[Federal Register Volume 61, Number 134 (Thursday, July 11, 1996)]
[Notices]
[Pages 36596-36599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17632]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37405; International Series Release No. 1002; File No. 
SR-NYSE-96-12]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 to the Proposed Rule Change by New York Stock Exchange, Inc., 
Relating to Equity-Linked Debt Securities

July 3, 1996.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1) (the ``Act''), notice is hereby given that on 
May 17, 1996, the New York Stock Exchange, Inc. filed with the 
Securities and Exchange 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 Exchange filed with the 
Commission Amendment No. 1 to the proposed rule change on June 7, 
1996.\1\ The Commission is approving the Exchange's proposal, as 
amended, on an accelerated basis, and solicits comments from interested 
persons.
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    \1\ In Amendment No. 1, the Exchange proposes to amend the 
proposed rule change to delete footnote one in Para. 703.21 of the 
NYSE Listed Company Manual. In light of the proposed 20% Test + 
Daily Trading Volume Standard described more fully herein, the 
Exchange believes that the footnote is unnecessary. See Letter from 
James E. Buck, NYSE, to Jonathan G. Katz, Secretary, Commission, 
dated June 7, 1996 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') is 
proposing amendments to its listing standards for Equity-Linked Debt 
Securities (``ELDS''). These listing standards are contained in Para. 
703.21 of its Listed Company Manual.

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

[[Page 36597]]

on the proposed rule change. The text of these statements may be 
examined at the places specified in Item IV below. The self-regulatory 
organization has prepared summaries, set forth in sections A, B and C 
below, of the most significant aspects of such statements.

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

    (a) Purpose--ELDS are non-convertible debt securities of an issuer 
where the value of the debt is based, at least in part, on the value of 
another issuer's common stock or non-convertible preferred stock (the 
``underlying security''). As initially adopted, the Exchange's listing 
standards permitted the listing of ELDS only if the underlying security 
was issued by a U.S. company.\2\ The Exchange subsequently amended 
these standards to permit the listing of ELDS based on underlying 
securities of widely-held non-U.S. companies which are traded in the 
U.S. market as sponsored \3\ American Depository Receipts, or ordinary 
shares (``non-U.S. securities'') if either (i) the Exchange has an 
effective, comprehensive surveillance sharing agreement with the 
primary market for the security or (ii) if over half of the volume in 
the underlying security occurs in the United States (the ``Primary 
Market Test'').\4\
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    \2\ See Securities Exchange Act Release No. 33468 (January 13, 
1994), 59 FR 3387 (January 21, 1994).
    \3\ As opposed to an unsponsored ADR, a sponsored ADR is 
established jointly by the issuer of the underlying security and 
depositary. With a sponsored ADR, the depositary is generally 
required to distribute notices of shareholder meetings and voting 
instructions to ADR holders, thereby ensuring the ADR holders will 
be able to exercise voting rights through the depositary with 
respect to the underlying securities.
    \4\ See Securities Exchange Act Release No. 34545 (August 18, 
1994), 59 FR 43877 (August 25, 1995).
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    The Exchange proposes to amend its ELDS listing standards by (1) 
revising the manner in which the Primary Market Test is calculated; (2) 
adding new criteria for the listing of ELDS 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 ELDS issuances linked to non-U.S. 
securities.
    Under the Primary Market Test, the Exchange can list ELDS if (i) 
for non-U.S. securities that trade in the United States as ordinary 
shares, at least half the world-wide volume in the security is in the 
United States or (ii) for non-U.S. securities that trade in the United 
States as sponsored American Depository Receipts (``ADRs''), the 
Relative ADR Volume''\5\ is at least 50 percent.
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    \5\ The ``Relative ADR Volume'' is the ratio of (A) the combined 
trading volume (on a share equivalent basis) of the ADR and ``other 
related ADRs and securities'' (as defined below) occurring in U.S. 
markets or in any other market with which the Exchange has in place 
an effective surveillance information sharing agreement to (B) the 
combined worldwide trading volume in the ADR, the security 
underlying the ADR and ``other related ADRs and securities''. For 
the purposes of the preceding sentence, ``other related ADRs and 
securities'' refers to the security underlying the ADR, other 
classes of common stock related to the underlying security, and ADRs 
overlying such other classes of stock. See NYSE Rule 715, 
Supplementary Material .40 (iv).
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    When the Exchange first adopted ELDS listing standards for non-U.S. 
securities, ``Relative ADR Volume'' was defined generally to require at 
least half of the trading volume in the security or the ADR, on a share 
equivalent basis, to be in the United States. However, in October 1995, 
the Commission approved amendments to that definition so that it now 
includes both U.S. volume and volume in any other market with which the 
Exchange has an effective, comprehensive surveillance sharing agreement 
(``permitted markets'') in determining whether the Primary Market Test 
is satisfied.\6\
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    \6\ See Securities Exchange Act Release No. 36434 (October 30, 
1995), 60 FR 56071 (November 6, 1995) (order approving revised 
listing standards for options on ADRs).
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    By incorporating the definition of ``Relative ADR Volume'' into the 
ELDS listing standards, the Exchange can now list ELDS on non-U.S. 
companies if the underlying security trades in the United States, as 
sponsored ADRs and at least half the volume in the security is in the 
United States or in permitted markets. The Exchange also proposes to 
include the definition of ``Relative U.S. Share Volume'' as a 
conforming change to the ELDS listing standards for non-U.S. securities 
that trade in the United States as ordinary shares.\7\
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    \7\ Specifically, the proposed definition of ``Relative U.S. 
Share Volume'' is the ratio of (i) the combined trading volume of 
the security and related securities in the United States and in any 
other market with which the Exchange has in place an effective, 
comprehensive surveillance information sharing agreement to (ii) the 
worldwide trading volume in such securities.
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    Second, the Exchange proposes to add an alternate set of criteria 
for the listing of ELDS on non-U.S. securities (``20% Test + Daily 
Trading Volume Standard''). These criteria will permit the Exchange to 
list ELDS on securities of non-U.S. issuers if: (i) the volume in U.S. 
markets \8\ is at least 20 percent of world-wide volume for the most 
recent six months; (ii) average daily U.S. trading volume for the six-
month period is at least 100,000 shares; and (iii) the actual trading 
volume on the majority of trading days in the United States during the 
six months is at least 60,000 shares.
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    \8\ This 20% Test + Daily Trading Volume Standard calculation 
does not include foreign markets with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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    Moreover, the Exchange proposes to amend the size limitations of 
ELDS issuances linked to non-U.S. securities. Specifically, the 
Exchange proposes to require that the size of ELDS issuances linked to 
non-U.S. securities will be limited to 2% of the total shares of the 
underlying security outstanding provided at least 20% (instead of the 
current 30% requirement) of the worldwide trading volume in the 
security and related for the six-months prior to the listing occurred 
in the U.S. market.\9\
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    \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 determining the size of eligible ELDS issuances.
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    The Exchange also proposes to delete footnote one from Section 
703.21 of the NYSE Listed Company Manual. That footnote refers to the 
Exchange's ability to list ELDS linked to non-U.S. securities if there 
is not an effective, comprehensive surveillance information agreement 
with the primary exchange in the country where the security is 
primarily traded. Specifically, the provision currently requires such 
an agreement if the Primary Market Test was not satisfied. In light of 
the proposed 20% Test + Daily Trading Volume Standard, the Exchange 
believes that this provision should no longer be applicable.\10\
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    \10\ See Amendment No. 1, supra note 1.
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    The Exchange believes that the proposed rule change will expand the 
number of non-U.S. securities that may underlie ELDS. In so doing, it 
will benefit investors by enhancing investment flexibility and 
increasing the ability of U.S. persons to invest in securities linked 
to highly-capitalized and actively-traded non-U.S. securities. The 
Exchange believes that the proposed criteria are carefully crafted to 
limit eligibility to those non-U.S. securities that have a significant 
amount of U.S. market trading interest or that trade in markets with 
which the Exchange has an effective, comprehensive surveillance sharing 
agreement. The Exchange believes that it will accordingly have the 
ability to gather information on potential trading problems or 
irregularities in the primary market for the security.
    (b) Basis--The Exchange believes that the proposed rule change is 
consistent with the Act and the requirements of Section 6(b)(5) of the 
Act in that the proposal is designed to prevent

[[Page 36598]]

fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change does not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Commission's Findings and Order Granting Accelerated Approval

    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.\11\ 
Specifically, the Commission finds that the Exchange's proposal to 
provide alternate criteria for the listing and trading of ELDs 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.
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    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed amendments to the listing 
standards for ELDS on non-U.S. securities will benefit investors by 
effectively increasing the number of available ELDS-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 ELDS and their underlying securities. Accordingly, the 
Commission believes that the proposal will extend the benefits 
associated with ELDS on non-U.S. securities to additional non-U.S. 
securities and provide market participants with opportunities to trade 
a greater number of ELDS on non-U.S. securities without compromising 
the effectiveness of the Exchange's listing standards for such 
securities.
    Currently, the Primary Market Test allows the Exchange to list 
options on an ADR 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 and permitted markets during the six month period preceding the 
selection of the ADR for options listing represents (on a share 
equivalent basis) at least 50% of the combined world-wide trading 
volume in such securities. The effect of the NYSE's proposal would be 
to allow this definition of ``Relative U.S. ADR Volume'' to apply to 
the listing of ELDS on ADRs. Additionally, the Exchange proposes to 
include the definition of ``Relative U.S. Share Volume'' as a 
conforming change to the ELDS listing standards for non-U.S. securities 
that trade in the United States as ordinary shares.
    The Commission has previously concluded that this standard is 
consistent with the Act and 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.\12\ 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 ELDS in order to adequately investigate any 
potential abuse or manipulation.\13\
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    \12\ See Securities Exchange Act Release Nos. 36990 (March 20, 
1996), 61 FR 13545 (March 27, 1996) (SR-Amex-95-44); 36995 (March 
20, 1996), 61 FR 13550 (March 27, 1996) (SR-CBOE-95-71); ad 36994 
(March 20, 1996), 61 FR 13553 (March 27, 1996) (SR-NASD-96-01) 
(``Structured Notes Approval Orders'').
    \13\ Id.
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    Additionally, the Commission finds that the proposed 20% Test + 
Daily Trading Volume Standard is consistent with the Act. As noted 
above, the 20% Test + Daily Trading Volume Standard will allow the 
Exchange to list ELDS on a non-U.S. security if, over the six month 
period preceding the date of selection of the non-U.S. security for 
ELDS 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; \14\ (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.
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    \14\ 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 ELDS 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 Primary Market Test by limiting the 
actual listing of ELDS 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 ELDS. 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 
ELDS 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 
ELDS listing. The Commission believes that it is appropriate to adjust 
the limitations on the size of the ELDS 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.\15\ The Commission

[[Page 36599]]

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.
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    \15\ The Commission notes that if a non-U.S. security and 
related securities has less than 20% of the worldwide trading volume 
occurring in the U.S. market during the six month period preceding 
the date of listing, then the instrument may not be linked to that 
non-U.S. security under any circumstances. The 20% minimum U.S. 
trading volume requirement should continue to ensure that the U.S. 
market is significant enough to accommodate ELDS trading.
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    The Commission notes that other existing ELDS 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 ELDS.\16\
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    \16\ The Exchange's initial listing standards require, among 
other things, that the linked stock underlying the Exchange-listed 
ELDS 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. 36993 (March 
20, 1996), 61 FR 13557 (March 27, 1996).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. In particular, the 
Exchange's proposal is substantively similar to proposals submitted by 
the other options exchanges and recently approved by the 
Commission,\17\ and presents no new regulatory issues. Further, these 
proposal were published for comment, and no comments were received. 
Accordingly, the Commission believes it is consistent with section 
6(b)(5) of the Act to approve the proposal on an accelerated basis.
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    \17\ See Structured Notes Approval Orders, supra note 12.
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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. The 
Commission believes that in light of the requirements set forth in the 
20% Test + Daily Trading Volume Standard, the provisions contained in 
footnote one to section 703.21 in the NYSE Listed Company Manual, as 
described above, should no longer be required. 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 the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., 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 in the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
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 the File No. SR-NYSE-96-12 and should be 
submitted by August 1, 1996.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (File No. SR-NYSE-96-12), as 
amended, is approved on an accelerated basis.
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    \18\ 15 U.S.C. 78s(b)(2).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17632 Filed 7-10-96; 8:45 am]
BILLING CODE 8010-01-M