Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 2 and 3 by the American Stock Exchange, Inc. Relating to the Listing and Trading of Options on the Mexico Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34356; International Series Release No. 681; File No.

SR-Amex-94-20]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment Nos. 2 and 3 by the American Stock Exchange, Inc.

Relating to the Listing and Trading of Options on the Mexico Index

July 12, 1994.

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 June 3,

1994, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'')

filed with the Securities and Exchange Commission (``Commission'') the

proposed rule change as described in Items I, II and III below, which

Items have been prepared by the self-regulatory organization. On June

27, 1994, the Exchange filed Amendment No. 1 to the proposed rule

change, the subject matter of which was superseded with the filing of

Amendment No. 2 (``Amendment No. 2''), which was filed on July 7,

1994.\1\ Amendment No. 1 was formally withdrawn in Amendment No. 2. On

July 11, 1994, the Exchange filed Amendment No. 3 (``Amendment No. 3'')

to the proposed rule change to provide for certain standards to be used

in conjunction with the maintenance of the Index, as described

below.\2\ The Commission is publishing this notice to solicit comments

on the proposed rule change and Amendment Nos. 2 and 3 from interested

persons.

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\1\See Letter from Howard Baker, Senior Vice President,

Derivative Securities, Amex, to Michael Walinskas, Derivative

Products Regulation, SEC, dated July 7, 1994. In the original

proposal, the Amex sought approval for the listing of options based

upon a Mexico Index that was capitalization-weighted and based upon

shares of twenty Mexican stocks or American Depository Receipts

(``ADRs'') traded on the New York Stock Exchange, Amex or that were

National Market securities. The Amex proposed that the Index be

classified as a broad-based index. Amendment No. 2 supersedes the

original proposal and Amendment No. 1.

\2\See Letter from Howard Baker, Senior Vice President,

Derivative Securities, Amex, to Michael Walinskas, Derivative

Products Regulation, SEC, dated July 11, 1994.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Amex proposes to trade options on the Mexico Index (``Mexico

Index'' or ``Index''), a new stock index developed by the Amex, based

on Mexican stocks (or ADRs thereon) traded on the Amex, the New York

Stock Exchange (``NYSE''), or that are National Market (``NM'')

securities traded through the National Association of Securities

Dealers Automated Quotation system (``NASDAQ''). The text of the

proposed rule change is available at the Office of the Secretary, Amex

and at the Commission.

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

1. Purpose

The Amex has developed a new index called the Mexico Index, based

entirely on shares of widely held Mexican stocks and ADRs traded on the

NYSE, Amex, or that are NM securities. The Index contains securities of

highly-capitalized companies with major business interests in Mexico.

These companies have been drawn from a variety of industries, including

construction, telecommunications, banking, shipping, tobacco, media,

and food and beverage, to reflect the diversity of the Mexican market.

Index Calculation and Maintenance

The Index is calculated using a ``modified'' equal dollar weighting

methodology. Two of the ten component securities have been given a

higher weighting in the Index in order to more closely approximate the

weight the industry represented by that component has in the Mexican

stock market. The Amex believes that this will allow the Index's value

to correlate more closely with the Bolsa Mexican Indice de Precios y

Cotizaciones, which is commonly known as the ``Bolsa Index.'' For

example, Telefonos de Mexico, which is the largest capitalized

component in the Index, will have a higher weight in the Index, but not

as high as if the Index were capitalization weighted. The Amex believes

that this ``modified'' equal dollar weighting methodology allows the

Index to be a more accurate reflection of the Mexican market since it

provides a higher weighting for the larger capitalized components, yet

does not permit those stocks to dominate the Index. The Exchange

believes that this method of calculation is important given the great

disparity in market value of a few of the Index's component stocks. It

has been the Exchange's experience that options on market value

weighted indexes dominated by one or two component stocks are less

useful to investors, since the index will tend to represent the one or

two components and not the group as a whole.

The following is a description of how the ``modified'' equal dollar

weighting calculation method works. As of the market close on June 17,

1994, a portfolio of ten Mexican stocks was established representing an

investment (rounded to the nearest whole share) of $24,000 in the

largest capitalized stock in the Index, $12,000 in the second largest,

and $8,000 in each of the remaining 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 231.00 at the close of trading on June 17, 1994. Each quarter

thereafter, following the close of trading on the third Friday of

March, June, September and December, the Index components will be

ranked in descending market capitalization order and the Index

portfolio adjusted by changing the number of whole shares of each

component stock so that the largest capitalized stock in the Index

represents 24% of the Index value, the second largest represents 12%,

and each of the remaining companies represent 8%. If the number of

components in the Index increases to greater than ten securities, the

Amex will continue to weight the two components with the highest market

capitalizations 24% and 12%, respectively. The remaining components

will then be weighted equally.\3\ For example, if two new components

are added to the Index, the two securities with the highest market

capitalizations will be assigned a 24% and 12% weighting, respectively,

while the remaining ten securities in the Index would be weighted 6.4%

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\3\See Amendment No. 3.

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If it becomes necessary to remove a stock from the Index, the

Exchange will either add a Mexican stock having characteristics that

will permit the Index to remain within the maintenance criteria

specified in its rules and the Generic Narrow-Based Index Approval

Order,\4\ or will permit the Index to remain at nine stocks until the

next quarterly rebalancing, at which time the Exchange will replace the

component so that the Index will continue to have at least ten

components.\5\ The Exchange has chosen to rebalance following the close

of trading on the quarterly expiration cycle because it allows an

option contract to be held for up to three months without a change in

the Index portfolio while at the same time, maintaining the

``modified'' equal dollar weighting feature of the Index. If necessary,

a divisor adjustment is made at 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.

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\4\See Securities Exchange Act Release No. 34157 (June 3, 1994),

59 FR 30062 (June 10, 1994) (``Generic Narrow Based Index Approval

Order'').

\5\See Amendment No. 3.

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The Amex states that it has had experience making regular quarterly

adjustments to a number of its indexes and has not encountered investor

confusion regarding the adjustments, since they are done on a regular

basis and timely, proper and adequate notice is given. An information

circular is distributed to all Exchange members notifying them of the

quarterly changes. This circular is also sent by facsimile to the

Exchange's contacts at the major options firms mailed to recipients of

the Exchange's options related information circulars, and made

available to subscribers of the Options New Network. In addition, the

Exchange will include in its promotional and marketing materials for

the Index description of the ``modified'' equal dollar weighting

methodology. 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, a stock

distribution, stock, splits, reverse stock splits, rights offering

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 in 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 replacement, the average dollar value of the

remaining portfolio components will be calculated and that amount

invested in the stock of the component, to the nearest whole share. In

all cases the divisor will be adjusted, if necessary, to ensure Index

continuity

The Amex will calculate and maintain the Index, and pursuant to

Exchange Rule 901C(b) may at any time or from time to time substitute

stocks, or adjust the number of stocks included in the Index, based on

changing conditions in Mexico. However, the Exchange will not decrease

the number of Index component stocks to less than nine or increase the

number of component stocks to greater than thirteen without prior

Commission approval.\6\

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\6\See Amendment No. 3.

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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 Exchange proposes to trade cash-settled, European-style Index

options (i.e., exercises are permitted at expiration only). The

Exchange also proposes that Mexico Index options will have trading

hours from 9:30 a.m. to 4:15 p.m. EST. As with other index options

traded on the Amex, the options on the Index will expire on the

Saturday following the third Friday of the expiration month

(``Expiration Friday''). The last trading day in an 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 Index value for purposes of settling a specific Mexico Index

option will be calculated based upon the primary exchange regular way

opening sale prices for the component stocks. In the case of NM

securities, the first reported sale price will be used. As trading

begins in each of the Index's component securities, its opening sale

price is captured for use in the calculation. Once all of the component

stocks have opened, the value of the Index is determined and that value

is used as the settlement value of the option. If any of the component

stocks do not open for trading on the last trading day before

expiration, then the prior day's last sale price is used in the

calculation.

The Exchange plans to list options 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 may be traded. In lieu of

such long-term options on a full-value Index level, the Exchange may

instead list long-term, reduced-value put and call options based on

one-tenth (1/10th) the Index's full-value. In either event, the

interval between expiration months for either a full-value or reduced-

value long-term option will not be less than six months.

Eligibility Standards for Index Components

The Index's component securities all have major business interests

in Mexico, and have been selected on the basis of their market

capitalization, trading liquidity, and representation of Mexican

business industries. The components represent the largest and most

liquid of all Mexican securities trading in the U.S. and the Index

tracks closely the performance of the Bolsa Index, a benchmark for the

Mexican stock market.

The Exchange has represented that it will ensure that the Index

initially and thereafter satisfies the listing and maintenance criteria

set forth in the Generic Narrow-Based Index Approval Order. In choosing

among Mexican stocks that meet the initial minimum criteria set forth

in the Generic Narrow-Based Index Approval Order (as well as Exchange

Rule 901C), the Exchange will select stocks that: (1) Have a minimum

market value in U.S. dollars of at least $75 million,\7\ except that

for each of the lowest weighted component securities in the Index that

in the aggregate account for no more than 10% of the weight of the

Index, the market value may be at least $50 million; (2) have an

average monthly trading volume in the U.S. markets over the previous

six month period of not less than one million shares (or ADRs) except

that for each of the lowest weighted component securities in the Index

that in the aggregate account for no more than 10% of the weight of the

Index, the trading volume shall be at least 500,000 shares in each of

the last six months; (3) have at least 90% of the numerical Index value

and at least 80% of the total number of component securities meeting

the current criteria for standardized option trading set forth in

Exchange Rule 915; and (4) are reported securities that trade on either

the NYSE, Amex (subject to the limitations of Rule 901C), or are NM

securities. In addition, no individual stock in the Index may represent

more than 25% of the Index weight (at the time of rebalancing) and the

five highest weighted stocks may not constitute more than 60% of the

Index weight (at the time of rebalancing).

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\7\In the case of ADRs, this represents market value as measured

by total world-wide shares outstanding.

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The Amex will ensure that not more than 20% of the weight of the

Index is represented by ADRs overlying foreign securities that are not

subject to comprehensive surveillance sharing agreements.\8\ Currently,

one component ADR, accounting for 8% of the Index value, has the

majority of its trading volume occurring on the Bolsa Mexicana de

Valores, an exchange with which the Amex does not currently have in

place an effective market information sharing agreement.

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\8\See Amendment No. 3.

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If the Index fails at any time to satisfy the maintenance criteria

set forth in the Generic Narrow-Based Index Approval Order and Exchange

Rule 901C, the Exchange will immediately notify the Commission of that

fact and will not open for trading any additional series of options on

the Index unless such failure is determined by the Exchange not to be

significant and the Commission concurs in that determination, or unless

the continued listing of options on the Mexico Index has been approved

by the Commission under Section 19(b)(2) of the Exchange Act.\9\

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\9\See Amendment No. 3.

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Exchange Rules Applicable to Stock Index Options

Amex Rules 900C through 980C will apply to the trading of regular

and long-term contracts based on the Index. These Rules cover issues

such as surveillance, exercise prices, and position limits.

Surveillance procedures currently used to monitor trading in each of

the Exchange's other index options will also be used to monitor trading

in options on the Index. The Index is deemed to be a Stock Index option

under Rule 901C(a) and a Stock Index Group under rule 900C(b)(1). With

respect to Rule 903C(b), the Exchange proposes to list near-the-money

(i.e., within ten points above or below the current index value)

options 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 proposes to establish, pursuant to Rule 904C(c), a

position limit of 7,500 contracts on the same side of the market.\10\

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\10\Telephone conversation between Howard Baker, Senior Vice

President, Derivative Securities, Amex, and Howard Kramer, Associate

Director, Division of Market Regulation, SEC, on July 12, 1994. In

Amendment No. 2, the Amex proposed position limits of 10,500

contracts. That portion of Amendment No. 2 which refers to position

limits has been withdrawn.

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In anticipation of substantial customer activity in the options on

this Index (including institutional activity), the Exchange seeks to

have the ability to utilize its Auto-Ex system for orders in the Index

options of up to 50 contracts. Auto-Ex is the Exchange's automated

execution system which provides for the automatic execution of market

and marketable limit orders at the best bid or offer at the time the

order is entered. The ability to use Auto-Ex for orders of up to 50

contracts will provide customers with deep, liquid markets as well as

expeditious executions. The Amex represents that it has the necessary

systems capacity to support new series that would result from the

introduction of Mexico Index Options.\11\

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\11\See Letter from Edward Cook, Jr., Managing Director,

Information Technology, Amex, to Michael Walinskas, Derivative

Products Regulation, SEC, dated July 8, 1994.

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2. Statutory Basis

The Exchange believes the proposed rule change is consistent with

Section 6(b) of the Act in general and furthers the objectives of

Section 6(b)(5) in particular in that it is designed to prevent

fraudulent and manipulative acts and practices and to promote just and

equitable principles of trade, and is not designed to permit unfair

discrimination between customers, issuers, brokers and dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange believes 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 on

the proposed rule change.

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

Commission Action

The Amex requests that the proposed rule change be given expedited

review and accelerated effectiveness pursuant to Section 19(b)(2) of

the Act.

Within 35 days of the publication of this notice in the Federal

Register or within such other 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 self-regulatory organization 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 person 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, 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 coping at the

Commission's Public Reference Section, 450 Fifth Street NW.,

Washington, DC 20549. 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-94-20 and should be

submitted by August 8, 1994.

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)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-17348 Filed 7-14-94; 8:45 am]

BILLING CODE 8010-01-M