[Federal Register Volume 61, Number 134 (Thursday, July 11, 1996)]
[Notices]
[Pages 36596-36599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17632]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37405; International Series Release No. 1002; File No.
SR-NYSE-96-12]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 to the Proposed Rule Change by New York Stock Exchange, Inc.,
Relating to Equity-Linked Debt Securities
July 3, 1996.
Pursuant to section 19(b)(1) of the Securities Exchange Act of
1934, 15 U.S.C. 78s(b)(1) (the ``Act''), notice is hereby given that on
May 17, 1996, the New York Stock Exchange, Inc. filed with the
Securities and Exchange 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 Exchange filed with the
Commission Amendment No. 1 to the proposed rule change on June 7,
1996.\1\ The Commission is approving the Exchange's proposal, as
amended, on an accelerated basis, and solicits comments from interested
persons.
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\1\ In Amendment No. 1, the Exchange proposes to amend the
proposed rule change to delete footnote one in Para. 703.21 of the
NYSE Listed Company Manual. In light of the proposed 20% Test +
Daily Trading Volume Standard described more fully herein, the
Exchange believes that the footnote is unnecessary. See Letter from
James E. Buck, NYSE, to Jonathan G. Katz, Secretary, Commission,
dated June 7, 1996 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') is
proposing amendments to its listing standards for Equity-Linked Debt
Securities (``ELDS''). These listing standards are contained in Para.
703.21 of its Listed Company Manual.
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
[[Page 36597]]
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
(a) Purpose--ELDS are non-convertible debt securities of an issuer
where the value of the debt is based, at least in part, on the value of
another issuer's common stock or non-convertible preferred stock (the
``underlying security''). As initially adopted, the Exchange's listing
standards permitted the listing of ELDS only if the underlying security
was issued by a U.S. company.\2\ The Exchange subsequently amended
these standards to permit the listing of ELDS based on underlying
securities of widely-held non-U.S. companies which are traded in the
U.S. market as sponsored \3\ American Depository Receipts, or ordinary
shares (``non-U.S. securities'') if either (i) the Exchange has an
effective, comprehensive surveillance sharing agreement with the
primary market for the security or (ii) if over half of the volume in
the underlying security occurs in the United States (the ``Primary
Market Test'').\4\
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\2\ See Securities Exchange Act Release No. 33468 (January 13,
1994), 59 FR 3387 (January 21, 1994).
\3\ As opposed to an unsponsored ADR, a sponsored ADR is
established jointly by the issuer of the underlying security and
depositary. With a sponsored ADR, the depositary is generally
required to distribute notices of shareholder meetings and voting
instructions to ADR holders, thereby ensuring the ADR holders will
be able to exercise voting rights through the depositary with
respect to the underlying securities.
\4\ See Securities Exchange Act Release No. 34545 (August 18,
1994), 59 FR 43877 (August 25, 1995).
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The Exchange proposes to amend its ELDS listing standards by (1)
revising the manner in which the Primary Market Test is calculated; (2)
adding new criteria for the listing of ELDS on non-U.S. securities
based on the daily trading volume in the U.S.; and (3) revising the
current restrictions on the size of ELDS issuances linked to non-U.S.
securities.
Under the Primary Market Test, the Exchange can list ELDS if (i)
for non-U.S. securities that trade in the United States as ordinary
shares, at least half the world-wide volume in the security is in the
United States or (ii) for non-U.S. securities that trade in the United
States as sponsored American Depository Receipts (``ADRs''), the
Relative ADR Volume''\5\ is at least 50 percent.
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\5\ The ``Relative ADR Volume'' is the ratio of (A) the combined
trading volume (on a share equivalent basis) of the ADR and ``other
related ADRs and securities'' (as defined below) occurring in U.S.
markets or in any other market with which the Exchange has in place
an effective surveillance information sharing agreement to (B) the
combined worldwide trading volume in the ADR, the security
underlying the ADR and ``other related ADRs and securities''. For
the purposes of the preceding sentence, ``other related ADRs and
securities'' refers to the security underlying the ADR, other
classes of common stock related to the underlying security, and ADRs
overlying such other classes of stock. See NYSE Rule 715,
Supplementary Material .40 (iv).
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When the Exchange first adopted ELDS listing standards for non-U.S.
securities, ``Relative ADR Volume'' was defined generally to require at
least half of the trading volume in the security or the ADR, on a share
equivalent basis, to be in the United States. However, in October 1995,
the Commission approved amendments to that definition so that it now
includes both U.S. volume and volume in any other market with which the
Exchange has an effective, comprehensive surveillance sharing agreement
(``permitted markets'') in determining whether the Primary Market Test
is satisfied.\6\
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\6\ See Securities Exchange Act Release No. 36434 (October 30,
1995), 60 FR 56071 (November 6, 1995) (order approving revised
listing standards for options on ADRs).
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By incorporating the definition of ``Relative ADR Volume'' into the
ELDS listing standards, the Exchange can now list ELDS on non-U.S.
companies if the underlying security trades in the United States, as
sponsored ADRs and at least half the volume in the security is in the
United States or in permitted markets. The Exchange also proposes to
include the definition of ``Relative U.S. Share Volume'' as a
conforming change to the ELDS listing standards for non-U.S. securities
that trade in the United States as ordinary shares.\7\
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\7\ Specifically, the proposed definition of ``Relative U.S.
Share Volume'' is the ratio of (i) the combined trading volume of
the security and related securities in the United States and in any
other market with which the Exchange has in place an effective,
comprehensive surveillance information sharing agreement to (ii) the
worldwide trading volume in such securities.
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Second, the Exchange proposes to add an alternate set of criteria
for the listing of ELDS on non-U.S. securities (``20% Test + Daily
Trading Volume Standard''). These criteria will permit the Exchange to
list ELDS on securities of non-U.S. issuers if: (i) the volume in U.S.
markets \8\ is at least 20 percent of world-wide volume for the most
recent six months; (ii) average daily U.S. trading volume for the six-
month period is at least 100,000 shares; and (iii) the actual trading
volume on the majority of trading days in the United States during the
six months is at least 60,000 shares.
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\8\ This 20% Test + Daily Trading Volume Standard calculation
does not include foreign markets with which the Exchange has in
place a comprehensive surveillance sharing agreement.
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Moreover, the Exchange proposes to amend the size limitations of
ELDS issuances linked to non-U.S. securities. Specifically, the
Exchange proposes to require that the size of ELDS issuances linked to
non-U.S. securities will be limited to 2% of the total shares of the
underlying security outstanding provided at least 20% (instead of the
current 30% requirement) of the worldwide trading volume in the
security and related for the six-months prior to the listing occurred
in the U.S. market.\9\
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\9\ As with the 20% Test + Daily Trading Volume Standard,
foreign markets with which the Exchange has in place a comprehensive
surveillance sharing agreement are not included in the calculation
for determining the size of eligible ELDS issuances.
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The Exchange also proposes to delete footnote one from Section
703.21 of the NYSE Listed Company Manual. That footnote refers to the
Exchange's ability to list ELDS linked to non-U.S. securities if there
is not an effective, comprehensive surveillance information agreement
with the primary exchange in the country where the security is
primarily traded. Specifically, the provision currently requires such
an agreement if the Primary Market Test was not satisfied. In light of
the proposed 20% Test + Daily Trading Volume Standard, the Exchange
believes that this provision should no longer be applicable.\10\
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\10\ See Amendment No. 1, supra note 1.
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The Exchange believes that the proposed rule change will expand the
number of non-U.S. securities that may underlie ELDS. In so doing, it
will benefit investors by enhancing investment flexibility and
increasing the ability of U.S. persons to invest in securities linked
to highly-capitalized and actively-traded non-U.S. securities. The
Exchange believes that the proposed criteria are carefully crafted to
limit eligibility to those non-U.S. securities that have a significant
amount of U.S. market trading interest or that trade in markets with
which the Exchange has an effective, comprehensive surveillance sharing
agreement. The Exchange believes that it will accordingly have the
ability to gather information on potential trading problems or
irregularities in the primary market for the security.
(b) Basis--The Exchange believes that the proposed rule change is
consistent with the Act and the requirements of Section 6(b)(5) of the
Act in that the proposal is designed to prevent
[[Page 36598]]
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change does not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Commission's Findings and Order Granting Accelerated Approval
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of section 6(b)(5) of the Act.\11\
Specifically, the Commission finds that the Exchange's proposal to
provide alternate criteria for the listing and trading of ELDs on non-
U.S. securities strikes a reasonable balance between the Commission's
mandates under section 6(b)(5) to remove impediments to and perfect the
mechanism of a free and open market and a national market system, while
protecting investors and the public interest.
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\11\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed amendments to the listing
standards for ELDS on non-U.S. securities will benefit investors by
effectively increasing the number of available ELDS-eligible non-U.S.
securities. At the same time, as described below, the proposal provides
safeguards designed to reduce the potential for manipulation and other
abusive trading strategies in connection with the trading of non-U.S.
security ELDS and their underlying securities. Accordingly, the
Commission believes that the proposal will extend the benefits
associated with ELDS on non-U.S. securities to additional non-U.S.
securities and provide market participants with opportunities to trade
a greater number of ELDS on non-U.S. securities without compromising
the effectiveness of the Exchange's listing standards for such
securities.
Currently, the Primary Market Test allows the Exchange to list
options on an ADR in the absence of a comprehensive/effective
surveillance sharing agreement with the primary exchange where the non-
U.S. security trades if the combined trading volume of the non-U.S.
security and other related non-U.S. securities occurring in the U.S.
market and permitted markets during the six month period preceding the
selection of the ADR for options listing represents (on a share
equivalent basis) at least 50% of the combined world-wide trading
volume in such securities. The effect of the NYSE's proposal would be
to allow this definition of ``Relative U.S. ADR Volume'' to apply to
the listing of ELDS on ADRs. Additionally, the Exchange proposes to
include the definition of ``Relative U.S. Share Volume'' as a
conforming change to the ELDS listing standards for non-U.S. securities
that trade in the United States as ordinary shares.
The Commission has previously concluded that this standard is
consistent with the Act and will continue to ensure that the majority
of world-wide trading volume in the non-U.S. security and other related
non-U.S. securities occurs in trading markets with which the Exchange
has in place a comprehensive/effective surveillance sharing
agreement.\12\ The existence of such agreements should deter as well as
detect manipulations or other abusive trading strategies and also
provide an adequate mechanism for obtaining market and trading
information from the non-U.S. markets that list the non-U.S. security
underlying the Exchange's ELDS in order to adequately investigate any
potential abuse or manipulation.\13\
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\12\ See Securities Exchange Act Release Nos. 36990 (March 20,
1996), 61 FR 13545 (March 27, 1996) (SR-Amex-95-44); 36995 (March
20, 1996), 61 FR 13550 (March 27, 1996) (SR-CBOE-95-71); ad 36994
(March 20, 1996), 61 FR 13553 (March 27, 1996) (SR-NASD-96-01)
(``Structured Notes Approval Orders'').
\13\ Id.
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Additionally, the Commission finds that the proposed 20% Test +
Daily Trading Volume Standard is consistent with the Act. As noted
above, the 20% Test + Daily Trading Volume Standard will allow the
Exchange to list ELDS on a non-U.S. security if, over the six month
period preceding the date of selection of the non-U.S. security for
ELDS trading (1) the combined world-wide trading volume for the non-
U.S. security in the U.S. market represents (on a share equivalent
basis) at least 20% of the combined world-wide trading volume in the
non-U.S. security and other related non-U.S. securities; \14\ (2) the
average daily trading volume for the non-U.S. security in the U.S.
market is at least 100,000 shares; and (3) the trading volume for the
non-U.S. security in the U.S. market is at least 60,000 shares per day
for a majority of the trading days.
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\14\ The Commission notes that the 20% Test + Daily Trading
Volume Standard does not include worldwide trading volume in the
non-U.S. security that takes place in a foreign market regardless of
the existence of a comprehensive surveillance sharing agreement with
the listing exchange. The 20% Test is a minimum U.S. market share
trading test intended to permit the listing of ELDS only on non-U.S.
securities that have active and liquid markets in the U.S.
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The Commission believes that these requirements present a
reasonable alternative to the Primary Market Test by limiting the
actual listing of ELDS on non-U.S. securities to only those non-U.S.
securities that have a significant amount of U.S. market trading
volume. This will ensure that the U.S. market is sufficiently active to
serve as a relevant pricing market for the non-U.S. security and that
the underlying foreign security is readily available to meet the
delivery requirements upon exercise of the ELDS. Accordingly, the
Commission believes that the 20% Test + Daily Trading Volume Standard
should help to ensure that the U.S. markets serve a significant role in
the price discovery of the applicable non-U.S. security and are
generally deep, liquid markets.
Finally, the Exchange believes, for similar reasons, that it is
appropriate to reduce the minimum U.S. trading volume requirements for
ELDS issuances from 30% to 20%. As noted above, the Commission believes
that the 20% Test + Daily Trading Volume Standard will ensure that an
underlying non-U.S. security has deep and liquid markets to sustain an
ELDS listing. The Commission believes that it is appropriate to adjust
the limitations on the size of the ELDS issuance to correspond to this
requirement. Accordingly, where the trading volume in the U.S. market
for the underlying non-U.S. security is between 20% and 50% of the
worldwide trading volume, the issuance will be limited to 2% of the
total outstanding shares of the underlying security.\15\ The Commission
[[Page 36599]]
believes that these restrictions will minimize the possibility that
trading in such issuances will adversely impact the market for the
security to which it is linked.
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\15\ The Commission notes that if a non-U.S. security and
related securities has less than 20% of the worldwide trading volume
occurring in the U.S. market during the six month period preceding
the date of listing, then the instrument may not be linked to that
non-U.S. security under any circumstances. The 20% minimum U.S.
trading volume requirement should continue to ensure that the U.S.
market is significant enough to accommodate ELDS trading.
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The Commission notes that other existing ELDS listing requirements
relating to the protection of investors will continue to apply. Among
other things, these rules set forth issuer standards as well as minimum
market capitalization and trading volume requirements that must be met
prior to listing an ELDS.\16\
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\16\ The Exchange's initial listing standards require, among
other things, that the linked stock underlying the Exchange-listed
ELDS either: (i) has a minimum market capitalization of $3 billion
and during the 12 months preceding listing is shown to have traded
at least 2.5 million shares, (ii) has a minimum market
capitalization of $1.5 billion and during the 12 months preceding
listing is shown to have traded at least 10 million shares; or (iii)
has a minimum market capitalization of $500 million and during the
12 months preceding listing is shown to have traded at least 15
million shares. See Securities Exchange Act Release No. 36993 (March
20, 1996), 61 FR 13557 (March 27, 1996).
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. In particular, the
Exchange's proposal is substantively similar to proposals submitted by
the other options exchanges and recently approved by the
Commission,\17\ and presents no new regulatory issues. Further, these
proposal were published for comment, and no comments were received.
Accordingly, the Commission believes it is consistent with section
6(b)(5) of the Act to approve the proposal on an accelerated basis.
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\17\ See Structured Notes Approval Orders, supra note 12.
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The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. The
Commission believes that in light of the requirements set forth in the
20% Test + Daily Trading Volume Standard, the provisions contained in
footnote one to section 703.21 in the NYSE Listed Company Manual, as
described above, should no longer be required. Accordingly, the
Commission believes it is consistent with section 6(b)(5) of the Act to
approve Amendment No. 1 to the proposal on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., 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, NW.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to the File No. SR-NYSE-96-12 and should be
submitted by August 1, 1996.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change (File No. SR-NYSE-96-12), as
amended, is approved on an accelerated basis.
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\18\ 15 U.S.C. 78s(b)(2).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17632 Filed 7-10-96; 8:45 am]
BILLING CODE 8010-01-M
