on the same side of the
market, then the position limit for the reduced value options will be
150,000 contracts on the same side of the market).
The exercise settlement value for all of the Index's expiring
options will be calculated based upon the primary exchange regular way
opening sale prices for the component stocks. In the case of securities
traded through Nasdaq system, the first reported regular way sale price
will be used. If any component stock does not open for trading on its
primary market on the last trading day before expiration, then the
prior day's last sale price will be used in the calculation.
Exchange Rules Applicable to Stock Index Options
Amex Rules 900C through 980C will apply to the trading of option
contracts based on the Index. These Rules cover issues such as
surveillance, exercise prices, and position limits. The Index is deemed
to be a Stock Index Option under Rule 901C(a) and a Stock Index
Industry Group under Rule 900C(b)(1). With respect to Rule 903C(b), the
Exchange proposes to list near-the-money (i.e., within ten points above
or below the current index value) option series on the Index at 2\1/2\
point strike (exercise) price intervals when the value of the Index is
below 200 points. In addition, the Exchange expects that the review
required by Rule 904C(c) will result in a position limit of 15,000
contracts with respect to options on this Index. Surveillance
procedures currently used to monitor trading in each of the Exchange's
other index options will also be used to monitor trading in options on
the NatWest Energy Index.
[[Page 20046]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act \7\ in that it is designed to prevent
fraudulent and manipulative acts and practices and to perfect the
mechanism of a free and open market.
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\7\ 15 U.S.C. Sec. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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 either solicited or received.
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 self-regulatory organizations 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. 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 USC Sec. 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
Exchange. All submissions should refer to File No. SR-AMEX-97-15 and
should be submitted by May 15, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10616 Filed 4-23-97; 8:45 am]
BILLING CODE 8010-01-M
