[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:

----------------------------------------------------------------------------------------------------------------
                                     Official                                                                   
              No.                commodity name &     Exchange       Units per contract       Contract used in  
                                      units                                                        index        
----------------------------------------------------------------------------------------------------------------
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)
------------------------------------------------------------------------
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
------------------------------------------------------------------------


    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                               
----------------------------------------------------------------------------------------------------------------
                                                Aug. 1st                                Sept. 1st               
----------------------------------------------------------------------------------------------------------------
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)                
----------------------------------------------------------------------------------------------------------------

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 

[[Page 198]]
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 

[[Page 199]]
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