[Federal Register Volume 60, Number 161 (Monday, August 21, 1995)]
[Notices]
[Pages 43481-43485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20641]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36103; File No. SR-Amex-95-06]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 2 to Proposed Rule Change by the American Stock Exchange,
Inc., Relating to Options on the Morgan Stanley Real Estate Investment
Trust Index
August 14, 1995.
I. Introduction and Background
On February 16, 1995, 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 list and trade options on the
Morgan Stanley REIT Index (``REIT Index''). On March 9, 1995, the
Exchange filed Amendment No. 1 to its proposal.\3\ Notice of the
proposal appeared in the Federal Register on March 23, 1995.\4\ No
comments were received on the proposed rule change set forth in the
Notice. On May 16, 1995, the Exchange filed Amendment No. 2 to its
proposal.\5\ This order approves the Exchange's proposal, as amended.
\1\ 15 U.S.C. 78s(b)(1) (1998).
\2\ 17 CFR 240.19b-4 (1994).
\3\ 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 letters
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 and March
9, 1995 (``Amendment No. 1'').
\4\ Securities Exchange Act Release No. 35511 (March 17, 1995),
60 FR 15316.
\5\ Letter from Claire P. McGrath, Managing Director and Special
Counsel, Derivative Securities, Amex, to Michael Walinskas Branch
Chief, Decision of Market Regulation, Commission, dated May 16, 1995
(``Amendment No. 2''). Amendment No. 2 provides additional
clarifying information regarding the Index, including the number of
Index components that are eligible for standardized options trading,
strike price intervals, and position limits. Id.
---------------------------------------------------------------------------
II. Description of the Proposal
A. General
The Amex proposes to list and trade standardized options on the
REIT Index, a capitalization weighted index developed by Morgan Stanley
& Co. Incorporated (``Morgan Stanley'') comprised of real estate
investment trusts (``REITs'') \6\ which are traded on the Amex, and the
New York Stock Exchange, Inc. (``NYSE''), or are traded through the
facilities of the Nasdaq system and are reported Nasdaq national market
(``NM'') securities. In addition, the Amex proposes to amend its Rule
902C(d) to include the REIT Index in the disclaimer provisions of that
rule. The REIT Index represents a portfolio of the largest and most
actively traded REITs, and is designed to provide a broad measure of
real estate equity performance. The Index does not
[[Page 43482]]
include healthcare REITs, real estate operating companies or
partnerships, or REITs that invest primarily in real estate mortgages
or real estate debt securities.
\6\ REITs are financial vehicles that allow investors to pool
funds for participation in real estate ownership of 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% to total assets cannot be sold in one
year; and that at last 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. All components on the Index will be REITs
as that term is defined in Sections 856 through 860 of the Internal
Revenue Code, 26 U.S.C. 856-60 (1988 & Supp. 1993). See Amendment
No. 1, supra note 3.
---------------------------------------------------------------------------
B. Composition of the Index
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.
When it created the Index, Morgan Stanley identified 87 REITs that
meet or exceed the listing criteria. Eighty of the REIT stocks
currently trade on the NYSE, four trade through the Nasdaq system, and
three on the Amex. The Index is capitalization weighted and will be
calculated continuously using last sale prices.
As of the close of trading on April 24, 1995, the Index was valued
at 195.1.\7\ As of the close of trading on February 10, 1995, the
market capitalizations of the individual securities in the Index ranged
from a high of $1.1 billion (Security Capital Industrial) to a low of
$103.4 million (Equity Inns Inc.), with a mean and median of $359
million and $279 million, respectively. The total market capitalization
of the securities in the Index was $31 billion. The total number of
shares outstanding for the REITs in the Index ranged from a high of
69.5 million shares (Security Capital Industrial) to a low of 7.5
million shares (JDN Realty). the 90-day lowest price per share of
securities in the Index, for a 90-day period preceding February 10,
1995, ranged from a high of $33.25 (Kimco Realty) to a low of $8.75
(Berkshire Realty). In addition, for a 120-day period preceding
February 10, 1995, the average daily trading volume of the REITs in the
Index ranged from a high of 142,138 shares (RFS Hotel Investments) to a
low of 10,359 shares (Property TR America), with the mean and median
being 39,167 and 31,937 shares, respectively. Lastly no one REIT
accounted for more than 3.41% of the Index's total value (Security
Capital Industrial and Simon Property Group), and the percentage
weighting of the five largest issues in the Index accounted for 15.42%
of the Index's value. The percentage weighting of the lowest weighted
component was .31% of the Index (Equity Inns), and the percentage
weighting of the five smallest issues accounted for 1.87% of the
Index's value.
\7\ See Amendment No. 2, Supra note 5. The Index divisor was
initially determined to yield a benchmark value of 200 on December
31, 1994.
---------------------------------------------------------------------------
Seventy-nine out of the 87 securities in the Index, representing
90.8% of the number of securities in the Index, and 95.67% of its
value, are eligible for standardized options trading (four of the 79
options eligible securities currently underlie exchange-listed
options). The eight components that do not meet options eligibility
standards account for only 9.2% of the number of securities in the
Index, and 4.33% of its value.\8\
\8\ Id. Amex Rule 915 provides criteria for potential underlying
securities for put or call option contracts. These criteria include:
a minimum of 7 million shares of the underlying security which are
owned by persons other than those required to report their security
holdings under Section 16(a) of the Act; a minimum of 2,000 holders
in the underlying security; trading volume of at least 2.4 million
shares in the preceding 12 months; a market price per share of the
underlying security of at least $7.5 for the majority of business
days during the three calendar months preceding the date of
selection; and the issuer is in compliance with applicable
requirements of the Act. Amex Rule 915, Commentary .01. The word
``security'' may be broadly interpreted to mean any equity security
as defined in Rule 3a11-1 under the Act, 17 CFR 240.3a11-1 (1994)
(definition of the term ``equity security''). Amex Rule 915,
Commentary .03.
---------------------------------------------------------------------------
C. Maintenance
The Exchange will be responsible for maintaining the Index once
trading begins. To maintain 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 REITs, real estate operating companies or partnerships, or
REITs that invest primarily in real estate mortgage or real estate 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, the Exchange will add to the Index all those
REITs that meet the criteria described above for initial inclusion in
the Index and that are not currently in the Index.
At the same time as REITs are added to the Index, REITs that do not
meet certain separate maintenance criteria will be removed from the
Index. 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 has stated that it will file with the Commission pursuant to
Section 19(b)(1) of the Act to obtain additional approval for such
Index.\9\
\9\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
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.\10\ If such an event occurs, the divisor shall be recalculated
to ensure continuity of the Index's value.
\10\ Although the Amex is responsible for maintaining the Index,
Morgan Stanley has stated that it may desire to consult with the
Amex (or that the Amex may desire to consult with Morgan Stanley)
concerning possible changes to the Index components upon the
occurrence of certain corporate events that may occur between
quarterly reviews. Events that might warrant such a reconfiguration
could include non-cash dividends, stock splits, rights offerings,
stock distributions, reorganizations, recapitalizations, and other
similar events. Letter from Robin Roger, Vice President and Counsel,
Morgan Stanley, to Michael Walinskas, Branch Chief, Division of
Market Regulation, Commission, dated June 22, 1995. For a
description of procedures attendant to such consultations, see id.,
and infra Section II.I., Surveillance.
[[Page 43483]]
---------------------------------------------------------------------------
D. Index Calculation and Applicable Exchange Rules
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.
Given that a REIT is required to distribute at least 95% of its taxable
income, much of a REIT's value is reflected in its dividend
distributions. As a total return index, the REIT Index will reflect the
value of the regular cash dividends of its component securities by
reinvesting such dividends 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 set 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.
E. Contract Specifications and Applicable Exchange Rules
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 Index multiplier will be 100. The strike price interval will be
five points for full-value Index options when the Index is above
200.\11\
\11\ For a description of other strike price intervals, see
infra text accompanying note 13.
---------------------------------------------------------------------------
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, long-term options on either a
full-value or a reduced-value Index level having up to 36 months until
expiration may be traded.\12\ Expiration intervals for both full-value
and reduced-value long-term options will not be less than six months.
\12\ See infra Section II.G.
---------------------------------------------------------------------------
Amex Rules 900C through 980C will apply to the trading of option
contracts based on the Index. These rules address, among other things,
surveillance, exercise prices, and position limits. 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). Pursuant 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.\13\
\13\ Amendment No. 2, supra note 5. Strike price intervals at
2\1/2\ points for long-term reduced-value Index options would apply
when the reduced-value Index, which is one-tenth the value of the
full-value Index, is below 200 points. Telephone conversation
between Claire P. McGrath, Managing Director and Special Counsel,
Derivatives Securities, Amex, and Francois Mazur, Staff Attorney,
Division of Market Regulation, Commission on August 8, 1995.
F. Settlement
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 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.
G. Listing of Long-Term Options on the Full-Value or Reduced-Value REIT
Index
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 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 are 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. As
discussed below, 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 (thus, a
position limit of 10,500 contracts on the same side of the market for
full-value Index options would be equivalent to a position limit for
the reduced-value Index options of 105,000 contracts on the same side
of the market).
H. Position and Exercise Limits, Margin Requirements, and Trading Halts
Because the Index is classified as a ``Stock Index Industry Group''
under Amex rules,\14\ Exchange rules that are applicable to the trading
of options on narrow-based indexes will apply to the trading of REIT
Index options and long-term Index options. Specifically, Exchange rules
governing margin requirements,\15\ position and exercise limits,\16\
and trading halt procedures \17\ that are applicable to the trading of
narrow-based index options will apply to options traded on the Index.
For purposes of determining whether a given position in reduced-value
long-term Index options complies with applicable position and exercise
limits, positions in the reduced-value long-term Index options will be
aggregated with positions in the full-value Index options. For these
purposes, ten reduced-value contracts will equal one full-value
contract.
\14\ Amex Rule 900C(b)(1).
\15\ Pursuant to Amex Rule 462, the minimum margin requirements
for short Index options positions will be 100% of the option premium
plus 20% of the underlying aggregate Index value, less any out-of-
the-money amount, with a minimum requirement of the options premium
plus 10% of the underlying aggregate Index value.
\16\ The Exchange expects that the review required by Rule
904C(c) relating to position limits for Stock Index Industry Groups
will result in a position limit of 10,500 contracts on the same side
of the market with respect to options on the Index. See Amendment
No. 2, supra note 5. Pursuant to Amex Rule 905C, exercise limits for
the Index options also will be 10,500 contracts on the same side of
the market. The Exchange may determine, pursuant to Rules 904C(c)
and 905C, that lower exercise and position limits are warranted.
\17\ Pursuant to Amex Rule 918C, the trading on the Amex of
Index options may be halted or suspended when trading has been
halted or suspended in the primary markets for any combination of
underlying stocks accounting for 20% or more of the current group
value.
---------------------------------------------------------------------------
I. Surveillance
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. In addition, the Intermarket
Surveillance Group Agreement (``ISG Agreement''), dated July 14, 1983,
as amended January 29,
[[Page 43484]]
1990, will be applicable to the trading of options on the Index.\18\
\18\ The Amex is a member of the ISG, which was formed on July
14, 1983 to, among other things, coordinate more effectively
surveillance and investigative information sharing arrangements in
the stock and options markets. See Intermarket Surveillance Group
Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members on January 29,
1990. See Second Amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990. The members of the ISG are: the Amex;
the Boston Stock Exchange, Inc.; the Chicago Board Options Exchange,
Inc.; the Chicago Stock Exchange, Inc.; the National Association of
Securities Dealers, Inc. (``NASD''); the NYSE; the Pacific Stock
Exchange, Inc.; and the Philadelphia Stock Exchange, Inc. Because of
the potential opportunities for trading abuses involving stock index
futures, stock options, and the underlying stock, and the need for
greater sharing of surveillance information for these potential
intermarket trading abuses, the major stock index futures exchanges
(e.g., the Chicago Mercantile Exchange and the Chicago Board of
Trade) joined the ISG as affiliate members in 1990.
Morgan Stanley also has established special procedures in
connection with the possibility that Morgan Stanley may consult with
the Amex, or the Amex may consult with it, regarding appropriate
changes in the Index constituency in the event of certain corporate
events affecting a REIT issuer. Specifically, such consultations will
be effected at Morgan Stanley only by a person or persons assigned to
the REITs industry within the capital markets group of the Investment
Banking Division. That person or those persons filling such position or
positions and engaged in the consultation with the Amex will be on the
non-sales and non-trading side of the firm. In addition, persons
engaged in consultations with the Amex will be subject to certain
procedures limiting the dissemination of such information within Morgan
Stanley, and in particular will be prohibited from relaying any
information concerning such consultations to the sales and trading side
of the firm. Persons involved in consultations with the Amex will not
be allowed to trade personally in the shares of the specific REIT
issuer under discussion, nor in the Amex listed option derived from the
Index, from the time consultation is undertaken until two days
following public dissemination of information concerning the decision
to include or exclude the issuer from the Index.\19\
\19\ Letter from Robin Roger, dated June 1, 1995, supra note 10.
Morgan Stanley will place on its Watch List those REIT issuers which
have been the subject of consultation between Morgan Stanley and the
Amex where such consultations have resulted in a decision to add or
delete the issuer from the Index. The Watch List is used as a device
to trigger the monitoring of trading and reviewing of research
relating to certain companies to avoid actual and potential
conflicts of interest. Morgan Stanley represents that it will
arrange a mechanism by which an Amex employee, as well as a Morgan
Stanley employee, will notify Morgan Stanley of an addition to, or
deletion from, the Index to ensure an adjustment to the Watch List.
Id.
---------------------------------------------------------------------------
III. Discussion
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, the requirements of Section 6(b)(5) of the Act.\20\
Specifically, the Commission finds that the trading of REIT Index
options, including full-value and reduced-value REIT long-term options,
will serve to promote the public interest and help to remove
impediments to a free and open securities market by providing investors
with a means of hedging exposure to market risk associated with REIT
securities.\21\
\20\ 15 U.S.C. 78f(b)(5) (1988).
\21\ Pursuant to Section 6(b)(5) of the Act, the Commission must
predicate approval of any new option proposal upon a finding that
the introduction of such new derivative instrument is in the public
interest. Such a finding would be difficult for a derivative
instrument that served no hedging or other economic function,
because any benefits that might be derived by market participants
likely would be outweighed by the potential for manipulation,
diminished public confidence in the integrity of the markets, and
other valid regulatory concerns. In this regard, the trading of
listed index options and full-value and reduced-value long-term
options on the REIT Index will provide investors with a hedging
vehicle that should reflect the overall movement of REIT securities
in the U.S. securities markets. The Commission also believes that
these Index options will provide investors with a means by which to
make investment decisions in the REIT sector of the U.S. securities
markets, allowing them to establish positions or increase existing
positions in such markets in a cost-effective manner. Moreover, the
Commission believes that the reduced-value long-term REIT Index
options will serve the needs of retail investors by providing them
with the opportunity to use a long-term option to hedge their
portfolios from long-term market moves at a reduced cost.
---------------------------------------------------------------------------
Nevertheless, the trading of options on the REIT Index, including
full-value and reduced-value long-term Index options, raises several
concerns related to index design, customer protection, surveillance,
and market impact. The Commission believes, for the reasons discussed
below, that the Amex has adequately addressed these concerns.
A. Index Design and Structure
The Commission finds that the REIT Index is a narrow-based index.
The REIT Index currently is composed on 87 securities, all of which are
REIT stocks.\22\ Accordingly, the Commission believes that it is
appropriate for the Amex to apply its rules governing narrow-based
index options to trading in the Index options.
\22\ The reduced-value REIT Index, which is composed of the same
component securities as the Index, is identical to the REIT Index,
except that it is calculated by dividing the Index value by ten.
The Commission also finds that the large capitalizations, liquid
markets, and relative weightings of the Index's component securities
significantly minimize the potential for manipulation of the Index.
First, the majority of the components that comprise the Index are
actively traded, with a mean and median average daily trading volume of
39,167 and 31,937 shares, respectively. Second, the market
capitalizations of the securities in the Index are very large, ranging
from a high of $1.1 billion to a low of $103.4 million, as of February
10, 1995, with the mean and median being $359.3 million and $279.2
million, respectively. Third, the Index is comprised of 87 component
securities, and no one particular security or group of securities
dominates the Index. Specifically, no individual REIT comprises more
than 3.41% of the Index, and the percentage weighting of the five
largest issues in the Index account for 15.42%. Fourth, 79 out of the
87 securities in the Index, representing 95.67% of the Index's value,
are eligible for standardized options trading (four of the 79 options
eligible securities currently underlie exchange-listed options).\23\
Fifth, should the number of component securities increase to more than
116 or fall to fewer than 58, as determined by the inclusion and
maintenance criteria described above, the Exchange will file with the
Commission pursuant to Section 19(b)(1) of the Act to obtain additional
approval for such Index. This will help to protect against material
adverse changes in the composition and design of the Index that might
adversely affect the Amex's obligations to protect investors and to
maintain fair and orderly markets in REIT Index options and long-term
Index options. Sixth, the Index will be calculated continuously using
last sale prices. This will further reduce the potential for
manipulation of the value of the Index. Finally, the Commission
believes that the existing mechanisms to monitor trading activity in
those securities, as discussed below, will help to deter, as well as
detect, such illegal activity.
\23\ Amendment No. 2, supra note 5. The eight components that do
not meet options eligibility standards account for only 4.33% of the
Index's value. Id.
---------------------------------------------------------------------------
B. Customer Protection
The Commission believes that a regulatory system designed to
protect public customers must be in place before the trading of
sophisticated
[[Page 43485]]
financial instruments, such as REIT Index options (including full-value
and reduced-value long-term Index options), can commence on a national
securities exchange. The Commission notes that the trading of
standardized, exchange-traded options occurs in an environment that is
designed to ensure, among other things, that: (1) The special risks of
options are disclosed to public customers; (2) only investors capable
of evaluating and bearing the risks of options trading are engaged in
such trading; and (3) special compliance procedures are applicable to
options accounts. Accordingly, because the Index options and Index
long-term options will be subject to the same regulatory regime as the
other standardized options currently traded on the Amex, the Commission
believes that adequate safeguards are in place to ensure the protection
of investors in REIT Index options and full-value and reduced-value
long-term Index options.
C. Surveillance
The Commission believes that a surveillance sharing agreement
between an exchange proposing to list a security index derivative
product and the exchange(s) trading the securities underlying the
derivative product is an important measure for surveillance of the
derivative and underlying securities markets. Such agreements ensure
the availability of information necessary to detect and deter potential
manipulations and other trading abuses, thereby making the security
index product less readily susceptible to manipulation.\24\ In this
regard, the NYSE, Amex, and NASD, which currently are the primary
markets for the REITs comprising the Index, are all members of the ISG,
which provides for the exchange of all necessary surveillance
information.\25\ Further, the Commission believes that the procedures
Morgan Stanley has established in connection with possible
consultations between itself and the Amex provide further assurances
that the Index will not be susceptible to manipulation.\26\
\24\ Securities Exchange Act Release No. 31243 (September 28,
1992), 57 FR 45829.
\29\ See supra note 18 and accompanying text.
\26\ See supra note 19 and accompanying text.
D. Market Impact
The Commission believes that the listing and trading on the Amex of
options on the REIT Index, including full-value and reduced-value long-
term Index options, will not adversely affect the underlying securities
markets.\27\ First, as described above, no one security dominates the
Index. Second, the Exchange's listing and maintenance criteria should
ensure that the component securities generally will be actively-traded,
highly capitalized securities.\28\ Third, the 10,500 contract position
and exercise limits applicable to Index options and long-term Index
options will serve to minimize potential manipulation and market impact
concerns. Fourth, the risk to investors of contra-party non-performance
will be minimized because the Index options and Index long-term options
will be issued and guaranteed by The Options Clearing Corporation just
like any other standardized option trading in the United States.
\27\ In addition, the Amex and the Options Price Reporting
Authority (``OPRA'') have stated that they have the necessary
systems capacity to support those new series of index options that
would result from the introduction of options and long-term options
on the REIT Index. See letter from Edward Cook, Jr., Managing
Director, Information Technology, Amex, to Michael Walinskas, Branch
Chief, Division of Market Regulation, Commission, dated May 2, 1995;
and letter from Joseph P. Corrigan, Executive Director, OPRA, to
Michael Walinskas, Branch Chief, Division of Market Regulation,
Commission, dated May 23, 1995.
\28\ The Commission notes that although 90.8% of the Index's
components currently are options eligible, the Exchange's proposed
maintenance criteria do not require a minimum percentage of
components to be options eligible securities. The Amex maintenance
criteria will require for each component, however, that it have a
minimum market capitalization of $75 million, a market price of at
least $5.00 for specified periods, and a trading volume of at least
900,000 shares during the preceding six months. These criteria are
generally consistent with the Amex's generic narrow-based index
option maintenance listing standards. See Securities Exchange Act
Release No. 34157 (June 3, 1994), 59 FR 30062. The Commission also
notes that the Index is made up of a large number of securities
(currently 87), and that the eight component securities that are not
options eligible, representing 9.2% of the number of securities in
the Index, account for only 4.33% of the Index value. See supra
Section II.B., Composition of the Index. Therefore, the Commission
believes that the listing and trading of REIT Index options will not
have an adverse market impact.
---------------------------------------------------------------------------
Lastly, the Commission believes that settling expiring REIT Index
options (including full-value and reduced-value Index long-term
options) based on the opening prices of component securities is
consistent with the Act. As noted in other contexts, valuing options
for exercise settlement on expiration based on opening prices rather
than closing prices may help to reduce adverse effects on markets for
securities underlying options on the Index.\29\
\29\ See Securities Exchange Act Release No. 30944 (July 21,
1992), 57 FR 33376.
---------------------------------------------------------------------------
E. Accelerated Approval of Amendment No. 2
The Commission finds good cause for approving Amendment No. 2 to
the Exchange's proposed rule change prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. Amendment No. 2 serves to clarify the Exchange's proposal by
providing additional information, including the number of Index
components that are eligible for standardized options trading, strike
price intervals, and position limits. Accordingly, the Commission finds
that no new regulatory issues are raised by Amendment No. 2. Therefore,
the Commission believes it is consistent with Sections 19(b)(2) and
6(b)(5) of the Act to approve Amendment No. 2 to the Exchange's
proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2. 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 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 in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Amex. All submissions should refer to the file
number in the caption above and should be submitted by September 11,
1995.
V. Conclusion
For the reasons set forth above, 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, the requirements of Section
6(b)(5).\30\
\30\ 15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-Amex-95-06), as amended, is approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\31\
\31\ 17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-20641 Filed 8-18-95; 8:45 am]
BILLING CODE 8010-01-M