[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Page 43792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20632]



[[Page 43792]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41698; File No. SR-Amex-99-18]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Approving Proposed Rule Change and Amendment No. 1 Thereto Amending 
Amex Rule 901C

August 3, 1999.

I. Introduction

    On May 17, 1999, the American Stock Exchange LLL (``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 amend Amex Rule 901C. On June 
8, 1999, Amex filed Amendment No. 1.\3\ The proposed rule change and 
Amendment No. 1 were published for comment in the Federal Register on 
June 24, 1999.\4\ No comments were received on the proposed proposal. 
This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Richard Strasser, Assistant Director, Division 
of Market Regulation, SEC, from Scott Van Hatten, Legal Counsel, 
Derivative Securities, Amex, dated June 4, 1999. In Amendment No. 1, 
Amex amended the text of the proposed rule.
    \4\ Securities Exchange Act Release No. 41536 (June 17, 1999), 
64 FR 33941.
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II. Description of the Proposal

    By adding Commentary .03 to Amex Rule 901C to establish criteria 
for the splitting of stock indexes, the proposed rule change will 
permit the Exchange to split broad and narrow-based indexes without 
submitting a proposed rule change to the Commission. Specifically, the 
proposal will require the Exchange, prior to instituting an index 
split, to issue an information circular to the Exchange's membership 
with details concerning the index split and the adjusting of position 
and exercise limits until the expiration of the further non-LEAP option 
contract. In effecting the index split, the Exchange will increase the 
applicable index divisor; proportionally increase the number of 
contracts outstanding; and increase the index option's applicable 
position and exercise limits. Position and exercise limits that are 
increased to accommodate any outstanding index option positions will 
revert, following the expiration of the furthest non-LEAP option 
contract, to their then applicable limit.

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).\5\ Specifically, the 
Commission finds that the proposal is consistent with the section 
6(b)(5) \6\ requirements in that the proposed reduction in the value of 
an index and the associated temporary increase 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.\7\
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving this rule and amendment, 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 an index, 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 an 
index. Similarly, the Commission believes that reducing the value of an 
index may attract additional investors, thus creating a more active and 
liquid trading market for the index options. The Commission notes that, 
before splitting an index, the Exchange will provide reasonable advance 
notice of the proposed index split to its membership.\8\
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    \8\ 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 change to the 
value of an index and the resulting adjustments to the outstanding 
options; issuing a second notice to its members just prior to 
implementing the index reduction 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 index that reminds 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 
the holders of all open positions in options on an index proposed to 
be split.
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    The Commission also believes that Amex's proposed adjustments to 
its position and exercise limits applicable to an index are appropriate 
and consistent with the Act. In particular, the Commission believes 
that the temporary increase of the position and exercise limits is 
reasonable in light of the fact that the size of the options contracts 
on an index will be proportionally reduced and that, as a result, the 
number of outstanding options contracts an investor holds will be 
increased. The temporary increase 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 an 
index, their current level of investment in the option contracts.
    The Commission further believes that increasing an index's divisor 
will not have an adverse market impact on the trading in these options. 
After the split, an index will continue to be composed of the same 
stocks with the same weightings and will be calculated in the same 
manner, except for the proposed change in the divisor.
    Finally, in its release adopting new Rule 19b-4(e),\9\ the 
Commission noted that if the trading rules, procedures and listing 
standards for the product class included criteria regarding splitting 
an index, such changes would be permitted without being considered a 
material change to the derivative securities product and without 
requiring the filing of a proposed rule change pursuant to Section 
19(b) of the Act.\10\ The proposed rule change will permit the Exchange 
to adjust the value of a stock index covered by Commentary .02 to Rule 
901C from time to time in response to prevailing market conditions 
without the need to submit a rule filing to the Commission on each 
occasion.
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    \9\ 17 CFR 240.19b-4(e).
    \10\ See Securities Exchange Act Release No. 40761 (December 8, 
1998), 63 FR 70952 (December 22, 1998) (``New Products Release'').
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-Amex-99-18) and Amendment 
No. 1 are approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20632 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M