19280 Federal Register / Vol. 63, No. 74 / Friday, April 17, 1998 / Notices

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 39580

(January 26, 1998) 63 FR 5577.

4Telephone conversation between Claire

McGrath, Vice President and Special Counsel,

Amex, and Deborah Flynn, Division of Market

Regulation (‘‘Division’’), Commission, on January

22, 1998.

5The component securities of the Index are as

follows: Bank of New York Co., Inc.; Chubb Corp.;

Comcast Corporation; Cracker Barrel Old Country

Stores; Delta Airlines, Inc.; DST Systems, Inc.;

Federal National Mortgage Association; Guidant

Corporation; Masco Corp.; Office Depot, Inc.; Pfizer,

Inc.; Protective Life Corp.; Questar Corp.; Tenet

Healthcare Corp.; Telecom Italia SpA; KLM Royal

Dutch Airlines; and Toyota Motor Corporation.

6Telephone conversation between Claire

McGrath, Vice President and Special Counsel,

Amex, and Deborah Flynn, Division, Commission,

on January 22, 1998.

7 17 CFR 240.19b–4.

8Telephone conversation between Claire

McGrath, Vice President and Special Counsel,

Amex, and Deborah Flynn, Division, Commission,

on April 8, 1998.

2. Before any currency transaction is

entered into, the Fund or its adviser

must obtain such available market

information as they deem necessary to

determine that the price to be paid or

received for, and the terms of, each

transaction are at least as favorable as

that available from other sources. This

shall include the following information,

without limitation:

With respect to round lot currency

transactions, the Fund must obtain and

document the competitive indications

with respect to the specific proposed

transaction, either from two other

currency dealers or from one currency

dealer and from an automated quotation

system approved by the board of

directors of the Fund, including a

majority of non-interested directors. In

the case of odd lot currency

transactions, the Fund must obtain and

document the competitive indications

with respect to (a) the specific proposed

transaction from two other currency

dealers; and (b) a round lot transaction

of the same currency with the same

settlement terms from one other

currency dealer or an automated

quotation system. Competitive quotation

information must include price and

settlement terms. Dealers must be those

who, in the experience of the Fund’s

adviser, have demonstrated the

consistent ability to provide

professional execution of currency

transactions at competitive market

prices in the currencies of the type

desired. The dealers also must be those

who, in the experience of the Fund’s

adviser, are in a position to quote

favorable prices.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10183 Filed 4–16–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39853; File No. SR–Amex–

97–48]

Self-Regulatory Organizations;

American Stock Exchange, Inc.; Order

Granting Approval To Proposed Rule

Change Relating to Listing and Trading

of Index Warrants on the Merrill Lynch

1998 Equity Focus Index

April 13, 1998.

I. Introduction

On December 22, 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 index

warrants based on the Merrill Lynch

1998 Equity Focus Index (‘‘Index’’).

The proposed rule change was

published for comment in the Federal

Register on February 3, 1998.3 No

comments were received on the

proposal. This order approves the

proposed rule change.

II. Description of the Proposal

The purpose of the proposed rule

change is to permit the Exchange to list

and trade cash-settled index warrants

based on the Index, an equal-dollar

weighted index developed by Merrill

Lynch, Pierce, Fenner & Smith, Inc. The

Exchange has represented that the

listing and trading of warrants based on

the Index will comply in all respects

with Amex Rules 1100 through 1110

and Section 106 of the Amex Company

Guide.

Design of the Index

The Exchange has represented that

the Index is narrow-based 4 and

composed of the stocks (or American

Depositary Receipts (‘‘ADRs’’) thereon)

of 17 companies 5 representing various

industries that are traded on the New

York Stock Exchange (‘‘NYSE’’) or

through the facilities of the National

Association of Securities Dealers

Automated Quotation system

(‘‘Nasdaq’’). The Index is equal-dollar

weighted and is, therefore, designed to

ensure that each of the component

securities is initially represented in an

approximately ‘‘equal’’ dollar amount in

the Index. Accordingly, each of the 17

companies included in the Index will

represent approximately 5.882 percent

of the weight of the Index at the time of

issuance of the warrant. The Index

multipliers will be determined to yield

an Index value of 100.00 on the date the

warrant is priced for initial offering to

the public.

According to the Amex, the total

market capitalization of the Index

totaled $380 billion on December 10,

1997. The median capitalization of the

companies in the Index on that date was

$9.4 billion and the average market

capitalization of these companies was

$22 billion. The individual market

capitalization of the companies ranged

from $1.7 billion to $106 billion. In

addition, minimum monthly trading

volume in the Index stocks ranged from

approximately 330,000 shares to 54.4

million shares during the six month

period from June through November

1997.

According to the Exchange, 15 of the

Index’s 17 component securities meet

the current criteria for standardized

options trading set forth in Rule 915.

Only two component securities,

Telecom Italia SpA and Toyota Motor

Corporation, are represented by ADRs

and according to the Amex, in both

instances, comprehensive surveillance

sharing arrangements are in place with

the appropriate regulatory authorities in

each relevant country. The Amex

represents that no component security

represents more than 25% of the weight

of the index and the five highest

weighted securities do not account for

more that 50% of the weight of the

Index.

Amex contemplates listing a single

issuance of warrants based on the

Index,6 with a term ranging from one to

three years. If the Amex seeks to list and

trade other products based on the Index,

including other issuances of Index

warrants, the Exchange will advise the

Commission to determine whether an

additional filing pursuant to Rule 19b–

4 7 is necessary. In addition, if the term

of the warrants exceeds one year, the

Exchange will monitor the options

eligibility of the underlying securities. If

less that 75% of the weight of the Index

is composed of securities that are

options eligible, the Amex will notify

the Commission.8

Maintenance of the Index

Shares of a component stock may be

replaced (or supplemented) with other

securities under certain circumstances,

such as the conversion of a component

stock into another class of security, the
Federal Register / Vol. 63, No. 74 / Friday, April 17, 1998 / Notices 19281

9See Section 106 of the Amex Company Guide.

10See Amex Rules 1107 and 1108.

11See Amex Rule 1110.

12See Amex Rule 1109.

13See Amex Rule 1101.

14See Amex Rule 1102.

15 15 U.S.C. 78f.

16 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).

17 15 U.S.C. 78f(b)(5).

18Pursuant to Section 6(b)(5) of the Act, the

Commission must predicate approval of any new

securities product upon a finding that the

introduction of such product is in the public

interest. Such a finding would be difficult with

respect to a warrant that served no hedging or other

economic function, because any benefits that might

be derived by market participants likely would be

outweighed by the potential for manipulation,

diminished public confidence in the integrity of the

markets, and other valid regulatory concerns.

19 In addition, as noted above, in the event that

a security in the Index is removed due to a

corporate consolidation and the holders of such

security receive cash, the cash value of such

security will be included in the Index and will

accrue interest at LIBOR to term.

termination of a depositary receipt

program or the spin-off of a subsidiary.

If the stock remains in the Index, the

multiplier of that security in the

portfolio may be adjusted to maintain

the component’s relative weight in the

Index at the level immediately prior to

the corporate action. In the event that a

security in the Index is removed due to

a corporate consolidation and the

holders of such security receive cash,

the cash value of such security will be

included in the Index and will accrue

interest at LIBOR to term, compounded

daily.

Trading of the Index Warrants

The Index warrants will be direct

obligations of their issuer subject to

cash-settlement during their term, and

either exercisable throughout their life

(i.e., American style) or exercisable only

on their expiration date (i.e., European

style). Upon exercise, or at the warrant

expiration date (if not exercisable prior

to such date), the holder of a warrant

structured as a ‘‘put’’ would receive

payment in U.S. dollars to the extent

that the Index has declined below a prestated index level. Conversely, holders

of a warrant structured as a ‘‘call’’

would, upon exercise or at expiration,

receive payment in U.S. dollars to the

extent that the Index has increased

above the pre-stated index level. If ‘‘outof-the-money’’ at the time of expiration,

the warrants would expire worthless.

Calculation and Dissemination of the

Value of the Index

Similar to other stock index values

published by the Exchange, the value of

the proposed Index will be calculated

continuously and disseminated every 15

seconds over the Consolidated Tape

Association’s Network B.

The multiplier of each of the 17

component stocks in the Index portfolio

will remain fixed except in the event of

certain types of corporate actions. Such

corporate action includes the payment

of a dividend other than an ordinary

cash dividend, stock distribution, stock

split, reverse stock split, rights offering,

distribution, reorganization,

recapitalization, or similar event. The

multiplier of each component stock may

also be adjusted, if necessary, in the

event of a merger, consolidation,

dissolution or liquidation of an issuer or

in certain other events such as the

distribution of property by an issuer to

shareholders, the expropriation or

nationalization of an issuer or the

imposition of certain foreign taxes on

shareholders of a foreign issuer.

Listing and Trading of the Index

Warrants

As stated above, the listing and

trading of the proposed warrants on the

Index will comply in all respects with

Amex Rules 1100 through 1110 and

Section 106 of the Amex Company

Guide. These provisions will govern all

aspects of the listing and trading of the

Index warrants, including issuer

eligibility,9 position and exercise

limits,10 reportable positions,11 and

trading halts and suspensions.12

In addition, these warrants will be

sold only to accounts approved for the

trading of standardized options 13 and

the Exchange’s options suitability

standards will apply to

recommendations regarding Index

warrants.14 Finally, the Amex will

distribute a circular to its membership,

prior to the commencement of trading,

calling attention to specific risks

associated with warrants on the Index.

III. Discussion

The Commission finds that the

proposed rule change, as amended, is

consistent with the requirements of

Section 6 of the Act 15 and the rules and

regulations thereunder applicable to a

national securities exchange.16

Specifically, the Commission believes

that the proposed rule change is

consistent with and furthers the

objectives of Section 6(b)(5) of the Act 17

in that the trading of warrants based on

the Index will serve to protect the

public interest and will help to remove

impediments to a free and open market

by providing investors holding positions

in some or all of the securities

underlying the Index with a means to

hedge exposure to the market risk

associated with their portfolios.18

Nevertheless, the trading of warrants

on the Index raises several concerns

relating to the design and maintenance

of the Index, customer protection,

surveillance, and market impact. The

Commission believes however, for the

reasons discussed below, that the Amex

has adequately addressed these

concerns.

The Commission finds that it is

appropriate and consistent with the Act

for the Amex to designate the Index as

narrow-based for warrant trading as the

Index is composed of a limited number

of stocks. The Commission believes that

the liquid markets, large capitalizations

and relative weightings of the Index’s

component stocks significantly

minimizes the potential for

manipulation of the Index. First, the 17

stocks that comprise the Index, of which

14 trade on the NYSE and 3 trade on

Nasdaq, are actively-traded. During the

six month period from June 1997

through November 1997, minimum

monthly trading in the Index stocks

ranged from approximately 330,000

shares to 54.4 million shares. Second,

the market capitalization of the stocks

comprising the Index is very large.

Specifically, the total capitalization of

the Index, as of December 10, 1997, was

approximately $22 billion, with the

market capitalization of the individual

stocks in the Index ranging from $1.7

billion to $106 billion. In addition, the

median capitalization of the companies

in the Index on that date was $9.4

billion, and the average market

capitalization of these companies was

$22 billion. Third, no one particular

stock dominates the Index. Specifically,

no single stock accounts for more than

approximately 5.882 percent of the

Index’s value.

The Commission notes that with

respect to the maintenance of the Index,

shares of a component stock will only

be replaced or supplemented under

certain limited circumstances, such as

the conversion of a component stock

into another class of security, the

termination of a depositary receipt

program or the spin-off of a subsidiary.

Accordingly, all replacement or

supplemental Index component

securities will be related to the original

component stock.19

Although the Index, as currently

composed, contains highly capitalized

and actively-traded issues reflected in

an equal-weighted manner, the Amex

has not proposed Index maintenance

criteria that ensures the Index will

remain this way. The Commission

understands that the Index is designed
19282 Federal Register / Vol. 63, No. 74 / Friday, April 17, 1998 / Notices

20 15 U.S.C. 78s(b).

21See Section 106 of the Amex Company Guide

which requires, among other things, that the issuer

have tangible net worth in excess of $250 million

and otherwise substantially exceed size and

earnings requirements in Section 101(A) of the

Company Guide or meet the alternative guideline

set forth in paragraph (a).

22The Commission notes that position limits for

narrow-based stock index warrants are set at a level

roughly equivalent to 75 percent of narrow-based

index options. As a result, position limits for

warrants based on the Index will be nine million.

23Telephone conversation between Claire

McGrath, Vice President and Special Counsel,

Amex, and Deborah Flynn, Division, Commission,

on March 16, 1998.

24 15 U.S.C. 78s(b)(2).

25 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Murray L. Ross, Vice President

and Secretary, Phlx, to Richard Strasser, Assistant

Director, Division of Market Regulation,

Commission, dated January 14, 1998. Amendment

No. 1 is described further below.

4See Securities Exchange Act Release No. 39622

(Feb. 4, 1998) 63 FR 7488 (Feb. 13, 1998).

5 In Amendment No. 1 to the filing, the Phlx

proposed a new rule, to be designated as Rule 21,

which would define an Inactive Nominee as

follows:

The term inactive nominee shall mean a natural

person associated with and designated by a member

organization who has applied for and been

approved by the Admissions Committee for such

status and is registered as such with the Office of

the Secretary. An inactive nominee shall have no

rights or privileges of membership unless and until

said inactive nominee becomes a member of the

Exchange pursuant to the By-Laws and Rules of the

Exchange. An inactive nominee merely stands

ready to assume legal title to a membership upon

notice by the member organization to the Office of

Secretary to be transferred intra-firm on an

expedited basis.

to reflect a static portfolio of stocks and

the active Index maintenance (i.e.,

including replacing Index components)

generally is inconsistent with such

approach. In order to address the

possibility that the quality of the stocks

in the Index could deteriorate or one or

several stocks could dominate the

Index, the Amex has represented that it

is seeking only to list and trade a single

issuance of warrants on the Index with

a limited duration of one to three years.

The Commission notes that if the

Exchange proposes to list and trade

other products based on Index,

including other index warrants, the

Exchange will advise the Commission in

order to determine whether a rule filing

pursuant to Section 19(b) of the Act 20

will be necessary. In addition, the

Commission notes that if the term of the

warrants exceeds one year, the

Exchange will monitor the options

eligibility of the underlying securities. If

less than 75% of the weight of the Index

is composed of securities that are

options eligible, the Amex will notify

the Commission. Given the high quality

of the component stocks, as well as the

other factors noted above, the

Commission believes that the absence of

active Index maintenance criteria is not

fatal to the Commission’s approval of

the listing and trading of a single

issuance of warrants on the Index.

The Commission further notes that

the rules and procedures of the

Exchange adequately address the special

concerns attendant to the trading of

Index warrants. Specifically, the

applicable suitability, account approval,

disclosure, and compliance

requirements of the applicable Amex

provisions satisfactorily address

potential public customer concerns.

Moreover, the Amex plans to distribute

a circular to its membership calling

attention to specific risks associated

with warrants on the Index. Finally,

pursuant to the Exchange’s listing

guidelines, only companies capable of

meeting the Amex’s index warrant

issuer standards will be eligible to issue

Index warrants.21

The Commission believes that the

listing and trading of warrants on the

Index will not adversely impact the

underlying securities because the Index

is comprised of highly-capitalized

securities that are actively-traded. In

addition, the Amex has established

reasonable position and exercise limits

for narrow-based stock index

warrants,22 which will serve to

minimize potential manipulation and

other stock market concerns.

Finally, the Amex represents 23 that

its existing surveillance procedures will

allow the Exchange to detect and deter

potential manipulations and other

trading abuses in the derivatives and

underlying securities markets. The

Exchange further represents that

comprehensive surveillance sharing

agreements are in place with the

appropriate regulatory authorities in the

countries that oversee the primary

markets for the two securities in the

Index that are represented by ADRs.

Accordingly, the Commission believes

that the Amex should have available to

it the regulatory tools necessary to

properly surveil for abuses in the

trading of warrants on the Index.

V. Conclusion

For the foregoing reasons, the

Commission finds that the Amex’s

proposal to list and trade warrants based

on the Index is consistent with the

requirements of the Act and the rules

and regulations thereunder.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,24 that the

proposed rule change (SR–Amex–97–

48) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–10184 Filed 4–16–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39851; File No. SR–PHLX–

97–35]

April 10, 1998.

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Approving Proposed Rule

Change To Amend Its By-Law Article

XII, Section 12–10, With Respect to the

Eligibility of Persons To Serve as

Inactive Nominees

On December 15, 1997, the

Philadelphia Stock Exchange,Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘SEC’’ or ‘‘Commission’’) the proposed

rule change pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

(‘‘Act’’),1 and Rule 19b–4 thereunder 2 to

amend its By-Law Article XII, Section

12–10, with respect to the eligibility of

persons to serve as inactive nominees.

On January 14, 1998, the Exchange

submitted Amendment No. 1 to the

filing, in which it proposed a new rule,

Phlx Rule 21, defining ‘‘Inactive

Nominee,’’ and explained the role of an

Inactive Nominee on the Phlx.3

Notice of the proposed rule change,

including Amendment No. 1, was

published in the Federal Register.4 The

Commission received no comment

letters in response to the filing. This

order approves the proposed rule

change, as amended.

I. Description of the Proposal

Phlx’s proposal would amend its ByLaw Article XII, Section 12–10, with

respect to the eligibility of persons to

serve as Inactive Nominees.5

Phlx By-Law Article XII, Section 12–

10, sets forth the eligibility requirements