[Federal Register Volume 61, Number 60 (Wednesday, March 27, 1996)]
[Notices]
[Pages 13545-13547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7341]




[[Page 13545]]

[Release No. 34-36990; International Series Release No. 952; File No. 
SR-Amex-95-44]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the American Stock 
Exchange, Inc., Relating to the Listing and Trading of Equity Linked 
Term Notes on Non-U.S. Securities

March 20, 1996.

I. Introduction

    On November 9, 1995, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') filed a proposed rule change with the Securities and 
Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ to amend Section 107B of the Amex Company Guide to 
provide alternate criteria for the listing and trading of hybrid debt 
securities whose value is linked to the performance of a non-U.S. 
company which is traded in the U.S. market as sponsored American 
Depositary Shares ordinary shares or otherwise.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposal was published for comment and appeared in 
the Federal Register on December 7, 1995.\3\ The Exchange filed with 
the Commission Amendment No. 1 to the proposed rule change on January 
5, 1996.\4\ No comment letters were received on the proposed rule 
change. This order approves the Exchange's proposal, as amended.

    \3\ See Securities Exchange Act Release No. 36538 (November 30, 
1995), 60 FR 62914.
    \4\ The Exchange submitted Amendment No. 1 to the Commission to 
make certain technical changes, as further described herein, to the 
listing standards regarding Equity Linked Term Notes on non-U.S. 
securities. See Letter from Claire McGrath, Special Counsel, Amex, 
to Michael Walinskas, Branch Chief, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Market Regulation''), 
Commission, dated January 5, 1996 (``Amendment No. 1'').
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II. Background

    On May 20, 1993 and December 13, 1993, the Commission approved 
amendments to Section 107 of the Amex Company Guide to provide for the 
listing and trading of Equity Linked Term Notes (``ELNs'').\5\ ELNs are 
intermediate term (two to seven years), non-convertible, hybrid debt 
instruments, the value of which is linked to the performance of a 
highly capitalized, actively traded U.S. and non-U.S. companies.

    \5\ See Securities Exchange Act Release Nos. 32345 (May 20, 
1993), 58 FR 30833 (May 27, 1993), and 33328 (December 13, 1993), 58 
FR 66041 (December 20, 1993).
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    In August 1994, the Exchange amended Section 107B of the Amex 
Company Guide to permit the listing and trading of ELNs linked to 
actively traded non-U.S. companies which are traded in the U.S. market 
as sponsored American Depositary Shares, ordinary shares or otherwise 
(``non-U.S. securities''), provided that (1) the Exchange has in place 
a comprehensive surveillance sharing agreement with the primary 
exchange on which the non-U.S. security trades; the trading volume of 
the non-U.S. security in the U.S. market represents at least 50% of the 
world-wide trading volume in the non-U.S. security (``50% Test''); and 
(2) the ELNs issuance does not exceed (i) 2% of the total shares of the 
underlying security outstanding provided at least 30% of the worldwide 
trading volume for the security for the six-months prior to the listing 
occurred in the U.S. market, (ii) 3% of the total shares of the 
underlying outstanding provided at least 50% of the worldwide trading 
volume for the security for the six-months prior to listing occurred in 
the U.S. market, or (iii) 5% of the total shares of the underlying 
security outstanding provided at least 70% of the worldwide trading 
volume for the security for the six-months prior to listing occurred in 
the U.S. market. No ELN may be listed if the U.S. market for the 
underlying security accounted for less than 30% of the worldwide 
trading volume for the security and related securities during the prior 
six months.\6\

    \6\ See Securities Exchange Act Release No. 34549 (August 18, 
1994), 59 FR 43873 (August 25, 1994).
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III. Description of the Proposal

    The Exchange proposes to amend its ELNs on non-U.S. security 
listing criteria by (1) revising the manner in which the applicable 
percentage of world-wide trading volume is calculated under the 50% 
Test; (2) adding new criteria for the listing of ELNs on non-U.S. 
securities, based on the daily trading volume in the U.S.; and (3) 
revising the current restrictions on the size of ELN issuances linked 
to non-U.S. securities to reflect the amendments to the listing 
criteria noted above.\7\ Specifically, the Exchange proposes to revise 
the 50% Test so that trading in non-U.S. securities and other related 
non-U.S. securities in any market with which the Exchange has in place 
a comprehensive/effective surveillance sharing agreement will be added 
to U.S. market volume for the purpose of determining whether the 50% 
Test has been met. Currently, only trading in the U.S. market counts 
toward satisfying the 50% Test.

    \7\ See Amendment No. 1, supra note 4.
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    Additionally, the Exchange proposes to add an alternate set of 
criteria under which the Exchange may list ELNs on non-U.S. securities 
(``20% Test + Daily Trading Volume Standards''). The new standard will 
permit the Exchange to list ELNs on non-U.S. securities if all of the 
following conditions are satisfied: (1) The combined world-wide trading 
volume for the non-U.S. security in the U.S. market represents (on a 
share equivalent basis) at least 20% of the combined world-wide trading 
volume in the non-U.S. security and other related non-U.S. securities 
over the six month period preceding the date of selection of the non-
U.S. security for an ELN listing; \8\ (2) the average daily trading 
volume for the non-U.S. security in the U.S. market over the six months 
preceding the date of selection of the non-U.S. security for an ELN 
listing is at least 100,000 shares; and (3) the trading volume for the 
non-U.S. security in the U.S. market is at least 60,000 shares per day 
for a majority of the trading days for the six months preceding the 
date of selection of the non-U.S. security for an ELN listing.

    \8\ The calculation for the 20% Test + Daily Trading Volume 
Standard does not include foreign markets with which the Exchange 
has in place a comprehensive surveillance sharing agreement. See 
Amendment No. 1, supra note 4.
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    Moreover, the Exchange proposes to amend the size limitations of 
ELN issuances linked to non-U.S. securities. Specifically, the Exchange 
proposes to require that the size of ELN issuances linked to non-U.S. 
securities will be limited to 2% of the total shares of the underlying 
security for the underlying security outstanding provided at least 20% 
of the worldwide trading volume for the security for the six-months 
prior to the listing occurred in the U.S. market. Additionally, under 
the proposed rule change, the 30% floor would be lowered to 20% \9\ so 
that an ELN would be permitted on a non-U.S. security if U.S. trading 
volume accounted for at least 20% of the world-wide trading volume 
during the six months prior to listing.\10\ As noted

[[Page 13546]]
 above, the current rule requires at least 30% of the trading volume to 
occur in the U.S. to issue an ELN linked to up to 2% of the outstanding 
shares of a non-U.S. security.\11\

    \9\ As with the 20% Test + Daily Trading Volume Standard, 
foreign markets with which the Exchange has in place a comprehensive 
surveillance sharing agreement are not included in the calculation 
for purposes of determining the size of eligible ELN issuances. See 
Amendment No. 1, supra note 4.
    \10\ The other size limitations in Amex's rule remains 
unchanged. Accordingly, the size of ELN issuances linked to non-U.S. 
securities will be limited to 3% of the total shares of the 
underlying security outstanding provided at least 50% of the 
worldwide trading volume for the security for the six-months prior 
to listing occurred in the U.S. market, or 5% of the total shares of 
the underlying security outstanding provided at least 70% of the 
worldwide trading volume for the security for the six-months prior 
to listing occurred in the U.S. market.
    \11\ This 30% requirement is also currently the minimum volume 
that must have occurred in the U.S. market in order for the Exchange 
to list an ELN linked to any non-U.S. security.
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    The Exchange believes that the proposed rule change is appropriate 
in that it limits the listing of ELNs linked to non-U.S. securities to 
those that have both a significant amount of U.S. market trading volume 
and a substantial volume of trading covered by a comprehensive/
effective surveillance sharing agreement, which provides reasonable 
assurances that the underlying non-U.S. securities are deliverable upon 
exercise of the ELNs, and gives the Exchange the ability to inquire 
into potential trading problems or irregularities in a market place 
that serves as a significant price discovery market for the non-U.S. 
security.
    The Exchange also believes that the proposed amendment will benefit 
investors by expanding the number of non-U.S. securities that may be 
linked to ELNs, thereby providing investors with enhanced investment 
flexibility. The Exchange believes that it is appropriate to now 
include additional non-U.S. securities within the existing ELNs 
regulatory framework because of the significant level of U.S. investor 
interest in both U.S. and non-U.S. highly capitalized and actively 
traded reporting companies.
    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) in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of change, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and to 
remove impediments to and percent the mechanism of a free and open 
market and a national market system.

IV. Commission Finding 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) of the Act.\12\ 
Specifically, the Commission finds that the Exchange's proposal to 
provide alternate criteria for the listing and trading of ELNs on non-
U.S. securities strikes a reasonable balance between the Commission's 
mandates under Section 6(b)(5) to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, while 
protecting investors and the public interest.

    \12\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed amendments to the listing 
standards for ELNs on non-U.S. securities will benefit investors by 
effectively increasing the number of available ELNs-eligible non-U.S. 
securities. At the same time, as described below, the proposal provides 
safeguards designed to reduce the potential for manipulation and other 
abusive trading strategies in connection with the trading of non-U.S. 
security ELNs and their underlying securities. Accordingly, the 
Commission believes that the proposal will extend the benefits 
associated with ELNs on non-U.S. securities to additional non-U.S. 
securities and provide market participants with opportunities to trade 
a greater number of ELNs on non-U.S. securities without compromising 
the effectiveness of the Exchange's listing standards for such 
securities.
    Currently, the 50% Test allows the Exchange to list ELNs on a non-
U.S. security in the absence of a comprehensive/effective surveillance 
sharing agreement with the primary exchange where the non-U.S. security 
trades if the combined trading volume of the non-U.S. security and 
other related non-U.S. securities occurring in the U.S. market during 
the six month period preceding the selection of the non-U.S. security 
for ELN listing represents (on a share equivalent basis) at least 50% 
of the combined world-wide trading volume in such securities.
    The Commission has previously concluded that the 50% Test helps to 
ensure that the relevant pricing market for non-U.S. securities 
underlying ELNs occurs in the U.S. market.\13\ In such cases, the 
Commission has previously found that the U.S. market is the 
instrumental market for purposes of deterring and detecting potential 
manipulations or other abusive trading strategies in conjunction with 
transactions in the overlying non-U.S. security ELN market. Because the 
U.S. self-regulatory organizations which comprise the U.S. market for 
non-U.S. securities are members of the Intermarket Surveillance 
Group,\14\ the Commission has concluded that there exists an effective 
surveillance sharing agreement to permit the exchanges and the NASD to 
adequately investigate any potential manipulations of the non-U.S. 
security ELNs or their underlying securities.

    \13\ See Securities Exchange Act Release Nos. 34549 (August 18, 
1994), 59 FR 43873 (August 25, 1994) (SR-Amex-93-46); 34759 
(September 30, 1994), 59 FR 50939 (October 6, 1994) (SR-CBOE-94-04); 
34758 (September 30, 1994), 59 FR 50943 (October 6, 1994) (SR-NASD-
94-49); 34985 (November 18, 1994), 59 FR 60860 (November 28, 1994) 
(SR-NYSE-94-37); and 35479 (March 13, 1995), 60 FR 14993 (March 21, 
1995) (SR-Phlx-95-09) (``ELN Approval Orders'').
    \14\ The Intermarket Surveillance Group (``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 members of the ISG are: the Amex; 
the Boston Stock Exchange, Inc.; the Chicago Board Options Exchange, 
Inc.; the Chicago Stock Exchange, Inc.; the National Association of 
Securities Dealers, Inc. (``NASD''); the New York Stock Exchange, 
Inc.; the Pacific Stock Exchange, Inc.; and the Philadelphia Stock 
Exchange, Inc. Because of potential opportunities for trading abuses 
involving stock index futures, stock options, and the underlying 
stock and the need for greater sharing of surveillance information 
for these potential intermarket trading abuses, the major stock 
index futures exchanges (e.g., the Chicago Mercantile Exchange and 
the Chicago Board of Trade) joined the ISG as affiliate members in 
1990.
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    The Exchange proposes to modify the 50% Test to include in the U.S. 
market volume calculation, the trading volume in non-U.S. securities 
and other related non-U.S. securities that occurs in any market with 
which the Exchange has in place a comprehensive/effective surveillance 
sharing agreement. The Commission believes that this proposed 
modification of the 50% Test is consistent with the Act and with the 
Commission's approach in the ELN Approval Orders because it will 
continue to ensure that the majority of world-wide trading volume in 
the non-U.S. security and other related non-U.S. securities occurs in 
trading markets with which the Exchange has in place a comprehensive/
effective surveillance sharing agreement. The existence of such 
agreements should deter as well as detect manipulations or other 
abusive trading strategies and also provide an adequate mechanism for 
obtaining market and trading information from the non-U.S. markets that 
list the non-U.S. security underlying the Exchange's ELNs in order to 
adequately investigate any potential abuse or manipulation.
    Additionally, the Commission finds that the proposed 20% Test + 
Daily

[[Page 13547]]
Trading Volume Standard is consistent with the Act and with the ELN 
Approval Orders. As noted above, the 20% Test + Daily Trading Volume 
Standard will allow the Exchange to list ELNs on a non-U.S. security 
if, over the six month period preceding the date of selection of the 
non-U.S. security for ELNs trading (1) the combined world-wide trading 
volume for the non-U.S. security in the U.S. market represents (on a 
share equivalent basis) at least 20% of the combined world-wide trading 
volume in the non-U.S. security and other related non-U.S. securities; 
\15\ (2) the average daily trading volume for the non-U.S. security in 
the U.S. market is at least 100,000 shares; and (3) the trading volume 
for the non-U.S. security in the U.S. market is at least 60,000 shares 
per day for a majority of the trading days.

    \15\ See supra note 8. The Commission notes that the 20% Test + 
Daily Trading Volume Standard does not include worldwide trading 
volume in the non-U.S. security that takes place in a foreign market 
regardless of the existence of a comprehensive surveillance sharing 
agreement with the listing exchange. The 20% Test is a minimum U.S. 
market share trading test intended to permit the listing of ELNs 
only on non-U.S. securities that have active and liquid markets in 
the U.S.
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    The Commission believes that these requirements present a 
reasonable alternative to the 50% Test by limiting the actual listing 
of ELNs on non-U.S. securities to only those non-U.S. securities that 
have a significant amount of U.S. market trading volume. This will 
ensure that the U.S. market is sufficiently active to serve as a 
relevant pricing market for the non-U.S. security and that the 
underlying foreign security is readily available to meet the delivery 
requirements upon exercise of the ELN. Accordingly, the Commission 
believes that the 20% Test + Daily Trading Volume Standard should help 
to ensure that the U.S. markets serve a significant role in the price 
discovery of the applicable non-U.S. security and are generally deep, 
liquid markets.
    Finally, the Exchange believes, for similar reasons, that it is 
appropriate to reduce the minimum U.S. trading volume requirements for 
ELNs issuances from 30% to 20%. As noted above, the Commission believes 
that the 20% Test + Daily Trading Volume Standard will ensure that an 
underlying non-U.S. security has deep and liquid markets to sustain an 
ELNs listing. The Commission believes that it is appropriate to adjust 
the limitations on the size of the ELNs issuance to correspond to this 
requirement. Accordingly, where the trading volume in the U.S. market 
for the underlying non-U.S. security is between 20% and 50% of the 
worldwide trading volume, the issuance will be limited to 2% of the 
total outstanding shares of the underlying security. The 20% minimum 
U.S. trading volume requirement should continue to ensure that the U.S. 
market is significant enough to accommodate ELNs trading. In this 
regard, the Commission believes that these restrictions will minimize 
the possibility that trading in such issuances will adversely impact 
the market for the security to which it is linked.
    The Commission notes that other existing ELNs listing requirements 
relating to the protection of investors will continue to apply. Among 
other things, these rules set forth issuer standards as well as minimum 
market capitalization and trading volume requirements that must be met 
prior to listing an ELN.\16\

    \16\ The Commission recently approved the Exchange's proposed 
rule change amending some of the initial listing standards regarding 
such structured notes. The Exchange's amended initial listing 
standards require, among other things, that the linked stock 
underlying the Exchange-listed ELNs either: (i) has a minimum market 
capitalization of $3 billion and during the 12 months preceding 
listing is shown to have traded at least 2.5 million shares, (ii) 
has a minimum market capitalization of $1.5 billion and during the 
12 months preceding listing is shown to have traded at least 10 
million shares; or (iii) has a minimum market capitalization of $500 
million and during the 12 months preceding listing is shown to have 
traded at least 15 million shares. See Securities Exchange Act 
Release No. 36989 (March 20, 1996).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 1 to the proposal makes certain technical 
clarifications, and revises paragraph (f) of Section 107B of the Amex 
Company Guide to reflect the amendments to the listing criteria in 
paragraph (e) as set forth herein. Accordingly, the Commission believes 
it is consistent with Section 6(b)(5) of the Act to approve Amendment 
No. 1 to the proposal on an accelerated basis.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. 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. 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 
Exchange. All submissions should refer to SR-Amex-95-44 and should be 
submitted by April 17, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (File No. SR-Amex-95-44), as 
amended, is approved.

    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\

    \18\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7341 Filed 3-26-96; 8:45 am]
BILLING CODE 8010-01-M