[Federal Register Volume 61, Number 120 (Thursday, June 20, 1996)]
[Notices]
[Pages 31570-31573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15771]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37312; File No. SR-Amex-96-20]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the American Stock Exchange,
Inc., Relating to Options on The Morgan Stanley Commodity Related
Equity Index
June 14, 1996.
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 June 3, 1996, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade options on the Morgan
Stanley Commodity Related Equity Index (``Index''), a new stock index
developed by Morgan Stanley & Co. Incorporated (``Morgan Stanley'')
based on stocks (or American Depository Receipts (``ADRs'') thereon) of
commodity related companies. In addition, the Amex proposes to amend
Exchange Rule 901C, Commentary .01 to reflect that 90 percent of the
Index's numerical index value will be accounted for by component
securities that meet the current criteria and guidelines set forth in
Exchange Rule 915.
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
[[Page 31571]]
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
Morgan Stanley has developed a new Index, based on the shares of
widely held companies involved in commodity related industries such as
energy (e.g., oil and gas production and oilfield services and
equipment), non-ferrous metals, precious metals, agriculture, and
forest products.\3\ Each of the component securities is traded on the
Amex, the New York Stock Exchange, Inc. (``NYSE''), or through the
facilities of the National Association of Securities Dealers (``NASD'')
Automated Quotation system (``Nasdaq'') and are reported national
market system securities (``Nasdaq/NMS''). The Amex intends to trade
standardized option contracts on the newly developed Index. The Amex is
filing this proposal pursuant to Exchange Rule 901C, Commentary .02,
which provides for the commencement of trading of options on the Index
thirty days after the date of this filing. The proposal meets all the
criteria set forth in Commentary .02 as well as the Commission's order
approving generic listing standards for options on narrow-based
indexes, as outlined below.\4\
\3\ The Index's component securities are as follows: Amerada
Hess Corporation; Anadarko Petroleum Corporation; Apache
Corporation; Atlantic Richfield Company; Baker-Hughes Inc.;
Burlington Resources Inc.; Schlumberger Ltd.; Aluminum Company of
America; Cyprus Amax Minerals Company; Phelps Dodge Corporation;
Reynolds Metal Company; USX-US Steel Group; Homestake Mining;
Newmont Mining Corporation; Placer Dome Inc.; Archer-Daniels-Midland
Company; Conagra Inc.; IBP Inc.; Potash Corporation Sask Inc.; and
Weyerhaeuser Company.
\4\ 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). The Commission notes, however,
that pursuant to the Generic Index Approval Order, the Exchange must
provide to the Commission written representations that both the Amex
and the Options Price Reporting Authority (``OPRA'') have the
necessary systems capacity to support the new series of options
before the Amex may list and trade options on the Index.
---------------------------------------------------------------------------
Eligibility Standards for Index Components
Pursuant to Commentary .02 to Exchange Rule 901C: (1) all of the
component securities are listed on the NYSE; (2) each component
security has a minimum market capitalization of at least $75
million;\5\ (3) each component security has had a monthly trading
volume of at least one million shares during the previous six months;
(4) all of the component securities currently meet the eligibility
criteria for standardized options trading set forth in Exchange Rule
915;\6\ (5) foreign country securities or ADRs thereon that are not
subject to comprehensive surveillance sharing agreements do not in the
aggregate represents more than 20 percent of the weight of the Index;
and (6) the Index is equal-dollar weighted, with no component security
representing more than 25 percent of the weight of the Index, and the
five highest weighted component securities not constituting more than
60 percent of the weight of the Index.
---------------------------------------------------------------------------
\5\ In the case of ADRs, this represents market value as
measured by total world-wide shares outstanding.
\6\ Telephone Conversation between Claire P. McGrath, Managing
Director and Special Counsel, Amex, and Matthew S. Morris, Attorney,
Division of Market Regulation, Commission, on June 12, 1996.
---------------------------------------------------------------------------
Maintenance of the Index
The Amex will maintain the Index in accordance with Exchange Rule
901C, Commentary .02 so that: (1) the total number of component
securities will not increase or decrease by more than 33\1/3\ percent
from the number of component securities in the Index at the time of its
initial listing, and in no event will the Index have less the nine
component securities; (2) the component securities constituting the top
90 percent of the Index by weight must have a minimum market
capitalization of $75 million, and the component securities
constituting the bottom 10 percent of the Index by weight must have a
minimum market capitalization of $50 million; (3) the monthly trading
volume of each component security must be at least 500,000 shares, or
for each of the lowest weighted component securities that in the
aggregate account for no more than 10 percent of the weight of the
Index, the monthly trading volume must be at least 400,000 shares; (4)
the Index must meet the criteria that no single component security
represents more than 25 percent of the weight of the Index and that the
five highest weighted component securities represent no more than 60
percent of the weight of the Index; and (5) 90 percent of the Index's
numerical index value and at least 80 percent of the total number of
component securities will meet the then current criteria for
standardized option trading set forth in Exchange Rule 915.
The Exchange will not open for trading any additional option series
should the Index fail to satisfy any of the maintenance criteria set
forth above unless such failure is determined by the Exchange not to be
significant and the Commission concurs in that determination, or unless
the continued listing of the Index option has been approved by the
Commission pursuant to Section 19(b)(2) of the Act.
The Index will be calculated and maintained by the Amex. A
component security may only be removed from the Index when: (1) the
component security no longer meets the objective maintenance criteria
set forth above; (2) as the result of a corporate event involving the
issuer of a component security, the component security is delisted
(e.g., the takeover or merger of the issuer of a component security);
or (3) the component security no longer represents the commodity
related industry it was intended to represent or another appropriate
commodity related industry. In all three situations, the Amex will be
responsible for removing the component security and choosing a
replacement. In addition, to properly reflect the changing conditions
in the commodity related industries, the Amex will evaluate the
component securities to determine whether to add or to delete an
industry subcategory, or to change the number of component securities
in an industry subcategory. 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 the dissemination of an
information circular. It is expected that the Index will remain at the
current number of component securities. If, however, the number of
component securities increases or decreases by more than one-third, the
Exchange will submit a rule filing to the Commission to obtain the
necessary approval.
Morgan Stanley will have no role in maintaining the Index and
generally will not be consulted by the Amex regarding potential changes
to the Index. In rare circumstances, however, the Amex may require
assistance and may wish to consult with employees of Morgan Stanley.
Therefore, since Morgan Stanley may be consulted regarding the
maintenance of the Index, a ``chinese wall'' has been erected around
the personnel at Morgan Stanley who have access to information
concerning changes and adjustments to the Index. Details of Morgan
Stanley's chinese wall procedures, which are closely modeled on
existing procedures for other Morgan Stanley indexes underlying
standardized options, have
[[Page 31572]]
been submitted to the Commission under separate cover.
Index Calculation
The Index is calculated 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 March 15, 1996, a
portfolio of stocks was established representing an investment of
$1,000,000 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 component securities in
the Index portfolio divided by the Index divisor. The Index divisor was
initially determined to yield a benchmark value of 200.00 at the close
of trading on March 15, 1996. Quarterly thereafter, following the close
of trading on the third Friday of March, June, September, and December,
the Index portfolio will be adjusted by changing the number of whole
shares of each component security 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 quarterly
adjustment.
As noted above, the number of shares of each component security in
the Index portfolio remains fixed between quarterly 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. In a merger or
consolidation of an issuer of a component security, 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 security'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 security, 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 the Index will be calculated continuously and disseminated
every fifteen 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 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 will expirations in the
three near-term calendar months and in the two additional calendar
months in the March cycle. In addition, longer term options 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 a reduced
value long-term option will not be less than six months. The trading of
any long-term option 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 Index options will be equivalent to the
position limits for regular (full value) Index options and would be
aggregated with such options.\7\
---------------------------------------------------------------------------
\7\ For example, if the position limit for the full value
options is 12,000 contracts on the same-side of the market, then the
position limit for the reduced value options will be 120,000
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 securities. In the case of
securities traded through the Nasdaq system, the first reported regular
way sale price will be used. If any component security 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
Exchange 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. 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 Index. The Index is deemed to be a Stock Index Option under
Exchange Rule 901C(a) and a Stock Index Industry Group under Exchange
Rule 900C(b)(1). With respect to Exchange 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 Exchange Rule 904C(c) will result in a position limit of 12,000
contracts with respect to options on the Index.
2. Statutory Basis
The Amex 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 perfect the mechanism of a free and open
market and a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Amex 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule change complies with the standards set
forth in the Generic Index Approval Order, it has become effective
pursuant to
[[Page 31573]]
Section 19(b)(3)(A) of the Act.\8\ Pursuant to the Generic Index
Approval Order, the Amex may not list options for trading on the Index
prior to thirty days after June 3, 1996, the date the proposed rule
change was filed with the Commission.\9\ At any time within sixty days
of the filing of the proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78s(b)(3)(A) (1988).
\9\ As noted above, see supra note 4, pursuant to the Generic
Index Approval Order, the Exchange must provide to the Commission
written representations that both the Amex and the OPRA have the
necessary systems capacity to support the new series of options
before the Amex may list and trade options on the Index.
---------------------------------------------------------------------------
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, 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-96-20 and should be
submitted by July 11, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
---------------------------------------------------------------------------
\10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jonathan G. Katz,
Secretary.
[FR Doc. 96-15771 Filed 6-19-96; 8:45 am]
BILLING CODE 8010-01-M
