Self-Regulatory Organizations; Filing and Order Granting Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a Proposed Rule Change by the New York Stock Exchange, Inc., Relating to the Listing of Options on American Depositary Receipts

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33552; International Series Release No. 631; File No.

SR-NYSE-93-43]

Self-Regulatory Organizations; Filing and Order Granting

Accelerated Approval of Proposed Rule Change and Amendment No. 1 to a

Proposed Rule Change by the New York Stock Exchange, Inc., Relating to

the Listing of Options on American Depositary Receipts

January 31, 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 October

28, 1993, the New York Stock Exchange, Inc., (``NYSE'' or ``Exchange'')

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

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

have been prepared by the self-regulatory organization. The Commission

is publishing this notice to solicit comments on the proposed rule

change from interested persons.\1\

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\1\The proposal was amended on January 10, 1994 to clarify the

procedure the NYSE would use to determine whether 50% or more of the

world-wide trading volume of the underlying foreign security occurs

in the U.S. ADR market. Letter from James E. Buck, Senior Vice

President and Secretary, NYSE, to Richard Zack, Branch Chief, Office

of Derivatives Regulation, Division of Market Regulation

(``Division''), Commission, dated January 10, 1994 (``Amendment No.

1'').

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

of the Proposed Rule Change

The NYSE proposes to amend Rules 715 and 716 to provide for the

listing and trading of options on American Depositary Receipts

(``ADRs'') where 50% or more of the world-wide trading volume of the

underlying foreign security occurs in the U.S. ADR market.

The text of the proposal is available at the Office of the

Secretary, NYSE 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 self-regulatory organization

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 self-regulatory organization

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

On November 27, 1992, the Commission approved a NYSE proposal to

list and trade ADR options where the underlying foreign security is

subject to a comprehensive surveillance sharing agreement and the

underlying ADR meets or exceeds the Exchange's established uniform

options listing standards.\2\ First, the ADR Approval Order provides

that for ADR options to be eligible for listing and continued trading,

the NYSE must have comprehensive surveillance sharing agreements in

place with the foreign exchanges that serve as the primary markets for

the foreign securities underlying the ADRs, unless the Commission

otherwise approves the options' listing without an agreement. Second,

the NYSE's initial listing standards require that the ADRs underlying

the Exchange-listed options have a ``float'' of 7,000,000 ADRs

outstanding, 2,000 shareholders, trading volume of at least 2,400,000

over the prior twelve month period, and a minimum price of $7\1/2\ for

a majority of the business days during the preceding three month

period. Moreover, options on ADRs must meet or exceed the maintenance

criteria for continued listing under the NYSE rules. Those criteria

require that the ADRs underlying Exchange-listed options maintain a

``float'' of 6,300,000 ADRs, 1,600 shareholders, trading volume of at

least 1,800,000 over the prior twelve month period, and a minimum price

of $5 on a majority of the business days during the preceding six month

period. Additionally, the ADR Approval Order requires the NYSE to make

reasonable inquiry to evaluate the securities underlying the ADRs to

ensure that these securities are generally consistent with the above-

noted listing requirements.

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\2\Securities Exchange Act Release No. 31528 (November 27,

1992), 57 FR 57256 (December 3, 1992) (``ADR Approval Order''). A

comprehensive surveillance sharing agreement provides, among other

things, for the exchange of market trading activity, clearing

activity, and the identity of the ultimate purchaser or seller of

the securities traded.

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Furthermore, the NYSE options initial listing standards require

that the ADR underlying an ADR option be registered and listed on a

national securities exchange or traded through the facilities of a

national securities association and be reported as a national market

system security. The issuers of the ADRs also must be in compliance

with any other applicable requirements of the Act.

The current proposal would authorize the NYSE to list and trade

options on ADRs where 50% or more of the world-wide trading volume in

the underlying foreign security occurs in the U.S. ADR market. The

proposal also provides that the percentage of the world-wide trading

volume that occurs in the U.S. ADR market meet a maintenance standard

of 30% for the ADR options to continue to be trading on the Exchange.

Under the proposal, if the ADR options meet the above-noted criteria,

the options may be listed without the existence of a surveillance

sharing agreement between the NYSE and the primary exchange on which

the foreign securities underlying the ADRs trade.\3\

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\3\Under the proposal, should the ADR option not meet this

numerical standard, the Exchange could not list the ADR option

unless there is a surveillance sharing agreement between the

Exchange and the primary exchange on which the foreign securities

underlying the ADRs trade or the Commission specifically authorized

the listing. The Commission would give such authorization in the

context of approving a rule filing submitted under section 19 of the

Act and Rule 19b-4, thereunder.

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The proposal provides that to determine whether 50% or more of the

world-wide trading volume in the underlying foreign security occurs in

the U.S. ADR market, the NYSE will calculate the trading volume for the

previous three months in the related securities which can affect the

pricing of the foreign security underlying the ADR option.\4\ Under the

proposal, the NYSE will determine that at least 50% of the world-wide

trading volume in a particular foreign security occurs in the U.S. ADR

market if the combined trading volume for ADRs overlying any class of

the foreign issuer's common stock, occurring in the U.S. ADR market, is

not less than 50% of the sum of (1) the combined trading volume for all

classes of the foreign issuer's common stock, and (2) the combined

trading volume for all ADRs overlying any of these classes of stock.

The above-noted calculation also will be used to determine if the

trading volume in the U.S. ADR market falls below 30% of the world-wide

trading volume for the underlying foreign security.\5\

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\4\Under the proposal, such related securities include all

classes of common stock issued by the foreign issuer and ADRs that

overlie any one of these classes of common stock. See Letter from

James E. Buck, Senior Vice President and Secretary, NYSE, to Richard

Zack, Branch Chief, Office of Derivatives Regulation, Division of

Market Regulation (``Division''), Commission, dated January 10, 1994

(``ADR Letter'').

\5\See ADR Letter, supra note 4. Under this calculation, the

trading volume for any U.S. ADR trading on an exchange that is not

part of the U.S. ADR market will be included in the determination of

world-wide trading volume, but not in the determination of U.S. ADR

market trading volume. The NYSE also represents that it will use its

best efforts to discover all markets (foreign and U.S.) on which the

foreign security (and any related securities) underlying the ADR

options trades.

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The proposal also defines the U.S. ADR market as the U.S. self-

regulatory organizations that are members of the Intermarket

Surveillance Group (``ISG'')\6\ and whose markets are linked together

by the Intermarket Trading System (``ITS'').\7\ The U.S. self-

regulatory organizations that currently make up the U.S. ADR market are

the Amex, the BSE, the CBOE, the CHX, the CSE, the NASD, the NYSE, the

PSE, and the Phlx.\8\

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\6\ISG was formed on July 14, 1983 to, among other things,

coordinate more effectively surveillance and investigative

information sharing arrangements in the stock and options markets.

See Intermarket Surveillance Group Agreement, July 14, 1983. The

most recent amendment to the ISG Agreement, which incorporates the

original agreement and all amendments made thereafter, was signed by

ISG members on January 29, 1990. See Second Amendment to the

Intermarket Surveillance Group Agreement, January 29, 1990. The

members of the ISG are: The American Stock Exchange, Inc.

(``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago

Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange,

Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the

National Association of Securities Dealers, Inc. (``NASD''), the

NYSE, the Pacific Stock Exchange, Inc. (``PSE''), and the

Philadelphia Stock Exchange, Inc. (``Phlx'').

\7\ITS is a communications system designed to facilitate trading

among competing markets by providing each market with order routing

capabilities based on current quotation information. The system

links the participant markets and provides facilities and procedures

for: (1) The display of composite quotation information at each

participant market, so that brokers are able to determine readily

the best bid and offer available from any participant for multiply

trading securities; (2) efficient routing of orders and sending

administrative messages (on the functioning of the system) to all

participating markets; (3) participation, under certain conditions,

by members of all participating markets in opening transactions in

those markets; and (4) routing orders from a participating market to

a participating market with a better price. The exchanges on which

Empresas ADRs trade are ITS participant markets. The NASD's Computer

Assisted Execution System links NASD market makers, for order

routing and execution purposes, to ITS for ADRs.

\8\See ADR letter, supra note 4.

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The Exchange believes that the proposed rule change is consistent

with section 6(b) of the Act,\9\ 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, to promote just

and equitable principles of trade, and to remove impediments to and

perfect the mechanism of a free and open market and a national market

system.

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\9\15 U.S.C. 78f(b) (1988).

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(B) Self-Regulatory Organization's Statement on Burden on Competition

The NYSE believes that the proposed rule change will not impose a

burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments on the proposed rule change were neither solicited

nor received.

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

Commission Action

The Exchange has requested that the proposed rule change be given

accelerated effectiveness pursuant to section 19(b)(2) of the Act.\10\

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\10\15 U.S.C. 78s(b)(2) (1988).

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The Commission finds 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, the

requirements of section 6(b)(5).\11\ Specifically, the Commission finds

that allowing options to trade on ADRs, among other things, gives

investors a better means to hedge their positions in the ADRs, as well

as enhanced market timing opportunities.\12\ Further, the pricing of

the ADRs underlying ADR options may become more efficient and market

makers in these ADRs, by virtue of enhanced hedging opportunities, may

be able to provide deeper and more liquid markets.\13\ In sum, options

on ADRs likely engender the same benefits to investors and the market

place that exist with respect to options on common stock.\14\

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\11\15 U.S.C. 78f(b)(5) (1988).

\12\For example, if an investor wants to invest in ADRs but does

not have sufficient cash available until a future date, he can

purchase an ADR option now for less money and exercise the option to

purchase the ADRs at a later date.

\13\See e.g., Report of the Special Study of the Options Markets

to the Securities and Exchange Commission, 96th Cong., lst Sess.

(Comm. Print No. 96-IFC3, December 22, 1978).

\14\Pursuant to section 6(b)(5) of the Act, the Commission must

predicate approval of any new securities product upon a finding that

the introduction of such new product is in the public interest. Such

a finding would be difficult for a derivative instrument that served

no hedging or other economic function, because any benefits that

might be derived by market participants likely would be outweighed

by the potential for manipulation, diminished public confidence in

the integrity of the markets, and other valid regulatory concerns.

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The Commission also believes that it is appropriate to permit the

NYSE to list and trade options on ADRs given that these options will be

subject to specific requirements related to the protection of

investors. First, NYSE rules require that the ADRs underlying these

options meet the NYSE's uniform options listing standards in all

respects. As described above, this would include the initial and

maintenance criteria. These criteria ensure, among other things, that

the underlying ADRs will maintain adequate price and float to prevent

the ADR options from being readily susceptible to manipulation.

Second, the ADR Approval Order requires that the NYSE make a

reasonable inquiry to evaluate foreign securities underlying the ADR

options to ensure that these securities are generally consistent with

the requirements set forth in the Exchange's options listing standards.

In the ADR Approval Order, the Commission recognized that in some

cases, an ADR underlying an option could meet the options listing

standards while the foreign security on which the ADR is based may not

meet these standards in every respect. For example, in the case of ADRs

overlying certain foreign securities, one ADR could represent several

shares of a specific stock. For this reason, it is possible that the

price of the ADR will meet exchange listing standards even though the

market price of the foreign security underlying the ADR may be less

than the NYSE standard. The Commission believes, however, that

requiring the NYSE to review the foreign securities underlying the ADR

options to ensure that they are generally consistent with the

Exchange's options listing standards, along with other market

safeguards, will adequately protect investors from the possibility that

these ADR options can be potentially manipulated.\15\

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\15\For example, we would expect the Exchange to consider

delisting an option on an ADR if the price and public float of the

underlying security did not meet trading or size maintenance

standards, or if the security underlying the ADR failed to meet

other standards that raised manipulative concerns.

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Third, the NYSE has in place an adequate mechanism for providing

for the exchange of the surveillance information necessary to

adequately detect and deter market manipulation or trading abuses

involving ADR options. Although the proposal does not require the NYSE

to have a comprehensive surveillance sharing agreement in place with

the foreign exchange on which the security underlying the ADR options

trade, the Commission believes that this does not impair the ability of

the NYSE to detect or deter manipulation because the proposal requires

that 50% or more of the trading activity in the underlying foreign

securities occur in the U.S. ADR market. The Commission notes the

proposal requires the U.S. self-regulatory organizations that

constitute the U.S. ADR market to be members of the ISG, which will

provide for the exchange of necessary surveillance information

concerning trading activity in the ADR options, and the respective

underlying ADR market.\16\

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\16\See ADR Letter, supra note 4.

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As a general matter, the Commission believes that the existence of

a surveillance sharing agreement that effectively permits the sharing

of information between an exchange proposing to list an equity option

and the exchange trading the stock underlying the equity option is

necessary to detect and deter market manipulation and other trading

abuses. In particular, the Commission notes that surveillance sharing

agreements provide an important deterrent to manipulation because they

facilitate the availability of information needed to fully investigate

a potential manipulation if it were to occur. These agreements are

especially important in the context of derivative products based on

foreign securities because they facilitate the collection of necessary

regulatory, surveillance and other information from foreign

jurisdictions.

In the context of ADRs, the Commission believes that, in most

cases, the relevant underlying equity market is the primary market on

which the security underlying the ADR trades. This is because, in most

cases, the market for the security underlying the ADR generally is

larger in comparison to the ADR market, both in terms of share volume

and the value of trading. Because of the additional leverage provided

by an option on an ADR, the Commission generally believes that having a

comprehensive surveillance sharing agreement in place, between the

exchange where the ADR option trades and the exchange where the foreign

security underlying the ADR primarily trades, will ensure the integrity

of the marketplace.\17\ The Commission further believes that the

ability to obtain relevant surveillance information, including, among

other things, the identity of the ultimate purchasers and sellers of

securities, is an essential and necessary component of a comprehensive

surveillance sharing agreement.

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\17\See also Securities Exchange Act Release No. 26653 (March

21, 1989), 54 FR 12705 (order approving the trading of options on

the International Market Index (``IMI''), an index comprised of ADRs

traded in the United States based on foreign securities). In this

approval order, the Commission specifically required that there be

comprehensive surveillance sharing agreements in place between the

Amex and the foreign exchanges on which the securities underlying

the ADRs trade so that a substantial percentage of the index was

covered by comprehensive surveillance sharing agreements.

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Under the current proposal, however, the Commission believes that

it is appropriate to permit the listing of options on an ADR without

the existence of a comprehensive surveillance sharing agreement with

the foreign market where the underlying security trades, as long as,

the U.S. market for the underlying ADRs is at least as large as the

market for the underlying foreign security. Specifically, the proposed

listing standards require that at least 50% of the world-wide trading

volume in the underlying foreign security occur in the U.S. ADR market,

which consists of the Amex, the BSE, the CBOE, the CHX, the CSE, the

NASD, the NYSE, the PSE, and the Phlx. The proposal further requires

that for the continued trading of the ADR options the percentage of the

world-wide trading volume occurring in the U.S. ADR market must not

fall below 30%. The Commission believes these standards will ensure

that the relevant pricing market for the options on ADRs is the U.S.

market rather than the foreign market where the security underlying the

ADR trades.

Moreover, the Commission believes that the proposed method for

determining whether the trading volume in the U.S. ADR market meets the

required percentages is adequate to ensure that the U.S. ADR market is

and continues to be the price discovery market for the foreign security

underlying the ADR option. Specifically, the NYSE has represented that

it will calculate the trading volume for the previous three months in

the underlying ADR, the underlying foreign security, and other related

securities which can affect the pricing of the underlying foreign

security.\18\ To list an ADR option without the existence of a

comprehensive surveillance sharing agreement, the proposal requires the

combined training volume for ADRs overlying any class of the foreign

issuer's stock, occurring in the U.S. ADR market, to be not less than

50% of the combined world-wide trading volume for all classes of the

issuer's stock and all ADRs that overlie any of these classes.\19\

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\18\See supra note 4, and accompanying text.

\19\Id.

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In summary, the Commission believes that in cases where a

substantial percentage of the world-wide trading volume for the

underlying ADR, the underlying foreign security, and other securities

relevant to the pricing of these securities occurs in the U.S. ADR

market,\20\ the U.S. ADR market operates as the price discovery market

for the foreign securities (i.e., stocks and ADRs) underlying the ADR

options. In these cases, the Commission believes that the U.S. ADR

market is the instrumental market for purposes of deterring and

detecting potential manipulation or other abusive trading strategies in

conjunction with transactions in the overlying ADR options market.

Therefore, because the NYSE, and all the other U.S. self-regulatory

agencies which make up the U.S. ADR market are members of the ISG, the

Commission believes that there is an effective surveillance sharing

arrangement to permit the exchanges and the NASD to adequately

investigate any potential manipulations of the ADR options or their

underlying securities.

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\20\We note that it is appropriate to view the U.S. ADR market

as a single market even though it is made up of several national

securities exchanges and the NASD. The Commission notes that all of

the markets on which or through which these ADRs could trade are

linked together by ITS. The Commission further notes that one

market, the NYSE, typically operates as the primary exchange on

which trades in U.S. ADRs are executed.

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The Commission finds good cause for approving the proposed rule

change, including Amendments No. 1, to the proposed rule change, prior

to the thirtieth day after the date of publication of notice of filing

thereof in the Federal Register.

The NYSE proposal to list and trade ADR options where at least 50%

of the world-wide trading volume of the underlying foreign security

occurs in the U.S. ADR market is identical to proposals by the Amex,

CBOE, and Phlx to provide for the listing of ADR options that meet this

uniform standard.\21\ The Amex, CBOE, and Phlx proposals were subject

to a full notice and comment period and no comments were received.\22\

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\21\Securities Exchange Act Release Nos. 33102 (October 25,

1993), 58 FR 58356 (November 1, 1993) (SR-CBOE-93-38), 33103

(October 25, 1993), 58 FR 58357 (November 1, 1993) (SR-Amex-93-28),

and 33252 (November 26, 1993), 58 FR 63604 (December 2, 1993) (SR-

Phlx-93-54).

\22\Although Amendment No. 1 to the proposal was not part of the

Amex, CBOE, and Phlx proposals when they were noticed for comment,

the Commission notes that Amendment No. 1 merely clarifies how the

NYSE will determine whether not less than 50% (or less than 30%, in

the case of the maintenance standard) of the world-wide trading

volume in the underlying foreign security (as represented by ADRs,

common stock and any other related securities) occurs in the U.S.

ADR market. The Commission believes that this amendment does not

make a substantive change to the proposal and, thus, raises no new

issues. Further, the Commission believes that the Amendment

strengthens the proposal by ensuring that the standard will be

applied consistently by all the markets seeking to list ADR options.

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The Commission further notes that approving the current proposal,

including Amendment No. 1, on an accelerated basis will permit the NYSE

to compete on an equal basis with the other options exchanges for

orders in ADR options. Accordingly, since the Commission finds that the

current proposal involves the exact same issues as the above-noted

proposals, the Commission believes it is consistent with sections

19(b)(2) and 6(b)(5) of the Act\23\ to approve the NYSE's proposal on

an accelerated basis.

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\23\15 U.S.C. 78s(b)(2) and 78f(b)(5) (1988).

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IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the proposed rule change, including Amendment No.

1 to the proposed rule change. 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 copying in the

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

Washington, DC. Copies of such filing will also be available for

inspection and copying at the principal office of the above-mentioned

self-regulatory organization. All submissions should refer to the file

number in the caption above and should be submitted by February 28,

1994.

It is therefore ordered, Pursuant to section 19(b)(2) of the

Act,\24\ that the proposed rule change (SR-NYSE-93-43) is approved,

effective February 7, 1994. Accordingly, the Exchange may submit

listing certificates for ADR options as specified herein on February 7,

1994 pursuant to Rule 12d1-3 under the Act and commence trading in the

options according to the time parameters established in the Joint

Options Listing Procedures Plan.

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\24\15 U.S.C. 78s(b)(2) (1988).

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\25\

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\25\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-2710 Filed 2-4-94; 8:45 am]

BILLING CODE 8010-01-M