24846 Federal Register / Vol. 61, No. 96 / Thursday, May 16, 1996 / Notices

10The NASD stated in its filing that few market

makers have utilized the five-day quotation delay

rule to become PMMs. 11 17 CFR 200.30–3(a)(12).

1The underwriter of the Securities has advised

the NYSE that the Securities will comply with the

‘‘hybrid exemption’’ of the Commodity Futures

Trading Commission (‘‘CFTC’’), 17 CFR part 34. The

underwriter has further advised the Exchange that

it has presented a description of the structure and

sample term sheet of the Securities to the staff of

the CFTC, who have not raised any objections.

A market maker may register as a

market maker in a NNM security and

become a PMM immediately if it is a

PMM in at least 80% of the securities in

which it makes a market. If a market

maker does not meet the 80% threshold,

it can either comply with the five-day

quotation delay rule or it can register in

the security as a regular Nasdaq market

maker, enter quotes immediately, and

satisfy the qualification criteria for the

next review period.

The NASD stated in its filing that the

five-day quotation delay rule originally

was intended to ensure that market

makers were not registering in a security

to take advantage of momentary shortselling opportunities. However, the

NASD expressed concern in its filing

that market making affiliates of the same

firm are able to use the five-day

quotation delay rule to circumvent the

application of the PMM standards by

‘‘swapping’’ lists of stocks in which they

make a market and alternatively receive

PMM designation without ever meeting

the quantitative PMM standards. The

NASD also expressed concern in its

filing that market makers are able to use

the five-day quotation delay rule to

inflate the percentage of stocks in which

they are a PMM above the 80 percent

level, thereby entitling them to PMM

status for all NNM securities in which

they register during the next month. In

both instances, the five-day quotation

delay rule would allow a market maker

to become a PMM for reasons wholly

unrelated to the quality of its marketmaking.10 Therefore, the NASD has

proposed to amend the Primary Market

Maker (‘‘PMM’’) Standards rule by

deleting the five-day quotation delay

rule.

The Commission finds that the rule

change is consistent with the provisions

of section 15A(b)(6) of the Act. The rule

change is designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest by ensuring that market

makers qualify for PMM status only if

they have met certain performance

standards. The rule change also is

reasonably designed to ensure that a

market maker’s short sale transactions

are made in connection with bona fide

market making activity.

It is therefore ordered, pursuant to

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

proposed rule change SR–NASD–96–11

be, and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12234 Filed 5–15–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37188; International Series

Release No. 976: File No. SR–NYSE–96–08]

Self-Regulatory Organizations; New

York Stock Exchange, Inc.; Notice of

Filing and Order Granting Accelerated

Approval of Proposed Rule Change

Relating to Commodity Indexed

Preferred Securities

May 9, 1996.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on April 8, 1996, the

New York Stock Exchange, Inc.

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

Securities and Exchange Commission

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

rule change as described in Items I and

II below, which Items have been

prepared by the NYSE. This Order

approves the proposed rule change on

an accelerated basis and also solicits

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to list under

Paragraph 703.19 of the Listed Company

Manual (‘‘Manual’’) Commodity Futures

Index Preferred Securities

(‘‘Securities’’). The Securities are

intermediate term securities whose

value will be linked, in part, to changes

in the 11 individual commodities (or the

futures contracts overlying such

commodities) that comprise the J.P.

Morgan Commodity Index or its

subindices.

The Securities either will be linked:

(1) directly to the price of a futures

contract on the commodity, (2) to an

‘‘Excess Return Index’’ of the

commodity, or (3) to a ‘‘Total Return

Index’’ of the commodity. An Excess

Return Index represents the cumulative

returns of investing in unleveraged

positions in nearby commodity futures

contracts and constantly rolling the

position forward to the next designated

contract as the contract nears expiration.

The Total Return Index consists of the

Excess Return Index plus the return on

three-month Treasury Bills.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NYSE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. NYSE has prepared

summaries, set forth in Sections (A),(B),

and (C) below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The Exchange proposes to list the

Securities pursuant to Para. 703.19 of

the Manual. Under Para. 703.19, the

issuer will be either a listed company,

an affiliate of a listed company or a

company that meets NYSE listing

criteria. It currently is anticipated that

the issuer will be a financing subsidiary

of a listed company.

The Securities. The Securities will be

preferred securities or debt securities

with a term of two to ten years listed

pursuant to Para. 703.19 of the Manual.

The redemption price of the Securities

will be based, in part, on the 10-day

average level of the value of the

underlying individual commodity (or

futures contract) during the 20 days

prior to maturity of the Securities. At

redemption, holders will receive par

value times a percentage calculated by

dividing the ending value of the

underlying commodity (or futures

contract) by the beginning value of the

underlying commodity (or futures

contract). Such percentage may be

greater or less than 100 percent and,

therefore, at redemption, the holder

could receive less than the original issue

amount of the Securities.1 The following

chart describes the linked contracts:
Federal Register / Vol. 61, No. 96 / Thursday, May 16, 1996 / Notices 24847

2These are accounting terms used to describe the

elements comprising the return associated with the

Index. Changes in the value of the Securities

actually result solely from the cumulative profit and

loss on the futures position overlying the applicable

commodity.

3The OECD—the Organization of Economic

Cooperation and Development—consists of the

United States, Japan, Germany, France, Italy, the

United Kingdom, Canada, Australia, Austria,

Belgium, Denmark, Finland, Greece, Iceland,

Ireland, Luxembourg, Mexico, Netherlands, New

Zealand, Norway, Portugal, Spain, Sweden,

Switzerland and Turkey.

4See Memorandum from David Seaman,

JPMorgan, to Vincent Patten, NYSE, dated May 6,

1996.

No. Official commodity name and units Exchange Units per

contract Contract used

1 Aluminum $/MT (Metric Tons) ...................................... LME .......... 25 tons ..... Third Wednesday of Mar, Jun, Sep and Dec.

2 Copper $/MT ................................................................. LME .......... 25 tons ..... Third Wednesday of Mar, Jun, Sep and Dec.

3 Nickel $/MT ................................................................... LME .......... 6 tons ....... Third Wednesday of Mar, Jun, Sep and Dec.

4 Zinc $/MT ...................................................................... LME .......... 25 tons ..... Third Wednesday of Mar, Jun, Sep and Dec.

5 Heating Oil #2 $/gal ...................................................... NYMEX .... 42,000 gal Every month.

6 Natural Gas $/MM BTU ................................................ NYMEX .... 10,000 MM

BTU.

Every month.

7 Unleaded Gas $/gal ...................................................... NYMEX .... 42,000 gal Every month.

8 WTI Light Sweet Crude $/BBL ..................................... NYMEX .... 1,000 bb1 Every month.

9 Platinum $/troy oz ......................................................... NYMEX .... 50 troy oz Jan, Apr, Jul, Oct.

10 Gold .............................................................................. COMEX .... 100 troy oz Feb, Apr, Jun, Aug and Dec.

11 Silver ............................................................................. COMEX .... 5,000 troy

oz.

Mar, May, Jul, Sep and Dec.

The Securities will meet the listing

criteria of Para. 703.19. Thus, if the

Securities are listed and traded as equity

securities: there will be at least one

million Securities outstanding; the

Securities will have a market value of at

least $4 million; and there will be at

least 400 holders of the Securities. If the

Securities are listed and traded as debt

securities, there will be a minimum

public market value of at least $4

million. Equity margin will apply to all

Securities, whether listed as debt or

equity.

The Indices. Securities linked to an

Excess Return Index will pay dividends

or interest (collectively, ‘‘Distributions’’)

at a specified rate. The value of the

Securities will be calculated with

reference to the prices of nearby futures

contracts on the applicable commodity.

An independent calculation agent will

calculate and disseminate the value of

the Securities every 60 seconds during

the trading day. The daily change in

value is derived exclusively from the

daily profit or loss on such futures

positions. Over time, the elements of

this change can be described as having

two components: the change in price in

the nearby contract (‘‘price return’’) and

the cost of carry imbedded in the futures

contract forward curve (‘‘roll return’’).2

The price return is the change in price

on the nearby futures contracts. The roll

return is the yield that is potentially

available as a result of the difference

between the prices for shorter-term

futures positions and longer-term

futures positions. These prices could

differ depending on a variety of factors,

including market expectation of price

trends and general supply and demand.

Historically, many commodity markets

have been in ‘‘backwardation’’ for

extended periods. That creates an

opportunity to increase return by

creating longer-dated positions and

‘‘rolling’’ positions forward as they

expire. However, there is no guarantee

that such a strategy will produce a

positive return. If prices for shorterdated positions are less than the prices

for longer-dated positions (a situation

known as ‘‘contango’’), there would be

a negative return to the roll over time.

If the Securities are linked to a Total

Return Index, in addition to price return

and roll return, the concept of

‘‘collateral return’’ will be included

when determining the value of the

Securities. Collateral Return

incorporates the component of returns

on U.S. Treasury Bills that would arise

if the face amount of the investment is

fully collateralized by Treasury Bills.

While commodities investors are not

obligated to collateralize their positions

fully, this return is included to facilitate

accurate comparison of the performance

of an investment in commodities

relative to an investment in financial

assets such as a stock or bond portfolio.

Under the Total Return methodology,

the Securities would either not have a

separate Distribution or the Distribution

would be substantially less than if the

Excess Return methodology were used.

If the Securities are linked directly to

the price of the commodity, there will

be no element of roll return, collateral

return or total return in the pricing.

Rather, the holders of the Securities will

receive Distributions on the face value

of their Securities. The frequency and

rates of such Distributions will vary

from issue to issue depending upon

prevailing interest rates and other

factors, including the price of the linked

commodity.

The design, composition and

calculation of a Total Return or Excess

Return Index is expected to remain

unchanged during the term of the

Securities. If market developments

require changes to these aspects of the

product, decisions regarding such

changes will be made by the JPMCI

Policy Committee, a neutral business

committee. This committee consists of

senior employees in the commodities

and research areas of J.P. Morgan, as

well as independent industry and

academic experts. Personnel from J.P.

Morgan’s commodities group serve only

in an advisory, non-voting role on the

committee. J.P. Morgan immediately

will notify the Exchange and vendors of

financial information if there is a change

in the design, composition or

calculation of the Securities.

If it becomes necessary to choose a

replacement price source for the

Securities, the new price source will

meet the following criteria: (i) it will be

priced in U.S. dollars, or if priced in a

non-U.S. currency, the exchange on

which the contract is traded must

publish an official exchange rate for

conversion of the price into U.S. dollars

and such currency must be freely

convertible into U.S. currency; (ii) it

will be traded on a regulated futures

exchange in an OECD country3 or in

Singapore; and (iii) it will have a

minimum annual volume of 300,000

contracts or US $500 million. The issuer

will notify the Exchange and vendors of

financial information immediately if

there is a change to the Securities.4

Members of the JPMCI Policy

Committee and employees of the

calculation agent that are involved in

the calculation of, or data collection for,

the Securities are prohibited from

trading the underlying futures positions

or the Securities. In addition, the

calculation agent has adopted such

reasonable and appropriate procedures

to ensure that it, its agents, affiliates and
24848 Federal Register / Vol. 61, No. 96 / Thursday, May 16, 1996 / Notices

5The NYSE has comprehensive surveillance

sharing agreements with all of the exchanges upon

which the futures contracts relating to a particular

Securities trade. Specifically, NYSE is able to obtain

market surveillance information, including

customer identity information, for transactions

occurring on NYMEX and Comex. Furthermore,

under the ISG information sharing agreement, SFA

will be able to provide, upon NYSE request,

surveillance information with respect to trades

effected on the LME, including client identity

information. Finally, if the underlying commodity

for an issuance of Securities changes or if a different

market is utilized for purposes of calculating the

value of a designated futures contract, the NYSE

will ensure that it has entered into a surveillance

sharing agreement with respect to the new relevant

market.

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

Commission must predicate approval of exchange

trading for new products upon a finding that the

introduction of the product is in the public interest.

Such a finding would be difficult with respect to

a product that served no investment, hedging or

other economic function, because any benefits that

might be derived by market participants would

likely be outweighed by the potential for

manipulation, diminished public confidence in the

integrity of the markets, and other valid regulatory

concerns.

7See Securities Exchange Act Release No. 36885

(February 26, 1996).

8Such factors include, but are not limited to,

international economic, social and political

conditions and levels of supply and demand for the

individual commodities.

9Such a requirement is more than the duty to

know and approve customers, and entails an

obligation to make a determination that the

transaction is suitable for the customer.

employees do not take advantage of, or

communicate to any other person, any

knowledge concerning changes in the

value of an Index.

Surveillance. The Exchange will be

able to obtain market surveillance

information, including customer

identity information, with respect to

transactions occurring on the applicable

futures exchange pursuant to its

information sharing agreement with

such exchange. The Exchange will not

trade any security unless it has a

surveillance agreement with the market

trading the underlying futures contract.

In the extremely unlikely event that the

securities are no longer based on an

exchange-traded futures contract (if, for

example, that exchange no longer trades

a particular futures contract), the J.P.

Morgan Policy Committee will seek to

substitute a similar futures contract. In

that situation, in addition to the

conditions listed above, the Exchange

would continue to trade the Securities

only if the new futures contract

underlying the Securities trade on an

exchange that has a comprehensive

information sharing agreement with the

NYSE or if the Commission staff

otherwise concurs in the continuation of

such trading.5

Sales Practices. Because there is an

element of derivative pricing regarding

the Securities, the Exchange will require

members, member organizations and

their employees to make a

determination with respect to customers

whose accounts have not previously

been approved to trade futures or

options that a transaction in the

Securities is suitable for such customer.

In addition, members, member

organizations and their employees

recommending a transaction in the

Securities will be required: (i) to

determine that the recommend

transaction is suitable for the customer;

and (ii) to have a reasonable basis for

believing that the customer can evaluate

the special characteristics of, and is able

to bear the financial risks of, the

recommended transaction.

The Exchange also will distribute a

circular to its membership prior to the

commencement of trading in the

Securities. That circular will provide

guidance with respect to member firm

compliance responsibilities (including

suitability recommendations) when

handling transactions in the Securities

and highlighting the special risks and

characteristics thereof.

Basis—The basis under the Securities

Exchange Act of 1934 (‘‘1934 Act’’) for

this propose rule change is the

requirement under Section 6(b)(5) that

an exchange have rules that are

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system, and, in general, to protect

investors and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that the

proposed rule change will not result in

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Comments were neither solicited nor

received.

III. 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). In

particular, the Commission believes that

the availability of exchange-traded

Securities will provide an instrument

for investors to achieve desired

investment objectives (e.g., commodity

exposure and portfolio diversification)

through the purchase of an exchangetraded securities product linked to one

of the single commodities noted above.6

For the reasons discussed below, the

Commission has concluded that the

NYSE listing standards applicable to

Securities are consistent with the Act.

The Securities are similar in structure

to a previous American Stock Exchange

(‘‘Amex’’) product, Commodity Indexed

Preferred Securities (‘‘ComPS’’), which

the Commission approved in February

1996.7 ComPS were listed pursuant to

Section 107 of the Amex Company

Guide, Other Securities, and, like the

NYSE Securities, the principal value of

ComPS is derived from the performance

of futures contracts overlying certain

selected physical commodities.

The value of the Securities will be

affected partially by certain risks that

are associate with the purchase and sale

of exchange-traded futures contracts.

Furthermore, the Commission notes that

the prices of commodities, including the

eleven individual commodities which

may underlie a particular Securities

issuance, may be subject to volatile

price movements caused by numerous

factors.8 Accordingly, an investment in

Securities may also be subject to volatile

price movements due to price changes

in the underlying commodities and

related futures contracts. In addition,

Securities possess many complex

features, such as the incorporation of

roll return and collateral return into

their pricing methodologies.

In order to address the complex and

risky nature of Securities, the NYSE has

proposed special suitability, disclosure,

and compliance requirements. First, the

Exchange will require members to make

a determination with respect to

customers whose accounts have not

previously been approved to trade

futures or options that a transaction in

the proposed securities is suitable for

such customer.9 This is important given

the embedded derivative component of

Securities. Second, the NYSE will

require that members who make

recommendations in Securities

determine that the transaction

recommended is suitable for the

customer and have a reasonable basis

for believing that the customer can

evaluate the special characteristics of,

and is able to bear the financial risks of,

the recommended transaction. Third,

because Securities are cash-settled,

holders will not receive, nor be required

to liquidate, the underlying physical

commodities or overlying futures
Federal Register / Vol. 61, No. 96 / Thursday, May 16, 1996 / Notices 24849

10The NYSE circular will be submitted to the

Commission for its review and should include,

among other things, a discussion of those risks

which may cause commodities to experience

volatile price movements in addition to details on

the pricing methodology to be used for that

particular issuance.

11As discussed above, members of the policy

committee are expressly prohibited from trading

Securities and from communicating any knowledge

concerning changes in the value of the underlying

commodities. The NYSE has advised that it has

surveillance procedures in place to periodically

review activity in the Securities, including the

ability to monitor any activity in the Securities by

members of the JPMCI. Telephone conversation

between Vincent Patten, NYSE, and Stephen M.

Youhn, SEC, on May 7, 1996.

12Paragraph 703.19(1) of the Manual states that

if the issuer is a NYSE-listed company, the issuer

must be a company in good standing (i.e., above

Continued Listing Criteria): if an affiliate of an

NYSE-listed company, the NYSE-listed company

must be a company in good standing; if not listed,

the issuer must meet NYSE specific original listing

standards. These standards, among other things, set

forth minimum requirements for net tangible assets,

net income, and aggregate market value of publicly

held shares.

13The Commission notes that a Rule 19b–4 filing

might be required in order to list any other

derivative product based upon a commodity

interest that differs from the proposed Securities.

14 15U.S.C. 78s(b)(2) (1988).

15 17 CFR 200.30–3(a)(12).

contracts. The Commission notes that

this provision will effectively terminate

a Securities investor’s exposure to

commodity market risk at the security’s

maturity and limit an investor’s loss to

the amount of his initial investment.

Finally, the Exchange plans to distribute

a circular to its membership calling

attention to the specific risks associated

with Securities.10 This will assist

members in determining the customers

eligible to trade Securities, formulating

recommendations in Securities, and in

monitoring customer and firm

transactions in Securities.

The Commission also believes that

several factors significantly minimize

the potential for manipulation of

Securities. First, each of the futures

contracts overlying the commodities is

relatively actively traded, and has

considerable open interest. Second, the

majority of futures contracts overlying

the component commodities trade on

exchanges that impose position limits

on speculative trading activity, which

are designed, and serve, to minimize

potential manipulation and other

market impact concerns. Third, as

discussed below, the NYSE has entered

into certain surveillance sharing

agreements with each of the futures

exchanges upon which the underlying

designated futures contracts trade.

These agreements should help to ensure

the availability of information necessary

to detect and deter potential

manipulations and other trading abuses,

thereby making Securities less readily

susceptible to manipulation. Fourth, the

price of Securities (with respect to those

commodities traded in the U.S.) will be

calculated every 60 seconds and

disseminated to vendors of electronic

financial information. Fifth, adequate

procedures are in place to prevent the

misuse of information by members of

the policy committee responsible for

replacements with respect to the

underlying contract.11 Accordingly, for

the reasons discussed above, the

Commission believes that Securities are

not readily susceptible to manipulation

and that in any event, the surveillance

procedures in place are sufficient to

detect and deter potential manipulation.

The Commission notes that Securities,

unlike standardized options, do not

contain a clearinghouse guarantee but

are instead dependent upon the

individual credit of the issuer. This

heightens the possibility that a

purchaser of Securities may not be able

to receive any cash payment due upon

maturity. To some extent this credit risk

is minimized by the Exchange’s listing

guidelines requiring Securities issuers

to comply with the listing requirements

of Para. 703.19(1).12 In addition,

financial information regarding the

issuer will be disclosed or incorporated

in the prospectus accompanying the

offering of Securities.

Based on the above, the Commission

finds that the proposal to trade the

Securities is consistent with the Act,

and, in particular, the requirements of

Section 6(b)(5).13

The Commission finds good cause for

approving the proposed rule change

prior to the thirtieth day after the date

of publication of notice thereof in the

Federal Register in order to allow NYSE

to list the Securities without delay. The

proposal will provide the Exchange

with increased flexibility in the listing

of commodity linked products without

compromising investor protection

concerns. In addition, the NYSE

proposal is nearly identical to the Amex

ComPS proposal, with the securities

being based on the same commodities

underlying the futures contracts, and

subject to the same valuation methods

used for ComPS. The Amex proposal

was subject to the full notice and

comment period and the Commission

notes that no comment letters were

received. Accordingly, the Commission

does not believe the NYSE proposal

raises any new or unique regulatory

issues. For these reasons, the

Commission believes there is good

cause, consistent with Sections 6(b)(5)

and 19(b)(2) of the Act, to approve the

proposed rule change on an accelerated

basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street NW.,

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

above-mentioned self-regulatory

organization. All submissions should

refer to the file number in the caption

above and should be submitted by June

6, 1996.

It therefore is ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–NYSE–96–

08) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–12235 Filed 5–15–96; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Request for Comments

The U.S. Small Business

Administration’s (SBA) Office of

Government Contracting requests

comments on a possible Agency

initiative to develop a concept for the

provision of Value Added Services

(VAS) to small businesses seeking

Federal procurement opportunities

through electronic commerce and

electronic data interchange (EC/EDI). It

is envisioned that these services would

be priced using a fee schedule

determined through negotiations with

the SBA. It is important to note that the

Agency does not intend to compete with

existing value-added-network (VAN)

service providers. Rather, the SBA seeks

to increase substantially the exposure of