[Federal Register Volume 64, Number 85 (Tuesday, May 4, 1999)]
[Notices]
[Pages 23883-23885]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41334; File No. SR-AMEX-99-03]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Granting Approval to Proposed Rule Change Relating to Bond Indexed Term
Notes
April 27, 1999.
I. Introduction
On January 12, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with 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
[[Page 23884]]
thereunder,\2\ a proposal to approve for listing and trading under
Section 107A of the Amex Company Guide seven bond index-linked term
notes. The proposed rule change and Amendment No. 1 \3\ to the proposal
were published for comment in the Federal Register on March 11,
1999.\4\ the Commission received no comments on the proposal. This
order approves the proposed rule change, as amended.
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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, Amex, to
Richard Strasser, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated February 16, 1999 (``Amendment No.
1''). Amendment No. 1 provided additional details regarding the
securities, including the principal factors that will affect the
rate of return on the securities and the formula for determining the
value of the securities at settlement.
\4\ Securities Exchange Act Release No. 41135 (March 3, 1999),
64 FR 12194 (File No. SR-AMEX-99-03).
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II. Description of the Proposal
The Amex proposes to list for trading under Section 107A of the
Company Guide \5\ seven term notes, each linked to a different bond
index (``Bond Index Notes''). The issuers of these securities will be
qualified under Section 107A(a),\6\ and each issue will meet the size
and distribution requirements of Section 107A(b).\7\
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\5\ Under Section 107A of the Company Guide, the Exchange may
approve for listing and trading securities which cannot be readily
categorized under the listing criteria for common and preferred
stocks, bonds, debentures, or warrants. See Securities Exchange Act
Release No. 27753 (March 1, 1990), 55 FR 8626 (March 8, 1990).
\6\ Pursuant to Section 107A(a) of the Company Guide, the issuer
generally must have assets of $100 million and stockholders' equity
of $10 million.
\7\ Pursuant to Section 107A(b) of the Company Guide, there must
be a minimum public distribution of one million trading units with a
minimum of 400 holders. When trading is expected to occur in larger
than average trading units (e.g., a $1,000 principal amount or
more), however, no minimum number of holders will be required. The
aggregate market value of issues listed under Section 107A must be
at least $4 million.
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Holders of the Bond Index Notes generally will receive interest on
the face value of their securities in an amount to be determined at the
time of issuance of the securities and disclosed to investors. The
frequency and rate of the interest payment will vary from issue to
issue based upon prevailing interest rates and other factors, such as a
discount factor and interest payments made on the underlying bonds and
credit spreads.\8\
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\8\ See Amendment No. 1. The discount factor may reflect
prevailing interest rates, commissions and such other amounts as
will be disclosed in the prospectus provided to investors.
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In addition, investors will receive at maturity an amount based on
the value of the linked bond index at maturity of the securities, which
may be more or less than the original principal amount thereof. The
Bond Index Notes will be valued at settlement based upon the following
formula: principal amount x (ending index value/beginning index value)
less a discount factor, which may reflect interest rates, commissions
and other such amounts as will be disclosed in the prospectus provided
to investors.\9\ Returns to investors in the Bond Index Notes are
unleveraged with neither a cap nor a floor.
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\9\ See Amendment No. 1.
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Bond index values for the purpose of determining the payment to
holders at maturity will be determined by reference to prices for the
linked index on a business day shortly prior to maturity. The Bond
Index Notes will provide for maturity within a period of not less than
one nor more than ten years from the date of issue, will not be
callable or redeemable prior to maturity, and will be cash settled in
U.S. currency.\10\ Holders of the securities will have no claim to the
bonds included in the indices.
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\10\ Id.
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Prior to the commencement of trading the Bond Index Notes, the
Exchange will distribute a circular to its membership providing
guidance about member firm compliance responsibilities, including
suitability recommendations, and highlighting the special risks and
characteristics of the proposed securities. In particular, the Exchange
will require members, member organizations and employees thereof
recommending a transaction in the Bond Index Notes: (1) to determine
that such transaction is suitable for the customer, and (2) to have a
reasonable basis for believing that the customer can evaluate the
special characteristics of, and is able to bear the financial risks of,
such transaction.
The securities will be subject to the Exchange's margin rules.\11\
The Bond Index Notes are subject to the equity trading rules of the
Exchange except that, where the securities are traded in thousand
dollar denominations as debt, they will be traded subject to the
Exchange's debt trading rules.
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\11\ See Amex Rule 462.
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The Exchange anticipates that the issuer will link distinct issues
of such securities to the following seven bond indices sponsored and
calculated by Merrill Lynch, Pierce, Fenner & Smith Incorporated
(``MLPF&S''): the U.S. Domestic Master, Mortgage Master, U.S.
Corporate/Government Master, U.S. Corporate Master, U.S. Treasury/
Agency Master, U.S. Treasury Master and U.S. Agency Master Indices.
Each index is intended to track a different sector of the fixed income
securities market.
The Exchange represents that each of the bond indices are broad
based \12\ and are adjusted pursuant to objective, publicly
disseminated rules.\13\ For a bond to qualify for inclusion in an
index, it must meet the pre-established and defined list of objective
criteria. The bonds included in each of the seven indices also meet or
exceed the Exchange's Bond and Debenture Listing Standards set forth in
Section 104 of the Amex Company Guide.\14\ Each index is rebalanced on
the last calendar day of the month. Bonds meeting the index's inclusion
criteria on the last calendar day of the month are included in the
index for the following month. Issues that no longer meet the criteria
during the course of the month remain in the index until the next
month-end rebalancing, at which point they are dropped from the index.
Bonds included in the indices are held constant throughout the month
until the following monthly rebalancing. Bond
[[Page 23885]]
weightings for each of the indices are based on a bond's total
outstanding capitalization (total face value currently outstanding
times price plus accrued interest). Returns and weighted average
characteristics are published daily.
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\12\ The U.S. Domestic Master Index, established in 1975, is an
indicator of the performance of the investment grade U.S. domestic
bond market. The index has over 7,000 issues and a market value of
over $5 trillion. The U.S. Treasury Master Index was established in
1977, and has approximately 160 issues with a market value of $2.2
trillion. The U.S. Agency Master Index, established in 1977, has
1,675 issues with a market value of approximately $450 billion. The
U.S. Corporate Master Index was established in 1972, and has
approximately 4,700 issues with a market value of $1.2 trillion. The
U.S. Corporate/Government Master Index, established in 1972, has
6,574 issues with approximate market value of $3.8 trillion. The
U.S. Treasury/Agency Index is a combination of the U.S. Treasury
Master and U.S. Agency Master Indices, and contains approximately
1,800 issues with market value of 6.2 trillion. A further
description of each of the seven indices is set forth in detail in
the notice release. See supra, note 4.
\13\ Information as to how the indices are calculated, including
the inclusion rules, are published on Bloomberg and the Merrill
Lynch public web site. Changes in any rules are generally published
approximately 30 days in advance of any change.
\14\ The Exchange's Bond and Debenture Listing Standards provide
for the listing of individual bond or debenture issuances provided
the issue has an aggregate market value or principal amount of at
least $5 million and either: the issuer of the debt security has
equity securities listed on the Exchange (or on the New York Stock
Exchange); an issuer of equity securities listed on the Exchange (or
on the New York Stock Exchange) directly or indirectly owns a
majority interest in, or is under common control with, the issuer of
the debt security; an issuer of equity securities listed on the
Exchange (or on the New York Stock Exchange) has guaranteed the debt
security; a nationally recognized statistical rating organization
(an ``NRSRO'') has assigned a current rating to the debt security
that is no lower than an S&P Corporation ``B'' rating or equivalent
rating by another NRSRO; or if no NRSRO has assigned a rating to the
issue, an NRSRO has currently assigned; (i) an investment grade
rating to an immediately senior issue; or (ii) a rating that is no
lower than an S&P Corporation ``B'' rating, or an equivalent rating
by another NRSRO, to a pari passu or junior issue.
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Each of the above indices are calculated by the Merrill Lynch
Research Portfolio Strategy Group based on the prices of the underlying
bonds determined each business day. The vast majority of the prices of
the underlying securities comprising the indices are determined by the
Merrill Lynch Pricing Services Group. These prices are determined in
accordance with all applicable statutory rules, self-regulatory
organization rules and generally accepted accounting principles
regarding valuation of security positions. When a security price is not
available from the Pricing Services Group, the Portfolio Strategy Group
will use a security price from a third party vendor that, in its best
judgment, will provide the most accurate market price thereof. The
resulting index values are then disseminated to, and published by,
Bloomberg L.P. and Reuters at the end of each business day. MLPF&S, in
its role as calculation agent for the Bond Index Notes, will use the
index values as published on Bloomberg L.P. In conjunction with the
issuance of the Bond Index Notes, the Exchange intends to publish the
index value associated with the previous day's close.
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 national securities exchange and, in
particular, with the requirements of Section 6(b)(5) under the Act \15\
that the rules of an exchange be designed to prevent fraudulent and
manipulative acts and practices, to facilitate transactions in
securities, and to protect investors and the public interest.\16\
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\15\ 15 U.S.C. 78f(b)(5).
\16\ 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).
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The Commission notes that the proposed Bond Index Notes have a
certain level of risk because they are derivatively priced and the
final rate of return to investors is unleveraged with neither a cap nor
a floor. Accordingly, the Commission has specific concerns regarding
this type of product. For the reasons discussed below, the Commission
believes that Amex's proposal adequately addresses these concerns.
First, the Commission notes that the protections of Section 107A of
the Amex Company Guide were designed to address the concerns attendant
to the trading of hybrid securities like the proposed Bond Index
Notes.\17\ In particular, by imposing the hybrid listing standards,
heightened suitability for recommendations, and compliance
requirements, noted above, the Commission believes that the Exchange
has adequately addressed the potential problems that could arise from
the hybrid nature of the proposed Bond Index Notes. In addition, Amex
will distribute a circular to its membership calling attention to the
specific risks associated with the Bond Index Notes. Distribution of
the circular should help ensure that only customers with an
understanding of the risk attendant to the trading of the Bond Index
Notes will trade these securities on their broker's recommendations.
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\17\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8623 (March 8, 1990).
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Second, the Commission notes that the final rate of return on the
Bond Index Notes depends, in part, upon the individual credit of the
issuer. To some extent this credit risk is minimized by the Exchange's
listing standards in Section 107A of the Company Guide, which provides
that only issuers satisfying substantial asset and equity requirements
may issue these types of hybrid securities. In addition, the Exchange's
hybrid listing standards further require that the proposed indexed term
notes have at least $4 million in market value. Further information,
including specific financial data, regarding the issuer and the
underlying indices will be publicly available to investors through the
prospectus.
Finally, the Commission believes that the listing and trading of
the proposed Bond Index Notes should not unduly impact the market for
the securities underlying the indices or raise manipulative concerns.
The Commission notes that all of the indices are well-established and
broad-based. Both the history and performance of these indices, as well
as the objective calculation rules for the indices, should be readily
available through a variety of public sources. Due to the indices'
issue size, market value, and representative nature of different
sectors of the fixed income securities market, the Commission believes
that the indices are not readily susceptible to manipulation.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-AMEX-99-03) is approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11145 Filed 5-3-99; 8:45 am]
BILLING CODE 8010-01-M