Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Notices 44735

1Namely, Yorkshire Power Group Limited

(‘‘Yorkshire Power Group’’), a U.K. company in

which Resources and a subsidiary of Public Service

Company of Colorado have respective 50%

ownership interests, and Yorkshire Holdings plc,

the actual owner of Yorkshire and a wholly owned

subsidiary of Yorkshire Power Group.

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3 ‘‘MITTS’’ and ‘‘Market Index Target-Term

Securities’’ are service marks of Merrill Lynch &

Co., Inc. (‘‘Merrill Lynch’’).

4Amendment No. 1 states that the Exchange’s

equity trading rules will apply to the trading of

indexed term notes linked to the Major 11

International Index, including Rule 411, which

requires members to use due diligence to learn

essential facts relative to every customer and to

every order or account accepted, and Rule 462,

which requires the application of equity margin

rules to the trading of indexed term notes.

Amendment No. 1 also states that the continued

listing guidelines set forth in Sections 1001 through

1003 of the Amex Company Guide will apply to the

proposed indexed term notes; that the exchange

will, prior to trading the proposed indexed term

notes, distribute an Information Circular to

members providing guidance with regard to

member firm compliance responsibilities, including

suitability recommendations, when handling

transactions in the indexed term notes, and

highlighting their special risks and characteristics;

that the Exchange will maintain the Index and it

will be the Exchange’s responsibility to determine,

if necessary, whether to replace a sub-index with

a substitute or successor index or undertake to

publish the sub-index if it ceases to be published.

See letter from Claire P. McGrath, Vice-President

and Special Counsel, Amex, to Ivette Lopez,

Assistant Director, Market Supervision,

Commission, dated June 10, 1997 (‘‘Amendment

No. 1’’).

5Amendment No. 2 further clarifies Amendment

No. 1 by stating that Section 1003(b) of the

Company Guide in particular will apply to the

proposed indexed term notes. Amendment No. 2

also states that the shares of a sub-index will remain

fixed, except in the case of a significant event, such

as a split in the value of the sub-index, a change

in the method of calculation, or if the sub-index

ceases to be published. Amendment No. 2 gives an

example of what would happen to the Index

calculation if a sub-index were to split in value.

Also, if the sub-index ceases to be published, Amex

could choose to replace it with a substitute index

(another index currently being published that

correlates highly with the sub-index being replaced,

such as Amex’s Japan Index could substitute for the

Nikkei 225), a successor index (an index intended

by the publisher as a replacement to the original

sub-index), or undertake to publish the sub-index

using the same procedures last used to calculate the

sub-index prior to its discontinuance. In addition,

Amendment No. 2 states that if the marketplace for

the securities underlying any one of the sub-indices

that constitute the Major 11 International Index is

closed on any given business day, due to natural

disaster or holiday observed in the foreign country,

Amex will use the previous closing value in the

calculation. See letter from Claire P. McGrath, VicePresident and Special Counsel, Derivatives

Securities, Amex, to Ivette Lopez, Assistant

Director, Market Regulation, Commission, dated

June 27, 1997 (‘‘Amendment No. 2’’).

6Amendment No. 3 states that Amex intends to

include a heightened suitability standard in the

Information Circular it will distribute to its

membership prior to the commencement of trading

in Major 11 International Index Notes. The circular

will state that before a member, member

organization, or employee of such member

organization undertakes to recommend a

transaction in the security, such member or member

organization should make a determination that the

security is suitable for such customer and the

person making the recommendation should have a

reasonable basis for believing at the time of making

the recommendation, that the customer has such

knowledge and experience in financial matters that

they may be capable of evaluating the risks and the

special characteristics of the recommended

transaction, including those highlighted, and is

financially able to bear the risks of the

Continued

their parent companies from time to

time through December 31, 2002 out of

capital or earned surplus to the extent

permitted under applicable corporate

law. AEP and Resources request this

authorization on behalf of: (i) Certain

existing Project Parents formed in

connection with AEP’s 1997 acquisition

of a 50% ownership interest in

Yorkshire Electricity Group plc, a U.K.

regional electricity company and a

FUCO (‘‘Yorkshire’’);1 (ii) those Project

Parents formed in connection with

AEP’s 1996 acquisition of a 70%

ownership interest in Nanyang General

Light Electric Co., Ltd. (‘‘Nanyang’’), a

cooperative joint venture company

formed under the laws of the People’s

Republic of China, established to own,

construct, finance and operate a coalfired electric generating station in

Nanyang, Henan Province, China; and

(iii) other existing and all future Project

Parents formed after the date of the

issuance of an order authorizing this

proposal (collectively, ‘‘Applicable

Project Parents’’). Resources states that

it would pay any such dividend only to

the extent that the dividend is based

upon: (i) A corresponding dividend or

dividends our of capital or unearned

surplus from an Applicable Project

Parent that is a direct subsidiary of

Resources or (ii) otherwise is based

upon Resources’ direct or indirect

ownership of an Exempt Project.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–22292 Filed 8–21–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38940; International Series

Release No. 1097; File No. SR–Amex–97–

20]

Self-Regulatory Organizations; Order

Granting Approval to Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval to

Amendment Nos. 1, 2, and 3 to

Proposed Rule Change by the

American Exchange, Inc., Relating to

the Listing and Trading of Indexed

Term Notes

August 15, 1997.

I. Introduction

On April 30, 1997, the American

Stock Exchange, Inc. (‘‘Amex’’ or

‘‘Exchange’’) submitted to 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 to

approve for listing and trading under

Section 107A of the Amex Company

Guide market index target-term

securities (‘‘MITTS’’),3 the return of

which is based in whole or in part on

changes in the value of the Major 11

International Index (‘‘the Major 11

International Index’’).

The proposed rule change, together

with the substance of the proposal, was

published for comment in Securities

Exchange Act Release No. 38665 (May

21, 1997) 62 FR 28911 (May 28, 1997).

No comment letters were received in

response to the proposal. The Exchange

subsequently filed Amendment Nos. 1,

2, and 3 to the proposed rule change on

June 11, 1997, 4 June 30, 1997, 5 and July

17, 1997,6 respectively. This order
44736 Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Notices

recommended transaction. See letter from Claire

McGrath, Vice-President and Special Counsel,

Amex, to Ivette Lopez, Assistant Director, Market

Regulation, Commission, dated July 16, 1997

(‘‘Amendment No. 3’’).

7See Securities Exchange Act Release No. 27753

(March 1, 1990), 55 FR 8626 (March 8, 1990).

8The Commission has previously approved the

listing and trading of MITTS or hybrid securities

similar to MITTS based upon portfolios of

securities. See e.g., Securities Exchange Act Release

Nos. 32840 (September 2, 1993), 58 FR 47485

(September 9, 1993); 33368 (December 22, 1993), 58

FR 68975 (December 29, 1993); 33495 (January 19,

1994), 59 FR 3883 (January 27, 1994); 34692

(September 20, 1994), 59 FR 49267 (September 27,

1994); 37533 (August 7, 1996), 61 FR 42075 (August

13, 1996); and 37744 (September 27, 1996), 61 FR

52480 (October 7, 1996) (‘‘Term Notes Approval

Orders’’). MITTS on the Major 11 International

Index Notes differ from these other MITTS products

in that the Major 11 International Index is an index

of several indices rather than a portfolio of

individual securities. See, e.g., Securities Exchange

Act Release No. 38819 (July 7, 1997), 62 FR 37320

(July 11, 1997).

9Specifically, the notes must have: (1) A

minimum distribution of one million trading units;

(2) a minimum of 400 holders; (3) an aggregate

market value of at least $4 million; and (4) a term

of at least one year. Additionally, the issuer of the

notes must have assets of at least $100 million,

stockholders’ equity of at least $10 million, and pretax income of at least $750,000 in the last fiscal year

or in tow of the three prior fiscal years. As an

alternative to these financial criteria, the issue must

have either: (1) Assets in excess of $200 million and

stockholders’ equity in excess of $10 million; or (2)

assets in excess of $100 million and stockholders’

equity of at least $20 million.

10The Exchange’s continued listing guidelines

are set forth in Sections 1001 through 1003 of the

Exchange’s Company Guide. Section 1002(b) 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 the

continued listing guidelines for distribution of the

indexed term notes on the Major 11 International

Index, the Exchange will rely, in part, on the

guidelines in Section 1003(b), which discuss

suspensions and delistings with respect to limited

distribution and reduced market value. See

Amendment No. 2, supra note 5.

11The Commission notes that the terms of the

final payout for the Notes have not yet been

finalized. However, Amex has stated that it expects

an investor to receive the appreciation, if any, of the

ending Index value over the starting Index value,

plus an additional amount that would be between

10% and 20% of the appreciation amount. In

addition, the Commission notes that previously

approved MITTS products have had terms that

include a cap on the amount of appreciation an

investor could receive, while other MITTS products

previously approved have been structured so that

the investor can receive (in addition to the

percentage of principal guaranteed) appreciation, if

any, of the ending index value over the starting

index value only if the ending index value is more

than a certain percentage above the starting index

value.

12See Amendment Nos. 1 and 2, supra notes 4

and 5.

13Rule 411 requires the Exchange’s members to

use due diligence to learn the essential facts relative

to every customer and to every order or account

accepted. Rule 462 requires the application of

equity margin rules to the trading of indexed term

notes. See Amendment No. 1, supra note 4.

14See Amendment No. 3, supra note 6.

15A description of each of the sub-indices is set

forth in detail in the notice release. See Securities

Exchange Act Release No. 38665 (May 21, 1997), 62

FR 28911 (May 28, 1997).

approves the proposed rule change, as

amended.

II. Background and Description

Under Section 107A of the Amex

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.7 The Amex now proposes

to list for trading under Section 107A of

the Company Guide indexed term notes

whose value in whole or in part will be

based upon an index consisting of the

major market indices of eight European

countries, two Asian countries, and

Australia (‘‘Major 11 International Index

Notes’’ or ‘‘Index Notes’’).8

The Index Notes will be nonconvertible debt securities and will

conform to the initial listing guidelines

under Section 107A of the Company

Guide 9 and the continued listing

guidelines under Sections 1001 to 1003

of the Company Guide.10 Although a

specific maturity date will not be

established until the time of the

offering, the Index Notes will provide

for maturity within a period of not less

than one nor more than ten years from

the date of issue. Indexed term notes

may provide for payments at maturity

based in whole or in part on changes in

the value of the index.11 At maturity,

holders of the Major 11 International

Index Notes will receive not less than

90% of the initial issue price. The notes

will not be callable or redeemable prior

to maturity and will be cash settled in

U.S. currency.

Consistent with other structured

products, the Exchange will distribute a

circular to its membership, prior to the

commencement of trading, providing

guidance with regard to member firm

compliance responsibilities, including

appropriate suitability criteria and/or

guidelines, and highlighting the special

risks and characteristics of the proposed

Major 11 International Index Notes.12

The Exchange’s equity trading rules will

apply to the trading of the indexed term

notes linked to the Index, including

Rules 411 and 462.13 Specifically, Rule

411 will impose a duty of due diligence

on Amex’s members and member firms

to learn the essential facts relating to

every customer prior to trading Major 11

International Index Notes. In addition,

for this particular MITTS product, the

Exchange will require members and

member firms to make a determination

that the proposed index term note is

suitable for the customer, and the

person making the recommendation

should have a reasonable basis for

believing at the time of making the

recommendation that the customer has

the knowledge and experience in

financial matters that they may be

capable of evaluating the risks and the

special characteristics of the

recommended transaction, and is

financially able to bear the risks of the

recommended transaction.14

According to Amex, the eleven

indices (‘‘sub-indices’’ or individually

‘‘sub-index’’) that form the Major 11

International Index are comprised of a

total of 911 of the largest and most

liquid securities from each of the eight

European markets, two Asian markets,

and the Australian market. Initial

weightings will be assigned to each subindex at the close of trading on the day

immediately prior to the listing of the

Index Notes and based upon the index’s

market capitalization. Based on market

data as of April 3, 1997, the Nikkei 225

Index (‘‘NKY’’) would have an assigned

weight of approximately 27.80%; the

UK’s Financial Times SE 100 Index

(‘‘FT–SE 100’’) would have an assigned

weight of approximately 23.44%; the

Deutscher Aktienindex (‘‘DAX’’) would

have an assigned weight of

approximately 8.86%; the Compagnie

des Agents de Change 40 Index (‘‘CAC

40’’) would have an assigned weight of

approximately 7.22%; the Swiss Market

Index (‘‘SMI’’) would have an assigned

weight of approximately 6.29%; the

Amsterdam European Options Exchange

Index (‘‘AEX’’) would have an assigned

weight of approximately 5.76%; the

Hong Kong 30 Index (‘‘HKX’’) would

have an assigned weight of

approximately 5.15%; the Australian

All Ordinaries Index (‘‘AS 30’’) would

have an assigned weight of

approximately 5.94%; the Milano Italia

Borsa 30 Index (‘‘MIB 30’’) would have

an assigned weight of approximately

3.63%; the Stockholm Options Market

Index (‘‘OMX’’) would have an assigned

weight of approximately 3.10%; and the

IBEX 35 would have an assigned weight

of approximately 2.81%. Amex

represents that it has in place

surveillance sharing agreements with

the appropriate regulatory organizations

in each country represented in the

Major 11 International Index, except

Sweden and Switzerland, which

together represented 9.39% of the Major

11 International Index as of April 3,

1997.15

The Major 11 International Index will

be calculated using a ‘‘capitalizationweighted’’ methodology. As noted
Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Notices 44737

16See Amendment No. 2, supra note 5.

17For example, Amex’s Japan Index could be a

substitute for the Nikkei 225. See Amendment No.

2, supra note 5.

18See Amendment Nos. 1 and 2, supra notes 4

and 5.

19See Amendment No. 2, supra note 5. The

Commission notes that this replacement process is

slightly different from the approach used in other

MITTS-like products. For example, under the terms

of other previously approved MITTS, when

portfolio securities cease to exist during the term of

the note due to a merger, acquisition, or similar

type corporate transaction, a value equal to the

security’s final value is assigned to the stock.

Further, if a market price is no longer available for

an index stock due to circumstances including, but

not limited to, liquidation, bankruptcy, insolvency,

or any other similar proceeding, then the security

is assigned a value of zero for index calculation

purposes, rather than replaced.

20See Amendment No. 2, supra note 5.

21 15 U.S.C. 78f(b)(5).

22See Term Notes Approval Orders, supra note 7.

23 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).

24See Amendment No. 1, supra note 4.

above, each sub-index will be given its

assigned weighting at the close of

trading on the day immediately prior to

the listing of the Index Note. The

number of shares in each sub-index will

be fixed on that day and will equal its

weighting in the Major 11 International

Index times 100 divided by the subindex level. There will be no periodic

rebalancing of the Major 11

International Index to reflect changes in

relative market capitalizations among

the sub-indices. The initial sub-index

value used in the Major 11 International

Index calculation will equal the product

of the number of shares in the sub-index

times its representative sub-index level.

The Major 11 International Index will

initially be set to provide a benchmark

value of 100.00 at the close of trading

on the day preceding the listing of the

proposed Index Note. The Exchange

will calculate the Major 11 International

Index and, similar to other stock index

values published by the Exchange, the

value of the Major 11 International

Index will be calculated continuously

and disseminated every 15 seconds over

the Consolidated Tape Association’s

Network B each trading day until the

last individual sub-index ceases

updating in its home market. The

Exchange will then disseminate the

Major 11 International Index based on

the closing values for each sub-index.

Because index term notes are

generally meant to be a one time

issuance, providing investors with a

percentage of the appreciation in the

index as measured over a specified

period of time, and are essentially a

passive investment, the Major 11

International Index will not be actively

maintained like other derivatively based

index products, except as discussed

below. The shares for each sub-index

will remain fixed during the life of the

note, except in the event of a significant

action taken by the publisher of the subindex such as a split of the value of the

sub-index or a change in the method of

calculation. For example, if the

publisher of one of the sub-indices were

to split that index, Amex would double

the shares represented by that sub-index

in the Major 11 International Index.16

Further, if a sub-index ceases to be

published, the Exchange may determine

to replace it with a substitute index

(another index currently being

published that correlates highly with

the sub-index being replaced),17 a

successor index (an index intended by

the publisher as a replacement to the

original sub-index), or may undertake to

publish the sub-index using the same

procedures last used to calculate the

sub-index prior to its discontinuance.18

For example, Amex states that if the

CAC–40 should cease to be published

by SBF-Paris Bourse, Amex may

undertake to publish a capitalizationweighted index of 40 of the most liquid

and highly capitalized stocks traded on

the Paris Bourse.19 Finally, the

Commission notes that Amex has sole

authority to determine whether to

replace a sub-index that has ceased to be

published and, if so, the choice of

replacement. The issuer of the Major 11

International Index Notes has no role in

these determinations.

If the marketplace for the securities

underlying any of the sub-indices that

constitute the Major 11 International

Index is closed on any given business

day in the U.S., such as in the event of

a market disruption due to a natural

disaster or in the more likely event that

the marketplace is closed for a holiday

celebrated in the foreign country, Amex

will use the previous closing value in

the calculation of the Major 11

International Index.20

III. Discussion

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).21

Specifically, the Commission believes

providing for exchange-trading of Major

11 International Index Notes will offer

a new and innovative means of

participating in the market for foreign

securities. In particular, the Commission

believes that the proposed Index Notes

will permit investors to gain equity

exposure in the component foreign

markets while at the same time limiting

the downside risk of the original

investment as a result of the principal

guarantee. Accordingly, for the same

reasons discussed below as well as the

same reasons as discussed in the Term

Notes Approval Orders,22 the

Commission finds that the rule proposal

is consistent with the requirements of

Section 6(b)(5) of the Act that the rules

of an exchange be designed to prevent

fraudulent and manipulative acts and

practices, to facilitate transactions in

securities, and to protect investors and

the public interest.23

The Commission notes that the Major

11 International Index Notes are not

leveraged instruments; however, their

price will still be derived from and

based upon the securities in eleven

different markets, as reflected by the

underlying sub-indices. As noted in the

Term Notes Approval Orders, the level

of risk involved in the purchase and sale

of a MITTS is generally similar to the

risk involved in the purchase or sale of

traditional common stock, except for the

fact that the products are derivatively

priced from a portfolio of securities.

MITTS on the Major 11 International

Index, however, raise an additional

level of risk because the final rate of

return of the Index Notes is derivatively

priced, based upon the performance of

a portfolio of eleven different subindices, whose performance is also

derivatively priced based upon the

performance of a portfolio of securities

trading in each of these eleven market

centers. Accordingly, the Commission

has specific concerns regarding this type

of product. For the reasons discussed

below, the Commission believes Amex’s

proposal adequately addresses these

concerns.

First, the Commission notes that

Amex’s rules and procedures addressing

the special concerns attendant to the

trading of hybrid securities will be

applicable to the proposed Index Notes.

In particular, by imposing the hybrid

listing standards, heightened suitability

for recommendations in Index Notes,

disclosure, and compliance

requirements noted above, the

Commission believes that the Exchange

has adequately addressed the potential

problems that could arise from the

hybrid nature of the proposed Index

Notes. In addition, Amex will distribute

a circular to its membership calling

attention to the specific risks associated

with the Major 11 International Index

Notes.24

Second, the Major 11 International

Index Notes remain a non-leveraged

product with the issuer guaranteeing no
44738 Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Notices

25See Amex Company Guide § 107A.

26See Term Notes Approval Orders, supra note 7.

27The Commission notes that the Major 11

International Index Notes are not quite equivalent

to other MITTS in that the Major 11 International

Index is based upon a group of sub-indices, all of

which have not been approved by the Commission

for trading. The Commission notes that by

approving this proposed rule change the

Commission is not approving either the Major 11

International Index or the underlying sub-indices

for options, warrants, and/or futures trading. The

Commission further notes that if the sub-indices

that have not been approved were to equal more

than 20% of the Major 11 International Index value,

the Commission would find it necessary to evaluate

those sub-indices like other index products before

approving the MITT. The decision to allow a

MITTS to be priced partly off of non-approved

indices is related to the fact that the Index Notes

are a limited issuance, at least 90% principal

guaranteed, non-leveraged investment, and that the

non-approved indices comprise only 12.05% of the

Major 11 International Index value. Any changes in

these factors would alter the Commission’s

determination.

28The sub-indices that have been previously

reviewed or approved in one of these contexts are

the NKY, FT–SE 100, DAX, CAC 40, HKX, AS 30,

MIB 30, OMX, and the IBEX 35. The other two subindices in the Major 11 International Index are SMI

and AEX.

29The Commission has issued these nonobjection letters relating to the offer and sale to U.S.

citizens of futures and/or options on futures on the

FT–SE 100, the DAX, the CAC 40, the MIB 30, the

OMX, and the IBEX 35. The Commission has issued

a non-objection letter relating to the application of

the Chicago Mercantile Exchange for designation as

a contract market to trade futures on the Nikkei 225

Index.

30The Commission notes that in its non-objection

letter to the CFTC regarding the Nikkei 225, it found

that the Nikkei 225 was not susceptible to

manipulation because of the large number of stocks

in the index and the representative nature of

various industry segments included in the index.

31See Securities Exchange Act Release Nos.

27565 (January 4, 1990), 55 FR 376 (Nikkei 225

Warrants); 27769 (March 6, 1990), 55 FR 9380

(March 13, 1990) (FT–SE 100 Warrants); 28544

(October 17, 1990), 55 FR 42792 (October 23, 1990)

(CAC 40 Warrants); 28587 (October 30, 1990), 55 FR

46595 (November 5, 1990) (CAC 40 Warrants);

29722 (September 23, 1991), 56 FR 49807 (October

1, 1991) (FT–SE 100 Reduced-Value Index Options);

33036 (October 8, 1993), 58 FR 53588 (October 15,

1993) (HKO Warrants); and 36070 (August 9, 1995),

60 FR 42205 (August 15, 1995) (DAX Warrants).

32As noted above, Amex represents that it has in

place surveillance sharing agreements with the

appropriate regulatory organizations in each

country in the Major 11 International Index, except

Sweden and Switzerland. These two countries

together represented only 9.39% of the Major 11

International Index as of April 3, 1997.

less than 90% of principal return. The

Commission realizes that the final

payout on the Major 11 International

Index Notes are dependent in part upon

the individual credit of the issuer. To

some extent this credit risk is

minimized by the Exchange’s listing

standards in Section 107A of the

Company Guide which provide that

only issuers satisfying substantial asset

and equity requirements may issue

securities such as MITTS. In addition,

the Exchange’s hydrid listing standards

further require that the proposed

indexed term notes have at least $4

million in market value.25 In any event,

financial information regarding the

issuer, in addition to information on the

underlying sub-indices, will be

publically available to investors.

Third, each of the sub-indices

represent securities from eleven major

markets. Both the history and

performance of these indices, as well as

current pricing trends, should be readily

available through a variety of public

sources. Further, the Commission notes

that although the value of each subindex should be available, Amex has

committed to disseminating the value of

the Major 11 International Index on a

real time basis at least once every 15

seconds throughout the trading day. As

noted above, current values for each

individual sub-index will be used,

including the value of the Major 11

International Index, for as long as they

are available during Amex’s trading

hours. The Commission believes that

this information will be extremely

useful and beneficial for investors in the

Index Notes.

Fourth, the Commission also has a

systematic concern, however, that a

broker-dealer or a subsidiary providing

a hedge for the issuer will incur position

exposure. As discussed in the Term

Notes Approval Orders, the Commission

believes this concern is minimal given

the size of the proposed Index Notes

issuance in relation to the net worth of

the issuer.26

Finally, the Commission also believes

that the listing and trading of the

proposed Index Notes should not

unduly impact the market for the

securities underlying the sub-indices or

raise manipulative concerns. The

Commission notes that all of the subindices that make up the Index are

established indices.27 The Commission

has previously reviewed or approved

nine of the eleven sub-indices,

representing 87.95% of the value of the

Major 11 International Index as of April

3, 1997,28 in the context of either

warrant trading, options trading, or

while issuing non-objection letters to

the Commodity Futures Trading

Commission (‘‘CFTC’’).29 In these

previous reviews, the Commission

evaluated each of the individual subindices noted above and found that they

were broad-based indices comprised of

highly capitalized stocks with high

trading volumes that were not readily

susceptible to manipulation.30

Specifically, in the letters to the

CFTC, the Commission found that

certain of the sub-indices are not readily

susceptible to manipulation because of

the representative nature of the various

industry segments included in the

individual index, the relative weighted

value of the index’s component stocks,

and the substantial capitalization and

trading volume of the component

stocks. In Commission orders previously

approving the FT–SE 100 for warrant

and reduced-value options trading, the

CAC 40 for warrant trading, the DAX for

warrant trading, the Nikkei 225 for

warrant trading, and the HKO for

warrant trading, the Commission made

similar findings that the index was a

broad-based index of actively traded,

well capitalized stocks.31 Additionally,

Amex’s surveillance procedures will

serve to deter as well as detect any

potential manipulation.32

The Commission finds good cause to

approve Amendment Nos. 1, 2, and 3 to

the proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. As noted above,

Amendment No. 1 states that the

Exchange’s equity rules, including the

equity margin rule and the suitability

rule, will apply to the trading of the

proposed Index Notes. Amendment No.

3 adopts heightened suitability

standards, as described above, for this

particular MITTS product. In addition,

Amendment No. 1 clarifies that the

Exchange will distribute to its

membership, prior to trading the

proposed Index Notes, a circular

providing guidance with regard to

member and member firm compliance

responsibilities, including suitability

recommendations, when handling

transactions in the proposed Index

Notes and highlighting their special

risks and characteristics.

Amendment No. 1 also states that the

continued listing standards set forth in

Sections 1001–1003 of the Amex

Company Guide will apply to the

trading of the proposed Index Notes,

and Amendment No. 2 further clarifies

this by stating that Section 1003(b), in

particular, will apply. Finally,

Amendment Nos. 1 and 2, collectively,

state that the shares for each sub-index

will remain fixed, except in the event of

a significant action taken by the

publisher, such as a split in the subindex value, a change in the calculation

of the sub-index, or if the sub-index

ceases to be published. Amendment No.

2 also provides additional detail on

potential changes that can be made to

the Index upon certain events, as well

as describes how Amex would calculate

the Index if a sub-index was closed on

any given business day in the U.S., such
Federal Register / Vol. 62, No. 163 / Friday, August 22, 1997 / Notices 44739

33 15 U.S.C. 78s(b)2.

34 17 CFR 200.30.3(a)12.

1 15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).

2 17 CFR 240.19b–4.

3See letter from Timothy H. Thompson, Senior

Attorney, CBOE, to Steve Youhn, Division of

Market Regulation, Commission, dated May 13,

1997 (‘‘Amendment No. 1’’).

4See Securities Exchange Act Release No. 38637

(May 14, 1997), 62 FR 28084 (May 22, 1997).

5See Securities Exchange Act Release No. 31920

(February 24, 1993), 58 FR 12280 (March 3, 1993).

6The rule currently provides that the Submitting

Member is entitled to the largest of the percentage

of the trade (1⁄2 or 2⁄3), $1 million Underlying

Equivalent Value, or the remaining Underlying

Equivalent Value on a closing transaction valued at

less than $1 million. These qualifications ($1

million Underlying Equivalent Value or the

remaining Underlying Equivalent Value) remain in

the proposed rule.

7Because the percentage entitlements for

Submitting Members for both FLEX Equity and

FLEX Index options are currently contained in one

paragraph in CBOE Rule 24A.5, the Exchange’s

proposal will separate the treatment of Flex Equity

and Flex Index options into different paragraphs.

as if a market disruption occurred due

to a natural disaster or a foreign holiday.

The Commission believes that

Amendment Nos. 1, 2, and 3, as

described herein, clarify and strengthen

the Exchange’s proposal by, among

other things, providing the specific

continued listing standards that will

apply, which should help ensure a

minimal level of depth and liquidity for

continued trading of the product on

Amex, identifying which trading rules

will apply to the trading of the Index

Notes, and adopting a heightened

suitability standard for

recommendations covering the Index

Notes. Amendment Nos. 1 and 2 also

refine the original proposal by

specifying in further detail how the

Exchange will be responsible for

determining any changes in the subindices due to a significant event, and

Amendment No. 1 clarifies the terms of

the Information Circular. Additionally,

the Exchange’s proposal to list and trade

the proposed Index Notes was noticed

for the full comment period and no

comment letters were received.

Accordingly, the Commission believes

that it is consistent with Section 6(b)(5)

of the Act to approve Amendment Nos.

1, 2, and 3 to the proposal on an

accelerated basis.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

1, 2, and 3 to the rule proposal. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street N.W., Washington, D.C.

20549. Copies of the submission, all

subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–Amex–97–20 and should be

submitted by September 12, 1997.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,33 that the

proposed rule change (SR–Amex–97–

20), including Amendment Nos. 1, 2,

and 3 is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.34

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–22291 Filed 8–21–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38939; File No. SR–CBOE–

97–16]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Inc.; Order Approving Proposed Rule

Change, and Amendment No. 1

Thereto, Relating to the Trading of

FLEX Index Options

August 15, 1997.

On March 13, 1997, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) submitted to the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’), pursuant to

Section 19(b) of the Securities Exchange

Act of 1934 (‘‘Act’’),1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend its rules governing the trading of

FLEX Index options. On May 13, 1997,

the CBOE submitted an amendment to

the Commission regarding the

proposal.3 Notice of the proposed rule

change, and Amendment No. 1 thereto,

appeared in the Federal Register on

May 22, 1997.4 No comments were

received on the proposal. This order

approves the proposal, as amended.

I. Description of the Proposal

The purpose of the proposed rule

change is to make certain changes to the

Exchange’s rules governing the trading

of FLEX Index options. Specifically,

those changes involve a reduction in the

percentage of a trade to which a

Submitting Member indicating an intent

to cross is entitled, and the

establishment of bid-offer spreads for

certain FLEX Index trades.

Since their inception,5 FLEX Index

options have relied on Appointed

Market-Makers (‘‘AMMs’’) to provide

liquidity for FLEX requests for quotes

(‘‘RFQs’’). AMMs are required, pursuant

to CBOE Rule 24A.9(b), to enter a FLEX

Quote in response to any RFQ on any

FLEX option of the class to which the

AMM is appointed.

As an inducement to attract volume

that would otherwise be transacted in

the over-the-counter market, the

Exchange established percentage

entitlements for the Exchange member

that initiates FLEX bidding and offering

by submitting a RFQ (‘‘Submitting

Member’’) where the Submitting

Member has indicated an intention to

cross or to act as principal on the trade

and has matched or improved the best

bid or offer (‘‘BBO’’). Generally, with

some qualifications, pursuant to CBOE

Rule 24A.5, the Submitting Member in

a FLEX Index option is entitled to 50%

(1⁄2) of the trade in the case where the

Submitting Member matches the BBO

and 66.67% (2⁄3) of the trade where the

Submitting Member improves the BBO.

To the extent Submitting Members

accept their entire entitlement on a

FLEX Index option trade, half of the

trade or less would remain for the other

market-makers to share. The Exchange

believes, however, that these

entitlements have discouraged

participation by market-makers in the

FLEX Index product. Accordingly, the

Exchange has proposed to amend its

rules so that the entitlement for

Submitting Members would be reduced

to the greater of 25% or a proportional

share of the trade.6 This means, for

example, that if there are four marketmakers participating on the trade in

addition to the Submitting Member,

then the Submitting Member would be

entitled to 25% of the trade because it

is greater than the proportional share

(1⁄5) of the trade. However, if there were

two market-makers participating on a

trade along with a Submitting Member,

the Submitting Member would be

entitled to a proportional share of the

trade, or 1⁄3. This is different from the

current entitlement for Submitting

Members in Flex Equity options, under

CBOE Rule 24A.5, who are entitled only

to 25% of the trade regardless of the

number of participants to the trade.7