[Federal Register Volume 59, Number 159 (Thursday, August 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-20235]
[[Page Unknown]]
[Federal Register: August 18, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34526; International Series Release No. 699; File No.
SR-Amex-94-19]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 2 to Proposed Rule Change, by the American Stock
Exchange, Inc. Relating to the Listing and Trading of Options and Full-
Value and Reduced-Value Long-Term Options on the Nikkei Stock Index 300
August 11, 1994.
I. Introduction
On May 31, 1994, the American Stock Exchange, Inc. (``Amex'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to provide for the listing and trading of options
and long-term options (``LEAPS'')\3\ based on the Nikkei Stock Index
300 (``Nikkei 300 Index'' or ``Index''), as well as LEAPS based on a
reduced-value Index. On June 10, 1994, the Exchange filed Amendment No.
1 to the proposed rule change.\4\ On July 14, 1994, the Exchange filed
Amendment No. 2 to the proposed rule change.\5\
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\``LEAPS'' is an acronym for Long-Term Equity Anticipation
Securities. LEAPS are long-term index option series that expire from
12 to 36 months from their date of issuance. See Amex Rule 903C.
\4\In Amendment No. 1, the Amex amended its proposal to provide
that (1) the exercise settlement value for all of the Nikkei Stock
Index 300 expiring option contracts will be calculated by Nihon
Keizai Shimbun based upon the opening price of each of the component
securities in Japan on the last business day prior to expiration;
(2) the position and exercise limits for Nikkei Stock Index 300
option contracts in the series with the nearest expiration month
will be 30,000 contracts; (3) the trading unit for Nikkei Stock
Index 300 options is the Index value multiplied by $100; (4) for
valuation purposes, one Nikkei Stock Index 300 unit (1.0) is
assigned a fixed value of one U.S. dollar; and (5) the Tokyo Stock
Exchange has recently requested that a new comprehensive
surveillance sharing agreement be entered into for options on the
Nikkei Stock Index 300, which agreement will cover the sharing of
surveillance information regarding the index's component securities.
See Letter from Claire P. McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, to Michael Walinskas, Branch
Chief, Derivatives Regulation, Division of Market Regulation,
Commission, dated June 10, 1994.
\5\In Amendment No. 2, the Exchange lowered the proposed
position limits for Index options and Index LEAPS to 25,000
contracts on the same side of the market, provided that no more than
15,000 contracts are in series in the nearest expiration month. See
Letter from Claire P. McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, to Michael Walinskas, Branch
Chief, Derivatives Oversight, Division of Market Regulation,
Commission, dated July 14, 1994.
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The proposed rule change was published for comment in the Federal
Register on June 17, 1994.\6\ No comments were received on the proposed
rule change. This order approves the Exchange's proposal and Amendment
Nos. 1 and 2 thereto.
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\6\See Securities Exchange Act Release No. 34198 (June 10,
1994), 59 FR 31282 (June 17, 1994).
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II. Description of the Proposal
A. General
The Amex proposes to trade standardized index option contracts
based on the Nikkei 300 Index, an index comprised of 300 representative
stocks of the first section\7\ of the Tokyo Stock Exchange (``TSE'').
The Amex also proposes to list LEAPS on the full-value Index and LEAPS
on a reduced-value Index that will be computed at one-tenth of the
value of the Index. Nikkei 300 Index LEAPS will trade independently of
and in addition to regular Nikkei 300 Index options traded on the
Exchange; however, as discussed below, position and exercise limits of
Index LEAPS and regular Index options will be aggregated.\8\
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\7\First section stocks are distinguished from second section
stocks by more stringent listing standards.
\8\See infra Section II.G.
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B. Composition and Maintenance of the Index
The Nikkei 300 Index was designed by Nihon Keizai Shimbun, Inc.
(``NKS''). The Amex represents that Index component stocks were
selected by NKS for their high market capitalizations, and their high
degree of liquidity, and are representative of the relative
distribution of industries within the broader Japanese equity market.
As of the date of this order, the Amex had not yet formally executed a
licensing agreement with NKS to list options on the Nikkei 300 Index.
As of July 8, 1994, the total capitalization of the Index was
approximately US$2.47 trillion.\9\ Market capitalizations of the
individual stocks in the Index ranged from a high of US$83.8 billion to
a low of US$1.03 billion, with a median of US$3.56 billion and a mean
of US$8.25 billion. In addition, the average daily trading volume of
the stocks in the Index, for the six-month period ending June 30, 1994,
ranged from a high of 4,740,000 shares to a low of 6,000 shares, with a
mean and median of approximately 676,000 and 417,000 shares,
respectively. The highest weighted component stock in the Index
accounts for 3.39 percent of the Index. The five largest Index
components account for approximately 14.9 percent of the Index's value.
The lowest weighted component stock comprises 0.042 percent of the
Index, and the five smallest Index components account for approximately
0.25 percent of the Index's value.
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\9\Based on the July 8, 1994 exchange rate of Y98.2 per US$1.00.
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The Index is maintained by NKS. To maintain the continuity of the
Index, NKS will adjust the Index divisor to reflect certain event
relating to the component stocks. These events include, but are not
limited to, changes in the number of shares outstanding, spin-offs,
certain rights issuances, and mergers and acquisitions. The Amex
represents that NKS reviews the composition of the Index periodically.
C. Contract Specifications
The proposed options on the Index will be cash-settled, European-
style options.\10\ Trading hours for the options will be from 9:30 a.m.
to 4:15 p.m. (New York time). The multiplier for the Index will be 100.
Strike prices on Index options and full-value Index LEAPS will be set
to bracket the Index level at $5.00 intervals. In addition, the
Exchange may list near-the-money (i.e., within ten points above or
below the current Index value) option series on the Index at 2\1/2\
point strike price intervals when the value of the Index is below 200
points. The Exchange intends to list options series with expirations in
the three near-term calendar months, plus up to three additional
calendar months in the March, June, September, December cycle. As
described in more detail below, the Exchange also intends to list Index
LEAPS, and LEAPS on a reduced-value Index, that will expire from 12 to
36 months from the date of their issuance.
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\10\A European-style option can be exercised only during a
specified period before the option expires.
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D. Calculation of the Index
The Nikkei 300 Index is capitalization-weighted and reflects
changes in the prices of the Index component securities relative to the
base date of the Index (October 1, 1982). The value of the Index is
calculated by multiplying the price of each component security by the
number of shares outstanding of each such security, adding the
products, and dividing by the current Index divisor. The Index divisor
is adjusted to reflect certain events relating to the component
stocks.\11\ The Index had a closing value of 299.47 on July 13, 1994.
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\11\See supra Section II.B. The Index divisor was set to give
the Index a value of 100 on its base date.
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Because trading does not occur on the TSE during the Amex's trading
hours, the daily dissemination of the Index value is calculated by the
Amex once each day based on the most recent official closing price of
each Index component security as reported by the TSE. This closing
value is disseminated throughout the trading day on the Amex.
E. Settlement of Index Options
Options on the index (including full-value and reduced-value Index
LEAPS) will expire on the Saturday following the third Friday of the
expiration month (``Expiration Friday''). The last trading day in an
option series normally will 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 exercise settlement
value for all of the index's expiring options will be calculated by NKS
based upon the opening price of each of the component securities in
Japan on the last business day prior to expiration. If a stock fails to
open for trading, the last available price of the stock will be used to
calculate the Index's settlement value. When an option expiration is
moved in accordance with an Exchange holiday, the last trading day for
the expiring Index options will be Wednesday, and the exercise
settlement value of the Index options will be determined at the opening
of the regular Thursday trading session on the TSE, even if the TSE is
open on Friday. If the TSE is closed on the Friday before expiration
but the Amex is not closed, the last trading day for expiring Index
options will be on Wednesday and the exercise settlement value of
expiring Index options will be determined at the opening of the regular
Thursday trading session on the TSE.
F. Listing of Long-Term Options on the Full-Value or Reduced-Value
Index
The Exchange may list series of LEAPS on the Nikkei 300 Index that
expire from 12 to 36 months from the date of their issuance on either
the full-value Index or a reduced-value Index computed at one-tenth of
the full-value Index, subject to existing Exchange requirements
applicable to full-value and reduced-value LEAPS.\12\ 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. The
current and closing values for reduced-value Index LEAPS will be
computed by dividing the value of the full-value Index by ten and
rounding the resulting figure to the nearest one-hundredth. For
example, a Nikkei 300 Index value of 299.47 would be 29.95 for the
reduced-value Index LEAPS, and 299.44 would become 29.94. The reduced-
value Index LEAPS will have a European-style exercise and will be
subject to the same rules that govern trading of all of the Exchange's
index options, including sales practices rules, margin requirements,
and floor trading procedures. Strike price intervals for the reduced-
value Index LEAPS will be no less than $2.50, instead of $5.00.
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\12\See Amex Rule 903C.
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G. Position and Exercise Limits, Margin Requirements, and Trading Halts
Position limits for options (including Index LEAPS) on the Nikkei
300 Index will be set at no more than 25,000 contracts on the same side
of the market, provided that no more than 15,000 of such contracts are
in series in the nearest expiration month.\13\ Exercise limits will be
set at the same level as position limits.\14\ For purposes of
calculating applicable position and exercise limits, positions in
reduced-value options on the index will be aggregated with each other
and with positions in the full-value Index options. Ten reduced-value
contracts will equal one full-value contract for purposes of
aggregating these positions.\15\
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\13\See Amex Rule 904C.
\14\See Amex Rule 905C.
\15\See Amex Rule 904C.
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Exchange rules applicable to options on the Index will be identical
to the rules applicable to other broad-based index options for purposes
of trading rotations, halts, and suspensions,\16\ and margin
treatment.\17\
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\16\See Amex Rule 918C.
\17\See Amex Rule 462(d)(2)(D)(iii).
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Finally, the Exchange proposes to utilize its Auto-Ex system for
orders in Index options of up to 50 contracts.\18\
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\18\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 Exchange believes that 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.
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H. Surveillance
The Exchange will use the same surveillance procedures currently
utilized for each of the Exchange's other index options to monitor
trading in Index options and Index LEAPS. The Exchange represents that
the TSE has requested that a new comprehensive surveillance sharing be
executed with respect to options on the Index. The Exchange expects
this agreement to cover the sharing of surveillance information
regarding the Index's component securities.\19\
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\19\See Infra Section III.C.
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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) of the Act.\20\
Specifically, the Commission finds that the trading of options based on
the Nikkei 300 Index will serve to protect investors, promote the
public interest, and help to remove impediments to a free and open
securities market by providing investors with a means to hedge exposure
to market risk associated with the Japanese equity market and provide a
surrogate instrument for trading in the Japanese securities market.\21\
The trading of options based on the Nikkei 300 Index should provide
investors with a valuable hedging vehicle that should reflect
accurately the overall movement of the Japanese equity market.
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\20\15 U.S.C. 78f(b)(5) (1988).
\21\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 product is in the public interest. Such a
finding would be difficult with respect to an option 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.
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In addition, the Commission believes, for the reasons discussed
below, that the Amex has adequately addressed issues related to
customer protection, index design, surveillance, and market impact on
Nikkei 300 Index options.
A. Index Design and Structure
The Commission finds that it is appropriate and consistent with the
Act to classify the Index as a broad-based index. Specifically, the
Commission believes the Index is broad-based because it reflects a
substantial segment of the Japanese equity market, and, among other
things, contains a large number of stocks that trade in that market.
First, the Index consists of 300 actively-traded stocks traded on the
first section of the TSE, representing 36 different industry groups in
Japan. Second, the market capitalizations of the stocks comprising the
Index are very large. Specifically, the total capitalization of the
Index, as of July 8, 1994, was US$2.47 trillion, with the market
capitalizations of the individual stocks in the Index ranging from a
high of US$83.8 billion to a low of US$1.03 billion, with a median
value of US$3.56 billion and a mean of US$8.25 billion. Third, no one
particular stock or group of stocks dominates the Index. Specifically,
no single stock comprises more than 3.39 percent of the Index's total
value, and the percentage weighting of the five largest issues in the
Index accounts for 14.9 percent of the Index's value. Accordingly, the
Commission believes it is appropriate to classify the Index as broad-
based.
B. Customer Protection
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 Nikkei 300 Index options
(including full-value and reduced-value Index LEAPS), can commence 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. Accordingly, because the Index options and Index
LEAPS will be subject to the same regulatory regime as the other
standardized options currently traded on the Amex, the Commission
believes that adequate safeguards are in place to ensure the protection
of investors in Nikkei 300 Index options and full-value and reduced-
value Nikkei 300 Index LEAPS.
C. Surveillance
As a general matter, the Commission believes that comprehensive
surveillance sharing agreements between the relevant foreign and
domestic exchanges are important where an index product comprised of
foreign securities is to be traded in the United States. In most cases,
in the absence of such a comprehensive surveillance sharing agreement,
the Commission believes that it would not be possible to conclude that
a derivative product, such as a Nikkei 300 Index option, was not
readily susceptible to manipulation.
Although the Amex and the TSE do not yet have a written
comprehensive surveillance sharing agreement that covers the trading of
Nikkei 300 Index options,\22\ a number of factors support approval of
the proposal at this time. First, while the size of an underlying
market is not determinative of whether a particular derivative product
based on that market is readily susceptible to manipulation, the size
of the market for the securities underlying the Nikkei 300 Index makes
it less likely that the proposed Index options are readily susceptible
to manipulation.\23\ In addition, the Commission notes that the TSE is
under the regulatory oversight of the Japanese Ministry of Finance
(``MOF''). The MOF has responsibility for both the Japanese securities
and derivatives markets. Accordingly, the Commission believes that the
ongoing oversight of the trading activity on the TSE by the MOF will
help to ensure that the trading of Nikkei 300 Index options will be
carefully monitored with a view toward preventing unnecessary market
disruptions.
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\22\The Amex and the TSE, however, currently have a surveillance
sharing agreement in place that covers other derivative products
traded on the Amex. That agreement has been previously amended by
the Amex and the TSE to include new products such as the trading of
Japan Index options. The Exchange represents that it currently is
pursuing a comprehensive surveillance sharing agreement with the TSE
with respect to Nikkei 300 Index options, which the Exchange expects
will cover the sharing of surveillance information regarding the
Index's component securities.
\23\In evaluating the manipulative potential of a proposed index
derivative product, as it relates to the securities that comprise
the index and the index product itself, the Commission has
considered several factors, including (1) the number of securities
comprising the index or group; (2) the capitalizations of those
securities; (3) the depth and liquidity of the group or index; (4)
the diversification of the group or index; (5) the manner in which
the index or group is weighted; and (6) the ability to conduct
surveillance on the product. See Securities Exchange Act Release No.
31016 (August 11, 1992), 57 FR 37012 (August 17, 1992).
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Finally, the Commission and the MOF have concluded a Memorandum of
Understanding (``MOU'') that provides a framework for mutual assistance
in investigatory and regulatory matters.\24\ Moreover, the Commission
also has a longstanding working relationship with the MOF on these
matters. Based on the longstanding relationship between the Commission
and the MOF and the existence of the MOU, the Commission is confident
that it and the MOF could acquire information from one another similar
to that which would be available in the event that a comprehensive
surveillance sharing agreement were executed between the Amex and the
TSE with respect to transactions in TSE-traded stocks related to Nikkei
300 Index option transactions on the Amex.\25\
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\24\See Memorandum of United States Securities and Exchange
Commission and the Securities Bureau of the Japanese Ministry of
Finance on the Sharing of Information, dated May 23, 1986.
\25\It is the Commission's expectation that this information
would include transaction, clearing, and customer information
necessary to conduct an investigation.
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Nevertheless, the Commission continues to believe strongly that a
comprehensive surveillance sharing agreement between the TSE and the
Amex covering Nikkei 300 Index options would be an important measure to
deter and detect potential manipulations or other improper or illegal
trading involving Nikkei 300 Index options. Accordingly, the Commission
believes it is critical that the TSE and the Amex continue to work
together to consummate a formal comprehensive surveillance sharing
agreement to cover Nikkei 300 Index options and the component
securities as soon as practicable.\26\
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\26\See supra note 22.
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D. Market Impact
The Commission believes that the listing and trading on the Amex of
Nikkei 300 Index options, including full-value and reduced-value Index
LEAPS, will not adversely impact the securities markets in the United
States or Japan.\27\ First, as described above, the Index is broad-
based and presently is comprised of 300 stocks with no one stock
dominating the Index. Second, as noted above, the stocks contained in
the Index. Second, as noted above, the stocks contained in the Index
have large capitalizations and are actively-traded. Third, the proposed
position and exercise limits of 25,000 contracts on the same side of
the market, provided that no more than 15,000 of such contracts are in
series in the nearest expiration month, will serve to minimize
potential manipulation and market impact concerns. Fourth, existing
Amex stock index options rules and surveillance procedures will apply
to options on the Index. Finally, the Commission finds that the ability
to use Auto-Ex for orders of up to 50 contracts will provide customers
with liquid markets and efficient executions.
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\27\In addition, the Amex and the Options Price Reporting
Authority (``OPRA'') have both represented that they have the
necessary systems capacity to support those new series of options
that would result from the introduction of Index options (including
full-value and reduced-value Index LEAPS). See Letter from Edward
Cook, Jr., Managing Director, Information Technology, Amex, to
Michael Walinskas, Branch Chief, Options Regulation, Division of
Market Regulation, Commission, dated July 12, 1994; Letter from
Joseph P. Corrigan, Executive Director, OPRA, to Charles Faurot,
Managing Director, Market Data Services, Amex, dated July 18, 1994.
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E. Accelerated Approval of Amendment No. 2
The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication on notice of filing thereof in the Federal Register.
Amendment No. 2 reduces the proposed position limits with respect to
Nikkei 300 Index options from 50,000 contracts on the same side of the
market to 25,000 contracts (provided that no more than 15,000
contracts, as opposed to 30,000 contracts as originally proposed, are
in series in the nearest expiration month). By reducing the position
limits, this amendment will serve to protect investors and the public
interest, and further minimize the potential for manipulation. Further,
the proposal containing the higher position limits was published for
the full 21-day comment period, and no comments were received.
Therefore, the Commission finds that no new regulatory issues are
raised by Amendment No. 2. Accordingly, the Commission believes it is
consistent with Sections 19(b)(2) and 6(b)(5) of the Act to approve
Amendment No. 2 on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2 to the proposed rule change.
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 foregoing that
are filed with the Commission, and all written communications relating
to the foregoing 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 filings also will be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-Amex-94-19, and should be submitted by September 8, 1994.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-Amex-94-19), as amended, is
approved.
\28\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-20235 Filed 8-17-94; 8:45 am]
BILLING CODE 8010-01-M
