[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38494-38497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18712]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37445; File No. SR-NYSE-95-42]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendments
No. 1 and 2 Thereto by the New York Stock Exchange, Inc. Relating to
the Establishment of Uniform Listing and Trading Guidelines for Narrow-
Based Stock Index Warrants
July 16, 1996.
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 December
10, 1995, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') the proposed rule change as described in Items I, II, and III
below, which Items have been prepared by the NYSE. The NYSE filed
Amendments No. 1 (``Amendment No. 1'') and 2 (``Amendment No. 2''
together with Amendment No. 1 ``Amendments'') to the proposed rule
change on April 3 and July 12, 1996, respectively.\1\ This Order
approves the proposed rule change, as amended, on an accelerated basis
and also solicits comments on the proposed rule change, as amended,
from interested persons.
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\1\ Letter from James E. Buck, Secretary, NYSE, to Michael
Walinskas, SEC, dated April 2, 1996 (Amendment No. 1) and Letter
from James E. Buck, Secretary, NYSE, to Ivette Lopez, SEC, dated
July 11, 1996 (Amendment No. 2). The Amendments primarily address
and clarify position limit related issues.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to amend Rule 414 (Index and Currency Warrants)
and Rule 431 (Margin Requirements) to permit the trading of warrants on
an industry index stock group (``industry index stock group'' or
``narrow-based stock index''). Amendments No. 1 and 2 propose to modify
Rule 414 and certain of the position limit rules that apply to narrow-
based stock index warrants, as discussed below.
The text of the proposed rule change is available at the Office of
the Secretary of the NYSE 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 NYSE 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 NYSE 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
On August 29, 1995, the Commission approved rule changes for the
NYSE and several other stock exchanges which established uniform
listing and trading guidelines for broad-based stock index, currency,
and currency index warrants (``broad-based regulatory framework'').\2\
Those standards govern all aspects of the listing and trading of index
warrants, including issuer eligibility, customer suitability and
account approval procedures, position and exercise limits, reportable
positions, automatic exercise, settlement, margin, and trading halts
and suspensions.
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\2\ On August 29, 1995, the Commission approved uniform listing
and trading guidelines for stock index, currency and currency index
warrants for the NYSE, Pacific Stock Exchange, Philadelphia Stock
Exchange, American Stock Exchange, and Chicago Board Options
Exchange. See Securities Exchange Act Release Nos. 36165, 36166,
36167, 36168, and 36169 (Aug. 29, 1995), respectively.
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The purpose of this proposal is to allow for the listing and
trading of warrants on narrow-based stock index groups in a similar
manner as was recently approved for other U.S. exchanges.\3\ With the
exceptions of separate higher margin requirements and reduced position
limits, the broad-based regulatory framework will fully apply to the
listing, trading, and surveillance of narrow-based index warrants. This
includes a heightened suitability standard for recommendations in index
warrants as well as requiring all purchasers of index warrants to be
options approved. The proposed changes from the broad-based regulatory
framework are outlined as follows:
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\3\ On March 21, 1996, the Commission approved uniform listing
and trading guidelines for narrow-based stock index warrants for the
Philadelphia Stock Exchange, American Stock Exchange, and Chicago
Board Options Exchange. See Securities Exchange Act Release No.
37007 (March 21, 1996).
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(a) Position Limits
The Exchange notes that position limits for broad-based index
warrants were set at levels approximately equal to 75 percent of the
then applicable corresponding limits applicable to options on the same
index. In turn, the Exchange proposes to establish narrow-based index
warrant position limits at a level equal to 75 percent of those
recently approved for narrow-based index options.\4\ As a result,
narrow-based position limits would be governed by three tiers, using
the same qualifications criteria as used for narrow-based index option
position limits:
\4\ Currently, depending on the characteristics of the index,
position limits for narrow-based index options are either 12,000,
9,000, or 6,000 contracts on the same side of the market.
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(i) 4,500,000 warrants if any single stock in the group accounts
for 30 percent or more of the index group value.\5\
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\5\ See Amendment No. 2.
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(ii) 6,750,000 warrants where either: (a) any single stock in
the group accounts for 20 percent or more of the group's numerical
index value; or (b) any five stocks in the group together account
for more than 50 percent of the index group value and no single
stock in the group accounts for 30 percent or more of the index
group value.\6\
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\6\ See Amendment No. 2.
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(iii) 9,000,000 warrants if the underlying group does not fall
within the criteria set forth in either of the other two tiers.
The NYSE proposes that it make the determinations concerning the
relative weight of stocks within an index when a warrant on the index
first commences to trade on the Exchange and twice a year thereafter.
Furthermore, the Exchange proposes to establish uniform dates on which
to make those semi-annual determinations so as to allow it to make all
such determinations for all Exchange-listed industry index warrants at
the same time.
[[Page 38495]]
The NYSE further proposes that after a warrant first commences to
trade, it will make its subsequent semi-annual determinations on the
first of the uniform dates thereafter. If the subsequent semi-annual
determinations indicate that an underlying industry index stock group
now qualifies for a higher position limit, then the filing would allow
the Exchange to increase the limit to the new number immediately. Once
a position limit has been established for a particular issuance of
warrants, however, it would never decrease as a result of changes in
the relative weights of the index's component stocks.\7\ The Exchange
believes this provision would eliminate the confusion and difficulty
that might accompany a forced reduction in position limits during the
life of a particular industry index warrant issue.
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\7\ Subsequently issued warrants on the same industry index
stock group would, however, be subject to the position limit
applicable at the time of the new issuance. This may result in
separate issuances of warrants on the same narrow-based stock index
with disparate position limit levels.
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In addition, Amendment No. 1 clarifies that industry index warrant
positions that a person or group of persons acting in concert holds or
controls must be aggregated for the purpose of applying the industry
index warrant rules. Aggregation applies in two contexts: within a
particular issue of industry index warrants and among different issues
on the same underlying industry index stock group. Within a particular
issue of industry index warrants, the aggregate position is subject to
the position limit that applies to that issue. In the case of multiple
issues of warrants on the same underlying industry index stock groups,
the aggregate position for all such issues is subject to the maximum
position limit that applies in respect of any such issue.
(b) Margin Requirements
Margin will be similar to that required for narrow-based index
options. Accordingly, all purchases of narrow-based index warrants must
be paid in full. Additionally, the minimum margin required for each
narrow-based index warrant carried short in a customer's account would
be 100% of the current market value of each warrant plus 20% of the
current index group value. Narrow-based index warrants would also be
subject to the same spread margin treatment recently approved for
broad-based index warrants.\8\
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\8\ See NYSE Rule 431.
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Listing Warrants on Approved Indexes
The proposed narrow-based index warrant regulatory framework would
also allow the Exchange to list a warrant on a narrow-based stock index
without prior Commission approval if the Commission has already
approved the underlying stock index for warrant or options trading.
Furthermore, the Exchange proposes to incorporate certain generic
initial listing and maintenance criteria which, when satisfied, provide
for the expedited approval of warrants based on narrow-based indexes.
The expedited approval process is nearly identical to that approved for
narrow-based index options,\9\ except as provided below:
\9\ See Securities Exchange Act Release No. 34157 (June 3,
1994).
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(i) The index must contain a minimum of nine stocks at all
times;\10\ and
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\10\ The generic narrow-based index option standard requires ten
stocks initially and nine stocks thereafter.
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(ii) Allow for the use of closing (``p.m.'') prices in
determining the value of an index warrant except that, where 25
percent or more of the value of an index underlying a warrant
consists of stocks that trade primarily in the United States,
opening prices (``a.m. settlement'') must be used at (1) the
warrant's expiration, and (2) on any date in which the warrant's
settlement value will be based on prices on either of the two
business days preceding expiration.\11\
\11\ The generic index option standard requires the use of
opening (``a.m.'') price settlement.
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The basis under the Act for the proposal, as amended, is the
requirement under Section 6(b)(5) that an exchange have rules that are
designed to prevent 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 NYSE does not believe the proposed rule change imposes 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
Comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange requests the Commission to find good cause pursuant to
Section 19(b)(2) for approving the proposal, as amended, prior to the
30th day after its publication in the Federal Register in view of the
Commission's previous approval of substantially identical rule changes
submitted by three other SROs.\12\ These other proposals were subject
to the full notice and comment period and the Exchange notes that no
comment letters were submitted. The NYSE also notes that the Commission
approved amendments to the three other SRO's narrow-based stock index
warrant proposal on an accelerated basis. Accordingly, because the
NYSE's proposed regulatory structure for narrow-based stock index
warrants mirrors standards already approved by the Commission for other
SROs, the NYSE believes no regulatory purpose would be served by
delaying the ability of NYSE to list narrow-based stock index warrants.
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\12\ See supra note 3.
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IV. 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).\13\ Specifically, the
Commission finds that the Exchange's proposal to establish uniform
listing and trading standards for narrow-based stock index warrants
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. In addition, the proposed listing
standards for warrants are consistent with the Section 6(b)(5)
requirements that rules of an exchange be designed to prevent
fraudulent and manipulative acts, to promote just and equitable
principles of trade, and are not designed to permit unfair
discrimination among issuers.
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\13\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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The Exchange's proposed generic listing standards for narrow-based
stock index warrants set forth a regulatory framework for the listing
of such products. Generally, listing standards serve as a means for an
exchange to screen issuers and to provide listed status only to bona
fide issuances that will have sufficient public float, investor base,
and trading interest to ensure that the market has the depth and
liquidity necessary to maintain fair and orderly markets. Adequate
standards are especially important for warrant issuances given the
leveraged and contingent liability they represent.
[[Page 38496]]
The Commission notes that, with certain exceptions listed below,
the Exchange will apply to narrow-based index warrants the same
regulatory framework which recently was approved for broad-based index
warrants. In approving the broad-based index warrant regulatory
framework, the Commission found that the framework provides an adequate
regulatory structure for the trading of such warrants, including
appropriate trading rules, sales practice requirements, margin
requirements, position and exercise limits and surveillance procedures.
The Commission also found that the applicable framework is designed to
minimize the potential for manipulation, thereby helping to ensure that
such index warrants do not have a negative market impact. Finally, the
Commission also indicated that the framework adequately addressed the
special risks to customers arising from the trading of such
warrants.\14\
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\14\ Pursuant to Section 6(b)(5) of the Act, the Commission is
required to find, among other things, that trading in warrants will
serve to protect investors and contribute to the maintenance of fair
and orderly markets. In this regard, the Commission must predicate
approval of any new derivative product upon a finding that the
introduction of such derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function,
because any benefits that might be derived by market participants
likely would be outweighed by the potential for manipulation,
diminished public confidence in the integrity of the markets, and
other valid regulatory concerns. As discussed below, the Commission
believes narrow-based index warrants will serve an economic purpose
by providing an alternative product that will allow investors to
participate in the price movements of the underlying securities in
addition to allowing investors holding positions in some or all of
such securities to hedge the risks associated with their portfolios.
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The Commission believes it is reasonable for the Exchange to apply
a nearly identical regulatory structure to narrow-based index warrants
as broad-based index warrants, particularly given the substantial
similarities that exist between them.\15\ Both broad and narrow-based
stock index warrants represent a leveraged investment in a portfolio or
group of equity securities. However, broad-based index products
generally have a large number of component securities and represent a
certain overall equities market or a substantial segment thereof.
Narrow-based index products, on the other hand, generally are comprised
of fewer component securities that often are concentrated in a
particular industry group. These differences heighten concerns with
leveraged narrow-based index products regarding market impact,
manipulation and volatility, dictating that narrow-based indexes be
subject to lower position limits and more restrictive margin
treatment.\16\
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\15\ The regulatory framework for broad-based index warrants is
similar to the approach used in regulating index options. Because
the same risks exist in trading of narrow-based index options, the
Commission believes it is appropriate to utilize the same approach.
\16\ This is similar to the approach taken in regulating narrow-
based and broad-based index options.
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Accordingly, the Exchange has proposed separate margin and position
limit treatment for narrow-based index warrants. The proposed margin
levels are analogous to those currently in place for narrow-based stock
index options. The Commission believes these requirements will provide
adequate customer margin levels sufficient to account for the potential
volatility of these products. In addition, the Commission believes that
it is appropriate to apply options margin treatment given the options-
like market risk posed by warrants.\17\
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\17\ The customer spread margin rules applicable to broad-based
stock index and currency warrants were approved subject to a one
year pilot program. The Commission notes that narrow-based index
warrants will be subject to the same pilot program and, upon
expiration of that program, it will determine whether to revise or
approve on a permanent basis the proposed spread margin rules.
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The proposed position limits are also similar to those in place for
narrow-based index options.\18\ In addition, the Exchange has proposed
aggregation requirements to address multiple issuances of warrants on
the same narrow-based index.\19\ The Commission believes that the
position limits and aggregation requirements are reasonable and will
serve to minimize potential manipulation and other market impact
concerns while not unduly restricting liquidity in warrant issuances.
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\18\ The Commission notes that position limits for broad-based
stock index warrants were set at a level roughly equivalent to 75%
of broad-based index options. In the absence of trading experience
with U.S. equities market based index warrants, the Commission
believes it would be imprudent to establish position limits for
positions greater than those currently applicable (on an equivalent
basis) to stock index options on the same index.
\19\ Because each individual warrant issuance is assigned a
separate identification symbol, the Exchange has the ability to
monitor the aggregation of separate issuances of warrants on the
same underlying index.
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The Commission believes the Exchange's existing surveillance
procedures applicable to broad-based index warrants are adequate to
surveil the trading of narrow-based index warrants. The Commission
found that the Exchange's broad-based surveillance procedures were
adequate to surveil for manipulation and other abuses involving the
warrant market and the underlying component securities. Given the
functional similarities between narrow and broad-based index warrants,
the Commission believes it is reasonable to apply the same surveillance
procedures to both.
Similarly, for the same reasons noted in our order approving broad-
based index warrants, the Commission believes that heightened customer
suitability standards, options account approval requirements, and sales
practice procedures which are modelled after index options should be
extended to narrow-based index warrants. The Commission notes that,
upon approval of this filing, the Exchange may list a warrant upon any
narrow-based index that the Commission has previously approved for
options or warrant trading. Additionally, in order to expedite SEC
review of a particular warrant issuance, the Exchange has proposed
employing accelerated listing procedures similar to those adopted for
listing options on narrow-based indexes.\20\
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\20\ Accelerated listing procedures allow the Exchange to permit
issuances of warrants on a particular narrow-based index pursuant to
a filing submitted to the Commission for effectiveness immediately
upon filing under Section 19(b)(3)(A) of the Act. In the event that
a proposed index does not qualify for expedited approval under these
standards, the Exchange is not precluded from filing a proposed rule
change for Commission review pursuant to Section 19(b)(2).
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The Commission notes that these proposed accelerated listing
standards for index warrants differ from the standards applicable to
narrow-based index options in that there is a minimum nine stock
requirement for index warrants (i.e., an index must initially and at
all times thereafter be comprised of at least nine stocks) and that
index warrants may, at certain times, utilize a p.m. settlement
methodology, as discussed above. The Commission believes the proposed
differences are reasonable in the warrant context for several reasons.
With respect to p.m. settlement, index warrants are issuer-based
products whose terms are individually set by the issuer, with the
number of warrants on a given index being fixed at the time of
issuance. Accordingly, it is not certain that there will be a
significant number of warrants in indexes with similar components
expiring on the same day. This may reduce pressure from liquidation of
warrant hedges at settlement. Second, the Commission authorized the
same settlement methodology for broad-based index warrants and believes
it is reasonable that narrow-based index warrants operate in the same
manner. With respect to the nine stock requirement, the Commission does
not believe that this difference is such that it will subject narrow-
based index warrants to
[[Page 38497]]
increased manipulation. In fact, narrow-based index options impose the
same maintenance requirement of nine stocks. The Commission does not
believe that the creation of a nine stock index, as opposed to a ten
stock index, will lead to increased manipulation, per se, provided the
other listing criteria are satisfied. The Commission notes that this
requirement precludes the issuance of index warrants pursuant to the
accelerated listing procedures upon any index comprised of less than
nine stocks.
The Commission believes that the accelerated listing procedures
will provide a sufficient opportunity for it to examine narrow-based
index warrant products based on new indexes (which require that a
filing be made pursuant to Section 19(b)(3)(A) of the Act).
Specifically, the Commission believes that the seven day prefiling
requirement gives the Commission staff an opportunity to discuss with
the Exchange whether its proposal to list and trade particular narrow-
based index warrants properly qualifies for effectiveness upon filing.
In addition, the Commission finds that the 30 day delay in the
commencement of trading of proposed narrow-based index warrants will
provide a meaningful opportunity for public comment prior to the
commencement of trading, while also providing the Exchange with the
opportunity to inform market participants in advance of the proposed
trade date for new index warrants. In accordance with Section
19(b)(3)(C) of the Act, if the Commission determines that the rule
change proposal is inconsistent with the requirements of the Act and
the rules and regulations thereunder, the 30 day delay would allow the
Commission to abrogate the rule change before trading commences, which
will minimize disruption on market participants. This authority could
be utilized if, for example, it is determined that the proposed narrow-
based index warrant does not satisfy the applicable accelerated listing
standards.
The Commission believes that the adoption of these proposed uniform
listing and trading standards for narrow-based index warrants will
provide an appropriate regulatory framework. These standards will also
benefit the Exchange by providing it with greater flexibility in
structuring narrow-based index warrant issuances and a more expedient
process for listing narrow-based index warrants without further
Commission review pursuant to Section 19(b) of the Act. As noted above,
additional Commission review of specific warrant issuances will
generally only be required for warrants overlying any non-approved
narrow-based index that has not been previously approved by the
Commission for narrow-based index warrant or options trading. If
Commission review of a particular warrant issuance is required, the
Commission expects that, to the extent that the warrant issuance
complies with the uniform criteria adopted herein, its review should
generally be limited to issues concerning the newly proposed index.
This should help ensure that such additional Commission review could be
completed in a prompt manner without causing any unnecessary delay in
listing new narrow-based index warrant products.
The Commission finds good cause for approving the proposal, as
amended, prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register in order to allow the NYSE to
begin listing narrow-based stock index warrants without delay. As
discussed above, the proposal is nearly identical to those submitted by
several other SROs.\21\ These other narrow-based stock index warrant
proposals were subject to the full notice and comment period and no
comment letters were received in response. The Commission notes that
the filing, as amended, brings the NYSE's proposal into conformity with
those of the other exchanges. Accordingly, the Commission does not
believe the filing, as amended, raises any new or unique regulatory
issues.
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\21\ See supra note 3.
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For these reasons, the Commission believes there is good cause,
consistent with Section 19(b)(2) \22\ of the Act, to approve the
Exchange's proposal, as amended, on an accelerated basis.
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\22\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Person 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 copying in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by August 14, 1996.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that proposed rule change (SR-NYSE-95-42) is approved, as
amended.
\23\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR Sec. 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18712 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M
