[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31039]


[[Page Unknown]]

[Federal Register: December 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35084; International Series Release No. 756; File No. 
SR-Amex-94-54]

 

Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange, 
Inc. Relating to the Listing of Options on the Amex Airline Index

December 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 December 
7, 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 Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to trade options on The Amex Airline Index 
(``Index''), a new stock index developed by the Amex based on airline 
industry stocks (or ADRs thereon) which are traded on the Amex, the New 
York Stock Exchange, Inc. (``NYSE''), or are national market system 
(``Nasdaq/NMS'') securities traded through Nasdaq. In addition, the 
Amex proposes to amend Rule 901C, Commentary .01 to reflect that 90% of 
the Index's numerical index value will be accounted for by stocks that 
meet the current criteria and guidelines set forth in Rule 915. The 
text of the proposed rule change is available at the Office of the 
Secretary, the 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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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

    The Amex has developed a new industry-specific index called The 
Amex Airline Index, based entirely on shares of widely-held airline 
industry stocks or American Depository Receipts (``ADRs'') which are 
exchange listed or are Nasdaq/NMS securities.1 It is intended that 
the Amex list standardized option contracts on the newly developed 
Index. The Exchange is filing this proposal pursuant to Rule 901C, 
Commentary .02, which provides for the commencement of trading of 
options on the Index thirty days after the filing date, i.e., 30 days 
after December 7, 1994. The Exchange represents that the proposal 
satisfies all the criteria set forth in Commentary .02 to Rule 901C and 
the Commission's order approving that rule as outlined below.2
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    \1\The component securities of the Index are AMR Corp., British 
Airways PLC (ADR), Southwest Airlines; UAL Corporation, Delta Air 
Lines Inc., KLM Royal Dutch Air, Alaska Airgroup Inc., Continental 
Airlines Inc. (Class B), Northwest Airlines Corporation, and USAir 
Group.
    2See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval 
Order'').
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Eligibility Standards for Index Components
    Pursuant to Commentary .02 to Amex Rule 901C, the Amex represents 
that all of the component securities of the Index are listed on the 
NYSE or are Nasdaq/NMS securities, each of the component securities has 
a minimum market capitalization of at least $75 million,3 and each 
has a monthly trading volume of at least one million shares per month 
over each of the six months preceding the filing of this proposal. In 
addition, all of the component securities in the Index have 
standardized options traded on them and thus have met the initial 
eligibility criteria for standardized options trading set forth in Amex 
Rule 915. One component (USAir Group), however, has traded below $5 
during two of the last six months. While it is not known at this point 
whether options on USAir Group will eventually be delisted, the Index 
would still satisfy the criteria set forth in Commentary .02 to Rule 
901C because as a result of each quarterly rebalancing, at least 90% of 
the value of the Index and at least 80% of the total number of 
components will meet the standards set forth in Rule 915.
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    \3\In the case of ADRs, this represents market value as measured 
by total world-wide shares outstanding.
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    As a result of the ``equal dollar-weighting'' calculation 
methodology,\4\ no individual component stock in the Index represents 
more than 25% of the weight of the Index following each quarterly 
rebalancing. Additionally, the top five highest weighted stocks in the 
Index do not constitute more than 60% of the weight of the Index. 
Finally, because the sole ADR component of the Index (British Airways 
PLC) has standardized options trading on it, the Index also satisfies 
the criteria that no more than 20% of the weight of the Index can be 
composed of non-options eligible foreign securities (including ADRs).
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    \4\See discussion of Index calculation, infra.
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Maintenance of the Index
    The Exchange will maintain the Index so that (1) the total number 
of component securities will not increase or decrease by more than 
33\1/3\% from the number of components in the proposed Index (i.e., 10) 
and in no event will the Index have less than nine components; (2) 
component stocks constituting the top 90% of the Index by weight, must 
have a minimum market capitalization of $75 million and the component 
stocks constituting the bottom 10% of the Index, by weight, must have a 
minimum market capitalization of $50 million; (3) the monthly trading 
volume of each component security shall be at least 500,000 shares, 
provided, however, that components accounting in aggregate for no more 
than 10% of the Index, by weight, shall have a monthly trading volume 
of at least 400,000 shares; and (4) the Index shall satisfy the 
criteria that no single component will represent more than 25% of the 
weight of the Index and that the five highest weighted component shall 
represent no more than 60% of the weight of the Index, as of each 
quarterly rebalancing.
    The Exchange shall not open for trading any additional option 
series should the Index fail to satisfy any of the maintenance criteria 
set forth above unless such failure is determined by the Exchange not 
to be significant and the Commission concurs in that determination.
Index Calculation
    The Index is calculated using an ``equal dollar-weighting'' 
methodology designed to ensure that each of the component securities is 
represented in an approximately ``equal'' dollar amount in the Index. 
The Exchange believes that this method of calculation is important 
since even among the largest companies in the airline industry there is 
great disparity in market value. For example, although the stocks 
included in the Index represent many of the most highly capitalized 
companies in the airline industry, the five most highly capitalized 
companies in the airline industry currently represent approximately 80% 
of the aggregate market value of the Index. It has been the Exchange's 
experience that options on market value weighted indexes dominated by 
relatively few component stocks are less useful to investors because 
the index will tend to represent those few components and not the 
broader target sector that the index is designed to represent.
    The following is a description of how the equal dollar-weighting 
calculation method works. As of the market close on October 21, 1994, a 
portfolio of airline securities was established representing an 
investment of $10,000 in the stock (or ADR) (rounded to the nearest 
whole share) of each of the 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 securities in the Index portfolio divided by the Index divisor. The 
Index divisor was initially determined to yield the benchmark value of 
200.00 at the close of trading on October 21, 1994. Each quarter 
thereafter, following the close of trading on the third Friday of 
January, April, July, and October, the Index portfolio will be adjusted 
by changing the number of whole shares of each component security so 
that each company is again represented in ``equal'' dollar amounts. 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 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.
    As noted above, the number of shares of each component security 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 split, reverse stock split, rights offering, distribution, 
reorganization, recapitalization, or similar event with respect to the 
component securities. In a merger or consolidation of an issuer of a 
component security, if the stock or ADR 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 or ADR replacement, the average dollar value of 
the remaining portfolio components will be calculated and that amount 
invested in the security 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 
securities, or adjust the number of securities included in the Index 
based on changing conditions in the airline industry. In the event, 
however, that the Exchange determines to increase the number of Index 
components to greater than thirteen or to reduce the number of 
components to fewer than nine, the Exchange will submit a 19b-4 filing 
to the Commission. In selecting securities to be included in the Index, 
the Exchange will be guided by a number of factors including market 
value of outstanding shares, trading activity, and adherence to Rule 
901C, Commentary .02. Similar to other stock index values published by 
the Exchange, 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 proposed options on the Index are European-style,\5\ and cash-
settled. The Exchange's standard option trading hours (9:30 a.m. to 
4:10 p.m. Eastern Standard Time) will apply to Index options. 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 Index option series will normally be the second to 
last business day preceding the Saturday following Expiration Friday 
(normally a Thursday). Trading in expiring Index options will cease at 
the close of trading on the last trading day.
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    \5\European-style options may only be exercised during a 
specified time period immediately prior to expiration.
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    The Exchange plans to list Index options series with expirations in 
the three near-term calendar months and in the two additional calendar 
months in the January 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 based on the full-value of the Index, the 
Exchange may instead list long-term, reduced-value put and call options 
based on one tenth (\1/10\th) of the Index's full value. In either 
event, the interval between expiration months for either a full-value 
of reduced-value long-term Index option will not be less than six 
months. The trading of any long-term Index options would be subject to 
the same rules which govern the trading of all the Exchange's index 
options, including sales practice rules, margin requirements, and floor 
trading procedures. Position limits on reduced-value long-term Index 
options will be equivalent to the position limits for regular (full-
value) Index options and would be aggregated with such options. For 
example, if the position limit for the full-value options on the Index 
is 10,500 contracts on the same side of the market, then the position 
limit for the reduced-value options will be 105,000 contracts on the 
same side of the market and positions in reduced-value Index options 
will be aggregated with positions in full-value Index options.
    The exercise settlement value for all of the expiring Index options 
will be calculated based upon the primary exchange regular way opening 
sale prices for the component securities. In the case of Nasdaq/NMS 
securities, the first reported sale price will be used. If any 
component security does not open for trading on its primary market on 
the last day before expiration, then the prior day's last sale price 
will be used in the exercise settlement value calculation.
Exchange Rules Applicable to Stock Index Options
    Amex Rules 900C through 980C will apply to the trading of option 
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., strike prices within ten points above or below the current Index 
value) option series on the Index at 2\1/2\ intervals only when the 
value of the Index is below 200 points. In addition, the Exchange 
expects that the review required by Rule 904C(c) will result in a 
position limit of 10,500 contracts with respect to options on this 
Index.
    The Amex represents that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5)\6\ in particular in that it will permit trading in 
options based on the Amex Airline Index pursuant to rules designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \6\15 U.S.C. Sec. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change complies with the 
standards set forth in the Generic Index Approval Order, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act. Pursuant to the 
Generic Index Approval Order,7 the Exchange may not list Amex 
Airline Index options for trading prior to 30 days after December 7, 
1994, the date the proposed rule change was filed with the Commission. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission may summarily abrogate the rule change if it appears to 
the Commission that such action is necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Act.
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    \7\See supra note 2.
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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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. All submissions should refer to File No. SR-
Amex-94-54 and should be submitted by January 9, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.8
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    \8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31039 Filed 12-16-94; 8:45 am]
BILLING CODE 8010-01-M