[Federal Register Volume 60, Number 134 (Thursday, July 13, 1995)]
[Notices]
[Pages 36167-36170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17203]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35-44; File No. SR-Amex-95-26]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
the American Stock Exchange, Inc. Relating to Options and Long-Term
Options on the Morgan Stanley High Technology 35 Index and Long-Term
Options on a Reduced-Value Morgan Stanley High Technology 35 Index
July 7, 1995.
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 June 29,
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 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 Morgan Stanley High
Technology 35 Index (``Tech 35 Index'' or ``Index''), a new stock index
developed by Morgan Stanley & Co. Incorporated (``Morgan Stanley'')
that is comprised of technology sector stocks that trade on the Amex or
the New York Stock Exchange, Inc. (``NYSE''), or that are National
Market securities traded through Nasdaq. In addition, the Amex proposes
to amend Rule 902C(d) to include the Tech 35 Index in the disclaimer
provisions of the rule. 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 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 Amex has prepared summaries, set forth in sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
[[Page 36168]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
The Amex is proposing to trade standardized index options on the
Index. The Index is an equal-dollar weighted index developed by Morgan
Stanley, representing a portfolio of large, actively traded technology
stocks. The Index includes securities of companies involved in the
following industries: Computer services, design software, server
software, PC software and new media, networking and telecommunications
equipment, server hardware, PC hardware and peripherals, specialized
systems, and semiconductors.\1\
\1\ The specific components of the Index are: Apple Computer,
Inc.; Autodesk, Inc.; Adobe Systems Incorporated; Applied Materials,
Inc.; America Online, Inc.; Automatic Data Processing, Inc.; Bay
Networks, Inc.; Broderbund Software, Inc.; Computer Associates
International Inc.; 3 Com Corporation; Compaq Computer Corporation;
Cabletron Systems, Inc.; Computer Sciences Corporation; Cisco
Systems, Inc.; EMC Corporation; Electronic Arts Inc.; First Data
Corporation; General Motors (Class E); Hewlett-Packard Company; IBM;
Intel Corporation; Intuit Inc.; KLA Instruments Corporation; Linear
Technology Corporation; Motorola, Inc.; Microsoft Corporation;
Novell, Inc.; Oracle Systems Corporation; Parametric Technology
Corporation; Seagate Technology, Inc.; Silicon Graphics, Inc.;
Synopsys, Inc.; Tellabs Inc.; Texas Instruments, Incorporated; and
Xilinx, Inc.
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Eligibility Standards for Index Components
The Amex represents that the Tech 35 Index conforms to 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 stocks that meet the
following standards: (1) A minimum market capitalization of $75
million; (2) average monthly trading volume of at least one million
shares during the preceding six months; (3) each component security
must be traded on the Amex or the NYSE, or must be a National Market
security traded through Nasdaq; and (4) upon annual rebalancing, at
least 90% of the Index's numerical value and at least 80% of the total
number of component securities must meet the then current criteria for
standardized options trading set forth in Exchange Rule 915.\2\ Also,
because the Index is equal-dollar weighted, 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 60% of the weight of the Index at each annual
rebalancing. Specifically, at each rebalancing, each component security
will account for approximately 2.86% of the weight of the Index.
\2\ As of June 15, 1995, all of the Index component securities
had standardized options trading on them.
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 at
each rebalancing. The Exchange believes that this method of calculation
is important because even among the largest companies in the technology
sector there is great disparity in market value. For example, although
the stocks included in the Index represent many of the highly
capitalized companies in the technology sector, the five most highly
capitalized companies in the Index currently represent approximately
60% 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 companies
and not the targeted industry as a whole.
The following is a description of how the equal-dollar weighting
calculating method works. As of the market close on December 16, 1994,
a portfolio of technology stocks was established representing an
investment of $300,000 in the stock (rounded to the nearest whole
share) of each of the securities represented 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 stocks in the Index 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 December 16, 1994. Annually thereafter, following
the close of trading on the third Friday of December, the Index will be
adjusted by changing the number of whole shares of each component stock
so that each company is again represented in approximately ``equal''
dollar amounts. If necessary, a divisor adjustment is made at the
rebalancing to ensure continuity of the Index's value. The newly
adjusted Index becomes the basis for the Index's value on the first
trading day following the annual adjustment.
As noted above, the number of shares of each component stock in the
Index remains fixed between annual reviews except in the event of
certain types of corporate actions such as the payment of a dividend
(other than an ordinary cash dividend), stock distribution, stock
split, reverse stock split, rights offering, distribution,
reorganization, recapitalization, or similar event with respect to the
component stocks. In a merger or consolidation of an issuer of a
component stock, if the stock remains in the Index, the number of
shares of that security in the Index may be adjusted, to the nearest
whole share, to maintain the component's relative weight in the Index
at the level at which it was represented immediately prior to the
corporate action. In the event of a stock replacement, the average
dollar value of the remaining Index components will be calculated and
that amount invested in the stock of the new component, rounded to the
nearest whole share. In all cases, the divisor will be adjusted, if
necessary, to ensure continuity in the value of the Index.
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.
Maintenance of the Index
The Tech 35 Index will be calculated and maintained by the Amex in
consultation with Morgan Stanley who may, from time to time, suggest
changes in the technology industry categories represented in the Index
or changes in the number of component stocks in an industry category to
properly reflect the changing conditions in the technology sector. In
addition, the Amex will consider replacing component securities that
fail to meet the following maintenance criteria on quarterly review:
(1) A minimum market capitalization of $75 million; (2) average monthly
trading volume in the component security of at least 500,000 shares
during the preceding six months; and (3) a share price greater than
$5.00.
At the beginning of each calendar quarter, Morgan Stanley will
provide the Amex with a current list of replacement stocks on which to
draw in the event that a component in the Index must be replaced due to
merger, takeover, or other similar event. The stocks on the replacement
list will be selected and ranked by Morgan Stanley based on a number of
criteria, including conformity to the Exchange Rules 915 and 916, which
set forth the criteria for the initial and continued listing of
standardized options on equity securities, trading liquidity, market
capitalization, ability to borrow shares, and share price. The
replacement stocks will be categorized by industry within the
technology sector and ranked within
[[Page 36169]]
their category based on the aforementioned criteria. The replacement
stock for a security being removed from the Index will be selected by
the Amex from the replacement list based on industry category and
liquidity.
In addition, Morgan Stanley will advise the Exchange regarding the
handling of unusual corporate actions which may arise from time to
time. Routine corporate actions (e.g., stock splits, routine spinoffs,
etc.) which require straightforward index divisor adjustments will be
handled by Exchange staff without consultation with Morgan Stanley. All
stock replacements and unusual divisor adjustments caused by the
occurrence of extraordinary events such as dissolution, merger,
bankruptcy, non-routine spin-offs, or extraordinary dividends will be
made by Exchange staff in consultation with Morgan Stanley. All stock
replacements and the handling of non-routine corporate actions will be
announced at least ten business days in advance of such effective
change, whenever practicable. As with all options currently trading on
the Amex, the Exchange will make this information available to the
public through the dissemination of an information circular.
Expiration and Settlement
The proposed options on the Index are European-style,\3\ and cash-
settled. The Exchange's standard option trading hours (9:30 a.m. to
4:10 p.m., New York 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
expiring 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.
\3\ 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 two additional calendar
months in the January cycle. In addition, longer term option series
having up to thirty-six months to expiration may be treaded. 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
or reduced-value long-term Index option will not be less than six
months. The trading of any long-term Index options will 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 will 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. 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 based on the full-value of the Index.
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 stocks. In the case of securities traded
through the Nasdaq, the first reported sale price will be used. If any
component stock does not open for trading on its primary market on the
last day before expiration, then the prior day's last sale price on
that market 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 when the value of
the Index is below 200 points.
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 is 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.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Amex does not believe that the proposed rule change will impose
any inappropriate 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
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, 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 in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-Amex-95-26 and should be
submitted by August 3, 1995.
[[Page 36170]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
\4\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17203 Filed 7-12-95; 8:45 am]
BILLING CODE 8010-01-M