[Federal Register Volume 61, Number 30 (Tuesday, February 13, 1996)]
[Notices]
[Pages 5590-5592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3100]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36812; File No. SR-Amex-96-03]


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

February 6, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 23, 1996, the 
American Stock Exchange, Inc. (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Amex. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The American Stock Exchange, Inc. (``Amex'' or the ``Exchange'') 
proposes to trade options on the Networking Index (``Index''), a new 
index developed by the Amex comprised of 15 computer and 
telecommunication networking stocks which are traded on the Amex, the 
New York Stock Exchange, Inc. (``NYSE''), or through the facilities of 
the National Association of Securities Dealers Automated Quotation 
system and are reported national market system securities (``NASDAQ/
NMS''). In addition, the Amex proposes to amend Rule 901C, Commentary 
.01, to reflect that 90% of the Index's numerical value will be 
accounted for by stocks that meet the current criteria and guidelines 
set forth in Rule 915.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections (A), (B) and (C) below, 
of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The Exchange proposes to trade standardized options on the 
Networking Index (``Index''), a modified equal-dollar weighted index 
developed by the Amex, representing a portfolio of large, actively 
traded computer and telecommunication networking stocks.
1. Eligibility Standards for Index Components
    The Networking Index currently conforms with Exchange Rule 901C, 
which specifies criteria for inclusion of stocks in an index on which 
standardized options will be traded. In addition, the Index also 
currently conforms to all the criteria set forth in Rule 901C, 
Commentary .02, which provides for the commencement of trading of 
options on an index thirty days after the date of filing, with the 
exception that the Index is calculated using a modified version of the 
equal-dollar weighting method. Therefore, the component securities all 
meet the following eligibility standards: (1) They are traded on the 
Amex or NYSE, or are NASDAQ/NMS securities; (2) component stocks 
comprising the top 90% of the Index by weight have a minimum market 
capitalization of $75 million, and those component stocks constituting 
the bottom 10% of the Index by weight have a market capitalization of 
at least $50 million; (3) stocks constituting the top 90% of the Index 
by weight have minimum monthly volume of 1,000,000 shares over the six 
months preceding this filing, and stocks constituting the bottom 10% of 
the Index by weight have a minimum monthly volume of at least 500,000 
shares over the six months preceding this filing. The Exchange will 
assure that upon quarterly rebalancing (1) at least 90% of the index's 
numerical index value and at least 80% of the total number of component 
securities individually will meet the then current criteria for 
standardized option trading set forth in Exchange Rule 915; (2) that no 
component security represent more than 25% of the weight of the Index; 
and (3) that the five highest weighted component securities in the 
index, in the aggregate, account for no more than 60% of the weight of 
the Index.
2. Index Calculation
    The Index is calculated using a ``modified equal-dollar weighting'' 
methodology. Four of the fifteen component securities are given higher 
weightings to reflect their higher market capitalizations than the rest 
of the group, while not allowing them to dominate the Index to the 
extent they would in a straight market capitalization weighted Index. 
This method of calculation is important given the great disparity in 
market value of a few of the Index's components. It has been the 
Exchange's experience that options on market value weighted indexes 
dominated by relatively few component stocks are less useful to 
investors, since the index will tend to represent these few components 
and not the industry as a whole. At the same time, the increase in 
Index weight for the smaller, less liquid stocks is lower than if the 
index had been straight equal-dollar weighted; and the decrease in 
Index weight of the larger, more liquid stocks also is less dramatic 
than using straight equal-dollar weighting.
    The following is a description of how the modified equal-dollar 
weighting calculation method works. As of the market close on October 
20, 1995, a portfolio of networking stocks was established representing 
an investment of $12,000 in each of the four highest capitalized stocks 
of the companies in the Index and $4,727.27 in the 11 remaining stocks 
(rounded in the nearest whole share). The value of the Index equals the 
current market value (i.e., based on U.S. primary market prices) of the 
sum of the assigned number of shares of each of the stocks in the Index 
portfolio divided by the Index divisor. The Index divisor was initially 
determined to yield the benchmark value of 200.00 at the close of 
trading on October 20, 1995. Each quarter thereafter, following the 
close of trading on the third Friday of January, April, July and 
October, the Index portfolio will be ranked in descending market 
capitalization order and the Index portfolio adjusted by changing the 
number of whole shares of each component stock so that the four largest 
capitalized stocks in the Index each represents 12% of the Index value 
for a total of 48%, and the remaining 52% of the Index value is evenly 
distributed over the remaining securities. At the inception of the 
Index, each of the remaining 11 components had a weight of 
approximately 4.73%. The Exchange has chosen to rebalance following the 
close of trading on the quarterly expiration cycle because it allows an 
option contract to be held for up to three 

[[Page 5591]]
months without a change in the Index portfolio while at the same time, 
maintaining the equal-dollar weighting feature of the Index. If 
necessary, a divisor adjustment is made at the rebalancing to ensure 
continuity of the Index's value. The newly adjusted portfolio becomes 
the basis for the Index's value on the first trading day following the 
quarterly adjustment.
    As noted above, the number of shares of each component stock in the 
Index portfolio remain fixed between quarterly \2\ reviews except in 
the event of certain types of corporate actions such as the payment of 
a dividend other than an ordinary cash dividend, stock distribution, 
stock split, reverse stock split, rights offering, distribution, 
reorganization, recapitalization, or similar event with respect to the 
component stocks. In a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security in the portfolio may be adjusted, to the 
nearest whole share, to maintain the component's relative weight in the 
Index at the level immediately prior to the corporate action. In the 
event of a stock replacement, the average dollar value of the remaining 
portfolio components in the same weighting tier of the stock being 
replaced (i.e., either the top four stocks by market capitalization as 
of the last rebalance, or the remaining stocks) will be calculated and 
that amount invested in the stock of the new component, to the nearest 
whole share. In all cases, the divisor will be adjusted, if necessary, 
to ensure Index continuity.

    \2\ Telephone Conversation between Claire McGrath, Managing 
Director and Special Counsel, Amex, and Francois Mazur, Attorney, 
Office of Market Supervision, Division of Market Regulation, 
Commission, on February 2, 1996 (``Telephone Conversation'').
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    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.
3. Maintenance of the Index \3\

    \3\ The Amex has stated that the Index will be maintained so as 
to conform with the generic maintenance listing standards for 
options on narrow-based indexes (Amex Rule 901C, Commentary .02). 
Telephone Conversation between Claire McGrath, Managing Director and 
Special Counsel, Amex, and Francois Mazur, Attorney, Office of 
Market Supervision, Division of Market Regulation, Commission, on 
February 6, 1996.
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    The Exchange will review the Index quarterly,\4\ and maintain it so 
that (1) the total number of component securities will not increase or 
decrease by more than 33\1/3\% from the number of components in the 
Index at the time of its initial listing and in no event will the Index 
have fewer than nine components; (2) component stocks constituting the 
top 90% of the Index by weight will have a minimum market 
capitalization of $75 million and the component stocks constituting the 
bottom 10% of the Index by weight will have a minimum market 
capitalization of $50 million; (3) the monthly trading volume for each 
of the past six months \5\ for each component security shall be at 
least 500,000 shares, or for each of the lowest weighted components in 
the Index that in the aggregate account for no more than 10% of the 
weight of the Index, the monthly trading volume shall be at least 
400,000 shares; and (4) no single component will represent more than 
25% of the weight of the Index and the five highest weighted components 
will represent no more than 60% of the Index at each quarterly 
rebalancing.

    \4\ Telephone Conversation, supra note 2.
    \5\ Id.
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    The Exchange shall not open for trading any additional option 
series should the Index fail to satisfy any of the maintenance criteria 
set forth above unless such failure is determined by the Exchange not 
to be significant and the Commission concurs in that determination.
4. Expiration and Settlement
    The proposed options on the Index will be European style (i.e., 
exercises permitted at expiration only), and cash settled. Standard 
option trading hours (9:30 a.m. to 4:10 p.m. New York time) will apply. 
The options on The Networking Index will expire on the Saturday 
following the third Friday of the expiration month (``Expiration 
Friday''). The last trading day in an expiring option series will 
normally be the second to last business day preceding the Saturday 
following the third Friday of the expiration month (normally a 
Thursday). Trading in expiring options will cease at the close of 
trading on the last trading day.
    The Exchange plans to list options series with expirations in the 
three near-term calendar months and in the two additional calendar 
months in the January cycle. In addition, longer term option series 
having up to thirty-six 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 (\1/10\) the Index's full value. Ineither event, the interval 
between expiration months for either a full value or reduced value 
long-term option will be not less than six months. The trading of any 
long term options would be subject to the same rules which govern the 
trading of all the Exchange's index options, including sales practice 
rules, margin requirements and floor trading procedures, and all 
options will have European style exercise. Position limits on reduced 
value long term Networking Index options will be equivalent to the 
position limits for regular (full value) Index options and would be 
aggregated with such options (for example, if the position limit for 
the full value options is 9,000 contracts on the same side of the 
market, then the position limit for the reduced value options will be 
90,000 contracts on the same side of the market).
    The exercise settlement value for all of the Index's expiring 
options will be calculated based upon the primary exchange regular way 
opening sale prices for the component stocks. In the case of securities 
traded through the NASDAQ/NMS, 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.
5. Exchange Rules Applicable to Stock Index Options
    Amex Rules 900C through 980C will apply to the trading of option 
contracts based on the Index. These Rules cover issues such as 
surveillance, exercise prices, and position limits. Surveillance 
procedures currently used to monitor trading in each of the Exchange's 
other index options will also be used to monitor trading in options on 
the Networking Index. The Index is deemed to be a Stock Index Option 
under Rule 901C(a) and a Stock Index Industry Group under Rule 
900C(b)(1). With respect to Rule 903C(b), the Exchange proposes to list 
near-the-money option series on the Index at 2\1/2\ point strike 
(exercise) price intervals when the value of the Index is below 200 
points. In addition, the Exchange expects that the review required by 
Rule 904C(c) will result in a position limit of 9,000 contacts with 
respect to options on this Index.
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b)(5) of the Act in particular in that it is 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 

[[Page 5592]]
facilitating transactions in, securities, and in general to protect 
investors and the public interest, and to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system.

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

    The Amex believes that the proposed rule change will not impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-Amex-96-03 and should be submitted by March 5, 1996.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\

    \6\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3100 Filed 2-12-96; 8:45 am]
BILLING CODE 8010-01-M