Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Relating to the Listing and Trading of Notes Linked to the Performance of the CBOE DJIA BuyWrite Index(sm), 35468-35473 [E5-3184]
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35468
Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Amex. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Amex–2005–026 and
should be submitted on or before July
11, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.6
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–3178 Filed 6–17–05; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51840; File No. SR-Amex2005–042]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing and Order Granting
Accelerated Approval of a Proposed
Rule Change Relating to the Listing
and Trading of Notes Linked to the
Performance of the CBOE DJIA
BuyWrite Index(sm)
June 14, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 20,
2005, the American Stock Exchange LLC
(‘‘Amex’’ 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
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
17:24 Jun 17, 2005
The Exchange proposes to list and
trade notes, the performance of which is
linked to the DJIA BuyWrite Index(sm)
(the ‘‘BXD Index’’ or ‘‘Index’’). The text
of the proposed rule change is available
on the Amex’s Web site (https://
www.amex.com), at the principal offices
of the Amex, and at the Commission’s
Public Reference Room.
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 III below. The Amex has
prepared summaries, set forth in
Sections A, B and C below, of the most
significant aspects of such statements.
1. Purpose
Under Section 107A of the Amex
Company Guide (‘‘Company Guide’’),
the Exchange may approve for listing
and trading securities that cannot be
readily categorized under the listing
criteria for common and preferred
stocks, bonds, debentures, or warrants.3
The Amex proposes to list for trading
under Section 107A of the Company
Guide notes linked to the performance
of the BXD Index (the ‘‘Notes’’). The
BXD Index is determined, calculated,
and maintained solely by the Chicago
Board Options Exchange, Inc.
3 See Securities Exchange Act Release No. 27753
(Mar. 1, 1990), 55 FR 8626 (Mar. 8, 1990) (File No.
SR-Amex-89–29).
1 15
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8010–01–P
6 17
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons and is
approving the proposal on an
accelerated basis.
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(‘‘CBOE’’).4 JPMorgan Chase & Co.
(‘‘JPMorgan’’) will issue the Notes.5
4 If the BXD Index is discontinued or suspended,
the calculation agent, in its sole discretion, may
substitute the BXD Index with an index
substantially similar to the discontinued or
suspended BXD Index (the ‘‘Successor Index’’). The
Successor Index may be calculated and/or
published by the CBOE or any other third party. If
the CBOE discontinues publication of the BXD
Index prior to, and such discontinuance is
continuing on, the Final Valuation Date and the
calculation agent determines, in its sole discretion,
that no Successor Index is available at such time,
then the calculation agent will determine the BXD
Index closing level for such date. The BXD Index
closing level will be computed by the calculation
agent in accordance with the formula for and
method of calculating the BXD Index last in effect
prior to such discontinuance, using the closing
price of the DJIA or the stocks underlying the DJIA
at the discretion of the calculation agent (or, if
trading in the relevant securities has been
materially suspended or materially limited, its good
faith estimate of the closing price that would have
prevailed but for such suspension or limitation) at
the close of the principal trading session on such
date for the DJIA or for each security comprising the
DJIA, the arithmetic average of the last bid and ask
prices (or, if trading in the relevant call option has
been materially suspended or materially limited, its
good faith estimate of the arithmetic average of the
last bid and ask prices that would have prevailed
but for such suspension or limitation) of the
relevant call option reported before 4:00 p.m.
Eastern time and such other inputs as may
reasonably be necessary. Notwithstanding these
alternative arrangements, discontinuance of the
publication of the BXD Index on the relevant
exchange may adversely affect the value of the
notes. If at any time the method of calculating the
BXD Index, the DJIA, or a Successor Index, or the
level thereof is changed in a material respect, or if
the BXD Index, the DJIA, or a Successor Index is
in any other way modified so that the BXD Index
or a Successor Index does not, in the opinion of the
calculation agent, fairly represent the level of the
BXD Index or such Successor Index had such
changes or modifications not been made, then, from
and after such time, the calculation agent will, at
the close of business in New York City on each date
on which the BXD Index closing level is to be
determined, make such calculations and
adjustments as, in the good faith judgment of the
calculation agent, may be necessary in order to
arrive at a level of an index comparable to the BXD
Index or such Successor Index, as the case may be,
as if such changes or modifications had not been
made, and the calculation agent will calculate the
BXD Index closing level with reference to the BXD
Index or such Successor Index, as adjusted.
Accordingly, if the method of calculating the BXD
Index, the DJIA, or a Successor Index is modified
so that the level of the BXD Index or a Successor
Index is a fraction of what it would have been if
there had been no such modification (e.g., due to
a split in the index), then the calculation agent will
adjust such index in order to arrive at a level of the
BXD Index or such Successor Index as if there had
been no such modification (e.g., as if such split had
not occurred).
J.P. Morgan Securities Inc., an affiliate of
JPMorgan, has been appointed to act as the
calculation agent. Telephone conversation between
Jeffrey P. Burns, Associate General Counsel, Amex
and David Liu, Attorney, Division of Market
Regulation (‘‘Division’’), Commission, on May 26,
2005.
5 The Exchange states that JPMorgan and Dow
Jones & Co. (‘‘Dow Jones’’) are negotiating a nonexclusive license agreement, with up to a 165-day
exclusivity period, providing for the use of the BXD
Index by JPMorgan in connection with certain
securities, including the Notes. Dow Jones is not
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Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
The Notes will conform to the initial
listing guidelines under Section 107A 6
and continued listing guidelines under
Sections 1001–1003 7 of the Company
Guide. The Notes are a series of
medium-term debt securities of
JPMorgan that provide for a cash
payment at maturity based on the
performance of the BXD Index as
adjusted by the Adjustment Amount.8
The principal amount of each Note is
expected to be $1,000. The Notes will
not have a minimum principal amount
that will be repaid and, accordingly,
payment on the Notes at maturity may
be less than the original issue price of
the Notes. In fact, the value of the BXD
Index must increase for the investor to
$1,000 × 1 +
receive at least the $1,000 principal
amount per security at maturity. If the
value of the BXD Index decreases or
does not increase sufficiently, the
investor will receive less, and possibly
significantly less, than the $1,000
principal amount per security. In
addition, holders of the Notes will not
receive any interest payments from the
Notes. The Notes will have a term of at
least one (1) but no more than ten (10)
years.9
The cash payment that a holder or
investor of a Note will be entitled to
receive at maturity (the ‘‘Payment
Amount’’) will depend on the relation of
the level of the BXD Index at the close
of the market on the Final Valuation
35469
Date 10 (the ‘‘Final Index Level’’) and the
closing value of the Index on the date
JPMorgan prices the Notes for initial
sale to the public (the ‘‘Initial Index
Level’’) less the Adjustment Amount. If
there is a ‘‘market disruption event’’ 11
when determining the Final Index
Level, the Final Index Level will be
determined on the next available trading
day during which no ‘‘market
disruption event’’ occurs. For purposes
of determining the amount payable at
maturity of the Notes, the Payment
Amount will be determined on the Final
Valuation Date.
The Payment Amount per Note will
equal:
Final Index Level − Initial Index Level
n
− 1.0%
, where n is
365
Initial Index Level
who want to participate in the exposure
to the DJIA that the BXD Index provides
while limiting downside risk, and who
are willing to forego principal
protection and interest payments on the
Notes during their term.
The Exchange notes that the
Commission has previously approved
the listing on the Amex of securities
with structures similar to that of the
proposed Notes.12 Description of the
Index. The BXD Index is a benchmark
index designed to measure the
responsible for and will not participate in the
issuance and creation of the Notes.
6 The initial listing standards for the Notes
require: (1) a minimum public distribution of one
million units; (2) a minimum of 400 shareholders;
(3) a market value of at least $4 million; and (4) a
term of at least one year. Because the Notes will be
issued in $1,000 denominations, the minimum
public distribution requirement of one million units
and the minimum holder requirement of 400
holders do not apply. In addition, the listing
guidelines provide that the issuer has assets in
excess of $100 million, stockholder’s equity of at
least $10 million, and pre-tax income of at least
$750,000 in the last fiscal year or in two of the three
prior fiscal years. In the case of an issuer which is
unable to satisfy the earning criteria stated in
Section 101 of the Company Guide, the Exchange
will require the issuer to have the following: (1)
assets in excess of $200 million and stockholders’
equity of at least $10 million; or (2) assets in excess
of $100 million and stockholders’ equity of at least
$20 million.
7 The Exchange’s continued listing guidelines are
set forth in Sections 1001 through 1003 of Part 10
to the Exchange’s Company Guide. Section 1002(b)
of the Company Guide states that the Exchange will
consider removing from listing any security where,
in the opinion of the Exchange, it appears that the
extent of public distribution or aggregate market
value has become so reduced to make further
dealings on the Exchange inadvisable. With respect
to continued listing guidelines for distribution of
the Notes, the Exchange will rely, in part, on the
guidelines for bonds in Section 1003(b)(iv) of the
Company Guide. Section 1003(b)(iv)(A) of the
Company Guide provides that the Exchange will
normally consider suspending dealings in, or
removing from the list, a security if the aggregate
market value or the principal amount of bonds
publicly held is less than $400,000.
8 The Adjustment Amount is an annual fee that
accrues daily over the term of the Notes. The
Adjustment Amount is equal to 1.0% multiplied by
the number of days since the pricing date of the
Notes divided by 365.
9 The term of the Notes is expected to be one (1)
year and will be disclosed in the pricing
supplement.
10 The Final Valuation Date will be the third
scheduled trading day prior to the maturity date.
11 A ‘‘market disruption event’’ means: (i) A
suspension, absence, or material limitation of
trading of stocks then constituting 20 percent or
more of the level of the DJIA (or the relevant
successor index) on the relevant exchanges (as
defined below) for such securities for more than
two hours of trading (or one hour of trading on any
day that is a ‘‘roll date’’ for purposes of calculating
the BXD Index) during, or during the one hour
period preceding the close of, the principal trading
session on such relevant exchange; or (ii) a
breakdown or failure in the price and trade
reporting systems of any relevant exchange as a
result of which the reported trading prices for
stocks then constituting 20 percent or more of the
level of the DJIA (or the relevant successor index)
(A) during the one hour preceding the close of the
principal trading session on such relevant exchange
or (B) during any one hour period of trading on
such relevant exchange on any day that is a ‘‘roll
date’’ for purposes of calculating the BXD Index; or
(iii) a suspension, absence, or material limitation of
trading of call options nominally sold in connection
with the BXD Index (or the relevant successor
index) on the CBOE for more than two hours of
trading, or during the one hour period preceding,
and including, the scheduled time at which the
value of such options is calculated for purposes of
calculating the BXD Index; or (iv) a breakdown or
failure in the price and trade reporting systems of
the CBOE as a result of which the reported trading
prices for call options nominally sold in connection
with the BXD Index during the one hour period
preceding, and including, the scheduled time at
which the value of such options is calculated for
purposes of the BXD Index are materially
inaccurate; or (v) the suspension, absence, or
material limitation of trading on any major U.S.
securities market for trading in futures or options
contracts related to the DJIA or the BXD Index (or
the relevant successor index) for more than two
hours of trading during, or during the one hour
period preceding the close of, the principal trading
session on such market; or a decision to
permanently discontinue trading in the relevant
futures or options contract, in each case as
determined by the calculation agent in its sole
discretion; and a determination by the calculation
agent in its sole discretion that the event described
above materially interfered with its ability or the
ability of any of JPMorgan’s affiliates to adjust or
unwind all or a material portion of any hedge with
respect to the notes. ‘‘Relevant exchange’’ means
the primary U.S. organized exchange or market of
trading for any security (or any combination
thereof) then included in the BXD Index or any
successor index. Telephone conversation between
Jeffrey P. Burns, Associate General Counsel, Amex
and David Liu, Attorney, Division, Commission, on
May 26, 2005.
12 See Securities Exchange Act Release Nos.
51634 (Apr. 29, 2005), 70 FR 24138 (May 6, 2005)
(approving the listing and trading of notes linked
to the BXM Index) (File No. SR–Amex–2005–036);
51426 (Mar. 23, 2005), 70 FR 16315 (Mar. 30, 2005)
(approving the listing and trading of notes linked
to the BXM Index) (File No. SR–Amex–2005–022);
and 50719 (Nov. 22, 2004), 69 FR 69644 (Nov. 30,
2004) (approving the listing and trading of nonprincipal protected notes linked to the BXM Index)
(File No. SR–Amex–2004–55). The BXM index is
the CBOE S&P 500 Buy Write IndexSM, while the
BXD is a parallel index using the DJIA as the
underlying index rather than the S&P 500. In
addition, the Exchanges notes that the Commission
has previously approved the listing and trading of
a packaged buy-write option strategy known as
‘‘BOUNDS.’’ See Securities Exchange Act Release
No. 36710 (Jan. 11, 1996), 61 FR 1791 (Jan. 23,
1996) (File Nos. SR–Amex–94–56, SR–CBOE–95–
14, and SR–PSE–95–01).
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EN20JN05.000</MATH>
The Notes are cash-settled in U.S.
dollars and do not give the holder any
right to receive any of the component
securities, dividend payments, or any
other ownership right or interest in the
securities comprising the BXD Index.
The Notes are designed for investors
35470
Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
performance of a hypothetical ‘‘buywrite’’ 13 strategy on the DJIA.
Developed by the CBOE in cooperation
with Dow Jones, the Index was initially
announced in March 2005.14 The BXD
was set to an initial value of 100.00 as
of October 16, 1997. The Exchange
states that the CBOE developed the BXD
Index in response to several factors,
including the repeated requests by
options portfolio managers that the
CBOE provide an objective benchmark
for evaluating the performance of buywrite strategies, one of the most popular
option trading strategies. Further, the
CBOE developed the BXD Index to
provide investors with a relatively
straightforward indicator of the riskreducing character of options that
otherwise may seem complicated and
inordinately risky.
The BXD Index is a passive total
return index based on (1) buying a
portfolio consisting of the component
stocks of the DJIA, and (2) ‘‘writing’’ (or
selling) near-term DJIA call options
(DJX), generally on the third Friday of
each month. This strategy consists of a
hypothetical portfolio consisting of a
‘‘long’’ position indexed to the DJIA on
which are deemed sold a succession of
one-month, at-the-money call options
on the DJIA (DJX) listed on the CBOE.
Dividends paid on the component
stocks underlying the DJIA and the
dollar value of option premium deemed
received from the sold call options are
functionally ‘‘re-invested’’ in the
covered DJIA portfolio.
The value of the BXD Index on any
given date will equal (1) the value of the
13 A ‘‘buy-write’’ is a conservative options
strategy in which an investor buys a stock or
portfolio and writes call options on the stock or
portfolio. This strategy is also known as a ‘‘covered
call’’ strategy. A buy-write strategy provides option
premium income to cushion decreases in the value
of an equity portfolio, but will underperform stocks
in a rising market. A buy-write strategy tends to
lessen overall volatility in a portfolio.
14 The BXD Index consists of a long position in
the component securities of the DJIA and options
on the DJIA (DJX). See www.cboe.com/bxd. The
Exchange notes that the Commission has approved
the listing of numerous securities linked to the
performance of the DJIA as well as options on the
DJIA. See, e.g., Securities Exchange Act Release
Nos. 39011 (Sep. 3, 1997), 62 FR 47840 (Sep. 11,
1997) (approving the listing and trading of options
on the DJIA) (File No. SR–CBOE–97–26); 39525
(Jan. 8, 1998), 63 FR 2438 (Jan. 15, 1998) (approving
the listing and trading of DIAMONDSSM Trust
Units, portfolio depositary receipts based on the
DJIA) (File No. SR–Amex–97–29); 46883 (Nov. 21,
2002), 67 FR 71216 (Nov. 29, 2002) (approving the
listing and trading of Market Recovery Notes on the
DJIA) (File No. SR–Amex–2002–88); 49453 (Mar.
19, 2004), 69 FR 15913 (Mar. 26, 2004) (approving
the listing and trading of Contingent Principal
Protected Notes linked to the DJIA) (File No. SR–
Amex–2004–13); and 51133 (Feb. 3, 2005), 70 FR
7129 (Feb. 10, 2005) (approving the listing and
trading of Notes linked to the DJIA) (File No. SR–
Amex–2004–101).
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17:24 Jun 17, 2005
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BXD Index on the previous day
multiplied by (2) the daily rate of
return 15 on the covered DJIA portfolio
on that date. Thus, the daily change in
the BXD Index reflects the daily changes
in value of the covered DJIA portfolio,
which consists of the DJIA (including
dividends) and the component DJIA call
option (DJX). The daily closing price of
the BXD Index is calculated and
disseminated by the CBOE on its Web
site at www.cboe.com and via the
Options Pricing and Reporting
Authority (‘‘OPRA’’) at the end of each
trading day.16 The value of the DJIA is
widely disseminated at least once every
fifteen (15) seconds throughout the
scheduled trading day. The Exchange
believes that the intraday dissemination
of the DJIA, along with the ability of
investors to obtain real-time, intraday
DJIA call option (DJX) pricing, provides
sufficient transparency regarding the
BXD Index.17 In addition, as indicated
above, the value of the BXD Index is
calculated once every scheduled trading
15 The daily rate of return on the covered DJIA
portfolio is based on (a) the change in the closing
value of the stocks in the DJIA portfolio, (b) the
value of ordinary cash dividends on the stocks
underlying the DJIA, and (c) the change in the
market price of the call option. The daily rate of
return will also include the value of ordinary cash
dividends distributed on the stocks underlying the
DJIA that are trading ‘‘ex-dividend’’ on that date
(that is, when transactions in the stock on an
organized securities exchange or trading system no
longer carry the right to receive that dividend or
distribution) as measured from the close in trading
on the previous day.
16 The Exchange notes that the Commission, in
connection with Bond Index Term Notes and the
Merrill Lynch EuroFund Market Index Target Term
Securities, has previously approved the listing and
trading of these products where the dissemination
of the value of the underlying index occurred once
per trading day. See Securities Exchange Act
Release Nos. 41334 (Apr. 27, 1999), 64 FR 23883
(May 4, 1999) (approving the listing and trading of
Bond Indexed Term Notes) (File No. SR–Amex–99–
03); and 40367 (Aug. 26, 1998), 63 FR 47052 (Sep.
3, 1998) (approving the listing and trading of
Merrill Lynch EuroFund Market Index Target Term
Securities) (File No. SR–Amex–98–24). See also
supra note 12.
17 Call options on the DJIA (DJX) are traded on the
CBOE, and both last sale and quotation information
for the call options are disseminated in real-time
through OPRA. The Exchanges states that the value
of the BXD can be readily approximated as a
function of observable market prices throughout the
trading day. In particular, such a calculation would
require information on the current price of the DJIA
index and specific nearest-to-expiration call and
put options on that index. These components trade
in highly liquid markets, and real-time prices are
available continuously throughout the trading day
from a number of sources, including Bloomberg and
CBOE. The Exchange notes that the ‘‘Indicative
Value’’ (as discussed below) may be a more accurate
indicator of the valuation of the Notes because it
reflects the fees associated with the Notes (e.g., on
the initial principal amount and the Adjustment
Amount); however, the ‘‘Indicative Value’’ is not
adjusted intraday. Telephone conversation between
Jeffrey P. Burns, Associate General Counsel, Amex
and David Liu, Attorney, Division, Commission, on
May 26, 2005.
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Fmt 4703
Sfmt 4703
day, thereby providing investors with a
daily value of such ‘‘hypothetical’’ buywrite options strategy on the DJIA.
The Exchange states that the CBOE
has represented that the BXD Index
value will be calculated and
disseminated by the CBOE once every
scheduled trading day after the close.
The daily change in the BXD Index
reflects the daily changes in the DJIA
and related options positions. The
Exchange states that JPMorgan has
represented that it will seek to arrange
to have the BXD Index calculated and
disseminated on a daily basis through a
third party if the CBOE ceases to
calculate and disseminate the Index.18
If, however, JPMorgan is unable to
arrange the calculation and
dissemination of the BXD Index (or a
Successor Index) as indicated above, the
Exchange will undertake to delist the
Notes.19
In order to provide an updated value
of the Payment Amount for use by
investors, the Exchange will
disseminate over the Consolidated Tape
Association’s Network B, a daily
indicative value (the ‘‘Indicative
Value’’) of the Notes. The Indicative
Value will equal the performance of the
BXD less the Adjustment Amount. The
Indicative Value will be calculated by
the Amex after the close of trading and
after the CBOE calculates the BXD Index
for use by investors the next scheduled
trading day. It is designed to provide
investors with a daily reference value of
the adjusted BXD Index. The Indicative
Value may not reflect the precise value
of the Notes or Payment Amount.
Therefore, the Indicative Value
disseminated by the Amex during
trading hours should not be viewed as
a real time update of the BXD Index,
which is calculated only once a day.
While the Indicative Value that will be
disseminated by the Amex is expected
to be close to the current BXD Index
value, the values of the Indicative Value
and the BXD Index will diverge due to
the application of the Adjustment
Amount.
From October 31, 1997 through March
31, 2005, the annualized returns for the
BXD Index and the DJIA were 7.15%
and 6.76%, respectively, with a total
deviation of the returns during the same
time period of 4.43%. As the chart
18 Prior to such change in the manner in which
the BXD Index is calculated, or in the event of any
Index substitution, the Exchange will file a
proposed rule change pursuant to Rule 19b–4,
which must be approved by the Commission prior
to continued listing and trading in the Notes.
Telephone conversation between Jeffrey P. Burns,
Associate General Counsel, Amex and David Liu,
Attorney, Division, Commission, on May 26, 2005.
19 See supra note 4 (regarding discontinuation of
the calculation and dissemination of the Notes).
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Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
attached as Exhibit 3 to the Exchange’s
Form 19b–4 indicates, the BXD Index
will closely track the DJIA except in
those cases where the market is
significantly rising or decreasing.20 In
the case of a fast rising market, the BXD
Index will trail the DJIA due to the
limited upside potential of the Index
because of the ‘‘buy-write’’ strategy. Due
to the cushioning effect of the ‘‘buywrite’’ strategy, the BXD Index has in
the past exhibited negative returns that
are less than the DJIA during a down
market. The Exchange expects the BXD
Index to continue to display these
characteristics.
The call options (DJX) included in the
value of the BXD Index have successive
terms of approximately one month. Each
day that an option expires, which day
is referred to as a ‘‘roll’’ date, that
option’s value at expiration is taken into
account in the value of the BXD Index.
At expiration, the call option (DJX) is
settled against the ‘‘Special Opening
Quotation’’ of the DJX used as the final
settlement price of the DJX call options.
The Special Opening Quotation is a
special calculation of the DJIA that is
compiled from the opening price of
component stocks underlying the DJIA.
The final settlement price of the call
option at expiration is equal to the
difference between the Special Opening
Quotation and the strike price of the
expired call option, or zero, whichever
is greater, and is removed from the
value of the BXD Index. Subsequent to
the settlement of the expired call option,
a new, ‘‘short’’ or sold at-the-money call
option is included in the value of the
BXD Index.21 The initial value of the
new call option is calculated by the
CBOE and is based on the volumeweighted average of all the transaction
prices of the new call option during a
designated time period on the day the
strike price is determined.22
The market capitalization of the DJIA
is approximately $3.6 trillion. The
Exchange states that, as of April 18,
2005, the market capitalization of the
securities included in the DJIA ranged
from a high of $381.59 billion to a low
of $14.8 billion. The average daily
20 The Exchange states that buy-write strategies,
such as the BXD Index, generally outperformed
stocks in 2000–2002 when the DJIA achieved
negative returns, but tended to underperform stocks
in the late 1990s when the DJIA rose by more than
15% per year.
21 Like the expired call option, the new call
option will expire approximately one month after
the date of sale.
22 For this purpose, the CBOE excludes from the
calculation those call options identified as having
been executed as part of a spread (i.e., a position
taken in two or more options in order to profit
through changes in the relative prices of those
options).
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trading volume for these same securities
for the last six (6) months ranged from
a high of 292 million shares to a low of
368,900 shares.
The Exchange represents that it
prohibits the initial and/or continued
listing of any security that is not in
compliance with Rule 10A–3 under the
Act.23
The Exchange states that, because the
Notes are issued in $1,000
denominations, the Amex’s existing
debt floor trading rules will apply to the
trading of the Notes. First, pursuant to
Amex Rule 411, the Exchange will
impose a duty of due diligence on its
members and member firms to learn the
essential facts relating to every customer
prior to trading the Notes.24 Second,
even though the Exchange’s debt trading
rules apply, the Notes will be subject to
the equity margin rules of the
Exchange.25 Third, the Exchange will,
prior to trading the Notes, distribute a
circular to the membership providing
guidance with regard to member firm
compliance responsibilities (including
suitability recommendations) when
handling transactions in the Notes and
highlighting the special risks and
characteristics of the Notes. With
respect to suitability recommendations
and risks, the Exchange will require
members, member organizations, and
employees thereof recommending a
transaction in the Notes (1) to determine
that such transaction is suitable for the
customer 26 and (2) to have a reasonable
basis for believing that the customer can
evaluate the special characteristics of,
and is able to bear the financial risks of,
such transaction. In addition, JPMorgan
will deliver a prospectus in connection
with its sales of the Notes.
The Exchange represents that its
surveillance procedures are adequate to
properly monitor the trading of the
Notes. Specifically, the Amex will rely
on its existing surveillance procedures
governing equities and options that
include additional monitoring on key
pricing dates,27 which the Exchange
states have been deemed adequate
under the Act. In addition, the Exchange
also has a general policy which
prohibits the distribution of material,
17 CFR 240.10A–3.
Rule 411 requires, among other things,
that every member or member organization use due
diligence to learn the essential facts, relative to
every customer and to every order or account
accepted.
25 See Amex Rule 462 and Section 107B of the
Company Guide.
26 See Amex Rule 411.
27 Telephone conversation between Jeffrey P.
Burns, Associate General Counsel, Amex and David
Liu, Attorney, Division, Commission, on May 26,
2005.
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23 See
24 Amex
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35471
non-public information by its
employees.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act 28 in general, and
furthers the objectives of Section 6(b)(5)
of the Act 29 in particular, in that it is
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.
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange states that no written
comments were solicited or received
with respect to the proposed rule
change.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Amex–2005–042 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
No. SR–Amex–2005–042. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
28 15
29 15
E:\FR\FM\20JNN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
20JNN1
35472
Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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
Room. Copies of the filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–Amex–2005–042 and should be
submitted on or before July 11, 2005.
IV. Commission’s Findings and Order
Granting Accelerated Approval of the
Proposed Rule Change
The Amex has asked the Commission
to approve the proposal on an
accelerated basis to accommodate the
timetable for listing the Notes. After
careful consideration, the Commission
finds that 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,
with the requirements of Section 6(b)(5)
of the Act.30 The Commission finds that
this proposal is similar to several
approved instruments currently listed
and traded on the Amex.31 Accordingly,
the Commission finds that the listing
and trading of the Notes based on the
BXD Index is consistent with the Act
and will promote just and equitable
principles of trade, and foster
cooperation and coordination with
persons engaged in regulating, clearing,
30 30
15 U.S.C. 78f(b)(5).
e.g., Securities Exchange Act Release Nos.
51634 (Apr. 29, 2005), 70 FR 24138 (May 6, 2005)
(approving the listing and trading of notes linked
to the performance of the CBOE S&P 500 BuyWrite
Index(sm)) (File No. SR–Amex–2005–036); 51426
(Mar. 23, 2005), 70 FR 16315 (Mar. 30, 2005)
(approving the listing and trading of notes linked
to the performance of the CBOE S&P 500 BuyWrite
Index(sm)) (File No. SR–Amex–2005–022); 50719
(Nov. 22, 2004), 69 FR 69644 (Nov. 30, 2004)
(approving the listing and trading of notes linked
to the performance of the CBOE S&P 500 BuyWrite
Index(sm)) (File No. SR–Amex–2004–55).
31 See,
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17:24 Jun 17, 2005
Jkt 205001
settling, and processing information
with respect to and facilitating
transactions in securities consistent
with Section 6(b)(5) of the Act.321
The requirements of Section 107A of
the Company Guide were designed to
address the concerns attendant to the
trading of hybrid securities, like the
Notes. For example, Section 107A of the
Company Guide provides that only
issuers satisfying substantial asset and
equity requirements may issue
securities such as the Notes. In addition,
the Exchange’s ‘‘Other Securities’’
listing standards further require that the
Notes have a market value of at least $4
million.33 In any event, financial
information regarding JPMorgan, in
addition to the information on the
component stocks, which are reporting
companies under the Act, and the
Notes, which will be registered under
Section 12 of the Act, will be available.
In approving the product, the
Commission recognizes that the Index is
a passive total return index based on (1)
buying a portfolio consisting of the
component stocks of the DJIA and (2)
‘‘writing’’ (or selling) near-term DJIA
call options (DJX), generally on the third
Friday of each month. Given the large
trading volume and capitalization of the
compositions of the stocks underlying
the DJIA, the Commission believes that
the listing and trading of the Notes that
are linked to the BXD Index should not
unduly impact the market for the
underlying securities compromising the
DJIA or raise manipulative concerns.34
Moreover, the issuers of the underlying
securities comprising the DJIA are
subject to reporting requirements under
the Act, and all of the component stocks
are either listed or traded on, or traded
through the facilities of, U.S. securities
markets.
The Commission also believes that
any concerns that a broker-dealer, such
as JPMorgan, or a subsidiary providing
a hedge for the issuer, will incur undue
position exposure are minimized by the
size of the Notes issuance in relation to
the net worth of JPMorgan.35
Finally, the Commission notes that
the value of the Index will be calculated
and disseminated by the CBOE once
every trading day after the close of
trading. However, the Commission notes
that the value of the DJIA will be widely
disseminated at least once every fifteen
seconds throughout the trading day and
that investors are able to obtain realtime call option pricing on the DJIA
during the trading day. Further, the
Indicative Value, which will be
calculated by the Amex after the close
of trading and after the CBOE calculates
the BXD Index for use by investors the
next trading day, is designed to provide
investors with a daily reference value of
the adjusted Index. The Commission
notes that JPMorgan has agreed to
arrange to have the BXD Index
calculated and disseminated on a daily
basis through a third party in the event
that the CBOE discontinues calculating
and disseminating the Index. In such
event, the Exchange agrees to obtain
Commission approval, pursuant to filing
the appropriate Form 19b–4, prior to the
substitution of the CBOE BXD Index.
Further, the Commission notes that the
Exchange has agreed to undertake to
delist the Notes in the event that the
CBOE ceases to calculate and
disseminate the Index, and JPMorgan is
unable to arrange to have the BXD Index
calculated and widely disseminated
through a third party.
The Commission finds good cause for
approving the proposed rule change
prior to the 30th day after the date of
publication of the notice of filing thereof
in the Federal Register. The Exchange
has requested accelerated approval
because this product is similar to
several other instruments currently
listed and traded on the Amex.36 The
Commission believes that the Notes will
provide investors with an additional
investment choice and that accelerated
approval of the proposal will allow
investors to begin trading the Notes
promptly. Additionally, the Notes will
be listed pursuant to Amex’s existing
hybrid security listing standards as
32 15 U.S.C. 78f(b)(5). In approving the proposed
rule, the Commission has considered the proposed
rule’s impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
33 See Section 107A(c) of the Company Guide.
34 The issuer, JPMorgan, disclosed in the
prospectus and prospectus supplement that the
hedging activities of it and its affiliates, including
taking positions in the stocks underlying the Index
and selling call options on the Index, which could
adversely affect the market value of the Notes from
time to time and the redemption amount holders of
the Notes would receive on the Notes. Such hedging
activity must, of course, be conducted in
accordance with applicable regulatory
requirements.
35 See Securities Exchange Act Release Nos.
44913 (Oct. 9, 2001), 66 FR 52469 (Oct. 15, 2001)
(order approving the listing and trading of notes
whose return is based on the performance of the
Nasdaq-100 Index) (File No. SR-NASD–2001–73);
44483 (June 27, 2001), 66 FR 35677 (July 6, 2001)
(order approving the listing and trading of notes
whose return is based on a portfolio of 20 securities
selected from the Amex Institutional Index) (File
No. SR–Amex–2001–40); and 37744 (Sept. 27,
1996), 61 FR 52480 (Oct. 7, 1996) (order approving
the listing and trading of notes whose return is
based on a weighted portfolio of healthcare/
biotechnology industry securities) (File No. SR–
Amex–96–27).
36 See supra notes 12 (citing previous approvals
of securities with structures similar to that of the
proposed Notes); and 14 (citing previous approvals
of securities linked to the performance of the DJIA
as well as options on the DJIA).
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Federal Register / Vol. 70, No. 117 / Monday, June 20, 2005 / Notices
described above. Therefore, the
Commission finds good cause,
consistent with Section 19(b)(2) of the
Act,37 to approve the proposal on an
accelerated basis.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,38 that the
proposed rule change (File No. SR–
Amex–2005–042) is hereby approved on
an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.39
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–3184 Filed 6–17–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51830; File No. SR–CBOE–
2005–26]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Order Granting Accelerated Approval
of a Proposed Rule Change and
Amendment No. 1 Thereto Relating to
the Terms of Index Option Contracts
Listed on the Exchange
June 13, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 16,
2005, the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ 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 Exchange. On June 9, 2005, CBOE
submitted Amendment No. 1 to the
proposed rule change.3 The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons
and to grant accelerated approval to the
proposed rule change, as amended.
37 37
15 U.S.C. 78s(b)(2).
15 U.S.C. 78s(b)(2).
39 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Form 19b–4, dated June 9, 2005
(‘‘Amendment No. 1). Amendment No. 1 replaced
the original rule filing in its entirety. In
Amendment No. 1, CBOE made certain
clarifications to the proposed rule text by
referencing Interpretation and Policy .12 to Rule
24.9 (determination of pricing sources used in the
calculation of an index) and further clarified the
rationale for pursuing this rule change.
38 38
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17:24 Jun 17, 2005
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
rules relating to the terms of index
option contracts listed on the Exchange.
The text of the proposed rule change is
below. Proposed new language is in
italics; deletions are in brackets.
*
*
*
*
*
CHAPTER XXIV
Index Options
Rule 24.1—Rule 24.8
*
*
*
*
No Change
*
Rule 24.9—Terms of Index Option
Contracts
Rule 24.9. (a) General.
(1)–(3) No Change.
(4) A.M.-Settled Index Options. The
last day of trading for A.M.-settled index
options shall be the business day
preceding the last day of trading in the
underlying securities prior to
expiration. The current index value at
the expiration of an A.M.-settled index
option shall be determined, for all
purposes under these rules and the rules
of the Clearing Corporation, on the last
day of trading in the underlying
securities prior to expiration, by
reference to the reported level of such
index as derived from [first reported
sale] the opening [(opening)] prices of
the underlying securities on such day,
as determined by the market for such
security selected by the Reporting
Authority pursuant to Interpretation
and Policy .12 to Rule 24.9, except that
in the event that the primary market for
an underlying security does not open for
trading, halts trading prematurely, or
otherwise experiences a disruption of
normal trading on that day, or in the
event that the primary market for an
underlying security is open for trading
on that day, but that particular security
does not open for trading, halts trading
prematurely, or otherwise experiences a
disruption of normal trading on that
day, the price of that security shall be
determined, for the purposes of
calculating the current index value at
expiration, as set forth in Rule 24.7(e).
The following A.M.-settled index
options are approved for trading on the
Exchange:
(i)–(lxxiv) No Change.
*
*
*
*
*
(5) Other Methods of Determining
Exercise Settlement Value. Exercise
settlement values for the following
index options are determined as
specified in this paragraph:
(i) No Change.
(ii) [Nasdaq 100 Stock Index. The
current index value at expiration shall
PO 00000
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35473
be determined, for all purposes under
these Rules and the Rules of the
Clearing Corporation, on the last day of
trading in the underlying securities
prior to expiration. The current index
value for such purposes shall be
calculated by the Nasdaq Stock Market,
Inc. (‘‘Nasdaq’’) and reported to the
CBOE using the volume weighted prices
(‘‘VWPs’’) of the securities underlying
the Nasdaq-100 Index, which VWPs
shall be calculated according to the then
current volume-weighted averaging
methodology developed by Nasdaq.
(iii) ]CBOE Volatility Indexes and
CBOE Increased-Value Volatility
Indexes. The current index value at
expiration shall be determined, for all
purposes under these Rules and the
Rules of the Clearing Corporation, on
the last day of trading in the underlying
securities prior to expiration. The
current index value for such purposes
shall be calculated by the Chicago Board
Options Exchange as a Special Opening
Quotation (SOQ) of each respective
Volatility or Increased-Value Volatility
Index using the sequence of opening
prices of the options that comprise each
Index. The opening price for any series
in which there is no trade shall be the
average of that option’s bid price and
ask price as determined at the opening
of trading.
(b)–(c) No Change.
* * * Interpretations and Policies:
.01–.12 No Change.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE 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 III below. The CBOE 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 purpose of the proposed rule
change is to clarify CBOE rules relating
to the determination of opening prices
for securities that underlie certain A.M.settled index options traded on the
Exchange and to clarify CBOE rules
relating to the determination of the
exercise settlement value for certain
E:\FR\FM\20JNN1.SGM
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]]>Agencies
[Federal Register Volume 70, Number 117 (Monday, June 20, 2005)]
[Notices]
[Pages 35468-35473]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3184]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51840; File No. SR-Amex-2005-042]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Order Granting Accelerated Approval of a Proposed
Rule Change Relating to the Listing and Trading of Notes Linked to the
Performance of the CBOE DJIA BuyWrite Index\(sm)\
June 14, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 20, 2005, the American Stock Exchange LLC (``Amex'' 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and is approving the
proposal on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade notes, the performance of
which is linked to the DJIA BuyWrite Index(sm) (the ``BXD Index'' or
``Index''). The text of the proposed rule change is available on the
Amex's Web site (https://www.amex.com), at the principal offices of the
Amex, and at the Commission's Public Reference Room.
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 III 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 107A of the Amex Company Guide (``Company Guide''),
the Exchange may approve for listing and trading securities that cannot
be readily categorized under the listing criteria for common and
preferred stocks, bonds, debentures, or warrants.\3\ The Amex proposes
to list for trading under Section 107A of the Company Guide notes
linked to the performance of the BXD Index (the ``Notes''). The BXD
Index is determined, calculated, and maintained solely by the Chicago
Board Options Exchange, Inc. (``CBOE'').\4\ JPMorgan Chase & Co.
(``JPMorgan'') will issue the Notes.\5\
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\3\ See Securities Exchange Act Release No. 27753 (Mar. 1,
1990), 55 FR 8626 (Mar. 8, 1990) (File No. SR-Amex-89-29).
\4\ If the BXD Index is discontinued or suspended, the
calculation agent, in its sole discretion, may substitute the BXD
Index with an index substantially similar to the discontinued or
suspended BXD Index (the ``Successor Index''). The Successor Index
may be calculated and/or published by the CBOE or any other third
party. If the CBOE discontinues publication of the BXD Index prior
to, and such discontinuance is continuing on, the Final Valuation
Date and the calculation agent determines, in its sole discretion,
that no Successor Index is available at such time, then the
calculation agent will determine the BXD Index closing level for
such date. The BXD Index closing level will be computed by the
calculation agent in accordance with the formula for and method of
calculating the BXD Index last in effect prior to such
discontinuance, using the closing price of the DJIA or the stocks
underlying the DJIA at the discretion of the calculation agent (or,
if trading in the relevant securities has been materially suspended
or materially limited, its good faith estimate of the closing price
that would have prevailed but for such suspension or limitation) at
the close of the principal trading session on such date for the DJIA
or for each security comprising the DJIA, the arithmetic average of
the last bid and ask prices (or, if trading in the relevant call
option has been materially suspended or materially limited, its good
faith estimate of the arithmetic average of the last bid and ask
prices that would have prevailed but for such suspension or
limitation) of the relevant call option reported before 4:00 p.m.
Eastern time and such other inputs as may reasonably be necessary.
Notwithstanding these alternative arrangements, discontinuance of
the publication of the BXD Index on the relevant exchange may
adversely affect the value of the notes. If at any time the method
of calculating the BXD Index, the DJIA, or a Successor Index, or the
level thereof is changed in a material respect, or if the BXD Index,
the DJIA, or a Successor Index is in any other way modified so that
the BXD Index or a Successor Index does not, in the opinion of the
calculation agent, fairly represent the level of the BXD Index or
such Successor Index had such changes or modifications not been
made, then, from and after such time, the calculation agent will, at
the close of business in New York City on each date on which the BXD
Index closing level is to be determined, make such calculations and
adjustments as, in the good faith judgment of the calculation agent,
may be necessary in order to arrive at a level of an index
comparable to the BXD Index or such Successor Index, as the case may
be, as if such changes or modifications had not been made, and the
calculation agent will calculate the BXD Index closing level with
reference to the BXD Index or such Successor Index, as adjusted.
Accordingly, if the method of calculating the BXD Index, the DJIA,
or a Successor Index is modified so that the level of the BXD Index
or a Successor Index is a fraction of what it would have been if
there had been no such modification (e.g., due to a split in the
index), then the calculation agent will adjust such index in order
to arrive at a level of the BXD Index or such Successor Index as if
there had been no such modification (e.g., as if such split had not
occurred).
J.P. Morgan Securities Inc., an affiliate of JPMorgan, has been
appointed to act as the calculation agent. Telephone conversation
between Jeffrey P. Burns, Associate General Counsel, Amex and David
Liu, Attorney, Division of Market Regulation (``Division''),
Commission, on May 26, 2005.
\5\ The Exchange states that JPMorgan and Dow Jones & Co. (``Dow
Jones'') are negotiating a non-exclusive license agreement, with up
to a 165-day exclusivity period, providing for the use of the BXD
Index by JPMorgan in connection with certain securities, including
the Notes. Dow Jones is not responsible for and will not participate
in the issuance and creation of the Notes.
---------------------------------------------------------------------------
[[Page 35469]]
The Notes will conform to the initial listing guidelines under
Section 107A \6\ and continued listing guidelines under Sections 1001-
1003 \7\ of the Company Guide. The Notes are a series of medium-term
debt securities of JPMorgan that provide for a cash payment at maturity
based on the performance of the BXD Index as adjusted by the Adjustment
Amount.\8\ The principal amount of each Note is expected to be $1,000.
The Notes will not have a minimum principal amount that will be repaid
and, accordingly, payment on the Notes at maturity may be less than the
original issue price of the Notes. In fact, the value of the BXD Index
must increase for the investor to receive at least the $1,000 principal
amount per security at maturity. If the value of the BXD Index
decreases or does not increase sufficiently, the investor will receive
less, and possibly significantly less, than the $1,000 principal amount
per security. In addition, holders of the Notes will not receive any
interest payments from the Notes. The Notes will have a term of at
least one (1) but no more than ten (10) years.\9\
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\6\ The initial listing standards for the Notes require: (1) a
minimum public distribution of one million units; (2) a minimum of
400 shareholders; (3) a market value of at least $4 million; and (4)
a term of at least one year. Because the Notes will be issued in
$1,000 denominations, the minimum public distribution requirement of
one million units and the minimum holder requirement of 400 holders
do not apply. In addition, the listing guidelines provide that the
issuer has assets in excess of $100 million, stockholder's equity of
at least $10 million, and pre-tax income of at least $750,000 in the
last fiscal year or in two of the three prior fiscal years. In the
case of an issuer which is unable to satisfy the earning criteria
stated in Section 101 of the Company Guide, the Exchange will
require the issuer to have the following: (1) assets in excess of
$200 million and stockholders' equity of at least $10 million; or
(2) assets in excess of $100 million and stockholders' equity of at
least $20 million.
\7\ The Exchange's continued listing guidelines are set forth in
Sections 1001 through 1003 of Part 10 to the Exchange's Company
Guide. Section 1002(b) of the Company Guide states that the Exchange
will consider removing from listing any security where, in the
opinion of the Exchange, it appears that the extent of public
distribution or aggregate market value has become so reduced to make
further dealings on the Exchange inadvisable. With respect to
continued listing guidelines for distribution of the Notes, the
Exchange will rely, in part, on the guidelines for bonds in Section
1003(b)(iv) of the Company Guide. Section 1003(b)(iv)(A) of the
Company Guide provides that the Exchange will normally consider
suspending dealings in, or removing from the list, a security if the
aggregate market value or the principal amount of bonds publicly
held is less than $400,000.
\8\ The Adjustment Amount is an annual fee that accrues daily
over the term of the Notes. The Adjustment Amount is equal to 1.0%
multiplied by the number of days since the pricing date of the Notes
divided by 365.
\9\ The term of the Notes is expected to be one (1) year and
will be disclosed in the pricing supplement.
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The cash payment that a holder or investor of a Note will be
entitled to receive at maturity (the ``Payment Amount'') will depend on
the relation of the level of the BXD Index at the close of the market
on the Final Valuation Date \10\ (the ``Final Index Level'') and the
closing value of the Index on the date JPMorgan prices the Notes for
initial sale to the public (the ``Initial Index Level'') less the
Adjustment Amount. If there is a ``market disruption event'' \11\ when
determining the Final Index Level, the Final Index Level will be
determined on the next available trading day during which no ``market
disruption event'' occurs. For purposes of determining the amount
payable at maturity of the Notes, the Payment Amount will be determined
on the Final Valuation Date.
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\10\ The Final Valuation Date will be the third scheduled
trading day prior to the maturity date.
\11\ A ``market disruption event'' means: (i) A suspension,
absence, or material limitation of trading of stocks then
constituting 20 percent or more of the level of the DJIA (or the
relevant successor index) on the relevant exchanges (as defined
below) for such securities for more than two hours of trading (or
one hour of trading on any day that is a ``roll date'' for purposes
of calculating the BXD Index) during, or during the one hour period
preceding the close of, the principal trading session on such
relevant exchange; or (ii) a breakdown or failure in the price and
trade reporting systems of any relevant exchange as a result of
which the reported trading prices for stocks then constituting 20
percent or more of the level of the DJIA (or the relevant successor
index) (A) during the one hour preceding the close of the principal
trading session on such relevant exchange or (B) during any one hour
period of trading on such relevant exchange on any day that is a
``roll date'' for purposes of calculating the BXD Index; or (iii) a
suspension, absence, or material limitation of trading of call
options nominally sold in connection with the BXD Index (or the
relevant successor index) on the CBOE for more than two hours of
trading, or during the one hour period preceding, and including, the
scheduled time at which the value of such options is calculated for
purposes of calculating the BXD Index; or (iv) a breakdown or
failure in the price and trade reporting systems of the CBOE as a
result of which the reported trading prices for call options
nominally sold in connection with the BXD Index during the one hour
period preceding, and including, the scheduled time at which the
value of such options is calculated for purposes of the BXD Index
are materially inaccurate; or (v) the suspension, absence, or
material limitation of trading on any major U.S. securities market
for trading in futures or options contracts related to the DJIA or
the BXD Index (or the relevant successor index) for more than two
hours of trading during, or during the one hour period preceding the
close of, the principal trading session on such market; or a
decision to permanently discontinue trading in the relevant futures
or options contract, in each case as determined by the calculation
agent in its sole discretion; and a determination by the calculation
agent in its sole discretion that the event described above
materially interfered with its ability or the ability of any of
JPMorgan's affiliates to adjust or unwind all or a material portion
of any hedge with respect to the notes. ``Relevant exchange'' means
the primary U.S. organized exchange or market of trading for any
security (or any combination thereof) then included in the BXD Index
or any successor index. Telephone conversation between Jeffrey P.
Burns, Associate General Counsel, Amex and David Liu, Attorney,
Division, Commission, on May 26, 2005.
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The Payment Amount per Note will equal:
[GRAPHIC] [TIFF OMITTED] TN20JN05.000
The Notes are cash-settled in U.S. dollars and do not give the
holder any right to receive any of the component securities, dividend
payments, or any other ownership right or interest in the securities
comprising the BXD Index. The Notes are designed for investors who want
to participate in the exposure to the DJIA that the BXD Index provides
while limiting downside risk, and who are willing to forego principal
protection and interest payments on the Notes during their term.
The Exchange notes that the Commission has previously approved the
listing on the Amex of securities with structures similar to that of
the proposed Notes.\12\ Description of the Index. The BXD Index is a
benchmark index designed to measure the
[[Page 35470]]
performance of a hypothetical ``buy-write'' \13\ strategy on the DJIA.
Developed by the CBOE in cooperation with Dow Jones, the Index was
initially announced in March 2005.\14\ The BXD was set to an initial
value of 100.00 as of October 16, 1997. The Exchange states that the
CBOE developed the BXD Index in response to several factors, including
the repeated requests by options portfolio managers that the CBOE
provide an objective benchmark for evaluating the performance of buy-
write strategies, one of the most popular option trading strategies.
Further, the CBOE developed the BXD Index to provide investors with a
relatively straightforward indicator of the risk-reducing character of
options that otherwise may seem complicated and inordinately risky.
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\12\ See Securities Exchange Act Release Nos. 51634 (Apr. 29,
2005), 70 FR 24138 (May 6, 2005) (approving the listing and trading
of notes linked to the BXM Index) (File No. SR-Amex-2005-036); 51426
(Mar. 23, 2005), 70 FR 16315 (Mar. 30, 2005) (approving the listing
and trading of notes linked to the BXM Index) (File No. SR-Amex-
2005-022); and 50719 (Nov. 22, 2004), 69 FR 69644 (Nov. 30, 2004)
(approving the listing and trading of non-principal protected notes
linked to the BXM Index) (File No. SR-Amex-2004-55). The BXM index
is the CBOE S&P 500 Buy Write IndexSM, while the BXD is a
parallel index using the DJIA as the underlying index rather than
the S&P 500. In addition, the Exchanges notes that the Commission
has previously approved the listing and trading of a packaged buy-
write option strategy known as ``BOUNDS.'' See Securities Exchange
Act Release No. 36710 (Jan. 11, 1996), 61 FR 1791 (Jan. 23, 1996)
(File Nos. SR-Amex-94-56, SR-CBOE-95-14, and SR-PSE-95-01).
\13\ A ``buy-write'' is a conservative options strategy in which
an investor buys a stock or portfolio and writes call options on the
stock or portfolio. This strategy is also known as a ``covered
call'' strategy. A buy-write strategy provides option premium income
to cushion decreases in the value of an equity portfolio, but will
underperform stocks in a rising market. A buy-write strategy tends
to lessen overall volatility in a portfolio.
\14\ The BXD Index consists of a long position in the component
securities of the DJIA and options on the DJIA (DJX). See
www.cboe.com/bxd. The Exchange notes that the Commission has
approved the listing of numerous securities linked to the
performance of the DJIA as well as options on the DJIA. See, e.g.,
Securities Exchange Act Release Nos. 39011 (Sep. 3, 1997), 62 FR
47840 (Sep. 11, 1997) (approving the listing and trading of options
on the DJIA) (File No. SR-CBOE-97-26); 39525 (Jan. 8, 1998), 63 FR
2438 (Jan. 15, 1998) (approving the listing and trading of
DIAMONDSSM Trust Units, portfolio depositary receipts
based on the DJIA) (File No. SR-Amex-97-29); 46883 (Nov. 21, 2002),
67 FR 71216 (Nov. 29, 2002) (approving the listing and trading of
Market Recovery Notes on the DJIA) (File No. SR-Amex-2002-88); 49453
(Mar. 19, 2004), 69 FR 15913 (Mar. 26, 2004) (approving the listing
and trading of Contingent Principal Protected Notes linked to the
DJIA) (File No. SR-Amex-2004-13); and 51133 (Feb. 3, 2005), 70 FR
7129 (Feb. 10, 2005) (approving the listing and trading of Notes
linked to the DJIA) (File No. SR-Amex-2004-101).
---------------------------------------------------------------------------
The BXD Index is a passive total return index based on (1) buying a
portfolio consisting of the component stocks of the DJIA, and (2)
``writing'' (or selling) near-term DJIA call options (DJX), generally
on the third Friday of each month. This strategy consists of a
hypothetical portfolio consisting of a ``long'' position indexed to the
DJIA on which are deemed sold a succession of one-month, at-the-money
call options on the DJIA (DJX) listed on the CBOE. Dividends paid on
the component stocks underlying the DJIA and the dollar value of option
premium deemed received from the sold call options are functionally
``re-invested'' in the covered DJIA portfolio.
The value of the BXD Index on any given date will equal (1) the
value of the BXD Index on the previous day multiplied by (2) the daily
rate of return \15\ on the covered DJIA portfolio on that date. Thus,
the daily change in the BXD Index reflects the daily changes in value
of the covered DJIA portfolio, which consists of the DJIA (including
dividends) and the component DJIA call option (DJX). The daily closing
price of the BXD Index is calculated and disseminated by the CBOE on
its Web site at www.cboe.com and via the Options Pricing and Reporting
Authority (``OPRA'') at the end of each trading day.\16\ The value of
the DJIA is widely disseminated at least once every fifteen (15)
seconds throughout the scheduled trading day. The Exchange believes
that the intraday dissemination of the DJIA, along with the ability of
investors to obtain real-time, intraday DJIA call option (DJX) pricing,
provides sufficient transparency regarding the BXD Index.\17\ In
addition, as indicated above, the value of the BXD Index is calculated
once every scheduled trading day, thereby providing investors with a
daily value of such ``hypothetical'' buy-write options strategy on the
DJIA.
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\15\ The daily rate of return on the covered DJIA portfolio is
based on (a) the change in the closing value of the stocks in the
DJIA portfolio, (b) the value of ordinary cash dividends on the
stocks underlying the DJIA, and (c) the change in the market price
of the call option. The daily rate of return will also include the
value of ordinary cash dividends distributed on the stocks
underlying the DJIA that are trading ``ex-dividend'' on that date
(that is, when transactions in the stock on an organized securities
exchange or trading system no longer carry the right to receive that
dividend or distribution) as measured from the close in trading on
the previous day.
\16\ The Exchange notes that the Commission, in connection with
Bond Index Term Notes and the Merrill Lynch EuroFund Market Index
Target Term Securities, has previously approved the listing and
trading of these products where the dissemination of the value of
the underlying index occurred once per trading day. See Securities
Exchange Act Release Nos. 41334 (Apr. 27, 1999), 64 FR 23883 (May 4,
1999) (approving the listing and trading of Bond Indexed Term Notes)
(File No. SR-Amex-99-03); and 40367 (Aug. 26, 1998), 63 FR 47052
(Sep. 3, 1998) (approving the listing and trading of Merrill Lynch
EuroFund Market Index Target Term Securities) (File No. SR-Amex-98-
24). See also supra note 12.
\17\ Call options on the DJIA (DJX) are traded on the CBOE, and
both last sale and quotation information for the call options are
disseminated in real-time through OPRA. The Exchanges states that
the value of the BXD can be readily approximated as a function of
observable market prices throughout the trading day. In particular,
such a calculation would require information on the current price of
the DJIA index and specific nearest-to-expiration call and put
options on that index. These components trade in highly liquid
markets, and real-time prices are available continuously throughout
the trading day from a number of sources, including Bloomberg and
CBOE. The Exchange notes that the ``Indicative Value'' (as discussed
below) may be a more accurate indicator of the valuation of the
Notes because it reflects the fees associated with the Notes (e.g.,
on the initial principal amount and the Adjustment Amount); however,
the ``Indicative Value'' is not adjusted intraday. Telephone
conversation between Jeffrey P. Burns, Associate General Counsel,
Amex and David Liu, Attorney, Division, Commission, on May 26, 2005.
---------------------------------------------------------------------------
The Exchange states that the CBOE has represented that the BXD
Index value will be calculated and disseminated by the CBOE once every
scheduled trading day after the close. The daily change in the BXD
Index reflects the daily changes in the DJIA and related options
positions. The Exchange states that JPMorgan has represented that it
will seek to arrange to have the BXD Index calculated and disseminated
on a daily basis through a third party if the CBOE ceases to calculate
and disseminate the Index.\18\ If, however, JPMorgan is unable to
arrange the calculation and dissemination of the BXD Index (or a
Successor Index) as indicated above, the Exchange will undertake to
delist the Notes.\19\
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\18\ Prior to such change in the manner in which the BXD Index
is calculated, or in the event of any Index substitution, the
Exchange will file a proposed rule change pursuant to Rule 19b-4,
which must be approved by the Commission prior to continued listing
and trading in the Notes. Telephone conversation between Jeffrey P.
Burns, Associate General Counsel, Amex and David Liu, Attorney,
Division, Commission, on May 26, 2005.
\19\ See supra note 4 (regarding discontinuation of the
calculation and dissemination of the Notes).
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In order to provide an updated value of the Payment Amount for use
by investors, the Exchange will disseminate over the Consolidated Tape
Association's Network B, a daily indicative value (the ``Indicative
Value'') of the Notes. The Indicative Value will equal the performance
of the BXD less the Adjustment Amount. The Indicative Value will be
calculated by the Amex after the close of trading and after the CBOE
calculates the BXD Index for use by investors the next scheduled
trading day. It is designed to provide investors with a daily reference
value of the adjusted BXD Index. The Indicative Value may not reflect
the precise value of the Notes or Payment Amount. Therefore, the
Indicative Value disseminated by the Amex during trading hours should
not be viewed as a real time update of the BXD Index, which is
calculated only once a day. While the Indicative Value that will be
disseminated by the Amex is expected to be close to the current BXD
Index value, the values of the Indicative Value and the BXD Index will
diverge due to the application of the Adjustment Amount.
From October 31, 1997 through March 31, 2005, the annualized
returns for the BXD Index and the DJIA were 7.15% and 6.76%,
respectively, with a total deviation of the returns during the same
time period of 4.43%. As the chart
[[Page 35471]]
attached as Exhibit 3 to the Exchange's Form 19b-4 indicates, the BXD
Index will closely track the DJIA except in those cases where the
market is significantly rising or decreasing.\20\ In the case of a fast
rising market, the BXD Index will trail the DJIA due to the limited
upside potential of the Index because of the ``buy-write'' strategy.
Due to the cushioning effect of the ``buy-write'' strategy, the BXD
Index has in the past exhibited negative returns that are less than the
DJIA during a down market. The Exchange expects the BXD Index to
continue to display these characteristics.
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\20\ The Exchange states that buy-write strategies, such as the
BXD Index, generally outperformed stocks in 2000-2002 when the DJIA
achieved negative returns, but tended to underperform stocks in the
late 1990s when the DJIA rose by more than 15% per year.
---------------------------------------------------------------------------
The call options (DJX) included in the value of the BXD Index have
successive terms of approximately one month. Each day that an option
expires, which day is referred to as a ``roll'' date, that option's
value at expiration is taken into account in the value of the BXD
Index. At expiration, the call option (DJX) is settled against the
``Special Opening Quotation'' of the DJX used as the final settlement
price of the DJX call options. The Special Opening Quotation is a
special calculation of the DJIA that is compiled from the opening price
of component stocks underlying the DJIA. The final settlement price of
the call option at expiration is equal to the difference between the
Special Opening Quotation and the strike price of the expired call
option, or zero, whichever is greater, and is removed from the value of
the BXD Index. Subsequent to the settlement of the expired call option,
a new, ``short'' or sold at-the-money call option is included in the
value of the BXD Index.\21\ The initial value of the new call option is
calculated by the CBOE and is based on the volume-weighted average of
all the transaction prices of the new call option during a designated
time period on the day the strike price is determined.\22\
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\21\ Like the expired call option, the new call option will
expire approximately one month after the date of sale.
\22\ For this purpose, the CBOE excludes from the calculation
those call options identified as having been executed as part of a
spread (i.e., a position taken in two or more options in order to
profit through changes in the relative prices of those options).
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The market capitalization of the DJIA is approximately $3.6
trillion. The Exchange states that, as of April 18, 2005, the market
capitalization of the securities included in the DJIA ranged from a
high of $381.59 billion to a low of $14.8 billion. The average daily
trading volume for these same securities for the last six (6) months
ranged from a high of 292 million shares to a low of 368,900 shares.
The Exchange represents that it prohibits the initial and/or
continued listing of any security that is not in compliance with Rule
10A-3 under the Act.\23\
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\23\ See 17 CFR 240.10A-3.
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The Exchange states that, because the Notes are issued in $1,000
denominations, the Amex's existing debt floor trading rules will apply
to the trading of the Notes. First, pursuant to Amex Rule 411, the
Exchange will impose a duty of due diligence on its members and member
firms to learn the essential facts relating to every customer prior to
trading the Notes.\24\ Second, even though the Exchange's debt trading
rules apply, the Notes will be subject to the equity margin rules of
the Exchange.\25\ Third, the Exchange will, prior to trading the Notes,
distribute a circular to the membership providing guidance with regard
to member firm compliance responsibilities (including suitability
recommendations) when handling transactions in the Notes and
highlighting the special risks and characteristics of the Notes. With
respect to suitability recommendations and risks, the Exchange will
require members, member organizations, and employees thereof
recommending a transaction in the Notes (1) to determine that such
transaction is suitable for the customer \26\ and (2) to have a
reasonable basis for believing that the customer can evaluate the
special characteristics of, and is able to bear the financial risks of,
such transaction. In addition, JPMorgan will deliver a prospectus in
connection with its sales of the Notes.
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\24\ Amex Rule 411 requires, among other things, that every
member or member organization use due diligence to learn the
essential facts, relative to every customer and to every order or
account accepted.
\25\ See Amex Rule 462 and Section 107B of the Company Guide.
\26\ See Amex Rule 411.
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The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Notes. Specifically,
the Amex will rely on its existing surveillance procedures governing
equities and options that include additional monitoring on key pricing
dates,\27\ which the Exchange states have been deemed adequate under
the Act. In addition, the Exchange also has a general policy which
prohibits the distribution of material, non-public information by its
employees.
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\27\ Telephone conversation between Jeffrey P. Burns, Associate
General Counsel, Amex and David Liu, Attorney, Division, Commission,
on May 26, 2005.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \28\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \29\ in particular, in that it
is 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.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange states that no written comments were solicited or
received with respect to the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-Amex-2005-042 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File No. SR-Amex-2005-042. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your
[[Page 35472]]
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (https://
www.sec.gov/rules/sro.shtml). 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 Room. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-Amex-2005-042 and should be
submitted on or before July 11, 2005.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
The Amex has asked the Commission to approve the proposal on an
accelerated basis to accommodate the timetable for listing the Notes.
After careful consideration, the Commission finds that 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, with the requirements of Section 6(b)(5)
of the Act.\30\ The Commission finds that this proposal is similar to
several approved instruments currently listed and traded on the
Amex.\31\ Accordingly, the Commission finds that the listing and
trading of the Notes based on the BXD Index is consistent with the Act
and will promote just and equitable principles of trade, and foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect to and
facilitating transactions in securities consistent with Section 6(b)(5)
of the Act.\321\
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\30\ 30 15 U.S.C. 78f(b)(5).
\31\ See, e.g., Securities Exchange Act Release Nos. 51634 (Apr.
29, 2005), 70 FR 24138 (May 6, 2005) (approving the listing and
trading of notes linked to the performance of the CBOE S&P 500
BuyWrite Index(sm)) (File No. SR-Amex-2005-036); 51426 (Mar. 23,
2005), 70 FR 16315 (Mar. 30, 2005) (approving the listing and
trading of notes linked to the performance of the CBOE S&P 500
BuyWrite Index(sm)) (File No. SR-Amex-2005-022); 50719 (Nov. 22,
2004), 69 FR 69644 (Nov. 30, 2004) (approving the listing and
trading of notes linked to the performance of the CBOE S&P 500
BuyWrite Index(sm)) (File No. SR-Amex-2004-55).
\32\ 15 U.S.C. 78f(b)(5). In approving the proposed rule, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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The requirements of Section 107A of the Company Guide were designed
to address the concerns attendant to the trading of hybrid securities,
like the Notes. For example, Section 107A of the Company Guide provides
that only issuers satisfying substantial asset and equity requirements
may issue securities such as the Notes. In addition, the Exchange's
``Other Securities'' listing standards further require that the Notes
have a market value of at least $4 million.\33\ In any event, financial
information regarding JPMorgan, in addition to the information on the
component stocks, which are reporting companies under the Act, and the
Notes, which will be registered under Section 12 of the Act, will be
available.
---------------------------------------------------------------------------
\33\ See Section 107A(c) of the Company Guide.
---------------------------------------------------------------------------
In approving the product, the Commission recognizes that the Index
is a passive total return index based on (1) buying a portfolio
consisting of the component stocks of the DJIA and (2) ``writing'' (or
selling) near-term DJIA call options (DJX), generally on the third
Friday of each month. Given the large trading volume and capitalization
of the compositions of the stocks underlying the DJIA, the Commission
believes that the listing and trading of the Notes that are linked to
the BXD Index should not unduly impact the market for the underlying
securities compromising the DJIA or raise manipulative concerns.\34\
Moreover, the issuers of the underlying securities comprising the DJIA
are subject to reporting requirements under the Act, and all of the
component stocks are either listed or traded on, or traded through the
facilities of, U.S. securities markets.
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\34\ The issuer, JPMorgan, disclosed in the prospectus and
prospectus supplement that the hedging activities of it and its
affiliates, including taking positions in the stocks underlying the
Index and selling call options on the Index, which could adversely
affect the market value of the Notes from time to time and the
redemption amount holders of the Notes would receive on the Notes.
Such hedging activity must, of course, be conducted in accordance
with applicable regulatory requirements.
---------------------------------------------------------------------------
The Commission also believes that any concerns that a broker-
dealer, such as JPMorgan, or a subsidiary providing a hedge for the
issuer, will incur undue position exposure are minimized by the size of
the Notes issuance in relation to the net worth of JPMorgan.\35\
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\35\ See Securities Exchange Act Release Nos. 44913 (Oct. 9,
2001), 66 FR 52469 (Oct. 15, 2001) (order approving the listing and
trading of notes whose return is based on the performance of the
Nasdaq-100 Index) (File No. SR-NASD-2001-73); 44483 (June 27, 2001),
66 FR 35677 (July 6, 2001) (order approving the listing and trading
of notes whose return is based on a portfolio of 20 securities
selected from the Amex Institutional Index) (File No. SR-Amex-2001-
40); and 37744 (Sept. 27, 1996), 61 FR 52480 (Oct. 7, 1996) (order
approving the listing and trading of notes whose return is based on
a weighted portfolio of healthcare/biotechnology industry
securities) (File No. SR-Amex-96-27).
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Finally, the Commission notes that the value of the Index will be
calculated and disseminated by the CBOE once every trading day after
the close of trading. However, the Commission notes that the value of
the DJIA will be widely disseminated at least once every fifteen
seconds throughout the trading day and that investors are able to
obtain real-time call option pricing on the DJIA during the trading
day. Further, the Indicative Value, which will be calculated by the
Amex after the close of trading and after the CBOE calculates the BXD
Index for use by investors the next trading day, is designed to provide
investors with a daily reference value of the adjusted Index. The
Commission notes that JPMorgan has agreed to arrange to have the BXD
Index calculated and disseminated on a daily basis through a third
party in the event that the CBOE discontinues calculating and
disseminating the Index. In such event, the Exchange agrees to obtain
Commission approval, pursuant to filing the appropriate Form 19b-4,
prior to the substitution of the CBOE BXD Index. Further, the
Commission notes that the Exchange has agreed to undertake to delist
the Notes in the event that the CBOE ceases to calculate and
disseminate the Index, and JPMorgan is unable to arrange to have the
BXD Index calculated and widely disseminated through a third party.
The Commission finds good cause for approving the proposed rule
change prior to the 30th day after the date of publication of the
notice of filing thereof in the Federal Register. The Exchange has
requested accelerated approval because this product is similar to
several other instruments currently listed and traded on the Amex.\36\
The Commission believes that the Notes will provide investors with an
additional investment choice and that accelerated approval of the
proposal will allow investors to begin trading the Notes promptly.
Additionally, the Notes will be listed pursuant to Amex's existing
hybrid security listing standards as
[[Page 35473]]
described above. Therefore, the Commission finds good cause, consistent
with Section 19(b)(2) of the Act,\37\ to approve the proposal on an
accelerated basis.
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\36\ See supra notes 12 (citing previous approvals of securities
with structures similar to that of the proposed Notes); and 14
(citing previous approvals of securities linked to the performance
of the DJIA as well as options on the DJIA).
\37\ 37 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\38\ that the proposed rule change (File No. SR-Amex-2005-042) is
hereby approved on an accelerated basis.
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\38\ 38 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3184 Filed 6-17-05; 8:45 am]
BILLING CODE 8010-01-P
