[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32563-32568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15349]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41503; File No. SR-Amex-99-10]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the American Stock Exchange LLC Relating to the Listing 
and Trading of Options on the Credit Suisse First Boston Technology 
Index

June 9, 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 10, 1999, the American Stock Exchange LLC (``Exchange'' or 
``Amex'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
filed with the Commission Amendment No. 1 to the proposal on April 15, 
1999.\3\ The Commission is publishing this notice and order to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval of 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\ In Amendment No. 1, the Exchange updated the list of 
component securities for the Credit Suisse First Boston Technology 
Index (``Index'') and provided revised market and trading data for 
all component securities. In addition, the Exchange clarified the 
formula used to calculate the value of the Index and identified the 
sub-sectors that comprise the technology sector. The Exchange also 
described in greater detail the annual rebalancing process. See 
Letter from Scott G. Van Hatten, Legal Counsel, Derivative 
Securities, Exchange, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
April 12, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to list for trading options on the Credit 
Suisse First Boston Technology Index (``Index''), a new index developed 
by Credit Suisse First Boston Corporation (``CSFB'') \4\ that measures 
the stock performance of companies primarily engaged in the computer 
and communications technology industry. In addition, the Exchange seeks 
to make two conforming changes to its rules. First, the Exchange 
proposes to amend Commentary .01 of Exchange Rule 901C, ``Designation 
of Stock Index Options,'' to indicate that 90% of the Index's numerical 
value will be accounted for by stocks that meet the current criteria 
and guidelines set forth in Exchange Rule 915.\5\ Second, the Exchange 
proposes to amend Exchange Rule 902C, ``Rights and Obligations of 
Holders and Writers of Stock Index Option Contracts,'' to include CSFB 
in the disclaimer provisions of that rule.
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    \4\ In its filing, the Exchange characterized CSFB as a 
``leading global investment banking firm that provides comprehensive 
financial advisory, capital raising, sales and trading, and 
financial products for users and suppliers of capital around the 
world.''
    \5\ Exchange Rule 915, ``Criteria for Underlying Securities,'' 
contains the criteria that securities underlying options contracts 
must satisfy. See infra note 9 for a description of those criteria.
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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 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 III 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 the 
Statutory Basis for, the Proposed Rule Change

I. Purpose
    The Exchange proposes to list for trading options on the Index. The 
Index is designed to reflect and measure the performance of companies 
engaged in the computer and communications technology industry. Each of 
the companies included in the Index derives more than 50% of its 
revenues from the computer and communications technology industry.\6\ 
The Exchange believes that options on the Index will provide investors 
with an investment vehicle to participate in the appreciation of the 
component securities, and a means to reduce the risk involved in 
selecting individual securities in the Index.
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    \6\ Exhibit 3B to the Exchange's proposed rule change identifies 
the 75 companies making up the Index. The component companies are: 
ADA Telecommunications, Advanced Micro Devices, Altera, Amazon.com, 
Amdocs, America Online, Analog Devices, Apple Computer, Applied 
Materials, At Home, BMC Software, Broadcom, Cadence Design, Cisco 
Systems, Citrix Systems, 3Com, Compaq Computer, Computer Associates, 
Computer Sciences, Compuware, Dell Computer, Earthlink Network, 
eBay, Electronic Arts, Electronic Data Systems, EMC, E*TRADE Group, 
First Data, Gartner Group, Gateway 2000, General Instrument, 
Hewlett-Packard, i2 Technologies, IBM, Ingram Micro, Inktomi, Intel, 
Intuit, KLA-Tencor, Lexmark International Group, Linear Technology, 
Lucent Technologies, Maxim Integrated Products, Microchip 
Technology, Micron Technology, Microsoft, Motorola, Network 
Associates, Newbridge Networks, Nokia, Northern Telecom, Novell, 
Oracle, Parametric Technology, PeopleSoft, QUALCOMM, Rambus, 
Sanmina, SAP, Sapient, Seagate Technology, Siebel Systems, 
Solectron, STMicroelectronics, Storage Technology, Sun Microsystems, 
Tellabs, Teradyne, Texas Instruments, Uniphase, Unisys, Veritas 
Software, Vitesse Semiconductor, Xilinx, and Yahoo.
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    The Exchange has represented that except for the Index's 
calculation methodology, which is modified equal-dollar weighted, the 
proposal meets all the critria set forth in Commentary .02 of Exchange 
Rule 901C and the Commission's order approving that rule \7\ 
(collectively, the ``generic listing criteria'').
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    \7\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994).
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a. Eligibility Criteria for Index Components
    CSFB has established objective criteria to select companies for the 
Index. Specifically, companies eligible for inclusion in the Index 
will: (1) Derive more than 50% of their revenues from the computer and 
communications technology industry; (2) have a minimum market 
capitalization greater than $500 million; and (3) have a

[[Page 32564]]

minimum trading volume of 1,000,000 shares per month for the preceding 
three mohths. Of these candidate components, the 50 largest eligible 
companies measured by average market capitalization (determined using 
the number of shares outstanding on the last day of each December, and 
the average price per share for the month of December) are automaitcial 
included in the Index. The remaining 25 Index components are selected 
by CSFB from the universe of eligible stocks to ensure that the Index 
provides appropriate representation of the sub-sectors comprising the 
computer and communications technology sector.\8\
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    \8\ CSFB has categorized the computer and communications 
technology sector into the following sub-sectors: computer software, 
semiconductor, telecommunications equipment, electronic production 
equipment, electronic data processing peripherals, diversified 
electronic products, recreational products, electronic components, 
investment banking, electronic data processing, catalogue, 
electronic components, and electronic distribution industries.
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    If addition to the selection criteria established by CSFB, the 
Exchange represents that the Index component securities will 
substantially comply with the generic listing standards found in 
Commentary .02 of Exchange Rule 901C. Specifically: (1) Each Index 
component security will have a minimum market capitalization of at 
least $75 million and a trading volume in each of the last six months 
of not less than 1,000,000 shares; (2) at least 90% of the Index's 
numerical index value and at least 80% of the total number of component 
securities will meet the current criteria for standardized options 
trading set forth in Exchange Rule 915;\9\ (3) each Index component 
security will be listed for primary market trading on the Exchange, the 
New York Stock Exchange, or through the facilities of the Nasdaq Stock 
Market and will be a reported security; and (4) no component security 
will represent more than 25% of the weight of the Index, and the five 
highest weighted component securities in the Index will not in the 
aggregate account for more than 50% of the weight of the Index.\10\
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    \9\ The Exchange's options listing standards, which are uniform 
among the options exchanges, provide that a security underlying an 
option must, among other things, meet the following requirements: 
(1) the public float must be at least 7,000,000 shares; (2) there 
must be a minimum of 2,000 securityholders; (3) trading volume in 
the U.S. must have been at least 2.4 million shares over the 
preceding twelve months; (4) the market price per share must have 
been at least $7.50 for a majority of the business days during the 
preceding three calendar months; and (5) the issuer must be in 
compliance with any applicable requirements of the Act. See Exchange 
Rule 915, ``Criteria for Underlying Securities,'' Commentary .01.
    \10\ In its filing, the Exchange mistakenly stated that the five 
highest weighted component securities in the Index would not in the 
aggregate account for more than 60% of the weight of the Index. The 
Exchange has confirmed that the correct figure is 50%. Telephone 
conversation between Scott G. Van Hatten, Legal Counsel, Derivative 
Securities, Exchange, and Michael Loftus, Attorney, Division, 
Commission (May 27, 1999).
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b. Index Calculation
    The Exchange will calculate the Index using a modified equal-dollar 
weighting methodology, which is designed to ensure that no single 
component or group of components dominates the Index. At the time of 
the initial balancing and each subsequent rebalancing, each of the 25 
largest component securities (measured by unadjusted market 
capitalization) will be assigned a weighting of approximately 2.4% of 
the Index's total weight. Thus, in the aggregate, the 25 largest 
component securities will account for 60% of the Index's total weight. 
Each of the remaining 50 Index component securities will be assigned a 
weighting of approximately 0.8% of the Index's total weight, resulting 
in an aggregate weighting of 40% of the Index's total weight.
    The Exchange believes that the modified equal-dollar weighting 
methodology allows the Index to more accurately reflect the investment 
performance of computer and communication technology-based securities. 
The Exchange further believes that although the weighting methodology 
provides for a higher weighting for the 25 largest capitalized 
components, the uniformly low percentage level of weighting for each 
security keeps those components from dominating the Index.
    As of the close of trading on December 31, 1998, a portfolio of 
Index component stocks was established representing an investment of 
$2.4 million in each of the 25 highest weighted securities in the Index 
and $800,000 in each of the remaining 50 securities (rounded to the 
nearest whole share). The value of the Index equals the current market 
value (based on the U.S. primary market prices) of the sum of the 
assigned number of shares of each of the securities in the Index 
portfolio divided by the Index divisor. The Index divisor was initially 
determined to yield a benchmark value of 200.00 at the close of trading 
on December 31, 1998.
c. Maintenance of the Index
    The Exchange will maintain the Index consistent with its original 
purpose to include companies that derive more than 50% of their revenue 
from the computer and communications technology industry. Further, the 
Exchange will maintain the Index in accordance with Exchange Rule 901C, 
Commentary .02 so that: (1) The Index is comprised of not less than 50 
component securities and not more than 100 component securities (i.e., 
the total number of Index component securities will not increase or 
decrease by more than one-third from the number of component securities 
in the Index at the time of its initial listing); (2) component 
securities constituting the top 90% of the Index, by weight, will each 
have a minimum market capitalization of $75 million, and the component 
securities constituting the bottom 10% of the Index, by weight, will 
each have a minimum market capitalization of $50 million; (3) 90% of 
the Index's numerical Index value and at least 80% of the total number 
of components will meet the listing criteria for standardized options 
that appear in Exchange Rule 915; \11\ (4) foreign country securities, 
or American Depositary Receipts (``ADRs'') thereon, that are not 
subject to comprehensive surveillance agreements will not in the 
aggregate represent more than 20% of the weight of the Index; (5) all 
component securities will be listed on the Exchange, the NYSE, or 
Nasdaq (as National Market securities); (6) no component security will 
represent more than 25% of the weight of the Index, and the five 
highest weighted components will not in the aggregate account for more 
than 50% of the weight of the Index; and (7) the trading volume for 
each component security shall be at least 500,000 shares for each of 
the last six months or, for each of the lowest weighted components that 
in the aggregate account for no more than 10% of the weight of the 
Index, the monthly trading volume may be at least 400,000 shares for 
each of the last months.
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    \1\ As part of its rule filing, the Exchange proposes to include 
this requirement in Commentary .01 of Exchange Rule 901C.
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    The Exchange shall not open for trading any additional option 
series should the Index fail to satisfy any of the maintenance criteria 
set forth above unless such failure is determined by the Exchange not 
to be significant and the Commission concurs with that determination, 
or unless the continued listing of the index option has been approved 
by the Commission pursuant to Section 19(b)(2) of the Act.\12\
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    \12\ 15 U.S.C. 78s(b)(2).
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d. Rebalancing
    The Exchange and CSFB will review the Index components at the end 
of each calendar year to ensure that the components continue to meet 
eligibility requirements and that the Index is representative of the 
computer and

[[Page 32565]]

communications technology industry. Following the close of trading on 
the second Friday of January of each calendar year, the component 
shares included in the Index portfolio will be rebalanced by adjusting 
the number of whole shares for each component such that each component 
security again approximately represents its assigned weighting in the 
Index: either 2.4% or 0.8% of the Index's total weight.
    At the time of the annual rebalancing, the Index components that 
continue to satisfy the Exchange's and CSFB's eligibility requirements 
are ranked in descending order by average market capitalization 
(determined using the shares outstanding on the last day in December 
and the average share price for the month of December). The 50 largest 
Index components that continue to meet all eligibility requirements 
automatically remain in the Index. The remaining Index components 
securities are evaluated, and removed if necessary, to ensure that the 
Index continues to accurately represent the sub-sectors of the 
technology industry and to allow for the addition of new companies that 
are participating in emerging areas of technology. The Exchange will 
add new companies to the Index by selecting replacements from a list of 
replacement candidates prepared semi-annually by CSFB.\13\
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    \13\ See infra Section II(A)(1)(e), ``Components Replacements'' 
for further information regarding the replacement list.
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    As part of the rebalancing, each of the 25 largest component 
securities (measured by average market capitalization) is assigned a 
weight of approximately 2.4% of the Index's total weight. The remaining 
50 Index components, are assigned a weight of 0.8% of the Index's total 
weight.
    After the fifth trading day of each January, CSFB will make 
available to the Exchange a list of all components to be included in 
the Index for the coming year, as well as their respective weightings--
either 2.4% or 0.8%. This list will be based on average component 
trading data for the preceding month of December. Following the close 
of trading on the second Friday in January, the next Index portfolio 
will be created by determining the number of whole shares for each 
component security so that each component represents its assigned 
weighting in the Index. After the composition of the Index has been 
determined, and prior to the third Friday in January, information 
concerning the selected components of the Index and their weighings 
will be announced by the Exchange. On the first trading day following 
the January expiration, all option contracts on the Index will trade 
based upon the newly rebalanced Index. An adjustment to the Index 
divisor will be made to ensure the continuity of the Index's value.
    The number of shares for each component stock included in the Index 
portfolio will remain fixed between annual rebalancings 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, 
stock split, reverse stock split, rights offering, distribution, 
reorganization, recapitalization, or similar event with respect to the 
component securities. In the case of a merger or the consolidation of 
an issuer of a component security, if the security remains in the 
Index, the number of shares for that component security included 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.\14\
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    \14\ In the case of routine corporate events such as stock 
splits, the Exchange will adjust the Index divisor without 
consulting CSFB. However, adjustments to the Index divisor following 
extraordinary corporate events such as a merger or bankruptcy will 
be made by the Exchange only after consulting with CSFB.
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e. Component Replacements
    The Exchange shall remove and replace an Index component security 
if: (1) The security no longer trades due to a merger, takeover, or 
similar extraordinary corporate event; (2) the security fails to 
satisfy the maintenance and eligibility criteria; or (3) the underlying 
company no longer represents the computer and communications technology 
industry.\15\ At the time of the annual review in January and after the 
fifth day of trading in July, CSFB will provide the Exchange with a 
list of approximately 30 eligible securities from which the Exchange 
will select replacements. The securities in the replacement list will 
be selected and ranked by CSFB based on a number of criteria, including 
conformity with the eligibility standards for Index components. To 
facilitate the selection of a replacement, the list will be categorized 
according to the sub-sectors represented in the Index. The Exchange 
will publicly disseminate the list of replacement securities upon 
receipt.
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    \15\ The Exchange and CSFB may consult from time to time to 
evaluate Index component securities and determine whether they 
continue to represent the computer and communications technology 
industry in the manner intended.
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    The Exchange will select replacement securities from the list based 
upon market capitalization, liquidity, and sector category. Although 
CSFB will prepare the list of replacement securities, the Exchange will 
determine which replacement security will be added to the Index. The 
Exchange will ensure that replacement securities meet all eligibility 
criteria at the time they are included in the Index.
    If a component security is added or replaced, the Exchange shall: 
(1) calculate the average dollar value of the remaining Index 
components that were not among the 25 largest stocks assigned a 
weighting of 2.4% at the time of the most recent annual rebalancing; 
and (2) invest that amount in the new component security, to the 
nearest whole share. In all cases the divisor will be adjusted, if 
necessary, to ensure continuity in the Index value.
    All replacements of component securities and the handling of non-
routine corporate actions (e.g., merger or acquisition) will be 
announced at least ten business days in advance of such effective 
change, whenever possible. The Exchange will make this information 
available to the public through dissemination of an information 
circular.
f. Dissemination of Index
    The Exchange will disseminate the value of the Index in a manner 
similar to the dissemination of values for other stock indexes that 
underlie Exchange-traded options. Specifically, during standard trading 
hours, the Exchange will continuously calculate the value of the Index 
and disseminate such value every 15 seconds over the Consolidated Tape 
Association's Network B.
g. Capacity
    The Exchange has represented that it has the necessary systems 
capacity to provide for the trading of options on the Index. 
Furthermore, the Exchange has confirmed with the Options Price 
Reporting Authority (``OPRA'') that OPRA has sufficient capacity to 
provide for the Exchange's listing and trading of options on the 
Index.\16\
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    \16\ See Letter from Joseph P. Corrigan, Executive Director, 
OPRA, to Richard Strasser, Assistant Director, Division, Commission, 
dated March 2, 1999.
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h. Expiration and Settlement
    Options on the Index will be European style options \17\ that will 
be cash settled. Standard option trading hours (9:30 A.M. to 4:02 P.M. 
Eastern Time) will apply to options on the Index. The Index option will 
expire on

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the Saturday following the third Friday of the expiration month 
(``Expiration Friday''). The last trading day in expiring option series 
will normally be the second to last business day preceding the Saturday 
that follows an Expiration Friday (normally a Thursday). Trading in 
expiring options will cease at the close of trading on the last trading 
day.
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    \17\ Exchange Rule 900C(b)(20) defines a European style option 
as ``an option contract that can be exercised only at its expiration 
pursuant to the rules of The Options Clearing Corporation.''
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    The Exchange plans to list options series with expirations in the 
three near-term calendar months and in two additional calendar months 
in the January cycle. The Exchange may list and trade flexible Exchange 
options (``FLEX Options'') as well as longer term option series that 
have up to thirty-six months to expiration. In lieu of long-term 
options on the full value of the Index, the Exchange may instead list 
long-term, reduced value options based on one-tenth (\1/10\th) the full 
value of the Index. In no case will the interval between expiration 
months for a full value or reduced value long-term option contract be 
less than six months.
    The trading of options on the Index, including any long-term 
options, will be subject to the same rules that govern the trading of 
all the Exchange's index options, including sales practice rules, 
margin requirements, and floor trading procedures. Position limits on 
reduced value long-term Index options will be equivalent to the 
position limits for regular (full value) Index options and will be 
aggregated with such options. For example, if the position limit for 
the full value Index options is 15,000 contracts on the same side of 
the market, then the position limit for the reduced value Index options 
will be 150,000 contracts on the same side of the market.
    The exercise settlement value for all of the Index's expiring 
options will be calculated based upon the primary exchanges' regular 
way opening sale prices for the component securities. In the case of 
Nasdaq-listed securities, the first reported regular way sale price 
will be used. If any component stock does not open for trading on its 
primary market on the last trading day before expiration, the previous 
trading day's last sale price will be used to calculate the settlement 
of the Index.
i. Exchange Rules Applicable to Stock Index Options
    The Index is deemed to be a ``stock index group'' under Exchange 
Rule 901C(a), ``Designation of Stock Index Options,'' and a ``stock 
index industry group'' under Exchange Rule 900C(b)(1), ``Stock Index 
Options: Applicability and Definitions.'' Consequently, Exchange Rules 
900C through 980C will apply to the trading of Index option contracts. 
These rules cover issues such as surveillance, exercise prices, and 
position limits.
    Surveillance procedures currently used to monitor trading in each 
of the Exchange's other index option contracts will also be used to 
monitor trading in options on the Index. With respect to Exchange Rule 
903C(b), ``Series of Stock Index Options,'' the Exchange proposes to 
list near-the-money (i.e., within ten points above or below the current 
Index value) option series on the Index at 2\1/2\ point strike 
(exercise) price intervals when the value of the Index is below 200 
points. The Exchange believes that under Exchange Rule 904C(c), 
``Position Limits,'' it is appropriate for the Exchange to establish a 
position limit for options on the Index at a level no greater than 
15,000 contracts.
j. Disclaimer Provisions of Rule 902C
    The Exchange proposes to amend Exchange Rule 902C to include CSFB 
in the disclaimer provisions of that rule. Because CSFB will have no 
control over dissemination of the value of the Index, the Exchange 
believes that CSFB should be included in the disclaimer provisions of 
Exchange Rule 902C, similar to other such entities whose names are 
attached to indexes underlying options listed on the Exchange.
k. Regulatory Circular for Member Firms
    Prior to the commencement of trading of options on the Index, the 
Exchange will issue a circular to members with relevant information 
concerning options on the Index. The circular also will remind Exchange 
members of their regulatory responsibilities; for example, members must 
comply with Exchange Rule 9.9, ``Suitability of Recommendations.''
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\18\ in general, and furthers the 
objectives of Section 6(b)(5)\19\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, and 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system.
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    \18\ 15 U.S.C. 78f(b).
     \19\ 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 inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foreging, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609. Copies of the submissions, 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 persons, 
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 in the Commission's Public Reference Section, 450 Fifth 
Street, N.W., Washington, D.C. 20549. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-Amex-99-10 and 
should be submitted by July 8, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission has carefully reviewed the Exchange's proposed rule 
change and finds, for the reasons set forth below, that the proposal is 
consistent with the requirements of Section 6 of the Act\20\ and the 
rules and regulations thereunder applicable to a national securities 
exchange. Specifically, the Commission finds that the proposal is 
consistent with Section 6(b)(5) of the Act which requires, among other 
things, that the rules of a national securities exchange be designed to 
promote just and equitable principles of trade, foster cooperation and 
coordination with persons engaged in

[[Page 32567]]

facilitating transactions in securities, and remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system. The Commission believes that the trading of options on the 
Index will serve to promote the public interest and help to remove 
impediments to a free and open securities market by providing investors 
with a means of hedging exposure to market risks associated with the 
securities issued by companies in the computer and communications 
technology industry.
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    \20\ 15 U.S.C. 78f.
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    The Commission finds that the trading of options on the Index will 
permit investors to participate in the price movements of the 75 
securities on which the Index is based. Further, trading of options on 
the Index will allow investors holding positions in some or all of the 
securities underlying the Index to hedge the risks associated with 
these securities.
Accordingly, the Commission believes that options on the Index will 
provide investors with an additional trading and hedging mechanism.\21\
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    \21\ Pursuant to Section 6(b)(5) of the Act, the Commission must 
predicate approval of any new option proposal upon a finding that 
the introduction of such new derivative instrument is in the public 
interest. Such a finding would be difficult for a derivative 
instrument that served no hedging or other economic function, 
because any benefits that might be derived by market participants 
likely would be outweighed by the potential for manipulation, 
diminished public confidence in the integrity of the markets, and 
other valid regulatory concerns.
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    Nevertheless, the trading of options on the Index raises several 
issues related to design of the Index, customer protection, and 
surveillance. The Commission believes, however, for the reasons 
discussed below, that the Exchange adequately has addressed these 
issues.

A. Index Design and Structure

    The Commission believes that it is appropriate for the Exchange to 
apply its rules governing options on stock index industry groups to the 
trading of options on the Index. The Commission notes that the Index 
contains 75 securities representing one industry group, and thus 
reflects a narrow segment of the U.S. equities market.
    The Commission notes that the 75 securities comprising the Index 
are actively-traded. The average daily trading volume among the 
component securities, calculated over a six month period ending April 
9, 1999, ranged from a high of 49.5 million shares per day (Dell 
Computer) to a low of 220,000 shares per day (Amdocs). In addition, the 
market capitalizations of the securities in the Index are large, 
ranging from a high of $475.7 billion (Microsoft) to a low of $888.1 
million (Ingram Micro) as of April 9, 1999. Finally, no one component 
security accounted for more than 3.99% of the Index's total weight, and 
the percentage weighting of the three largest issues in the Index 
accounted for 10.68% of the Index's total weight.\22\
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    \22\ At the most recent annual rebalancing (i.e., January 1999), 
each of the 25 largest component securities was assigned a weighting 
of approximately 2.4% of the total Index weight. This weighting is 
not static, however, and varies in response to changes in the market 
price of each component security. Therefore, increases in the market 
prices of some component securities have caused their weightings to 
increase above the original 2.4% setting (e.g., America Online had a 
weighting of 3.99% as of April 9, 1999).
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    With respect to the maintenance of the Index, the Commission 
believes that the Exchange has implemented several measures to ensure 
that the Index remains comprised of highly-capitalized, actively-traded 
securities, thereby ensuring that the Index will remain substantially 
the same over time. In this regard, the Exchange will maintain the 
Index so that; (1) the component securities comprising the top 90% of 
the Index, by weight, each will have market capitalizations of at least 
$75 million, and the remaining 10% each will have market 
capitalizations of no less than $50 million; (2) the component 
securities comprising the top 90% of the Index, by weight, each will 
have monthly trading volumes of at least 500,000 shares, and the 
remaining 10% each will have monthly trading volumes no less than 
400,000 shares; (3) at least 90% of the components in the Index, by 
weight, and 80% of the number of components in the Index will be 
eligible for standardized options trading; (4) the component securities 
will have primary listings on the Exchange, NYSE, or Nasdaq and will be 
``reported'' securities pursuant to Rule 11Aa3-1 of the Act,\23\ and 
(5) absent approval from the Commission pursuant to Section 19(b)(2) of 
the Act, the Exchange will not increase the number of components to 
more than 100 or reduce the number of components to fewer than 50.
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    \23\ 17 CFR 240.11Aa3-1.
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    The Commission further believes that the maintenance standards 
governing the Index will help protect against material changes in the 
composition and design of the Index that might adversely affect the 
Exchange's obligations to protect investors and to maintain fair and 
orderly markets in options based on the Index. The Exchange is required 
to immediately notify the Commission staff if the Index fails at any 
time to satisfy one or more of the specified maintenance criteria. 
Further, in such an event, the Exchange will not open for trading any 
additional series of options on the Index, unless the Exchange 
determines that such failure is insignificant and the Commission 
concurs in that determination, or unless the Commission approves the 
continued listing of options on the Index under Section 19(b)(2) of the 
Act.\24\
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    \24\ 15 U.S.C. 78s(b)(2).
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B. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as options based on the 
Index, can commence on a national securities exchange. The Commission 
notes that the trading of standardized exchange-listed options occurs 
in an environment that is designed to ensure that: (1) the special 
risks of options are disclosed to public customers; (2) only investors 
capable of evaluating and bearing the risks of options trading are 
engaged in such trading; and (3) special compliance procedures are 
applicable to options accounts. Accordingly, because the Index options 
will be subject to the same regulatory regime as the other standardized 
options currently traded on the Exchange, the Commission believes that 
adequate safeguards are in place to ensure the protection of investors 
in Index options.

C. Surveillance

    In evaluating new derivative instruments, the Commission, 
consistent with the protection of investors, considers the degree to 
which the exchange sponsoring the derivative instrument has the ability 
to obtain information necessary to detect and deter market manipulation 
and other trading abuses. The Commission believes that a surveillance 
sharing agreement between an exchange proposing to list a security 
index derivative product and the primary exchange(s) trading the 
securities underlying the derivative product is an important measure 
for surveillance of the derivative and underlying securities markets. 
Such agreements facilitate and ensure the availability of information 
needed to fully investigate manipulation if it were to occur.\25\ In 
this regard, the Commission notes that the Exchange and the primary 
markets for the stocks underlying the Index--the NYSE and the NASDR 
(the self-regulatory

[[Page 32568]]

organization which oversees Nasdaq)--are members of the Intermarket 
Surveillance Group, which provides for the sharing of all necessary 
surveillance information among members. The Commission believes that 
this arrangement will ensure the availability of information necessary 
to detect potential manipulations and other trading abuses. In 
addition, the Exchange has represented that foreign country securities, 
or ADRs thereon, that are not subject to comprehensive surveillance 
agreements will not in the aggregate represent more than 20% of the 
weight of the Index.
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    \24\ See Securities Exchange Act Release No. 31243 (Sept. 28, 
1992), Fr 45849 (Oct. 5, 1992), 57 FR 45849 (Oct. 5, 1992).
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    The Commission notes that certain concerns are raised when a 
broker-dealer, such as CSFB, is involved in the development and 
maintenance of a stock index that underlies an exchange-traded 
derivative product. For several reasons, however, the Commission 
believes that the Exchange has adequately addressed this concern with 
respect to options on the Index.
    First, the value of the Index, including the final settlement 
value, will be calculated and disseminated by the Exchange 
independently of CSFB. Accordingly, neither CSFB nor any of its 
affiliates or other persons will be in receipt of the values prior to 
their public dissemination. Second, CSFB has established informational 
barriers around the CSFB personnel who have access to information 
regarding changes and adjustments to the Index.\26\ The Commission 
believes that these barriers will help prevent the improper use of 
material non-public information concerning the Index and strengthen the 
proposal by maintaining the integrity of changes made to the Index. In 
addition, CSFB currently has in place internal review procedures to 
monitor trading activity in Index component securities and securities 
included in the replacement list. Finally, the Exchange's existing 
surveillance procedures for stock index options will apply to the 
options on the Index and should provide the Exchange with adequate 
information to detect and deter trading abuses. In sum, the Commission 
believes that the procedures discussed above will help to ensure that 
CSFB does not unfairly use any information regarding the Index that it 
obtained through its role in developing and maintaining the Index.
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    \26\ Details of the CSFB informational barriers have been 
submitted to the Commission under separate cover. See Letter from 
Robert L. Mazzeo; Solomon, Zauderer, Ellenhorn, Frischer & Sharp; to 
Richard Strasser, Assistant Director, Division, Commission, dated 
June 9, 1999.
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    The Commission also believes that it is appropriate for the 
Exchange to make conforming changes to Exchange Rules 901C and 902C. 
The revisions are technical in nature and are designed to ensure that 
the Exchange's rules remain current. The Commission believes that it is 
important for the Exchange to update its rules to reflect newly listed 
derivative products. Pursuant to Section 19(b)(2) of the Act,\27\ the 
Commission finds good cause for approving the proposal, including 
Amendment No. 1 thereto, prior to the thirtieth day after the date of 
publication of notice of the filing thereof in the Federal Register. 
The Commission notes that proposed rule changes regarding the listing 
and trading of options on industry group or narrow-based stock indexes 
may become effective immediately upon filing provided they satisfy 
certain generic listing standards.\28\ The generic listing standards 
establish minimum guidelines concerning the design and operation of 
narrow-based indexes.
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    \27\ 15 U.S.C. 78s(b)(2).
    \28\ See Securities Exchange Act Release No. 34157 (June 3, 
1994), 59 FR 30062 (June 10, 1994) and Commentary .02 of Exchange 
Rule 901C. While a proposed rule change filed in accordance with the 
generic listing standards becomes effective immediately upon filing, 
trading in the approved options may not commerce until 30 days from 
the date of filing.
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    The Commission recognizes that the Index, as amended, satisfies all 
of the generic listing standards save two, the weighting methodology 
\29\ and the frequency of rebalancing.\30\ The Commission believes that 
because these deviations from the generic listing standards are not 
significant, they should not preclude the Exchange from receiving 
accelerated approval for its proposal.
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    \29\ Although the generic listing standards contemplate the 
calculation of indexes using capitalization weighted, price 
weighted, or equal-dollar weighted methods, the standards do not 
specifically encompass the modified equal-dollar weighted 
methodology that the Exchange proposes to use for the Index.
    \30\ Under the generic listing standards, indexes based upon the 
equal-dollar weighting methodology must be rebalanced at least 
quarterly.
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    Specifically, the modified equal-dollar weighted methodology will 
ensure that the weighting of the Index does not become concentrated in 
one or several component securities. Because the weightings assigned to 
the component securities are low (i.e., 2.4% and 0.8%), it is unlikely 
that the weighting of a single component or group of component 
securities would increase to such a level that concentration issues 
would arise. Furthermore, the Exchange has represented that in no 
instance will a single component security represent more than 25% of 
the weight of the Index, nor will the five highest weighted component 
securities in the aggregate account for more than 50% of the weight of 
the Index.
    For similar reasons, the Commission believes that it is appropriate 
for the Exchange to rebalance the Index annually rather than quarterly. 
Quarterly rebalancings were designed as a prophylactic measure against 
concentration problems. The Commission believes, however, that the low 
weightings assigned to component securities of the Index at the annual 
rebalancings addresses the concentration concerns that underlie the 
need for more frequent rebalancings. Accordingly, because the Index 
substantially complies with the generic listing standards, and the 
investor protection concerns have been addressed, the Commission finds 
good cause exists for granting accelerated approval to the proposed 
rule change Amendment No. 1 thereto.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change, SR-Amex-99-10, and Amendment 
No. 1 thereto, are hereby approved on an accelerated basis.

    \31\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15349 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M