Self-Regulatory Organizations; American Stock Exchange LLC; Order Granting Approval to Proposed Rule Change Relating to Margin Treatment of Grand Exchange-Traded Fund Share Options Contracts

[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Notices]
[Pages 5327-5328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2537]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40985; File No. SR-AMEX-98-45]


Self-Regulatory Organizations; American Stock Exchange LLC; Order 
Granting Approval to Proposed Rule Change Relating to Margin Treatment 
of Grand Exchange-Traded Fund Share Options Contracts

January 27, 1999.

I. Introduction

    On November 25, 1998, The American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to permit each ``Grand'' 
Exchange-Traded Fund Share (Fund Share) \3\ option contract to be 
recognized to the same extent that 10 ordinary Fund Share option 
contracts would be recognized under Amex Rule 462--Minimum Margins.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term Exchange-Traded Fund Share includes securities 
representing interests in unit investment trusts or open-end 
management investment companies that hold securities based on an 
index or portfolio of securities. Currently, the Exchange trades 
unit investment trust securities known as Portfolio Depositary 
Receipts SM (``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 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. The Exchange also 
trades nine Fund Shares known as Select Sector SPDRsSM, 
each of which is offered by the Select Sector SPDRSM 
Trust, an open-end management investment company. 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.
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    The proposed rule change was published for comment in the Federal 
Register on December 24, 1998.\4\ No comments were received on the 
proposal. This order approves the proposal.
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    \4\ Securities Exchange Act Release No. 40803 (December 17, 
1998), 63 FR 71310 (File No. SR-AMEX-98-45).
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II. Description of the Proposal

    The rule proposal clarifies that the margin requirements set forth 
in Amex Rule 462--Minimum Margins \5\ apply to an option contract 
overlying 1000 Exchange-Traded Fund Shares (the ``Grand option 
contract'').\6\ The Amex represents that the Grand option contract is 
the economic equivalent of holding 10 ordinary Fund Share option 
contracts, each of which overlies 100 shares of an underlying Fund 
Share. The Exchange notes that, specifically, the provisions of Amex 
Rule 462(d)(2)(D)(ii) have applicability to an

[[Page 5328]]

account holding a ``straddle'' or a ``spread'' position, as discussed 
below.
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    \5\ Amex Rule 462 states: ``In the case of a put or call dealt 
in on a registered national securities exchange or a registered 
securities association and issued by The Options Clearing 
Corporation, and representing options on equity securities, 100% of 
the option premium plus 20% of the market value of the equivalent 
number of shares of the underlying security, reduced by any excess 
of the exercise price over the current market price of the 
underlying security in the case of a call, or any excess of the 
current market price of the underlying security over the exercise 
price in the case of a put, (except that in the case of such options 
on Exchange-Traded Fund Shares or other securities that represent an 
interest in a registered investment company that satisfies the 
criteria set forth in Rule 915; Commentary .06, margin must equal at 
least 100% of the current market value of the contract plus (1) 15% 
of the market value of equivalent units of the underlying security 
value if the Exchange-Traded Fund Share holds securities based upon 
a broad-based index or portfolio; or (2) 20% of the market value of 
equivalent units of the underlying security value if the Exchange-
Traded Fund Share holds securities based upon a narrow-based index 
or portfolio).'' Amex Rule 462(d)(2)(D)(ii); Securities Exchange Act 
Release No. 40157 (July 1, 1998), 63 FR 37426 (July 10, 1998) 
(``July 1998 Release'').
    \6\ On July 1, 1998, the Exchange received approval to trade 
both options overlying Exchange-Traded Fund Share and Grand option 
contract. See July 1998 Release, supra note 5.
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    Amex Rules 462(d)(2)(F) and (G) recognize the reduced risk 
associated with an account holding a ``straddle'' or a ``spread'' 
position by providing for margin requirements specific to the 
particular strategy (straddle or spread). For example, in the case of a 
spread strategy (i.e., where an account holding a short call also holds 
a long call, or where an account holding a short put also holds a long 
put (provided the long positions expire on or after the expiration of 
the short positions)), Amex Rule 462(d)(2)(G) requires margin for a 
call spread equal to the lesser of (1) 100% of the option premium plus 
15% of the market value of the equivalent number of shares of the 
underlying security value if the Exchange-Traded Fund Share holds 
securities based upon a broad-based index or portfolio; or 20% of the 
market value of the equivalent number of shares of the underlying 
security value if the Exchange-Traded Fund Share holds securities based 
upon a narrow-based index or portfolio, reduced by any excess of the 
exercise price over the current market price of the underlying security 
in the case of a call, or any excess of the current market price of the 
underlying security over the exercise price in the case of a put or (2) 
the amount, if any, by which the exercise price of the ``long'' call 
exceeds the exercise price of the ``short'' call. In the case of a put 
spread, Amex Rule 462(d)(2)(G) requires margin equal to the lesser of 
(1) 100% of the option premium plus 15% of the market value of the 
equivalent number of shares of the underlying security value if the 
Exchange-Traded Fund Share holds securities based upon a broad-based 
index or portfolio; or 20% of the market value of the equivalent number 
of shares of the underlying security value if the Exchange-Traded Fund 
Share holds securities based upon a narrow-based index or portfolio, 
reduced by any excess of the exercise price over the current market 
price of the underlying security in the case of a call, or any excess 
of the current market price of the underlying security over the 
exercise price in the case of a put or (2) the amount, if any, by which 
the exercise price of the ``short'' put exceeds the exercise price of 
the ``long'' put. In these contexts, the Exchange proposes that the 
required margin under Amex Rule 462(d)(2)(G) be applicable for each 
short Grand Fund Share call (put) option contract offset by 10 long 
ordinary Fund Share call (put) option contracts.
    In the case of a straddle (i.e., where an account holding both a 
put and a call for the same number of shares of the same equity 
security), guaranteed or carried ``short'' for a customer, the amount 
of margin required under Amex Rule 462(d)(2)(F) is the margin on the 
put or the call whichever is greater (under Amex Rule 462(d)(2)(D)), 
plus 100% of the premium on the other option. In this context, the 
Exchange proposes that the reduced margin under Amex Rule 462(d)(2)(D) 
be applicable for each Grand Fund Share call (put) option contract 
offset by 10 ordinary Fund Share put (call) option contracts. The 
Exchange believes the proposed margin offsets are appropriate given 
that the Grand contract is the economic equivalent of 10 ordinary Fund 
Share option contracts. In addition, the Exchange believes that by 
providing the same margin treatment for Grand Fund Share option 
contracts and 10 ordinary Fund Share option contracts, any potential 
investor confusion concerning the margin treatment of Grand contracts 
will be eliminated.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with the Section 6(b)(5) \7\ requirements that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, 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.\8\
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that it is reasonable and appropriate for 
the Exchange to apply the margin requirements of Amex Rule 462 to a 
Grand option contract.\9\ Specifically, the Commission believes 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 Grand option contracts 
based on a broad-based index or portfolio. In this respect, the margin 
requirements for Grand option contracts are comparable to those that 
currently apply to broad-based index options.\10\
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    \9\ The Commission notes that the Exchange currently applies the 
margin requirements of Amex Rule 462 to the economic equivalent of a 
Grand option contract (i.e., 10 ordinary Fund Share option 
contracts). See July 1998 release, supra note 5.
    \10\ The 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 
board-based margin treatment for these WEBS is appropriate, without 
addressing the issue of whether such WEBS are based. See July 1998 
Release, supra note 5.
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    Further, 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 
Grand option contracts based on a narrow-based index or portfolio is 
also appropriate. In this respect, the margin requirements for Grand 
option contracts are comparable to those that currently apply to 
narrow-based index options. In addition, this requirement should help 
to ensure that purchasers of Grand option contracts 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 product.
    For the foregoing reasons, the Commission finds that the Exchange's 
proposal to apply Amex Rule 462 regarding margin treatment to Grand 
Fund Share option contracts is consistent with the requirements of the 
Act and the rules and regulations thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-AMEX-98-45) is approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(2).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2537 Filed 2-2-99; 8:45 am]
BILLING CODE 8010-01-M