[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: 94-31207]


[[Page Unknown]]

[Federal Register: December 20, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35088; File No. SR-PSE 94-28]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Pacific 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 
September 22, 1994, the Pacific Stock Exchange, Inc. (``PSE'' 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. 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. 5, 1994, the PSE 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 proposed rule change is available at the Office of 
the Secretary, PSE, 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. 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 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 PSE proposes to: (1) Amend its listing guidelines and establish 
uniform rules for the trading of stock index and currency warrants, and 
(2) establish special customer margin requirements for positions in 
stock index and currency warrants.
    The PSE seeks to amend Rule 7.18 to provide higher standards for 
warrant issuers than currently exists. In particular, future warrant 
issuers would be expected to have a minimum tangible net worth in 
excess of $150 million. In addition, the aggregate original issue price 
of all of a particular issuer's warrant offerings (combined with 
offerings by its affiliates) that are listed on a national securities 
exchange or that are National Market securities traded through NASDAQ 
would not be permitted to exceed 25% of the issuer's net worth. The 
proposed amendment will require that each warrant issue will be 
automatically exercised on either the delisting date (if the issue is 
not listed upon another organized securities market) or upon 
expiration. Rule 7.18 also will be amended to provide that opening 
prices (``a.m. settlement'') for all U.S. traded securities will be 
used to determine an index's settlement value where 25 percent or more 
of the value of the index is represented by securities whose primary 
trading market is in the U.S.
    Rule 2.16 is being amended to apply the current customer margin 
requirements for broad based stock index and currency options to stock 
index and currency warrants, respectively. Thus, purchases of stock 
index and currency warrants will require payment in full, and short 
sales of stock index warrants will require initial margin of: (i) 100 
percent of the current value of the warrant plus (ii) 15 percent of the 
current value of the underlying broad stock index less the amount by 
which the warrant is out of the money up to a maximum of five percent 
of the index value. Short sales of currency warrants will follow the 
margin requirements applicable to listed currency options. The Exchange 
proposes that its stock index and currency warrant margin requirements 
be permitted offset treatment for spread, straddle and covered 
positions.\2\ Proposed Rule 8 of the Exchange rules applies to the 
trading of index warrants and currency warrants. Proposed Rule 8.1 
provides that, unless the context otherwise requires or a specific 
provision of Rule 8 applies, the provisions of the Constitution and all 
other rules and polices of the Exchange apply to trading of such 
securities.
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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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    Proposed Rule 8.4 states that no member or member organization 
shall accept an order from a customer for the purchase or sale of index 
or currency warrants unless the customer's account has been approved 
for options trading pursuant to Exchange Rule 9.18(b). Furthermore, 
proposed Rules 8.5-8.8 require that the option rules pertaining to 
suitability, discretionary account trading, supervision of accounts and 
customer complaints be applied to stock index and currency warrants.
    Proposed Rule 8.9 requires approval by a Compliance Registered 
Options Principal of all advertisements, sales literature and 
educational material issued by a member organization pertaining to 
stock index and currency warrants. The rule further requires Exchange 
approval of all advertisements and educational materials pertaining to 
stock index and currency warrants.
    Proposed Rule 8.10 provides that position limits for stock index 
warrants on the same index with original issue prices of ten dollars or 
less will be fifteen million warrants covering all such issues. The 
rule provides that warrants with an original issue price greater than 
ten dollars will be weighted more heavily than warrants with an 
original issue price of ten dollars or less in calculating position 
limits. The rule also gives the Exchange the authority to require the 
liquidation of a position in stock index warrants that is in excess of 
the position limits set forth in the rule, and Commentary to the rule 
provides procedures for allowing limited exceptions to the position 
limits.
    Proposed Rule 8.11 provides for exercise limits on stock index 
warrants analogous to those found in stock index options and states 
that such limits are separate and distinct from any exercise limits 
that may be imposed by the issuers of stock index warrants.
    Proposed Rule 8.12 requires that the trading halt provisions in 
Rule 7.11 shall be applied to trading in stock index warrants.
    Upon Commission approval of the foregoing amendments, the Exchange 
proposes it will only file rule changes for specific warrant issues 
where there is no corresponding option or warrant on the same 
underlying broad based index already listed on a national securities 
exchange or NASDAQ. Accordingly, when a listed option overlies a 
particular broad based index, the Exchange proposes it be able to list 
warrants on that index 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 or 
American Depositary Receipts (``ADRs'') overlying foreign securities 
that are not subject to comprehensive surveillance sharing agreements 
between the PSE and the primary exchange on which the foreign security 
(including a foreign security underlying an ADR) is traded.\3\ 
Furthermore, Commentary .01 to Proposed Rule 2.16 provides that stock 
index and currency warrants listed on the Exchange prior to SEC 
approval of this filing shall continue to be governed by those 
provisions of the Exchange's rules that were applicable to such 
warrants prior to approval of this filing. 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 Michael Pierson, PSE, and 
Stephen M. Youhn, SEC, on December 5, 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 Exchange believes 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), in particular, in that it will facilitate 
transactions in securities.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change imposes 
a burden on competition.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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. 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 PSE. All 
submissions should refer to File No. SR-PSE-94-28 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. 94-31207 Filed 12-19-94; 8:45 am]
BILLING CODE 8010-01-M