Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the American Stock Exchange, Inc. Relating to the Listing of Options on the Amex Airline Index

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35084; International Series Release No. 756; File No.

SR-Amex-94-54]

Self-Regulatory Organizations; Notice of Filing and Immediate

Effectiveness of Proposed Rule Change by the American Stock Exchange,

Inc. Relating to the Listing of Options on the Amex Airline Index

December 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 December

7, 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 Exchange. 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 Exchange proposes to trade options on The Amex Airline Index

(``Index''), a new stock index developed by the Amex based on airline

industry stocks (or ADRs thereon) which are traded on the Amex, the New

York Stock Exchange, Inc. (``NYSE''), or are national market system

(``Nasdaq/NMS'') securities traded through Nasdaq. In addition, the

Amex proposes to amend Rule 901C, Commentary .01 to reflect that 90% of

the Index's numerical index value will be accounted for by stocks that

meet the current criteria and guidelines set forth in Rule 915. The

text of the proposed rule change is available at the Office of the

Secretary, the 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. The

text of these statements may be examined at the places specified in

Item IV below. The Exchange has prepared summaries, set forth in

Section (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

The Amex has developed a new industry-specific index called The

Amex Airline Index, based entirely on shares of widely-held airline

industry stocks or American Depository Receipts (``ADRs'') which are

exchange listed or are Nasdaq/NMS securities.1 It is intended that

the Amex list standardized option contracts on the newly developed

Index. The Exchange is filing this proposal pursuant to Rule 901C,

Commentary .02, which provides for the commencement of trading of

options on the Index thirty days after the filing date, i.e., 30 days

after December 7, 1994. The Exchange represents that the proposal

satisfies all the criteria set forth in Commentary .02 to Rule 901C and

the Commission's order approving that rule as outlined below.2

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\1\The component securities of the Index are AMR Corp., British

Airways PLC (ADR), Southwest Airlines; UAL Corporation, Delta Air

Lines Inc., KLM Royal Dutch Air, Alaska Airgroup Inc., Continental

Airlines Inc. (Class B), Northwest Airlines Corporation, and USAir

Group.

2See Securities Exchange Act Release No. 34157 (June 3,

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

Order'').

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Eligibility Standards for Index Components

Pursuant to Commentary .02 to Amex Rule 901C, the Amex represents

that all of the component securities of the Index are listed on the

NYSE or are Nasdaq/NMS securities, each of the component securities has

a minimum market capitalization of at least $75 million,3 and each

has a monthly trading volume of at least one million shares per month

over each of the six months preceding the filing of this proposal. In

addition, all of the component securities in the Index have

standardized options traded on them and thus have met the initial

eligibility criteria for standardized options trading set forth in Amex

Rule 915. One component (USAir Group), however, has traded below $5

during two of the last six months. While it is not known at this point

whether options on USAir Group will eventually be delisted, the Index

would still satisfy the criteria set forth in Commentary .02 to Rule

901C because as a result of each quarterly rebalancing, at least 90% of

the value of the Index and at least 80% of the total number of

components will meet the standards set forth in Rule 915.

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\3\In the case of ADRs, this represents market value as measured

by total world-wide shares outstanding.

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As a result of the ``equal dollar-weighting'' calculation

methodology,\4\ no individual component stock in the Index represents

more than 25% of the weight of the Index following each quarterly

rebalancing. Additionally, the top five highest weighted stocks in the

Index do not constitute more than 60% of the weight of the Index.

Finally, because the sole ADR component of the Index (British Airways

PLC) has standardized options trading on it, the Index also satisfies

the criteria that no more than 20% of the weight of the Index can be

composed of non-options eligible foreign securities (including ADRs).

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\4\See discussion of Index calculation, infra.

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Maintenance of the Index

The Exchange will maintain the Index so that (1) the total number

of component securities will not increase or decrease by more than

33\1/3\% from the number of components in the proposed Index (i.e., 10)

and in no event will the Index have less than nine components; (2)

component stocks constituting the top 90% of the Index by weight, must

have a minimum market capitalization of $75 million and the component

stocks constituting the bottom 10% of the Index, by weight, must have a

minimum market capitalization of $50 million; (3) the monthly trading

volume of each component security shall be at least 500,000 shares,

provided, however, that components accounting in aggregate for no more

than 10% of the Index, by weight, shall have a monthly trading volume

of at least 400,000 shares; and (4) the Index shall satisfy the

criteria that no single component will represent more than 25% of the

weight of the Index and that the five highest weighted component shall

represent no more than 60% of the weight of the Index, as of each

quarterly rebalancing.

The Exchange shall not open for trading any additional option

series should the Index fail to satisfy any of the maintenance criteria

set forth above unless such failure is determined by the Exchange not

to be significant and the Commission concurs in that determination.

Index Calculation

The Index is calculated using an ``equal dollar-weighting''

methodology designed to ensure that each of the component securities is

represented in an approximately ``equal'' dollar amount in the Index.

The Exchange believes that this method of calculation is important

since even among the largest companies in the airline industry there is

great disparity in market value. For example, although the stocks

included in the Index represent many of the most highly capitalized

companies in the airline industry, the five most highly capitalized

companies in the airline industry currently represent approximately 80%

of the aggregate market value of the Index. It has been the Exchange's

experience that options on market value weighted indexes dominated by

relatively few component stocks are less useful to investors because

the index will tend to represent those few components and not the

broader target sector that the index is designed to represent.

The following is a description of how the equal dollar-weighting

calculation method works. As of the market close on October 21, 1994, a

portfolio of airline securities was established representing an

investment of $10,000 in the stock (or ADR) (rounded to the nearest

whole share) of each of the 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 securities in the Index portfolio divided by the Index divisor. The

Index divisor was initially determined to yield the benchmark value of

200.00 at the close of trading on October 21, 1994. Each quarter

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

January, April, July, and October, the Index portfolio will be adjusted

by changing the number of whole shares of each component security so

that each company is again represented in ``equal'' dollar amounts. 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 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.

As noted above, the number of shares of each component security 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 split, reverse stock split, rights offering, distribution,

reorganization, recapitalization, or similar event with respect to the

component securities. In a merger or consolidation of an issuer of a

component security, if the stock or ADR 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 or ADR replacement, the average dollar value of

the remaining portfolio components will be calculated and that amount

invested in the security 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

securities, or adjust the number of securities included in the Index

based on changing conditions in the airline industry. In the event,

however, that the Exchange determines to increase the number of Index

components to greater than thirteen or to reduce the number of

components to fewer than nine, the Exchange will submit a 19b-4 filing

to the Commission. In selecting securities to be included in the Index,

the Exchange will be guided by a number of factors including market

value of outstanding shares, trading activity, and adherence to Rule

901C, Commentary .02. Similar to other stock index values published by

the Exchange, 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 proposed options on the Index are European-style,\5\ and cash-

settled. The Exchange's standard option trading hours (9:30 a.m. to

4:10 p.m. Eastern Standard Time) will apply to Index options. 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 Index option series will normally be the second to

last business day preceding the Saturday following Expiration Friday

(normally a Thursday). Trading in expiring Index options will cease at

the close of trading on the last trading day.

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\5\European-style options may only be exercised during a

specified time period immediately prior to expiration.

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The Exchange plans to list Index options series with expirations in

the three near-term calendar months and in the two additional calendar

months in the January 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 based on the full-value of the Index, the

Exchange may instead list long-term, reduced-value put and call options

based on one tenth (\1/10\th) of the Index's full value. In either

event, the interval between expiration months for either a full-value

of reduced-value long-term Index option will not be less than six

months. The trading of any long-term Index options would be subject to

the same rules which govern the trading of all the Exchange's index

options, including sales practice rules, margin requirements, and floor

trading procedures. Position limits on reduced-value long-term Index

options will be equivalent to the position limits for regular (full-

value) Index options and would be aggregated with such options. For

example, if the position limit for the full-value options on the Index

is 10,500 contracts on the same side of the market, then the position

limit for the reduced-value options will be 105,000 contracts on the

same side of the market and positions in reduced-value Index options

will be aggregated with positions in full-value Index options.

The exercise settlement value for all of the expiring Index options

will be calculated based upon the primary exchange regular way opening

sale prices for the component securities. In the case of Nasdaq/NMS

securities, the first reported sale price will be used. If any

component security does not open for trading on its primary market on

the last day before expiration, then the prior day's last sale price

will be used in the exercise settlement value calculation.

Exchange Rules Applicable to Stock Index Options

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

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., strike prices within ten points above or below the current Index

value) option series on the Index at 2\1/2\ intervals only when the

value of the Index is below 200 points. In addition, the Exchange

expects that the review required by Rule 904C(c) will result in a

position limit of 10,500 contracts with respect to options on this

Index.

The Amex represents that the proposed rule change is consistent

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

Section 6(b)(5)\6\ in particular in that it will permit trading in

options based on the Amex Airline Index pursuant to rules designed to

prevent fraudulent and manipulative acts and practices, to promote just

and equitable principles of trade, to foster cooperation and

coordination with persons engaged in facilitating transactions in

securities, and to remove impediments to and perfect the mechanism of a

free and open market and a national market system.

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\6\15 U.S.C. Sec. 78f(b)(5) (1988).

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

The Exchange does not believe that the proposed rule change will

impose any burden on competition.

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

Proposed Rule Change Received From Members, Participants or Others

No written comments were solicited or received with respect to the

proposed rule change.

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

Commission Action

Because the foregoing proposed rule change complies with the

standards set forth in the Generic Index Approval Order, it has become

effective pursuant to Section 19(b)(3)(A) of the Act. Pursuant to the

Generic Index Approval Order,7 the Exchange may not list Amex

Airline Index options for trading prior to 30 days after December 7,

1994, the date the proposed rule change was filed with the Commission.

At any time within 60 days of the filing of the proposed rule change,

the Commission may summarily abrogate the rule change if it appears to

the Commission that such action is necessary or appropriate in the

public interest, for the protection of investors, or otherwise in

furtherance of the purposes of the Act.

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\7\See supra note 2.

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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. Sec. 552, will be available for inspection and copying at

the Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. All submissions should refer to File No. SR-

Amex-94-54 and should be submitted by January 9, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.8

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-31039 Filed 12-16-94; 8:45 am]

BILLING CODE 8010-01-M