[Federal Register Volume 62, Number 169 (Tuesday, September 2, 1997)]
[Notices]
[Pages 46390-46392]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21384]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38968; File No. SR-AMEX-97-31]


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

August 25, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 19, 1997, 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 
Exchange. 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).
    \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 AMEX proposes to trade options on The Disk Drive Index (``the 
Index''), a new stock index developed by the AMEX based on stocks, or 
American Depositary Receipts (``ADRs'') thereon, of companies involved 
in the design and/or manufacture of disk drives, components of disk 
drives, and/or software designed to interact with disk drives. AMEX 
proposes to amend its Rule 901C, Commentary .01, to provide for the 
listing and trading of the Index. In addition, the AMEX proposes to 
amend Rule 901C, Commentary .01, to reflect that 90 percent of the 
Index's numerical index value will be accounted for by stocks that meet 
the current criteria and guidelines set forth in AMEX 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 AMEX 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 AMEX 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The AMEX has developed a new index called The Disk Drive Index 
(``Index''), based entirely on shares of widely held companies involved 
in the design and/or manufacture of disk drives, components of disk 
drives, and/or software designed to interact with disk drives. The 
companies represented in the index include: Applied Magnetics Corp., a 
supplier of magnetic heads for disk-drive applications; HMT 
Technologies Corp., a designer and manufacturer of thin-film disks for 
high-capacity computer disk drives; Hutchinson Technology, a supplier 
of suspension assemblies for rigid disk drives; Iomega Corp., a 
manufacturer of removable data-storage devices; Komag Inc., a 
manufacturer of components for hard-disk drives, including thin-film 
disks and recording heads; Quantum Corp., a manufacturer of storage 
products for computer systems; Read-Rite Corp., a producer of thin-film 
magnetic recording heads for hard-disk drives; Seagate Technology, a 
designer of rigid, magnetic disk drives and components for computer 
systems; Storage Technology, a manufacturer of information storage and 
retrieval subsystems and networking products; and Western Digital 
Corp., a manufacturer of hard-disk drives.\3\ The AMEX intends to trade 
standardized option contracts on the newly developed Index. The AMEX is 
filing this proposal pursuant to AMEX Rule 901C, Commentary .02, which 
provides for the commencement of the 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 and the Commission's order 
approving that rule as outlined below.\4\
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    \3\ The AMEX submitted additional information regarding the 
component securities. This information is available in the 
Commission's public reference room, as described in section IV 
below, or at the Office of the Secretary, AMEX.
    \4\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (SR-AMEX-92-35) (approval order 
relating to narrow-based index options listing standards) (``Generic 
Index Approval Order'').
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    Eligibility criteria for index components. Pursuant to Commentary 
.02 to Rule 901C, (1) each of the component securities has a minimum 
market capitalization of at least $75 million and has a trading volume 
in

[[Page 46391]]

each of the last six months of not less than 1,000,000 shares; (2) at 
least 90% of the Index's numerical index value and at least 80% of the 
total number of component securities meet the current criteria for 
standardized option trading set forth in Exchange Rule 915 (in fact, 
all of the component securities in the Index currently underlie 
standardized options); (3) the Index contains no ADRs; (4) all 
component stocks are listed on the AMEX, the New York Stock Exchange, 
or traded through the facilities of the Nasdaq stock market and are 
reported National Market System securities (``Nasdaq/NMS''); and (5) no 
component security represents more than 25% of the weight of the Index, 
and the five highest weighted component securities in the Index do not 
in the aggregate account for more than 60% of the weight of the Index.
    Maintenance of the Index. The Exchange will maintain the Index in 
accordance with AMEX Rule 901C, Commentary .02, so that, (1) the Index 
is comprised of no less than nine and no more than 13 underlying 
stocks; (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, may have a minimum market capitalization of $50 million; (3) 
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 AMEX Rule 915; (4) foreign 
country securities or ADRs thereon that are not subject to 
comprehensive surveillance agreements will not in the aggregate 
represent more than 20% of the weight of the Index; (5) all component 
stocks will either be listed on AMEX, the New York Stock Exchange, or 
be Nasdaq/NMS securities; (6) no component security will represent more 
than 25% of the weight of the Index, and the five highest weighted 
components will not in the aggregate account for more than 60% of the 
Index; and (7) trading volume of each component security shall be at 
least 500,000 shares for each of the last six months, 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 may be at least 400,000 shares for each of the last six 
months.
    The Exchange shall 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.
    Index calculation. The Exchange will calculate the Index using an 
``equal-dollar weighting'' methodology. The following is a description 
of the methodology. As of the market close on November 15, 1996, a 
portfolio of stocks was established representing an investment of 
approximately $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 the benchmark value of 200.00 
at the close of trading on November 15, 1996.\5\ Quarterly thereafter, 
following the close of trading on the third Friday of February, May, 
August and November, 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 during 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.
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    \5\ The Index's value at the close of trading on August 12, 
1997, was 278.28.
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    As noted above, the number of shares of each component stock in the 
Index portfolio remain 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, 
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 Exchange may 
adjust the number of shares of that security in the portfolio, 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 addition or replacement, the Exchange will calculate 
the average dollar value of the remaining components 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 the Index will be calculated continuously and disseminated 
every 15 seconds over the Consolidated Tape Association's Network B by 
the Exchange.
    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 4:02 p.m. 
New York time) will apply. The options on The Disk Drive 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 options series with expirations in the 
three near-term calendar months and in the two additional calendar 
months in the January 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\) 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. 
Position limits on reduced value long term Disk Drive Index options 
will be equivalent to the position limits for regular (full value) 
Index options and would be aggregated with such options (e.g., 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 Nasdaq/NMS 
listed securities, 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

[[Page 46392]]

expiration, then the prior day's last sale price will be used in the 
calculation.\6\
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    \6\ The Commission notes that pursuant to Article XVII, Section 
4 of the Options Clearing Corporation's (``OCC'') by-laws, OCC is 
empowered to fix an exercise settlement amount in the event it 
determines a current index value is unreported or otherwise 
unavailable. Further, OCC has the authority to fix an exercise 
settlement amount whenever the primary market for the securities 
representing a substantial part of the value of an underlying index 
is not open for trading at the time when the current index value 
(i.e., the value used for exercise settlement purposes) ordinarily 
would be determined. See Securities Exchange Act Release No. 37315 
(June 17, 1996), 61 FR 42671 (order approving SR-OCC-95-19).
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    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. 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 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.
2. Basis
    The proposed rule change is consistent with Section 6(b) of the 
Exchange 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 trade, 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 Exchange does not believe that the proposed rule change will 
impose any 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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Exchange Act. Pursuant to the Generic Index Approval 
Order,\7\ the AMEX may not list options for trading on the Index prior 
to 30 days after August 19, 1997.\8\ At any time within 60 days of the 
filing of such 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 the furtherance of the 
purposes of the Exchange Act.\9\
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    \7\ See Securities Exchange Act Release No., 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) (SR-AMEX-92-35).
    \8\ The AMEX represented to the Commission that it has the 
necessary systems capacity to support the new series of options to 
be generated by the Index. The AMEX also stated that it requested a 
written representation from the Options Price Reporting Authority 
(``OPRA'') confirming the adequacy of its systems capacity. The AMEX 
will not permit trading of options on the index until it confirms 
with the Commission that OPRA has given the AMEX a written 
representation that it has the necessary systems capacity. See 
Letter from Claire P. McGrath, Vice President & Special Counsel, 
Derivative Securities, the AMEX, to Ivette Lopez, Assistant 
Director, Office of Market Supervision, Division of Market 
Regulation, Commission, dated August 18, 1997.
    \9\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested person 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, 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 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the AMEX. All 
submissions should refer to file number SR-AMEX-97-31 and should be 
submitted by September 23, 1997.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21384 Filed 8-29-97; 8:45 am]
BILLING CODE 8010-01-M