[Federal Register Volume 59, Number 243 (Tuesday, December 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31205]


[[Page Unknown]]

[Federal Register: December 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35085; File No. SR-NYSE-94-41]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the New York 
Stock Exchange, Inc., Relating to the Establishment of Uniform Listing 
and Trading Guidelines for Stock Index and Currency Warrants

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 November 
9, 1994, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. 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: (1) Amend its listing guidelines for 
stock index (``stock index'' or ``index'') warrants and currency 
warrants (``currency warrants'');\1\ (2) establish various new rules 
for the trading of stock index and currency warrants; and (3) establish 
special customer margin requirements for positions in stock index and 
currency warrants. On Dec. 8, 1994, the NYSE amended certain 
surveillance related matters addressed in the filing. See footnote 3, 
infra.
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    \1\Currency warrants, as used in this filing, may refer to 
warrants on individual currencies (or cross currencies) or to 
warrants on a specific currency index group (``currency index 
warrants'').
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    The text of the proposal is available at the Office of the 
Secretary, 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 self-regulatory organization 
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 self-regulatory organization 
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

    The NYSE proposes (1) to add a new Rule 414 (Index and Currency 
Warrants) in order (a) to prescribe procedures for approving and 
supervising accounts that trade currency warrants, currency index 
warrants and stock index warrants and (b) to prescribe stock index 
warrant position and exercise limits, (2) to replace Supplementary 
Material .30 to Rule 405 (Diligence to Accounts), which contains 
provisions that the proposed rule change proposes to supersede, with a 
cross reference to proposed Rule 414, (3) to amend existing Rule 431 
(Margin Requirements) to modify currency warrant and stock index 
warrant margin requirements and to establish currency index warrant 
margin requirements, (4) to amend Para. 703.15 (Foreign Currency 
Warrants and Currency Index Warrants) of the Exchange's Listed Company 
Manual to modify the listing standards for currency warrants and to 
establish listing standards for currency index warrants, and (5) to 
amend Para. 703.17 (Stock Index Warrants Listing Standards) of the 
Exchange's Listed Company manual to modify the listing standards for 
stock index warrants.
    The provisions of proposed Rule 414 include (a) provisions 
governing the approval, supervision and suitability of customers, which 
for the most part follow the Rules that the Exchange applies in respect 
of trading in stock index options, and (b) stock index warrant position 
limits. It also includes a newly added stock index warrant exercise 
limit. A more detailed discussion of the provisions of the proposed 
rule change follows.
    Paragraph (a) of Rule 414 defines relevant terms.
    Paragraph (b) of Rule 414 specifies that the Rule applies to 
Exchange trading in currency warrants, currency index warrants and 
stock index warrants and that other Exchange Rules and the Exchange's 
Constitution also so apply.
    Paragraph (c) of Rule 414 establishes position limits for stock 
index warrants. For a position of stock index warrants with an original 
issue price of $10 or less, the position limit is 15 million index 
warrants. For a position of stock index warrants with an original issue 
price in excess of $10, the number of such warrants is converted to the 
equivalent number of warrants that the position would contain if the 
issuer had originally priced the issue at $10. Thus, 1 million stock 
index warrants with an original issue price of $20 would represent the 
equivalent of 2 million stock index warrants with an original issue 
price of $10 ($20/$10  x  1 million stock index warrants) and the 15 
million stock index warrant position limit would apply to the 2 million 
stock index warrant ``equivalents.'' Paragraph (c) also provides 
procedures for allowing limited exceptions to those position limits as 
circumstances warrant.
    Paragraph (d) of Rule 414 imposes exercise limits on stock index 
warrants equal to the position limits. The exercise limits are separate 
and distinct from any limits the issuer of the stock index warrant may 
impose.
    Paragraph (e) of Rule 414 applies the options rule counterpart to 
stock index warrant trading halts.
    Paragraph (f) of Rule 414 requires a member or member organization 
to have approved an account for options trading pursuant to the 
standards and procedures set forth in Rule 721 (Opening of Accounts) 
before the account can trade currency warrants, currency index warrants 
and/or stock index warrants. Paragraphs (g), (h), (i) and (j) of Rule 
414 apply options rule counterparts to trading in currency warrants, 
currency index warrants and stock index warrants in the areas of 
supervision of accounts (see Rule 722 (Supervision of Accounts)), 
suitability (see Rule 723 (Suitability)), discretionary accounts (see 
Rule 724 (Discretionary Accounts)), and customer complaints (see Rule 
732 (Customer Complaints)).
    Paragraph (k) of Rule 414 applies the options rule counterpart (see 
Rule 791 (Communications to Customers)) to communications to customers 
relating to currency warrants, currency index warrants and/or stock 
index warrants. In addition, Paragraph (k) requires those 
communications to state that currency warrants, currency index warrants 
and stock index warrants, unlike standardized options, are subject to 
issuer's credit risks and warrant terms and conditions that may differ 
from those that apply to other warrant issues overlying the same 
currency or index. The paragraph also advises that the prospectus 
requirements of the Securities Act of 1933 apply to certain 
communications.
    Paragraph (1) of Rule 414 requires that, where 25 percent or more 
of the value of an underlying index stock group is represented by 
securities of United States issuers, the calculation of a stock index 
warrant's settlement value must use the opening prices of those 
securities on the U.S. markets.
    Supplementary Material .30 to Rule 405 is amended to cross-
reference Rule 414 and to delete (a) the statement that the suitability 
requirements of Rule 723 apply to stock index warrants and (b) the 
recommendation that the account approval requirements of Rule 721 be 
applied to stock index warrants. Paragraphs (f) and (h) of Rule 414 
supersede those notions.
    The Exchange proposes to amend those portions of the Rule 431 
margin requirements that apply to margin on foreign currency options 
and options on broad index stock groups so as to apply the same margin 
requirements to currency warrants and stock index warrants, 
respectively, and to establish currency index warrant margin 
requirements. For example, stock index warrants will follow broad index 
options in requiring margin of (A) 100 percent of the current market 
value of all ``long'' stock index warrants and (B) in the case of 
``short'' positions in stock index warrants, (1) 100 percent of the 
current value of the option plus (2) 15 percent of the current value of 
the underlying index stock group multiplied by the applicable index 
multiplier. The Exchange proposes that its margin requirements be 
permitted offset treatment for spread, straddle and covered 
positions.\2\
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    \2\The Staff of the Commission has indicated to the Exchange 
that it must request and obtain appropriate interpretive or no-
action relief from the Commission in order to permit its index and 
currency warrant margin requirements to allow offset treatment for 
spread, straddle and covered positions.
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    The Exchange proposes to amend Para. 703.15 of the Listed Company 
Manual, which currently provides listing standards for foreign currency 
warrants, to cause it to apply to currency index warrants. The Exchange 
also proposes to amend Para 703.15 and Para. 703.17 of the Listed 
Company Manual (A) to change the issuer ``substantiality'' requirement 
for $100 million in assets to $150 million in tangible net worth, (B) 
to specify that the issuer is expected to refrain from issuing warrants 
where its aggregate currency and index warrant offerings exceed 25 
percent of its net worth and (C) to require in-the-money currency and 
index warrants to be automatically exercised at expiration if not 
otherwise exercised.
    In listing new stock index warrant or currency index warrant issues 
for trading on the Exchange, the Exchange would submit a proposed rule 
change only where a warrant issue overlies an index on which warrants 
or options are not already listed, whether on the Exchange or on 
another self-regulatory organization. Thus, an Exchange would list for 
trading index warrants on indexes that already underlie listed options 
or warrants without further Commission review and approval pursuant to 
Section 19(b) of the Act. Both initial and maintenance listing 
standards for stock index warrants will require that no more than 20% 
of the securities in the underlying index, by weight, may be comprised 
of foreign securities that are not subject to comprehensive 
surveillance sharing agreements between the NYSE and the primary 
exchange on which the foreign security (including a foreign security 
underlying an ADR) is traded.\3\ Finally, prior to trading index or 
currency warrants, the Exchange will distribute a circular to its 
membership providing guidance regarding member firm compliance 
responsibilities (including suitability recommendations) when handling 
transactions in index or currency warrants.
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    \3\Telephone conversation between Vincent Patten, NYSE, and 
Stephen M. Youhn, SEC, on December 8, 1994 (``Amendment No. 1''). 
The Exchange proposes that the ``20% test'' be applied in the same 
manner as that contained in Securities Exchange Act Release No. 
34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (Commission 
approval order allowing the expedited trading approval of certain 
narrow-based index options.)
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    The basis under the Act for the proposed rule change 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 foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to 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 that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the 1934 Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on the proposed rule change. The Exchange has not received any 
unsolicited written comments from members or other interested parties.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer 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 such 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, 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. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 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 January 10, 
1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-31205 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-M