[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24976-24979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12383]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37195; File No. SR-Amex-96-12]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval To Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendments Nos. 1 and 2 To Proposed 
Rule Change by the American Stock Exchange, Inc., Relating to Listing 
and Trading of Warrants Based on the Select Technology Stock Index

May 10, 1996.

I. Introduction

    On April 9, 1996, the American Stock Exchange, Inc. (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade warrants based on the Select 
Technology Stock Index (``Index'').\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ The Amex has clarified that the name of the index will be 
the Select Technology Stock Index. Telephone Conversation between 
Michael T. Bickford, Vice President, Capital Markets Group, Amex, 
and Matthew S. Morris, Attorney, Derivatives Regulation, Office of 
Self-Regulatory Oversight, Division of Market Regulation 
(``Division''), Commission, on May 3, 1996.
---------------------------------------------------------------------------

    The proposed rule change appeared in the Federal Register on April 
23, 1996.\4\ No comments were received on the proposed rule change. The 
Amex subsequently filed Amendment No. 1 to the proposed rule change on 
May 2, 1996 \5\ and Amendment No. 2 on May 8, 1996.\6\ The Amex has 
requested

[[Page 24977]]

accelerated approval for the proposal. This order approves the Amex's 
proposal, as amended, on an accelerated basis and solicits comments 
from interested persons on Amendment Nos. 1 and 2.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 37122 (April 17, 
1996), 61 FR 17931 (April 23, 1996).
    \5\ In Amendment No. 1, the Amex amended its rule filing to 
clarify that the Commission will be notified if: (1) the number of 
components in the Index decreases to less than nine; (2) the three 
highest weighted components represent more than 60 percent of the 
weight of the Index; or (3) the trading volume of any of the 
components falls below 500,000 shares for each of the last six 
months. In Amendment No. 1, the Amex also changed the manner in 
which the value of the Index will be calculated from a price-
weighted to an equal-dollar weighted methodology. In addition, the 
Amex replaced component securities C-Cube Microsystems, Inc., 
Computer Sciences Corporation, and General Motors Corporation (Class 
E) with Adaptec Inc., Hewlett Packard Co., and Sun Microsystems. See 
letter from Michael T. Bickford, Vice President, Capital Markets 
Group, Amex, to Michael Walinskas, Branch Chief, Derivatives 
Regulation, Office of Self-Regulatory Oversight, Division, 
Commission, dated May 2, 1996 (``Amendment No. 1'').
    \6\ In Amendment No. 2, the Amex removed Applied Materials, Inc. 
as a component security of the Index. See letter from Michael T. 
Bickford, Vice President, Capital Markets Group, Amex, to Michael 
Walinskas, Branch Chief, Derivatives Regulation, Office of Self-
Regulatory Oversight, Division, Commission, dated May 8, 1996 
(``Amendment No. 2'').
---------------------------------------------------------------------------

II. Description

    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled index warrants based on the Select 
Technology Stock Index (``Index Warrants''). The Exchange has 
represented that the listing and trading of warrants based on the Index 
will comply in all respects with Amex Rules 1100 through 1110, Amex 
Rule 462, and Section 106 of the Amex Company Guide.

A. Design of the Index

    The Exchange has also represented that the Index is narrow-based 
and comprised of the stocks of 23 technology companies.\7\ The Index is 
equal-dollar weighted and is therefore designed to ensure that each of 
the component securities is represented in an approximate ``equal'' 
dollar amount. Accordingly, each of the 23 companies included in the 
Index will represent approximately 4.347 percent of the weight of the 
Index at the time of issuance of the warrant. The Index multipliers 
will be determined to yield the benchmark value of 100.00 on the date 
the warrant is priced for initial offering to the public.
---------------------------------------------------------------------------

    \7\ The component securities of the Index are as follows: Adc 
Telecommunications, Inc.; America Online, Inc.; Adaptec Inc.; Cisco 
Systems, Inc.; Computer Associates International, Inc.; Dell 
Computer Corporation; Digital Equipment Corporation; First Data 
Corporation; Gateway 2000, Inc.; Hewlett-Packard Co.; Informix 
Corporation; Intel Corporation; International Business Machines 
Corp.; Lsi Logic Corporation; Microsoft Corporation; Oracle Systems 
Corporation; Qualcomm, Inc.; Sun Microsystems; Tencor Instruments; 
Texas Instruments, Inc.; Vishay Intertechnology, Inc.; Xerox 
Corporation; and Xilinx Inc.
---------------------------------------------------------------------------

    The Exchange has stated that the total market capitalization of the 
Index was approximately $339.7 billion on April 29, 1996. The median 
capitalization of the companies in the Index on that date was $5.2 
billion, and the average market capitalization of these companies was 
$14.8 billion. The individual market capitalization of the companies 
ranged from $730 million to $59 billion. In addition, during the six-
month period from October 1995 through March 1996, average monthly 
trading volume in the Index stocks ranged from approximately 9.1 
million shares to approximately 229.6 million shares.
    It is currently contemplated that the Select Technology Stock Index 
will be used as the basis for only one index warrant, which has a term 
of two-years. If the Exchange wishes to list and trade other products 
based on the Select Technology Stock Index, including other index 
warrants, the Exchange will advise the Commission to determine whether 
an additional filing pursuant to Rule 19b-4 of the Act is necessary or 
appropriate.

B. Maintenance of the Index

    The Exchange represents that it will monitor the component 
securities in the Index on a monthly basis. In this regard, the 
Exchange will notify the Commission if: (1) Less than 75 percent of the 
component securities are eligible for standardized options trading; \8\ 
(2) the number of components in the Index decreases to less than nine; 
(3) the three highest weighted components represent more than 60 
percent of the weight of the Index; or (4) the trading volume of any of 
the components falls below 500,000 shares for each of the last six 
months.
---------------------------------------------------------------------------

    \8\ See Amex Rule 915. Currently, 100 percent of the components 
are eligible for standardized options trading.
---------------------------------------------------------------------------

    Shares of a component stock may be replaced (or supplemented) with 
other securities under certain limited circumstances, such as the 
conversion of a component stock into another class of security or the 
spin-off of a subsidiary. Accordingly, all replacement or supplemental 
Index component securities will be related to the original component 
stock. Moreover, if a change in the composition of the Index is 
contemplated for reasons other than those set forth above, the Exchange 
will notify the Commission to determine whether a rule filing pursuant 
to section 19(b) of the Act will be required.
    If the stock remains in the Index, the multiplier of that security 
may be adjusted to maintain the component's relative weight in the 
Index immediately prior to the corporate action. In the event that a 
security in the Index is removed due to a corporate consolidation and 
the holders of such security receive cash, the cash value of such 
security will be included in the Index and will accrue interest at 
LIBOR to term.

C. Trading of the Index Warrants

    The Index Warrant will be a direct obligation of the issuer, 
subject to cash-settlement in U.S. dollars and either exercisable 
throughout its life (i.e., American-style) or exercisable only 
immediately prior to its expiration date (i.e., European-style). If the 
Index Warrant is structured as a ``put,'' upon exercise (or at the 
warrant expiration date if the warrant has an European-style exercise), 
the holder will receive payment in U.S. dollars to the extent that the 
value of the Index has declined below a pre-stated cash settlement 
value. Conversely, if the Index Warrant is structured as a ``call,'' 
upon exercise (or at the warrant expiration date if the warrant has an 
European-style exercise), the holder will receive payment in U.S. 
dollars to the extent that the value of the Index has increased above 
the pre-stated cash settlement value. If the Index Warrant is ``out-of-
the-money'' at the time of expiration it will expire worthless.

D. Calculation and Dissemination of the Value of the Index

    The Index value will be continuously calculated and will be 
publicly disseminated every fifteen seconds over the Consolidated Tape 
Association's Network B.
    In addition, the multiplier of each component stock remains fixed 
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. The 
multiplier of each component stock may also be adjusted, if necessary, 
in the event of a merger, consolidation, dissolution, or liquidation of 
an issuer, or in certain other events such as the distribution of 
property by an issuer to shareholders.

E. Listing Standards and Customer Safeguards

    As stated above, the listing and trading of the proposed warrants 
on the Select Technology Stock Index will comply in all respects with 
Amex Rules 1100 through 1110, Amex Rule 462, and Section 106 of the 
Amex Company Guide. These provisions will govern all aspects of the 
listing and trading of the Index Warrants, including, issuer 
eligibility,\9\ position and exercise limits,\10\ reportable 
positions,\11\ automatic exercise,\12\ settlement value,\13\ 
margin,\14\ and trading halts and suspensions.\15\
---------------------------------------------------------------------------

    \9\ See Section 106 of the Amex Company Guide.
    \10\ See Amex Rules 1107 and 1108.
    \11\ See Amex Rule 1110.
    \12\ See Section 106(f) of the Amex Company Guide.
    \13\ See Section 106(e) of the Amex Company Guide.
    \14\ See Amex Rule 462.
    \15\ See Amex Rule 1109.
---------------------------------------------------------------------------

    Additionally, these warrants will be sold only to accounts approved 
for the

[[Page 24978]]

trading of standardized options\16\ and, the Exchange's options 
suitability standards will apply to recommendations regarding Index 
Warrants.\17\ The Exchange's rules regarding discretionary orders will 
also apply to transactions in Index Warrants.\18\ Finally, prior to the 
commencement of trading, the Amex will distribute a circular to its 
membership calling attention to specific risks associated with warrants 
on the Index.
---------------------------------------------------------------------------

    \16\ See Amex Rule 1101.
    \17\ See Amex Rule 1102.
    \18\ See Amex Rule 1103.
---------------------------------------------------------------------------

III. Discussion

    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, with the requirements of Section 6(b).\19\ Specifically, 
the Commission finds that the trading of warrants based on the Select 
Technology Stock Index will serve to protect the public interest and 
will help to remove impediments to a free and open market by providing 
investors holding positions in some or all of the securities underlying 
the Index with a means to hedge exposure to the market risk associated 
with their portfolios.\20\
---------------------------------------------------------------------------

    \19\ See 15 U.S.C. Sec. 78f(b) (1988).
    \20\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new securities product upon a finding that 
the introduction of such product is in the public interest. Such a 
finding would be difficult with respect to a warrant that served no 
hedging or other economic function, because any benefits that might 
be derived by market participants likely would be outweighed by the 
potential for manipulation, diminished public confidence in the 
integrity of the markets, and other valid regulatory concerns.
---------------------------------------------------------------------------

    Nevertheless, the trading of warrants on the Index raises several 
concerns relating to the design and maintenance of the Index, customer 
protection, surveillance, and market impact. The Commission believes, 
however, for the reasons discussed below, that the Amex has adequately 
addressed these concerns.\21\
---------------------------------------------------------------------------

    \21\ The Commission also notes that the Amex is presently only 
seeking the authority to list and trade a single issuance of 
warrants on the Index with a term of two-years and that if the 
Exchange proposes to list and trade other products based on the 
Index, including other index warrants, the Exchange will advise the 
Commission in order to determine whether a rule filing pursuant to 
Section 19(b) of the Act will be necessary or appropriate. This 
limitation is important since the Index's maintenance criteria might 
present additional issues if the Index was proposed to be used for 
index options trading.
---------------------------------------------------------------------------

A. Design and Maintenance of the Index

    The Commission finds that it is appropriate and consistent with the 
Act for the Amex to designate the Index as narrow-based for warrant 
trading as the Index is comprised of a limited number of technology 
stocks.\22\ The Commission also believes that the liquid markets, large 
capitalizations, and relative weightings of the Index's component 
stocks significantly minimizes the potential for manipulation of the 
Index. First, the stocks that comprise the Index are actively-traded, 
of which nine trade on the New York Stock Exchange, Inc. (``NYSE'') and 
fifteen trade through the facilities of the National Association of 
Securities Dealers (``NASD'') Automated Quotation system (``Nasdaq'') 
and are reported national market system securities (``Nasdaq/NMS''). 
During the six-month period from October 1995 through March 1996, 
average monthly trading volume in the Index stocks ranged from 
approximately 9.1 million shares to approximately 229.6 million shares. 
Second, the market capitalization of the stocks comprising the Index 
are very large. Specifically, the total capitalization of the Index, as 
of April 29, 1996, was approximately $339.7 billion, with the market 
capitalization of the individual stocks in the Index ranging from 
approximately $730 million to approximately $59 billion. In addition, 
the median capitalization of the companies in the Index on that date 
was $5.2 billion, and the average market capitalization of these 
companies was $14.8 billion. Third, no one particular stock dominates 
the Index. Specifically, no single stock accounts for more than 
approximately 4.347 percent of the Index's value, and the percentage 
weighting of the three largest issues in the Index account for 
approximately 13.041 percent of the Index's value.
---------------------------------------------------------------------------

    \22\ The Commission notes that if the Amex determines to 
maintain the Index with some number of component securities other 
than 23, the Exchange should notify the Commission. Telephone 
Conversation between Michael T. Bickford, Vice President, Capital 
Markets Group, Amex, and Matthew S. Morris, Attorney, Derivatives 
Regulation, Office of Self-Regulatory Oversight, Division, 
Commission, on May 9, 1996.
---------------------------------------------------------------------------

    The Commission notes that with respect to the maintenance of the 
Index, shares of a component stock will only be replaced (or 
supplemented) under certain limited circumstances, such as the 
conversion of a component stock into another class of security, or the 
spin-off of a subsidiary. Accordingly, all replacement or supplemental 
Index component securities will be related to the original component 
stock.\23\ In addition, if a change in the composition of the Index is 
contemplated for reasons other than those set forth above, the Exchange 
will notify the Commission to determine whether a rule filing pursuant 
to Section 19(b) of the Act will be required.\24\
---------------------------------------------------------------------------

    \23\ In addition, as noted above, in the event that a security 
in the Index is removed due to a corporate consolidation and the 
holders of such security receive cash, the cash value of such 
security will be included in the Index and will accrue interest at 
LIBOR to term.
    \24\ Telephone Conversation between Michael T. Bickford, Vice 
President, Capital Markets Group, Amex, and Matthew S. Morris, 
Attorney, Derivatives Regulation, Office of Self-Regulatory 
Oversight, Division, Commission, on May 9, 1996.
---------------------------------------------------------------------------

    The Amex has also implemented several safeguards in connection with 
the listing and trading of the Index Warrants that will serve to ensure 
that the Index maintains its intended character as a highly-capitalized 
and actively-traded index. In this regard, the Exchange will notify the 
Commission if: (1) Less than 75 percent of the component securities in 
the Index are eligible for standardized options trading; (2) the number 
of components in the Index decreases to less than nine; (3) the three 
highest weighted components represent more than 60 percent of the 
weight of the Index; or (4) the trading volume of any of the components 
in the Index falls below 500,000 shares for each of the last six 
months.\25\
---------------------------------------------------------------------------

    \25\ In the event the Exchange is unable to maintain these 
requirements, the Exchange will consult with the Commission 
regarding appropriate regulatory responses.
---------------------------------------------------------------------------

B. Customer Protection

    The Commission notes that the rules and procedures of the Exchange 
adequately address the special concerns attendant to the trading of 
index warrants. Specifically, the applicable suitability, account 
approval, disclosure, and compliance requirements of the applicable 
Amex provisions satisfactorily address potential public customer 
concerns. Moreover, the Amex plans to distribute a circular to its 
membership calling attention to specific risks associated with warrants 
on the Index. Finally, pursuant to the Exchange's listing guidelines, 
only companies capable of meeting the Amex's index warrant issuer 
standards will be eligible to issue Index Warrants.\26\
---------------------------------------------------------------------------

    \26\ See Section 106 of the Amex Company Guide which requires, 
among other things, that the issuer have tangible net worth in 
excess of $250 million and otherwise substantially exceed size and 
earnings requirements in Section 101(A) of the Company Guide or meet 
the alternative guideline in paragraph (a).

---------------------------------------------------------------------------

[[Page 24979]]

C. Surveillance

    The Commission believes that a surveillance sharing agreement 
between an exchange proposing to list a security index derivative 
product and the exchange(s) trading the securities underlying the 
derivative product is an important measure for the surveillance of the 
derivative and underlying securities markets. Such agreements ensure 
the availability of the information necessary to detect and deter 
potential manipulations and other trading abuses, thereby making the 
security index product less readily susceptible to manipulation. In 
this regard, the Amex, and the NYSE and the NASD (where the component 
securities of the Index are currently listed) are all members of the 
Intermarket Surveillance Group (``ISG''), which provides for the 
exchange of all necessary surveillance information.\27\
---------------------------------------------------------------------------

    \27\ 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. 
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 NASD; the NYSE; the Pacific Stock Exchange, 
Inc.; and the Philadelphia Stock Exchange, Inc. Due to the potential 
opportunities for trading abuses involving stock index futures, 
stock options, and the underlying stock, as well as for 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) have also joined the ISG as affiliate members.
---------------------------------------------------------------------------

D. Market Impact

    The Commission believes that the listing and trading of warrants on 
the Index will not adversely impact the underlying securities. First, 
the Amex's existing index warrants surveillance procedures will apply 
to warrants on the Index. Second, the Index is comprised of highly-
capitalized securities that are actively-traded. Lastly, the Amex has 
established reasonable position and exercise limits for narrow-based 
stock index warrants,\28\ which will serve to minimize potential 
manipulation and other stock market concerns.
---------------------------------------------------------------------------

    \28\ The Commission notes that position limits for narrow-based 
stock index warrants are set at a level roughly equivalent to 75 
percent of narrow-based index options. As a result, position limits 
for warrants based on the Index will be nine million. See Securities 
Exchange Act Release No. 37007 (March 21, 1996), 61 FR 14165 (March 
29, 1996) (order approving establishment of uniform listing and 
trading guidelines for narrow-based stock index warrants) (SR-Amex-
95-39).
---------------------------------------------------------------------------

    The Commission finds good cause to approve the proposed rule 
filing, including Amendment Nos. 1 and 2, prior to the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. The Commission notes that to date no comments were 
received on the proposal. The Commission also notes that accelerated 
approval of this rule filing is based, in part, on the following facts: 
(i) The Amex is presently seeking authority to list and trade only a 
single issuance of warrants on the Index which have a term of two-
years; (ii) the Index's component securities are highly-capitalized and 
actively-traded; and (iii) the Amex has represented that the warrants 
on the Index will comply in all respects with the Exchange rules 
governing the listing and trading of narrow-based warrants, including 
Amex Rules 1100 through 1110, Amex Rule 462, and Section 106 of the 
Amex Company Guide. Moreover, Amendment No. 1 to the Amex's proposal 
describes details of certain Index maintenance procedures and the Index 
calculation methodology. In this regard, the Commission believes that 
the Exchange's monthly review of the Index's component securities for 
options eligibility, percentage weight, and trading volume, as 
described above, will help to ensure that the Index maintains its 
intended market character as well as remains an appropriate trading 
vehicle for public customers. In addition, the equal-dollar methodology 
is a well-established index calculation method and therefore does not 
present any new or novel regulatory issues. Lastly, although Amendment 
Nos. 1 and 2 change the Index's component securities, these 
modifications are minor and consistent with the Index's general 
objective. In this context, the Index continues to be comprised of 
actively-traded and highly-capitalized securities. Accordingly, the 
Commission believes that it is consistent with Section 6(b)(5) of the 
Act to approve the proposed rule change, including Amendment Nos. 1 and 
2, on an accelerated basis.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2. 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 also will be 
available for inspection and copying at the principal office of the 
Amex. All submissions should refer to File No. SR-Amex-96-12 and should 
be submitted by June 7, 1996.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the Amex's 
proposal to list and trade warrants based on the Select Technology 
Stock Index is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-Amex-96-12), as amended, is 
approved on an accelerated basis.

    \29\ 15 U.S.C. Sec. 78s (b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12383 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M