Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 to Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to the Establishment of Uniform Listing and Trading Guidelines for Stock Index and Currency Warrants

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35088; File No. SR-PSE 94-28]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change and Amendment No. 1 to Proposed Rule Change by the Pacific Stock

Exchange, Inc. Relating to the Establishment of Uniform Listing and

Trading Guidelines for Stock Index and Currency Warrants

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

September 22, 1994, the Pacific Stock Exchange, Inc. (``PSE'' 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 Exchange proposes to: (1) Amend its listing guidelines for

stock index (``stock index'' or ``index'') warrants and currency

warrants (``currency warrants'');\1\ (2) establish various new rules

for the trading of stock index and currency warrants; and (3) establish

special customer margin requirements for positions in stock index and

currency warrants. On Dec. 5, 1994, the PSE amended certain

surveillance related matters addressed in the filing. See footnote 3,

infra.

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\1\Currency warrants, as used in this filing, may refer to

warrants on individual currencies (or cross currencies) or to

warrants on a specific currency index group (``currency index

warrants'').

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

the Secretary, PSE, 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. 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 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 PSE proposes to: (1) Amend its listing guidelines and establish

uniform rules for the trading of stock index and currency warrants, and

(2) establish special customer margin requirements for positions in

stock index and currency warrants.

The PSE seeks to amend Rule 7.18 to provide higher standards for

warrant issuers than currently exists. In particular, future warrant

issuers would be expected to have a minimum tangible net worth in

excess of $150 million. In addition, the aggregate original issue price

of all of a particular issuer's warrant offerings (combined with

offerings by its affiliates) that are listed on a national securities

exchange or that are National Market securities traded through NASDAQ

would not be permitted to exceed 25% of the issuer's net worth. The

proposed amendment will require that each warrant issue will be

automatically exercised on either the delisting date (if the issue is

not listed upon another organized securities market) or upon

expiration. Rule 7.18 also will be amended to provide that opening

prices (``a.m. settlement'') for all U.S. traded securities will be

used to determine an index's settlement value where 25 percent or more

of the value of the index is represented by securities whose primary

trading market is in the U.S.

Rule 2.16 is being amended to apply the current customer margin

requirements for broad based stock index and currency options to stock

index and currency warrants, respectively. Thus, purchases of stock

index and currency warrants will require payment in full, and short

sales of stock index warrants will require initial margin of: (i) 100

percent of the current value of the warrant plus (ii) 15 percent of the

current value of the underlying broad stock index less the amount by

which the warrant is out of the money up to a maximum of five percent

of the index value. Short sales of currency warrants will follow the

margin requirements applicable to listed currency options. The Exchange

proposes that its stock index and currency warrant margin requirements

be permitted offset treatment for spread, straddle and covered

positions.\2\ Proposed Rule 8 of the Exchange rules applies to the

trading of index warrants and currency warrants. Proposed Rule 8.1

provides that, unless the context otherwise requires or a specific

provision of Rule 8 applies, the provisions of the Constitution and all

other rules and polices of the Exchange apply to trading of such

securities.

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\2\The staff of the Commission has indicated to the Exchange

that it must request and obtain appropriate interpretive or no-

action relief from the Commission in order to permit its index and

currency warrant margin requirements to allow offset treatment for

spread, straddle and covered positions.

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Proposed Rule 8.4 states that no member or member organization

shall accept an order from a customer for the purchase or sale of index

or currency warrants unless the customer's account has been approved

for options trading pursuant to Exchange Rule 9.18(b). Furthermore,

proposed Rules 8.5-8.8 require that the option rules pertaining to

suitability, discretionary account trading, supervision of accounts and

customer complaints be applied to stock index and currency warrants.

Proposed Rule 8.9 requires approval by a Compliance Registered

Options Principal of all advertisements, sales literature and

educational material issued by a member organization pertaining to

stock index and currency warrants. The rule further requires Exchange

approval of all advertisements and educational materials pertaining to

stock index and currency warrants.

Proposed Rule 8.10 provides that position limits for stock index

warrants on the same index with original issue prices of ten dollars or

less will be fifteen million warrants covering all such issues. The

rule provides that warrants with an original issue price greater than

ten dollars will be weighted more heavily than warrants with an

original issue price of ten dollars or less in calculating position

limits. The rule also gives the Exchange the authority to require the

liquidation of a position in stock index warrants that is in excess of

the position limits set forth in the rule, and Commentary to the rule

provides procedures for allowing limited exceptions to the position

limits.

Proposed Rule 8.11 provides for exercise limits on stock index

warrants analogous to those found in stock index options and states

that such limits are separate and distinct from any exercise limits

that may be imposed by the issuers of stock index warrants.

Proposed Rule 8.12 requires that the trading halt provisions in

Rule 7.11 shall be applied to trading in stock index warrants.

Upon Commission approval of the foregoing amendments, the Exchange

proposes it will only file rule changes for specific warrant issues

where there is no corresponding option or warrant on the same

underlying broad based index already listed on a national securities

exchange or NASDAQ. Accordingly, when a listed option overlies a

particular broad based index, the Exchange proposes it be able to list

warrants on that index without further Commission review and approval

pursuant to Section 19(b) of the Act.

Both initial and maintenance listing standards for stock index

warrants will require that no more than 20% of the securities in the

underlying index, by weight, may be comprised of foreign securities or

American Depositary Receipts (``ADRs'') overlying foreign securities

that are not subject to comprehensive surveillance sharing agreements

between the PSE and the primary exchange on which the foreign security

(including a foreign security underlying an ADR) is traded.\3\

Furthermore, Commentary .01 to Proposed Rule 2.16 provides that stock

index and currency warrants listed on the Exchange prior to SEC

approval of this filing shall continue to be governed by those

provisions of the Exchange's rules that were applicable to such

warrants prior to approval of this filing. Finally, prior to trading

index or currency warrants, the Exchange will distribute a circular to

its membership providing guidance regarding member firm compliance

responsibilities (including suitability recommendations) when handling

transactions in index or currency warrants.

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\3\Telephone conversation between Michael Pierson, PSE, and

Stephen M. Youhn, SEC, on December 5, 1994 (``Amendment No. 1'').

The Exchange proposes that the ``20% test'' be applied in the same

manner as that contained in Securities Exchange Act Release No.

34157 (June 3, 1994), 59 FR 30062 (June 10, 1994) (Commission

approval order allowing the expedited trading approval of certain

narrow-based index options).

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The Exchange believes 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), in particular, in that it will facilitate

transactions in securities.

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

The Exchange does not believe that the proposed rule change imposes

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

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. 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 PSE. All

submissions should refer to File No. SR-PSE-94-28 and should be

submitted by January 10, 1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\17 CFR 200.30-3(a)(12) (1993).

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[FR Doc. 94-31207 Filed 12-19-94; 8:45 am]

BILLING CODE 8010-01-M