[Federal Register Volume 62, Number 79 (Thursday, April 24, 1997)]
[Notices]
[Pages 20043-20046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10616]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38526; International Series Release No. 1074 File No. 
SR-AMEX-97-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the American Stock Exchange, Inc. 
Relating to Options on the NatWest Energy Index

April 18, 1997.
    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 March 20, 1997, the American Stock Exchange, Inc. 
(``Amex'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change. On April 16, 
1997, the Exchange filed Amendment No. 1 3 to 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. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Claire P. McGrath, Amex to Ivette Lopez, 
SEC, dated April 16, 1997 (``Amendment No. 1''). Amendment No. 1 
corrects language in the filing indicating that the list of 
replacement stocks will be furnished quarterly. Because the NatWest 
Energy Index will be rebalanced annually, NatWest will provide the 
Amex with a current list of replacement stocks annually.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Amex proposes to trade options on The NatWest Energy Index (``the 
Index''), a narrow based index developed by the Amex and NatWest 
Securities Corporation based on stocks (or ADRs thereon) of companies 
whose business is in various segments of the energy industry. In 
addition, the Amex proposes to amend (1) Rule 901C,

[[Page 20044]]

Commentary .01 to reflect that 90% of the Index's numerical index value 
will be accounted for by stocks that meet the current criteria and 
guidelines set forth in Rule 915; and (2) Rule 902C to include the 
NatWest Energy Index in the disclaimer provisions of the rule.
    The text of the proposed rule change is available at the Office of 
the Secretary, Amex and at the Commission.

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 
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
    The Amex and NatWest Securities Corporation (``NatWest'') have 
developed a new index called The NatWest Energy Index (``Index''), 
based entirely on shares of widely held companies involved in producing 
and providing different types of energy products. The industries 
represented by these companies are domestic and international oil 
producers, refiners and transmitters, oil equipment manufacturers and 
drillers, and natural gas producers.
Eligibility Standards for Index Components
    The NatWest Energy Index conforms with Exchange Rule 901C which 
specifies criteria for inclusion of stocks in an index on which 
standardized options will be traded. In addition, the Index has met the 
following standards: (1) Each of the component securities are traded on 
the Amex, the New York Stock Exchange or through Nasdaq and are 
reported national market system securities; (2) each of the component 
securities has a minimum market capitalization of at least $75 million; 
\4\ (3) each of the components have had a monthly trading volume of at 
least one million shares during each of the previous six months; (4) 
each of the component securities in the Index has met the initial 
eligibility criteria for standardized options trading set forth in rule 
915; (5) foreign country securities or ADRs thereon that are not 
subject to comprehensive surveillance sharing agreements do not in the 
aggregate represent more than 20% of the weight of the Index; and (6) 
no individual component stock in the Index represents more than 25 
percent of the weight of the Index, and the top five highest weighted 
stocks do not constitute more than 50 percent of the weight of the 
Index. The criteria set forth above are identical to the criteria 
established for the expedited listing of options on stock industry 
indexes pursuant to Exchange Rule 901C, Commentary .02.\5\ In fact, 
this Index would have been filed pursuant to that expedited process if 
it were not for its annual rather than quarterly rebalancing feature 
which is discussed in the section entitled Index Calculation.
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    \4\ In the case of ADRs, this represents market value as 
measured by total world-wide shares outstanding.
    \5\ 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). As required, the Exchange has 
provided the Commission with written representations that the 
Options Price Reporting Authority has the necessary systems capacity 
to support the new series of options. See Letter from Joe Corrigan, 
OPRA to Ivette Lopez, SEC, dated April 15, 1997. In addition, a 
letter representing that the Amex has the necessary systems capacity 
to support the new series of options has been received by the 
Commission. See Letter from Edward Cook Jr., Amex to Ivette Lopez, 
SEC, dated April 7, 1997.
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Maintenance of the Index
    The Index will be maintained in accordance with Rule 901C, 
Commentary .02 which provides that the Index continues to meet the 
Eligibility Standards set forth above, except that, (1) The total 
number of component securities will not increase or decrease by more 
than 33\1/3\% from the number of components in the Index at the time of 
its initial listing and in no event will the Index have less than nine 
components; (2) component stocks constituting the top 90% of the Index 
by weight, will have a minimum market capitalization of $75 million and 
the component stocks constituting the bottom 10% of the Index, by 
weight, will have a minimum market capitalization of $50 million; \6\ 
(3) the monthly trading volume of each component security shall be at 
least 500,000 shares, or for each of the lowest weighted components in 
the Index that in the aggregate account for no more than 10% of the 
weight of the Index, the monthly trading volume shall be at least 
400,000 shares; (4) no single components will represent more than 25% 
of the weight of the Index and the five highest weighted component will 
represent no more than 50% of the Index as of the first day of January 
and July in each year; and (5) 90% of the Index's numerical index value 
and at least 80% of the total number of component securities will meet 
the then current criteria for standardized option trading set forth in 
Exchange Rule 915.
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    \6\ In the case of ADRs, this represents market value as 
measured by total world-wide shares outstanding.
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    Should the Index fail to satisfy any of the maintenance criteria 
set forth above, the Amex will notify Commission staff to determine the 
appropriate regulatory response. Such responses could include, but are 
not limited to, prohibiting opening transactions or allowing only 
closing transactions. In addition, the Exchange shall not open for 
trading any additional option series unless such failure is determined 
by the Exchange not to be significant and the Commission concurs in 
that determination.
    The Index will be maintained by the Amex in consultation with 
NatWest who may, from time to time, suggest changes in the Index's 
components, in the industry categories represented or in the number of 
component stocks in an industry category to properly reflect the 
changing conditions in the energy sector. At the beginning of each 
calendar year, NatWest will provide the Amex with a current list of 
replacement stocks on which to draw in the event that a component in 
the Index is to be replaced. The stocks in the replacement list will be 
selected and ranked by NatWest based on a number of criteria, including 
conformity to the initial eligibility standards set forth above, 
trading liquidity, market capitalization, the ability to borrow shares 
and share price. The replacement stocks will be categorized by industry 
within the energy sector and ranked within their category based on the 
aforementioned criteria. The replacement stock for a security leaving 
the Index will be selected by the Amex from the replacement list based 
on industry category and liquidity.
    In addition, NatWest will advise the Exchange regarding the 
handling of unusual corporate actions which may arise from time to 
time. Routine corporate actions (e.g., stock splits, routine spin-offs, 
etc.) which require straightforward index divisor adjustments will be 
handled by Exchange staff without consultation with NatWest. All stock 
replacements and unusual divisor adjustments caused by the occurrence 
of extraordinary events such as dissolution, merger,

[[Page 20045]]

bankruptcy, non-routine spin-offs or extraordinary dividends will be 
made by Exchange staff in consultation with NatWest. 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 dissemination of an information circular.
    Since this Index is being maintained, in part, by a broker/dealer 
(NatWest Securities Corporation), a ``chinese wall'' shall be erected 
by NatWest around the personnel who have access to information 
concerning changes and adjustments to the Index. A letter discussing 
those ``chinese wall'' procedures has been sent to the Commission under 
separate cover.
Index Calculation
    The Index shall be calculated by the Amex 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 December 
20, 1996, a portfolio of stocks was established representing an 
investment of $100,000 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 
stocks in the Index portfolio divided by the Index divisor. The Index 
divisor was initially determined to yield a benchmark value of 250.00 
at the close of trading on December 20, 1996. Annually thereafter, 
following the close of trading on the third Friday of December, the 
Index portfolio will be adjusted by changing the number of whole shares 
of each component stock 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 annual adjustment. While the Index is to be 
rebalanced annually, the Exchange will, if at any time between annual 
rebalancings the top five stock in the Index by weight represent in the 
aggregate more than one-third of the Index's value, rebalance the Index 
after the close of trading on expiration Friday in the next month on 
the March cycle. For example, if in July it is determined that the top 
five components in the Index account for more than one-third of the 
Index's weight, then the Index will be rebalanced after the close of 
trading on expiration Friday in September.
    As noted above, the number of shares of each component stock in the 
Index portfolio remains fixed between annual 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 with respect to the 
component stocks. In a merger or consolidation of an issuer of a 
component stock, 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'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, 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 each Index will be calculated continuously and disseminated 
every 15 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 NatWest Energy 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 with expirations in the 
three near-term calendar months and in the two additional calendar 
months in the March cycle. In addition, longer term option 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 reduced 
value long-term option will not be less than six months. The trading of 
any long term options 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 NatWest Energy Index options will be equivalent 
to the position limits for regular (full value) Index options and would 
be aggregated with such options (for example, if the position limit for 
the full value options is 15,000 contracts on the same side of the 
market, then the position limit for the reduced value options will be 
150,000 contracts on the same side of the market).
    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 stocks. In the case of securities 
traded through Nasdaq system, the first reported regular way sale price 
will be used. If any component stock 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
    Amex 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. The Index is deemed 
to be a Stock Index Option under Rule 901C(a) and a Stock Index 
Industry Group under Rule 900C(b)(1). With respect to 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 Rule 904C(c) will result in a position limit of 15,000 
contracts with respect to options on this Index. 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 NatWest Energy Index.

[[Page 20046]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \7\ in that it is designed to prevent 
fraudulent and manipulative acts and practices and to perfect the 
mechanism of a free and open market.
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    \7\ 15 U.S.C. Sec. 78f(b).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 either solicited or received.

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

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organizations consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, NW, Washington, DC 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 USC Sec. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-AMEX-97-15 and 
should be submitted by May 15, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10616 Filed 4-23-97; 8:45 am]
BILLING CODE 8010-01-M