[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21010]
[[Page Unknown]]
[Federal Register: August 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34554; International Series Release No. 702, File No.
SR-Amex-94-18]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 by the American Stock Exchange, Inc.,
Relating to the Listing and Trading of Options on the Israeli Index
August 19, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May
31, 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 August
2, 1994, the Exchange filed Amendment No. 1 to the proposed rule
change, the subject matter of which supersedes the original
proposal.\1\ On August 8, 1994, the Exchange filed Amendment No. 2
(``Amendment No. 2'') to the proposal to clarify how the index will be
weighted when the composition of the index changes from its current
number of eleven components.\2\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\In the original proposal, the Amex originally sought approval
of a narrow-based, capitalization-weighted index comprised of ten
components.
\2\See Letter from Nathan Most, Senior Vice President, New
Products Development, Amex, to Michael Walinskas, Derivative
Products Regulation, SEC, dated August 5, 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 Amex/Oscar Gruss Israel
Index (``Israeli Index'' or ``Index''), a new stock index developed by
the Amex in conjunction with Oscar Gruss & Son, Inc. based on Israeli
stocks (or ADRs thereon) trades on the Amex, 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 Amex/Oscar Gruss
Israel Index, based entirely on shares of widely held Israeli stocks
and American Depository Receipts (``ADRs'') traded on the NYSE, or that
are NM securities. The Index contains securities of highly capitalized
companies with major business interests in Israel. These include
companies which are incorporated in Israel, whose offices are located
in Israel, or whose research and development activities are
concentrated in Israel.
Index Calculation and Maintenance
The Index is calculated using a ``modified'' equal dollar weighting
methodology. Five of the eleven 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 Israeli
stock market. For example, ECI Telecom Ltd. and Teva Pharmaceutical
Industries, which are the largest capitalized components 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 Israeli market since it provides a higher
weighting for the larger capitalized components, yet does not permit
those stocks not 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 components. It has been the Exchange's
experience that options on market value weighted indexes dominated by
one or two components 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 $100,000 portfolio comprised of eleven Israeli component
securities was established representing a hypothetical ``investment''
(rounded to the nearest whole share) of $12,000 in the five largest
capitalized Index components and $6,667 in each of the six remaining
Index Components. 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 Index components divided by
the Index divisor. The Index divisor was initially determined to yield
the benchmark value of 213.00 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 five largest capitalized stocks in the
Index represent 60% of the Index value, and the remaining 40% of the
Index value is evenly distributed over the remaining securities. If the
number of components in the Index changes from eleven securities, the
Amex will continue to weight the five components with the highest
market capitalization 12%. The remaining components will then be
weighted equally.\3\ For example, if two new components are added to
the Index, the five securities with the highest market capitalizations
will be assigned 12% weightings while the remaining eight securities in
the Index would be weighted 5%.
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\3\See Amendment No. 2.
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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.
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 News Network. In addition, the
Exchange will include in its promotional and marketing materials for
the Index a description of the ``modified'' equal dollar weighting
methodology. As noted above, the number of shares of each component
stock in the Index portfolio remains 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, a 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 components' 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 in the same weighting tier as the stock
being replaced will be calculated and that amount ``invested'' in the
stock of the new 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 Israel. 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 fourteen without prior
Commission approval.
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 Israeli Index options will have trading
hours from 9:30 a.m. to 4:10 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 Israeli Index
option will be calculated based upon the primary exchange regular way
opening sale prices for the component securities.\4\ 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 used 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.
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\4\In the case of ADRs, the primary exchange refers to the
primary exchange for the ADR and not the underlying security.
Telephone conversation between Claire McGrath, Special Counsel,
Derivative Securities, Amex, and Stephen Youhn, Derivative Products
Regulation, SEC, on Aug. 19, 1994.
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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 trade. 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 (\1/10\th) 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 Israel, and have been selected on the basis of their market
capitalization, trading liquidity, and representation of Israeli
business industries. The Amex believes the components represent the
largest and most liquid of all Israeli securities trading in the U.S.,
and that the Index tracks closely the performance of larger broad
market Israeli indexes, such as the Oscar Gruss Israel Index, which
contains all of the more than 50 Israeli securities currently traded in
the U.S. This index is carried in the Israeli press as well as by
Bloomberg L.P., a major U.S. data vendor.
In choosing among Israeli stocks that meet the minimum criteria set
forth in Exchange Rule 901C, the Exchange will select stocks that: (1)
have a minimum market value in U.S. dollars of at least $75 million,
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 500,000 shares (or ADRs); (3) have at
least 85% 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.
The Amex will ensure that no 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.\5\ Currently,
no Index components have the majority of their trading volume occurring
on an exchange with which the Amex does not currently have in place an
effective surveillance sharing agreement.
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\5\See Amendment No. 2.
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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 Industry 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.
The Exchange seeks to have the ability to utilize its Auto-Ex
system for orders in 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 Exchange believes
the ability to use Auto-Ex for orders of up to 50 contracts will
provide customers with liquid markets and expeditious executions. The
Amex represents that it has the necessary systems capacity to support
new series that would result from the introduction of Israeli Index
Options.\6\
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\6\See Letter from Warren I. Kaiser, Senior Vice President,
Information Technology, Amex, to Michael Walinskas, Derivative
Products Regulation, SEC, dated August 8, 1994. Additionally, the
Options Price Reporting Authority (``OPRA'') has stated that it has
the necessary systems capacity to support those new series of index
options that would result from the introduction of Index options and
Index LEAPS. See Memorandum from Joe Corrigan, Executive Director,
OPRA, to Charles Faurot, Managing Director, Market Data Services,
Amex, dated August 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
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 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, 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. Sec. 552, will be available for inspection and copying 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-94-18 and should be
submitted by September 16, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21010 Filed 8-25-94; 8:45 am]
BILLING CODE 8010-01-M
