[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43023-43027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16321]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49999; File No. SR-Amex-2004-42]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the American 
Stock Exchange LLC Relating to the Listing and Trading of Contingent 
Principal Protection Notes Linked to the Performance of the Nikkei 225 
Index

July 9, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on June 2, 2004, 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 and II 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 and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(l).
    \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 list and trade notes linked to the 
performance of the Nikkei 225 (``Nikkei 225'' or ``Index'') that 
provide for contingent principal protection (``Notes''). The Notes also 
provide for enhanced appreciation, such that if the ending value of the 
Index exceeds its starting value, the Notes' participation in the 
appreciation of the Index will be increased by an Upside Participation 
Rate expected to be 127%. The text of the proposed rule change is 
available at the Office of the Secretary, the Amex 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 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 III 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
    Under Section 107A of the Amex Company Guide (``Company Guide''), 
the Exchange may approve for listing and trading securities which 
cannot be readily categorized under the listing criteria for common and 
preferred stocks, bonds, debentures, or warrants.\3\ The Amex proposes 
to list for trading under Section 107A of the Company Guide the Notes, 
which will be issued by Citigroup under the name ``Index LASERS.'' \4\ 
The Nikkei 225 is a stock index determined, calculated and maintained 
solely by NKS.\5\ The Notes will provide for participation \6\ in the 
positive performance of the Nikkei 225 during their term while also 
reducing the risk exposure to the principal investment amount as long 
as the Index does not decline at any time during the term of the Notes 
to a pre-established level to be determined at the time of issuance 
(the ``Contingent Level''). This Contingent Level will be a pre-
determined percentage decline from the level of the Index at the close 
of the market on the date the Notes are priced for initial sale to the 
public (the ``Initial Level''). The Issuer expects that the Contingent 
Level will be 65% of the initial value of the Index.\7\ A decline of 
the Index to the Contingent Level is referred to as a ``Contingent 
Event.''
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    \3\ See Securities Exchange Act Release No. 27753 (March 1, 
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
    \4\ Citigroup Global Markets Holdings, Inc. (``Citigroup'') and 
Nihon Keizai Shimbun, Inc. (``NKS'') have entered into a non-
exclusive license agreement providing for the use of the Nikkei 225 
by Citigroup and certain affiliates and subsidiaries in connection 
with certain securities including these Notes. NKS is not 
responsible and will not participate in the issuance and creation of 
the Notes.
    \5\ The Notes are not sponsored, endorsed, sold or promoted by 
NKS. NKS is a recognized service with business information in Japan 
and publishes a large business daily, The Nihon Keizai Shimbon, and 
four other financial newspapers. NKS is not affiliated with a 
securities broker or dealer. The Index measures the composite price 
performance of selected Japanese stocks. The Index is currently 
based on the 225 Underlying Stocks trading on the Tokyo Stock 
Exchange (``TSE'') and represents a broad cross-section of Japanese 
industry. All 225 of the stocks underlying the index are stocks 
listed in the First Section of the TSE. Stocks listed in the First 
Section are among the most actively traded stocks on the TSE. The 
Index is a modified, price-weighted index. Each component stock's 
weight in the Index is based on its price per share rather than the 
total market capitalization of the issuers. NKS calculates the Index 
by multiplying the per share price of a component stock by the 
corresponding weighting factor for the stock (a ``Weight Factor''), 
calculating the sum of all these products and dividing that sum by a 
divisor. The divisor, initially set on May 16, 1949 at 225, was 
23.156 as of July 9, 2004, and is subject to periodic adjustments. 
Each Weight Factor is computed by dividing [yen] 50 by the par value 
of the relevant component stock, so that the share price of each 
component stock when multiplied by its Weight Factor corresponds to 
a share price based on a uniform par value of [yen] 50. Each Weight 
Factor represents the number of shares of the related component 
stock, which are included in one trading unit of the Index. The 
stock prices used in the calculation of the Index are those reported 
by a primary market for the component stocks, which is currently the 
TSE.
    \6\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 9, 2004 (removal of reference to 
``uncapped'' participation since the Notes have an Upside 
Participation Rate expected to be 127%).
    \7\ Id.
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    The Contingent Principal Protection Notes, which will be registered 
under section 12 of the Act,\8\ will conform to the initial listing 
guidelines under

[[Page 43024]]

Section 107A \9\ and continued listing guidelines under Sections 1001-
1003 \10\ of the Company Guide. The Notes are unsecured senior non-
convertible debt securities of Citigroup. Unlike ordinary debt 
securities, the Notes do not guarantee any return of principal at 
maturity. The Notes will not pay interest and are not subject to 
redemption prior to maturity by Citigroup or at the option of any 
beneficial owner. The Notes will have a term of not less than one but 
not more than ten (10) years.\11\ The Notes will mature on June 19, 
2008.\12\ Citigroup will issue the Notes in denominations of whole 
units (a ``Unit''), with each Unit representing a single Note. The 
original public offering price will be $10 per Unit. The Notes will 
entitle the owner at maturity to receive at least 100% of the principal 
investment amount as long as the Nikkei 225 never experiences a 
Contingent Event. In the case of a positive Index return, the holder 
would receive the full principal investment amount of the Note plus the 
product of $10, the percentage change of the Nikkei 225 during the term 
and the Upside Participation Rate (expected to be 127%). Accordingly, 
even if the Index declines but never reaches the Contingent Level, the 
holder will receive the principal investment amount of the Notes at 
maturity. If, however, the Notes experience a Contingent Event at any 
time during the term, the holder loses the ``principal protection'' and 
will be entitled to receive a payment based on the percentage change of 
the Index, positive or negative. In this case, the Notes will not have 
a minimum principal investment amount that will be repaid, and payment 
on the Notes prior to or at maturity may be less than the original 
issue price of the Notes. Accordingly, if the Index experiences a 
negative return and a Contingent Event, the Notes would be fully 
exposed to any decline in the level of the Nikkei 225.\13\ The Notes 
are also not callable by the Issuer.
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    \8\ Id.
    \9\ The initial listing standards for the Notes require: (1) A 
minimum public distribution of one million units; (2) a minimum of 
400 shareholders; (3) a market value of at least $4 million; and (4) 
a term of at least one year. In addition, the listing guidelines 
provide that the issuer has assets in excess of $100 million, 
stockholder's equity of at least $10 million, and pre-tax income of 
at least $750,000 in the last fiscal year or in two of the three 
prior fiscal years. In the case of an issuer which is unable to 
satisfy the earning criteria stated in Section 101 of the Company 
Guide, the Exchange will require the issuer to have the following: 
(1) assets in excess of $200 million and stockholders' equity of at 
least $10 million; or (2) assets in excess of $100 million and 
stockholders' equity of at least $20 million.
    \10\ The Exchange's continued listing guidelines are set forth 
in Sections 1001 through 1003 of Part 10 to the Exchange's Company 
Guide. Section 1002(b) of the Company Guide states that the Exchange 
will consider removing from listing any security where, in the 
opinion of the Exchange, it appears that the extent of public 
distribution or aggregate market value has become so reduced to make 
further dealings on the Exchange inadvisable. With respect to 
continued listing guidelines for distribution of the Notes, the 
Exchange will rely, in part, on the guidelines for bonds in Section 
1003(b)(iv). Section 1003(b)(iv)(A) provides that the Exchange will 
normally consider suspending dealings in, or removing from the list, 
a security if the aggregate market value or the principal amount of 
bonds publicly held is less than $400,000.
    \11\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 9, 2004.
    \12\ Id.
    \13\ A negative return of the Nikkei 225, together with a 
Contingent Event, will reduce the redemption amount at maturity with 
the potential that the holder of the Note could lose his entire 
investment amount.
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    The payment that a holder or investor of a Note will be entitled to 
receive (the ``Redemption Amount'') will depend on the relation of the 
level of the Nikkei 225 at the close of the market on a single business 
day (the ``Valuation Date'') shortly before maturity of the Notes (the 
``Final Level'') and the Initial Level. In addition, whether the Notes 
retain ``principal protection'' or are fully exposed to the performance 
of the Index is determined by whether the Nikkei 225 ever experiences a 
Contingent Event during the term of the Notes.
    If the percentage change of the Index is positive and the Index 
never experiences a Contingent Event, the Redemption Amount per Unit 
will equal:
[GRAPHIC] [TIFF OMITTED] TN19JY04.151

    If the percentage change of the Index is zero or negative and the 
Index never experience a Contingent Event, the redemption amount per 
unit will equal the principal investment amount of $10.
    If the Index experiences a Contingent Event, the Redemption Amount 
per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN19JY04.152

    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive a portfolio security, dividend payments or 
any other ownership right or interest in the portfolio or index of 
securities comprising the Nikkei 225. The Notes are designed for 
investors who want to participate or gain exposure to a broad 
representation of the Japanese stock market while partially limiting 
their investment risk and who are willing to forego market interest 
payments on the Notes during such term. The Commission has previously 
approved the listing of securities linked to the performance of the 
Nikkei 225, including products traded on the Exchange.\14\
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    \14\ See Securities Exchange Act Release Nos. 49670 (May 7, 
2004), 69 FR 27959 (May 17, 2004) (approving the listing and trading 
of Accelerated Return Notes linked to the Nikkei 225 for Nasdaq); 
38940 (August 15, 1997), 62 FR 44735 (August 22, 1997) (approving 
the listing and trading of notes based on the Major 11 International 
Index); 34821 (October 11, 1994), 59 FR 52568 (October 18, 1994) 
(approving the listing and trading of warrants on the Nikkei 300); 
and 27565 (December 22, 1989), 55 FR 376 (January 4, 1990) 
(approving the listing and trading of warrants based on the Nikkei 
225 and noting the existence of a Memorandum of Understanding 
between the Commission and the Japanese Ministry of Finance for 
surveillance purposes).
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    As of May 26, 2004, the market capitalization of the securities 
included in the Nikkei 225 ranged from a high of approximately 14 
trillion yen ($128 billion) to a low of approximately 30 billion yen 
($257 million). The average daily trading volume for these same 
securities for the last six (6) months ranged from a high of 
approximately 8.257 million shares (7 trillion yen) to a low of 
approximately 1.696 million shares (1.2 trillion yen). The Index is 
composed of 225 securities and is broad-based. The highest weighted 
stock has a weight of 3.5% while the top five (5) stocks in the Index 
account for 14.2 %. The level or value of the Index is calculated once 
per minute during TSE trading hours \15\ and is readily accessible

[[Page 43025]]

to U.S. investors at http://www.nni.nikkei.co.jp and http://www.bloomberg.com. NKS is under no obligation to continue the 
calculation and dissemination of the Index. In the event that NKS ever 
ceases to maintain the Index, the Exchange will contact the Commission 
staff to consider prohibiting the continued trading of the Notes.\16\
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    \15\ TSE trading hours are currently 9 a.m. to 11 a.m. and from 
12:30 p.m. to 3 p.m. Tokyo time, Monday through Friday. Due to time 
zone differences, on any normal trading day the TSE will close prior 
to the opening of business in New York City on the same calendar 
day. Therefore, the closing level of the Index on a trading day will 
generally be available in the U.S. by the opening of business on the 
same calendar day.
    The TSE has adopted certain measures, including daily price 
floors and ceilings on individual stocks, intended to prevent any 
extreme short-term price fluctuations resulting from order 
imbalances. In general, any stock listed on the TSE cannot be traded 
at a price lower than the applicable price floor or higher than the 
applicable price ceiling. These price floors and ceilings are 
expressed in absolute Japanese yen, rather than percentage limits 
based on the closing price of the stock on the previous trading day. 
In addition, when there is a major order imbalance in a listed 
stock, the TSE posts a ``special bid quote'' or a ``special asked 
quote'' for that stock at a specified higher or lower price level 
than the stock's last sale price in order to solicit counter-orders 
and balance supply and demand for the stock. Prospective investors 
should also be aware that the TSE may suspend the trading of 
individual stocks in certain limited and extraordinary 
circumstances, including, for example, unusual trading activity in 
that stock. As a result, changes in the Index may be limited by 
price limitations or special quotes, or by suspension of trading, on 
individual stocks that comprise the Index, and these limitations 
may, in turn, adversely affect the value of the Notes. Telephone 
conversation between Jeffrey Burns, Associate General Counsel, Amex, 
and Florence Harmon, Senior Special Counsel, Division, Commission, 
dated July 9, 2004.
    \16\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 9, 2004.
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    In order to maintain continuity in the level of the Index in the 
event of certain changes due to non-market factors affecting the 
Underlying Stocks, such as the addition or deletion of stocks, 
substitution of stocks, stock dividends, stock splits or distributions 
of assets to stockholders, the divisor used in calculating the Index is 
adjusted in a manner designed to prevent any instantaneous change or 
discontinuity in the level of the Index. The divisor remains at the new 
value until a further adjustment is necessary as the result of another 
change. As a result of each change affecting any Underlying Stock, the 
divisor is adjusted in such a way that the sum of all share prices 
immediately after the change multiplied by the applicable Weight Factor 
and divided by the new divisor, i.e., the level of the Index 
immediately after the change, will equal the level of the Index 
immediately prior to the change.\17\
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    \17\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 9, 2004 (pertaining to discussion 
of the continuity of the level of the Index). Underlying Stocks may 
be deleted or added by NKS. However, to maintain continuity in the 
Index, the policy of NKS is generally not to alter the composition 
of the Underlying Stocks except when an Underlying Stock is deleted 
in accordance with the following criteria. Any stock becoming 
ineligible for listing in the First Section of the TSE due to any of 
the following reasons will be deleted from the Underlying Stocks: 
bankruptcy of the issuer; merger of the issuer into, or acquisition 
of the issuer by, another company; delisting of the stock or 
transfer of the stock to the ``Seiri-Post'' because of excess debt 
of the issuer or because of any other reason; or transfer of the 
stock to the Second Section of the TSE. Upon deletion of a stock 
from the Index, NKS will select, in accordance with certain criteria 
established by it, a replacement for the deleted Underlying Stock. 
In an exceptional case, a newly listed stock in the First Section of 
the TSE that is recognized by NKS to be representative of a market 
may be added to the Underlying Stocks. As a result, an existing 
Underlying Stock with low trading volume and not representative of a 
market will be deleted.
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    Because the Notes are issued in $10 denominations, the Amex's 
existing equity floor trading rules will apply to the trading of the 
Notes. First, pursuant to Amex Rule 411, the Exchange will impose a 
duty of due diligence on its members and member firms to learn the 
essential facts relating to every customer prior to trading the 
Notes.\18\ Second, the Notes will be subject to the equity margin rules 
of the Exchange \19\ and will be subject to the regular equity trading 
hours of the Exchange. Third, the Exchange will, prior to trading the 
Notes, distribute a circular to the membership providing guidance with 
regard to member firm compliance responsibilities (including 
suitability recommendations) when handling transactions in the Notes 
and highlighting the special risks and characteristics of the Notes. 
With respect to suitability recommendations and risks, the Exchange 
will require members, member organizations and employees thereof 
recommending a transaction in the Notes: (1) to determine that such 
transaction is suitable for the customer, and (2) to have a reasonable 
basis for believing that the customer can evaluate the special 
characteristics of, and is able to bear the financial risks of such 
transaction. In addition, Citigroup will deliver a prospectus in 
connection with the initial sales of the Notes in accordance with its 
standard prospectus delivery procedures.
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    \18\ Amex Rule 411 requires that every member, member firm or 
member corporation use due diligence to learn the essential facts, 
relative to every customer and to every order or account accepted.
    \19\ See Amex Rule 462 and Section 107B of the Company Guide.
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    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Notes. Specifically, 
the Amex will rely on its existing surveillance procedures governing 
equities that include additional monitoring on key pricing dates,\20\ 
which have been deemed adequate under the Act. In addition, the 
Exchange has an effective surveillance sharing agreement with the TSE 
that may be used as a basis for listing and trading securities linked 
to the Nikkei 225.\21\ The Exchange also notes that the TSE is a member 
of the Intermarket Surveillance Group (``ISG'').\22\ As a result, the 
Exchange asserts that market surveillance information is available from 
the TSE, if necessary, due to regulatory concerns that may arise in 
connection with the component stocks. In the event that it becomes 
necessary, the Exchange will seek the Commission's assistance pursuant 
to memoranda of understanding or similar inter-governmental agreements 
or arrangements that may exist between the Commission and the Japanese 
securities regulators.
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    \20\ Telephone conversation between Jeffrey Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission, dated July 9, 2004 (pertaining to key pricing 
dates).
    \21\ See Information Sharing Agreement between the Amex and the 
TSE dated September 25, 1990.
    \22\ ISG membership obligates an exchange to compile and 
transmit market surveillance information and resolve in good faith 
any disagreements regarding requests for information or responses 
thereto.
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    The Exchange also has a general policy that prohibits the 
distribution of material, non-public information by its employees.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act \23\ in general and furthers the objectives 
of Section 6(b)(5) \24\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, 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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    \23\ 15 U.S.C. 78f.
    \24\ 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 burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange did not solicit or receive any written comments on the 
proposed rule change.

[[Page 43026]]

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Amex-2004-42 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Amex-2004-42. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal offices of Amex. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-Amex-2004-42 
and should be submitted on or before August 9, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Amex has asked the Commission to approve the proposal on an 
accelerated basis to accommodate the timetable for listing the Notes. 
The Commission notes that it has previously approved the listing of 
securities the performance of which have been linked to, or based on, 
the Index.\25\ The Commission has also previously approved the listing 
of securities with a structure similar to that of the Notes.\26\
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    \25\ See Securities Exchange Act Release Nos. 49670 (May 7, 
2004), 69 FR 27959 (May 17, 2004) (approving the listing and trading 
of Accelerated Return Notes linked to the Nikkei 225 for Nasdaq); 
and 38940 (August 15, 1997), 62 FR 44735 (August 22, 1997) 
(approving the listing and trading of Market Index Target-Term 
Securities, the return on which is based on changes in the value of 
a portfolio of 11 foreign indexes, including the Nikkei 225 Index).
    \26\ See Securities Exchange Act Release Nos. 47464 (March 7, 
2003), 68 FR 12116 (March 13, 2003) (approving the listing and 
trading of Market Recovery Notes Linked to the S&P 500 Index); 47009 
(December 16, 2002), 67 FR 78540 (December 24, 2002) (approving the 
listing and trading of Market Recovery Notes linked to the Nasdaq-
100 Index); and 46883 (November 21, 2002), 67 FR 71216 (November 29, 
2002) (approving the listing and trading of Market Recovery Notes 
linked to the Dow Jones Industrial Average).
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    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder, applicable to a national 
securities exchange, and, in particular, with the requirements of 
Section 6(b)(5) of the Act,\27\ 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.\28\ The Commission believes that the 
Notes will provide investors with a means to participate in any 
percentage increase in the Index that exists at the maturity of the 
Notes, subject to the Capped Value, while also reducing the risk 
exposure to the principal investment amount as long as the Index does 
not decline at any time during the term of the Note to a pre-determined 
percentage decline, expected to be 65% of the initial value of the 
Index--the Contingent Level. Specifically, as described more fully 
above, if the value of the Nikkei 225 Index has increased, a beneficial 
owner will be entitled to receive at maturity a payment on the Notes 
based on the appreciation of the Index by an Upside Participation Rate 
of 127%. If the Index declines but never reaches the Contingent Level, 
the holder will receive the principal investment amount of the Notes at 
maturity. If, however, the Notes experience a Contingent Event at any 
time during the term, the holder loses the ``principal protection'' and 
will be entitled to receive a payment based on the percentage change of 
the Index, positive or negative.
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Thus, the Notes are non-principal protected instruments, but are 
not leveraged. The Notes are debt instruments, the price of which will 
be derived from and based upon the value of the Nikkei 225 Index. The 
Notes do not have a minimum principal amount that will be repaid at 
maturity, and the payments of the Notes prior to or at maturity may be 
less than the original issue price of the Notes. Accordingly, the level 
of risk involved in the purchase or sale of the Notes is similar to the 
risk involved in the purchase or sale of traditional common stock. 
Because the final rate of return of the Notes is derivatively priced, 
based on the performance of the 225 common stocks underlying the Nikkei 
225 Index, and because the Notes are instruments that do not guarantee 
a return of principal, there are several issues regarding the trading 
of this type of product. However, for the reasons discussed below, the 
Commission believes that Amex's proposal adequately addresses the 
concerns raised by this type of product.
    The Commission notes that the protections of Amex Rule 107A were 
designed to address the concerns attendant to the trading hybrid 
securities like the Notes. In particular, by imposing the hybrid 
listing standards, suitability, disclosure, and compliance requirements 
noted above, the Commission believes that Amex has addressed adequately 
the potential problems that could arise from the hybrid nature of the 
Notes. The Commission notes that Amex will distribute a circular to its 
membership calling attention to the specific risks associated with the 
Notes. The Commission also notes that Citigroup will deliver a 
prospectus in connection with the initial sales of the Notes. In 
addition, the Commission notes that Amex will incorporate and rely upon 
its existing surveillance procedures governing equities, which have 
been deemed adequate under the Act.
    In approving the product, the Commission recognizes that the Index 
is a stock index calculated, published and disseminated by NKS, which 
measures the composite price performance of selected Japanese stocks. 
The Index is currently based on 225 common stocks traded on the TSE and 
represents a broad cross-section of Japanese industry. All 225 
underlying stocks are listed in the First Section of the TSE and are, 
therefore, among the most actively traded stocks on the TSE. The Nikkei 
is

[[Page 43027]]

a modified, price-weighted index, which means a component stock's 
weight in the Nikkei is based on its price per share rather than total 
market capitalization of the issuers. NKS calculates the Index by 
multiplying the per share price of a component stock by the 
corresponding weighting factor for the stock, calculating the sum of 
all these products, and dividing that sum by a divisor.
    As stated above, NKS is under no obligation to continue the 
calculation and dissemination of the Index. In the event the 
calculation and dissemination every minute of the Index is 
discontinued, Amex represents that it will contact Commission staff and 
consider prohibiting the continued listing of the Notes. The Commission 
notes that the changes in the composition of the Nikkei 225 Index is 
made solely by NKS. The changes to these common stocks tend to be made 
infrequently with most substitutions the result of mergers and other 
extraordinary corporate actions. As of May 26, 2004, the average daily 
trading volume for the securities included in the Nikkei 225 for the 
last six (6) months ranged from a high of approximately 8.257 million 
shares (7 trillion yen) to a low of approximately 1.696 million shares 
(1.2 trillion yen). As of the same date, the market capitalization of 
the components ranged from 14 trillion yen ($128 billion) to 30 billion 
yen ($257 million). The highest-weighted stock in the Index has the 
weight of 3.5% while the top five (5) stocks in the Index account for 
14%. Given the composition of the stocks underlying the Nikkei 225 
Index, the Commission believes that the listing and trading of the 
Notes that are linked to the Nikkei 225 Index should not unduly impact 
the market for the underlying securities comprising the Nikkei 225 
Index or raise manipulative concerns. As discussed more fully above, 
the underlying stocks comprising the Nikkei 225 Index are well-
capitalized, highly liquid stocks.
    In light of the fact that the Nikkei is a foreign index, the 
Commission believes adequate surveillance sharing agreements between 
the Amex and the TSE are a necessary prerequisite to deter and detect 
potential manipulations or other improper or illegal trading involving 
the Notes. While many of the issuers of the underlying securities 
comprising the Nikkei 225 are not subject to reporting requirements 
under the Act, Amex represents that an adequate surveillance sharing 
agreement exists through the ISG between the Amex and the TSE to deter 
and detect potential manipulations or other improper trading in the 
underlying components. Therefore, Amex's surveillance procedures will 
serve to deter as well as detect any potential manipulation. This 
agreement obligates the Amex and TSE to compile and transmit market 
surveillance information and resolve in good faith any disagreements 
regarding requests for information. Accordingly, the Commission 
believes that the surveillance sharing agreement through ISG is 
adequate for the Amex to surveil the components of the Nikkei 225 for 
potential manipulation or other trading abuses between the markets with 
respect to the trading of the Notes based on the Nikkei 225.
    Furthermore, the Commission notes that the Notes are depending upon 
the individual credit of the issuer, Citigroup. To some extent this 
credit risk is minimized by the Amex's listing standards in Amex Rule 
107A, which provide the only issuers satisfying substantial asset and 
equity requirements may issue securities such as the Notes. In 
addition, the Amex's hybrid listing standards further require that the 
Notes have a market value of at least $4 million. In any event, 
financial information regarding Citigroup, in addition to the 
information on the 225 common stocks comprising the Nikkei 225 Index, 
including the dissemination of the Index value once per minute, will be 
publicly available.\29\
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    \29\ See http://www.nni.nikkei.co.jp and http://www.bloomberg.com.
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    The Commission also has a systemic concern, however, that a broker-
dealer such as Citigroup, or a subsidiary providing a hedge for the 
issuer will incur position exposure. However, as the Commission has 
concluded in previous approval orders for other hybrid instruments 
issued by broker-dealers,\30\ the Commission believes that this concern 
is minimal given the size of the Notes issuance in relation to the net 
worth of Citigroup.
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    \30\ See, e.g., Securities Exchange Act Release Nos. 44913 
(October 9, 2001), 66 FR 52469 (October 15, 2001) (order approving 
the listing and trading of notes whose return is based on the 
performance of the Nasdaq-100 Index) (File No. SR-NASD-2001-73); 
44483 (June 27, 2001), 66 FR 35677 (July 6, 2001) (order approving 
the listing and trading of notes whose return is based on a 
portfolio of 20 securities selected from the Amex Institutional 
Index) (File No. SR-Amex-2001-40); and 37744 (September 27, 1996), 
61 FR 52480 (October 7, 1996) (order approving the listing and 
trading of notes whose return is based on a weighted portfolio of 
healthcare/biotechnology industry securities) (File No. SR-Amex-96-
27).
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    Finally, as the Commission noted, the value of the Nikkei 225 Index 
will be disseminated at least once every minute throughout the trading 
day. Because the Nikkei 225 Index contains foreign securities and is 
composed of highly liquid and well-capitalized securities, the 
Commission believes that providing access to the value of the Index at 
least once every minute throughout the trading day is sufficient and 
will provide benefits to investors in the product.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. The Commission 
believes that the Notes will provide investors with an additional 
investment choice and that accelerated approval of the proposal will 
allow investors to begin trading the Notes promptly. In addition, the 
Commission notes that it has previously approved the listing and 
trading of other derivative securities based on the Index and 
securities with a structure similar to that of the Notes.\31\ 
Accordingly, the Commission believes that there is good cause, 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\32\ to 
approve the proposal, on an accelerated basis.
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    \31\ See supra notes 25 and 26.
    \32\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-Amex-2004-42) is hereby 
approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16321 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P