[Federal Register Volume 59, Number 246 (Friday, December 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31529]


[[Page Unknown]]

[Federal Register: December 23, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35106; File No. SR-Amex-94-35]

 

Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendments No. 1 and No. 2 to Proposed 
Rule Change Relating to Automatic Cancellation of Open Orders in 
Expiring Equity Securities.

December 16, 1994.
    On September 6, 1994, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 amend Amex Rule 179 to provide 
for automatic cancellation of open orders\3\ in expiring equity 
securities. On November 10, 1994, the Exchange submitted to the 
Commission Amendment No. 1 to the proposed rule change in order to 
define certain terms used in the original filing.\4\ On December 14, 
1994, the Exchange submitted Amendment No. 2 to the proposed rule 
change to make certain technical corrections to the scope of its 
proposal.\5\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
    \3\An open or Good 'Til Cancelled (``GTC'') order is an order 
that remains in effect until it is either executed or cancelled. See 
Amex Rule 131(j).
    \4\See letter from Claudia Crowley, Special Counsel, Legal & 
Regulatory Policy Division, Amex, to Beth Stekler, Attorney, 
Division of Market Regulation, SEC, dated November 10, 1994 
(``Amendment No. 1'').
    \5\See letter from Linda Tarr, Special Counsel, Legal & 
Regulatory Policy Division, Amex, to Beth Stekler, Attorney, 
Division of Market Regulation, SEC, dated December 14, 1994 
(``Amendment No. 2'').
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 34763 (September 30, 1994), 59 FR 50937 
(October 6, 1994). No comments were received on the proposal. This 
order approves the proposed rule change, including Amendments No. 1 and 
No. 2 on an accelerated basis.
    Exchange Rule 179 is designed to facilitate the timely completion 
of transactions in expiring securities. Currently, Rule 179 applies 
only to rights and warrants. The rule requires that, for certain 
periods of time before the expiration of an issue of rights or 
warrants, members and member organizations that place orders in those 
securities must specify ``next day'' or ``cash'' settlement, rather 
than ``regular way'' five-day delivery.\6\ Specifically, orders in 
expiring rights must be for ``next day'' delivery during the five 
business days preceding the final day for trading the issue, and for 
``cash'' settlement on the final trading day before expiration.\7\ 
Orders in expiring warrants must be for ``next day'' delivery during 
the three business days preceding the final five business days for 
trading the issue, and for ``cash'' settlement during the final five 
business days before expiration.\8\
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    \6\``Next day'' settlement requires delivery on the business day 
following the trade date; ``cash'' settlement requires delivery on 
the trade date. See Amex Rule 124.
    \7\See Rule 179(a).
    \8\See Rule 179(b).
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    Rule 179 further provides for automatic cancellation of open 
``regular way'' and ``next day'' orders in expiring rights and 
warrants, entered in the Exchange's automated Post Execution Reporting 
(``PER'') system and on the specialist's book, prior to commencing 
``next day'' and ``cash'' trading in those securities.\9\ Members and 
member organizations are informed of cancellations in advance, via 
notices on the ticker tape and in the Amex's Weekly Bulletin,\10\ and 
have an opportunity to replace cancelled orders. The substituted order 
is treated as a new order and does not retain the priority on the 
specialist's book of the cancelled ``regular way'' or ``next day'' 
order. The Exchange believes that the amendments to Rule 179 have 
resulted in a significant reduction of errors in the clearance and 
settlement of expiring rights and warrants.
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    \9\The automatic cancellation provisions were adopted in 
Securities Exchange Act Release No. 32320 (May 17, 1993), 58 FR 
30078 (May 25, 1993) (File No. SR-Amex-92-31) (``1993 approval 
order''). Prior to approval of that proposal, open orders in 
expiring rights and warrants remained in PER and on the specialist's 
book, unless the orders were cancelled by the member or member 
organization that had placed them. Accordingly, the Amex specialist 
treated open ``regular way'' orders as ``next day'' orders and open 
``next day'' orders as ``cash'' orders, where required by Rule 179's 
time frames. See supra, 1993 approval order.
    \10\Ticker notices appear on a weekly basis beginning two to 
four weeks before the start of ``non-regular way'' trading. The 
notice then runs on the last day of ``regular way'' trading and on 
every day of ``next day'' or ``cash'' trading. All ticker notices 
are published verbatim in the Amex's Weekly Bulletin. Telephone 
conversation between Linda Tarr, Special Counsel, Legal & Regulatory 
Policy Division, Amex, and Beth Stekler, Attorney, Division of 
Market Regulation, SEC, on December 5, 1994.
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    The Exchange proposes to expand Rule 179's automatic cancellation 
provisions to include all expiring equity securities. For purposes of 
this rule, the term ``expiring equity security'' will be defined as any 
security that is traded on the Exchange as an equity security and has a 
specific maturity, expiration or termination date.\11\ According to the 
Amex, that definition will include currency and index warrants, 
redeemable preferred stock, Contingent Value Rights, Stock Index Return 
Securities, Equity Linked Securities, Yield Enhanced Equity Linked Debt 
Securities and other similar products; but will not include securities 
that are being delisted from the Exchange.\12\
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    \11\See Amendments No. 1 and No. 2, supra, notes 4-5. According 
to the Amex, this definition will exclude securities that are traded 
as debt securities or options. Telephone conversation between 
Claudia Crowley, Special Counsel, Legal & Regulatory Policy 
Division, Amex, and Beth Stekler, Attorney, Division of Market 
Regulation, SEC, on December 9, 1994.
    \12\See Amendment No. 1, supra, note 4.
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    Under the Amex proposal, orders in an expiring equity security, 
other than an issue of rights or warrants described in Rule 179(a) and 
(b),\13\ must be for ``next day'' delivery during the five business 
days preceding the final day for trading that security, and for 
``cash'' settlement on the final trading day before expiration. Where 
appropriate, however, the Exchange may establish different time frames 
for particular types of expiring equity securities.
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    \13\The Amex has indicated that Rules 179(a) and (b) generally 
describe securities that entitle the holder to buy or sell shares of 
the issuer's common stock and that, upon exercise, result in a 
change in ownership (rather than a monetary payment). Telephone 
conversation between Claudia Crowley, Special Counsel, Legal & 
Regulatory Policy Division, Amex, and Beth Stekler, Attorney, 
Division of Market Regulation, SEC, on December 15, 1994.
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    At the specified times, open ``regular way'' and ``next day'' 
orders in any expiring equity security (including rights and warrants), 
entered in PER and on the specialist's book will be automatically 
cancelled. The Exchange will continue to use its existing procedures 
(i.e., ticker notices and the Weekly Bulletin) to notify members and 
member organizations of impending cancellations.\14\ As is currently 
the case for rights and warrants, substituted ``next day'' and ``cash'' 
orders in other types of expiring equity securities will be treated as 
new orders. The Amex believes that the extension of Rule 179's 
provisions to all expiring equity securities should provide comparable 
benefits (i.e., a reduction of clearance and settlement errors).
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    \14\See supra, note 10 and accompanying text. In this regard, 
the Amex has committed to distribute an Information Circular 
advising members and member organizations that the Commission has 
approved this proposal and describing how notification of 
cancellations will be provided. See letter from Linda Tarr, Special 
Counsel, Legal & Regulatory Policy Division, Amex, to Beth Stekler, 
Attorney, Division of Market Regulation. SEC, dated September 28, 
1994.
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    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, with the requirements of Section 6(b).\15\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designated to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest.
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    \15\15 U.S.C. Sec. 78f(b) (1988).
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    For the same reasons discussed in the Commission's order approving 
automatic cancellation of open orders in rights and warrants,\16\ the 
Commission believes that the proposed rule change will facilitate the 
timely clearance and settlement of trades in other types of expiring 
equity securities and should create a more efficient market for such 
products. As noted therein, orders entered into PER and placed on the 
specialist's book are routinely assigned the Amex's omnibus give-up 
(``APEX'');\17\ this symbol locks in ``regular way'' clearance through 
National Securities Clearing Corporation (``NSCC'') facilities. Orders 
for ``next day'' or ``cash'' settlement, however, require the member or 
member organization's specific give-up symbol, instead of ``APEX,'' to 
obtain ``non-regular way'' clearance through NSCC. To the extent that 
open orders with the ``APEX'' give-up remain in PER and on the book 
after the start of ``non-regular way'' trading, the specialist must 
change that symbol manually. If he or she fails to do so, executed 
trades would go through the normal clearance cycle and would not settle 
in a timely fashion.
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    \16\See 1993 approval order, supra, note 9.
    \17\``APEX'' identifies the Exchange as the contra party to the 
transaction.
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    After careful review, the Commission has concluded that the Amex 
proposal will help ensure that, as a matter or course, open orders in 
all expiring equity securities have the give-up symbol needed to 
complete transactions prior to the issue's expiration. Under Rule 179, 
as amended, open ``regular way'' orders will be electronically purged 
from Amex systems once ``non-regular way'' trading begins. The 
specialist will no longer be responsible for correcting errors 
manually. Instead, if ``next day'' or ``cash'' settlement is 
acceptable, the member or member organization that placed the order 
will have the opportunity to substitute a new order with appropriate 
delivery terms.\18\ In the Commission's opinion, the proposed rule 
change should make the market for expiring equity securities function 
more smoothly.
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    \18\As the Commission noted in regard to rights and warrants, 
see 1993 approved order supra note 9, the member or member 
organization that placed the order did not agree to and, in fact, 
may not be able to satisfy new delivery terms. Accordingly, the 
Commission concluded that it was more equitable to cancel open 
orders in expiring rights and warrants that to hold investors to a 
commitment they did not make. For the same reason, the Commission 
believes that the Amex's current proposal is fair to the market 
participants with open orders in other expiring equity securities.
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    Finally, the Commission believes that Exchange members and member 
organizations will receive adequate notice of impending cancellations 
of open orders in expiring equity securities. As the expiration date of 
a given issue approaches, the Amex will place messages on the ticker-
tape and in its Weekly Bulletin.\19\ These notices will appear weekly 
during ``regular way'' trading and on a daily basis once ``non-regular 
way'' trading begins.\20\ Based on the Amex's experience with rights 
and warrants,\21\ the Commission continues to believe that these 
procedures are sufficient to alert members and member organizations 
that open orders in expiring equity securities will be cancelled, and 
to provide them with a reasonable opportunity to respond.
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    \19\See supra, note 10.
    \20\Id.
    \21\To date, the Amex is not aware of any complaints regarding 
automatic cancellation of open orders in expiring rights and 
warrants or regarding the adequacy of notice thereof. Telephone 
conversation between Claudia Crowley, Special Counsel, Legal & 
Regulatory Policy Division, Amex, and Beth Stekler, Attorney, 
Division of Market Regulation, SEC, on December 9, 1994.
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    The Commission finds good cause for approving Amendments No. 1 and 
No. 2 prior to the thirtieth day after the date of publication of the 
notice of filing thereof. Amendment No. 1 merely defines certain terms 
used in the original filing, and Amendment No. 2 makes certain 
technical corrections to the scope of the proposal. Finally, the 
Commission did not receive any comments on the proposal, which was 
noticed for the full statutory period.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 1 and 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, N.W., Washington, D.C. 20549. Copies of the submission, 
all subsequent amendments, all written statements with respect to the 
proposed rules change that are filed with the Commission, and all 
written communications relating to Amendments No. 1 and No. 2 between 
the Commission and any persons, 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, N.W., Washington, D.C. 20549. 
Copies of such filing will also be available at the principal office of 
the Amex. All submissions should refer to File No. SR-Amex-94-35 and 
should be submitted by January 13, 1995.
    It is therefore ordered, Pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-Amex-94-35), including 
Amendments No. 1 and No. 2 on an accelerated basis, is approved.

    \22\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.\23\
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    \23\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31529 Filed 12-22-94; 8:45 am]
BILLING CODE 8010-01-M