Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 by the American Stock Exchange LLC Relating to Options on the Cure for Cancer Common Stock Index

[Federal Register Volume 64, Number 42 (Thursday, March 4, 1999)]
[Notices]
[Pages 10512-10515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5374]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41100; File No. SR-Amex-98-31]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the American Stock Exchange LLC 
Relating to Options on the Cure for Cancer Common Stock Index

February 24, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby give that 
on August 14, 1998, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission '') the proposed rule change. The Exchange submitted 
Amendment No. 1 to its proposal on January 28, 1999,\3\ and Amendment 
No. 2 on February 24, 1999.\4\ The proposed rule change, as amended, is 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange amended its eligibility 
standard for component securities by adding an additional level of 
trading volume. Further, the Exchange amended its maintenance 
criteria by raising the percentage of the index that must satisfy 
Rule 915, clarifying that the Commission has agreed to a specific 
component of the index satisfying the standard set forth in Amex 
Rule 916 instead of Amex Rule 915, and specifying that 90% of the 
weight of the index must have a minimum monthly trading volume of 
500,000 shares and 10% of the weight of the index must have a 
minimum trading volume of 350,000 shares for each of the last six 
months. See Amended Rule 19b-4 Filing (``Amendment No. 1'').
    \4\ In Amendment No. 2, the Exchange specified its procedure for 
rebalancing the index in the event of certain types of corporate 
events, raised its eligibility standard for component securities by 
raising the level of trading volume required for initial 
eligibility, clarified that Cell Pathways, Inc. currently satisfies 
the initial options eligibility criteria of Amex Rule 915, and 
clarified that the Exchange will maintain the index consistent with 
its original purpose. Further, the Exchange specified that stock 
replacements and the handling of non-routine corporate actions will 
be announced at least ten business days in advance whenever 
possible. See Letter from Scott Van Hatten, Legal Counsel, Amex, to 
Richard Strasser, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated February 23, 1999 (``Amendment No. 
2'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to trade options on the Cure for Cancer 
Common Stock Index (``Index''), a new index

[[Page 10513]]

developed by Amex comprising of companies engaged in the research, 
creation, development and production of cancer fighting drugs, 
treatments and processes.

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

    In its filing with the Commission, 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 IV below. 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 trade standardized options on the Index. The Index is composed of 
the stocks of twelve companies engaged in the research, creation, 
development and production of cancer fighting drugs, treatments and 
processes. Options on the Index will provide investors with a low-cost 
means to participate in the performance of the cancer research, 
treatment and cure industry and to hedge against the risk of investing 
in the industry.

Eligibility Standards for Index Components

    Amex, as developer of the Index, is responsible for selecting and 
maintaining the companies to be included in the Index. The Index 
conforms with the criteria of Exchange Rule 901C for including stocks 
in an index on which standardized options trade. In addition, all of 
the component securities currently meet the following standard: (1) 
each component has a market capitalization of at least $75 million, 
except one that has a market value of at least $50 million and accounts 
for no more than 10% of the weight of the Index; (2) more than 80% of 
the weight of the Index is accounted for by securities each having a 
trading volume of not less than 1,000,000 shares over each of the six 
months and the remaining 20% of the weight of the Index is accounted 
for by one component having a trading volume of not less than 850,000 
shares and the other, specifically agreed to by the Commission, trading 
not less than 350,000 shares over each of the six months,\5\ (3) 75% of 
the Index's components and its numerical index value currently underlie 
standardized options; (4) foreign country securities or American 
Depositary Receipts (``ADR'') thereon are not currently represented in 
the Index; (5) all component stocks are either listed on the New York 
Stock Exchange (``NYSE''), Amex, or traded through the facilities of 
the National Association of Securities Dealers Automated Quotation 
System (``Nasdaq'') and are reported National Market System (``NMS'') 
securities; and (6) no component security represents more than 25% of 
the weight of the Index, and the five highest weighted component 
securities in the Index do not in the aggregate account for more than 
60% of the weight of the Index.
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    \5\ See Amendment No. 1, supra note 3 and Amendment No.2, supra 
note 4. The Amex represents that it will verify that the individual 
component securities satisfy this requirement as of February 26, 
1999. Telephone conversation between Scott Van Hatten, Legal 
Counsel, Amex, and Terri Evans, Attorney, Division, Commission, on 
February 23, 1999.
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    The Exchange believes the potential for manipulation of the Index 
is minimized for the following reasons: (1) no single component 
dominates the Index, which is equal-dollar weighted, with each 
component constituting approximately 8.3% of the Index; (2) 75% of the 
value of the Index is accounted for by stocks which currently underlie 
standardized options; and (3) the component stocks are substantial and 
liquid, having an average market capitalization of $247.43 million, an 
average of 22.39 million shares outstanding, and a six-month average 
monthly trading volume of 4.9 million shares.

Index Maintenance

    The Index will be maintained by the Exchange consistent with its 
original purpose (i.e., to include components engaged in the research, 
creation, development and production of cancer fighting drugs, 
treatments and processes).\6\ The number of shares of each component 
stock in the Index portfolio will remain fixed between quarterly 
rebalances except in the event of certain types of corporate 
actions.\7\ If necessary in order to maintain continuity of the Index, 
its divisor may be adjusted to reflect certain events relating to the 
component stocks. These events include, but are not limited to, stock 
distributions, stock splits, reverse stock splits, spin-offs, certain 
rights issuance, recapitalizations, reorganizations, and mergers and 
acquisitions. All stock replacements and the handling of non-routine 
corporate actions will be announced at least ten business days in 
advance of such effective change, whenever possible. The Exchange will 
make this information available to the public through dissemination of 
an information circular.\8\
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    \6\ See Amendment No. 2, supra note 4.
    \7\ Id.
    \8\ Id.
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    The Exchange will maintain the Index so that (1) the Index is 
comprised of no less than nine component securities; (2) the component 
securities constituting the top 90% of the Index by weight, will have a 
minimum market capitalization of $75 million and the component stocks 
constituting the bottom 10% of the Index, by weight, may have a minimum 
market capitalization of $50 million; (3) 75% of the Index's numerical 
index value will meet the then current criteria for standardized option 
trading set forth in Amex Rule 915, except that one component included 
in the 75% and specifically agreed to by the Commission may meet the 
then current criteria set forth in Amex Rule 916,\9\ (4) foreign 
country securities or ADRs thereon that are not subject to 
comprehensive surveillance agreements will not in the aggregate 
represent more than 20% of the weight of the Index; (5) all component 
stocks will either be listed on Amex, NYSE, or Nasdaq/NMS; and (6) each 
of the component stocks shall have a minimum monthly trading volume of 
at least 500,000 shares for each of the last six months, except that 
for each of the lowest weighted components in the Index that in the 
aggregate account for no more than 10% of the weight of the Index, 
trading volume must be at least 350,000 shares for each of the last six 
months.\10\
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    \9\ See Amendment No. 1, supra note 3.
    \10\ Id.
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    The Exchange shall not open for trading any additional option 
series should the Index fail to satisfy any of the maintenance criteria 
set forth above unless such failure is determined by the Exchange not 
to be significant and the Commission concurs in that determination.

Index Calculation

    The Index will be calculated by the Amex using an ``equal-dollar 
weighted'' methodology. The following is a description of the 
methodology. As of the market close on December 31, 1992, a portfolio 
of stocks was established representing an investment of approximately 
$100,000 in the stock (rounded to the nearest whole share) of

[[Page 10514]]

each of the companies in the index. The value of the Index equals the 
current market value (i.e., based on U.S. primary market prices) of the 
sum of the assigned number of shares of each of the stocks in the Index 
portfolio divided by the Index divisor. The Index divisor was initially 
determined to yield the benchmark value of 100.00 as of the close of 
trading on December 31, 1992. Quarterly, following the close of trading 
on the third Friday of February, May, August and November, the Index 
portfolio will be adjusted by changing the number of whole shares of 
each component stock so that each company is again represented in 
``equal'' dollar amounts. If necessary, a divisor adjustment is made 
during the rebalancing to ensure continuity of the Index's value. The 
newly adjusted portfolio becomes the basis for the Index's value on the 
first trading day following the quarterly adjustment.
    As noted above, the number of shares of each component stock in the 
Index portfolio remain fixed between quarterly reviews except in the 
event of certain types of corporate actions such as the payment of a 
dividend other than an ordinary cash dividend, stock distribution, 
reorganization, recapitalization, or similar event with respect to the 
component stocks. In a merger or consolidation of an issuer of a 
component stock, if the stock remains in the Index, the number of 
shares of that security of the portfolio may be adjusted, to the 
nearest whole share, to maintain the component's relative weight in the 
Index at the level immediately prior to the corporate action. In the 
event of a stock addition to a replacement, the average dollar value of 
the remaining components will be calculated and that amount invested in 
the stock of the new component to the nearest whole share. In all 
cases, the divisor will be adjusted, if necessary, to ensure Index 
continuity.
    Similar to other stock index values published by the Exchange, the 
value of the Index will be calculated continuously and disseminated 
every 15 seconds over the Consolidated Tape Association's Network B.

Expiration and Settlement

    The proposed options on the Index will be European style (i.e., 
exercises permitted at expiration only) and cash settled. Standard 
option trading hours (9:30 a.m. to 4:02 p.m. (ET)) will apply. The 
options on the Index will expire on the Saturday following the third 
Friday of the expiration month. The last trading day in an expiring 
option series will normally be the second to last business day 
preceding the Saturday following the third Friday of the expiration 
month (normally a Thursday). Trading in expiring options will cease at 
the close of trading on the last trading day.
    The Exchange plans to list option series with expirations in the 
three near-term calendar months and in the two additional calendar 
months in the March cycle. In addition, longer-term option series 
having up to thirty-six months to expiration and FLEX Index options may 
be traded on the Index. Instead of such long-term options on a full 
value Index level, the Exchange may list long-term, reduced value put 
and call options based on one-tenth (\1/10\th) of the Index's full 
value. The interval between expirations months for either a full value 
or reduced value long-term option will not be less than six months. The 
trading of any long-term options, either full or reduced value, would 
be subject to the same rules that govern the trading of all the 
Exchange's index options, including sales practice rules, margin 
requirements and floor trading procedures, and all options will have 
Europeans style exercise.
    The exercise settlement value for all of the Index's expiring 
options will be calculated based upon the primary exchange regular way 
opening sale prices for the component stocks. In the case of securities 
traded through the Nasdaq system, the first reported regular way sale 
price will be used. If any component stock does not open for trading on 
its primary market on the last trading day before expiration, then the 
prior day's last sale price will be used in the calculation.\11\
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    \11\ The Commission notes that pursuant to Article XVII, Section 
4 of the Options Clearing Corporation's (``OCC'') by-laws, OCC is 
empowered to fix an exercise settlement amount in the event it 
determines a current index value is unreported or otherwise 
unavailable. Further, OCC has the authority to fix an exercise 
settlement amount whenever the primary market for the securities 
representing a substantial part of the value of an underlying index 
is not open for trading at the time when the current index value 
(i.e., the value used for exercise settlement purposes) ordinarily 
would be determined. See Securities Exchange Act Release No. 37315 
(June 17, 1996), 61 FR 42671 (order approving SR-OCC-95-19).
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Exchange Rules Applicable to Stock Index Options

    Amex Rules 900C through 980C will apply to the trading of option 
contracts based on the Index. These Exchange Rules cover issues such as 
surveillance, exercise prices and position limits. The Index is deemed 
to be a Stock Index Option under Amex Rule 901C(a) and a Stock Index 
Industry Group under Amex Rule 900C(b)(1). With respect to Amex Rule 
903C(b), the Exchange proposes a list near-the-money (i.e., within ten 
points above or below the current Index value) option series on the 
Index at 2\1/2\ point strike (exercise) price intervals when the value 
of the Index is below 200 points. In addition, the Exchange expects 
that the review required by Amex Rule 904C(c) will result in a position 
limit of 15,000 contracts with respect to options on this Index. 
Surveillance procedures currently used to monitor trading in each of 
the Exchange's other index options will also be used to monitor trading 
options on the Index.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
\12\ in general and furthers the objectives of Section 6(b)(5) \13\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and is not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition.

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

    The Exchange has neither solicited nor received written comments 
with respect to 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 the Amex 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange

[[Page 10515]]

Commission, 450 Fifth Street, NW, Washington, DC 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 Room in Washington, DC. Copies of such filing will 
also be available for inspection and copying at the principal office of 
the Exchange. All submissions should refer to File No. SR-Amex-98-31 
and should be submitted by March 25, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5374 Filed 3-3-99; 8:45 am]
BILLING CODE 8010-01-M