Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 by the American Stock Exchange, Inc., Relating to the Listing and Trading of Options on the Israeli Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34554; International Series Release No. 702, File No.

SR-Amex-94-18]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment Nos. 1 and 2 by the American Stock Exchange, Inc.,

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

August 19, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on May

31, 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 August

2, 1994, the Exchange filed Amendment No. 1 to the proposed rule

change, the subject matter of which supersedes the original

proposal.\1\ On August 8, 1994, the Exchange filed Amendment No. 2

(``Amendment No. 2'') to the proposal to clarify how the index will be

weighted when the composition of the index changes from its current

number of eleven components.\2\ The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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\1\In the original proposal, the Amex originally sought approval

of a narrow-based, capitalization-weighted index comprised of ten

components.

\2\See Letter from Nathan Most, Senior Vice President, New

Products Development, Amex, to Michael Walinskas, Derivative

Products Regulation, SEC, dated August 5, 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 Amex/Oscar Gruss Israel

Index (``Israeli Index'' or ``Index''), a new stock index developed by

the Amex in conjunction with Oscar Gruss & Son, Inc. based on Israeli

stocks (or ADRs thereon) trades on the Amex, 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 Amex/Oscar Gruss

Israel Index, based entirely on shares of widely held Israeli stocks

and American Depository Receipts (``ADRs'') traded on the NYSE, or that

are NM securities. The Index contains securities of highly capitalized

companies with major business interests in Israel. These include

companies which are incorporated in Israel, whose offices are located

in Israel, or whose research and development activities are

concentrated in Israel.

Index Calculation and Maintenance

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

methodology. Five of the eleven 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 Israeli

stock market. For example, ECI Telecom Ltd. and Teva Pharmaceutical

Industries, which are the largest capitalized components 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 Israeli market since it provides a higher

weighting for the larger capitalized components, yet does not permit

those stocks not 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 components. It has been the Exchange's

experience that options on market value weighted indexes dominated by

one or two components 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 $100,000 portfolio comprised of eleven Israeli component

securities was established representing a hypothetical ``investment''

(rounded to the nearest whole share) of $12,000 in the five largest

capitalized Index components and $6,667 in each of the six remaining

Index Components. 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 Index components divided by

the Index divisor. The Index divisor was initially determined to yield

the benchmark value of 213.00 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 five largest capitalized stocks in the

Index represent 60% of the Index value, and the remaining 40% of the

Index value is evenly distributed over the remaining securities. If the

number of components in the Index changes from eleven securities, the

Amex will continue to weight the five components with the highest

market capitalization 12%. The remaining components will then be

weighted equally.\3\ For example, if two new components are added to

the Index, the five securities with the highest market capitalizations

will be assigned 12% weightings while the remaining eight securities in

the Index would be weighted 5%.

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\3\See Amendment No. 2.

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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.

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 News Network. In addition, the

Exchange will include in its promotional and marketing materials for

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

methodology. As noted above, the number of shares of each component

stock in the Index portfolio remains 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, a 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 components' 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 in the same weighting tier as the stock

being replaced 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.

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 Israel. 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 fourteen without prior

Commission approval.

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 Israeli Index options will have trading

hours from 9:30 a.m. to 4:10 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 Israeli Index

option will be calculated based upon the primary exchange regular way

opening sale prices for the component securities.\4\ 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 used 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.

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\4\In the case of ADRs, the primary exchange refers to the

primary exchange for the ADR and not the underlying security.

Telephone conversation between Claire McGrath, Special Counsel,

Derivative Securities, Amex, and Stephen Youhn, Derivative Products

Regulation, SEC, on Aug. 19, 1994.

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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 trade. 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 (\1/10\th) 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 Israel, and have been selected on the basis of their market

capitalization, trading liquidity, and representation of Israeli

business industries. The Amex believes the components represent the

largest and most liquid of all Israeli securities trading in the U.S.,

and that the Index tracks closely the performance of larger broad

market Israeli indexes, such as the Oscar Gruss Israel Index, which

contains all of the more than 50 Israeli securities currently traded in

the U.S. This index is carried in the Israeli press as well as by

Bloomberg L.P., a major U.S. data vendor.

In choosing among Israeli stocks that meet the minimum criteria set

forth in Exchange Rule 901C, the Exchange will select stocks that: (1)

have a minimum market value in U.S. dollars of at least $75 million,

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 500,000 shares (or ADRs); (3) have at

least 85% 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.

The Amex will ensure that no 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.\5\ Currently,

no Index components have the majority of their trading volume occurring

on an exchange with which the Amex does not currently have in place an

effective surveillance sharing agreement.

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\5\See Amendment No. 2.

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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 Industry 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.

The Exchange seeks to have the ability to utilize its Auto-Ex

system for orders in 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 Exchange believes

the ability to use Auto-Ex for orders of up to 50 contracts will

provide customers with liquid markets and expeditious executions. The

Amex represents that it has the necessary systems capacity to support

new series that would result from the introduction of Israeli Index

Options.\6\

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\6\See Letter from Warren I. Kaiser, Senior Vice President,

Information Technology, Amex, to Michael Walinskas, Derivative

Products Regulation, SEC, dated August 8, 1994. Additionally, the

Options Price Reporting Authority (``OPRA'') has stated that it has

the necessary systems capacity to support those new series of index

options that would result from the introduction of Index options and

Index LEAPS. See Memorandum from Joe Corrigan, Executive Director,

OPRA, to Charles Faurot, Managing Director, Market Data Services,

Amex, dated August 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

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 persons 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. Sec. 552, will be available for inspection and copying 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-94-18 and should be

submitted by September 16, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-21010 Filed 8-25-94; 8:45 am]

BILLING CODE 8010-01-M