[Federal Register Volume 64, Number 54 (Monday, March 22, 1999)]
[Notices]
[Pages 13836-13837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6917]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41164; File No. SR-Amex-99-01]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the American Stock Exchange LLC Relating to 
Reductions in Airline, Natural Gas, Pharmaceutical and Securities 
Broker-Dealer Indices Values

March 12, 1999.

I. Introduction

    On January 6, 1999, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 reduce the index values for 
the Airlines, Natural Gas, Pharmaceutical and Securities Broker/Dealer 
Indices.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on February 9, 1999.\3\ No comments were received on the 
proposal. This order approves the proposal.
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    \3\ Securities Exchange Act Release No. 41010 (February 1, 
1999), 64 FR 6404 (February 9, 1999).
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II. Description of the Proposal

    The Commission granted the Exchange approval to list and trade 
options on the Airline Index on December 12, 1994,\4\ the Natural Gas 
Index on March 7, 1994,\5\ the Pharmaceutical Index on June 18, 
1992,\6\ and the Securities Broker/Dealer Index on March 15, 1994.\7\ 
Initially, the aggregate value of the stocks contained in the Indices 
was reduced by divisors to establish index benchmark values of 200 in 
the Airline Index and Pharmaceutical Index and 300 in the Natural Gas 
Index and Securities Broker/Dealer Index. As of December 16, 1998, the 
index values were as follows: Airline Index--275, Pharmaceutical--742, 
Natural Gas Index--216, and Securities Broker/Dealer Index--464.\8\
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    \4\ Securities Exchange Act Release No. 35084 (December 12, 
1994), 59 FR 65419 (December 19, 1994).
    \5\ Securities Exchange Act Release No. 33720 (March 7, 1994), 
59 FR 11630 (March 11, 1994).
    \6\ Securities Exchange Act Release No. 30830 (June 18, 1992), 
57 FR 28221 (June 24, 1992).
    \7\ Securities Exchange Act Release No. 33766 (March 15, 1994), 
59 FR 13518 (March 22, 1994).
    \8\ On May 1, 1998, the Commission granted the Exchange approval 
to split the Airline Index in half. See Securities Exchange Act 
Release No. 39941 (May 1, 1998), 63 FR 25251 (May 7, 1998). On March 
20, 1998, the Commission granted the Exchange approval to split the 
Securities Broker/Dealer Index in half. See Securities Exchange Act 
Release No. 39775 (March 20, 1998), 63 FR 14741 (March 26, 1998).
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    In the case of the Airline, Pharmaceutical and Securities Broker/
Dealer Indices, the Exchange believes that as a consequence of the 
rising values of the Indices, premium levels for options on the Indices 
have also risen. According to the Exchange, these higher premium levels 
have been cited as the principal factor that has discouraged retail 
investors and some market professionals from trading those index 
options. In addition, in the case of the Natural Gas Index the Exchange 
represents that its membership has indicated that indices with values 
between 100 and 200 tend to promote increased liquidity in the 
overlying options. As a result, the Exchange is proposing to decrease 
the Indices by one-half of their present values.
    To decrease the values of the Indices, the Exchange will double the 
divisor used in calculating the 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 value Indices will result in 
substantial lowering of the dollar values of options premiums for 
options contracts on the Airline, Natural Gas, Pharmaceutical, and 
Securities Broker/Dealer 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 Indices 
will be doubled and the associated strike prices halved.

Position and Exercise Limits

    Currently, position and exercise limits for the Indices are as 
follows: Airline--15,000 contracts; Natural Gas--15,000 contracts; 
Pharmaceutical--12,000 contracts; and Securities Broker/Dealer--15,000. 
The Exchange proposes to double the position and exercise limits to 
30,000, 30,000, 24,000, and 30,000 contracts respectively, 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.
    Because 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 12,000 or 
15,000 contract limit will, as a result of the Index value reductions, 
automatically hold 24,000 or 30,000 contracts to correspond with the 
lowered Index values. These increased position and exercise limits will 
revert to the original limits at the expiration of the furthest 
expiration month for non-LEAPs as established on the date of the 
split.\9\
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    \9\ See note 13 infra.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with the requirements of Section 6(b).\10\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) \11\ requirements in that the proposed reduction in value of 
the 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 a manner consistent with the protection of 
investors and the public interest.\12\
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    By reducing the value of the 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 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 Indices are 
appropriate and consistent with the Act. In particular, the Commission 
believes that the temporary doubling of the position and exercise 
limits is reasonable in light of the fact that the size of the options 
contracts on the Indices will be halved and that, as a result, the 
number of

[[Page 13837]]

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 Indices, their current 
level of investment in the Airline, Natural Gas, Pharmaceutical, and 
Securities Broker/Dealer Index option 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 at 
the expiration of the furthest expiration month for non-LEAPs as 
established on the date of the split.\13\
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    \13\ According to the Amex, December 1999 will be the furthest 
expiration months for non-LEAPs on the Indices, for purposes of the 
reversion of position and exercise limits to their original levels. 
Per telephone conversation between Scott Van Hatten, Legal Counsel, 
Amex, and Marianne Duffy, Division of Market Regulation, SEC, on 
January 28, 1999.
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    The Commission further believes that doubling the Airline, Natural 
Gas, Pharmaceutical, and Securities Broker/Dealer Indices' divisors 
will not have an adverse market impact on the trading in these options. 
After the split, the Indices will continue to be composed of the same 
stocks with the same weighings 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 will also remain the 
same.
    Finally, the Commission notes that, before implementing the 
proposed changes, the Exchange will provide reasonable advance notice 
of the proposed changes to the Indices to its membership.\14\ From 
experience, the Commission finds that reasonable notice may include the 
Exchange providing notice to its membership at least two weeks prior to 
the implementation of the proposed changes to the values of the Indices 
and the resulting adjustments to the outstanding options, issuing a 
second notice to its members just prior to implementing the Index 
reductions setting forth the new divisor and other relevant 
information, and issuing a circular to its members at least one month 
prior to the expiration of the furthest non-LEAP options on the Indices 
reminding its member firms that the respective position and exercise 
limits will revert to their original levels. Although not exclusive, 
the Commission believes that these proposed time frames should allow 
for adequate notice to be provided to the holders of all open positions 
in options on the Airline, Natural Gas, Pharmaceutical, and Securities 
Broker/Dealer Indices and other market participants.
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    \14\ Id. and telephone conversation between Scott Van Hatten, 
Legal Counsel, Amex, and Heather Traeger, Division of Market 
Regulation, SEC, on March 11, 1999.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-Amex-99-01) is approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6917 Filed 3-19-99; 8:45 am]
BILLING CODE 8010-01-M