Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the American Stock Exchange LLC Relating to Bond Indexed Securities

[Federal Register Volume 64, Number 47 (Thursday, March 11, 1999)]
[Notices]
[Pages 12194-12196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6046]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41135; File No. SR-AMEX-99-03]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the American Stock Exchange LLC Relating 
to Bond Indexed Securities

March 3, 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 given that 
on January 12, 1999, 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 Amex. 
On February 16, 1999, the Exchange filed Amendment No. 1.\3\ 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)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 provided additional details regarding the 
securities, including the principal factors that will affect the 
rate of return on the securities and the formula for determining the 
value of the securities at settlement. See Letter from Scott G. Van 
Hatten, Legal Counsel, Amex, to Richard Strasser, Assistant 
Director, Division of Market Regulation, Commission, dated February 
16, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Amex proposes to approve for listing and trading under Section 107 
of the Amex Company Guide seven bond indexed preferred or debt 
securities.

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 IV 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 
Statutory Basis for, the Proposed Rule Change

I. Purpose
    Under Section 107A of the Amex Company Guide, the Exchange may 
approve for listing and trading securities that cannot be readily 
categorized under the listing criteria for common and preferred stocks, 
bonds, debentures and warrants. The Amex now proposes to list for 
trading under Section 107A of the Company Guide seven different bond 
index linked term notes, each linked to a different bond index. Each 
issue of the proposed securities will meet the size and distribution 
requirements of Section 107A. The issuers of such securities also will 
be qualified under Section 107A.
    Holders of the securities generally will receive interest on the 
face value of their securities in an amount to be determined at the 
time of issuance of the securities and disclosed to investors. The 
frequency and rate of the interest payment will vary from issue to 
issue based upon prevailing interest rates and other factors, such as a 
discount factor and interest payments made on the underlying bonds and 
credit spreads.\4\
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    \4\ See Amendment No. 1. The discount factor may reflect 
prevailing interest rates, commissions and such other amounts as 
will be disclosed in the prospectus provided to investors.
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    In addition, investors will receive at maturity an amount based on 
the value

[[Page 12195]]

of the linked bond index at maturity of the securities, which may be 
more or less than the original principal amount thereof. The securities 
will be valued at settlement based upon the following formula: 
principal amount  x  (ending index value/beginning index value) less a 
discount factor, which may reflect interest rates, commissions and 
other such amounts as will be disclosed in the prospectus provided to 
investors.\5\ Returns to investors in the proposed securities are 
unleveraged with neither a cap nor a floor.
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    \5\ See Amendment No. 1.
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    Bond index values for the purpose of determining the payment to 
holders at maturity will be determined by reference to prices for a 
linked index on a business day shortly prior to maturity. The 
securities will provide for maturity within a period of not less than 
one nor more than ten years from the date of issues.\6\ The securities 
will not be callable or redeemable prior to maturity and will be cash 
settled in U.S. currency.\7\ Holders of the securities will have no 
claim to the bonds included in the indices. The Exchange anticipates 
that the issuer will link distinct issues of such securities to the 
following seven bond indices sponsored and calculated by Merrill Lynch, 
Pierce, Fenner & Smith Incorporated (``MLPF&S''): the U.S. Domestic 
Master, Mortgage Master, U.S. Corporate/Government Master, U.S. 
Corporate Master, U.S. Treasury/Agency Master, U.S. Treasury Master and 
U.S. Agency Master Indices. The Mortgage Master, U.S. Corporate/
Government Master, U.S. Corporate Master, U.S. Treasury/Agency Master, 
U.S. Treasury Master and U.S. Agency Master Indices are all subindices 
of the U.S. Domestic Master Index.
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    \6\ Id.
    \7\ Id.
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    In structure, the proposed bond indexed debt securities are, in 
part, similar to previously approved commodity preferred securities \8\ 
and stock index linked term notes,\9\ however, the proposed linked 
indices comprise bond indices as opposed to commodity futures or equity 
securities indices. Accordingly, the Exchange proposes to provide for 
the listing and trading of the bond index linked term notes where the 
bonds included in each of the seven indices meet the Exchange's Bond 
and Debenture Listing Standards set forth in Section 104 of the Amex 
Company Guide.\10\
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    \8\ See Securities Exchange Act Release No. 39402 (December 4, 
1997), 62 FR 65459 (December 12, 1997), granting immediate 
effectiveness to an Exchange proposal to list and trade commodity 
preferred securities (ComPS).
    \9\ See Securities Exchange Act Release No. 38940 (August 15, 
1997), 62 FR 44735 (August 22, 1997), approving an Exchange proposal 
to list and trade indexed term notes linked to the Major 11 
International Index.
    \10\ The Exchange's Bond and Debenture Listing Standards provide 
for the listing of individual bond or debenture issuances provided 
the issue has an aggregate market value or principal amount of at 
least $5 million and either: the issuer of the debt security has 
equity securities listed on the Exchange (or on the New York Stock 
Exchange); an issuer of equity securities listed on the Exchange (or 
on the New York Stock Exchange) directly or indirectly owns a 
majority interest in, or is under common control with, the issuer of 
the debt security; an issuer of equity securities listed on the 
Exchange (or on the New York Stock Exchange) has guaranteed the debt 
security; a nationally recognized statistical rating organization 
(an ``NRSRO'') has assigned a current rating to the debt security 
that is no lower than an S&P Corporation ``B'' rating or equivalent 
rating by another NRSRO; or if no NRSRO has assigned a rating to the 
issue, an NRSRO has currently assigned; (i) an investment grade 
rating to an immediately senior issue; or (ii) a rating that is no 
lower than an S&P Corporation ``B'' rating, or an equivalent rating 
by another NRSRO, to a pari passu or junior issue. All of the 
underlying bonds in each of the proposed indices exceed these 
listing standards.
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    Each index is rebalanced on the last calendar day of the month. For 
a bond to qualify for inclusion in an index, it must meet the pre-
established and defined list of objective criteria. Bonds meeting the 
index's inclusion criteria on the last calendar day of the month are 
included in such index for the following month. Issues that no longer 
meet the criteria during the course of the month remain in the index 
until the next month-end rebalancing at which point they are dropped 
from the index. Bonds included in the indices are held constant 
throughout the month until the following monthly rebalancing. Bond 
eligibility criteria for each of the subindices is set forth below.
    U.S. Domestic Master Index. The U.S. Domestic Master Index,\11\ 
established in 1975, is MLPF&S's indicator of the performance of the 
investment grade U.S. domestic bond market. The index currently 
captures over $5 trillion of the outstanding debt of the U.S. Treasury 
Note and Bond, U.S. Agency, Mortgage Pass-through and U.S. Investment 
Grade Corporate Bond markets. Current bond criteria for the Domestic 
Master Index include all of the criteria set forth below for each of 
the subindices.
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    \11\ As of December 31, 1998, the U.S. Domestic Master Index is 
comprised of 6,911 issues with a market value of $5.52 trillion--
Bloomberg L.P.
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    U.S. Treasury Master Index. As of December 31, 1998, the U.S. 
Treasury Master Index, established in 1977, was comprised of 163 issues 
with a market value equal to $2.32 trillion.\12\ U.S. Treasury Notes 
and Bonds included in the U.S. Treasury Master Index have a remaining 
term to maturity equal to or greater than one year with at least $1 
billion face value outstanding. U.S. Treasury STRIPS are not included 
in the index, however, the outstanding face value of the underlying 
notes and bonds from which these securities are created are not reduced 
by the amount stripped. The U.S. Treasury Master Index contains no 
inflation-indexed securities.
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    \12\ Data as of December 31, 1998--Bloomberg L.P.
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    U.S. Agency Master Index. As of December 31, 1998, the U.S. Agency 
Master Index, established in 1977, contained 1,628 issues with a market 
value equal to $429 billion.\13\ U.S. agency issues included in the 
U.S. Agency Master Index have a remaining term to final maturity equal 
to or greater than one year, including medium term notes, with at least 
$100 million face value outstanding. The issues are payable in U.S. 
Dollars. The index contains no inflation-indexed securities, structured 
notes or other forms of variable coupon securities. Securities must 
have a fixed coupon schedule. Step-up coupons are included in the index 
provided the coupon schedule is fixed at the time of issuance.
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    \13\ Data as of December 31, 1998--Bloomberg L.P.
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    U.S. Corporate Master Index. As of December 31, 1998, the U.S. 
Corporate Master Index, established in 1972, was comprised of 4,670 
issues with a market value equal to $1.16 trillion.\14\ U.S. corporate 
issues included in the U.S. Corporate Master Index are limited to 
securities that are issued in the U.S. domestic markets, including 
yankees, global bonds and medium term notes, with remaining terms to 
maturity equal to or greater than one year and at least $100 million 
face value outstanding. The issuances are payable in U.S. Dollars. 
Securities must have a fixed coupon schedule. Step-up coupons are 
included in the index provided the coupon schedule is fixed at the time 
of issuance. Rule 144A securities issued with registration rights are 
included in the index only after they are exchanged for registered 
securities. Taxable securities issued by municipalities are included in 
the index. Issues included in the index must have a credit rating of 
investment grade (BBB3 or above) based on a composite of Moody's and 
S&P. The calculation of composite rating is based on an averaging that 
is biased to the lower of the two ratings. For example.

    \14\ Data as of December 31, 1998--Bloomberg L.P.
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Baa3/BB+=BB1 composite rating
Baa2/BB+=BBB3 composite rating
Baa3/BB-=BB2 composite rating

If an issue is rated by only one of the services, the rating will equal 
that individual rating. Issues that are not rated by either Moody's or 
S&P are

[[Page 12196]]

excluded. Capital trust preferred securities are included in the index 
Mortgage Master Index.
    As of December 31, 1998, the Mortgage Master-Index, established in 
1975, comprised 450 issues with a market value equal to $1.60 
trillion.\15\ Mortgage-backed securities in the Mortgage Master Index 
include single-family 30-year, 15-year and balloon mortgages. GNMA II, 
mobile home and GPM mortgages are excluded in the index must have at 
least $600 million current face outstanding. Individual pools are 
aggregated into generic securities based on issuer, type (30-year, 15-
year, etc.), coupon and production year. Asset-backed securities (other 
than MBS) are not included in this index or any of the Domestic Master 
sub-indices.
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    \15\ Data as of December 31, 1998-Bloomberg L.P.
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    U.S. Corporate/Government Master Index. The U.S. Corporate/
Government Master Index,\16\ established in 1972, comprises a 
combination of the U.S. Corporate Master, U.S. Treasury Master and U.S. 
Agency Master Indices.
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    \16\ As of December 31, 1998, the U.S. Corporate and Government 
Master Index contained 6,461 issues with a market value equal to 
$3.92 trillion--Bloomberg L.P.
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    U.S. Treasury/Agency Master Index. The U.S. Treasury/Agency 
Index,\17\ established in 1972, comprises a combination of the U.S. 
Treasury Master and U.S. Agency Master Indices.
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    \17\ As of December 31, 1998, the U.S. Treasury/Agency Master 
Index contained 1,791 issues with a market value equal to $2.75 
trillion--Bloomberg L.P.
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    Each of the above indices are calculated by Merrill Lynch 
Research's Portfolio Strategy Group based on the prices of the 
underlying bonds determined each business day. All securities in the 
indices are priced at approximately 3:00 p.m. New York time each 
business day. The vast majority of the prices of the underlying 
securities comprising the indices are determined by the Merrill Lynch 
desks. These prices are determined in accordance with all applicable 
statutory rules, self-regulatory organization rules and generally 
accepted accounting principles regarding valuation of security 
positions. In addition to using these prices in calculating the indices 
and valuing client portfolios, MLPF&S simultaneously distributes these 
prices electronically to hundreds of mutual fund customers who use 
these prices to determine the value of their positions in accordance 
with applicable regulations. When a security price is not available, 
the Portfolio Strategy Group will use a security price from a third 
party vendor that, in its best judgment, will provide the most accurate 
market price thereof. The resulting index values are disseminated to, 
and published by Bloomberg L.P. and Reuters at the end of each business 
day. MLPF&S, in its rule as calculation agent for the bond index linked 
term notes, will use the index values as published on Bloomberg L.P. In 
conjunction with the issuance of the bond index linked term notes, the 
Exchange intends to publish the index value associated with the 
previous day's close.
    Bond weightings for each of the indices are based on a bond's total 
outstanding capitalization (total face value currently outstanding 
times price plus accrued interest). Returns and weighted average 
characteristics are published daily.
    The Exchange will require members, member organizations and 
employees thereof recommending a transaction in the securities: (1) To 
determine that such transaction is suitable for the customer and (2) 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, such transaction. The Exchange will distribute a circular to its 
membership prior to trading such securities providing guidance with 
regard to member firm compliance responsibilities (including 
suitability recommendations) when handling transactions in such 
securities and highlighting the special risks and characteristics 
thereof.
    The securities will be subject to the equity margin and trading 
rules of the Exchange except that, where the securities are traded in 
thousand dollar denominations as debt, they will be traded subject to 
the Exchange's debt trading rules.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act, in general, and further the objectives of Section 6(b)(5),\18\ 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 a national market system and, in general, 
protect investors and the public interest.
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    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Amex does not believe that the proposed rule change will impose 
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

    No written comments were either solicited or received 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 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 Exchange consents, the Commission will:
    (A) by order approve the 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 proposal is 
consistent with the Act. Persons making written submission 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 at the Commission's 
Public Reference Room. 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-99-03 and should be 
submitted by April 1, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6046 Filed 3-10-99; 8:45 am]
BILLING CODE 8010-01-M