[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24976-24979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12383]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37195; File No. SR-Amex-96-12]
Self-Regulatory Organizations; Order Granting Accelerated
Approval To Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendments Nos. 1 and 2 To Proposed
Rule Change by the American Stock Exchange, Inc., Relating to Listing
and Trading of Warrants Based on the Select Technology Stock Index
May 10, 1996.
I. Introduction
On April 9, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade warrants based on the Select
Technology Stock Index (``Index'').\3\
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
\3\ The Amex has clarified that the name of the index will be
the Select Technology Stock Index. Telephone Conversation between
Michael T. Bickford, Vice President, Capital Markets Group, Amex,
and Matthew S. Morris, Attorney, Derivatives Regulation, Office of
Self-Regulatory Oversight, Division of Market Regulation
(``Division''), Commission, on May 3, 1996.
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The proposed rule change appeared in the Federal Register on April
23, 1996.\4\ No comments were received on the proposed rule change. The
Amex subsequently filed Amendment No. 1 to the proposed rule change on
May 2, 1996 \5\ and Amendment No. 2 on May 8, 1996.\6\ The Amex has
requested
[[Page 24977]]
accelerated approval for the proposal. This order approves the Amex's
proposal, as amended, on an accelerated basis and solicits comments
from interested persons on Amendment Nos. 1 and 2.
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\4\ See Securities Exchange Act Release No. 37122 (April 17,
1996), 61 FR 17931 (April 23, 1996).
\5\ In Amendment No. 1, the Amex amended its rule filing to
clarify that the Commission will be notified if: (1) the number of
components in the Index decreases to less than nine; (2) the three
highest weighted components represent more than 60 percent of the
weight of the Index; or (3) the trading volume of any of the
components falls below 500,000 shares for each of the last six
months. In Amendment No. 1, the Amex also changed the manner in
which the value of the Index will be calculated from a price-
weighted to an equal-dollar weighted methodology. In addition, the
Amex replaced component securities C-Cube Microsystems, Inc.,
Computer Sciences Corporation, and General Motors Corporation (Class
E) with Adaptec Inc., Hewlett Packard Co., and Sun Microsystems. See
letter from Michael T. Bickford, Vice President, Capital Markets
Group, Amex, to Michael Walinskas, Branch Chief, Derivatives
Regulation, Office of Self-Regulatory Oversight, Division,
Commission, dated May 2, 1996 (``Amendment No. 1'').
\6\ In Amendment No. 2, the Amex removed Applied Materials, Inc.
as a component security of the Index. See letter from Michael T.
Bickford, Vice President, Capital Markets Group, Amex, to Michael
Walinskas, Branch Chief, Derivatives Regulation, Office of Self-
Regulatory Oversight, Division, Commission, dated May 8, 1996
(``Amendment No. 2'').
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II. Description
The purpose of the proposed rule change is to permit the Exchange
to list and trade cash-settled index warrants based on the Select
Technology Stock Index (``Index Warrants''). The Exchange has
represented that the listing and trading of warrants based on the Index
will comply in all respects with Amex Rules 1100 through 1110, Amex
Rule 462, and Section 106 of the Amex Company Guide.
A. Design of the Index
The Exchange has also represented that the Index is narrow-based
and comprised of the stocks of 23 technology companies.\7\ The Index is
equal-dollar weighted and is therefore designed to ensure that each of
the component securities is represented in an approximate ``equal''
dollar amount. Accordingly, each of the 23 companies included in the
Index will represent approximately 4.347 percent of the weight of the
Index at the time of issuance of the warrant. The Index multipliers
will be determined to yield the benchmark value of 100.00 on the date
the warrant is priced for initial offering to the public.
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\7\ The component securities of the Index are as follows: Adc
Telecommunications, Inc.; America Online, Inc.; Adaptec Inc.; Cisco
Systems, Inc.; Computer Associates International, Inc.; Dell
Computer Corporation; Digital Equipment Corporation; First Data
Corporation; Gateway 2000, Inc.; Hewlett-Packard Co.; Informix
Corporation; Intel Corporation; International Business Machines
Corp.; Lsi Logic Corporation; Microsoft Corporation; Oracle Systems
Corporation; Qualcomm, Inc.; Sun Microsystems; Tencor Instruments;
Texas Instruments, Inc.; Vishay Intertechnology, Inc.; Xerox
Corporation; and Xilinx Inc.
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The Exchange has stated that the total market capitalization of the
Index was approximately $339.7 billion on April 29, 1996. The median
capitalization of the companies in the Index on that date was $5.2
billion, and the average market capitalization of these companies was
$14.8 billion. The individual market capitalization of the companies
ranged from $730 million to $59 billion. In addition, during the six-
month period from October 1995 through March 1996, average monthly
trading volume in the Index stocks ranged from approximately 9.1
million shares to approximately 229.6 million shares.
It is currently contemplated that the Select Technology Stock Index
will be used as the basis for only one index warrant, which has a term
of two-years. If the Exchange wishes to list and trade other products
based on the Select Technology Stock Index, including other index
warrants, the Exchange will advise the Commission to determine whether
an additional filing pursuant to Rule 19b-4 of the Act is necessary or
appropriate.
B. Maintenance of the Index
The Exchange represents that it will monitor the component
securities in the Index on a monthly basis. In this regard, the
Exchange will notify the Commission if: (1) Less than 75 percent of the
component securities are eligible for standardized options trading; \8\
(2) the number of components in the Index decreases to less than nine;
(3) the three highest weighted components represent more than 60
percent of the weight of the Index; or (4) the trading volume of any of
the components falls below 500,000 shares for each of the last six
months.
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\8\ See Amex Rule 915. Currently, 100 percent of the components
are eligible for standardized options trading.
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Shares of a component stock may be replaced (or supplemented) with
other securities under certain limited circumstances, such as the
conversion of a component stock into another class of security or the
spin-off of a subsidiary. Accordingly, all replacement or supplemental
Index component securities will be related to the original component
stock. Moreover, if a change in the composition of the Index is
contemplated for reasons other than those set forth above, the Exchange
will notify the Commission to determine whether a rule filing pursuant
to section 19(b) of the Act will be required.
If the stock remains in the Index, the multiplier of that security
may be adjusted to maintain the component's relative weight in the
Index immediately prior to the corporate action. In the event that a
security in the Index is removed due to a corporate consolidation and
the holders of such security receive cash, the cash value of such
security will be included in the Index and will accrue interest at
LIBOR to term.
C. Trading of the Index Warrants
The Index Warrant will be a direct obligation of the issuer,
subject to cash-settlement in U.S. dollars and either exercisable
throughout its life (i.e., American-style) or exercisable only
immediately prior to its expiration date (i.e., European-style). If the
Index Warrant is structured as a ``put,'' upon exercise (or at the
warrant expiration date if the warrant has an European-style exercise),
the holder will receive payment in U.S. dollars to the extent that the
value of the Index has declined below a pre-stated cash settlement
value. Conversely, if the Index Warrant is structured as a ``call,''
upon exercise (or at the warrant expiration date if the warrant has an
European-style exercise), the holder will receive payment in U.S.
dollars to the extent that the value of the Index has increased above
the pre-stated cash settlement value. If the Index Warrant is ``out-of-
the-money'' at the time of expiration it will expire worthless.
D. Calculation and Dissemination of the Value of the Index
The Index value will be continuously calculated and will be
publicly disseminated every fifteen seconds over the Consolidated Tape
Association's Network B.
In addition, the multiplier of each component stock remains fixed
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. The
multiplier of each component stock may also be adjusted, if necessary,
in the event of a merger, consolidation, dissolution, or liquidation of
an issuer, or in certain other events such as the distribution of
property by an issuer to shareholders.
E. Listing Standards and Customer Safeguards
As stated above, the listing and trading of the proposed warrants
on the Select Technology Stock Index will comply in all respects with
Amex Rules 1100 through 1110, Amex Rule 462, and Section 106 of the
Amex Company Guide. These provisions will govern all aspects of the
listing and trading of the Index Warrants, including, issuer
eligibility,\9\ position and exercise limits,\10\ reportable
positions,\11\ automatic exercise,\12\ settlement value,\13\
margin,\14\ and trading halts and suspensions.\15\
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\9\ See Section 106 of the Amex Company Guide.
\10\ See Amex Rules 1107 and 1108.
\11\ See Amex Rule 1110.
\12\ See Section 106(f) of the Amex Company Guide.
\13\ See Section 106(e) of the Amex Company Guide.
\14\ See Amex Rule 462.
\15\ See Amex Rule 1109.
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Additionally, these warrants will be sold only to accounts approved
for the
[[Page 24978]]
trading of standardized options\16\ and, the Exchange's options
suitability standards will apply to recommendations regarding Index
Warrants.\17\ The Exchange's rules regarding discretionary orders will
also apply to transactions in Index Warrants.\18\ Finally, prior to the
commencement of trading, the Amex will distribute a circular to its
membership calling attention to specific risks associated with warrants
on the Index.
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\16\ See Amex Rule 1101.
\17\ See Amex Rule 1102.
\18\ See Amex Rule 1103.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\19\ Specifically,
the Commission finds that the trading of warrants based on the Select
Technology Stock Index will serve to protect the public interest and
will help to remove impediments to a free and open market by providing
investors holding positions in some or all of the securities underlying
the Index with a means to hedge exposure to the market risk associated
with their portfolios.\20\
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\19\ See 15 U.S.C. Sec. 78f(b) (1988).
\20\ 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 product is in the public interest. Such a
finding would be difficult with respect to a warrant 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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Nevertheless, the trading of warrants on the Index raises several
concerns relating to the design and maintenance of the Index, customer
protection, surveillance, and market impact. The Commission believes,
however, for the reasons discussed below, that the Amex has adequately
addressed these concerns.\21\
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\21\ The Commission also notes that the Amex is presently only
seeking the authority to list and trade a single issuance of
warrants on the Index with a term of two-years and that if the
Exchange proposes to list and trade other products based on the
Index, including other index warrants, the Exchange will advise the
Commission in order to determine whether a rule filing pursuant to
Section 19(b) of the Act will be necessary or appropriate. This
limitation is important since the Index's maintenance criteria might
present additional issues if the Index was proposed to be used for
index options trading.
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A. Design and Maintenance of the Index
The Commission finds that it is appropriate and consistent with the
Act for the Amex to designate the Index as narrow-based for warrant
trading as the Index is comprised of a limited number of technology
stocks.\22\ The Commission also believes that the liquid markets, large
capitalizations, and relative weightings of the Index's component
stocks significantly minimizes the potential for manipulation of the
Index. First, the stocks that comprise the Index are actively-traded,
of which nine trade on the New York Stock Exchange, Inc. (``NYSE'') and
fifteen trade through the facilities of the National Association of
Securities Dealers (``NASD'') Automated Quotation system (``Nasdaq'')
and are reported national market system securities (``Nasdaq/NMS'').
During the six-month period from October 1995 through March 1996,
average monthly trading volume in the Index stocks ranged from
approximately 9.1 million shares to approximately 229.6 million shares.
Second, the market capitalization of the stocks comprising the Index
are very large. Specifically, the total capitalization of the Index, as
of April 29, 1996, was approximately $339.7 billion, with the market
capitalization of the individual stocks in the Index ranging from
approximately $730 million to approximately $59 billion. In addition,
the median capitalization of the companies in the Index on that date
was $5.2 billion, and the average market capitalization of these
companies was $14.8 billion. Third, no one particular stock dominates
the Index. Specifically, no single stock accounts for more than
approximately 4.347 percent of the Index's value, and the percentage
weighting of the three largest issues in the Index account for
approximately 13.041 percent of the Index's value.
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\22\ The Commission notes that if the Amex determines to
maintain the Index with some number of component securities other
than 23, the Exchange should notify the Commission. Telephone
Conversation between Michael T. Bickford, Vice President, Capital
Markets Group, Amex, and Matthew S. Morris, Attorney, Derivatives
Regulation, Office of Self-Regulatory Oversight, Division,
Commission, on May 9, 1996.
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The Commission notes that with respect to the maintenance of the
Index, shares of a component stock will only be replaced (or
supplemented) under certain limited circumstances, such as the
conversion of a component stock into another class of security, or the
spin-off of a subsidiary. Accordingly, all replacement or supplemental
Index component securities will be related to the original component
stock.\23\ In addition, if a change in the composition of the Index is
contemplated for reasons other than those set forth above, the Exchange
will notify the Commission to determine whether a rule filing pursuant
to Section 19(b) of the Act will be required.\24\
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\23\ In addition, as noted above, in the event that a security
in the Index is removed due to a corporate consolidation and the
holders of such security receive cash, the cash value of such
security will be included in the Index and will accrue interest at
LIBOR to term.
\24\ Telephone Conversation between Michael T. Bickford, Vice
President, Capital Markets Group, Amex, and Matthew S. Morris,
Attorney, Derivatives Regulation, Office of Self-Regulatory
Oversight, Division, Commission, on May 9, 1996.
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The Amex has also implemented several safeguards in connection with
the listing and trading of the Index Warrants that will serve to ensure
that the Index maintains its intended character as a highly-capitalized
and actively-traded index. In this regard, the Exchange will notify the
Commission if: (1) Less than 75 percent of the component securities in
the Index are eligible for standardized options trading; (2) the number
of components in the Index decreases to less than nine; (3) the three
highest weighted components represent more than 60 percent of the
weight of the Index; or (4) the trading volume of any of the components
in the Index falls below 500,000 shares for each of the last six
months.\25\
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\25\ In the event the Exchange is unable to maintain these
requirements, the Exchange will consult with the Commission
regarding appropriate regulatory responses.
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B. Customer Protection
The Commission notes that the rules and procedures of the Exchange
adequately address the special concerns attendant to the trading of
index warrants. Specifically, the applicable suitability, account
approval, disclosure, and compliance requirements of the applicable
Amex provisions satisfactorily address potential public customer
concerns. Moreover, the Amex plans to distribute a circular to its
membership calling attention to specific risks associated with warrants
on the Index. Finally, pursuant to the Exchange's listing guidelines,
only companies capable of meeting the Amex's index warrant issuer
standards will be eligible to issue Index Warrants.\26\
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\26\ See Section 106 of the Amex Company Guide which requires,
among other things, that the issuer have tangible net worth in
excess of $250 million and otherwise substantially exceed size and
earnings requirements in Section 101(A) of the Company Guide or meet
the alternative guideline in paragraph (a).
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C. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a security index derivative
product and the exchange(s) trading the securities underlying the
derivative product is an important measure for the surveillance of the
derivative and underlying securities markets. Such agreements ensure
the availability of the information necessary to detect and deter
potential manipulations and other trading abuses, thereby making the
security index product less readily susceptible to manipulation. In
this regard, the Amex, and the NYSE and the NASD (where the component
securities of the Index are currently listed) are all members of the
Intermarket Surveillance Group (``ISG''), which provides for the
exchange of all necessary surveillance information.\27\
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\27\ The 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.
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 NASD; the NYSE; the Pacific Stock Exchange,
Inc.; and the Philadelphia Stock Exchange, Inc. Due to the potential
opportunities for trading abuses involving stock index futures,
stock options, and the underlying stock, as well as for 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) have also joined the ISG as affiliate members.
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D. Market Impact
The Commission believes that the listing and trading of warrants on
the Index will not adversely impact the underlying securities. First,
the Amex's existing index warrants surveillance procedures will apply
to warrants on the Index. Second, the Index is comprised of highly-
capitalized securities that are actively-traded. Lastly, the Amex has
established reasonable position and exercise limits for narrow-based
stock index warrants,\28\ which will serve to minimize potential
manipulation and other stock market concerns.
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\28\ The Commission notes that position limits for narrow-based
stock index warrants are set at a level roughly equivalent to 75
percent of narrow-based index options. As a result, position limits
for warrants based on the Index will be nine million. See Securities
Exchange Act Release No. 37007 (March 21, 1996), 61 FR 14165 (March
29, 1996) (order approving establishment of uniform listing and
trading guidelines for narrow-based stock index warrants) (SR-Amex-
95-39).
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The Commission finds good cause to approve the proposed rule
filing, including Amendment Nos. 1 and 2, prior to the thirtieth day
after the date of publication of notice of filing thereof in the
Federal Register. The Commission notes that to date no comments were
received on the proposal. The Commission also notes that accelerated
approval of this rule filing is based, in part, on the following facts:
(i) The Amex is presently seeking authority to list and trade only a
single issuance of warrants on the Index which have a term of two-
years; (ii) the Index's component securities are highly-capitalized and
actively-traded; and (iii) the Amex has represented that the warrants
on the Index will comply in all respects with the Exchange rules
governing the listing and trading of narrow-based warrants, including
Amex Rules 1100 through 1110, Amex Rule 462, and Section 106 of the
Amex Company Guide. Moreover, Amendment No. 1 to the Amex's proposal
describes details of certain Index maintenance procedures and the Index
calculation methodology. In this regard, the Commission believes that
the Exchange's monthly review of the Index's component securities for
options eligibility, percentage weight, and trading volume, as
described above, will help to ensure that the Index maintains its
intended market character as well as remains an appropriate trading
vehicle for public customers. In addition, the equal-dollar methodology
is a well-established index calculation method and therefore does not
present any new or novel regulatory issues. Lastly, although Amendment
Nos. 1 and 2 change the Index's component securities, these
modifications are minor and consistent with the Index's general
objective. In this context, the Index continues to be comprised of
actively-traded and highly-capitalized securities. Accordingly, the
Commission believes that it is consistent with Section 6(b)(5) of the
Act to approve the proposed rule change, including Amendment Nos. 1 and
2, on an accelerated basis.
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 1 and 2. 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. Sec. 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 also will be
available for inspection and copying at the principal office of the
Amex. All submissions should refer to File No. SR-Amex-96-12 and should
be submitted by June 7, 1996.
IV. Conclusion
For the foregoing reasons, the Commission finds that the Amex's
proposal to list and trade warrants based on the Select Technology
Stock Index is consistent with the requirements of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-Amex-96-12), as amended, is
approved on an accelerated basis.
\29\ 15 U.S.C. Sec. 78s (b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12383 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M
