[Federal Register Volume 64, Number 202 (Wednesday, October 20, 1999)]
[Notices]
[Pages 56545-56547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27367]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41999; File No. SR-Amex-98-33]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by American Stock Exchange LLC Regarding a Pilot Program 
Relating to Rule 462 (Minimum Margins) Applicable to Portfolio 
Depositary Receipts and Index Fund Shares

October 13, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act),\1\ notice is hereby given that on September 18, 1998, the 
American Stock Exchange LLC (``Amex'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change described in Items I, II, and III below, which 
Items have been prepared by the Amex. Amex amended the proposal twice 
on March 4, 1999.\2\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The Commission received two amendments from the Exchange 
dated March 4, 1999. See Notice of Filing of Amendment No. 1 to a 
Proposed Rule Change by American Stock Exchange LLC Relating to Rule 
462 (Minimum Margins) Applicable to Portfolio Depository Receipts 
and Index Fund shares (``Amendment No. 1'') and letter from Michael 
Cavalier, Associate General Counsel, Legal & Regulatory Policy, 
Exchange to Michael A. Walinskas, Deputy Associate Director, 
Division of Market Regulation (``Division''), Commission 
(``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Amex proposes amending that portion of Exchange Rule 462 
addressing the required margin for certain short index options 
positions covered by positions in Portfolio Depository Receipts 
(``PDRs'') or Index Fund Shares.\3\ The Exchange requests that the 
proposed rule change be approved on an accelerated basis and that it be 
implemented as a one-year pilot program. The text of the proposed rule 
change is as follows, with [brackets] indicating words to be deleted 
and italics indicating words to be added:
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    \3\ PDRs are shares in a unit investment trust created under 
state or other local law, whose assets are a securities portfolio. 
Index Fund Shares are shares in an open-end management investment 
company registered under the Investment Company Act of 1940, as 
amended, whose assets are a securities portfolio.
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Minimum Margins

* * * * *

Rule 462(d)(2)(H)(iv)

    No margin need be required in respect of a call index option 
contract carried in a short position where there is carried for the 
same account a long position in Portfolio Depositary Receipts or Index 
Fund Shares as specified in Commentary .10 to this Rule, having a 
market value at least equal to the aggregate current index value of the 
stocks underlying the index options contracts to be covered.
    No margin need be required in respect of a put index option 
contract carried in a short position where there is carried for the 
same account a short position in Portfolio Depositary Receipts or Index 
Fund Shares as specified in Commentary .10 to this Rule, having a 
market value at least equal to the aggregate current index value of the 
stocks underlying the index options contracts to be covered.
    The term ``aggregate current index value'' shall have the meaning 
set forth in Rule 900C.
    In computing margin on an existing position in Portfolio Depositary 
Receipts or Index Fund Shares covering a ``short'' put or ``short'' 
call, the market value of such Portfolio Depositary Receipts or Index 
Fund Shares to be used shall not be greater than the exercise price in 
the case of a call or less than the market value of such Portfolio 
Depositary Receipts or Index Fund Shares in the case of a put and the 
required margin shall be increased by an unrealized loss on the short 
security position.
    [(iv)] (v) No change other than renumbering.

Commentary

.10  Under the provisions of subparagraph (H)(iv) of paragraph (d)(2) 
of this Rule regarding margin requirements applicable to positions in 
index options and Portfolio Depositary Receipts or Index Fund Shares: 
(1) positions in Standard & Poor's Depositary Receipts 
(``SPDRs'') shall be cover for positions in S&P 500 
Index options (SPX), S&P 100 Index

[[Page 56546]]

options (OEX) or Institutional Index options (XII); (2) positions in 
MidCap SPDRsTM shall be cover for positions in S&P MidCap 
400 Index TM options (MID); (3) positions in DIAMONDS 
TM shall be cover for positions in Dow Jones Industrials 
options (DJX) or Major Market Index options (XMI); and (4) positions in 
Nasdaq-100 SharesSM shall be cover for positions in Nasdaq-
100 Index options (NDX).
* * * * *

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 Amex 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 Amex 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

1. Purpose
    The filing proposes to amend Amex Rule 462(d)(2)(H)(iv) and to 
adopt Commentary .10 to Rule 462 to permit PDRs \4\ and Index Fund 
Shares traded on the Exchange under Amex Rules 1000 and 1000A, 
respectively, to serve as cover for certain short index options 
positions. Specifically, proposed Rule 462(d)(2)(H)(iv) would provide 
that no additional margin is required in respect of a call index option 
carried in a short position where the same account is long PDRs or 
Index Fund Shares as specified in proposed Commentary .10. Similarly, 
no additional margin would be required in respect of a short put index 
option contract where the account has a short position in PDRs or Index 
Fund Shares as specified in proposed Commentary .10. In either case, 
the PDR or Index Fund Shares position would be required to have a 
market value at least equal to the aggregate current index value, as 
defined in Amex rule 900C,\5\ of stocks underlying the index options 
contracts to be covered.\6\
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    \4\ ``PDR'' is a service mark of PDR Services LLC, a Delaware 
limited liability company whose sole member is the American Stock 
Exchange LLC.
    \5\ See infra note 10 defining aggregate current index value.
    \6\ Current subparagraph (iv) of Rule 462(d)(2)(H) would be 
renumbered as subparagraph (v).
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    In letters dated August 19, 1992, and January 14, 1993, to staffs 
of the SEC and the Board of Governors of the Federal Reserve System 
(``Federal Reserve''), respectively, the Exchange proposed certain 
margin treatment for Standard & Poor's Depositary Receipts based on the 
S&P 500 Index.\7\ The Exchange proposed that, with respect 
to positions that are hedged or offset, where one leg of the position 
consists of SPDRs and the other leg is an Options Clearing Corporation-
issued option on a broad-based stock index with at least a 99% 
correlation with the S&P 500 Index, such position be treated as the 
equivalent of covered equity options. Specifically, the Exchange 
requested that no additional margin be required in respect of a short 
index call position when a long position in SPDRs is carried for the 
same account, and in respect of a short index put position when a short 
position in SPDRs is carried for the same account. The Federal Reserve 
stated that the Exchange's proposed margin requirements were compatible 
with then-current Regulation T.\8\ Thereafter, the Federal Reserve took 
a comparable position with respect to MidCap SPDRs,TM based 
on the S&P MidCap 400 Index TM.\9\
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    \7\ See letter dated August 19, 1992 from James M. McNeil, Chief 
Examiner, Amex, to Sharon M. Lawson, Assistant Director, Division, 
SEC; letter dated January 14, 1993 from James M. McNeil, Chief 
Examiner, Amex, to Laura M. Homer, Division of Supervision and 
Regulation, Federal Reserve.
    \8\ See letter dated February 1, 1993 from Michael J. 
Schoenfeld, Senior Securities Regulation Analyst, Federal Reserve, 
to James M. McNeil, Chief Examiner, Amex.
    \9\ The Amex represents that the Federal Reserve orally 
confirmed this position by telephone call between James M. McNeil, 
Amex and Michael Schoenfeld, Federal Reserve on May 1, 1995. In 
connection with the commencement of trading in DIAMONDS 
SM Trust Units, the Amex also requested confirmation from 
the Federal Reserve that margin treatment of DIAMONDS would be 
comparable to that for SPDRs under Regulation T. Instead of 
providing such confirmation, the Federal Reserve, in its January 8, 
1998 letter to the Amex regarding application of Regulation T to 
DIAMONDS noted that Section 220.18 of Regulation T, (the Supplement 
to Regulation T), amended effective June 1, 1997, provides that the 
margin requirements for options is ``the amount or other position'' 
specified by the national securities exchange that trades the option 
(for listed options). See letter from Scott Holz, Senior Attorney, 
Federal Reserve, to James M. McNeil, Chief Examiner, Amex, dated 
January 8, 1998.
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    The Exchange proposes to incorporate the offsets and cover for 
short index options positions to those described in the Federal 
Reserve's February 1993 letter into Amex Rule 462, as well as to add 
comparable treatment for positions in DJX, XMI and NDX options, as 
identified in proposed new Commentary .10 to Rule 462. Proposed Rule 
462(d)(2)(H)(iv) provides that no additional margin is required in 
respect of a call index option contract carried in a short position 
where there is carried for the same account a long position in PDRs or 
Index Fund Shares as specified in Commentary .10 that has a market 
value at least equal to the aggregate current index value of the stocks 
underlying the index options contracts to be covered. In addition, no 
margin is required in respect of a put index options contract carried 
in a short position where there is carried for the same account a short 
position in PDRs or Index Fund Shares as specified in Commentary .10 
that has a market value at least equal to the aggregate current index 
value of the stocks underlying the index options contracts to be 
covered.\10\
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    \10\ Aggregate current index value'' means the ``current index 
group value'' multiplied by the ``index multiplier.''
    The ``current index group value'' is $1.00 multiplied by the 
total of the current prices of all stocks in an index after each 
stock's current price is multiplied by a factor representing that 
stock's weight in the index.
    The ``index multiplier'' is a number (determined when the PDR or 
Index Fund Share is created) that the trading level of the 
corresponding index (i.e., the Dow at 9926.2) is multiplied by to 
reduce it to an appropriate trading amount. For example, when the 
Dow trades at 9926.2, a DIAMONDS share trades at $99.26. Thus, the 
index multiplier is .01.
    See Amex Rule 900C.
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    Proposed Commentary .10 to Rule 462 specifies the PDRs or Index 
Fund Shares which qualify for margin treatment under Rule 
462(d)(2)(H)(iv), together with the specific index options that such 
PDRs or Index Fund Shares can offset or cover for margin purposes.\11\ 
Proposed Commentary .10 specifies that: (1) positions in Standard & 
Poor's Depositary Receipts  (``SPDRs'') shall 
be covered for positions in S&P 500 Index options (SPX), 
S&P 100 Index options (OEX) or Institutional Index options 
(XII); (2) positions in MidCap SPDRsTM shall be covered for 
positions in S&P MidCap 400 IndexTM options (MID); (3) 
positions in DIAMONDSTM shall be cover for positions in Dow 
Jones Industrial options (DJX) or Major Market Index options (XMI); and 
(4) positions in Nasdaq-100 SharesSM shall be cover for 
positions in Nasdaq-100 Index options (NDX). The Exchange 
points out that these proposed offsets in Commentary .10 apply only to 
indexes and PDRs or Index Fund Shares with a high degree of 
correlation, both in performance (return on investments) and in the 
collection of securities underlying such indexes, PDRs and Index Fund 
shares.
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    \11\ The rule does not apply to margin with respect to long or 
short positions in PDRs and Index Fund Shares.

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[[Page 56547]]

    The Exchange believes it is appropriate for the index options 
specified in proposed Commentary .10 to be offset by the specified PDRs 
because the index options and PDRs are based on the same underlying 
securities, or related to indexes whose underlying securities include 
all securities underlying another index (i.e., S&P 100 
Index and the S&P 500 Index) or indexes that have a high 
degree of overlap of securities underlying the indexes and that have 
historically demonstrated a very high correlation in price changes 
(i.e., the Institutional Index and the S&P 500 Index; the 
Major Market Index and the Dow Jones Industrial Average). The Exchange 
will propose additions to or deletions from Commentary .10 by a filing 
with the Commission pursuant to Rule 19b-4.
(1) Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act in general and furthers the objectives of 
Section 6(b) in particular in that it is designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
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

    The Exchange requests that the Commission grant accelerated 
effectiveness to the proposed rule change pursuant to Section 19(b) of 
the Act. Amex represents that the proposed rule is similar in effect to 
the position taken previously by the Federal Reserve in correspondence 
with Amex, as cited above, in connection with trading of PDRs on the 
Exchange. Amex further requests that the proposed rule be implemented 
as a one-year pilot program.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room, 450 Fifth Street, NW, Washington, DC. Copies of 
such filing will also be available for inspection and copying at the 
principal office of the Amex. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
File Number SR-AMEX-98-33 should be included on the subject line if E-
mail is used to submit a comment letter. Electronically submitted 
comment letters will be posted on the Commission's Internet web site 
(http://www.sec.gov). All submissions should refer to File Number SR-
AMEX-98-33 and should be submitted by November 10, 1999.

    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. 99-27367 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M