[Federal Register Volume 64, Number 75 (Tuesday, April 20, 1999)]
[Notices]
[Pages 19393-19395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9814]
[[Page 19393]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41276; File No SR-Amex-99-09]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange LLC Relating to an Amendment to
Amex Rule 901C
April 12, 1999.
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 March 1, 1999, the American Stock Exchange LLC (``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 Exchange proposes to amend Amex Rule 901C to add modified
equal-dollar weighting and modified capitalization weighting as
acceptable weighting calculation methodologies for the construction of
narrow-based index options.\3\ [Bracketing] indicates text to be
deleted, and italics indicates text to be added. The text of the
proposed rule change is as follows:
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\3\ The Exchange refers to narrow-based index options as ``stock
industry index options.'' See Amex Rule 900C(b)(1).
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* * * * *
Designation of Stock Index Options
Rule 901C. (a)-(c) No Change.
Commentary
.01 No change.
.02 No change.
(a) No change.
(b) Index Calculation--(i) The index will be calculated based on
either the capitalization, [weighting,] modified capitalization, price,
[weighting or] equal-dollar, [weighting] or modified equal-dollar
weighting methodology. (ii) Indexes based upon the equal-dollar or
modified equal-dollar weighting method will be rebalanced at least
quarterly. (iii) If the index is maintained by a broker-dealer, the
broker-dealer shall erect a ``[chinese] firewall'' around the personnel
who have access to information concerning changes and adjustments to
the index and the index shall be calculated by a third party who is not
a broker-dealer. (iv) The current index value will be disseminated
every 15 seconds over the Consolidated Tape Association's Network B.
(c) No change.
(d) No change.
* * * * *
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 Exchange 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 Exchange 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
The Exchange proposes to amend Commentary .02 to Amex Rule 901C to
include modified capitalization and modified equal-dollar weighting in
the group of index calculation methodologies used for calculating stock
industry index groups.\4\ Commentary .02 to Amex Rule 901C permits the
Exchange to list options on stock industry index groups if the index
meets certain criteria. Presently, the criteria require the index to be
calculated using either the capitalization, price, or equal-dollar
weighting methodologies. The Exchange proposes to include modified
capitalization and modified equal-dollar weighting calculation
methodologies in Commentary .02 to Amex Rule 901C to (i) better meet
the needs of index option users; (ii) increase flexibility in index
construction; and (iii) more accurately reflect the industry
represented by the index.
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\4\ A stock index industry group is defined in the Amex Rule as
a group of stocks representing a particular industry or related
industries. Id.
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Use of the capitalization weighting calculation methodology to
determine an index value is accomplished by multiplying the primary
exchange regular way last sale price of each component security by its
number of shares outstanding, adding the products, and dividing by the
current index divisor. Determining an index value for modified
capitalization weighted indexes is calculated in a similar manner.
However, instead of using the number of shares outstanding, the
methodology uses an adjusted number of shares outstanding in the
multiplication (adding the products and then dividing by the current
index divisor). The modified capitalization weighting methodology uses
an adjusted number of shares outstanding to prevent components with
relatively large market capitalizations from representing an excessive
portion of an index's value. For example, inclusion of a large
capitalization company in an index along with a number of smaller
capitalization companies can result in the larger capitalization
company's representation in the index exceeding 25% of the index's
value, which violates the requirements of Amex Rule 901C, Commentary
.02(a)(7). However, use of the modified capitalization index
calculation methodology would permit a reduction in the large
capitalization company's representation in the index to an amount less
than 25% of the index's value, thereby permitting the index to satisfy
the requirements of Commentary .02(a)(7). The Exchange represents that,
as a part of their due diligence, the component weighting will be
reviewed quarterly, and if necessary, adjusted to ensure the index
continues to meet the weighting guidelines. Adjustments will be made on
an intra-quarterly basis to reflect corporate actions, share issuances
and repurchases, etc.
Use of the equal-dollar weighting calculation methodology to
determine an index value initially is accomplished by establishing an
initial dollar representation (for example $100,000), determining the
number of shares of each component representing this amount and then
multiplying the primary exchange regular way last sale price of each
component security by its predetermined fixed number of shares. The
equal-dollar weighted methodology results in equal representation of
each component in the index. The modified equal-dollar weighting
methodology can be used to distinguish between larger and smaller
capitalized companies, permitting larger capitalized companies to
represent a larger portion of an index's value. This methodology can
enhance an index's use as an accurate measure for a particular industry
sector and thus its utility to market participants.
In effect, the modified equal-dollar weighting methodology is the
mirror image of the modified capitalization weighting methodology.
While the modified capitalization weighting
[[Page 19394]]
methodology prevents companies with the largest capitalization from
skewing an index, the modified equal-dollar weighting methodology
guards against the smaller capitalized companies doing so. Determining
an initial index value for modified equal-dollar weighted indexes uses
two or more fixed dollar values for different groups of the index
components instead of using the same fixed dollar value for each
component. In this way, the modified equal-dollar weighted method
allows for similar component stocks to be weighted similarly, while
differentiating among dissimilar groups (e.g., high capitalization
stocks versus lower capitalization stocks). For example, given a ten
stock index, five components with capitalizations of approximately $1
billion (or $5 billion in aggregate) and five with capitalizations of
approximately $500 million (or $2.5 billion in aggregate), rather than
each component accounting for 10% of the index (as would be the case in
a pure equal-dollar weighted index), the modified equal-dollar
weighting methodology would permit the larger capitalization components
to account for twice the amount of the smaller capitalized companies.
This permits a more accurate representation of the actual market
capitalization composition of the industry for which the index is
designed to measure.
The number of shares of each component security in an index
calculated under the modified equal-dollar weighting methodology will
be adjusted quarterly, so that the members of each weighting group are
again set to the appropriate index weight. The number of shares of each
component stock in the index portfolio will 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 number of shares of that security in the portfolio
may be adjusted 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
average dollar value of the remaining components in the same weighting
group will be calculated, 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.
The Exchange notes that the Inter@ctive Week Internet Index, the
Nasdaq-100 Index, and the Amex Eurotop 100 Index are currently
calculated using modified capitalization weighting methodologies, and
have been approved as indexes that may underlie index options.
Additionally, the Amex Mexico Index and the Amex Networking Index
currently use modified equal-dollar weighting index calculation
methodologies, and have been approved as indexes that may underlie
index options.
Increasingly, the Exchange receives requests to construct new stock
industry indexes using the modified capitalization or modified equal-
dollar weighting methodologies, in many cases to enable the proposed
indexes to meet the generic criteria for narrow-based indexes, or to
provide for the timely trading of options on the newly proposed
indexes. As a result, the Exchange proposes to add the modified
capitalization and modified equal-dollar weighted calculation
methodologies to the existing narrow-based criteria set forth in Amex
Rule 901C that are currently subject to filing pursuant to Rule 19b-
4(e) under the Act.\5\ In doing so, use of the modified capitalization
and modified equal-dollar weighted calculation methodologies will be
limited to those narrow-based indexes meeting the generic index
criteria set forth in Commentary .02 to Amex Rule 901C. In the event a
proposed index does not meet the criteria set forth in Commentary .02,
the Exchange will submit the terms of the proposed index to the
Commission for review pursuant to section 19(b)(2) of the Act.\6\
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\5\ 17 CFR 240.19b-4(e).
\6\ 15 U.S.C. 78s(b)(2).
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The Exchange represents that the terms of any modified
capitalization or modified equal-dollar weighting calculation
methodology will be clearly defined, and consist of objective standards
that will permit any newly developed narrow-based index initially to
meet, and subsequently, to continue to be maintained, in accordance
with the generic criteria set forth in Commentary .02 to Amex Rule
901C. Further, the Exchange represents that these terms will be
discussed in marketing materials describing the index and in the
Information Circulars distributed to members upon the launch of the new
index options.
2. Statutory Basis
The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act \7\ in general, and furthers the objectives of
section 6(b)(5) of the Act \8\ 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 mechanisms
of, a free and open market and a national market system.
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\7\ 15 U.S.C. 78f(b).
\8\ 15 U.S.C. 78f(b)(5).
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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
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 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 such 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 proposed rule
change 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 20549-0609.
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
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provisions of 5 U.S.C. 552, will be available for inspection and
copying in 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
number SR-Amex-99-09 and should be submitted by May 11, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-9814 Filed 4-19-99; 8:45 am]
BILLING CODE 8010-01-M