[Federal Register Volume 67, Number 195 (Tuesday, October 8, 2002)]
[Notices]
[Pages 62838-62839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25611]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46581; File No. SR-Amex-2002-50]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Trading of Trust Issued Receipts and ``Other Securities''

October 1, 2002.

I. Introduction

    On May 31, 2002, the American Stock Exchange LLC (``Amex or 
Exchange'') filed with the Securities and Exchange Commission 
(``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 relating to the trading by regular members in 
securities listed pursuant to Section 107 of the Amex Company Guide 
(Other Securities) and Amex Rule 1200 (Trust Issued Receipts). On July 
8, 2002, the Exchange filed Amendment No. 1 to the proposed rule 
change.\3\ The amended proposed rule change was published for comment 
in the Federal Register on Wednesday, July 31, 2002.\4\ The Commission 
received no comments on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Claire McGrath, Senior Vice President and 
Deputy General Counsel, Amex, to Nancy Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated July 
3, 2002 (``Amendment No. 1''). Amendment No. 1 deleted a proposed 
technical change to Amex Rule 958.
    \4\ Securities Exchange Act Release No. 46251 (July 24, 2002), 
67 FR 49724.
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II. Description of the Proposed Rule Change

    The Amex proposed to amend Amex Rule 958, Commentary .10 relating 
to trading by regular members in Other Securities and Trust Issued 
Receipts. In its proposal, the Exchange noted that in 1992, the 
Commission approved Amex Rule 958, Commentary .10 relating to trading 
on the Floor in ``derivative products,'' index warrants, and currency 
warrants.\5\ Commentary .10 requires that these securities be traded by 
Registered Traders under Amex Rule 958, which relates to trading by 
Registered Options Traders (``ROTs''). Commentary .10 also states that 
index warrants and currency warrants may be traded by ROTs who are 
regular members. Options Principal Members (``OPMs'') and Limited 
Trading Permit Holders (``LTPs'') are permitted to trade derivative 
products under Amex Rule 958, but are not permitted to trade index or 
currency warrants. All of these securities must be traded under Amex 
Rule 958 only and cannot be traded by Registered Equity Traders 
(``RETs'') or Registered Equity Market Makers (``REMMs'') under Amex 
Rules 111 or 114.\6\ The ``derivative products'' traded by Registered 
Traders under Amex Rule 958 include all exchange-traded funds listed 
under Amex Rules 1000 and 1000A, including, for example, Nasdaq 100 
Index Tracking StockTM, SPDRs[reg], DIAMONDS[reg], 
iSharesTM, and Select Sector SPDRs[reg].
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    \5\ Securities Exchange Act Release No. 30768 (June 2, 1992), 57 
FR 24277 (June 8, 1992) (File No. SR-Amex-92-06).
    \6\ The term ``derivative products'' is defined in Article I, 
Section 3(d) of the Exchange Constitution to include standardized 
options and ``other securities which are issued by The Options 
Clearing Corporation or another limited purpose entity or trust, and 
which are based solely on the performance of an index or portfolio 
of other publicly traded securities.'' The definition explicitly 
excludes warrants of any type and closed-end funds.
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    Pursuant to Amex Rule 958, Commentary .10, regular members trading 
derivative products, index warrants, and currency warrants as ROTs are 
subject to continuous market making obligations. As such, ROTs receive 
market maker margin. OPMs and LTPs are also permitted to trade 
derivative products pursuant to Article I, Section 3 and Article IV, 
Section 1(h), respectively, of the Amex Constitution, and, because 
their trading under Amex Rule 958 also requires ongoing market making 
obligations, OPMs and LTPs also receive market maker margin.\7\
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    \7\ OPMs also can trade stock options and index options. LTPs 
can trade index options but not stock options. As previously 
mentioned, OPMs and LTPs also may trade derivative products, but are 
not permitted to trade index or currency warrants. Derivative 
products cannot be traded by persons registered as RETs or REMMs 
under Amex Rules 111 or 114. REMMs are not subject to Amex Rule 958 
type continuous market making obligations and do not receive ``good 
faith'' market maker margin, but instead are subject to full 
customer margin requirements.
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    According to the Exchange, when it first authorized trading in 
derivative products by OPMs and LTPs in 1990, it specifically intended 
to encourage trading crowds and competitive market making to develop in 
such products as SuperTrust securities (which represented interests in 
actual portfolios of securities such as the S&P 500 Index) and 
SPDRS[reg], which were then under development by the 
Exchange. In the Exchange's Rule 19b-4 filing with the Commission to 
authorize such OPM and LTP trading, the Exchange stated that the 
definition of derivative products was not intended to include products 
that OPMs and LTPs were not entitled to trade at that time, including 
currency warrants, index warrants, or closed-end mutual funds.\8\
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    \8\ See Securities Exchange Act Release No. 28612 (November 14, 
1990), 55 FR 48308 (November 20, 1990) (File No. SR-Amex-90-17).
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    The Exchange proposes to amend Amex Rule 958, Commentary .10 to 
clarify that ``structured products'' and Trust Issued Receipts 
(HOLDRSSM) traded under Amex equity trading rules must be 
traded under Amex Rule 958 and only by registered traders who are 
regular members. Structured products include all securities listed 
under Section 107 of the Amex Company Guide (e.g., Index-Linked Notes 
(MITTS[reg], BOXESSM, TIERSSM); Equity-Linked 
Term Notes (e.g., GOALS, ELKSSM, SPARQSSM, 
STRIDESSM) and Trust Preferred Securities (e.g., TOPrS)).

[[Page 62839]]

Trust Issued Receipts include HOLDRSSM and are listed under 
Amex Rules 1200 et seq. Therefore, the Exchange represents that these 
securities are ineligible to be traded either (1) by OPMs or LTPs; or 
(2) by RETs or REMMs under Amex Rules 111 and 114.\9\ The Exchange 
believes that permitting regular member ROTs to trade structured 
products and HOLDRSSM under Amex Rule 958 will promote 
additional market depth and liquidity. According to the Amex, 
structured products and Trust Issued Receipts do not fall within the 
definition of ``derivative products'' as contemplated by the Exchange 
in authorizing OPMs and LTPs to trade derivative products; therefore, 
OPMs and LTPs are not permitted to trade those products. The Exchange 
proposal would clarify Amex Rule 958 to reflect this position.\10\
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    \9\ However, because RETs and REMMs are regular members of the 
Exchange, they may, after registering under Amex Rule 958, trade 
structured products and Trust Issued Receipts under Amex Rule 958. 
Telephone conversation between Michael Cavalier, Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel and 
Steven Johnston, Special Counsel, Division, Commission, on July 22, 
2002.
    \10\ The Exchange also originally proposed a technical change to 
Amex Rule 958. The Exchange withdrew the proposed technical change 
in Amendment No. 1. The proposed technical change was unnecessary 
because it had been previously proposed by the Amex and approved by 
the Commission. (See Securities Exchange Act Release No. 45320 
(January 18, 2002), 67 FR 3921 (January 28, 2002)(File No. SR-Amex-
2001-79).
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III. Discussion of the Proposed Rule Change

    The Exchange's proposal would amend Amex Rule 958, Commentary .10 
to clarify that structured products and Trust Issued Receipts rules 
must be traded under Amex Rule 958 and only by registered traders who 
are regular (i.e., full) members. The proposed rule change would codify 
current practice, which affects REMMs, RETs, OPMs, and LTPs. Under the 
current practice, REMMs and RETs, which are regular members of the 
Exchange, must register under Amex Rule 958 in order to trade 
structured products or Trust Issued Receipts; LTPs and OPMs, which are 
not regular members, are not permitted to trade those products.
    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act \11\ and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission finds that the proposal is consistent with 
section 6(b)(5) of the Act, \12\ which requires that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    When an individual REMM, RET, or other regular member of the 
exchange registers under Amex Rule 958, he or she becomes a competing 
market maker with continuous affirmative market making obligations. The 
individual also receives ``good faith'' margin, which permits the 
individual to finance up to 100% of his or her securities positions' 
market value. \13\ Entitlement to good faith margin may serve to 
attract regular members to trade structured products and Trust Issued 
Receipts, which, in turn may provide increased depth and liquidity to 
the markets for those products. Greater depth and liquidity contribute 
to better executions, a result which is consistent with the protection 
of investors and the public interest.
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    \13\ Good faith margin, as defined in Regulation T, issued by 
the Board of Governors of the Federal Reserve System, as the amount 
of margin which a creditor, exercising sound judgment, would 
customarily require for a specified security position and which is 
established without regard to the customer's other assets or 
securities positions held in connection with unrelated transactions. 
See 12 CFR 220.2. In lieu of margin that otherwise would be 
required, good faith margin permits a trader to finance up to 100% 
of his or her securities positions' market value.
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    The Exchange does not permit either structured products or Trust 
Issued Receipts to be traded by OPMs or LTPs. OPMs and LTPs have 
authority to trade ``derivative products,'' as defined in the Amex 
Constitution and interpreted by the Amex Board of Governors. The Amex 
observes that when it proposed to allow OPMs and LTPs to trade 
derivative products, it explicitly stated that its proposal was not 
intended to expand OPM and LTP trading privileges beyond products that 
OPMs and LTPs were trading at that time. OPMs and LTPs were not trading 
structured products and Trust Issued Receipts; those products were not 
in existence when the Exchange proposed to allow OPMs and LTPs to trade 
derivative products. Moreover, the Amex represents that the definition 
of derivative products contemplates only products that are based on 
open-ended, managed indexes or portfolios registered under the 
Investment Company Act of 1940.\14\ Structured products and Trust 
Issued Receipts do not satisfy those criteria.\15\
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    \14\ 15 U.S.C. 80a-1 et seq.
    \15\ Telephone conversation between Michael Cavalier, Associate 
General Counsel, Amex, and Steven Johnston, Special Counsel, 
Division, Commission, on September 4, 2002.
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    The Commission finds that it is within the Exchange's discretion to 
assign or limit trading rights based on type of product and class of 
membership, as long as the procedures adopted are not inconsistent with 
the purposes of the Act.\16\ In this regard, the Exchange has 
articulated a legitimate business purpose of attracting registered 
traders to trade structured products and Trust Issued Receipts. The 
Commission therefore finds the Exchange's proposed rule change 
clarifying current practice to be consistent with the Act.\17\
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    \16\ 15 U.S.C. 78f(b). See Securities Exchange Act Release No. 
28612 (November 14, 1990), 55 FR 48308 (November 20, 1990)(File No. 
SR-Amex-90-17).
    \17\ 15 U.S.C. 78f(b).
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-Amex-2002-50) is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-25611 Filed 10-7-02; 8:45 am]
BILLING CODE 8010-01-P