Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the American Stock Exchange, Inc., Relating to the Listing and Trading of Commodity Linked Notes

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35005; File No. SR-Amex-94-30]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 by the American Stock Exchange, Inc.,

Relating to the Listing and Trading of Commodity Linked Notes

November 23, 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

August 22, 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. The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

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

of the Proposed Rule Change

The Amex proposes to approve for listing and trading under Section

107 of the Amex Company Guide intermediate term notes whose value will

be linked in part to changes in the levels of either the J.P. Morgan

Commodity Excess Return Index (``JPMCIX'') or the J.P. Morgan Commodity

Return Index (``JPMCI,'' together with JPMCIX, ``Indexes'').\1\

According to the Amex, both Indexes measure the return from an

investment in the same 11 liquid industrial futures contracts.

---------------------------------------------------------------------------

\1\The Amex on November 16, 1994, submitted Amendment Number 1

(``Amendment No. 1'') to the proposal to allow the underwriter to

link the value of the notes to either the JPMCI or JPMCIX, depending

upon market conditions and investor interest at the time of the

offering. Additionally, the Amendment provides that: only options

approved accounts will be permitted to trade the notes; the notes

will provide for a 75% floor; the index value will be calculated at

least once a day; and the Amex has executed the necessary

surveillance sharing agreements with the relevant commodities

exchanges. See Letter from Benjamin Krause, Amex, to Michael

Walinskas, Derivative Products Regulation, SEC, dated November 16,

1994.

---------------------------------------------------------------------------

The text of the proposed rule change and Amendment No. 1 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

Under Section 107 of the Amex Company Guide (``Section 107''), the

Exchange may approve for listing and trading securities which 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 107 intermediate term notes the value of

which can be expected to fluctuate based on changes in the level of an

index consisting of base metals, precious metals and energy related

commodities. These securities will conform to the listing guidelines

under Section 107 which provide that such issues have: (1) A public

distribution of one million trading units; (2) 400 holders; and (3) a

market value of not less than $20 million. The Exchange also will

require that the issuer have a minimum tangible net worth of $150

million. In addition, the Exchange will require that the total original

issue price of the security (when combined with all of the issuer's

commodity linked notes which are listed on a national securities

exchange or traded through the facilities of NASDAQ), shall not be

greater than 25% of the issuer's tangible net worth at the time of

issuance.

Such notes will have a term of one to three years and will not pay

interest. Upon maturity, holders will receive not less than 75% of the

original issue price plus an amount in U.S. dollars equal to a

participation rate (i.e., a specified percentage) multiplied by any

positive difference between the level of the appropriate index at the

time of the offering and the average of the closing index level on the

five business days preceding maturity. The notes may not be redeemed

prior to maturity, and holders of the notes have no claim to the

physical commodities in the linked index.

The proposed notes will be linked to either the J.P. Morgan

Commodity Index or the J.P. Morgan Commodity Excess Return Index. Both

indexes measure the return from an investment in the same 11 liquid

industrial futures contracts.\2\ The Exchange states that the JPMCI and

JPMCIX are identical in all respects except for the incorporation of

``collateral return,'' as more fully described below, into the

JPMCI.\3\ Both Indexes are constructed as an arithmetic average of

commodity returns, and will be rebalanced monthly to maintain constant

dollar weights. Because the Exchange and the underwriter believe the

Indexes are identical in all respects (with the exception of

incorporating collateral return), they desire the flexibility to

determine at the time of offering, based upon investor demand and

market conditions, which of the Indexes it will utilize for valuing the

notes.

---------------------------------------------------------------------------

\2\The commodities underlying the Index and their approximate

weightings are: aluminum (9%), copper (8%), nickel (2%), zinc (3%),

heating oil (10%), natural gas (7%), unleaded gas (5%), WTI Light

Sweet Crude (33%), gold (15%), silver (5%) and platinum (3%).

\3\See Amendment No. 1.

---------------------------------------------------------------------------

The JPMCIX and JPMCI are designed to capture both ``price'' return

and ``roll'' return from an investment in commodities. Price return, or

``spot'' return, is the component of return that arises from changes in

constant maturity nearby prices. Roll return is the component of return

that arises from rolling a long position through time in a sloping

forward price curve environment. When nearby futures contracts are more

expensive than longer dated contracts, roll return is positive. When

the reverse applies, roll return is negative.

Due to price fluctuations, the relative weights of the Index

components will be rebalanced monthly to maintain the appropriate

dollar weighting. In addition, due to the periodic expiration of the

futures contracts used to compute the Index value, it also is necessary

to ``roll'' out of expiring contracts and into the new nearby

contracts. To minimize possible pricing volatility arising from

conducting the ``roll'' on a single business day, the substitution of

the new contract for the old is accomplished with 20% of the roll

volume transacted on each of the five subsequent business days after

the rebalance date. The futures contract to be used for monthly

rebalancing and rolling of each commodity will be the nearest

designated futures contract to be used in the appropriate Index, with a

termination of trading date not earlier than ten business days into the

following month.\4\

---------------------------------------------------------------------------

\4\For energy and base metals, the new and old contracts will be

different. For precious metals, the new and old contracts may be the

same contract because of the absence of a designated contract for

every month. In this instance, rebalancing and rolling will only

involve an adjustment of the amount held of the old contracts.

---------------------------------------------------------------------------

The JPMCI is a ``total return'' index based upon the same eleven

commodities as the JPMCIX which, in addition to measuring price return

and roll return, is also comprised of collateral return. The Amex

states that collateral return is the risk free component of commodity

returns afforded by full collateralization of the notional value of

futures positions with Treasury bills. It measures the return that an

investor would receive if the investor were to fully margin a futures

position (i.e., post 100% margin) with Treasury bills. According to the

underwriter, some investors may choose not to fully collateralize

commodity investments, but because stocks and bonds are collateralized

investments, it is useful to treat commodities on the same basis to

compare risk-return performance. Therefore, the underwriter believes

that collateralization permits meaningful comparison with traditional

assets in a portfolio allocation framework.\5\

---------------------------------------------------------------------------

\5\The return based upon the Treasury bill rate is calculated

using a 13 week T-bill yield, compounded daily at the decompounded

discount rate of the most recent weekly U.S. Treasury bill auction

as found in the H.15 (519) report published by the Board of

Governors of the Federal Reserve System, on the full (100%) value of

the index. Interest accrues on an actual day basis over weekends and

holidays at the previous day's rate. See Amendment No. 1.

---------------------------------------------------------------------------

It is intended that the composition, relative weights and manner of

calculation for both Indexes will remain constant. It is conceivable,

however, that market developments may eventually necessitate changes in

the weighting, composition or calculation methodology of an Index. Such

developments could include, among other things, changing liquidity

conditions or the discontinuation of existing contracts, the emergence

of new contracts on relevant commodities, or major progress in

substitution technology that renders obsolete industrial processes that

make use of a certain commodity.

Decisions relating to changes in index weighting, composition or

calculation methodology will be determined on the basis of advice from

a neutral business committee, the JPMCI Policy Committee. This

committee is composed of senior employees in the commodities and

research areas of J.P. Morgan as well as independent industry and

academic experts. Commodity Group personnel of J.P. Morgan are

restricted to an advisory, non-voting membership on the JPMCI Policy

Committee. The issuer will immediately notify the Exchange and vendors

of financial information that report the Index values in the event that

there is a change in the relative weightings, calculation methodology

or composition.

Prices utilized in the Indexes will be based on New York Mercantile

Exchange (``NYMEX'') prices for platinum and energy related

commodities; Commodity Exchange (``Comex'') prices for other precious

metals (Comex is a wholly-owned subsidiary of NYMEX); and London Metal

Exchange (``LME'') prices for base metals. These prices are widely

reported by vendors of financial information and the press. Index

values will be calculated at least once each trading day by the issuer

or an affiliate of the issuer and disseminated to vendors of financial

information by the issuer.\6\ Members of the JPMCI Policy Committee and

employees of the calculation agent who are involved in the calculation

of, or data collection for, any of the commodities underlying the notes

or the aggregate value of the commodity index underlying the notes will

be expressly prohibited from trading the notes. The calculation agent

will adopt and maintain such reasonable and appropriate procedures as

to ensure that the calculation agent, its agents, affiliates and

employees, do not take advantage of or communicate to any other person

any knowledge concerning changes in the value of the notes or

commodities underlying the note before such information is made

publicly available.

---------------------------------------------------------------------------

\6\See Amendment No. 1.

---------------------------------------------------------------------------

The Amex is able to obtain market surveillance information,

including customer identity information, with respect to transactions

occurring on the LME pursuant to its information sharing arrangements

with the Securities and Futures Authority through the Intermarket

Surveillance Group. The Exchange also is able to obtain market

surveillance information, including customer identity information, with

respect to transactions occurring on NYMEX and Comex pursuant to its

information sharing agreement with NYMEX.

The notes will provide for payment at maturity of not less than 75%

of the offering price and the Exchange will require that only accounts

approved for options trading under Amex Rule 921 shall be permitted to

engage in the purchase and/or sale of such notes. In addition, the Amex

will require recommendations in the notes to comply with the

suitability standards set forth in Rule 923. Additionally, the Exchange

will distribute a circular to its membership prior to trading such

notes providing guidance with regard to member firm compliance

responsibilities (including suitability recommendations) when handling

transactions in such notes and highlighting the special risks and

characteristics thereof. Specifically, the Exchange will provide an

Information Circular regarding the proposed commodity linked notes that

substantially incorporates the suitability language contained in Rule

923.\7\

---------------------------------------------------------------------------

\7\Telephone Conversation between William Floyd-Jones, Jr.,

Assistant General Counsel, Legal & Regulatory Policy Division, Amex,

to Stephen Youhn, Derivative Products Regulation, SEC, on November

23, 1994.

---------------------------------------------------------------------------

The notes will be subject to the equity margin and trading rules of

the Exchange.

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, 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 Section, 450 Fifth Street, N.W.,

Washington, D.C. 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-94-30 and should be

submitted by December 23, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

---------------------------------------------------------------------------

\8\17 CFR 200.30-3(a)(12) (1993).

---------------------------------------------------------------------------

Jonathan G. Katz,

Secretary.

[FR Doc. 94-29636 Filed 12-1-94; 8:45 am]

BILLING CODE 8010-01-M