[Federal Register Volume 59, Number 135 (Friday, July 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17348]
[[Page Unknown]]
[Federal Register: July 15, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34356; International Series Release No. 681; File No.
SR-Amex-94-20]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 2 and 3 by the American Stock Exchange, Inc.
Relating to the Listing and Trading of Options on the Mexico Index
July 12, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 3,
1994, 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. On June
27, 1994, the Exchange filed Amendment No. 1 to the proposed rule
change, the subject matter of which was superseded with the filing of
Amendment No. 2 (``Amendment No. 2''), which was filed on July 7,
1994.\1\ Amendment No. 1 was formally withdrawn in Amendment No. 2. On
July 11, 1994, the Exchange filed Amendment No. 3 (``Amendment No. 3'')
to the proposed rule change to provide for certain standards to be used
in conjunction with the maintenance of the Index, as described
below.\2\ The Commission is publishing this notice to solicit comments
on the proposed rule change and Amendment Nos. 2 and 3 from interested
persons.
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\1\See Letter from Howard Baker, Senior Vice President,
Derivative Securities, Amex, to Michael Walinskas, Derivative
Products Regulation, SEC, dated July 7, 1994. In the original
proposal, the Amex sought approval for the listing of options based
upon a Mexico Index that was capitalization-weighted and based upon
shares of twenty Mexican stocks or American Depository Receipts
(``ADRs'') traded on the New York Stock Exchange, Amex or that were
National Market securities. The Amex proposed that the Index be
classified as a broad-based index. Amendment No. 2 supersedes the
original proposal and Amendment No. 1.
\2\See Letter from Howard Baker, Senior Vice President,
Derivative Securities, Amex, to Michael Walinskas, Derivative
Products Regulation, SEC, dated July 11, 1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Amex proposes to trade options on the Mexico Index (``Mexico
Index'' or ``Index''), a new stock index developed by the Amex, based
on Mexican stocks (or ADRs thereon) traded on the Amex, the New York
Stock Exchange (``NYSE''), or that are National Market (``NM'')
securities traded through the National Association of Securities
Dealers Automated Quotation system (``NASDAQ''). The text of the
proposed rule change is available at the Office of the Secretary, Amex
and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Amex has developed a new index called the Mexico Index, based
entirely on shares of widely held Mexican stocks and ADRs traded on the
NYSE, Amex, or that are NM securities. The Index contains securities of
highly-capitalized companies with major business interests in Mexico.
These companies have been drawn from a variety of industries, including
construction, telecommunications, banking, shipping, tobacco, media,
and food and beverage, to reflect the diversity of the Mexican market.
Index Calculation and Maintenance
The Index is calculated using a ``modified'' equal dollar weighting
methodology. Two of the ten component securities have been given a
higher weighting in the Index in order to more closely approximate the
weight the industry represented by that component has in the Mexican
stock market. The Amex believes that this will allow the Index's value
to correlate more closely with the Bolsa Mexican Indice de Precios y
Cotizaciones, which is commonly known as the ``Bolsa Index.'' For
example, Telefonos de Mexico, which is the largest capitalized
component in the Index, will have a higher weight in the Index, but not
as high as if the Index were capitalization weighted. The Amex believes
that this ``modified'' equal dollar weighting methodology allows the
Index to be a more accurate reflection of the Mexican market since it
provides a higher weighting for the larger capitalized components, yet
does not permit those stocks to dominate the Index. The Exchange
believes that this method of calculation is important given the great
disparity in market value of a few of the Index's component stocks. It
has been the Exchange's experience that options on market value
weighted indexes dominated by one or two component stocks are less
useful to investors, since the index will tend to represent the one or
two components and not the group as a whole.
The following is a description of how the ``modified'' equal dollar
weighting calculation method works. As of the market close on June 17,
1994, a portfolio of ten Mexican stocks was established representing an
investment (rounded to the nearest whole share) of $24,000 in the
largest capitalized stock in the Index, $12,000 in the second largest,
and $8,000 in each of the remaining companies in the Index. The value
of the Index equals the current market value (i.e., based on U.S.
primary market prices) of the sum of the assigned number of shares of
each of the stocks in the Index portfolio divided by the Index divisor.
The Index divisor was initially determined to yield the benchmark value
of 231.00 at the close of trading on June 17, 1994. Each quarter
thereafter, following the close of trading on the third Friday of
March, June, September and December, the Index components will be
ranked in descending market capitalization order and the Index
portfolio adjusted by changing the number of whole shares of each
component stock so that the largest capitalized stock in the Index
represents 24% of the Index value, the second largest represents 12%,
and each of the remaining companies represent 8%. If the number of
components in the Index increases to greater than ten securities, the
Amex will continue to weight the two components with the highest market
capitalizations 24% and 12%, respectively. The remaining components
will then be weighted equally.\3\ For example, if two new components
are added to the Index, the two securities with the highest market
capitalizations will be assigned a 24% and 12% weighting, respectively,
while the remaining ten securities in the Index would be weighted 6.4%
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\3\See Amendment No. 3.
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If it becomes necessary to remove a stock from the Index, the
Exchange will either add a Mexican stock having characteristics that
will permit the Index to remain within the maintenance criteria
specified in its rules and the Generic Narrow-Based Index Approval
Order,\4\ or will permit the Index to remain at nine stocks until the
next quarterly rebalancing, at which time the Exchange will replace the
component so that the Index will continue to have at least ten
components.\5\ The Exchange has chosen to rebalance following the close
of trading on the quarterly expiration cycle because it allows an
option contract to be held for up to three months without a change in
the Index portfolio while at the same time, maintaining the
``modified'' equal dollar weighting feature of the Index. 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.
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\4\See Securities Exchange Act Release No. 34157 (June 3, 1994),
59 FR 30062 (June 10, 1994) (``Generic Narrow Based Index Approval
Order'').
\5\See Amendment No. 3.
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The Amex states that it has had experience making regular quarterly
adjustments to a number of its indexes and has not encountered investor
confusion regarding the adjustments, since they are done on a regular
basis and timely, proper and adequate notice is given. An information
circular is distributed to all Exchange members notifying them of the
quarterly changes. This circular is also sent by facsimile to the
Exchange's contacts at the major options firms mailed to recipients of
the Exchange's options related information circulars, and made
available to subscribers of the Options New Network. In addition, the
Exchange will include in its promotional and marketing materials for
the Index description of the ``modified'' equal dollar weighting
methodology. As noted above, the number of shares of each component
stock in the Index portfolio remain 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, a stock
distribution, stock, splits, reverse stock splits, rights offering
distribution, reorganization, recapitalization, or similar event with
respect to the component stocks. In a merger or consolidation of an
issuer of a component stock, if the stock remains in the Index, the
number of shares of that security in the portfolio may be adjusted, to
the nearest whole share, to maintain the component's relative weight in
the Index at the level immediately prior to the corporate action. In
the event of a stock replacement, the average dollar value of the
remaining portfolio components will be calculated and that amount
invested in the stock of the component, to the nearest whole share. In
all cases the divisor will be adjusted, if necessary, to ensure Index
continuity
The Amex will calculate and maintain the Index, and pursuant to
Exchange Rule 901C(b) may at any time or from time to time substitute
stocks, or adjust the number of stocks included in the Index, based on
changing conditions in Mexico. However, the Exchange will not decrease
the number of Index component stocks to less than nine or increase the
number of component stocks to greater than thirteen without prior
Commission approval.\6\
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\6\See Amendment No. 3.
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The value of the Index will be calculated continuously and
disseminated every 15 seconds over the Consolidated Tape Association's
Network B.
Expiration and Settlement
The Exchange proposes to trade cash-settled, European-style Index
options (i.e., exercises are permitted at expiration only). The
Exchange also proposes that Mexico Index options will have trading
hours from 9:30 a.m. to 4:15 p.m. EST. As with other index options
traded on the Amex, 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 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 Index value for purposes of settling a specific Mexico Index
option will be calculated based upon the primary exchange regular way
opening sale prices for the component stocks. In the case of NM
securities, the first reported sale price will be used. As trading
begins in each of the Index's component securities, its opening sale
price is captured for use in the calculation. Once all of the component
stocks have opened, the value of the Index is determined and that value
is used as the settlement value of the option. If any of the component
stocks do not open for trading on the last trading day before
expiration, then the prior day's last sale price is used in the
calculation.
The Exchange plans to list options series with expirations in the
three near-term calendar months and in the two additional calendar
months in the March cycle. In addition, longer term option series
having up to thirty-six months to expiration may be traded. In lieu of
such long-term options on a full-value Index level, the Exchange may
instead list long-term, reduced-value put and call options based on
one-tenth (1/10th) the Index's full-value. In either event, the
interval between expiration months for either a full-value or reduced-
value long-term option will not be less than six months.
Eligibility Standards for Index Components
The Index's component securities all have major business interests
in Mexico, and have been selected on the basis of their market
capitalization, trading liquidity, and representation of Mexican
business industries. The components represent the largest and most
liquid of all Mexican securities trading in the U.S. and the Index
tracks closely the performance of the Bolsa Index, a benchmark for the
Mexican stock market.
The Exchange has represented that it will ensure that the Index
initially and thereafter satisfies the listing and maintenance criteria
set forth in the Generic Narrow-Based Index Approval Order. In choosing
among Mexican stocks that meet the initial minimum criteria set forth
in the Generic Narrow-Based Index Approval Order (as well as Exchange
Rule 901C), the Exchange will select stocks that: (1) Have a minimum
market value in U.S. dollars of at least $75 million,\7\ except that
for each of the lowest weighted component securities in the Index that
in the aggregate account for no more than 10% of the weight of the
Index, the market value may be at least $50 million; (2) have an
average monthly trading volume in the U.S. markets over the previous
six month period of not less than one million shares (or ADRs) except
that for each of the lowest weighted component securities in the Index
that in the aggregate account for no more than 10% of the weight of the
Index, the trading volume shall be at least 500,000 shares in each of
the last six months; (3) have at least 90% of the numerical Index value
and at least 80% of the total number of component securities meeting
the current criteria for standardized option trading set forth in
Exchange Rule 915; and (4) are reported securities that trade on either
the NYSE, Amex (subject to the limitations of Rule 901C), or are NM
securities. In addition, no individual stock in the Index may represent
more than 25% of the Index weight (at the time of rebalancing) and the
five highest weighted stocks may not constitute more than 60% of the
Index weight (at the time of rebalancing).
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\7\In the case of ADRs, this represents market value as measured
by total world-wide shares outstanding.
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The Amex will ensure that not more than 20% of the weight of the
Index is represented by ADRs overlying foreign securities that are not
subject to comprehensive surveillance sharing agreements.\8\ Currently,
one component ADR, accounting for 8% of the Index value, has the
majority of its trading volume occurring on the Bolsa Mexicana de
Valores, an exchange with which the Amex does not currently have in
place an effective market information sharing agreement.
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\8\See Amendment No. 3.
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If the Index fails at any time to satisfy the maintenance criteria
set forth in the Generic Narrow-Based Index Approval Order and Exchange
Rule 901C, the Exchange will immediately notify the Commission of that
fact and will not open for trading any additional series of options on
the Index 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 options on the Mexico Index has been approved
by the Commission under Section 19(b)(2) of the Exchange Act.\9\
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\9\See Amendment No. 3.
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Exchange Rules Applicable to Stock Index Options
Amex Rules 900C through 980C will apply to the trading of regular
and long-term 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 Rule 901C(a) and a Stock Index Group under rule 900C(b)(1). With
respect to Rule 903C(b), the Exchange proposes to list near-the-money
(i.e., within ten points above or below the current index value)
options 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 proposes to establish, pursuant to Rule 904C(c), a
position limit of 7,500 contracts on the same side of the market.\10\
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\10\Telephone conversation between Howard Baker, Senior Vice
President, Derivative Securities, Amex, and Howard Kramer, Associate
Director, Division of Market Regulation, SEC, on July 12, 1994. In
Amendment No. 2, the Amex proposed position limits of 10,500
contracts. That portion of Amendment No. 2 which refers to position
limits has been withdrawn.
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In anticipation of substantial customer activity in the options on
this Index (including institutional activity), the Exchange seeks to
have the ability to utilize its Auto-Ex system for orders in the Index
options of up to 50 contracts. Auto-Ex is the Exchange's automated
execution system which provides for the automatic execution of market
and marketable limit orders at the best bid or offer at the time the
order is entered. The ability to use Auto-Ex for orders of up to 50
contracts will provide customers with deep, liquid markets as well as
expeditious executions. The Amex represents that it has the necessary
systems capacity to support new series that would result from the
introduction of Mexico Index Options.\11\
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\11\See Letter from Edward Cook, Jr., Managing Director,
Information Technology, Amex, to Michael Walinskas, Derivative
Products Regulation, SEC, dated July 8, 1994.
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2. Statutory Basis
The Exchange believes 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 and to promote just and
equitable principles of trade, and is not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Amex requests that the proposed rule change be given expedited
review and accelerated effectiveness pursuant to Section 19(b)(2) of
the Act.
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested person are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies
of the submission, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and coping at the
Commission's Public Reference Section, 450 Fifth Street NW.,
Washington, DC 20549. 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-94-20 and should be
submitted by August 8, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17348 Filed 7-14-94; 8:45 am]
BILLING CODE 8010-01-M
