[Federal Register Volume 65, Number 68 (Friday, April 7, 2000)]
[Notices]
[Pages 18395-18397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8647]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42605; File No. SR-Amex-98-33]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change and 
Notice of Filing and Order Granting Accelerated Approval of Amendment 
No. 3 to the Proposed Rule Change by the American Stock Exchange LLC 
Relating to Margin Requirements

March 31, 2000.

I. Introduction

    On September 18, 1998, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 
19b-4 thereunder,\2\ to allow specified Portfolio Depositary Receipts 
(``PDRs'') \3\ or Index Fund Shares \4\ to serve as cover for short 
positions in options on specified indexes. On March 5, 1999, the Amex 
filed Amendment Nos. 1 and 2 to the proposal.\5\ The proposed rule 
change and Amendment Nos. 1 and 2 were published for comment in the 
Federal Register on October 20, 1999.\6\ On September 24, 1999, the 
Amex provided data regarding the correlation between several PDRs or 
Index Fund Shares and indexes.\7\ On December 15, 1999, the Amex filed 
Amendment No. 3 to the proposal.\8\ The Commission received no comments 
regarding 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\ PDRs are shares in a unit investment trust registered under 
the Investment Company Act of 1940, as amended, whose assets are a 
securities portfolio.
    \4\ 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.
    \5\ See letter from Geraldine Brindisi, Vice President and 
Corporate Secretary, Amex, to Michael Walinskas, Deputy Associate 
Director, Office of Market Supervision, Commission, dated March 4, 
1999 (``Amendment No. 1''); and letter from Michael Cavalier, 
Associate General Counsel, Legal and Regulatory Policy, Amex, to 
Michael A. Walinskas, Deputy Associate Director, Division of Market 
Regulation (``Division''), Commission, dated March 4, 1999 
(``Amendment No. 2''). In Amendment No. 1, the Amex (1) provided 
requirements for calculating the margin for an existing position in 
PDRs or Index Fund Shares serving as cover for short index options; 
and (2) added Commentary .10 to Amex Rule 462(d)(2)(H) to specify 
the PDRs or Fund Shares that may serve as cover for short index 
options positions. Specifically, Commentary .10 provided that: (1) 
Positions in Standard & Poor's (``S&P'') Depositary Receipts 
(``SPDRs'') shall be cover for positions in S&P 500 Index options; 
S&P 100 Index options, or Institutional Index options; (2) positions 
in S&P MidCap 400 Depository Receipts (``MidCap SPDRs'') shall be 
cover for positions in S&P MidCap 400 Index options; (3) positions 
in DIAMONDS Trust Units (``DIAMONDS'') shall be cover for positions 
in Dow Jones Industrial Index (``DJX'') options or Major Market 
Index options; and (4) positions in Nasdaq-100 Shares shall be cover 
for positions in Nasdaq 100-Index options. Amendment No. 2 revised 
the caption for the notice provided with Amendment No. 1.
    \6\ See Securities Exchange Act Release No. 41999 (October 13, 
1999), 64 FR 56545.
    \7\ See letter from Michael Cavalier, Associate General Counsel, 
Legal and Regulatory Policy, Amex, to Mandy Cohen, Special Counsel, 
Division, Commission, dated September 24, 1999.
    \8\ See letter from Michael Cavalier, Associate General Counsel, 
Legal and Regulatory Policy, Amex, to Yvonne Fraticelli, Special 
Counsel, Division, Commission, dated December 8, 1999 (``Amendment 
No. 3''). In Amendment No. 3, the Amex revised proposed Commentary 
.10 to provide that specified PDRs or Index Fund Shares may serve as 
cover only for options on the index that the PDR or Index Fund Share 
is designed to replicate. Specifically, Amendment No. 3 revised 
Commentary .10 to provide that: (1) Positions in SPDRs shall be 
cover for S&P 500 Index options; (2) positions in MidCap SPDRs shall 
be cover for S&P 400 Index options; (3) positions in DIAMONDS shall 
be cover for DJX options; and (4) positions in Nasdaq-100 Shares 
shall be cover for positions in Nasdaq-100 Index options. In 
addition, Amendment No. 3 requested permanent approval of the 
proposed changes.
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II. Background and Description of the Proposal

    In a letter dated February 1, 1993, the staff of the Board of 
Governors of the Federal Reserve System (``Federal Reserve Board'') 
indicated that it was compatible with Regulation T \9\ for the Amex to 
treat positions in Standard & Poor's Depositary Receipts (``SPDRs'') 
\10\ as ``cover'' for an Options Clearing Corporation (``OCC'')--issued 
option on a broad-based stock index with at least 99% correlation with 
the S&P 500 Index.\11\ Specifically, the 1993 Letter stated that the 
Amex may require no additional margin where one leg of a position 
consisted of SPDRs and the other leg was an OCC-issued index option on 
a broad-based stock index with at least 99% correlation with the S&P 
500 Index.\12\ According to the Amex, the Federal Reserve Board staff 
also indicated that MidCap SPDRs\13\ could serve as cover for S&P 
MidCap 400 Index options.\14\
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    \9\ 12 CFR 220. The Federal Reserve Board issued Regulation T 
pursuant to Section 7(c) of the Act.
    \10\ SPDRs represent interests in a unit investment trust that 
holds a portfolio of stocks replicating the S&P 500 Index. See 
Securities Exchange Act Release No. 31591 (December 11, 1992), 57 FR 
60253 (order approving File No. SR-Amex-92-18).
    \11\ See letter from Michael J. Schoenfeld, Senior Securities 
Regulation Analyst, Federal Reserve Board, to James M. McNeil, Chief 
Examiner, Amex, dated February 1, 1993 (``1993 Letter'').
    \12\ See Letter, supra note 11.
    \13\ MidCap SPDRs represent interests in a unit investment trust 
that holds a portfolio of stocks replicating the S&P MidCap 400 
Index. See Securities Exchange Act Release No. 35534 (March 24, 
1995), 60 FR 16686 (order approving File No. SR-Amex-94-52).
    \14\ According to the Amex, the Federal Reserve Board staff 
confirmed this position in a telephone conversation between Michael 
J. Schoenfeld, Senior Securities Regulation Analyst, Federal Reserve 
Board, and James M. McNeil, Chief Examiner, Amex, on May 1, 1995. 
Conversation between Michael Cavalier, Associate General Counsel, 
Legal and Regulatory Policy, Amex, and Yvonne Fraticelli, Special 
Counsel, Division, Commission, on February 24, 2000.
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    Federal Reserve Board amendments to Regulation T that became 
effective on June 1, 1997, modified or deleted certain margin 
requirements regarding options transactions in favor of rules to be 
adopted by the options exchanges, subject to approval by the 
Commission.\15\ Because exchange rules, as approved by the Commission, 
rather than Regulation T, now govern matters such as permitted offsets 
and cover for short options positions, the Amex proposes to revise Amex 
Rule 462, ``Minimum Margins,'' to incorporate into Amex Rule 462 the 
Federal Reserve Board staff positions regarding SPDRs and MidCap SPDRs. 
In addition, the Amex proposes to amend Amex Rule

[[Page 18396]]

462 to allow DIAMONDS \16\ to serve as cover for DJX options and to 
allow Nasdaq-100 Shares \17\ to serve as cover for Nasdaq-100 Index 
options.
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    \15\ See Board of Governors of the Federal Reserve System Docket 
No. R-977 (April 24, 1996), 61 FR 20386 (permitting the adoption of 
margin requirements ``deemed appropriate by the exchange that trades 
the option, subject to the approval of the Securities and Exchange 
Commission'').
    \16\ DIAMONDS are units of beneficial interest in the DIAMONDS 
Trust, which holds a portfolio of stocks replicating the Dow Jones 
Industrial Average. See Securities Exchange Act Release No. 39525 
(January 8, 1998), 63 FR 2438 (order approving File No. SR-Amex-97-
29). In connection with the commencement of trading in DIAMONDS, the 
Amex requested confirmation from the Federal Reserve Board staff 
that margin treatment of DIAMONDS would be comparable to that for 
SPDRs under Regulation T. See letter from James M. McNeil, Chief 
Examiner, Amex, to Scott Holz, Senior Attorney, Legal Division, The 
Federal Reserve Board, dated December 3, 1997. In response, the 
Federal Reserve Board staff noted, among other things, that the 
amendments to Regulation T that became effective on June 1, 1997, 
provide that the margin requirement for listed options is the amount 
specified by the national securities exchange that trades the 
option. Thus, the Federal Reserve Board staff indicated that 
DIAMONDS could serve as cover for a short position in index options 
if the rules of the appropriate self-regulatory organization 
specified that DIAMONDS qualify for such treatment. See letter from 
Scott Holz, Senior Attorney, the Federal Reserve Board, to James M. 
McNeil, Chief Examiner, Amex, dated January 8, 1998.
    \17\ Nasdaq 100 shares are units of beneficial interest in the 
Nasdaq-100 Trust, a portfolio of stocks replicating the Nasdaq 100 
Index. See Securities Exchange Act Release No. 41119 (February 26, 
1999, 64 FR 11510 (order approving File No. SR-Amex-98-34).
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    Specifically, the proposal amends Amex Rule 462(d)(2)(H) to provide 
that no margin need be required in respect of a call index option or a 
put index option carried in a short position where the same account 
carries a long position in the PDRs or Index Fund Shares specified in 
Commentary .10 to the rule, and the PDRs or Index Fund Shares serving 
as cover have a market value at least equal to the aggregate current 
index value \18\ of the stocks underlying the index option contracts to 
be covered. Commentary .10 provides that: (1) Position in SPDRs shall 
be cover for position in S&P 500 Index options; (2) positions in MidCap 
SPDRs shall be cover for positions in S&P MidCap 400 Index options; (3) 
positions in DIAMONDS shall be cover for positions in DJX options; and 
(4) positions in Nasdaq-100 Shares shall be cover for positions in 
Nasdaq-100 Index options.\19\
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    \18\ Under Amex Rule 900C, the ``aggregate current index value'' 
is the current index group value (i.e., the current numerical index 
value of a stock index group multiplied by $1.00) multiplied by the 
index multiplier (i.e. the number specified in a stock index option 
contract by which the market closing index group value is to be 
multiplied to arrive at the value required to be delivered upon 
valid exercise of the contract).
    \19\ See Amendment No. 3, supra note 8.
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    In addition, the proposal states that in computing the margin on an 
existing position in PDRs or Index Fund Shares that covers a short 
index put or call, the market value of the PDRs or Index Funds 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 the PDRs or Index Fund Shares, 
in the case of a put, and the required margin shall be increased by any 
unrealized loss on the short put security position.\20\
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    \20\ See Amendment No. 3, supra, note 8.
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III. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange. 
In particular, the Commission finds that the proposal is consistent 
with the Section 6(b)(5) \21\ requirements that the rules of an 
exchange be 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.\22\
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    \21\ 15 U.S.C. 78f(b)(5).
    \22\ In approving this rule, the Commission has considered the 
proposal's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f).
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    As noted above, the proposal will amend Amex Rule 462 to provide 
that no margin need be required for short call or put positions in 
specified index options when the account carrying the short index 
option position also holds a long position in specified corresponding 
PDRs or Index Fund Shares that have a market value at least equal to 
the aggregate current index value of the stocks underlying the index 
option contracts to be covered. Specifically, the proposal will allow 
positions in SPDRs to serve as cover for positions in S&P 500 Index 
options; positions in MidCap SPDRs to serve as cover for positions in 
MidCap 400 Index options; positions in DIAMONDS to serve as cover for 
positions in DJX options; and positions in Nasdaq-100 Shares to served 
as cover for positions in Nasdaq-100 Index options.\23\
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    \23\ See Amendment No. 3, supra note 8.
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    Thus, the proposal will allow long positions in specified PDRs or 
Index Fund Shares to cover short positions in options on the indexes 
that the PDRs or Index Fund Shares are designed to replicate. The 
values of the PDR or Index Fund Share and the index that the PDR or 
Index Fund Share is designed to replicate should move in tandem. In 
addition, the PDR or Index Fund Share serving as cover for an index 
option position must have a market value at least equal to the 
aggregate current index value of the stocks underlying the index option 
contracts to be covered. Accordingly, the long PDR or Index Fund Share 
position service as cover for the short index option position should 
ensure that the index option writer would be able to deliver upon 
exercise the difference between the current index value and the 
exercise price of the option. Specifically, in an account that meets 
the requirements of the proposal, the amount earned from closing out 
the long PDR or Index Fund Share position would adequately cover the 
option writer's obligation upon exercise. Accordingly, the Commission 
believes that it is reasonable for the Amex to allow SPDRs, MidCap 
SPDRs, DIAMONDS, and Nasdaq-100 Shares to serve as cover for short 
positions in options on the indexes they are designed to replicate.
    In addition, the Commission notes that the proposal incorporates 
into the Amex's rules the Federal Reserve Board staff's positions 
regarding SPDRs and MidCap SPDRs.\24\ For the reasons discussed above, 
the Commission believes that it is reasonable for the Amex to 
incorporate the Federal Reserve Board staff's positions into its rules 
and to provide the same treatment for DIAMONDS serving as cover for DJX 
options and for Nasdaq-100 Shares serving as cover for Nasdaq-100 Index 
options.
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    \24\ See 1993 Letter, supra note 11, and note 14, supra.
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    The Commission also believes that it is reasonable for the proposal 
to provide that in computing the margin on an existing position in PDRs 
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 the PDRs 
or Index Fund Shares, in the case of a put, and that the required 
margin shall be increased by any unrealized loss on the short put 
security position. The Commission believes that these requirements will 
help to ensure that the writer of an index put or call option that is 
covered by a long position in PDRs or Index Fund Shares would be able 
to meet its obligation upon exercise of the option. In addition, the 
Commission notes that the proposed margin requirement for PDRs or Index 
Fund Shares serving as cover for short index option positions is 
consistent with current Amex Rule 462(d)(2)(H)iv),\25\ which 
establishes the margin requirement for an existing security position 
carried against a short put or call.\26\
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    \25\ The proposal will renumber current Amex Rule 
462(d)(2)(H)(iv) as Amex Rule 462(d)(2)(H)(v).
    \26\ Specially, current Amex Rule 462(d)(2)(H)(iv) provides that 
in computing margin on an existing net security position carried 
against a short put or short call, the current market price to be 
used shall not be greater than the exercise price in the case of a 
call or less than the current market price in the case of a put and 
the required margin shall be increased by an unrealized loss on the 
short security position.

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[[Page 18397]]

    The Commission notes that the current proposal applies solely to 
the PDRs or Index Fund Shares and the corresponding index options 
specified in the proposal. If the Amex intends to allow additional PDRs 
or Index Fund Shares to serve as cover for short positions in options 
on other indexes, the Amex must file a proposed rule change pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder to adopt the 
additional offsets.
    The commission finds good cause for approving Amendment No. 3 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Specifically, Amendment No. 3 strengthens the proposal by clarifying 
the language of the proposed rule change and by providing that 
specified PDRs or Index Fund Shares may serve as cover for short 
positions in options on the index that the PDR or Index Fund Share is 
designed to replicate. Accordingly, the Commission believes that 
granting accelerated approval of Amendment No. is appropriate and 
consistent with Sections 6(b)(5) and 10(b)(2) of the Act.\27\
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    \27\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 3 including whether Amendment No. 3 
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 at the Commission's 
Public Reference Room. Copies of the 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-98-33 and should be 
submitted by April 28, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-Amex-98-33), as amended, is 
approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8647 Filed 4-6-00; 8:45 am]
BILLING CODE 8010-01-M