[Federal Register Volume 72, Number 25 (Wednesday, February 7, 2007)]
[Notices]
[Pages 5765-5768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1937]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55182; File No. SR-Amex-2006-19]
Self-Regulatory Organizations; American Stock Exchange LLC; Order
Approving Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto
Relating to the Listing and Trading of Options on the Nuveen Municipal
Fund Index
January 26, 2007.
I. Introduction
On February 17, 2006, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade options on the Price-Return
Nuveen Municipal Closed-End Fund Index (``NMUNP'') (``the Nuveen
Municipal Fund Index'' or ``Index''). On July 12, 2006, the Exchange
filed Amendment No. 1 to the proposed rule change. On September 19,
2006, the Exchange filed Amendment No. 2 to the proposed rule change.
On November 13, 2006, the Exchange filed Amendment No. 3 to the
proposed rule change. The proposed rule change was published for
comment in the Federal Register on December 6, 2006.\3\ The Commission
received no comments regarding the proposal. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 54813 (November 22,
2006), 71 FR 70801.
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II. Description of the Proposal
The Exchange seeks to list and trade cash-settled, European-style
index options on the Price-Return Nuveen Municipal Fund Index. Options
on the Index will be the first index options based on an index of
closed-end funds, and are intended for the use of investors desiring to
achieve exposure to a broad section of the national tax-free
[[Page 5766]]
municipal closed-end fund market, as well as a hedging vehicle for
those investors holding such closed-end funds.
The Index is a capitalization-weighted index based entirely on the
shares of Closed-End Funds listed on either the Amex, New York Stock
Exchange, Inc. (the ``NYSE'') or the Nasdaq Stock Market, Inc.
(``Nasdaq'') that are exempt from federal income tax through investment
in bonds issued by state and local governments and agencies. Each
component is a NMS stock as defined in Rule 600 under the Securities
Exchange Act of 1934 (the ``1934 Act''). Currently, the Index is
comprised of the shares of Closed-End Funds that are listed on the Amex
or NYSE.
A. Index Design and Composition
The Nuveen Municipal Fund Index is designed to be a broad
representation of the U.S. municipal fund market. This Index is
capitalization-weighted and includes only those Closed-End Funds
domiciled in the U.S. and its territories and that are traded on the
Amex, NYSE, or Nasdaq. The component Closed-End Funds are weighted by
their market capitalization, which is calculated by multiplying the
primary market price by the outstanding shares.
Each of the component Closed-End Funds are required to have a
minimum market capitalization of at least $100 million and an average
monthly trading volume over the prior six (6) months of at least
500,000 shares. In addition, for newly listed Closed-End Funds to be an
index component, at least one (1) dividend payment with an ex-date
prior to inclusion in the Index is required.
The Index is calculated based on a market capitalization weighting
methodology. In a market capitalization index, components are weighted
based on total market value of the outstanding shares, i.e., share
price times the number of shares outstanding. The Exchange states that
this type of index typically fluctuates in line with the price moves of
the components. After the initial weighting of the Index, the weights
are updated in conjunction with scheduled quarterly adjustments.
As of January 31, 2006, the Closed-End Funds comprising the Nuveen
Municipal Fund Index had an average market capitalization of $414
million, ranging from a high of $1.9 billion (Nuveen Municipal Value
Fund Inc. (NUV)) to a low of $101 million (MBIA Capital/Claymore
Managed Duration Investment Grade Municipal Fund (MZF)). The number of
available shares outstanding ranged from a high of 194.9 million (NUV)
to a low of 7.9 million (MZF), and averaged 31.9 million shares. The
six-month average daily trading volume for Index components was 45,000
shares per day, ranging from a high of 159,100 shares per day (NUV) to
a low of 13,100 shares per day (Morgan Stanley Quality Municipal
Securities (IQM)).
B. Index Calculation and Maintenance
The value of the Index will be calculated by the Amex on behalf of
Nuveen and will be disseminated at 15-second intervals during regular
Amex trading hours to market information vendors via the Consolidated
Tape Association (``CTA'') or by other major market data vendors (from
another Amex market data feed). The Amex is responsible for making all
necessary adjustments to the Index to reflect component deletions,
share changes, stock splits, stock dividends (other than an ordinary
cash dividend), and stock price adjustments due to restructuring,
mergers, or spin-offs involving the underlying components. In the event
of component or share weight changes to the Index portfolio, the
payment of dividends other than ordinary cash dividends, spin-offs,
rights offerings, re-capitalization, or other corporate actions
affecting a component of the Index, the index divisor may be adjusted
to ensure that such corporate actions do not affect the Index level.
The Exchange states that the methodology used to calculate the
value of the Nuveen Municipal Fund Index is similar to the methodology
used to calculate the value of other well-known market-capitalization
weighted indexes. The level of the Index reflects the total market
value of the component Closed-End Funds relative to a particular base
period and is computed by dividing the total market value of the
Closed-End Funds in the Index by the index divisor. The divisor is
adjusted periodically to maintain consistent measurement of the Index.
The Index is reviewed each December, March, June, and September to
ensure that at least 90% of the Index weight is accounted for by
components that continue to represent the universe of Closed-End Funds
that meet the Index methodology maintenance requirements. To remain in
the Index, components must maintain a market capitalization of at least
$75 million and have a six (6) month average monthly trading volume
over 250,000 shares. Changes to Index components and/or the component
share weights typically take effect after the close of trading on the
third Friday of each calendar quarter month in connection with
quarterly rebalancing. The Amex and Nuveen,\4\ by mutual agreement, may
change the number of issues comprising the Index by adding or deleting
one or more components contained in the Index with one or more
substitute Closed-End Funds.
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\4\ The Commission notes that Nuveen, because it selects the
components for the Index, has represented to Amex that it prohibits
individuals at Nuveen who will be privy to information about future
changes to the Nuveen Municipal Fund Index rules or constituent
stocks from trading on that information, for their own benefit or
for the benefit of Nuveen's clients. Additionally, Nuveen has
represented that it has firewalls around the personnel who have
access to information concerning changes and adjustments to the
Index. Telephone conversation between Jeffrey P. Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division of Market Regulation (``Division''), Commission on November
17, 2006.
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C. Continued Listing Standards
The Exchange will apply the following maintenance standards for
continued listing: (i) The number of securities in the Index may not
drop by one-third or more from the number of components in the Index at
the time of initial listing; \5\ (ii) no more than 10% or more of the
weight of the Index is represented by component securities having a
market value of less than $75 million; (iii) no more than 10% of the
weight of the Index is represented by component securities trading less
than 15,000 shares per day; (iv) the largest component security in the
Index accounts for no more than 15% of the weight of the Index, or the
largest five components in the aggregate account for more than 50% of
the weight of the Index on the first day of January and July each year;
or (v) the component securities will be listed and traded on the Amex,
the NYSE, or NASDAQ.\6\
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\5\ The Exchange states that the Index currently has 86
components, and therefore, may not be comprised of less than 57
components. This representation replaces any prior representation to
the effect that the Index could be comprised of no less than 10
components. Telephone conversation between Jeffrey P. Burns,
Associate General Counsel, Amex, and Florence Harmon, Senior Special
Counsel, Division, Commission on November 17, 2006.
\6\ These maintenance standards are adapted from Commentary .03
of Amex Rule 901C to address the unique characteristics of the
closed-end fund Index components, which may not always satisfy
Commentary .03(4) of Amex Rule 901C. Telephone conversation between
Jeffrey P. Burns, Associate General Counsel, Amex, and Florence
Harmon, Senior Special Counsel, Division, Commission on November 23,
2006.
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If the Index ceases to be maintained or calculated, or its values
are not disseminated at least every 15 seconds by the Amex over the CTA
(or another major market data vendor) or the above Index maintenance
standards are not satisfied, the Exchange would not list
[[Page 5767]]
any additional series for trading and would limit all transactions in
options on the Index to closing transactions only for the purpose of
maintaining a fair and orderly market and protecting investors.
D. Contract Specifications
Options on the Nuveen Municipal Fund Index will expire on the
Saturday following the third Friday of the expiration month. Trading in
options on the Index will normally cease at 4:15 p.m. Eastern time
(``ET'') on the Thursday preceding an expiration Saturday. The exercise
settlement value at expiration of each Nuveen Municipal Fund Index
option will be calculated by the Amex on behalf of Nuveen, based on the
opening prices of the Index's component Closed-End Funds on the last
business day prior to expiration (``Settlement Day'').\7\ The
Settlement Day is normally the Friday preceding ``Expiration
Saturday.'' If a component Closed-End Fund in the Index does not trade
on Settlement Day, the last reported sales price in the primary market
from the previous trading day would be used to calculate the settlement
value. Settlement values for the Index will be disseminated by the Amex
over the CTA.
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\7\ The aggregate exercise value of the option contract is
calculated by multiplying the Index value by the Index multiplier,
which is 100.
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E. Trading Rules
The Nuveen Municipal Fund Index is a broad stock index group as
defined in Amex Rule 900C(b)(1). Options on the Index would be
European-style and a.m. cash-settled. The Exchange's standard trading
hours for broad-based index options (9:30 a.m. to 4:15 p.m. ET), as set
forth in Commentary .02 to Amex Rule 1, will apply to options on the
Nuveen Municipal Fund Index. Exchange rules that apply to the trading
of options on broad-based indexes will also apply to options on the
Index.\8\ The trading of these options will also be subject to, among
others, Exchange rules governing margin requirements and trading halt
procedures for index options.
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\8\ See Amex Rules 900C through 980C.
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For options on the Nuveen Municipal Fund Index, the Exchange
proposes to establish an aggregate position limit of 25,000 contracts
on the same side of the market, provided that no more than 15,000 of
such contracts are in the nearest expiration month series.\9\
Commentary .01(c) to Rule 904C provides that position limits for hedged
index options may not exceed twice the established position limits for
broad stock index groups. The Exchange proposes that a hedge exemption
of 37,500 be available for the Index. Furthermore, proprietary accounts
of member organizations could receive an exemption of up to three times
the established position limit for the purpose of facilitating public
customer orders, to the extent they comply with the procedures and
criteria listed in Commentary .02 to Amex Rules 950(d) and 950(d)--
ANTE.
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\9\ The same limits that apply to position limits would apply to
exercise limits for these products.
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The Exchange proposes to apply broad-based index margin
requirements for the purchase and sale of options on the Nuveen
Municipal Fund Index. Accordingly, purchases of put or call options
with nine months or less until expiration would have to be paid for in
full. Writers of uncovered put or call options would have to deposit/
maintain 100% of the option proceeds, plus 15% of the aggregate
contract value (current index level x $100), less any out-of-the-money
amount, subject to a minimum of the option proceeds plus 10% of the
aggregate contract value for call options and a minimum of the option
proceeds plus 10% of the aggregate exercise price amount for put
options.
The Exchange proposes to set a strike price interval of at least
2\1/2\ points, at a minimum, for a near-the-money series in a near-term
expiration month when the level of the Index is below 200, a 5-point
strike price interval, at a minimum, for any options series with an
expiration up to one year, and at least a 10-point strike price
interval for any longer-term option. The minimum tick size for series
trading below $3 would be $0.05, and for series trading at or above $3
would be $0.10.
The Exchange proposes to list options on the Index in the three
consecutive near-term expiration months, plus up to three successive
expiration months in the March cycle. For example, consecutive
expirations of January, February, March, plus June, September, and
December expirations would be listed.\10\ In addition, long-term option
series having up to 60 months to expiration will be traded.\11\ The
trading of long-term options on the Index will be subject to the same
rules that govern all the Exchange's index options, including sales
practice rules, margin requirements, and trading rules.
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\10\ See Amex Rule 903C(a).
\11\ See Amex Rule 903C(a)(iii).
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F. Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for options on the Nuveen Municipal Fund Index and
intends to apply those same procedures that it applies to the
Exchange's other index options. In addition, the Exchange is a member
of the Intermarket Surveillance Group (``ISG''). The ISG members work
together to coordinate surveillance and share information regarding the
stock and options markets.
The Exchange also represents that it has the necessary systems
capacity to support the new options series that would result from the
introduction of options on the Nuveen Municipal Fund Index, including
long-term options.
III. Discussion and Commission's Findings
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.\12\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act \13\ and will promote just
and equitable principles of trade, and facilitate transactions in
securities, and, in general, protect investors and the public interest.
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\12\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\13\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the Nuveen Municipal Fund Index (i) is
designed broadly to represent the U.S. national tax-free municipal
closed-end fund market with a current composition of eighty-six (86)
closed-end funds that are listed on U.S. securities exchanges and (ii)
shall be comprised of no fewer than fifty-seven (57) component closed-
end funds at any time.
Currently, the Index is broad-based and well-diversified. In the
event, however, that the Index's characteristics change materially from
the characteristics described herein and on which the Commission is
basing its findings, the Exchange would not rely on this approval order
to list and trade these options. Under such circumstances, the Exchange
would not list any additional series for trading and would limit all
transactions in options on the Index to closing transaction.
The Commission notes that while the Index will be monitored and
maintained by Nuveen, the value of the Index will be calculated and
disseminated by the Exchange in 15-second intervals throughout the
trading day. The Exchange will limit transactions to closing
transactions if the Index value is not calculated and disseminated by a
major market data vendor or the CTA at least every 15-seconds during
the time the options trade on the Exchange.
[[Page 5768]]
The Commission notes that Nuveen, because it selects the components
for the Index, has represented to Amex that it prohibits individuals at
Nuveen who will be privy to information about future changes to the
Nuveen Municipal Fund Index rules or constituent stocks from trading on
that information, for their own benefit or for the benefit of Nuveen's
clients. Additionally, Nuveen has represented that it has firewalls
around the personnel who have access to information concerning changes
and adjustments to the Index. Additionally, the Commission notes that
Amex will incorporate and rely upon its existing surveillance
procedures governing index options, which it states are adequate to
deter as well as detect any potential manipulation.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change (SR-Amex-2006-19), as modified
by Amendment Nos. 1, 2 and 3, be, and hereby is, approved.
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\14\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-1937 Filed 2-6-07; 8:45 am]
BILLING CODE 8010-01-P