[Federal Register Volume 61, Number 120 (Thursday, June 20, 1996)]
[Notices]
[Pages 31570-31573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15771]




SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37312; File No. SR-Amex-96-20]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange, 
Inc., Relating to Options on The Morgan Stanley Commodity Related 
Equity Index

June 14, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 3, 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade options on the Morgan 
Stanley Commodity Related Equity Index (``Index''), a new stock index 
developed by Morgan Stanley & Co. Incorporated (``Morgan Stanley'') 
based on stocks (or American Depository Receipts (``ADRs'') thereon) of 
commodity related companies. In addition, the Amex proposes to amend 
Exchange Rule 901C, Commentary .01 to reflect that 90 percent of the 
Index's numerical index value will be accounted for by component 
securities that meet the current criteria and guidelines set forth in 
Exchange 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

[[Page 31571]]

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
1. Purpose
    Morgan Stanley has developed a new Index, based on the shares of 
widely held companies involved in commodity related industries such as 
energy (e.g., oil and gas production and oilfield services and 
equipment), non-ferrous metals, precious metals, agriculture, and 
forest products.\3\ Each of the component securities is traded on the 
Amex, the New York Stock Exchange, Inc. (``NYSE''), or through the 
facilities of the National Association of Securities Dealers (``NASD'') 
Automated Quotation system (``Nasdaq'') and are reported national 
market system securities (``Nasdaq/NMS''). The Amex intends to trade 
standardized option contracts on the newly developed Index. The Amex is 
filing this proposal pursuant to Exchange Rule 901C, Commentary .02, 
which provides for the commencement of trading of options on the Index 
thirty days after the date of this filing. The proposal meets all the 
criteria set forth in Commentary .02 as well as the Commission's order 
approving generic listing standards for options on narrow-based 
indexes, as outlined below.\4\

    \3\ The Index's component securities are as follows: Amerada 
Hess Corporation; Anadarko Petroleum Corporation; Apache 
Corporation; Atlantic Richfield Company; Baker-Hughes Inc.; 
Burlington Resources Inc.; Schlumberger Ltd.; Aluminum Company of 
America; Cyprus Amax Minerals Company; Phelps Dodge Corporation; 
Reynolds Metal Company; USX-US Steel Group; Homestake Mining; 
Newmont Mining Corporation; Placer Dome Inc.; Archer-Daniels-Midland 
Company; Conagra Inc.; IBP Inc.; Potash Corporation Sask Inc.; and 
Weyerhaeuser Company.
    \4\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (``Generic Index Approval 
Order'') (File No. SR-Amex-92-35). The Commission notes, however, 
that pursuant to the Generic Index Approval Order, the Exchange must 
provide to the Commission written representations that both the Amex 
and the Options Price Reporting Authority (``OPRA'') have the 
necessary systems capacity to support the new series of options 
before the Amex may list and trade options on the Index.
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Eligibility Standards for Index Components
    Pursuant to Commentary .02 to Exchange Rule 901C: (1) all of the 
component securities are listed on the NYSE; (2) each component 
security has a minimum market capitalization of at least $75 
million;\5\ (3) each component security has had a monthly trading 
volume of at least one million shares during the previous six months; 
(4) all of the component securities currently meet the eligibility 
criteria for standardized options trading set forth in Exchange Rule 
915;\6\ (5) foreign country securities or ADRs thereon that are not 
subject to comprehensive surveillance sharing agreements do not in the 
aggregate represents more than 20 percent of the weight of the Index; 
and (6) the Index is equal-dollar weighted, with no component security 
representing more than 25 percent of the weight of the Index, and the 
five highest weighted component securities not constituting more than 
60 percent of the weight of the Index.
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    \5\ In the case of ADRs, this represents market value as 
measured by total world-wide shares outstanding.
    \6\ Telephone Conversation between Claire P. McGrath, Managing 
Director and Special Counsel, Amex, and Matthew S. Morris, Attorney, 
Division of Market Regulation, Commission, on June 12, 1996.
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Maintenance of the Index

    The Amex will maintain the Index in accordance with Exchange Rule 
901C, Commentary .02 so that: (1) the total number of component 
securities will not increase or decrease by more than 33\1/3\ percent 
from the number of component securities in the Index at the time of its 
initial listing, and in no event will the Index have less the nine 
component securities; (2) the component securities constituting the top 
90 percent of the Index by weight must have a minimum market 
capitalization of $75 million, and the component securities 
constituting the bottom 10 percent of the Index by weight must have a 
minimum market capitalization of $50 million; (3) the monthly trading 
volume of each component security must be at least 500,000 shares, or 
for each of the lowest weighted component securities that in the 
aggregate account for no more than 10 percent of the weight of the 
Index, the monthly trading volume must be at least 400,000 shares; (4) 
the Index must meet the criteria that no single component security 
represents more than 25 percent of the weight of the Index and that the 
five highest weighted component securities represent no more than 60 
percent of the weight of the Index; and (5) 90 percent of the Index's 
numerical index value and at least 80 percent of the total number of 
component securities will meet the then current criteria for 
standardized option trading set forth in Exchange Rule 915.
    The Exchange will 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, or unless 
the continued listing of the Index option has been approved by the 
Commission pursuant to Section 19(b)(2) of the Act.
    The Index will be calculated and maintained by the Amex. A 
component security may only be removed from the Index when: (1) the 
component security no longer meets the objective maintenance criteria 
set forth above; (2) as the result of a corporate event involving the 
issuer of a component security, the component security is delisted 
(e.g., the takeover or merger of the issuer of a component security); 
or (3) the component security no longer represents the commodity 
related industry it was intended to represent or another appropriate 
commodity related industry. In all three situations, the Amex will be 
responsible for removing the component security and choosing a 
replacement. In addition, to properly reflect the changing conditions 
in the commodity related industries, the Amex will evaluate the 
component securities to determine whether to add or to delete an 
industry subcategory, or to change the number of component securities 
in an industry subcategory. All stock replacements and the handling of 
non-routine corporate actions will be announced at least ten business 
days in advance of such effective change, whenever practicable. As with 
all options currently trading on the Amex, the Exchange will make this 
information available to the public through the dissemination of an 
information circular. It is expected that the Index will remain at the 
current number of component securities. If, however, the number of 
component securities increases or decreases by more than one-third, the 
Exchange will submit a rule filing to the Commission to obtain the 
necessary approval.
    Morgan Stanley will have no role in maintaining the Index and 
generally will not be consulted by the Amex regarding potential changes 
to the Index. In rare circumstances, however, the Amex may require 
assistance and may wish to consult with employees of Morgan Stanley. 
Therefore, since Morgan Stanley may be consulted regarding the 
maintenance of the Index, a ``chinese wall'' has been erected around 
the personnel at Morgan Stanley who have access to information 
concerning changes and adjustments to the Index. Details of Morgan 
Stanley's chinese wall procedures, which are closely modeled on 
existing procedures for other Morgan Stanley indexes underlying 
standardized options, have

[[Page 31572]]

been submitted to the Commission under separate cover.

Index Calculation

    The Index is calculated using an ``equal-dollar weighting'' 
methodology designed to ensure that each of the component securities is 
represented in an approximately ``equal'' dollar amount in the Index. 
The following is a description of how the equal-dollar weighting 
calculation method works. As of the market close on March 15, 1996, a 
portfolio of stocks was established representing an investment of 
$1,000,000 in the stock (rounded to the nearest whole share) of each of 
the companies in the Index. 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 component securities in 
the Index portfolio divided by the Index divisor. The Index divisor was 
initially determined to yield a benchmark value of 200.00 at the close 
of trading on March 15, 1996. Quarterly thereafter, following the close 
of trading on the third Friday of March, June, September, and December, 
the Index portfolio will be adjusted by changing the number of whole 
shares of each component security so that each company is again 
represented in ``equal'' dollar amounts. 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 security in 
the Index portfolio remains fixed between quarterly 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. In a merger or 
consolidation of an issuer of a component security, if the stock 
remains in the Index, the number of shares of that security in the 
portfolio will be adjusted, if necessary, to the nearest whole share, 
to maintain the component security's relative weight in the Index at 
the level immediately prior to the corporate action. In the event of a 
stock replacement, the dollar value of the security being replaced will 
be calculated and that amount invested in the stock of the new 
component security, to the nearest whole share. In all cases, the 
divisor will be adjusted, if necessary, to ensure Index continuity.
    Similar to other stock index values published by the Exchange, the 
value of the Index will be calculated continuously and disseminated 
every fifteen seconds over the Consolidated Tape Association's Network 
B.

Expiration and Settlement

    The proposed options on the Index will be European-style (i.e., 
exercises are 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 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 option series will expirations in the 
three near-term calendar months and in the two additional calendar 
months in the March cycle. In addition, longer term options 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\th) the Index's full value. In either event, the 
interval between expiration months for either a full value or a reduced 
value long-term option will not be less than six months. The trading of 
any long-term option 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 Index options will be equivalent to the 
position limits for regular (full value) Index options and would be 
aggregated with such options.\7\
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    \7\ For example, if the position limit for the full value 
options is 12,000 contracts on the same-side of the market, then the 
position limit for the reduced value options will be 120,000 
contracts on the same-side of the market.
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    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 securities. In the case of 
securities traded through the Nasdaq system, the first reported regular 
way sale price will be used. If any component security 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.

Exchange Rules Applicable to Stock Index Options

    Exchange 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 Index. The Index is deemed to be a Stock Index Option under 
Exchange Rule 901C(a) and a Stock Index Industry Group under Exchange 
Rule 900C(b)(1). With respect to Exchange Rule 903C(b), the Exchange 
proposes to list near-the-money (i.e., within ten points above or below 
the current index value) 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 Exchange Rule 904C(c) will result in a position limit of 12,000 
contracts with respect to options on the Index.
2. Statutory Basis
    The Amex 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 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 does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Because the foregoing rule change complies with the standards set 
forth in the Generic Index Approval Order, it has become effective 
pursuant to

[[Page 31573]]

Section 19(b)(3)(A) of the Act.\8\ Pursuant to the Generic Index 
Approval Order, the Amex may not list options for trading on the Index 
prior to thirty days after June 3, 1996, the date the proposed rule 
change was filed with the Commission.\9\ At any time within sixty days 
of the filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \8\ 15 U.S.C. 78s(b)(3)(A) (1988).
    \9\ As noted above, see supra note 4, pursuant to the Generic 
Index Approval Order, the Exchange must provide to the Commission 
written representations that both the Amex and the OPRA have the 
necessary systems capacity to support the new series of options 
before the Amex may list and trade options on the Index.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the Amex. All 
submissions should refer to File No. SR-Amex-96-20 and should be 
submitted by July 11, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-15771 Filed 6-19-96; 8:45 am]
BILLING CODE 8010-01-M