[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71319-71321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40803; File No. SR-AMEX-98-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC Relating to the Margin 
Treatment of Grand Exchange-Traded Fund Share Options Contracts

December 17, 1998.
    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 November 25, 1998, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the Amex. 
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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[[Page 71320]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes to permit each ``Grand'' Exchange-Traded Fund 
Share \3\ (Fund Share) option contract to be recognized to the same 
extent that 10 ordinary Fund Share option contracts would be recognized 
under Amex Rule 462-Minimum Margins.
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    \3\ The term Exchange-Traded Fund Share includes securities 
representing interests in opened unit investment trusts or open-end 
management investment companies that hold securities based on an 
index or portfolio of securities. Currently, the Exchange trades 
unit investment trust securities known as Portfolio Depositary 
Receipts SM (``PDRs'') based on the Standard & Poor's 
500 Composite Stock Price Index, the Standard & Poor's 
MidCap 400 Index, and the Dow Jones Industrial Average. In addition, 
the Exchange trades Fund Shares which are issued by an open-end 
management investment company consisting of seventeen separate 
series known as World Equity Benchmark Shares SM (WEBs) 
based on seventeen foreign equity market indexes. PDRs and WEBS are 
listed on the Amex pursuant to Rule 1000, et seq. and Rule 1000A 
seq., respectively, and trade like shares of common stock.
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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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On July 1, 1998, the Exchange approval to trade options overlying 
Exchange-Traded Fund Shares and to trade an option contract overlying 
1000 Exchange-Traded Fund Shares (the ``Grand'') option contract.\4\ 
The Exchange now proposes to permit each ``Grand'' Exchange-Traded Fund 
Share option contract to be recognized to the same extent as 10 
ordinary Fund Share option contracts under Amex Rule 462-Minimum 
Margins.\5\ The Grand contract overlies 1,000 of the underlying Fund 
Shares, the same number of shares of the underlying security 
represented by 10 of the ordinary Fund Share option contracts (each of 
which overlies 100 shares of an underlying Fund Share). Accordingly, 
holding the Grand option contract is the economic equivalent of holding 
10 ordinary option contracts. The only difference is that upon 
exercise, the Grand requires delivery of the 1,000 Fund Shares 
underlying the contract; a position in 10 ordinary contracts may be 
exercised incrementally, resulting in delivery of as few as 100 Fund 
Shares at a time.
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    \4\ Securities Exchange Act Release No. 40157 (July 1, 1998), 63 
FR 37426 (July 10, 1998).
    \5\ Amex Rule 462 states: ``In the case of a put or call dealt 
in on a registered national securities exchange or a registered 
securities association and issued by The Options Clearing 
Corporation, and representing options on equity securities, 100% of 
the option premium plus 20% of the market value of the equivalent 
number of shares of the underlying security, reduced by any excess 
of the exercise price over the current market price of the 
underlying security in the case of a call, or any excess of the 
current market price of the underlying security over the exercise 
price in the case of a put, (except that in the case of such options 
on Exchange-Traded Fund Shares or other securities that represent an 
interest in a registered investment company that satisfies the 
criteria set forth in Rule 915; Commentary .06, margin must equal at 
least 100% of the current market value of the contract plus (1) 15% 
of the market value of equivalent units of the underlying security 
value if the Exchange-Traded Fund Share holds securities based upon 
a broad-based index or portfolio; or (2) 20% of the market value of 
equivalent units of the underlying security value if the Exchange-
Traded Share holds securities based upon a narrow-based index or 
portfolio).'' Amex Rule 462(d)(2)(D)(ii); Securities Exchange Act 
Release No. 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998). The 
current rule proposal clarifies that these are the margin 
requirements for ``Grand'' Exchange-Traded Fund Share option 
contracts. The Commission notes that, specifically, the provisions 
of Amex Rule 462(d)(2)(D)(ii) have applicability to an account 
holding a ``Straddle'' or a ``spread'' position, as discussed below. 
See Amex Rules 462(d)(2)(F) and (G).
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    Currently, Amex Rules 462(d)(2)(F) and (G) recognize the reduced 
risk associated with an account holding a ``straddle'' or a ``spread'' 
position by providing for margin requirements specific to the 
particular strategy a (straddle or spread). For example, in the case of 
a spread strategy (i.e., where an account holding a short call also 
holds a long call, or where an account holding a short put also holds a 
long put (provided the long positions expire on or after the expiration 
of the short positions)), Amex Rule 462(d)(2)(G) requires margin for a 
call spread equal to the lesser of (1) 100% of the option premium plus 
15% of the market value of the equivalent number of shares of the 
underlying security value if the Exchange-Traded Fund Share holds 
securities based upon a broad-based index or portfolio; or 20% of the 
market value of the equivalent number of shares of the underlying 
security value if the exchange-Traded Fund Share holds securities based 
upon a narrow-based index or portfolio, reduced by any excess of the 
exercise price over the current market price of the underlying security 
in the case of a call, or any excess of the current market price of the 
underlying security over the exercise price in the case of a put or (2) 
the amount, if any, by which the exercise price of the ``long'' call 
exceeds the exercise price of the ``short'' call. And in the case of a 
put spread, Amex Rule 462(d)(2)(G) requires margin equal to the lesser 
of (1) 100% of the option premium plus 15% of the market value of the 
equivalent number of shares of the underlying security value if the 
Exchange-Traded Fund Share holds securities based upon a broad-based 
index or portfolio; or 20% of the market value of the equivalent number 
of shares of the underlying security value if the Exchange-Traded Fund 
Share holds securities based upon a narrow-based index or portfolio, 
reduced by any excess of the exercise price over the current market 
price of the underlying security in the case of a call, or any excess 
of the current market price of the underlying security over the 
exercise price in the case of a put or (2) the amount, if any, by which 
the exercise price of the ``short'' put exceeds the exercise price of 
the ``long'' put. In these contexts, the Exchange proposed that the 
required margin under Amex Rule 462(d)(2)(G) be applicable for each 
short Grand Fund Share call (put) option contract offset by 10 long 
ordinary Fund Share call (put) option contracts.
    In the case of a straddle (i.e., where an account holding both a 
put and a call for the same number of shares of the same equity 
security), guaranteed or carried ``short'' for a customer, the amount 
of margin required under Amex Rule 462(d)(2)(F) is the margin on the 
put or the call whichever is greater (under Amex Rule 462(d)(2)(D)), 
plus 100% of the premium on the other option. In this context, the 
Exchange proposes that the reduced margin under Amex Rule 462(d)(2)(D) 
be applicable for each Grand Fund Share call (put) option contract 
offset by 10 ordinary Fund Share put (call) option contracts. The 
Exchange believes the proposed margin offsets are appropriate given 
that the Grand contract is the economic equivalent of 10 ordinary Fund 
Share option contracts. In addition, the Exchange believes that by 
providing the same margin treatment for Grand Fund Share option 
contracts and 10 ordinary Fund Share option contracts, any potential 
investor confusion concerning the margin treatment of Grand contracts 
will be eliminated.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act, in general, and furthers the objectives of

[[Page 71321]]

Section 6(b)(5),\6\ 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.
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    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will 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 Amex has neither solicited nor received written comments on the 
proposed rule change.

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 within 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 Exchange 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, including whether the proposal is 
consistent with the Act. 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 U.S.C. 
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 Amex. All 
submissions should refer to File No. SR-AMEX-98-45 and should be 
submitted by January 14, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34127 Filed 12-23-98; 8:45 am]
BILLING CODE 8010-01-M