[Federal Register Volume 64, Number 167 (Monday, August 30, 1999)]
[Notices]
[Pages 47206-47207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22428]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41775; File No. SR-Amex-99-28]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the American Stock Exchange 
LLC to Revise the Settlement Value Calculation Methodology for Nasdaq/
NMS Component Stocks in the Morgan Stanley High Technology 35 Index

August 20, 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 July 29, 1999, the American Stock Exchange LLC (the ``Exchange'' or 
``Amex'') 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 revise the settlement value calculation 
methodology for Nasdaq National Market System (``Nasdaq/NMS'') 
component stocks in the Morgan Stanley High Technology 35 Index 
(``Index''). The proposal does not revise the Index in any other way.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, and at the Commission.

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 revise the settlement value calculation 
methodology for Nasdaq/NMS component stocks in the Index. Currently, 
the Index's settlement value is determined by using the regular way 
opening sale price for each of the Index's component stocks in its 
primary market on the last trading day prior to expiration.\3\ The 
Exchange proposes to revise the settlement value calculation 
methodology by using the volume weighted average price for each Nasdaq/
NMS listed Index component, as calculated during the first five minutes 
of trading immediately following the first reported trade for such 
component.\4\
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    \3\ See Securities Exchange Act Release No 36283 (Sept. 26, 
1995), 60 FR 51825 (Oct. 3, 1995) (order approving the Exchange's 
proposed rule change to list and trade options on the Index).
    \4\ If no other trades are executed in a Nasdaq/NMS listed Index 
component during the five minutes following the first reported 
trade, the Exchange will use the price of the first reported trade 
in calculating the settlement value for the Index. Telephone 
conversation between Michael L. Loftus, Attorney, Division of Market 
Regulation, Commission, and Scott G. Van Hatten, Legal Counsel, 
Derivative Securities, Exchange (August 17, 1999).
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    While investors in exchange-listed securities are able to receive 
executions at the specialist-determined opening price by entering a 
market-on-open order, investors in Nasdaq securities cannot be assured 
of transacting at a price equal to the first reported print. In some 
instances, the first reported price may be significantly different than 
the price at which investors receive execution. As a result, investors, 
market-makers, and the Index specialist cannot be sure that their 
hedges or offsets will converge to the settlement value for the Index. 
Moreover, in some cases the value of the hedge may differ significantly 
from the Index settlement value. This uncertainty adds to the cost of 
trading the Index options and makes them less desirable to trade.
    While it may remain difficult to accomplish complete or perfect 
convergence using the proposed methodology, the volume weighted average 
price should provide a better opportunity for market participants to 
transact at a price near the settlement price used for the Index. This 
makes it less likely that there will be a significant difference 
between a market participant's hedge and the settlement value of the 
Index. For this reason, the Exchange is revising the settlement value 
calculation methodology for Nasdaq/NMS listed Index components.\5\
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    \5\ The Exchange intends to submit to the Commission a separate, 
but similar, rule filing that revises the settlement value 
calculation methodology for other Exchange indexes by using volume 
weighted average prices for Nasdaq/NMS component securities in place 
of regular way opening sale prices. Telephone conversation between 
Michael L. Loftus, Attorney, Division of Market Regulation, 
Commission, and Scott G. Van Hatten, Legal Counsel, Derivative 
Securities, Exchange (August 17, 1999).
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    The Exchange proposes to calculate the Index's settlement value by 
using the volume weighted average price for all Nasdaq/NMS listed Index 
components, as calculated during the first five minutes of trading in 
such component. Once the first trade in a Nasdaq/NMS component is 
reported, that component's volume weighted average price is determined 
by: (i) Multiplying the number of shares traded (volume) by the price 
at which those shares traded (execution price) for each trade; (ii) 
aggregating these products; and (iii) dividing this sum by the total 
number of shares traded (total volume) during the five minute period 
immediately following the first reported trade.\6\ For all other Index 
components

[[Page 47207]]

not primarily listed on the Nasdaq/NMS (i.e., those Index components 
having the Exchange or the New York Stock Exchange as their primary 
market), the Index's settlement value will continue to reflect the 
regular way opening sale prices reported on the primary market on the 
last trading day prior to expiration.
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    \6\ The facilitate the prompt and accurate calculation of the 
Index's final settlement value, the volume weighted average price 
for all Nasdaq/NMS stocks included in the Index will be calculated 
by Nasdaq's ``Index Calculation Group'' and forwarded electronically 
to Amex's ``Index Calculation Group.''
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    The settlement value calculation methodology currently used for 
Nasdaq/NMS components (``Old Methodology'') will continue to be used 
for the settlement of any option series still outstanding when Index 
option contracts based on the proposed settlement value calculation 
methodology (``New Methodology'') are introduced. Thereafter, any newly 
introduced Index option series will settle based on the New 
Methodology. Index option contracts based on the Old Methodology will 
be aggregated with those based on the New Methodology for purposes of 
determining compliance with position and exercise limits.\7\ 
LEAPS (Long Term Equity Anticipation Securities) still 
outstanding when the New Methodology is implemented will continue to 
settle based on the Old Methodology. Thereafter, any newly introduced 
LEAPS will settle based on the New Methodology.
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    \7\ As set forth in Exchange Rules 904C and 905C, the current 
position and exercise limits for options on the Index are 15,000 
contracts on the same side of the market. The Exchange notes, 
however, that these position and exercise limits may be revised 
upwards in connection with an Exchange proposal to increase the 
position and exercise limits for narrow-based index options. See 
Securities Exchange Act Release No. 40756 (Dec. 7, 1998), 63 FR 
68809 (Dec. 14, 1998).
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    The Exchange believes that the use of the volume weighted average 
price to calculate the Index's settlement value is appropriate and 
should result in a settlement value that better reflects the markets in 
Nasdaq/NMS securities. The Exchange proposes no other changes to the 
Index, and will continue to maintain the Index in accordance with the 
applicable criteria set forth in the original order approving the Index 
for options trading.\8\ The Exchange will disseminate an information 
circular to its members to inform them of the change to the Index's 
settlement value calculation methodology. The circular will detail the 
method by which contracts settling under the Old Methodology will be 
phased out and those settling based on the New Methodology will be 
introduced.
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    \8\ See Note 3 supra.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5),\10\ 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 regulating, clearing, settling, 
processing information with respect to, and 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not impose 
any burden on competition.

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

    The Exchange has neither solicited nor received comments with 
respect to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
(3) by its terms, does not become operative for 30 days after July 29, 
1999, the date of filing; \11\ and the Exchange provided the Commission 
with written notice of its intent to file the proposed rule change, 
along with the text of the proposal, at least five business days prior 
to the filing date; the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6) 
\13\ thereunder.
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    \11\ Although the proposed rule change is considered effective 
upon filing, it may not become operative until at least August 28, 
1999, which is 30 days after the date of filing (July 29, 1999).
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if its 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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, 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-99-28 and should be 
submitted by September 20, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22428 Filed 8-27-99; 8:45 am]
BILLING CODE 8010-01-M