37426 Federal Register / Vol. 63, No. 132 / Friday, July 10, 1998 / Notices

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

2 17 CFR 240.19b–4.

3Amendment Nos. 1 and 2 have been replaced

and superseded by Amendment No. 5.

4See Securities Exchange Act Release No. 38308

(February 19, 1997), 62 FR 8467.

5See Letter from Claire P. McGrath, Vice

President & Senior Counsel, Amex, to Sharon

Lawson, Senior Special Counsel, Office of Market

Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Division’’), dated January 6, 1998

(‘‘Amendment No. 3’’). Amendment No. 3 makes a

number of changes to the proposal which are

discussed herein.

6See Letter from Claire P. McGrath, Vice

President and Special Counsel, Amex, to Sharon

Lawson, Senior Special Counsel, OMS, Division,

Commission, dated March 11, 1998 (‘‘Amendment

No. 4’’). Amendment No. 4 provides that options on

Fund Shares can either meet the uniform options

listing standards set forth in Rule 915 and

commentary .01 thereunder or meet the criteria set

forth in proposed commentary .06 to Rule 915. The

portion of Amendment No. 4 that addresses

comprehensive surveillance sharing agreements

with regard to non-U.S. stocks in the index or

portfolio on which the fund shares are based has

been replaced and superseded by Amendment No.

5.

7See Letter from Claire P. McGrath, Vice

President and Special Counsel, Amex, to Sharon

Lawson, Senior Special Counsel, OMS, Division,

Commission, dated April 27, 1998 (‘‘Amendment

No. 5’’). In Amendment No. 5 the Amex proposes

the following surveillance sharing standard: (1) that

any Fund Share with non-U.S. stocks in the

underlying index or portfolio that are not subject to

comprehensive surveillance sharing agreements do

not in the aggregate represent more than 50% of the

weight of the index or portfolio; (2) stocks for which

the primary market is in anyone country that is not

subject to a comprehensive surveillance agreement

do not represent 20% or more of the weight of the

index; and (3) stocks for which the primary market

is in any two countries that are not subject to

comprehensive agreements do not represent 33% or

more of the weight of the index. Amendment No.

5 supersedes and replaces Amendment Nos. 1 & 2,

and the portion of Amendment No. 4 that addresses

surveillance sharing.

8See Letter from Claire P. McGrath, Vice

President and Special Counsel, Amex, to Sharon

Lawson, Senior Special Counsel, OMS, Division,

Commission, dated June 19, 1998 (‘‘Amendment

No. 6’’). In Amendment No. 6 the Exchange clarifies

that Fund Shares that hold securities based upon a

narrow-based index or portfolio must have options

margin that equals at least 100% of the current

market value of the contracts plus 20% of the

ROUTINE USES OF RECORDS MAINTAINED IN THE

SYSTEM, INCLUDING CATEGORIES OF USERS AND

THE PURPOSE OF SUCH USES.

These records and information

contained in these records are used as

follows:

1. To the appropriate Federal, State or

local agency responsible for

investigating, prosecuting, enforcing, or

implementing a statute, rule, regulation,

or order, where the SEC becomes aware

of an indication of a violation or

potential violation of civil or criminal

law or regulation;

2. To another Federal agency or to a

court when the Government is party to

a judicial proceeding before the court;

3. To a Federal, State, or local agency,

in response to its requests, in

connection with the hiring or retention

of an employee, the issuance of a

security clearance, or the conducting of

a security or background investigation

of an individual, to the extent that the

information is relevant and necessary to

the requesting agency; and

4. To the Office of Inspector General

for investigating allegations of abuse,

should they occur.

Policies and practices for storing, retrieving,

accessing, retaining, and disposing of records

in the system:

Retrievability:

By use of a database, records may be

retrieved by the employee’s name and

identification number.

Safeguards:

Records are safeguarded by restricted

computer passwords, locked file

cabinets, and safes.

Retention and disposal:

Records are maintained in a

computerized database and paper.

Electronic records, identification cards,

and passes are destroyed three months

after expiration, revocation, or return to

issuing office, as provided in the

National Archives and Records

Administration’s General Records

Schedule No. 11, Item 4.

System manger(s) and address:

Office of Administrative and

Personnel Management, Operations

Center, Securities and Exchange

Commission, 6432 General Green Way,

Mail Stop O–1, Alexandria, VA 22312–

2413.

Notification procedure:

All requests to determine whether this

system of records contains a record

pertaining to the requesting individual

may be directed to the Privacy Act

Officer, Securities and Exchange

Commission, Operations Center, 6432

General Green Way, Mail Stop O–5,

Alexandria, VA 22312–2413.

Records access procedures:

persons wishing to obtain information

on the procedures for gaining access to

or contesting the contents of this record

may contact the Privacy Act Officer,

Securities and Exchange Commission,

Operations Center, 6412 General Green

Way, Mail Stop O–5, Alexandria, VA

22312–2413.

Contesting records procedures:

See record access procedures above.

Record source categories:

Inforamtion is provided by the SEC

employee, contractor, consultant, or

press member being issued the

identification card and by the issuing

official.

Exemptions claimed for the system:

None.

Dated: July 2, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18298 Filed 7–9–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40157; File No. SR–Amex–

96–44]

Self-Regulatory Organizations; Order

Granting Approval of a Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendment Nos. 3, 4, 5 and 6 to the

Proposed Rule Change by the

American Stock Exchange, Inc.

Relating to the Listing and Trading of

Options on Exchange-Traded Fund

Shares

July 1, 1998.

I. Introduction

On November 21, 1996, the American

Stock Exchange, Inc. (‘‘Amex’’ or

‘‘Exchange’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) a proposed rule change

to list and trade options on securities

representing interests in open-end,

exchange-listed investment companies

that hold securities constituting or

based on an index or portfolio of

securities (‘‘Exchange-Traded Fund

Shares’’ or ‘‘Fund Shares’’). The

Exchange filed Amendment Nos. 1 and

2 to the proposal on January 16, 1997,

and February 19, 1997, respectively.3

Notice of the proposal, and Amendment

Nos. 1 and 2 appeared in the Federal

Register on February 25, 1997.4 No

comment letters were received on the

proposed rule change. On January 7,

1998, the Amex filed Amendment No. 3

to the proposed rule change.5

Among other things, Amendment No.

3 revises the proposal to permit the

Amex to trade FLEX Equity options on

Fund Shares. On March 12, 1998, the

Amex filed Amendment No. 4 to the

proposal 6 and on April 28, 1998, the

Exchange filed Amendment No. 5.7

Finally, on June 19, 1998, the Exchange

filed Amendment No. 6 to the proposed

rule change.8 This order approves the
Federal Register / Vol. 63, No. 132 / Friday, July 10, 1998 / Notices 37427

market value of equivalent units of the underlying

security value.

9 In general, FLEX Equity options provide

investors with the ability to customize basic option

features including size, expiration date, exercise

style, and certain exercise prices.

10Currently, the Exchange trades unit investment

trust securities known as Portfolio Depository

ReceiptsSM (‘‘PDRs’’) based on the Standard &

Poor’s 500 Composite Stock Price Index, the

Standard & Poor’s MidCap 400 Index, and the Dow

Jones Industrial Average. In addition, the Exchange

trades Index Fund Shares which are issued by an

open-end management investment company

consisting of seventeen separate series known as

World Equity Benchmark SharesSM (‘‘WEBS’’)

based on seventeen foreign equity market indexes.

PDRs and WEBS are listed on the Amex pursuant

to Rule 1000, et seq. and Rule 1000A et seq.,

respectively, and trade like shares of common stock.

The Commission notes that not all PDRs or WEBS

currently trading on the Amex may meet the

standards for options trading approved by this

order.

11See Amendment No. 3, supra note 5. In the

event the Exchange lists options covering both 100

and 1000 of the same underlying Fund Shares, the

Exchange will assign separate trading symbols to

the options and will issue an Information Circular

to all its members advising of the trading symbols.

Telephone conversation between Claire P. McGrath,

Vice President & Senior Counsel, Amex, and James

T. McHale, Special Counsel, OMS, Division,

Commission, on June 17, 1998.

12See Amendment No. 3, supra note 5.

13 Id.

14See Securities Exchange Act Release No. 39032

(September 9, 1997) (Order eliminating position

and exercise limits for FLEX Equity options on a

two year pilot basis) (‘‘FLEX Equity Position Limit

Pilot’’).

15Specifically, Commentary .01 to Rule 915

requires the underlying security to have a public

float of 7,000,000 shares, 2000 holders, trading

volume of 2,400,000 shares in the preceding 12

months, a share price of $7.50 for the majority of

the business days during the three calendar months

preceding the date of the selection, and that the

issuer of the underlying security is in compliance

with the Act.

16Provided the authorized creation participant

has undertaken to deliver the shares as soon as

possible and such undertaking has been secured by

the delivery and maintenance of collateral

consisting of cash or cash equivalents satisfactory

to the Fund which underlies the option, as

described in the Fund prospectus. See Amendment

No. 3, supra note 5.

17See Amendment No. 5, supra note 7.

18Specifically, Commentary .01 to Rule 916

provides that an underlying security will not meet

the Exchange’s requirements for continued listing

when, among other things; (1) there are fewer than

6 300,000 publicly-held shares; (2) there are fewer

than 1600 holders; (3) trading volume was less than

1,800,000 shares in the preceding twelve months;

and (4) the share price of the underlying security

closed below $5 on a majority of the business days

during the preceding 6 months.

Exchange’s proposal, and Amendment

Nos. 3, 4, 5, and 6 on an accelerated

basis.

II. Description of the Proposal

The purpose of the proposed rule

change is to provide for the trading of

options and FLEX Equity options 9 on

Fund Shares. As noted above, Fund

Shares are exchange-listed securities

representing interests in open-end unit

investment trusts or open-end

management investment companies

(‘‘Funds’’) that hold securities based on

an index or a portfolio of securities.10

Fund Shares are issued in exchange for

an ‘‘in kind’’ deposit of a specified

portfolio of securities, together with a

cash payment, in minimum size

aggregations or multiples thereof

(‘‘Creation Units’’). The size of the

applicable Creation Unit size

aggregation is set forth in the Fund’s

prospectus, and varies from one series

of Fund Shares to another, but generally

is of substantial size (e.g., value in

excess of $450,000 per creation unit). A

Fund, generally, will issue and sell

Fund Shares in Creation Unit size

through a principal underwriter on a

continuous basis at the net asset value

per share next determined after an order

to purchase Fund Shares and the

appropriate securities are received.

Following issuance, Fund Shares are

traded on an exchange like other equity

securities, and equity trading rules

apply. Likewise, redemption of Fund

Shares is made in Creation Unit size and

‘‘in kind,’’ with a portfolio of securities

and cash exchanged for the Fund Shares

that have been tendered for redemption.

Generally, options on ExchangeTraded Fund Shares are proposed to be

traded on the Exchange pursuant to the

same rules and procedures that apply to

trading in options on equity securities.

However, the Exchange is also

proposing to list FLEX Equity options

on Fund Shares and some options will

have a unit of trading of 1000 ExchangeTraded Fund Shares. The Exchange will

list option contracts covering either 100

or 1000 Fund Shares, or both,

depending on the price and volatility of

the underlying Fund Shares and the

popularity of the options.11 Strike prices

for both the 100 and 1000 share

contracts will be set to bracket the Fund

Shares at one point intervals up to a

share price of $200.12 The proposed

position and exercise limits for options

on Fund Shares would be the same as

those established for stock options as set

forth in Amex Rules 904 and 905. The

Amex anticipates that most options on

Fund Shares initially will qualify for

only the lowest position limit. As with

standardized equity options, the

position limits will be increased for

options if the volume of trading in the

Fund Shares increases to meet the

requirements of a higher limit.13 As is

currently the case for all FLEX Equity

options, no position and exercise limits

will be applicable to FLEX Equity

options overlying Fund Shares until, at

least, September 9, 1999.14

The listing and maintenance

standards proposed for options on

Exchange-Traded Fund Shares are set

forth in proposed Commentary .06

under Exchange Rule 915 and in

proposed Commentary .08 under

Exchange Rule 916, respectively.

Pursuant to the proposed initial listing

standards, Amex only will list Fund

Shares that are principally traded on a

national securities exchange or through

the facilities of a national securities

association and reported as national

market securities. In addition, the initial

listing standards require that either: (1)

the Fund Shares meet the uniform

options listing standards in

Commentary .01 to Rule 915, which

include minimum public float, trading

volume, and share price of the

underlying security in order to list the

option; 15 or (2) the Exchange-Traded

Fund Shares must be available for

creation or redemption each business

day in cash or in kind from the Fund at

a price related to the net asset value,

and the Exchange will require that the

underlying Fund Shares may be created

even though some or all of the securities

needed to be deposited have not been

received by the Fund.16

In addition, the initial listing

standards require that: (1) any Fund

Share with non-U.S. stocks in the

underlying index or portfolio that are

not subject to comprehensive

surveillance agreements do not in the

aggregate represent more than 50% of

the weight of the index or portfolio; (2)

stocks for which the primary market is

in any one country that is not subject to

a comprehensive surveillance agreement

do not represent 20% or more of the

weight of the index or portfolio; and (3)

stocks for which the primary market is

in any two countries that are not subject

to comprehensive surveillance

agreements do not represent 33% or

more of the weight of the index or

portfolio.17

The Exchange’s proposed

maintenance standards provide that if a

particular series of Exchange-Traded

Fund Shares should cease to trade on an

exchange or as national market

securities in the over-the-counter

market, there will be no opening

transactions in the options on the Fund

Shares, and all such options will trade

on a liquidation-only basis. In addition,

the Amex will consider the suspension

of opening transactions in any series of

options of the class covering Fund

Shares if: (1) the options fail to meet the

uniform equity option maintenance

standards Commentary .01 to Rule

916,18 when the options were listed

pursuant to the equity option listing
37428 Federal Register / Vol. 63, No. 132 / Friday, July 10, 1998 / Notices

19See Amendment No. 4, supra note 6. The

Commission notes that even if options on Fund

Shares were not listed under the uniform equity

option listing standards, Amex Rules 1002 and

1002A require a minimum number of Fund Shares

to be outstanding before trading in a series of Fund

Shares may commence. In addition, the Amex has

represented that although there is no comparable

public float maintenance standard for the

underlying Fund Shares, as a practical matter there

can never be trading in a series of Fund Shares in

which there is less than one Creation Unit

outstanding, since Fund Shares only may be created

and redeemed in Creation Unit size, and if the last

outstanding Creation Unit should ever be redeemed,

the series (and the options on that series) will cease

to trade.

20See Amendment No. 3, supra note 5. An

American-style option may be exercised at any time

prior to its expiration. A European-style option,

however, may be exercised only on its expiration

date.

21 Id.

22See Amendment No. 6, supra note 8.

23See letter from Joseph P. Corrigan, Executive

Director, OPRA, to Ivette Lopez, Assistant Director,

OMS, Division, Commission, dated November 8,

1996.

24 15 U.S.C. 78f(b)(5).

25The Commission hereby incorporates by

reference its findings and conclusions with respect

to the appropriateness of FLEX Equity options

generally. See Securities Exchange Act Release No.

37336 (June 19, 1996), 61 FR 33558 (June 27, 1996).

26Pursuant 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 new product is in the public

interest. Such a finding would be difficult for a

derivative instrument that served no hedging or

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.

27 15 U.S.C. 78c(f).

28See FLEX Equity Position Limit Order, supra

note 14. Pursuant to the FLEX Equity Position Limit

Pilot, the Commission expects the Amex to include

its experience with FLEX Equity options on Fund

Shares in its report to the Commission.

29The Commission notes, and Amex has verified,

that holders of options on Fund Shares who

exercise and receive the underlying Fund Shares

must receive, like any purchaser of Fund Shares, a

product description or prospectus, as appropriate.

Telephone Conversation between Claire P.

McGrath, Vice President and Senior Counsel,

Amex, Sharon Lawson, Senior Special Counsel,

OMS, Division, Commission, and James McHale,

Special Counsel, OMS, Division, Commission, on

June 25, 1998.

standards of Commentary .01 to Rule

915;19 (2) following the initial twelvemonth period beginning upon the

commencement of trading of the Fund

Shares on a national securities exchange

or as national market securities through

the facilities of a national securities

association there are fewer than 50

record and/or beneficial holders of Fund

Shares for 30 or more consecutive

trading days; (3) the value of the index

or portfolio of securities on which the

Fund Shares are based is no longer

calculated or available; or (4) such other

event shall occur or condition exist that

in the opinion of the Exchange makes

further dealing in such options on the

Exchange inadvisable.

Options on Fund Shares will be

physically-settled and will have the

American-style exercise feature used on

all standardized equity options, and not

the European-style feature originally

proposed.20 The Exchange, however,

also proposes to trade FLEX Equity

options which will be available with

both the American-style and Europeanstyle exercise feature, as well as other

FLEX Equity features.21

The proposed margin requirements

for options on Exchange-Traded Fund

Shares are at the same levels that apply

to options generally under Exchange

Rule 462, except, with respect to Fund

Shares based on a broad-based index or

portfolio, and those Fund Shares

approved by the Commission to date,

minimum margin must be deposited

and maintained equal to 100% of the

current market value of the option plus

15% of the market value of equivalent

units of the underlying security value.

Fund Shares that hold securities based

upon a narrow-based index or portfolio

must have options margin that equals at

least 100% of the current market value

of the contract plus 20% of the market

value of equivalent units of the

underlying security value.22 In this

respect, the margin requirements

proposed for options on ExchangeTraded Fund Shares are comparable to

margin requirements that currently

apply to broad-based and narrow-based

index options.

The Exchange believes it has the

necessary systems capacity to support

the additional series of options that

would result from the introduction of

options on Fund Shares, and it has been

advised that the Options Price Reporting

Authority (‘‘OPRA’’) also will have the

capacity to support these additional

series now that it has implemented an

additional outgoing high speed line

from the OPRA processor.23

III. Commission Findings and

Conclusions

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, the

requirements of Section 6(b)(5).24

Specifically, the Commission believes

that providing for the listing and trading

of options and FLEX Equity options 25

on Exchange-Traded Fund Shares

should give investors a better means to

hedge their positions in the underlying

Fund Shares. Further, the Commission

believes that pricing of the underlying

Fund Shares may become more efficient

and market makers in these shares, by

virtue of enhanced hedging

opportunities, may be able to provide

deeper and more liquid markets. In sum,

the Commission believes that options on

Fund Shares likely will engender the

same benefits to investors and the

market place that exist with respect to

options on common stock,26 thereby

serving to promote the public interest,

remove impediments to a free and open

securities market, and promote

efficiency, competition, and capital

formation.27

As a general matter, the Commission

believes that a regulatory system

designed to protect public customers

must be in place before the trading of

sophisticated financial instruments,

such as options on Fund Shares, can

commence trading on a national

securities exchange. The Commission

notes that the trading of standardized

exchange-traded options occurs in an

environment that is designed to ensure,

among other things, that: (1) The special

risks of options are disclosed to public

customers; (2) only investors capable of

evaluating and bearing the risks of

options trading are engaged in such

trading; and (3) special compliance

procedures are applicable to options

accounts. With regard to position and

exercise limits, the Commission finds

that it is appropriate to adopt the tiered

approach used in setting position and

exercise limits for standardized stock

options. This approach should serve to

minimize potential manipulation and

market impact concerns. In addition, the

Commission believes that the rationale

for allowing FLEX Equity options

generally to trade without position and

exercise limits until September 9, 1999,

is equally applicable in the context of

FLEX Equity options on Fund Shares.28

Accordingly, because options and FLEX

Equity options on Fund Shares will be

subject to the same regulatory regime as

the other options and FLEX Equity

options currently traded on the Amex,

the Commission believes that adequate

safeguards are in place to ensure the

protection of investors in options and

FLEX Equity options on Fund Shares.

The Commission also believes that it

is appropriate to permit the Amex to list

and trade options, including FLEX

Equity options, on Exchange-Traded

Fund Shares given that these options

must meet specific requirements related

to the protection of investors.29 First,

the Exchange’s listing and delisting

criteria for options on Fund Shares are

adequate. With regard to initial listing,

the proposal requires that either: (1) the
Federal Register / Vol. 63, No. 132 / Friday, July 10, 1998 / Notices 37429

30Provided the authorized creation participant

has undertaken to deliver the shares as soon as

possible and such undertaking has been secured by

the delivery and maintenance of collateral

consisting of cash or cash equivalents satisfactory

to the Fund which underlies the option, as

described in the Fund prospectus.

31See supra note 18.

32See supra note 30.

33The Exchange uses the term ‘‘comprehensive

surveillance agreement’’ to mean an agreement

which requires that the parties provide each other,

upon request, information about market trading,

clearing activity under the identity of the ultimate

purchasers and sellers of securities. Telephone

conversation between Claire P. McGrath, Vice

President and Senior Counsel, Amex, and James T.

McHale, Special Counsel, OMS, Division,

Commission, on June 17, 1998.

34 ISG was formed on July 14, 1983, to, among

other things, coordinate more effectively

surveillance and investigative information sharing

arrangements in the stock and options markets. See

Intermarket Surveillance Group Agreement, July 14,

1983. The members of ISG include all of the

registered National Securities Exchanges and the

National Association of Securities Dealers, Inc.

(‘‘NASD’’). In addition, the major stock index

futures exchanges (e.g., the Chicago Mercantile

Exchange and the Chicago Board of Trade) are

affiliate members of ISG.

35For example, the ISG Agreement would allow

for the exchange of surveillance and investigative

information between the Amex, trading PDRs on the

S&P 500 index, and the markets trading the 500

stocks represented in the S&P 500 index. In

addition, should other markets begin trading Fund

Shares in the future, trading information with

regard to the Fund Shares themselves would be

readily available to the Amex pursuant to the ISG

and the Amex could list options on those Fund

Shares, assuming the options met all of the listing

standards and requirements discussed herein.

36The Commission notes that the portfolios or

indexes comprising WEBS have not been

designated as broad-based by the Commission. In

this order, the Commission is only determining that

broad-based margin treatment for the WEBS is

appropriate, without addressing the issue of

whether such WEBS are broad-based.

37See Amendment No. 6, supra note 8.

underlying Fund Shares meet the

Amex’s uniform options listing

standards; or (2) the Exchange-Traded

Fund Shares must be available for

creation or redemption each business

day in cash or in kind from the Fund at

a price related to the net asset value,

and the Exchange will require that the

underlying Fund Shares may be created

even though some or all of the securities

needed to be deposited have not been

received by the Fund.30 This listing

requirement should ensure that there

exists sufficient supply of the

underlying Fund Shares so that a short

call writer, for example, will have the

ability to secure delivery of the Fund

Shares upon exercise of the option.

In reviewing the Amex’s proposal, as

originally submitted, the Commission

had been concerned with the ability to

produce Fund Shares upon exercise of

the option. The Commission believes

the Amex has adequately addressed

these concerns through the adoption of

the listing standards set forth above. In

particular, options listed pursuant to the

uniform options listing standards will

have to meet the options maintenance

listing standards which require, among

other things, that a minimum number of

Fund Shares be outstanding to continue

trading the options.31 The alternative

listing criteria, noted above, should also

help to ensure that the underlying Fund

Shares will be available upon exercise

by requiring the Fund to allow market

participants to create Fund Shares even

though some or all of the necessary

securities needed to be deposited are

not available.32 Although there is no

absolute assurance that market

participants will go ahead and create

Fund Shares in the event a short call

writer needs to purchase Fund Shares to

meet an exercise notice, it is likely that

arbitrage opportunities will create an

incentive to do so. Further, in the event

there are not enough Fund Shares to

meet exercise requirements, as with

other physically-settled equity options,

the Options Clearing Corporation

(‘‘OCC’’) has rules that would apply to

such situations.

Second, the Commission believes that

the surveillance standard developed by

the Amex for options on Fund Shares is

adequate to address the concerns

associated with the listing and trading

of such securities. Specifically, the

Amex has proposed that: (1) any Fund

Share with non-US stocks in the

underlying index or portfolio that are

not subject to comprehensive

surveillance agreements do not in the

aggregate represent more than 50% of

the weight of the index or portfolio; (2)

stocks for which the primary market is

in any one country that is not subject to

a comprehensive surveillance agreement

do not represent 20% or more of the

weight of the index or portfolio; and (3)

stocks for which the primary market is

in any two countries that are not subject

to comprehensive surveillance

agreements do not represent 33% or

more of the weight of the index or

portfolio.33

As a general matter, the Commission

believes that comprehensive

surveillance agreements provide an

important deterrent to manipulation

because they facilitate the availability of

information needed to fully investigate

a potential manipulation if it were to

occur. These agreements are especially

important in the content of derivative

products based on foreign securities

because they facilitate the collection of

necessary regulatory, surveillance and

other information from foreign

jurisdictions. In evaluating the current

proposal, the Commission believes that

requiring comprehensive surveillance

agreements to be in place between the

Amex and the primary markets for

foreign securities that comprise 50% or

more of the weight of the underlying

index or portfolio upon which Fund

Shares are based, as well as the other

conditions discussed above, provides an

adequate mechanism for the exchange of

surveillance sharing information

necessary to detect and deter possible

market manipulations. Although the

Commission recognizes that up to 50%

of the Portfolio’s value may not be

covered by comprehensive surveillance

agreements, the other requirements will

ensure that a significant percentage of

the portfolio is not made up of securities

from uncovered countries. Further, as to

the domestically-traded Fund Shares

themselves and the domestic stocks in

the underlying index or portfolio upon

which Fund Shares are based, the

Intermarket Surveillance Group

(‘‘ISG’’) 34 Agreement will be applicable

to the trading of options on Fund

Shares.35

Finally, the Commission believes that

it is appropriate to require minimum

margin of 100% of the current market

value of the option plus 15% of the

market value of the underlying security

value (‘‘broad-based margin’’) for

options on Fund Shares based on a

broad-based index or portfolio and for

options on Fund Shares which have

been approved to date.36 Moreover, the

Commission believes that requiring

minimum margin of 100% of the current

market value of the option plus 20% of

the market value of the underlying

security value (‘‘narrow-based margin’’)

for options on Fund Shares based on a

narrow-based index or portfolio is

appropriate.37 The Commission notes

that these margin requirements for

options on Exchange-Traded Fund

Shares are comparable to margin

requirements that currently apply to

broad-based and narrow-based index

options.

The Commission finds good cause for

approving Amendment Nos. 3, 4, 5, and

6 to the proposed rule change prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. Amendment No. 3,

strengthens the proposal by: (1)

providing that the Exchange will not list

options on Fund Shares unless the Fund

has agreed to issue Fund Shares even

though some or all of the securities

needed to be deposited have not been

received, thus ensuring a minimum

level of liquidity; and (2) adopting

standardized options position and

exercise limits. Amendment No. 3 also:

(1) provides the options on Fund Shares
37430 Federal Register / Vol. 63, No. 132 / Friday, July 10, 1998 / Notices

38 15 U.S.C. 78s(b)(2).

39 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 38342

(February 26, 1997), 62 FR 10098.

4On May 2, 1997, the CBOE filed an amendment

to the proposed rule change. See Letter from

Michael L. Meyer, Esq., Schiff Hardin & Waite, to

Howard L. Kramer, Senior Associate Director,

Office of Market Supervision (‘‘OMS’’), Division of

Market Regulation (‘‘Division’’), Commission, dated

May 2, 1997 (‘‘Amendment No. 1’’). Amendment

No. 1 made no changes to the proposal, but merely

clarified the Exchange’s original filing. Amendment

No. 1 is no longer relevant, and has been replaced

and superseded by Amendment Nos. 2 and 3.

5See Letter from Michael L. Meyer, Esq., Schiff

Hardin & Waite to Howard L. Kramer, Senior

Associate Director, OMS, Division, Commission,

dated January 9, 1998 (‘‘Amendment No. 2’’). In

Amendment No. 2 the Exchange proposes to revise

the listing standards for Fund Shares set forth in

Interpretation and Policy .06 under Rule 5.3 to

require, in addition to other criteria, either: (1) that

the underlying Fund Shares or units must satisfy

the same criteria and guidelines under CBOE rules

that apply to determine the eligibility for listing

options on underlying equity securities; or (2) that

the issuer is obligated to issue Fund Shares in a

specified aggregate number in return for a cash

deposit in an amount equal to the value of the

securities that comprise the index or portfolio

represented by the Fund Shares. In addition,

Amendment No. 2 provides that the same tiered

shall have the American-style exercise

feature; (2) allows for the trading of

FLEX Equity options on Fund Shares;

(3) permits the Exchange to list options

on Funds Shares covering 100 or 1000

Fund Shares or both; (4) sets strike

prices for both 100 and 1000 share

contracts to bracket the Fund Shares

price at one point intervals up to a share

price of $200; and (5) makes various

non-substantive references to

‘‘Exchange-Traded Fund Shares’’

throughout Amex’s Rules, where

appropriate. The Commission finds that

these changes are not controversial

because they do not alter the

fundamental nature of the proposal.

Amendment No. 4 provides the

Exchange with the flexibility to list

Fund Shares pursuant to the uniform

option listing standards in Rule 915 and

Commentary .01, in lieu of obtaining a

commitment from the unit investment

trust or management investment

company to issue Fund Shares even

though some or all of the securities

needed to be deposited have not been

received. The Commission believes that

this strengthens the proposal because

the uniform option listing standards

help to ensure that the Fund Shares

underlying the options are actively

traded, with substantial public float and

number of holders. That portion of

Amendment No. 4 that addresses

comprehensive surveillance sharing

agreements has been replaced and

superseded by Amendment No. 5.

The Commission also believes that

Amendment No. 5, concerning

surveillance requirements, strengthens

the Amex’s proposal. Amendment No.

5, provides a clear, objective standard

for determining the comprehensive

surveillance requirements for trading

options on Fund Shares where the

underlying index or portfolio contains

non-U.S. stocks.

The Commission finds that

Amendment No. 6 also strengthens the

Amex’s proposal. Amendment No. 6

provides that the Amex will apply

narrow-based margin to options on

Fund Shares which are based on a

narrow-based index or portfolio of

securities. This requirement should

ensure that purchasers of options on

Fund Shares based on a narrow-based

index or portfolio post sufficient margin

to address any concerns associated with

the potentially increased volatility

inherent in a narrow-based index.

Finally, the Commission notes that no

comments were received on the original

Amex proposal, which was subject to

full 21-day comment period.

Accordingly, the Commission believes

that there is good cause, consistent with

Section 6(b)(5) of the Act, to approve

Amendment Nos. 3, 4, 5, and 6 to the

proposed rule change on an accelerated

basis.

Interested persons are invited to

submit written data, views and

arguments concerning Amendment Nos.

3, 4, 5 and 6 to the proposed rule

change, including whether the

Amendments are consistent with the

Act. 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 in

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. Copies of such filing

will also be available for inspection and

copying at the principal office of the

Amex. All submissions should refer to

File No. SR-Amex–96–44 and should be

submitted by July 31, 1998.

For the foregoing reasons, the

Commission finds that the Amex’s

proposal to list and trade options and

FLEX Equity Options on Fund Shares 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,38 that the proposed rule

change (File No. SR-Amex–96–44), as

amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.39

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18414 Filed 7–9–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40166; File No. SR–CBOE–

97–03]

Self-Regulatory Organizations; Order

Granting Approval of a Proposed Rule

Change and Notice of Filing and Order

Granting Accelerated Approval of

Amendment Nos. 2 and 3 to the

Proposed Rule Change by the Chicago

Board Options Exchange, Inc. Relating

to Options on Interests in Listed,

Open-End, Indexed Investment

Companies

July 2, 1998.

I. Introduction

On January 22, 1997, the Chicago

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

or ‘‘Exchange’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) a proposed rule change

to adopt rules to permit the trading of

options on securities representing

interest in open-end, exchange-listed

investment companies that hold a

portfolio of securities comprising or

based on a broad-based stock index

(‘‘Exchange-Traded Fund Shares’’ or

‘‘Fund Shares’’). Notice of the proposal

appeared in the Federal Register on

March 5, 1997.3 No comment letters

were received on the proposed rule

change.4 On January 12, 1998, the

Exchange filed Amendment No. 2 to the

proposal.5 On May 18, 1998, the CBOE