[Federal Register Volume 63, Number 132 (Friday, July 10, 1998)]
[Notices]
[Pages 37426-37430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18414]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40157; File No. SR-Amex-96-44]
Self-Regulatory Organizations; Order Granting Approval of a
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval of Amendment Nos. 3, 4, 5 and 6 to the Proposed
Rule Change by the American Stock Exchange, Inc. Relating to the
Listing and Trading of Options on Exchange-Traded Fund Shares
July 1, 1998.
I. Introduction
On November 21, 1996, the American Stock Exchange, Inc. (``Amex''
or ``Exchange''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
a proposed rule change to list and trade options on securities
representing interests in open-end, exchange-listed investment
companies that hold securities constituting or based on an index or
portfolio of securities (``Exchange-Traded Fund Shares'' or ``Fund
Shares''). The Exchange filed Amendment Nos. 1 and 2 to the proposal on
January 16, 1997, and February 19, 1997, respectively.\3\ Notice of the
proposal, and Amendment Nos. 1 and 2 appeared in the Federal Register
on February 25, 1997.\4\ No comment letters were received on the
proposed rule change. On January 7, 1998, the Amex filed Amendment No.
3 to the proposed rule change.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment Nos. 1 and 2 have been replaced and superseded by
Amendment No. 5.
\4\ See Securities Exchange Act Release No. 38308 (February 19,
1997), 62 FR 8467.
\5\ See Letter from Claire P. McGrath, Vice President & Senior
Counsel, Amex, to Sharon Lawson, Senior Special Counsel, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Division''), dated January 6, 1998 (``Amendment No. 3'').
Amendment No. 3 makes a number of changes to the proposal which are
discussed herein.
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Among other things, Amendment No. 3 revises the proposal to permit
the Amex to trade FLEX Equity options on Fund Shares. On March 12,
1998, the Amex filed Amendment No. 4 to the proposal \6\ and on April
28, 1998, the Exchange filed Amendment No. 5.\7\ Finally, on June 19,
1998, the Exchange filed Amendment No. 6 to the proposed rule
change.\8\ This order approves the
[[Page 37427]]
Exchange's proposal, and Amendment Nos. 3, 4, 5, and 6 on an
accelerated basis.
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\6\ See Letter from Claire P. McGrath, Vice President and
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel,
OMS, Division, Commission, dated March 11, 1998 (``Amendment No.
4''). Amendment No. 4 provides that options on Fund Shares can
either meet the uniform options listing standards set forth in Rule
915 and commentary .01 thereunder or meet the criteria set forth in
proposed commentary .06 to Rule 915. The portion of Amendment No. 4
that addresses comprehensive surveillance sharing agreements with
regard to non-U.S. stocks in the index or portfolio on which the
fund shares are based has been replaced and superseded by Amendment
No. 5.
\7\ See Letter from Claire P. McGrath, Vice President and
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel,
OMS, Division, Commission, dated April 27, 1998 (``Amendment No.
5''). In Amendment No. 5 the Amex proposes the following
surveillance sharing standard: (1) that any Fund Share with non-U.S.
stocks in the underlying index or portfolio that are not subject to
comprehensive surveillance sharing agreements do not in the
aggregate represent more than 50% of the weight of the index or
portfolio; (2) stocks for which the primary market is in anyone
country that is not subject to a comprehensive surveillance
agreement do not represent 20% or more of the weight of the index;
and (3) stocks for which the primary market is in any two countries
that are not subject to comprehensive agreements do not represent
33% or more of the weight of the index. Amendment No. 5 supersedes
and replaces Amendment Nos. 1 & 2, and the portion of Amendment No.
4 that addresses surveillance sharing.
\8\ See Letter from Claire P. McGrath, Vice President and
Special Counsel, Amex, to Sharon Lawson, Senior Special Counsel,
OMS, Division, Commission, dated June 19, 1998 (``Amendment No.
6''). In Amendment No. 6 the Exchange clarifies that Fund Shares
that hold securities based upon a narrow-based index or portfolio
must have options margin that equals at least 100% of the current
market value of the contracts plus 20% of the market value of
equivalent units of the underlying security value.
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II. Description of the Proposal
The purpose of the proposed rule change is to provide for the
trading of options and FLEX Equity options \9\ on Fund Shares. As noted
above, Fund Shares are exchange-listed securities representing
interests in open-end unit investment trusts or open-end management
investment companies (``Funds'') that hold securities based on an index
or a portfolio of securities.\10\ Fund Shares are issued in exchange
for an ``in kind'' deposit of a specified portfolio of securities,
together with a cash payment, in minimum size aggregations or multiples
thereof (``Creation Units''). The size of the applicable Creation Unit
size aggregation is set forth in the Fund's prospectus, and varies from
one series of Fund Shares to another, but generally is of substantial
size (e.g., value in excess of $450,000 per creation unit). A Fund,
generally, will issue and sell Fund Shares in Creation Unit size
through a principal underwriter on a continuous basis at the net asset
value per share next determined after an order to purchase Fund Shares
and the appropriate securities are received. Following issuance, Fund
Shares are traded on an exchange like other equity securities, and
equity trading rules apply. Likewise, redemption of Fund Shares is made
in Creation Unit size and ``in kind,'' with a portfolio of securities
and cash exchanged for the Fund Shares that have been tendered for
redemption.
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\9\ In general, FLEX Equity options provide investors with the
ability to customize basic option features including size,
expiration date, exercise style, and certain exercise prices.
\10\ Currently, the Exchange trades unit investment trust
securities known as Portfolio Depository ReceiptsSM (``PDRs'') based
on the Standard & Poor's 500 Composite Stock Price Index,
the Standard & Poor's MidCap 400 Index, and the Dow Jones Industrial
Average. In addition, the Exchange trades Index Fund Shares which
are issued by an open-end management investment company consisting
of seventeen separate series known as World Equity Benchmark
SharesSM (``WEBS'') based on seventeen foreign equity market
indexes. PDRs and WEBS are listed on the Amex pursuant to Rule 1000,
et seq. and Rule 1000A et seq., respectively, and trade like shares
of common stock. The Commission notes that not all PDRs or WEBS
currently trading on the Amex may meet the standards for options
trading approved by this order.
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Generally, options on Exchange-Traded Fund Shares are proposed to
be traded on the Exchange pursuant to the same rules and procedures
that apply to trading in options on equity securities. However, the
Exchange is also proposing to list FLEX Equity options on Fund Shares
and some options will have a unit of trading of 1000 Exchange-Traded
Fund Shares. The Exchange will list option contracts covering either
100 or 1000 Fund Shares, or both, depending on the price and volatility
of the underlying Fund Shares and the popularity of the options.\11\
Strike prices for both the 100 and 1000 share contracts will be set to
bracket the Fund Shares at one point intervals up to a share price of
$200.\12\ The proposed position and exercise limits for options on Fund
Shares would be the same as those established for stock options as set
forth in Amex Rules 904 and 905. The Amex anticipates that most options
on Fund Shares initially will qualify for only the lowest position
limit. As with standardized equity options, the position limits will be
increased for options if the volume of trading in the Fund Shares
increases to meet the requirements of a higher limit.\13\ As is
currently the case for all FLEX Equity options, no position and
exercise limits will be applicable to FLEX Equity options overlying
Fund Shares until, at least, September 9, 1999.\14\
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\11\ See Amendment No. 3, supra note 5. In the event the
Exchange lists options covering both 100 and 1000 of the same
underlying Fund Shares, the Exchange will assign separate trading
symbols to the options and will issue an Information Circular to all
its members advising of the trading symbols. Telephone conversation
between Claire P. McGrath, Vice President & Senior Counsel, Amex,
and James T. McHale, Special Counsel, OMS, Division, Commission, on
June 17, 1998.
\12\ See Amendment No. 3, supra note 5.
\13\ Id.
\14\ See Securities Exchange Act Release No. 39032 (September 9,
1997) (Order eliminating position and exercise limits for FLEX
Equity options on a two year pilot basis) (``FLEX Equity Position
Limit Pilot'').
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The listing and maintenance standards proposed for options on
Exchange-Traded Fund Shares are set forth in proposed Commentary .06
under Exchange Rule 915 and in proposed Commentary .08 under Exchange
Rule 916, respectively. Pursuant to the proposed initial listing
standards, Amex only will list Fund Shares that are principally traded
on a national securities exchange or through the facilities of a
national securities association and reported as national market
securities. In addition, the initial listing standards require that
either: (1) the Fund Shares meet the uniform options listing standards
in Commentary .01 to Rule 915, which include minimum public float,
trading volume, and share price of the underlying security in order to
list the option; \15\ or (2) the Exchange-Traded Fund Shares must be
available for creation or redemption each business day in cash or in
kind from the Fund at a price related to the net asset value, and the
Exchange will require that the underlying Fund Shares may be created
even though some or all of the securities needed to be deposited have
not been received by the Fund.\16\
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\15\ Specifically, Commentary .01 to Rule 915 requires the
underlying security to have a public float of 7,000,000 shares, 2000
holders, trading volume of 2,400,000 shares in the preceding 12
months, a share price of $7.50 for the majority of the business days
during the three calendar months preceding the date of the
selection, and that the issuer of the underlying security is in
compliance with the Act.
\16\ Provided the authorized creation participant has undertaken
to deliver the shares as soon as possible and such undertaking has
been secured by the delivery and maintenance of collateral
consisting of cash or cash equivalents satisfactory to the Fund
which underlies the option, as described in the Fund prospectus. See
Amendment No. 3, supra note 5.
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In addition, the initial listing standards require that: (1) any
Fund Share with non-U.S. stocks in the underlying index or portfolio
that are not subject to comprehensive surveillance agreements do not in
the aggregate represent more than 50% of the weight of the index or
portfolio; (2) stocks for which the primary market is in any one
country that is not subject to a comprehensive surveillance agreement
do not represent 20% or more of the weight of the index or portfolio;
and (3) stocks for which the primary market is in any two countries
that are not subject to comprehensive surveillance agreements do not
represent 33% or more of the weight of the index or portfolio.\17\
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\17\ See Amendment No. 5, supra note 7.
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The Exchange's proposed maintenance standards provide that if a
particular series of Exchange-Traded Fund Shares should cease to trade
on an exchange or as national market securities in the over-the-counter
market, there will be no opening transactions in the options on the
Fund Shares, and all such options will trade on a liquidation-only
basis. In addition, the Amex will consider the suspension of opening
transactions in any series of options of the class covering Fund Shares
if: (1) the options fail to meet the uniform equity option maintenance
standards Commentary .01 to Rule 916,\18\ when the options were listed
pursuant to the equity option listing
[[Page 37428]]
standards of Commentary .01 to Rule 915;\19\ (2) following the initial
twelve-month period beginning upon the commencement of trading of the
Fund Shares on a national securities exchange or as national market
securities through the facilities of a national securities association
there are fewer than 50 record and/or beneficial holders of Fund Shares
for 30 or more consecutive trading days; (3) the value of the index or
portfolio of securities on which the Fund Shares are based is no longer
calculated or available; or (4) such other event shall occur or
condition exist that in the opinion of the Exchange makes further
dealing in such options on the Exchange inadvisable.
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\18\ Specifically, Commentary .01 to Rule 916 provides that an
underlying security will not meet the Exchange's requirements for
continued listing when, among other things; (1) there are fewer than
6 300,000 publicly-held shares; (2) there are fewer than 1600
holders; (3) trading volume was less than 1,800,000 shares in the
preceding twelve months; and (4) the share price of the underlying
security closed below $5 on a majority of the business days during
the preceding 6 months.
\19\ See Amendment No. 4, supra note 6. The Commission notes
that even if options on Fund Shares were not listed under the
uniform equity option listing standards, Amex Rules 1002 and 1002A
require a minimum number of Fund Shares to be outstanding before
trading in a series of Fund Shares may commence. In addition, the
Amex has represented that although there is no comparable public
float maintenance standard for the underlying Fund Shares, as a
practical matter there can never be trading in a series of Fund
Shares in which there is less than one Creation Unit outstanding,
since Fund Shares only may be created and redeemed in Creation Unit
size, and if the last outstanding Creation Unit should ever be
redeemed, the series (and the options on that series) will cease to
trade.
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Options on Fund Shares will be physically-settled and will have the
American-style exercise feature used on all standardized equity
options, and not the European-style feature originally proposed.\20\
The Exchange, however, also proposes to trade FLEX Equity options which
will be available with both the American-style and European-style
exercise feature, as well as other FLEX Equity features.\21\
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\20\ See Amendment No. 3, supra note 5. An American-style option
may be exercised at any time prior to its expiration. A European-
style option, however, may be exercised only on its expiration date.
\21\ Id.
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The proposed margin requirements for options on Exchange-Traded
Fund Shares are at the same levels that apply to options generally
under Exchange Rule 462, except, with respect to Fund Shares based on a
broad-based index or portfolio, and those Fund Shares approved by the
Commission to date, minimum margin must be deposited and maintained
equal to 100% of the current market value of the option plus 15% of the
market value of equivalent units of the underlying security value. Fund
Shares that hold securities based upon a narrow-based index or
portfolio must have options margin that equals at least 100% of the
current market value of the contract plus 20% of the market value of
equivalent units of the underlying security value.\22\ In this respect,
the margin requirements proposed for options on Exchange-Traded Fund
Shares are comparable to margin requirements that currently apply to
broad-based and narrow-based index options.
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\22\ See Amendment No. 6, supra note 8.
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The Exchange believes it has the necessary systems capacity to
support the additional series of options that would result from the
introduction of options on Fund Shares, and it has been advised that
the Options Price Reporting Authority (``OPRA'') also will have the
capacity to support these additional series now that it has implemented
an additional outgoing high speed line from the OPRA processor.\23\
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\23\ See letter from Joseph P. Corrigan, Executive Director,
OPRA, to Ivette Lopez, Assistant Director, OMS, Division,
Commission, dated November 8, 1996.
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III. Commission Findings 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).\24\ Specifically, the
Commission believes that providing for the listing and trading of
options and FLEX Equity options \25\ on Exchange-Traded Fund Shares
should give investors a better means to hedge their positions in the
underlying Fund Shares. Further, the Commission believes that pricing
of the underlying Fund Shares may become more efficient and market
makers in these shares, by virtue of enhanced hedging opportunities,
may be able to provide deeper and more liquid markets. In sum, the
Commission believes that options on Fund Shares likely will engender
the same benefits to investors and the market place that exist with
respect to options on common stock,\26\ thereby serving to promote the
public interest, remove impediments to a free and open securities
market, and promote efficiency, competition, and capital formation.\27\
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\24\ 15 U.S.C. 78f(b)(5).
\25\ The Commission hereby incorporates by reference its
findings and conclusions with respect to the appropriateness of FLEX
Equity options generally. See Securities Exchange Act Release No.
37336 (June 19, 1996), 61 FR 33558 (June 27, 1996).
\26\ 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 new product is in the public interest. Such
a finding would be difficult for a derivative instrument that served
no hedging or 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.
\27\ 15 U.S.C. 78c(f).
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As a general matter, the Commission believes that a regulatory
system designed to protect public customers must be in place before the
trading of sophisticated financial instruments, such as options on Fund
Shares, can commence trading on a national securities exchange. The
Commission notes that the trading of standardized exchange-traded
options occurs in an environment that is designed to ensure, among
other things, that: (1) The special risks of options are disclosed to
public customers; (2) only investors capable of evaluating and bearing
the risks of options trading are engaged in such trading; and (3)
special compliance procedures are applicable to options accounts. With
regard to position and exercise limits, the Commission finds that it is
appropriate to adopt the tiered approach used in setting position and
exercise limits for standardized stock options. This approach should
serve to minimize potential manipulation and market impact concerns. In
addition, the Commission believes that the rationale for allowing FLEX
Equity options generally to trade without position and exercise limits
until September 9, 1999, is equally applicable in the context of FLEX
Equity options on Fund Shares.\28\ Accordingly, because options and
FLEX Equity options on Fund Shares will be subject to the same
regulatory regime as the other options and FLEX Equity options
currently traded on the Amex, the Commission believes that adequate
safeguards are in place to ensure the protection of investors in
options and FLEX Equity options on Fund Shares.
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\28\ See FLEX Equity Position Limit Order, supra note 14.
Pursuant to the FLEX Equity Position Limit Pilot, the Commission
expects the Amex to include its experience with FLEX Equity options
on Fund Shares in its report to the Commission.
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The Commission also believes that it is appropriate to permit the
Amex to list and trade options, including FLEX Equity options, on
Exchange-Traded Fund Shares given that these options must meet specific
requirements related to the protection of investors.\29\ First, the
Exchange's listing and delisting criteria for options on Fund Shares
are adequate. With regard to initial listing, the proposal requires
that either: (1) the
[[Page 37429]]
underlying Fund Shares meet the Amex's uniform options listing
standards; or (2) the Exchange-Traded Fund Shares must be available for
creation or redemption each business day in cash or in kind from the
Fund at a price related to the net asset value, and the Exchange will
require that the underlying Fund Shares may be created even though some
or all of the securities needed to be deposited have not been received
by the Fund.\30\ This listing requirement should ensure that there
exists sufficient supply of the underlying Fund Shares so that a short
call writer, for example, will have the ability to secure delivery of
the Fund Shares upon exercise of the option.
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\29\ The Commission notes, and Amex has verified, that holders
of options on Fund Shares who exercise and receive the underlying
Fund Shares must receive, like any purchaser of Fund Shares, a
product description or prospectus, as appropriate. Telephone
Conversation between Claire P. McGrath, Vice President and Senior
Counsel, Amex, Sharon Lawson, Senior Special Counsel, OMS, Division,
Commission, and James McHale, Special Counsel, OMS, Division,
Commission, on June 25, 1998.
\30\ Provided the authorized creation participant has undertaken
to deliver the shares as soon as possible and such undertaking has
been secured by the delivery and maintenance of collateral
consisting of cash or cash equivalents satisfactory to the Fund
which underlies the option, as described in the Fund prospectus.
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In reviewing the Amex's proposal, as originally submitted, the
Commission had been concerned with the ability to produce Fund Shares
upon exercise of the option. The Commission believes the Amex has
adequately addressed these concerns through the adoption of the listing
standards set forth above. In particular, options listed pursuant to
the uniform options listing standards will have to meet the options
maintenance listing standards which require, among other things, that a
minimum number of Fund Shares be outstanding to continue trading the
options.\31\ The alternative listing criteria, noted above, should also
help to ensure that the underlying Fund Shares will be available upon
exercise by requiring the Fund to allow market participants to create
Fund Shares even though some or all of the necessary securities needed
to be deposited are not available.\32\ Although there is no absolute
assurance that market participants will go ahead and create Fund Shares
in the event a short call writer needs to purchase Fund Shares to meet
an exercise notice, it is likely that arbitrage opportunities will
create an incentive to do so. Further, in the event there are not
enough Fund Shares to meet exercise requirements, as with other
physically-settled equity options, the Options Clearing Corporation
(``OCC'') has rules that would apply to such situations.
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\31\ See supra note 18.
\32\ See supra note 30.
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Second, the Commission believes that the surveillance standard
developed by the Amex for options on Fund Shares is adequate to address
the concerns associated with the listing and trading of such
securities. Specifically, the Amex has proposed that: (1) any Fund
Share with non-US stocks in the underlying index or portfolio that are
not subject to comprehensive surveillance agreements do not in the
aggregate represent more than 50% of the weight of the index or
portfolio; (2) stocks for which the primary market is in any one
country that is not subject to a comprehensive surveillance agreement
do not represent 20% or more of the weight of the index or portfolio;
and (3) stocks for which the primary market is in any two countries
that are not subject to comprehensive surveillance agreements do not
represent 33% or more of the weight of the index or portfolio.\33\
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\33\ The Exchange uses the term ``comprehensive surveillance
agreement'' to mean an agreement which requires that the parties
provide each other, upon request, information about market trading,
clearing activity under the identity of the ultimate purchasers and
sellers of securities. Telephone conversation between Claire P.
McGrath, Vice President and Senior Counsel, Amex, and James T.
McHale, Special Counsel, OMS, Division, Commission, on June 17,
1998.
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As a general matter, the Commission believes that comprehensive
surveillance agreements provide an important deterrent to manipulation
because they facilitate the availability of information needed to fully
investigate a potential manipulation if it were to occur. These
agreements are especially important in the content of derivative
products based on foreign securities because they facilitate the
collection of necessary regulatory, surveillance and other information
from foreign jurisdictions. In evaluating the current proposal, the
Commission believes that requiring comprehensive surveillance
agreements to be in place between the Amex and the primary markets for
foreign securities that comprise 50% or more of the weight of the
underlying index or portfolio upon which Fund Shares are based, as well
as the other conditions discussed above, provides an adequate mechanism
for the exchange of surveillance sharing information necessary to
detect and deter possible market manipulations. Although the Commission
recognizes that up to 50% of the Portfolio's value may not be covered
by comprehensive surveillance agreements, the other requirements will
ensure that a significant percentage of the portfolio is not made up of
securities from uncovered countries. Further, as to the domestically-
traded Fund Shares themselves and the domestic stocks in the underlying
index or portfolio upon which Fund Shares are based, the Intermarket
Surveillance Group (``ISG'') \34\ Agreement will be applicable to the
trading of options on Fund Shares.\35\
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\34\ 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
members of ISG include all of the registered National Securities
Exchanges and the National Association of Securities Dealers, Inc.
(``NASD''). In addition, the major stock index futures exchanges
(e.g., the Chicago Mercantile Exchange and the Chicago Board of
Trade) are affiliate members of ISG.
\35\ For example, the ISG Agreement would allow for the exchange
of surveillance and investigative information between the Amex,
trading PDRs on the S&P 500 index, and the markets trading the 500
stocks represented in the S&P 500 index. In addition, should other
markets begin trading Fund Shares in the future, trading information
with regard to the Fund Shares themselves would be readily available
to the Amex pursuant to the ISG and the Amex could list options on
those Fund Shares, assuming the options met all of the listing
standards and requirements discussed herein.
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Finally, the Commission believes that it is appropriate to require
minimum margin of 100% of the current market value of the option plus
15% of the market value of the underlying security value (``broad-based
margin'') for options on Fund Shares based on a broad-based index or
portfolio and for options on Fund Shares which have been approved to
date.\36\ Moreover, the Commission believes that requiring minimum
margin of 100% of the current market value of the option plus 20% of
the market value of the underlying security value (``narrow-based
margin'') for options on Fund Shares based on a narrow-based index or
portfolio is appropriate.\37\ The Commission notes that these margin
requirements for options on Exchange-Traded Fund Shares are comparable
to margin requirements that currently apply to broad-based and narrow-
based index options.
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\36\ The Commission notes that the portfolios or indexes
comprising WEBS have not been designated as broad-based by the
Commission. In this order, the Commission is only determining that
broad-based margin treatment for the WEBS is appropriate, without
addressing the issue of whether such WEBS are broad-based.
\37\ See Amendment No. 6, supra note 8.
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The Commission finds good cause for approving Amendment Nos. 3, 4,
5, and 6 to the proposed rule change prior to the thirtieth day after
the date of publication of notice thereof in the Federal Register.
Amendment No. 3, strengthens the proposal by: (1) providing that the
Exchange will not list options on Fund Shares unless the Fund has
agreed to issue Fund Shares even though some or all of the securities
needed to be deposited have not been received, thus ensuring a minimum
level of liquidity; and (2) adopting standardized options position and
exercise limits. Amendment No. 3 also: (1) provides the options on Fund
Shares
[[Page 37430]]
shall have the American-style exercise feature; (2) allows for the
trading of FLEX Equity options on Fund Shares; (3) permits the Exchange
to list options on Funds Shares covering 100 or 1000 Fund Shares or
both; (4) sets strike prices for both 100 and 1000 share contracts to
bracket the Fund Shares price at one point intervals up to a share
price of $200; and (5) makes various non-substantive references to
``Exchange-Traded Fund Shares'' throughout Amex's Rules, where
appropriate. The Commission finds that these changes are not
controversial because they do not alter the fundamental nature of the
proposal.
Amendment No. 4 provides the Exchange with the flexibility to list
Fund Shares pursuant to the uniform option listing standards in Rule
915 and Commentary .01, in lieu of obtaining a commitment from the unit
investment trust or management investment company to issue Fund Shares
even though some or all of the securities needed to be deposited have
not been received. The Commission believes that this strengthens the
proposal because the uniform option listing standards help to ensure
that the Fund Shares underlying the options are actively traded, with
substantial public float and number of holders. That portion of
Amendment No. 4 that addresses comprehensive surveillance sharing
agreements has been replaced and superseded by Amendment No. 5.
The Commission also believes that Amendment No. 5, concerning
surveillance requirements, strengthens the Amex's proposal. Amendment
No. 5, provides a clear, objective standard for determining the
comprehensive surveillance requirements for trading options on Fund
Shares where the underlying index or portfolio contains non-U.S.
stocks.
The Commission finds that Amendment No. 6 also strengthens the
Amex's proposal. Amendment No. 6 provides that the Amex will apply
narrow-based margin to options on Fund Shares which are based on a
narrow-based index or portfolio of securities. This requirement should
ensure that purchasers of options on Fund Shares based on a narrow-
based index or portfolio post sufficient margin to address any concerns
associated with the potentially increased volatility inherent in a
narrow-based index.
Finally, the Commission notes that no comments were received on the
original Amex proposal, which was subject to full 21-day comment
period. Accordingly, the Commission believes that there is good cause,
consistent with Section 6(b)(5) of the Act, to approve Amendment Nos.
3, 4, 5, and 6 to the proposed rule change on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment Nos. 3, 4, 5 and 6 to the proposed rule
change, including whether the Amendments are consistent with the Act.
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 in the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 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-96-44 and should be submitted by July 31, 1998.
For the foregoing reasons, the Commission finds that the Amex's
proposal to list and trade options and FLEX Equity Options on Fund
Shares 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,\38\ that the proposed rule change (File No. SR-Amex-96-44), as
amended, is approved.
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\38\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18414 Filed 7-9-98; 8:45 am]
BILLING CODE 8010-01-M
