[Federal Register Volume 61, Number 2 (Wednesday, January 3, 1996)]
[Notices]
[Pages 195-199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-35]
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[[Page 196]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36639; International Series Release No. 911; File No.
SR-Amex-95-50]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange, Inc. Relating to Commodity
Indexed Securities
December 27, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
December 11, 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 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 Amex proposes to approve for listing and trading under Section
107 of the Amex Company Guide commodity indexed preferred or debt
securities (``ComPS''), as described below.
The text of the proposed rule change is available at the Office of
the Secretary, 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 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
1. Purpose
Under Section 107 of the Amex Company Guide, the Exchange may
approve for listing and trading securities which cannot be readily
categorized under the listing criteria for common and preferred stocks,
bonds, debentures and warrants. The Amex now proposes to list for
trading under Section 107 of the Company Guide commodity indexed
preferred or debt securities.\1\ Each issue of the proposed securities
will meet the existing size and distribution requirements of Section
107. The issuers of such securities also will meet the existing
requirements under Section 107.
\1\ The Underwriter of the proposes securities has advised the
Exchange that the securities will comply with the ``hybrid
exemption'' of the Commodity futures Trading Commission (``CFTC'')
under 17 CFR Part 34. The underwriter has further advised the
Exchange that it has presented a description of the structure and
sample term sheet of the ComPs product to the staff of the CFTC, who
have raised no objection to the structure.
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Holders of ComPs generally will receive a dividend or interest as
applicable on the face value of their securities. The frequency and
rate of the dividend or interest payment will vary from issue to issue
based upon prevailing interest rates and other factors. In addition,
investors will receive at maturity a payment linked to the price of a
single commodity in accordance with the following formula:
Face Amount x (Ending Commodity Price/Beginning Commodity Price)
Commodity prices will be determined in a manner described in
greater detail within. In addition, commodity prices for the purpose of
determining the payment to holders at maturity will be determined by
reference to prices for a linked commodity over at least a ten business
day period. The securities will have a term of from two to ten years.
Holders of the securities will have no claim to any of the underlying
physical linked commodities. The Exchange anticipates that the issuer
will link different issues of ComPS to the following commodities: West
Texas Intermediate (``WTI'') crude oil, natural gas, unleaded gasoline,
heating oil, aluminum (``Al''), copper (``Cu''), zinc (``Zn''), nickel
(``Ni''), gold, silver and platinum.
The prices for the commodities linked to the proposed ComPS will be
based upon: (i) London Metal Exchange (``LME'') closing prices for the
futures contracts expiring the third Wednesday of March, June,
September and December (with respect to the linked base metals); (ii)
New York Mercantile Exchange (``NYMEX'') official settlement prices for
the near term futures contract expiring every month (with respect to
the linked energy commodities); (iii) NYMEX official settlement prices
for the platinum contract expiring January, April, July and October;
(iv) Commodity Exchange (``COMEX'') official settlement prices for the
gold contract expiring February, April, June, August and December; and
(v) COMEX official settlement prices for the silver contract expiring
March, May, July, September and December. These prices are widely
reported by vendors of financial information and the press. The
following charts describe the linked contracts:
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Official
No. commodity name & Exchange Units per contract Contract used in
units index
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1............................. Aluminum $/MT LME 25 tons............... Third Wednesday of
(Metric Tons). Mar., Jun., Sep. and
Dec.
2............................. Copper $/MT...... LME 25 tons............... Third Wednesday of
Mar., Jun., Sep. and
Dec.
3............................. Nickel $/MT...... LME 6 tons................ Third Wednesday of
Mar., Jun., Sep. and
Dec.
4............................. Zinc $/MT........ LME 25 tons............... Third Wednesday of
Mar., Jun., Sep. and
Dec.
5............................. Heating Oil #2 $/ NYMEX 42,000 gal............ Every month.
gal.
6............................. Natural Gas $/MM NYMEX 10,000 MM BTU......... Every month.
BTU.
7............................. Unleaded Gas $/ NYMEX 42,000 gal............ Every month.
gal.
8............................. WTI Light Sweet NYMEX 1,000 bbl............. Every month.
Crude $/BBL.
9............................. Platinum $/troy NYMEX 50 troy oz............ Jan., Apr., Jul.,
oz. Oct.
10............................ Gold............. COMEX 100 troy oz........... Feb. Apr., Jun., Aug.
and Dec.
11............................ Silver........... COMEX 5,000 troy oz......... Mar., May, Jul., Sep.
and Dec.
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Avg. open
Avg. daily interest
Commodity volume (in (in
contracts) contracts)
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Al............................................ 58,417 257,886
Cu............................................ 68,945 207,748
Ni............................................ 13,620 58,515
Zn............................................ 21,212 100,518
Heating Oil................................... 36,184 159,614
Natural Gas................................... 25,495 130,255
Unleaded Gas.................................. 30,331 93,225
WTI........................................... 107,654 411,483
Gold.......................................... 33,860 155,347
Silver........................................ 23,954 120,027
Platinum...................................... 3,572 23,239
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The value of the linked commodities will be calculated using one of
three pricing methodologies, as described below; (1) Excess Return, (2)
Total Return or (3) Price Return methodologies.
a. Excess Return
When the Excess Return methodology is employed, it is anticipated
that holders of the proposed ComPS will realize a return on their
investment equivalent to a trading strategy that holds a fully
collateralized near term commodity futures contract for the linked
commodity and, near the expiration of the contract, rolls, the position
into the next nearest designated contract. To minimize possible pricing
volatility arising from conducting the ``roll'' on a single business
day, the substitution of the new contract for the old will be
accomplished over a five business day period in increments of 20% of
the index value. For example, the index change on the day immediately
following the first roll is 80% of the old contract change plus 20% of
the new contract change. On the next day, the index change is 60% old
contract and 40% new contract and so forth until after the last roll
day the index change is now 100% the new contract change. For energy
commodities, the ``roll'' will be conducted each month. For base and
precious metals, due to the absence of a designated contract for each
month, the ``roll'' will be conducted periodically into the designated
contract. Rolls for all commodities will begin on the fifth business
day of the month. If a market disruption (e.g., a limit price move, no
trading or limited trading) occurs on a roll day, then the affected
commodity will not roll on that day, and the volume to roll will
accumulate and roll on the next available day.
The Excess Return methodology for calculating the value of the
linked commodity will permit investors to realize the return on holding
a continuous unleveraged investment in the nearby futures contract. The
investment return of this strategy can be characterized as the sum of
``price'' return and ``roll'' return and is simply the return from
holding a continuous position in nearby futures contracts and, as the
contract nears expiration, selling it and reinvesting all proceeds into
the next designated contract. Price return is the return that arises
solely from changes over time in the price of the nearby contract.
Thus, if on the first day of a given month the price of the nearby
contract is $15.00, and on the 30th day of such month the price of the
contract is $15.50, the investor in such contract has earned a price
return of 3.3% ($0.50/$15 or 3.33%). Roll return represents the yields
which are potentially available as a result of the differential between
the prices for shorter-dated commodity futures positions and the prices
for longer-dated commodity future positions. The price of the longer-
dated position may be higher or lower than the price of the shorter-
dated position based on a variety of factors, including the cost of
transportation, storage and insurance of commodities, the expectations
of market participants with respect to future price trends and general
supply and demand trends.
Many commodity markets, including those for base metals and energy
products, have historically been in backwardation for extended periods
(i.e., the nearby futures contracts are more expensive than longer
dated contracts). This creates an opportunity to increase the return
available through an investment in such commodities by establishing
longer-dated positions in the commodities and continuously ``rolling''
such positions forward as they approach expiration. With the passage of
time, longer-dated positions replace expiring shorter-dated positions.
Positions that were formerly longer-dated but which have become
shorter-dated positions are rolled forward and sold, with the proceeds
used to purchase longer-dated replacement contracts. This process
results in the realization of the roll return. However, if the prices
for shorter-dated positions are less than the prices for longer-dated
positions (a condition referred to as ``contango'') the investor may
bear a cost with rolling futures positions forward, even where prices
for shorter-dated positions remain constant or increase. This potential
cost arises from the fact that as longer-dated contracts become
shorter-dated contracts and then approach expiration, the prices of
such contracts may decrease relative to the prices for the same
contract when it was further away from expiration. Thus, as the
maturing contracts are sold and rolled into longer-dated positions, the
investor realizes a relatively smaller amount of proceeds, and must
purchase the newly acquired longer dated futures contract at a higher
price.
The example that follows illustrates the calculation of Excess
Return as the sum of price and roll return. In the example, spot prices
move from $15 to $15.50 over one month, and the one month second nearby
contract moves from 14.40 to $15 (i.e., the price curve remains in a
constant $0.50 backwardation). Holding period Excess Return, therefore,
is ($15.50-$14.50)/$14.50 or 6.9%.
Calculating Excess Return in a Backwardated Market
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Aug. 1st Sept. 1st
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1st Nearby Contract and Price. Sep. $15.00............................ Oct. $15.50
2nd Nearby Contract and Price. Oct. $14.50............................ Nov. $15.00
P/L on Oct Position Initiated ....................................... $1.00
Aug 1st.
Holding Period Spot Return.... ....................................... 3.3% (on Sep. contract)
Holding Period Excess Return.. ....................................... 6.9% (on Oct. contract)
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b. Total Return
As stated above, the proposed securities also may use a ``Total
Return'' methodology to value the linked commodities. The Total Return
methodology simply adds the element of return arising from an
investment in U.S. Treasury bills to the value of the linked commodity
as calculated by the Excess Return methodology described above. The
element of return arising from and investment in Treasury bills is
referred to as collateral return (``collateral return''). Thus, Total
Return equals Excess Return plus an interest
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rate equivalent to the U.S. Treasury bill rate.
If the Total Return methodology is used, securities will not have a
separate dividend or interest payment, or if they do have a separate
dividend or interest payment, it will be substantially less than if the
Excess Return methodology were used. The return based upon the Treasury
bill rate will be calculated using a 13 week T-bill yield, compounded
daily at the decompounded discount rate of the most recent weekly U.S.
Treasury bill auction as found in the H.15 (519) report published by
the Board of Governors of the Federal Reserve System, on the full value
of the commodity. Interest will accrue on an actual day basis over
weekends and holidays at the previous day's rate.
c. Price Return
If a Price Return methodology is employed, the value of the linked
commodity at maturity of the ComPS will be determined by reference to
the price of a specified near term futures contract. The use of the
Price Return methodology eliminates the elements of roll and collateral
return from the valuation of the linked commodities.\2\ If the Price
Return methodology is used to determine the value of the linked
commodity, the holders of the proposed ComPS generally will receive a
dividend or interest payment on the face value of their securities, the
frequency and rate of which will vary from issue to issue depending
upon prevailing interest rates and other factors.
\2\ When a Price Return methodology is utilized, the Exchange
believes the proposed commodity indexed preferred securities are in
some respects similar to New York Stock Exchange (``NYSE'') listed
preferred securities that currently trade under the symbols FCX B,
FCX C and FCX D. These NYSE listed securities pay a floating
quarterly dividend expressed in terms of a fraction of an ounce of
gold or silver, and the value of these securities at maturity also
is expressed as a fraction of an ounce of gold or silver. For
example, the dividend on the FCX B preferred equals .000875 ounces
of gold per share, and its maturity value is .1 ounce of gold per
share. For purposes of these securities, the price of gold and
silver is determined by reference to the London fixing for these
metals. A total of 15,065,580 shares of these securities with an
original issue price of approximately $500 million were listed
between August 1993 and July 1994.
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It is anticipated that the contract underlying a particular ComPS
will remain unchanged during the term of the instrument. Certain
developments, however, may necessitate changes with respect to the
underlying contract.\3\ Decisions regarding such changes will be
determined by a policy committee consisting of employees of the
commodities and research areas of the underwriter or its affiliates as
well as independent industry and academic experts. Employees of the
underwriter or its affiliates will be restricted to an advisory, non-
voting membership on the committee. Members of the policy committee
will be prohibited from trading ComPS.
\3\ Such developments could include, among other things,
changing liquidity conditions or the discontinuation of existing
contracts or the emergence of new ``benchmark'' contracts for the
particular linked commodity.
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If it becomes necessary to choose a replacement contract, the
``new'' replacement contract will meet the following criteria: (i) it
will be priced in U.S. dollars, or if priced in a foreign currency, the
exchange on which the contract is traded must publish an official
exchange rate for conversion of the price into U.S. dollars and such
currency must be freely convertible into U.S. currency, (ii) it will be
traded on a regulated futures exchange in the U.S., Canada, U.K, Japan,
Singapore or an O.E.C.D. country,\4\ and (iii) it will have a minimum
annual volume of 300,000 contracts or $500 million. The underwriter
will immediately notify the Exchange and vendors of financial
information in the event that there is a change in the futures contract
underlying a particular series of ComPS.
\4\ The O.E.C.D. (Organization of Economic Cooperation and
Development) consists of the following countries: the U.S., Japan,
Germany, France, Italy, U.K., Canada, Australia, Austria, Belgium,
Denmark, Finland, Greece, Iceland, Ireland, Luxembourg, Mexico,
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland and Turkey.
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The Amex represents that it is able to obtain market surveillance
information, including customer identity information, with respect to
transactions occurring on the LME pursuant to its information sharing
arrangement with the Securities and Futures Authority (``SFA'') in the
United Kingdom and through the Intermarket Surveillance Group (``ISG'')
\5\. The Exchange also is able to obtain market surveillance
information, including customer identity information, with respect to
transactions occurring on NYMEX or COMEX pursuant to its information
sharing agreement with NYMEX. In addition, the Exchange is able to
obtain market surveillance information, including customer identity
information, regarding transactions on several other futures exchanges
in the U.S. and abroad through the ISG.
\5\ The ISG 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
domestic 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.; the New York Stock Exchange, Inc.; the Pacific Stock Exchange,
Inc.; and the Philadelphia Stock Exchange, Inc. The SFA is an
affiliate member of ISG.
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In the event that the policy committee determines that the contract
underlying a ComPS should be changed, and it identifies an appropriate
benchmark replacement contract, the substitution of the new contract
for the old only will be done where: (1) The Exchange has established a
comprehensive information sharing agreement with the market or self-
regulator for the replacement contract,\6\ or (2) the SEC has
established suitable alternative arrangements with an appropriate
regulator of the market for the replacement contract. When there is no
suitable benchmark replacement contract or, there is suitable benchmark
contract but the Exchange's or the Commission's information sharing
arrangements do not meet the above criteria, then the affected ComPS
either will be called by the issuer or the payment to be made to
holders at maturity will be fixed as of such time using prices derived
from the old underlying contract, and thereafter the principal amount
will not fluctuate throughout the term of the instrument as a result of
the price of a linked commodity.
\6\ The Exchange currently has information sharing arrangements
that qualify as comprehensive information sharing agreements with
the following futures markets and self-regulators: Chicago Board of
Trade, Chicago Mercantile Exchange, London International Financial
Futures and Options Exchange, Montreal Exchange, New York Futures
Exchange, New York Mercantile Exchange and the U.K. Securities and
Futures Authority. From time to time, moreover, the Exchange may
enter into new information sharing arrangements that qualify as
comprehensive information sharing agreements with securities and
futures markets and self-regulators other than those with which the
Exchange currently has such agreements.
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The underwriter intends to retain the services of an independent
calculation agent to compute the value of the linked commodities in
accordance with the protocols described above if a Total Return or an
Excess Return methodology is employed since the value of the linked
commodities will vary from the prices of the relevant futures contracts
then trading due to the incorporation of roll and collateral return
into the value of the linked commodities. With respect to the linked
energy and precious metal commodities (i.e., those commodities traded
in the U.S.), the value of such commodities for purposes of the
proposed securities will be calculated every 60 seconds and
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disseminated to vendors of financial data via the Exchange's Network B.
With respect to base metals (i.e., those traded on the LME), the value
of the commodities will be continuously disseminated on Network B, but
will be updated only once per day during U.S. market hours as the
market for the relevant contracts does not trade in a continuous
fashion when the U.S. securities markets are open.
Since commodity returns historically have been negatively
correlated with financial assets, the Exchange believes that the
ownership of ComPS (although their return is uncertain) will help to
diversify a portfolio of financial instruments. The proposed ComPS also
will benefit the producers, consumers and dealers of the underlying
commodities by permitting them, through the issuance of ComPS, to raise
low cost capital.
Returns to investors in ComPS are unleveraged with neither a cap
nor a floor. There is an element of derivative pricing, however, with
respect to the calculation of the final payment. The Exchange,
accordingly, will require members, member organizations and employees
thereof to make a determination with respect to customers whose
accounts have not previously been approved to trade futures or options
that a transaction in the proposed securities is suitable for such
customer. In addition, members, member organizations or employees
thereof recommending a transaction in ComPS would be required: (1) To
determine that the transaction recommended is suitable for the customer
and (2) to have a reasonable basis for believing that the customer can
evaluate the special characteristics of, and is able to bear the
financial risks of, the recommended transaction. The Exchange will
distribute a circular to its membership prior to trading ComPS
providing guidance with regard to member firm compliance
responsibilities (including suitability recommendations) when handling
transactions in such securities and highlighting the special risks and
characteristics thereof.
ComPS will be subject to the equity margin and trading rules of the
Exchange except that, where ComPS are issued as debt in denominations
with a face value of $1,000 or greater, they will be traded subject to
the Exchange's debt trading rules.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) that an exchange have rules that are
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 regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and national market system, and, in
general, to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposed rule change will impose no
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 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 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, N.W., Washington, D.C. 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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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-95-50 and should be
submitted by January 24, 1996.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-35 Filed 1-2-96; 8:45 am]
BILLING CODE 8010-01-M