[Federal Register Volume 67, Number 69 (Wednesday, April 10, 2002)]
[Notices]
[Pages 17475-17477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45692; File No. SR-Amex-2002-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the American Stock Exchange LLC To Amend Commentary .02(c) of 
Rule 901C To Include Volume Weighted Average Pricing as a Permissible 
Index Option Settlement Value Calculation Methodology

April 4, 2002.
    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 5, 2002, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') 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 Amex proposes to amend Commentary .02(c) of Amex Rule 901C to 
add volume weighted average pricing (``VWAP'') as a permissible index 
option settlement value calculation methodology. The text of the 
proposed rule change is below. Proposed new language is in italics.
* * * * *
Designation of Stock Index Options
    Rule 901C
    (a)-(c) No change.
Commentary
    .01 No change.
    .02 The Exchange has received approval, pursuant to the Securities 
Exchange Act of 1934 (``Act''), to list options on stock industry index 
groups pursuant to Rule 19b-4(e) of the Act provided each of the 
following criteria are satisfied:
    (a) No change.
    (b) No change.
    (c) Expiration and Settlement--Options on an index established 
pursuant to this Commentary will be cash settled and the index value 
for purposes of settling a specific index option will be calculated 
based upon either the primary exchange regular way opening sale prices 
for the component stocks or the primary exchange regular way opening 
sale prices for components listed on a national securities exchange and 
volume weighted average prices for component stocks listed on NASDAQ/
NMS.
    (d) No change.
* * * * *

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 amend Commentary .02(c) to Amex Rule 901C 
to add VWAP as a permissible index option settlement value calculation 
methodology. Currently, Commentary .02(c) of Amex Rule 901C provides 
that index settlement values are determined by using the regular way 
opening sale price for each of an index's component stocks in its 
primary market on the last trading day prior to expiration.\3\ Unlike 
exchange-listed securities where there is a market opening price at 
which all

[[Page 17476]]

investors entering a market-on-open order can participate, investors in 
National Association of Securities Dealers Automated Quotation System 
(``NASDAQ'') National Market System (``NMS'') securities cannot be sure 
of transactions at a price equal to the first reported print. In some 
instances, this price may be significantly different than the first 
price at which most investors can conduct transactions. As a result, 
investors, market-makers and the specialist cannot be sure that any 
hedges into which they may have entered will converge to the settlement 
value for the index; and, 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 options and makes them less desirable 
to trade. While it may still be difficult to get complete convergence, 
using the VWAP provides more opportunity for investors to transact at a 
price near the settlement price, making it much less likely that there 
will be any significant difference between the hedge and the settlement 
value. For this reason, the Exchange is proposing to permit, in 
addition to ``regular way'' opening price settlement, the VWAP 
settlement calculation methodology for NASDAQ/NMS listed components.
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    \3\ See, e.g., Securities Exchange Act Release No. 36283 
(September 26, 1995), 60 FR 51825 (October 3, 1995) (SR-Amex-95-26) 
(order approving the listing and trading of options on the Morgan 
Stanley High Technology 35 Index).
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    To obtain the component price to be used in the settlement 
calculation of an index subject to VWAP, the Exchange would revise the 
settlement calculation methodology by using VWAP for all NASDAQ/NMS 
component securities of such index option during the first five minutes 
of trading immediately following the first reported trade for the 
component. Once the first trade in a component occurs, that component's 
VWAP is determined by multiplying the number of shares traded (volume) 
by the price at which those shares traded (execution price) for each 
trade, adding up all of these products and dividing this sum by the 
total number of shares traded (total volume) during the five minute 
period immediately following the initial trade.\4\ For all other 
components (i.e., those with the Amex or the New York Stock Exchange as 
their primary market), an index's settlement value would continue to 
reflect the regular way opening sale prices for each of an index's 
component stocks in their primary market on the last trading day prior 
to expiration.
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    \4\ The VWAP for all NASDAQ/NMS stocks included in the index 
will be calculated by the NASDAQ index calculation group and 
forwarded electronically to the Amex's index calculation group to 
permit Amex's index calculation group to include the values in its 
determination of the final settlement value.
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    The settlement calculation methodology currently used for NASDAQ/
NMS components of existing Amex index options will continue to be used 
for settlement of the Exchange's index options unless the Exchange 
specifically determines to use the proposed VWAP settlement calculation 
methodology. A change to a VWAP settlement methodology for NASDAQ/NMS 
components of index options will require that the existing opening 
price regular way methodology be used for the settlement of outstanding 
index options series as of the time of the introduction of the VWAP 
methodology. Upon a determination to change to a VWAP methodology, the 
Exchange will inform its members of such change in the settlement 
methodology through dissemination of an information circular. The 
circular will detail the method by which contracts settling under the 
current opening price regular way settlement will be phased out and 
those settling based on the VWAP methodology will be introduced.\5\
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    \5\ The Exchange states that the Options Clearing Corporation 
has been informed of this rule filing and has no objections to the 
proposed rule change. Telephone message from Jeffrey P. Burns, 
Assistant General Counsel, Amex, to Cyndi Nguyen, Attorney, Division 
of Market Regulation, Commission, on March 18, 2002.
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    Thereafter, any newly introduced index option series would settle 
based on the VWAP methodology. Index option contracts would be 
aggregated regardless of the settlement methodology for purposes of 
determining compliance with positions and exercise limits. Long Term 
Equity Anticipation Securities (``LEAPS'') outstanding as of the date 
of the introduction of option contracts using the VWAP methodology 
would continue to settle based on opening price regular way 
methodology. Any newly introduced LEAPS would be subject to VWAP 
methodology.
    The Exchange believes that permitting the VWAP settlement 
calculation methodology for NASDAQ/NMS component securities of an index 
option is appropriate and should result in a settlement value more 
reflective of the markets in NASDAQ/NMS securities.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \6\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \7\ in particular, because it 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of change, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Amex has requested accelerated approval of the proposed rule 
change. While the Commission will not grant accelerated approval at 
this time, the Commission will consider granting accelerated approval 
of the proposal at the close of an abbreviated comment period of 15 
days from the date of publication of the proposal in the Federal 
Register.

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, 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

[[Page 17477]]

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. 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 
number SR-Amex-2002-15 and should be submitted by April 25, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-8644 Filed 4-9-02; 8:45 am]
BILLING CODE 8010-01-P