[Federal Register Volume 63, Number 88 (Thursday, May 7, 1998)]
[Notices]
[Pages 25251-25252]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12145]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39941; File No. SR-Amex-98-11]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 to Proposed Rule Change Relating to a Reduction in the 
Value of the de Jager Year 2000 and Amex Airline Indices

May 1, 1998.

I. Introduction

    On February 23, 1997, 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 split the de Jager Year 2000 (``de Jager 
Index''), Amex Securities Broker/Dealer Index (``Broker/Dealer Index'') 
and Amex Airline (``Airline Index'') Indices to one-half of their 
current values. On March 11, 1998, the Amex filed Amendment No. 1 to 
the proposed rule change.\3\ On March 20, 1998, the Amex filed 
Amendment No. 2 to the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Scott G. Van Hatten, Legal Counsel, 
Derivative Securities, Amex, to Sharon Lawson, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
March 10, 1998 (``Amendment No. 1''). In Amendment No. 1, the Amex 
requests expedited review and accelerated effectiveness of the 
proposed rule change with respect to the provisions concerning the 
Broker/Dealer Index. In addition to correcting a clerical error, 
Amendment No. 1 also makes clear that the position and exercise 
limits, which are proposed to be initially doubled, will revert to 
their original limits at the expiration of the furthest expiration 
month for non-long term options series (``LEAPs'') as established on 
the date of the split.
    \4\ See Letter from Scott G. Van Hatten, Legal Counsel, 
Derivative Securities, Amex, to Sharon Lawson, Assistant Director, 
Division, Commission, dated March 19, 1998 (``Amendment No. 2''). In 
Amendment No. 2, the Amex represents that, in connection with the 
splitting of the Airline, Broker/Dealer and de Jager Indices, it 
will issue: (1) a circular to its members at least two weeks prior 
to the split, disclosing the pre- and post-reduction values, the 
doubling of the number of contracts, and the temporary doubling of 
the position limits for the options overlying such Indices; (2) a 
second notice to its members just prior to implementing the index 
reductions setting forth the new divisor and other relevant 
information; and (3) a circular at least one month prior to the 
expiration of the furthest non-LEAP options reminding members that 
the position limits are scheduled to revert to the original levels.
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    On March 26, 1998, the proposed rule change and Amendment No. 1 
were published for comment in the Federal Register \5\ and the 
Commission granted accelerated approval to the portion of the proposal 
relating to the Broker/Dealer Index. No comments were received on the 
proposal. This order approves the portions of the proposed rule change 
relating to the de Jager Index and Airline Index (collectively, ``de 
Jager and Airline Indices'') and approves Amendment No. 2 on an 
accelerated basis.
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    \5\ See Securities Exchange Act Release No. 39775 (March 20, 
1998) 63 FR 14741.
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II. Description of the Proposal

    The Commission granted the Exchange approval to list and trade 
options on the de Jager \6\ and the Airline \7\ Indices on February 19, 
1997 and December 12, 1994, respectively. Initially, the aggregate 
value of the stocks contained in the de Jager and Airline Indices was 
reduced by divisors to establish index benchmark values of 250 and 200, 
respectively. Over the past two years, the index value of the Airline 
Index has more than tripled in value from 200 to 728. Moreover, since 
its creation, the index value of the de Jager Index has nearly doubled 
in value from 250 \8\ to 413.
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    \6\ See Securities Exchange Act Release No. 38307 62 FR 8469 
(February 25, 1997) (order approving File No. SR-Amex-97-04).
    \7\ See Securities Exchange Act Relase No. 35084 59 FR 65419 
(December 19, 1994) (order approving File No. SR-Amex-94-54).
    \8\ As originally filed, the proposal incorrectly listed the de 
Jager's benchmark Index value as 200. This clerical error was 
corrected by the Exchange in Amendment No. 1. See Amendment No. 1, 
supra note 3.
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    As a consequence of the rising values of the Indices, premium 
levels for options on the de Jager and Airline Indices have also risen. 
According to the Exchange, these higher premium levels have been cited 
as the principal factor that has discourage retail investors and some 
small market professionals from trading these index options. As a 
result, the Exchange is proposing to decrease the de Jager and Airline 
Indices to one-half of their respective present values.
    To decrease the values of the Indices, the Exchange will double the 
divisor used in calculating the de Jager and Airline Indices. The Amex 
proposes no other changes to the components of the Indices, their 
methods of calculation (other than the change in the divisor), 
expiration style of the options or any other Index specification.
    The Amex believes that lower values Indices will result in 
substantial lowering of the dollar values of options premiums for 
options contracts on the de Jager and Airline Indices. The Exchange 
plans to adjust outstanding series similar to the manner in which 
equity options are adjusted for a 2-for-1 stock split. On the effective 
date of the split ``ex-date,'' the number of outstanding options 
contracts on the de Jager and Airline Indices will be doubled and the 
associated strike prices halved.

Position and Exercise Limits

    Currently, position and exercise limits for the de Jager Index 
equal 12,000 contracts, while position and exercise limits for the 
Airline Index equal 15,000 contracts, on the same side of the market. 
The Exchange proposes to double the position and exercise limits to 
24,000 contracts for the de Jager Index and to 30,000 contracts for the 
Airline Index on the same side of the market. This change will be made 
simultaneously with the proposed reduction of the Indices' values and 
the doubling of the number of contracts.
    Since the new position and exercise limits will be equivalent to 
the Indices' present limits, the Exchange believes there is no 
additional potential for manipulation of the Indices or the underlying 
securities. Further, an investor who is currently at the de Jager 
(12,000) or Airline (15,000) Indices' contract limit will, as a result 
of the Index value reductions, automatically hold 24,000 or 30,000 
contracts, respectively, to correspond with the lowered Index values. 
These increased position and exercise limits will revert to their 
original limits at the expiration of the furthest expiration month for 
non-LEAPs as established on the date of the split.

III. Discussion

    The Commission finds that the proposed rule change, as amended, 
relating to the de Jager and Airline Indices is consistent with the 
requirements of Section 6 of the Act \9\ and the rules and regulations 
thereunder applicable to a national securities exchange.\10\ 
Specifically, the Commission believes that the provisions of the 
proposed rule change pertaining to the de Jager and Airline Indices are 
consistent with and further the objectives of Section 6(b)(5) of the 
Act \11\ in that the proposed reduction in value of the de Jager and 
Airline Indices and the associated temporary increases in the position 
and exercise limits should remove impediments to and perfect the 
mechanism of a free and open market in

[[Page 25252]]

a manner consistent with the protection of investors and the public 
interest.
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    \9\ 15 U.S.C. 78f.
    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
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    By reducing the value of the de Jager and Airline Indices, the 
Commission believes that a broader range of investors will be provided 
with a means to hedge their exposure to the market risk associated with 
the stocks underlying the Indices. Similarly, the Commission believes 
that reducing the value of the de Jager and Airline Indices may attract 
additional investors, thus creating a more active and liquid trading 
market.
    The Commission also believes that Amex's proposed adjustments to 
its position and exercise limits applicable to the de Jager and Airline 
Indices are appropriate and consistent with the Act. In particular, the 
Commission believes that the temporary doubling of the position and 
exercise limits are reasonable in light of the fact that the size of 
the options contracts on the de Jager and Airline Indices will be 
halved and that, as a result, the number of outstanding options 
contracts an investor holds will be doubled. The temporary doubling of 
the position and exercise limits, therefore, will ensure that investors 
will not potentially be in violation of the lower existing position and 
exercise limits while permitting market participants to maintain, after 
the split of the de Jager and Airline Indices, their current level of 
investment in the de Jager and Airline Index options contracts. As 
noted above, the increased position and exercise limits of 24,000 and 
30,000 contracts will revert to their original limits of 12,000 and 
15,000 contracts, respectively, at the expiration of the furthest 
expiration month for non-LEAPs as established on the date of the 
split.\12\
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    \12\ According to the Amex, January 1999 and February 1999 will 
be the furthest expiration months for non-LEAPs on the Airline and 
de Jager Indices, respectively, for purposes of the reversion of 
position and exercise limits to their original levels. Per telephone 
conversation between Scott Hatten, Legal Counsel, Derivative 
Securities, Amex, and Deborah Flynn, Division, Commission, on April 
29, 1998.
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    The Commission further believes that doubling the de Jager and 
Airline Indices' divisors will not have an adverse market impact on the 
trading in these options. After the split, the de Jager and Airline 
Indices will continue to be composed of the same stocks with the same 
weightings and will be calculated in the same manner, except for the 
proposed change in the divisors. The Commission notes that the Amex's 
surveillance procedures also will remain the same.
    Finally, the Commission notes that, prior to implementing the 
proposed changes, the Exchange will provide advance notice of the 
proposed changes to the de Jager and Airline Indices to its 
membership.\13\ The de Jager and Airline Indices are expected to be 
reduced by one-half immediately following the May 15, 1998 
expiration.\14\ The Amex has committed to provide notice to its 
membership at least two weeks prior to the implementation of the 
proposed changes to the values of the de Jager and Airline Indices and 
the resulting adjustments to the outstanding options contracts on the 
de Jager and Airline Indices.\15\ In addition, the Commission notes 
that the Exchange has agreed to issue a second notice to its members 
just prior to implementing the Index reductions setting forth the new 
divisor and other relevant information.\16\ Finally, the Exchange has 
agreed to issue a circular to its members at least one month prior to 
the expiration of the furthest non-LEAP options on the de Jager and 
Airline Indices reminding its member firms that the respective position 
and exercise limits will revert to their original levels.\17\ The 
Commission believes that the proposed time frames should allow for 
adequate notice to be provided to the holders of all open positions in 
options on the de Jager and Airline Indices and other market 
participants.
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    \13\ See Amendment No. 2, supra note 5.
    \14\ Per telephone conversation between Scott Van Hatten, Legal 
Counsel, Derivative Securities, Amex, and Deborah Flynn, Division, 
Commission, on May 1, 1998.
    \15\ See Amendment No. 2, supra note 5.
    \16\ Id.
    \17\ Id.
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    The Commission finds good cause for approving Amendment No. 2 to 
the proposed rule change prior to the thirtieth day after publication 
in the Federal Register. The Commission notes that Amendment No. 2 
merely codifies the notification procedures that the Amex had agreed to 
verbally prior to the Commission's grant of partial accelerated 
approval to the reduction in value of the Broker/Dealer Index. The 
Commission believes that Amendment No. 2 should ensure that market 
participants will receive adequate notice prior to the implementation 
of the adjustments to the values of the de Jager and Airline Indices 
and the eventual reversion to the original position and exercise 
limits. Accordingly, the Commission finds that good cause exists, 
consistent with Section 6(b)(5) of the Act,\18\ to accelerate approval 
of Amendment No. 2 to the proposed rule change.
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    \18\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
is consistent with the Act. 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 submissions, 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 at the Commission's 
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 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-98-11 and should be submitted by May 28, 1998.

V. Conclusion

    For the foregoing reasons, the Commission finds that the Amex's 
proposal, as amended, to reduce the value of the de Jager and Airline 
Indices by one-half and to temporarily double the corresponding 
position and exercise limits, 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,\19\ that the portions of the amended proposed rule change (SR-
Amex-98-11) relating to the de Jager and Airline Indices are approved.

    \19\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-12145 Filed 5-6-98; 8:45 am]
BILLING CODE 8010-01-M