Document ID: SEC-2006-1572-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC
Posted Date: 2006-12-06T05:00Z

[Federal Register: December 6, 2006 (Volume 71, Number 234)]
[Notices]               
[Page 70801-70804]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[(Release No. 34-54813; File No. SR-Amex-2006-19)]

 
Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2 and 3 
Thereto Relating to the Listing and Trading of Options on the Nuveen 
Municipal Fund Index

November 22, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(''Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 17, 2006, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. On July 12, 2006, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On September 19, 2006, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ On November 13, 2006, 
the Exchange filed Amendment No. 3 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Amex clarified the Index symbol and the 
rationale for the product.
    \4\ In Amendment No. 2, Amex replaced the original rule filing 
in its entirety and incorporated the previously filed Amendment No. 
1.
    \5\ In Amendment No. 3, Amex made modifications to the Purpose 
section to clarify the ``Index Calculation and Maintenance'' section 
and included representations made by Nuveen regarding the existence 
of firewalls to address insider trading concerns.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade options on the Price-Return 
Nuveen Municipal Closed-End Fund Index (``NMUNP'') (the ``Nuveen 
Municipal Fund Index'' or ``Index''), an index based on the shares of 
exchange-listed closed-end management investment companies that are 
exempt from federal income tax by investing in portfolios of bonds 
issued by state and local governments and agencies (``Closed-End 
Funds'' or ``Funds'').
    The text of the proposed rule change is available on the Amex's Web 
site at http://www.amex.com, at the Amex Office of the Secretary, and 

at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit the Exchange 
to list and trade cash-settled, European-style index options on the 
Price-Return Nuveen Municipal Fund Index. The Exchange believes that 
options on the Index will be the first index options based on an index 
of closed-end funds. The proposed Index options are intended for the 
use of investors

[[Page 70802]]

desiring to achieve exposure to a broad section of the national tax-
free municipal closed-end fund market, as well as a hedging vehicle for 
those investors holding such closed-end funds.
    The Index is a capitalization-weighted index based entirely on the 
shares of Closed-End Funds listed on either the Amex, New York Stock 
Exchange, Inc. (the ``NYSE'') or the Nasdaq Stock Market, Inc. 
(``Nasdaq'') that are exempt from federal income tax through investment 
in bonds issued by state and local governments and agencies. Each 
component is a NMS stock as defined in Rule 600 under the Securities 
Exchange Act of 1934 (the ``1934 Act''). Currently, the Index is 
comprised of the shares of Closed-End Funds that are listed on the Amex 
or NYSE.
    Index Design and Composition. The Nuveen Municipal Fund Index is 
designed to be a broad representation of the U.S. municipal fund 
market. This Index is capitalization-weighted and includes only those 
Closed-End Funds domiciled in the U.S. and its territories and that are 
traded on the Amex, NYSE, or Nasdaq. The component Closed-End Funds are 
weighted by their market capitalization, which is calculated by 
multiplying the primary market price by the outstanding shares.
    Each of the component Closed-End Funds are required to have a 
minimum market capitalization of at least $100 million and an average 
monthly trading volume over the prior six (6) months of at least 
500,000 shares. In addition, for newly listed Closed-End Funds to be an 
index component, at least one (1) dividend payment with an ex-date 
prior to inclusion in the Index is required.
    The Index is calculated based on a market capitalization weighting 
methodology. In a market capitalization index, components are weighted 
based on total market value of the outstanding shares, i.e., share 
price times the number of shares outstanding. The Exchange states that 
this type of index typically fluctuates in line with the price moves of 
the components. After the initial weighting of the Index, the weights 
are updated in conjunction with scheduled quarterly adjustments.
    As of January 31, 2006, the Closed-End Funds comprising the Nuveen 
Municipal Fund Index had an average market capitalization of $414 
million, ranging from a high of $1.9 billion (Nuveen Municipal Value 
Fund Inc. (NUV)) to a low of $101 million (MBIA Capital/Claymore 
Managed Duration Investment Grade Municipal Fund (MZF)). The number of 
available shares outstanding ranged from a high of 194.9 million (NUV) 
to a low of 7.9 million (MZF), and averaged 31.9 million shares. The 
six-month average daily trading volume for Index components was 45,000 
shares per day, ranging from a high of 159,100 shares per day (NUV) to 
a low of 13,100 shares per day (Morgan Stanley Quality Municipal 
Securities (IQM)).
    Index Calculation and Maintenance. The value of the Index will be 
calculated by the Amex on behalf of Nuveen and will be disseminated at 
15-second intervals during regular Amex trading hours to market 
information vendors via the Consolidated Tape Association (``CTA'') or 
by other major market data vendors (from another Amex market data 
feed).
    The Exchange states that the methodology used to calculate the 
value of the Nuveen Municipal Fund Index is similar to the methodology 
used to calculate the value of other well-known market-capitalization 
weighted indexes. The level of the Index reflects the total market 
value of the component Closed-End Funds relative to a particular base 
period and is computed by dividing the total market value of the 
Closed-End Funds in the Index by the index divisor. The divisor is 
adjusted periodically to maintain consistent measurement of the Index. 
The Index commenced on December 31, 1994 with a base value of 1000.00. 
On December 30, 2005, the Index value was 1144.05.
    Options on the Nuveen Municipal Fund Index will expire on the 
Saturday following the third Friday of the expiration month. Trading in 
options on the Index will normally cease at 4:15 p.m. Eastern time 
(``ET'') on the Thursday preceding an expiration Saturday. The exercise 
settlement value at expiration of each Nuveen Municipal Fund Index 
option will be calculated by the Amex on behalf of Nuveen, based on the 
opening prices of the Index's component Closed-End Funds on the last 
business day prior to expiration (``Settlement Day'').\6\ The 
Settlement Day is normally the Friday preceding ``Expiration 
Saturday.'' If a component Closed-End Fund in the Index does not trade 
on Settlement Day, the last reported sales price in the primary market 
from the previous trading day would be used to calculate the settlement 
value. Settlement values for the Index will be disseminated by the Amex 
over the CTA.
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    \6\ The aggregate exercise value of the option contract is 
calculated by multiplying the Index value by the Index multiplier, 
which is 100.
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    The Nuveen Municipal Fund Index is monitored and maintained by the 
Amex. The Amex is responsible for making all necessary adjustments to 
the Indexes to reflect component deletions, share changes, stock 
splits, stock dividends (other than an ordinary cash dividend), and 
stock price adjustments due to restructuring, mergers, or spin-offs 
involving the underlying components. Some corporate actions, such as 
stock splits and stock dividends, require simple changes to the 
available shares outstanding and the stock prices of the component 
securities. Other corporate actions, such as share issuances, change 
the market value of the Indexes and would require the use of an index 
divisor to effect adjustments.
    The Index is reviewed each December, March, June, and September to 
ensure that at least 90% of the Index weight is accounted for by 
components that continue to represent the universe of Closed-End Funds 
that meet the Index methodology maintenance requirements. To remain in 
the Index, components must maintain a market capitalization of at least 
$75 million and have a six (6) month average monthly trading volume 
over 250,000 shares. Changes to Index components and/or the component 
share weights typically take effect after the close of trading on the 
third Friday of each calendar quarter month in connection with 
quarterly rebalancing. The Amex and Nuveen,\7\ by mutual agreement, may 
change the number of issues comprising the Index by adding or deleting 
one or more components contained in the Index with one or more 
substitute Closed-End Funds. If an Index component is added or deleted 
during a quarterly rebalance, the share weights used in the calculation 
of the Index will be updated based upon current shares outstanding. The 
Index components and their share weights are determined and announced 
prior to taking effect. The share weight of each component in the Index 
portfolio remains fixed between quarterly reviews, except in the event 
of certain types of corporate actions such as splits, reverse splits, 
stock dividends, or similar events. The share weights used in the Index 
calculation are not

[[Page 70803]]

typically adjusted for shares issued or repurchased between quarterly 
reviews.
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    \7\ The Commission notes that Nuveen, because it selects the 
components for the Index, has represented to Amex that it prohibits 
individuals at Nuveen who will be privy to information about future 
changes to the Nuveen Municipal Fund Index rules or constituent 
stocks from trading on that information, for their own benefit or 
for the benefit of Nuveen's clients. Additionally, Nuveen has 
represented that it has firewalls around the personnel who have 
access to information concerning changes and adjustments to the 
Index. Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission on November 
17, 2006.
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    In the event of a merger between two components, the share weight 
of the surviving entity may be adjusted to account for any shares 
issued in this acquisition. The Exchange may substitute components or 
change the number of issues included in the Index, based on changing 
conditions in the industry or in the event of certain types of 
corporate actions, such as mergers, acquisitions, spin-offs, and 
reorganizations. In the event of component or share weight changes to 
the Index portfolio, the payment of dividends other than ordinary cash 
dividends, spin-offs, rights offerings, re-capitalization, or other 
corporate actions affecting a component of the Index, the index divisor 
may be adjusted to ensure that such corporate actions do not affect the 
Index level.
    The Exchange will apply the following maintenance standards for 
continued listing: (i) The number of securities in the Index may not 
drop by one-third or more from the number of components in the Index at 
the time of initial listing; \8\ (ii) no more than 10% or more of the 
weight of the Index is represented by component securities having a 
market value of less than $75 million; (iii) no more than 10% or more 
of the weight of the Index is represented by component securities 
trading less than 15,000 shares per day; (iv) the largest component 
security in the Index accounts for no more than 15% of the weight of 
the Index, or the largest five components in the aggregate account for 
more than 50% of the weight of the Index on the first day of January 
and July each year; \9\ or (v) the component securities will be listed 
and traded on the Amex, the NYSE, or NASDAQ.\10\
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    \8\ The Exchange states that the Index currently has 86 
components, and therefore, may not be comprised of less than 57 
components. This representation replaces any prior representation to 
the effect that the Index could be comprised of no less than 10 
components. Telephone conversation between Jeffrey P. Burns, 
Associate General Counsel, Amex, and Florence Harmon, Senior Special 
Counsel, Division, Commission on November 17, 2006.
    \9\ Telephone conversation between Jeffrey P. Burns, Associate 
General Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission on November 21, 2006 to remove this footnote.
    \10\ These maintenance standards are adapted from Commentary .03 
of Amex Rule 901C to address the unique characteristics of the 
closed-end fund Index components, which may not always satisfy 
Commentary .03(4) of Amex Rule 901C. Telephone conversation between 
Jeffrey P. Burns, Associate General Counsel, Amex, and Florence 
Harmon, Senior Special Counsel, Division, Commission on November 23, 
2006.
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    If the Index ceases to be maintained or calculated, or its values 
are not disseminated at least every 15 seconds by the Amex over the CTA 
(or another major market data vendor) or the above Index maintenance 
standards are not satisfied, the Exchange would not list any additional 
series for trading and would limit all transactions in options on the 
Index to closing transactions only for the purpose of maintaining a 
fair and orderly market and protecting investors.
    Contract Specifications. The Nuveen Municipal Fund Index is a broad 
stock index group as defined in Amex Rule 900C(b)(1). Options on the 
Index would be European-style and a.m. cash-settled. The Exchange's 
standard trading hours for broad-based index options (9:30 a.m. to 4:15 
p.m. ET), as set forth in Commentary .02 to Amex Rule 1, will apply to 
options on the Nuveen Municipal Fund Index. Exchange rules that apply 
to the trading of options on broad-based indexes will also apply to 
options on the Index.\11\ The trading of these options will also be 
subject to, among others, Exchange rules governing margin requirements 
and trading halt procedures for index options.
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    \11\ See Amex Rules 900C through 980C.
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    For options on the Nuveen Municipal Fund Index, the Exchange 
proposes to establish an aggregate position limit of 25,000 contracts 
on the same side of the market, provided that no more than 15,000 of 
such contracts are in the nearest expiration month series.\12\
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    \12\ The same limits that apply to position limits would apply 
to exercise limits for these products.
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    Commentary .01(c) to Rule 904C provides that position limits for 
hedged index options may not exceed twice the established position 
limits for broad stock index groups. The Exchange proposes that a hedge 
exemption of 37,500 be available for the Index.
    Furthermore, proprietary accounts of member organizations could 
receive an exemption of up to three times the established position 
limit for the purpose of facilitating public customer orders, to the 
extent they comply with the procedures and criteria listed in 
Commentary .02 to Amex Rules 950(d) and 950(d)--ANTE.
    The Exchange proposes to apply broad-based index margin 
requirements for the purchase and sale of options on the Nuveen 
Municipal Fund Index. Accordingly, purchases of put or call options 
with nine months or less until expiration would have to be paid for in 
full. Writers of uncovered put or call options would have to deposit/
maintain 100% of the option proceeds, plus 15% of the aggregate 
contract value (current index level x $100), less any out-of-the-money 
amount, subject to a minimum of the option proceeds plus 10% of the 
aggregate contract value for call options and a minimum of the option 
proceeds plus 10% of the aggregate exercise price amount for put 
options.
    The Exchange proposes to set a strike price interval of at least 
2\1/2\ points, at a minimum, for a near-the-money series in a near-term 
expiration month when the level of the Index is below 200, a 5-point 
strike price interval, at a minimum, for any options series with an 
expiration up to one year, and at least a 10-point strike price 
interval for any longer-term option. The minimum tick size for series 
trading below $3 would be $0.05, and for series trading at or above $3 
would be $0.10.
    The Exchange proposes to list options on the Index in the three 
consecutive near-term expiration months, plus up to three successive 
expiration months in the March cycle. For example, consecutive 
expirations of January, February, March, plus June, September, and 
December expirations would be listed.\13\ In addition, long-term option 
series having up to 60 months to expiration will be traded.\14\ The 
trading of long-term options on the Index will be subject to the same 
rules that govern all the Exchange's index options, including sales 
practice rules, margin requirements, and trading rules.
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    \13\ See Amex Rule 903C(a).
    \14\ See Amex Rule 903C(a)(iii).
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    Surveillance and Capacity. The Exchange represents that it has an 
adequate surveillance program in place for options on the Nuveen 
Municipal Fund Index and intends to apply those same procedures that it 
applies to the Exchange's other index options. In addition, the 
Exchange is a member of the Intermarket Surveillance Group (``ISG''). 
The members of the ISG include all of the national securities 
exchanges, plus the NASD. The ISG members work together to coordinate 
surveillance and share information regarding the stock and options 
markets. In addition, the major futures exchanges are affiliated 
members of the ISG, which allows for the sharing of surveillance 
information for potential intermarket trading abuses.
    The Exchange also represents that it has the necessary systems 
capacity to support the new options series that would result from the 
introduction of options on the Nuveen Municipal Fund Index, including 
long-term options.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \15\

[[Page 70804]]

in general, and furthers the objectives of Section 6(b)(5),\16\ in 
particular, in that it 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, in general, to protect investors and the 
public interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange did not receive any written comments on the proposed 
rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which NASD consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Commission is considering granting accelerated approval of the 
proposed rule change, as amended, at the end of a 15-day comment 
period.\17\
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    \17\ Amex has requested accelerated approval of this proposed 
rule change, as amended, prior to the 30th day after the date of 
publication of the notice of filing thereof, following the 
conclusion of a 15-day comment period. Telephone conversation 
between Jeffrey P. Burns, Associate General Counsel, Amex, and 
Florence Harmon, Senior Special Counsel, Division, Commission on 
November 21, 2006.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-Amex-2006-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2006-19. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provision of 5 U.S.C. 552, will be available for inspection and copying 
in the Commission's Public Reference Room. Copies of such filing also 
will be available for inspection and copying at the principal office of 
the Amex. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submission should refer to File Number SR-Amex-
2006-19 and should be submitted on or before December 21, 2006.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Nancy M. Morris,
Secretary.
[FR Doc. E6-20572 Filed 12-5-06; 8:45 am]

BILLING CODE 8011-01-P