[Federal Register Volume 61, Number 43 (Monday, March 4, 1996)]
[Notices]
[Pages 8315-8319]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4887]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36885; International Series Release No. 939; File No. 
SR-AMEX-95-50]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to the Listing and 
Trading of Commodity Indexed Securities

February 26, 1996

I. Introduction

    On December 11, 1995, the American Stock Exchange, Inc. (``Amex'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade commodity 
indexed preferred or debt securities (``ComPS''), whose value will be 
linked to the price of a single commodity.

    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR Sec. 240.19b-4 (1993).
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    Notice of the proposed rule change was published for comment and 
appeared in the Federal Register on January 3, 1996.\3\ No comments 
were received on the proposal. This order approves the proposal.

    \3\ See Securities Exchange Act Release No. 36639 (Dec. 27, 
1995), 61 FR 196.
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II. Description of Proposal

    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 ComPS, which will conform to the Amex's listing guidelines 
under Section 107 of the Company Guide.\4\ Accordingly, all issuances 
of ComPS must have: (1) A public distribution of one million trading 
units; (2) 400 holders; and (3) a market value of not less than $4 
million. The Exchange also will require that the issuer have a minimum 
tangible net worth of $150 million. In addition, the Exchange will 
require that the total original issue price of the notes (when combined 
with all of the issuer's commodity linked notes which are listed on a 
national securities exchange or traded through the facilities of 
NASDAQ), shall be greater than 25% of the issuer's tangible net worth 
at the time of issuance.

    \4\ The proposed underwriter of ComPS 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 
ComPS 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:

Fact Amount * (Ending Commodity Price/Beginning Commodity Price)

    Commodity prices will be determined in a manner as described in 
greater detail below. 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 have no claim to any of the underlying 
physical linked commodities. Under the proposal, the Exchange may only 
link different issues of ComPS to the following commodities: West Texas 
Intermediate (``WTI'') crude oil, natural gas, unleaded gasoline, 
hearing oil, alumium (``Al''), copper (``Cu''), zinc (``Zn''), nickel 
(``Ni''), gold, silver and platium.
    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 platium 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:

[[Page 8316]]


----------------------------------------------------------------------------------------------------------------
Official Commodity Name and Units         Exchange              Units per contract       Contract used for ComPS
----------------------------------------------------------------------------------------------------------------
1. Aluminum $/MT (Metric Tons)...  LME..................  25 tons......................  Third Wednesday of 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 $/gal.........  NYMEX................  42,000 gal...................  Every month.           
6. Natural Gas $/MM BTU..........  NYMEX................  10,000 MM BTU................  Every month.           
7. Unleaded Gas $/gal............  NYMEX................  42,000 gal...................  Every month.           
8. WTI Light Sweet Crude $/BBL...  NYMEX................  1,000 bbl....................  Every month.           
9. Platinum $/troy oz............  NYMEX................  50 troy oz...................  Jan, Apr, Jul, 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.                  
----------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------
                                                              Avg. open 
                                                 Avg. daily    interest 
                   Commodity                     volume (in      (in    
                                                 contracts)   contracts)
------------------------------------------------------------------------
A1............................................       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.

1. Excess Return

    When the Excess Return methodology is employed to value ComPS, 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. Accordingly, this 
methodology can be characterized as the sum of ``price'' return and 
``roll'' return.
    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 future positions and the prices for longer-
dated commodity futures 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.
    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.
    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 

[[Page 8317]]
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 second nearby monthly 
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%.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Aug 1st                                            Sept 1st                    
--------------------------------------------------------------------------------------------------------------------------------------------------------
Calculating excess return in a backwardated                                                                                                             
 market:                                                                                                                                                
    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 Aug 1st.........  .................................................  $1.00.                                           
    Holding Period Spot Return....................  .................................................  3.3% (on Sep contract).                          
    Holding Period Excess Return..................  .................................................  6.9% (on Oct contract).                          
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2. 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 an investment in Treasury bills is 
referred to as collateral return (``collateral return''). Thus, Total 
Return equals Excess Return plus an interest 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.

3. 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. 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.
    It is anticipated that the futures 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 futures contract.\5\ 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.

    \5\ 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 futures 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,\6\ and (iii) at the time of 
replacement, 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 
chance in the futures contract underlying a particular series of 
ComPS.\7\

    \6\ 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.
    \7\ The Amex would also have to have suitable surveillance 
arrangements for any replacement contract, as discussed above.
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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 
arrangements with the Securities and Futures Authority (``SFA'') in the 
United Kingdom through the Intermarket Surveillance Group (``ISG'').\8\ 
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.\9\

    \8\ 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.
    \9\ See infra note 10.
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    In the event that the policy committee determines that the futures 
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-

[[Page 8318]]
regulator for the replacement contract,\10\ or (2) the SEC has 
established suitable alternative arrangements with an appropriate 
regulator of the market for the replacement contract.\11\ When there is 
no suitable benchmark replacement contract or, there is a 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 a certain time and in a manner 
established by the underwriter, and thereafter the principal amount 
will not fluctuate throughout the term of the instrument as a result of 
the price of a linked commodity.

    \10\ 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 enters 
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.
    \11\ Amex will notify the Commission staff prior to the 
commencement of a ComPS replacement contract change. Telephone 
conversation between Michael Bickford, Amex, and Michael Walinskas, 
SEC, on February 21, 1996.
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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 as a result of the incorporation of roll and collateral 
return (in the case of Total Return methodology). With respect to ComPS 
overlying the linked energy and precious metal commodities (i.e., those 
commodities traded in the U.S.), the value of such ComPS will be 
calculated every 60 seconds and disseminated to vendors of financial 
data via the Exchange's Network B. With respect to ComPS overlying base 
metals (i.e., those traded on the LME), the value of such ComPS 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 
underlying 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. According to the 
Exchange, 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 will 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 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 (although they will still remain subject 
to equity margin rules).

III. Commission Findings and Conclusions

    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). In particular, the 
Commission believes that the availability of exchange-traded ComPS will 
provide an instrument for investors to achieve desired investment 
objectives (e.g., commodity exposure and portfolio diversification) 
through the purchase of an exchange-traded securities product linked to 
one of the single commodities noted above.\12\ For the reasons 
discussed below, the Commission has concluded that the Amex listing 
standards applicable to ComPS are consistent with the Act.

    \12\ Pursuant to Section 6(b)(5) of the Act the Commission must 
predicate approval of exchange trading for new products upon a 
finding that the introduction of the product is in the public 
interest. Such a finding would be difficult with respect to a 
product that served no investment, hedging or other economic 
function, because any benefits that might be derived by market 
participants would likely be outweighed by the potential for 
manipulation, diminished public confidence in the integrity of the 
markets, and other valid regulatory concerns.
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    ComPS are similar in structure to a previous Amex proposed product, 
Commodity Indexed Notes (``COINs''), which the Commission approved in 
March 1995.\13\ COINs, similar to ComPS, were proposed to be listed 
pursuant to Section 107 of the Amex Company Guide. The principal value 
of COINs was to be derived from the performance of a commodity index 
comprised of futures contracts overlying certain selected physical 
commodities.

    \13\ See Securities Exchange Act Release No. 35518 (March 21, 
1995).
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    Like COINs, the value of ComPS will be affected partially by 
certain risks that are associated with the purchase and sale of 
exchange-traded futures contracts. Furthermore, the Commission notes 
that the prices of commodities, including the eleven individual 
commodities which may underlie a particular ComPS issuance, may be 
subject to volatile price movements caused by numerous factors.\14\ 
Accordingly, an investment in ComPS may also be subject to volatile 
price movements due to price changes in the underlying commodities and 
related futures contracts. In addition, ComPS possess many complex 
features, such as the incorporation of roll return and collateral 
return into their pricing methodologies.

    \14\ Such factors include, but are not limited to, international 
economic, social and political conditions and levels of supply and 
demand for the individual commodities.
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    In order to address the complex and risky nature of ComPS, the Amex 
has proposed special suitability, disclosure, and compliance 
requirements. First, the Exchange will require members 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.\15\ This is 
important given the embedded derivative component of ComPS. Second, the 


[[Page 8319]]
Amex will require that members who make recommendations in ComPS 
determine that the transaction recommended is suitable for the customer 
and 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. Third, because ComPS 
are cash-settled, holders will not receive, nor be required to 
liquidate, the underlying physical commodities or overlying futures 
contracts. The Commission notes that this provision will effectively 
terminate a ComPS investor's exposure to commodity market risk at the 
security's maturity and limit an investor's loss to the amount of his 
initial investment. Finally, the Exchange plans to distribute a 
circular to its membership calling attention to the specific risks 
associated with ComPS.\16\ This will assist members in determining the 
customers eligible to trade ComPS, formulating recommendations in 
ComPS, and in monitoring customer and firm transactions in ComPS.

    \15\ Such a requirement is more than the duty to know and 
approve customers, but entails an obligation to make a determination 
that the transaction is suitable for the customer.
    \16\ The ComPS circular will be submitted to the Commission for 
its review and should include, among other things, a discussion of 
those risks which may cause commodities to experience volatile price 
movements in addition to details on the pricing methodology to be 
used for that particular issuance.
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    The Commission also believes that several factors significantly 
minimize the potential for manipulation of ComPS. First, each of the 
futures contracts overlying the commodities is relatively actively 
traded, and has considerable open interest. Second, the majority of 
futures contracts overlying the component commodities trade on 
exchanges that impose position limits on speculative trading activity, 
which are designed, and serve, to minimize potential manipulation and 
other market impact concerns. Third, as discussed below, the Amex has 
entered into certain surveillance sharing agreements with each of the 
futures exchanges upon which the underlying designated futures 
contracts trade. These agreements should help to ensure the 
availability of information necessary to detect and deter potential 
manipulations and other trading abuses, thereby making ComPS less 
readily susceptible to manipulation.\17\ Fourth, the price of ComPS 
(with respect to those commodities traded in the U.S.) will be 
calculated every 60 seconds and disseminated to vendors of electronic 
financial information via the Exchange's Network B.\18\ Fifth, adequate 
procedures are in place to prevent the misuse of information by members 
of the policy committee responsible for replacements with respect to 
the underlying contract.\19\ Accordingly, for the reasons discussed 
above, the Commission believes that ComPS are not readily susceptible 
to manipulation and that in any event, the surveillance procedures in 
place are sufficient to detect and deter potential manipulation.

    \17\ The Amex has comprehensive surveillance sharing agreements 
with all of the exchanges upon which the futures contracts relating 
to a particular ComPS trade. Specifically, Amex is able to obtain 
market surveillance information, including customer identity 
information, for transactions occurring on NYMEX and Comex. 
Furthermore, under the ISG information sharing agreement, SFA will 
be able to provide, upon Amex request, surveillance information with 
respect to trades effected on the LME, including client identity 
information. Finally, if the underlying commodity for an issuance of 
ComPS changes or if a different market is utilized for purposes of 
calculating the value of a designated futures contract, the Amex 
will ensure that it has entered into a surveillance sharing 
agreement with respect to the new relevant market.
    \18\ For commodities traded on the LME, as discussed above, 
prices for ComPS will be continuously disseminated on Network B, 
however, they will only be updated once per day during U.S. hours.
    \18\ As discussed above, members of the policy committee are 
expressly prohibited from trading ComPS and from communicating any 
knowledge concerning changes in the value of the underlying 
commodities. Amex will also have surveillance procedures in place to 
periodically review activity in the securities.
---------------------------------------------------------------------------

    The Commission notes the ComPS, unlike standardized options, do not 
contain a clearinghouse guarantee but are instead dependent upon the 
individual credit of the issuer. This heightens the possibility that a 
purchaser of ComPS may not be able to receive any cash payment due upon 
maturity. To some extent this credit risk is minimized by the 
Exchange's listing guidelines requiring ComPS issuers to possess at 
least $100 million in assets and stockholders' equity of at least $10 
million. In any event, financial information regarding the issuer will 
be disclosed or incorporated in the prospectus accompanying the 
offering of ComPS.
    Based on the above, the Commission finds that the proposal to trade 
ComPS is consistent with the Act, and, in particular, the requirements 
of Section 6(b)(5).\20\

    \20\ The Commission notes that a Rule 19b-4 filing might be 
required in order to list any other derivative product based upon a 
commodity interest that differs from the proposed ComPS or 
previously approved COINs products.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change is approved.

    \21\ 15 U.S.C. Sec. 78s(b)(2) (1982).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\

    \22\ 17 CFR Sec. 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4887 Filed 3-1-96; 8:45 am]
BILLING CODE 8010-01-M