[Federal Register Volume 60, Number 56 (Thursday, March 23, 1995)]
[Notices]
[Pages 15316-15318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7136]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35511; File No. SR-Amex-95-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange, Inc., Relating to Options on the 
Morgan Stanley REIT Index.

March 17, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ notice is hereby given that on February 16, 1995, 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 Amex. The Exchange filed Amendment No. 1 to the 
proposed rule change on March 9, 1995.\2\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.

    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\Amendment No. 1 provides additional information regarding the 
Index components, and states that the Exchange will file with the 
Commission pursuant to Section 19(b)(1) of the Act should the number 
of component securities in the Index exceed 116. See letter from 
Claire P. McGrath, Managing Director and Special Counsel, 
Derivatives Securities, to Michael Walinskas, Branch Chief, Division 
of Market Regulation, Commission, dated March 9, 1995 (``Amendment 
No. 1'').
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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 Morgan Stanley REIT Index 
(``REIT Index''), a new index developed by Morgan Stanley & Co. 
Incorporated (``Morgan Stanley'') comprised of real estate investment 
trusts (``REITs'')\3\ which are traded on the Amex, the New 
[[Page 15317]] York Stock Exchange, Inc. (``NYSE''), or through the 
facilities of the Nasdaq system and are reported Nasdaq national market 
(``NM'') securities. In addition, the Amex proposes to amend Rule 
902C(d) to include the REIT Index in the disclaimer provisions of the 
rule.

    \3\All components of the Index will be REITs as that term is 
defined in Sections 856 through 860 of the Internal Revenue Code, 26 
U.S.C. Secs. 856-60 (1988 & Supp. 1993). Id. A REIT is a financial 
vehicle that allows investors to pool funds for participation in 
real estate ownership or financing. REITs are subject to special tax 
treatment and are exempt from corporate level tax if they meet 
certain qualifications. These qualifications include, but are not 
limited to, the distribution of 95% of taxable income; that five or 
fewer individuals cannot own more than 50% of the shares; that over 
10% of total assets cannot be sold in one year; and that at least 
75% of taxable income be derived from real estate in the form of, 
for example, rents, mortgages, or gains from the sale of real 
estate. See letter from Claire P. McGrath, Managing Director and 
Special Counsel, Derivatives Securities, Amex, to Michael Walinskas, 
Branch Chief, Division of Market Regulation, Commission, dated March 
6, 1995.
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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

1. Introduction
    The Exchange is proposing to trade standardized options on the REIT 
Index, a capitalization weighted index developed by Morgan Stanley, 
representing a portfolio of the largest and most actively traded REITs, 
and designated to provide a broad measure of real estate equity 
performance. The Index does not include healthcare REITs, real estate 
operating companies or partnerships, or REITs that invest primarily in 
real estate mortgages or debt securities.
2. Eligibility Standards for Index Components
    The REIT Index conforms with Exchange Rule 901C, which specifies 
criteria for inclusion of stocks in an index on which standardized 
options will be traded. In addition, Morgan Stanley has included in the 
Index only those REITs that meet the following standards: (1) A minimum 
market capitalization of $100 million; (2) a market price of at least 
$7.50 for the majority of business days during the three calendar 
months preceding the date of selection, as measured by the lowest 
closing price reported in any market in which the component security 
traded on each of the subject days; (3) trading volume in the component 
security of at least 1.2 million shares during the preceding six 
months; (4) each component security must be traded on the Amex, NYSE or 
must be a Nasdaq NM security; and (5) no component security will 
represent more than 25% of the weight of the Index, nor will the five 
highest weighted component securities in the Index, in the aggregate, 
account for more than 50% of the weight of the Index. The criteria set 
forth above are the same as or exceed many of the criteria established 
for the expedited listing of options on stock industry indexes pursuant 
to Exchange rule 901C, Commentary .02.
3. Maintenance of the Index
    In creating the Index, Morgan Stanley identified approximately 87 
REITs that meet or exceed the above criteria. In maintaining the Index, 
the Exchange will review the component securities on a quarterly basis 
to ensure that the Index continues to represent only the largest and 
most actively traded REITs. After the close of trading on the last 
business day of December, March, June, and September, all publicly 
traded equity REITs (except healthcare stocks and REITs that invest 
primarily in real estate mortgage or debt securities) will be reviewed 
to see if they meet the criteria outlined above. After the close of 
trading on the third Friday of January, April, July, and October, and 
Exchange will add to the Index all those REITs that meet the criteria 
and are not currently in the Index.
    Those REITs already in the Index that no longer meet the following 
maintenance criteria will be removed from the Index at the same time. 
The maintenance criteria for the component securities are: (1) A 
minimum market capitalization of $75 million; (2) a market price of at 
least $5.00 for the majority of business days during the three calendar 
months preceding the date of selection, as measured by the lowest 
closing price reported in any market in which the component security 
traded on each of the subject days; and (3) trading volume in the 
component security of at least 900,000 shares during the preceding six 
months.
    It is anticipated that the number of components in the REIT Index 
will increase as more real estate investment companies enter the public 
market, and those currently in the public market grow in size and 
trading volume. However, if the number of component securities in the 
Index shall increase to more than 116 or decrease to fewer than 58, the 
Exchange will file with the Commission pursuant to Section 19(b)(1) of 
the Act to obtain additional approval for such Index.\4\

    \4\See Amendment No. 1, supra note 2.
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    The number of component stocks in the Index shall remain fixed 
between quarterly reviews except in the event of certain types of 
corporate actions such as a merger or takeover which warrants the 
removal of a component security from the Index prior to its quarterly 
review. In such case, the divisor shall be recalculated to ensure 
continuity of the Index's value.
4. Index Calculation
    The REIT Index is market capitalization weighted, where the Index 
value is calculated by multiplying the primary exchange regular way 
last sale price of each component security by its number of shares 
outstanding, adding the sums and dividing by the current index divisor. 
The REIT Index is a total return index, in that the regular cash 
dividends of its component securities are reinvested into the Index 
portfolio. Therefore, at the close of trading each day, the prices of 
component securities which will trade ``ex-dividend'' the next day will 
be adjusted (downward) by the value of the dividend amount to reflect 
the price impact on the stock as it trades without (``ex'') the 
dividend on the following day. The divisor is then adjusted to ensure 
continuity of the Index value. The Index divisor was initially 
determined to yield a benchmark value of 200 on December 31, 1994. 
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.
5. Expiration and Settlement
    The proposed options on the Index will be European style (i.e., 
exercises permitted at expiration only), and cash settled. Standard 
option trading hours (9:30 a.m. to 4:10 p.m. New York time) will apply. 
The options on the REIT Index will expire on the Saturday following the 
third Friday of the expiration month. The last trading day in an 
expiring 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 Exchange plans to list 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 36 months to expiration may be traded. In lieu of such 
long-term options on a full value Index level, the Exchange may instead 
list [[Page 15318]] long-term, reduced value put and call options based 
on one-tenth (1/10th) 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. The trading of any long-term 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, and all options will have European style exercise. 
Position limits on reduced value long-term REIT 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 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).
    The exercise settlement value for all of the Index's expiring 
options will be calculated based upon the primary exchange regular way 
opening sale prices for the component stocks. In the case of securities 
traded through the Nasdaq system, the first reported regular way sale 
price will be used. If any component stock does not open for trading on 
its primary market on the last trading day before expiration, then the 
prior day's last sale price will be used in the calculation.
6. 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 address 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 REIT Index. The 
Exchange has designated the Index 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) option 
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 expects that the review required by Rule 904C(c)\5\ will 
result in a position limit of 10,500 contracts with respect to options 
on the Index.

    \5\Rule 904C(c) relates to position limits for stock index 
industry groups.
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7. Basis
    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) of the Act in particular in that it is designated 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 regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in, securities, and in general to protect investors and the public 
interest, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.

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

    The Amex believes that the proposed rule change will not impose any 
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 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 submissions, 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 and 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. 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 File No. 
SR-Amex-95-06 and should be submitted by April 13, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\

    \6\17 CFR 200.30-3(a)(12) (1994).
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[FR Doc. 95-7136 Filed 3-22-95; 8:45 am]
BILLING CODE 8010-01-M