[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35468-35473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3184]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51840; File No. SR-Amex-2005-042]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing and Order Granting Accelerated Approval of a Proposed 
Rule Change Relating to the Listing and Trading of Notes Linked to the 
Performance of the CBOE DJIA BuyWrite Index\(sm)\

June 14, 2005.
    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 April 20, 2005, 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)(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 Exchange proposes to list and trade notes, the performance of 
which is linked to the DJIA BuyWrite Index(sm) (the ``BXD Index'' or 
``Index''). The text of the proposed rule change is available on the 
Amex's Web site (http://www.amex.com), at the principal offices of the 
Amex, and at the Commission's Public Reference Room.

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 
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 that 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 notes 
linked to the performance of the BXD Index (the ``Notes''). The BXD 
Index is determined, calculated, and maintained solely by the Chicago 
Board Options Exchange, Inc. (``CBOE'').\4\ JPMorgan Chase & Co. 
(``JPMorgan'') will issue the Notes.\5\
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    \3\ See Securities Exchange Act Release No. 27753 (Mar. 1, 
1990), 55 FR 8626 (Mar. 8, 1990) (File No. SR-Amex-89-29).
    \4\ If the BXD Index is discontinued or suspended, the 
calculation agent, in its sole discretion, may substitute the BXD 
Index with an index substantially similar to the discontinued or 
suspended BXD Index (the ``Successor Index''). The Successor Index 
may be calculated and/or published by the CBOE or any other third 
party. If the CBOE discontinues publication of the BXD Index prior 
to, and such discontinuance is continuing on, the Final Valuation 
Date and the calculation agent determines, in its sole discretion, 
that no Successor Index is available at such time, then the 
calculation agent will determine the BXD Index closing level for 
such date. The BXD Index closing level will be computed by the 
calculation agent in accordance with the formula for and method of 
calculating the BXD Index last in effect prior to such 
discontinuance, using the closing price of the DJIA or the stocks 
underlying the DJIA at the discretion of the calculation agent (or, 
if trading in the relevant securities has been materially suspended 
or materially limited, its good faith estimate of the closing price 
that would have prevailed but for such suspension or limitation) at 
the close of the principal trading session on such date for the DJIA 
or for each security comprising the DJIA, the arithmetic average of 
the last bid and ask prices (or, if trading in the relevant call 
option has been materially suspended or materially limited, its good 
faith estimate of the arithmetic average of the last bid and ask 
prices that would have prevailed but for such suspension or 
limitation) of the relevant call option reported before 4:00 p.m. 
Eastern time and such other inputs as may reasonably be necessary. 
Notwithstanding these alternative arrangements, discontinuance of 
the publication of the BXD Index on the relevant exchange may 
adversely affect the value of the notes. If at any time the method 
of calculating the BXD Index, the DJIA, or a Successor Index, or the 
level thereof is changed in a material respect, or if the BXD Index, 
the DJIA, or a Successor Index is in any other way modified so that 
the BXD Index or a Successor Index does not, in the opinion of the 
calculation agent, fairly represent the level of the BXD Index or 
such Successor Index had such changes or modifications not been 
made, then, from and after such time, the calculation agent will, at 
the close of business in New York City on each date on which the BXD 
Index closing level is to be determined, make such calculations and 
adjustments as, in the good faith judgment of the calculation agent, 
may be necessary in order to arrive at a level of an index 
comparable to the BXD Index or such Successor Index, as the case may 
be, as if such changes or modifications had not been made, and the 
calculation agent will calculate the BXD Index closing level with 
reference to the BXD Index or such Successor Index, as adjusted. 
Accordingly, if the method of calculating the BXD Index, the DJIA, 
or a Successor Index is modified so that the level of the BXD Index 
or a Successor Index is a fraction of what it would have been if 
there had been no such modification (e.g., due to a split in the 
index), then the calculation agent will adjust such index in order 
to arrive at a level of the BXD Index or such Successor Index as if 
there had been no such modification (e.g., as if such split had not 
occurred).
    J.P. Morgan Securities Inc., an affiliate of JPMorgan, has been 
appointed to act as the calculation agent. Telephone conversation 
between Jeffrey P. Burns, Associate General Counsel, Amex and David 
Liu, Attorney, Division of Market Regulation (``Division''), 
Commission, on May 26, 2005.
    \5\ The Exchange states that JPMorgan and Dow Jones & Co. (``Dow 
Jones'') are negotiating a non-exclusive license agreement, with up 
to a 165-day exclusivity period, providing for the use of the BXD 
Index by JPMorgan in connection with certain securities, including 
the Notes. Dow Jones is not responsible for and will not participate 
in the issuance and creation of the Notes.

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[[Page 35469]]

    The Notes will conform to the initial listing guidelines under 
Section 107A \6\ and continued listing guidelines under Sections 1001-
1003 \7\ of the Company Guide. The Notes are a series of medium-term 
debt securities of JPMorgan that provide for a cash payment at maturity 
based on the performance of the BXD Index as adjusted by the Adjustment 
Amount.\8\ The principal amount of each Note is expected to be $1,000. 
The Notes will not have a minimum principal amount that will be repaid 
and, accordingly, payment on the Notes at maturity may be less than the 
original issue price of the Notes. In fact, the value of the BXD Index 
must increase for the investor to receive at least the $1,000 principal 
amount per security at maturity. If the value of the BXD Index 
decreases or does not increase sufficiently, the investor will receive 
less, and possibly significantly less, than the $1,000 principal amount 
per security. In addition, holders of the Notes will not receive any 
interest payments from the Notes. The Notes will have a term of at 
least one (1) but no more than ten (10) years.\9\
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    \6\ 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. Because the Notes will be issued in 
$1,000 denominations, the minimum public distribution requirement of 
one million units and the minimum holder requirement of 400 holders 
do not apply. 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.
    \7\ 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) of the Company Guide. Section 1003(b)(iv)(A) of the 
Company Guide 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.
    \8\ The Adjustment Amount is an annual fee that accrues daily 
over the term of the Notes. The Adjustment Amount is equal to 1.0% 
multiplied by the number of days since the pricing date of the Notes 
divided by 365.
    \9\ The term of the Notes is expected to be one (1) year and 
will be disclosed in the pricing supplement.
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    The cash payment that a holder or investor of a Note will be 
entitled to receive at maturity (the ``Payment Amount'') will depend on 
the relation of the level of the BXD Index at the close of the market 
on the Final Valuation Date \10\ (the ``Final Index Level'') and the 
closing value of the Index on the date JPMorgan prices the Notes for 
initial sale to the public (the ``Initial Index Level'') less the 
Adjustment Amount. If there is a ``market disruption event'' \11\ when 
determining the Final Index Level, the Final Index Level will be 
determined on the next available trading day during which no ``market 
disruption event'' occurs. For purposes of determining the amount 
payable at maturity of the Notes, the Payment Amount will be determined 
on the Final Valuation Date.
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    \10\ The Final Valuation Date will be the third scheduled 
trading day prior to the maturity date.
    \11\ A ``market disruption event'' means: (i) A suspension, 
absence, or material limitation of trading of stocks then 
constituting 20 percent or more of the level of the DJIA (or the 
relevant successor index) on the relevant exchanges (as defined 
below) for such securities for more than two hours of trading (or 
one hour of trading on any day that is a ``roll date'' for purposes 
of calculating the BXD Index) during, or during the one hour period 
preceding the close of, the principal trading session on such 
relevant exchange; or (ii) a breakdown or failure in the price and 
trade reporting systems of any relevant exchange as a result of 
which the reported trading prices for stocks then constituting 20 
percent or more of the level of the DJIA (or the relevant successor 
index) (A) during the one hour preceding the close of the principal 
trading session on such relevant exchange or (B) during any one hour 
period of trading on such relevant exchange on any day that is a 
``roll date'' for purposes of calculating the BXD Index; or (iii) a 
suspension, absence, or material limitation of trading of call 
options nominally sold in connection with the BXD Index (or the 
relevant successor index) on the CBOE for more than two hours of 
trading, or during the one hour period preceding, and including, the 
scheduled time at which the value of such options is calculated for 
purposes of calculating the BXD Index; or (iv) a breakdown or 
failure in the price and trade reporting systems of the CBOE as a 
result of which the reported trading prices for call options 
nominally sold in connection with the BXD Index during the one hour 
period preceding, and including, the scheduled time at which the 
value of such options is calculated for purposes of the BXD Index 
are materially inaccurate; or (v) the suspension, absence, or 
material limitation of trading on any major U.S. securities market 
for trading in futures or options contracts related to the DJIA or 
the BXD Index (or the relevant successor index) for more than two 
hours of trading during, or during the one hour period preceding the 
close of, the principal trading session on such market; or a 
decision to permanently discontinue trading in the relevant futures 
or options contract, in each case as determined by the calculation 
agent in its sole discretion; and a determination by the calculation 
agent in its sole discretion that the event described above 
materially interfered with its ability or the ability of any of 
JPMorgan's affiliates to adjust or unwind all or a material portion 
of any hedge with respect to the notes. ``Relevant exchange'' means 
the primary U.S. organized exchange or market of trading for any 
security (or any combination thereof) then included in the BXD Index 
or any successor index. Telephone conversation between Jeffrey P. 
Burns, Associate General Counsel, Amex and David Liu, Attorney, 
Division, Commission, on May 26, 2005.
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    The Payment Amount per Note will equal:
    [GRAPHIC] [TIFF OMITTED] TN20JN05.000
    
    The Notes are cash-settled in U.S. dollars and do not give the 
holder any right to receive any of the component securities, dividend 
payments, or any other ownership right or interest in the securities 
comprising the BXD Index. The Notes are designed for investors who want 
to participate in the exposure to the DJIA that the BXD Index provides 
while limiting downside risk, and who are willing to forego principal 
protection and interest payments on the Notes during their term.
    The Exchange notes that the Commission has previously approved the 
listing on the Amex of securities with structures similar to that of 
the proposed Notes.\12\ Description of the Index. The BXD Index is a 
benchmark index designed to measure the

[[Page 35470]]

performance of a hypothetical ``buy-write'' \13\ strategy on the DJIA. 
Developed by the CBOE in cooperation with Dow Jones, the Index was 
initially announced in March 2005.\14\ The BXD was set to an initial 
value of 100.00 as of October 16, 1997. The Exchange states that the 
CBOE developed the BXD Index in response to several factors, including 
the repeated requests by options portfolio managers that the CBOE 
provide an objective benchmark for evaluating the performance of buy-
write strategies, one of the most popular option trading strategies. 
Further, the CBOE developed the BXD Index to provide investors with a 
relatively straightforward indicator of the risk-reducing character of 
options that otherwise may seem complicated and inordinately risky.
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    \12\ See Securities Exchange Act Release Nos. 51634 (Apr. 29, 
2005), 70 FR 24138 (May 6, 2005) (approving the listing and trading 
of notes linked to the BXM Index) (File No. SR-Amex-2005-036); 51426 
(Mar. 23, 2005), 70 FR 16315 (Mar. 30, 2005) (approving the listing 
and trading of notes linked to the BXM Index) (File No. SR-Amex-
2005-022); and 50719 (Nov. 22, 2004), 69 FR 69644 (Nov. 30, 2004) 
(approving the listing and trading of non-principal protected notes 
linked to the BXM Index) (File No. SR-Amex-2004-55). The BXM index 
is the CBOE S&P 500 Buy Write IndexSM, while the BXD is a 
parallel index using the DJIA as the underlying index rather than 
the S&P 500. In addition, the Exchanges notes that the Commission 
has previously approved the listing and trading of a packaged buy-
write option strategy known as ``BOUNDS.'' See Securities Exchange 
Act Release No. 36710 (Jan. 11, 1996), 61 FR 1791 (Jan. 23, 1996) 
(File Nos. SR-Amex-94-56, SR-CBOE-95-14, and SR-PSE-95-01).
    \13\ A ``buy-write'' is a conservative options strategy in which 
an investor buys a stock or portfolio and writes call options on the 
stock or portfolio. This strategy is also known as a ``covered 
call'' strategy. A buy-write strategy provides option premium income 
to cushion decreases in the value of an equity portfolio, but will 
underperform stocks in a rising market. A buy-write strategy tends 
to lessen overall volatility in a portfolio.
    \14\ The BXD Index consists of a long position in the component 
securities of the DJIA and options on the DJIA (DJX). See 
www.cboe.com/bxd. The Exchange notes that the Commission has 
approved the listing of numerous securities linked to the 
performance of the DJIA as well as options on the DJIA. See, e.g., 
Securities Exchange Act Release Nos. 39011 (Sep. 3, 1997), 62 FR 
47840 (Sep. 11, 1997) (approving the listing and trading of options 
on the DJIA) (File No. SR-CBOE-97-26); 39525 (Jan. 8, 1998), 63 FR 
2438 (Jan. 15, 1998) (approving the listing and trading of 
DIAMONDSSM Trust Units, portfolio depositary receipts 
based on the DJIA) (File No. SR-Amex-97-29); 46883 (Nov. 21, 2002), 
67 FR 71216 (Nov. 29, 2002) (approving the listing and trading of 
Market Recovery Notes on the DJIA) (File No. SR-Amex-2002-88); 49453 
(Mar. 19, 2004), 69 FR 15913 (Mar. 26, 2004) (approving the listing 
and trading of Contingent Principal Protected Notes linked to the 
DJIA) (File No. SR-Amex-2004-13); and 51133 (Feb. 3, 2005), 70 FR 
7129 (Feb. 10, 2005) (approving the listing and trading of Notes 
linked to the DJIA) (File No. SR-Amex-2004-101).
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    The BXD Index is a passive total return index based on (1) buying a 
portfolio consisting of the component stocks of the DJIA, and (2) 
``writing'' (or selling) near-term DJIA call options (DJX), generally 
on the third Friday of each month. This strategy consists of a 
hypothetical portfolio consisting of a ``long'' position indexed to the 
DJIA on which are deemed sold a succession of one-month, at-the-money 
call options on the DJIA (DJX) listed on the CBOE. Dividends paid on 
the component stocks underlying the DJIA and the dollar value of option 
premium deemed received from the sold call options are functionally 
``re-invested'' in the covered DJIA portfolio.
    The value of the BXD Index on any given date will equal (1) the 
value of the BXD Index on the previous day multiplied by (2) the daily 
rate of return \15\ on the covered DJIA portfolio on that date. Thus, 
the daily change in the BXD Index reflects the daily changes in value 
of the covered DJIA portfolio, which consists of the DJIA (including 
dividends) and the component DJIA call option (DJX). The daily closing 
price of the BXD Index is calculated and disseminated by the CBOE on 
its Web site at www.cboe.com and via the Options Pricing and Reporting 
Authority (``OPRA'') at the end of each trading day.\16\ The value of 
the DJIA is widely disseminated at least once every fifteen (15) 
seconds throughout the scheduled trading day. The Exchange believes 
that the intraday dissemination of the DJIA, along with the ability of 
investors to obtain real-time, intraday DJIA call option (DJX) pricing, 
provides sufficient transparency regarding the BXD Index.\17\ In 
addition, as indicated above, the value of the BXD Index is calculated 
once every scheduled trading day, thereby providing investors with a 
daily value of such ``hypothetical'' buy-write options strategy on the 
DJIA.
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    \15\ The daily rate of return on the covered DJIA portfolio is 
based on (a) the change in the closing value of the stocks in the 
DJIA portfolio, (b) the value of ordinary cash dividends on the 
stocks underlying the DJIA, and (c) the change in the market price 
of the call option. The daily rate of return will also include the 
value of ordinary cash dividends distributed on the stocks 
underlying the DJIA that are trading ``ex-dividend'' on that date 
(that is, when transactions in the stock on an organized securities 
exchange or trading system no longer carry the right to receive that 
dividend or distribution) as measured from the close in trading on 
the previous day.
    \16\ The Exchange notes that the Commission, in connection with 
Bond Index Term Notes and the Merrill Lynch EuroFund Market Index 
Target Term Securities, has previously approved the listing and 
trading of these products where the dissemination of the value of 
the underlying index occurred once per trading day. See Securities 
Exchange Act Release Nos. 41334 (Apr. 27, 1999), 64 FR 23883 (May 4, 
1999) (approving the listing and trading of Bond Indexed Term Notes) 
(File No. SR-Amex-99-03); and 40367 (Aug. 26, 1998), 63 FR 47052 
(Sep. 3, 1998) (approving the listing and trading of Merrill Lynch 
EuroFund Market Index Target Term Securities) (File No. SR-Amex-98-
24). See also supra note 12.
    \17\ Call options on the DJIA (DJX) are traded on the CBOE, and 
both last sale and quotation information for the call options are 
disseminated in real-time through OPRA. The Exchanges states that 
the value of the BXD can be readily approximated as a function of 
observable market prices throughout the trading day. In particular, 
such a calculation would require information on the current price of 
the DJIA index and specific nearest-to-expiration call and put 
options on that index. These components trade in highly liquid 
markets, and real-time prices are available continuously throughout 
the trading day from a number of sources, including Bloomberg and 
CBOE. The Exchange notes that the ``Indicative Value'' (as discussed 
below) may be a more accurate indicator of the valuation of the 
Notes because it reflects the fees associated with the Notes (e.g., 
on the initial principal amount and the Adjustment Amount); however, 
the ``Indicative Value'' is not adjusted intraday. Telephone 
conversation between Jeffrey P. Burns, Associate General Counsel, 
Amex and David Liu, Attorney, Division, Commission, on May 26, 2005.
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    The Exchange states that the CBOE has represented that the BXD 
Index value will be calculated and disseminated by the CBOE once every 
scheduled trading day after the close. The daily change in the BXD 
Index reflects the daily changes in the DJIA and related options 
positions. The Exchange states that JPMorgan has represented that it 
will seek to arrange to have the BXD Index calculated and disseminated 
on a daily basis through a third party if the CBOE ceases to calculate 
and disseminate the Index.\18\ If, however, JPMorgan is unable to 
arrange the calculation and dissemination of the BXD Index (or a 
Successor Index) as indicated above, the Exchange will undertake to 
delist the Notes.\19\
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    \18\ Prior to such change in the manner in which the BXD Index 
is calculated, or in the event of any Index substitution, the 
Exchange will file a proposed rule change pursuant to Rule 19b-4, 
which must be approved by the Commission prior to continued listing 
and trading in the Notes. Telephone conversation between Jeffrey P. 
Burns, Associate General Counsel, Amex and David Liu, Attorney, 
Division, Commission, on May 26, 2005.
    \19\ See supra note 4 (regarding discontinuation of the 
calculation and dissemination of the Notes).
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    In order to provide an updated value of the Payment Amount for use 
by investors, the Exchange will disseminate over the Consolidated Tape 
Association's Network B, a daily indicative value (the ``Indicative 
Value'') of the Notes. The Indicative Value will equal the performance 
of the BXD less the Adjustment Amount. The Indicative Value will be 
calculated by the Amex after the close of trading and after the CBOE 
calculates the BXD Index for use by investors the next scheduled 
trading day. It is designed to provide investors with a daily reference 
value of the adjusted BXD Index. The Indicative Value may not reflect 
the precise value of the Notes or Payment Amount. Therefore, the 
Indicative Value disseminated by the Amex during trading hours should 
not be viewed as a real time update of the BXD Index, which is 
calculated only once a day. While the Indicative Value that will be 
disseminated by the Amex is expected to be close to the current BXD 
Index value, the values of the Indicative Value and the BXD Index will 
diverge due to the application of the Adjustment Amount.
    From October 31, 1997 through March 31, 2005, the annualized 
returns for the BXD Index and the DJIA were 7.15% and 6.76%, 
respectively, with a total deviation of the returns during the same 
time period of 4.43%. As the chart

[[Page 35471]]

attached as Exhibit 3 to the Exchange's Form 19b-4 indicates, the BXD 
Index will closely track the DJIA except in those cases where the 
market is significantly rising or decreasing.\20\ In the case of a fast 
rising market, the BXD Index will trail the DJIA due to the limited 
upside potential of the Index because of the ``buy-write'' strategy. 
Due to the cushioning effect of the ``buy-write'' strategy, the BXD 
Index has in the past exhibited negative returns that are less than the 
DJIA during a down market. The Exchange expects the BXD Index to 
continue to display these characteristics.
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    \20\ The Exchange states that buy-write strategies, such as the 
BXD Index, generally outperformed stocks in 2000-2002 when the DJIA 
achieved negative returns, but tended to underperform stocks in the 
late 1990s when the DJIA rose by more than 15% per year.
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    The call options (DJX) included in the value of the BXD Index have 
successive terms of approximately one month. Each day that an option 
expires, which day is referred to as a ``roll'' date, that option's 
value at expiration is taken into account in the value of the BXD 
Index. At expiration, the call option (DJX) is settled against the 
``Special Opening Quotation'' of the DJX used as the final settlement 
price of the DJX call options. The Special Opening Quotation is a 
special calculation of the DJIA that is compiled from the opening price 
of component stocks underlying the DJIA. The final settlement price of 
the call option at expiration is equal to the difference between the 
Special Opening Quotation and the strike price of the expired call 
option, or zero, whichever is greater, and is removed from the value of 
the BXD Index. Subsequent to the settlement of the expired call option, 
a new, ``short'' or sold at-the-money call option is included in the 
value of the BXD Index.\21\ The initial value of the new call option is 
calculated by the CBOE and is based on the volume-weighted average of 
all the transaction prices of the new call option during a designated 
time period on the day the strike price is determined.\22\
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    \21\ Like the expired call option, the new call option will 
expire approximately one month after the date of sale.
    \22\ For this purpose, the CBOE excludes from the calculation 
those call options identified as having been executed as part of a 
spread (i.e., a position taken in two or more options in order to 
profit through changes in the relative prices of those options).
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    The market capitalization of the DJIA is approximately $3.6 
trillion. The Exchange states that, as of April 18, 2005, the market 
capitalization of the securities included in the DJIA ranged from a 
high of $381.59 billion to a low of $14.8 billion. The average daily 
trading volume for these same securities for the last six (6) months 
ranged from a high of 292 million shares to a low of 368,900 shares.
    The Exchange represents that it prohibits the initial and/or 
continued listing of any security that is not in compliance with Rule 
10A-3 under the Act.\23\
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    \23\ See 17 CFR 240.10A-3.
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    The Exchange states that, because the Notes are issued in $1,000 
denominations, the Amex's existing debt 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.\24\ Second, even though the Exchange's debt trading 
rules apply, the Notes will be subject to the equity margin rules of 
the Exchange.\25\ 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 \26\ 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, JPMorgan will deliver a prospectus in 
connection with its sales of the Notes.
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    \24\ Amex Rule 411 requires, among other things, that every 
member or member organization use due diligence to learn the 
essential facts, relative to every customer and to every order or 
account accepted.
    \25\ See Amex Rule 462 and Section 107B of the Company Guide.
    \26\ See Amex Rule 411.
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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 and options that include additional monitoring on key pricing 
dates,\27\ which the Exchange states have been deemed adequate under 
the Act. In addition, the Exchange also has a general policy which 
prohibits the distribution of material, non-public information by its 
employees.
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    \27\ Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex and David Liu, Attorney, Division, Commission, 
on May 26, 2005.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \28\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \29\ 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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    \28\ 15 U.S.C. 78f(b).
    \29\ 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 states that no written comments were solicited or 
received with respect to the proposed rule change.

III. 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. 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-2005-042 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 No. SR-Amex-2005-042. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your

[[Page 35472]]

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 Room. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. 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 No. SR-Amex-2005-042 and should be 
submitted on or before July 11, 2005.

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

    The Amex has asked the Commission to approve the proposal on an 
accelerated basis to accommodate the timetable for listing the Notes. 
After careful consideration, the Commission finds that the proposed 
rule change 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.\30\ The Commission finds that this proposal is similar to 
several approved instruments currently listed and traded on the 
Amex.\31\ Accordingly, the Commission finds that the listing and 
trading of the Notes based on the BXD Index is consistent with the Act 
and will promote just and equitable principles of trade, and foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing information with respect to and 
facilitating transactions in securities consistent with Section 6(b)(5) 
of the Act.\321\
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    \30\ 30 15 U.S.C. 78f(b)(5).
    \31\ See, e.g., Securities Exchange Act Release Nos. 51634 (Apr. 
29, 2005), 70 FR 24138 (May 6, 2005) (approving the listing and 
trading of notes linked to the performance of the CBOE S&P 500 
BuyWrite Index(sm)) (File No. SR-Amex-2005-036); 51426 (Mar. 23, 
2005), 70 FR 16315 (Mar. 30, 2005) (approving the listing and 
trading of notes linked to the performance of the CBOE S&P 500 
BuyWrite Index(sm)) (File No. SR-Amex-2005-022); 50719 (Nov. 22, 
2004), 69 FR 69644 (Nov. 30, 2004) (approving the listing and 
trading of notes linked to the performance of the CBOE S&P 500 
BuyWrite Index(sm)) (File No. SR-Amex-2004-55).
    \32\ 15 U.S.C. 78f(b)(5). In approving the proposed rule, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The requirements of Section 107A of the Company Guide were designed 
to address the concerns attendant to the trading of hybrid securities, 
like the Notes. For example, Section 107A of the Company Guide provides 
that only issuers satisfying substantial asset and equity requirements 
may issue securities such as the Notes. In addition, the Exchange's 
``Other Securities'' listing standards further require that the Notes 
have a market value of at least $4 million.\33\ In any event, financial 
information regarding JPMorgan, in addition to the information on the 
component stocks, which are reporting companies under the Act, and the 
Notes, which will be registered under Section 12 of the Act, will be 
available.
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    \33\ See Section 107A(c) of the Company Guide.
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    In approving the product, the Commission recognizes that the Index 
is a passive total return index based on (1) buying a portfolio 
consisting of the component stocks of the DJIA and (2) ``writing'' (or 
selling) near-term DJIA call options (DJX), generally on the third 
Friday of each month. Given the large trading volume and capitalization 
of the compositions of the stocks underlying the DJIA, the Commission 
believes that the listing and trading of the Notes that are linked to 
the BXD Index should not unduly impact the market for the underlying 
securities compromising the DJIA or raise manipulative concerns.\34\ 
Moreover, the issuers of the underlying securities comprising the DJIA 
are subject to reporting requirements under the Act, and all of the 
component stocks are either listed or traded on, or traded through the 
facilities of, U.S. securities markets.
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    \34\ The issuer, JPMorgan, disclosed in the prospectus and 
prospectus supplement that the hedging activities of it and its 
affiliates, including taking positions in the stocks underlying the 
Index and selling call options on the Index, which could adversely 
affect the market value of the Notes from time to time and the 
redemption amount holders of the Notes would receive on the Notes. 
Such hedging activity must, of course, be conducted in accordance 
with applicable regulatory requirements.
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    The Commission also believes that any concerns that a broker-
dealer, such as JPMorgan, or a subsidiary providing a hedge for the 
issuer, will incur undue position exposure are minimized by the size of 
the Notes issuance in relation to the net worth of JPMorgan.\35\
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    \35\ See Securities Exchange Act Release Nos. 44913 (Oct. 9, 
2001), 66 FR 52469 (Oct. 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 (Sept. 27, 1996), 61 FR 52480 (Oct. 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, the Commission notes that the value of the Index will be 
calculated and disseminated by the CBOE once every trading day after 
the close of trading. However, the Commission notes that the value of 
the DJIA will be widely disseminated at least once every fifteen 
seconds throughout the trading day and that investors are able to 
obtain real-time call option pricing on the DJIA during the trading 
day. Further, the Indicative Value, which will be calculated by the 
Amex after the close of trading and after the CBOE calculates the BXD 
Index for use by investors the next trading day, is designed to provide 
investors with a daily reference value of the adjusted Index. The 
Commission notes that JPMorgan has agreed to arrange to have the BXD 
Index calculated and disseminated on a daily basis through a third 
party in the event that the CBOE discontinues calculating and 
disseminating the Index. In such event, the Exchange agrees to obtain 
Commission approval, pursuant to filing the appropriate Form 19b-4, 
prior to the substitution of the CBOE BXD Index. Further, the 
Commission notes that the Exchange has agreed to undertake to delist 
the Notes in the event that the CBOE ceases to calculate and 
disseminate the Index, and JPMorgan is unable to arrange to have the 
BXD Index calculated and widely disseminated through a third party.
    The Commission finds good cause for approving the proposed rule 
change prior to the 30th day after the date of publication of the 
notice of filing thereof in the Federal Register. The Exchange has 
requested accelerated approval because this product is similar to 
several other instruments currently listed and traded on the Amex.\36\ 
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. 
Additionally, the Notes will be listed pursuant to Amex's existing 
hybrid security listing standards as

[[Page 35473]]

described above. Therefore, the Commission finds good cause, consistent 
with Section 19(b)(2) of the Act,\37\ to approve the proposal on an 
accelerated basis.
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    \36\ See supra notes 12 (citing previous approvals of securities 
with structures similar to that of the proposed Notes); and 14 
(citing previous approvals of securities linked to the performance 
of the DJIA as well as options on the DJIA).
    \37\ 37 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\38\ that the proposed rule change (File No. SR-Amex-2005-042) is 
hereby approved on an accelerated basis.
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    \38\ 38 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3184 Filed 6-17-05; 8:45 am]
BILLING CODE 8010-01-P