[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