[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Notices]
[Pages 43023-43027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16321]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49999; File No. SR-Amex-2004-42]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change by the American
Stock Exchange LLC Relating to the Listing and Trading of Contingent
Principal Protection Notes Linked to the Performance of the Nikkei 225
Index
July 9, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on June 2, 2004, 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.
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\1\ 15 U.S.C. 78s(b)(l).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade notes linked to the
performance of the Nikkei 225 (``Nikkei 225'' or ``Index'') that
provide for contingent principal protection (``Notes''). The Notes also
provide for enhanced appreciation, such that if the ending value of the
Index exceeds its starting value, the Notes' participation in the
appreciation of the Index will be increased by an Upside Participation
Rate expected to be 127%. The text of the proposed rule change is
available at the Office of the Secretary, the Amex and at the
Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Amex included statements
concerning the purpose of, and basis for, the proposed rule change 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 the
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 which
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 the Notes,
which will be issued by Citigroup under the name ``Index LASERS.'' \4\
The Nikkei 225 is a stock index determined, calculated and maintained
solely by NKS.\5\ The Notes will provide for participation \6\ in the
positive performance of the Nikkei 225 during their term while also
reducing the risk exposure to the principal investment amount as long
as the Index does not decline at any time during the term of the Notes
to a pre-established level to be determined at the time of issuance
(the ``Contingent Level''). This Contingent Level will be a pre-
determined percentage decline from the level of the Index at the close
of the market on the date the Notes are priced for initial sale to the
public (the ``Initial Level''). The Issuer expects that the Contingent
Level will be 65% of the initial value of the Index.\7\ A decline of
the Index to the Contingent Level is referred to as a ``Contingent
Event.''
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\3\ See Securities Exchange Act Release No. 27753 (March 1,
1990), 55 FR 8626 (March 8, 1990) (order approving File No. SR-Amex-
89-29).
\4\ Citigroup Global Markets Holdings, Inc. (``Citigroup'') and
Nihon Keizai Shimbun, Inc. (``NKS'') have entered into a non-
exclusive license agreement providing for the use of the Nikkei 225
by Citigroup and certain affiliates and subsidiaries in connection
with certain securities including these Notes. NKS is not
responsible and will not participate in the issuance and creation of
the Notes.
\5\ The Notes are not sponsored, endorsed, sold or promoted by
NKS. NKS is a recognized service with business information in Japan
and publishes a large business daily, The Nihon Keizai Shimbon, and
four other financial newspapers. NKS is not affiliated with a
securities broker or dealer. The Index measures the composite price
performance of selected Japanese stocks. The Index is currently
based on the 225 Underlying Stocks trading on the Tokyo Stock
Exchange (``TSE'') and represents a broad cross-section of Japanese
industry. All 225 of the stocks underlying the index are stocks
listed in the First Section of the TSE. Stocks listed in the First
Section are among the most actively traded stocks on the TSE. The
Index is a modified, price-weighted index. Each component stock's
weight in the Index is based on its price per share rather than the
total market capitalization of the issuers. NKS calculates the Index
by multiplying the per share price of a component stock by the
corresponding weighting factor for the stock (a ``Weight Factor''),
calculating the sum of all these products and dividing that sum by a
divisor. The divisor, initially set on May 16, 1949 at 225, was
23.156 as of July 9, 2004, and is subject to periodic adjustments.
Each Weight Factor is computed by dividing [yen] 50 by the par value
of the relevant component stock, so that the share price of each
component stock when multiplied by its Weight Factor corresponds to
a share price based on a uniform par value of [yen] 50. Each Weight
Factor represents the number of shares of the related component
stock, which are included in one trading unit of the Index. The
stock prices used in the calculation of the Index are those reported
by a primary market for the component stocks, which is currently the
TSE.
\6\ Telephone conversation between Jeffrey Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, dated July 9, 2004 (removal of reference to
``uncapped'' participation since the Notes have an Upside
Participation Rate expected to be 127%).
\7\ Id.
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The Contingent Principal Protection Notes, which will be registered
under section 12 of the Act,\8\ will conform to the initial listing
guidelines under
[[Page 43024]]
Section 107A \9\ and continued listing guidelines under Sections 1001-
1003 \10\ of the Company Guide. The Notes are unsecured senior non-
convertible debt securities of Citigroup. Unlike ordinary debt
securities, the Notes do not guarantee any return of principal at
maturity. The Notes will not pay interest and are not subject to
redemption prior to maturity by Citigroup or at the option of any
beneficial owner. The Notes will have a term of not less than one but
not more than ten (10) years.\11\ The Notes will mature on June 19,
2008.\12\ Citigroup will issue the Notes in denominations of whole
units (a ``Unit''), with each Unit representing a single Note. The
original public offering price will be $10 per Unit. The Notes will
entitle the owner at maturity to receive at least 100% of the principal
investment amount as long as the Nikkei 225 never experiences a
Contingent Event. In the case of a positive Index return, the holder
would receive the full principal investment amount of the Note plus the
product of $10, the percentage change of the Nikkei 225 during the term
and the Upside Participation Rate (expected to be 127%). Accordingly,
even if the Index declines but never reaches the Contingent Level, the
holder will receive the principal investment amount of the Notes at
maturity. If, however, the Notes experience a Contingent Event at any
time during the term, the holder loses the ``principal protection'' and
will be entitled to receive a payment based on the percentage change of
the Index, positive or negative. In this case, the Notes will not have
a minimum principal investment amount that will be repaid, and payment
on the Notes prior to or at maturity may be less than the original
issue price of the Notes. Accordingly, if the Index experiences a
negative return and a Contingent Event, the Notes would be fully
exposed to any decline in the level of the Nikkei 225.\13\ The Notes
are also not callable by the Issuer.
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\8\ Id.
\9\ 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. 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.
\10\ 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). Section 1003(b)(iv)(A) 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.
\11\ Telephone conversation between Jeffrey Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, dated July 9, 2004.
\12\ Id.
\13\ A negative return of the Nikkei 225, together with a
Contingent Event, will reduce the redemption amount at maturity with
the potential that the holder of the Note could lose his entire
investment amount.
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The payment that a holder or investor of a Note will be entitled to
receive (the ``Redemption Amount'') will depend on the relation of the
level of the Nikkei 225 at the close of the market on a single business
day (the ``Valuation Date'') shortly before maturity of the Notes (the
``Final Level'') and the Initial Level. In addition, whether the Notes
retain ``principal protection'' or are fully exposed to the performance
of the Index is determined by whether the Nikkei 225 ever experiences a
Contingent Event during the term of the Notes.
If the percentage change of the Index is positive and the Index
never experiences a Contingent Event, the Redemption Amount per Unit
will equal:
[GRAPHIC] [TIFF OMITTED] TN19JY04.151
If the percentage change of the Index is zero or negative and the
Index never experience a Contingent Event, the redemption amount per
unit will equal the principal investment amount of $10.
If the Index experiences a Contingent Event, the Redemption Amount
per Unit will equal:
[GRAPHIC] [TIFF OMITTED] TN19JY04.152
The Notes are cash-settled in U.S. dollars and do not give the
holder any right to receive a portfolio security, dividend payments or
any other ownership right or interest in the portfolio or index of
securities comprising the Nikkei 225. The Notes are designed for
investors who want to participate or gain exposure to a broad
representation of the Japanese stock market while partially limiting
their investment risk and who are willing to forego market interest
payments on the Notes during such term. The Commission has previously
approved the listing of securities linked to the performance of the
Nikkei 225, including products traded on the Exchange.\14\
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\14\ See Securities Exchange Act Release Nos. 49670 (May 7,
2004), 69 FR 27959 (May 17, 2004) (approving the listing and trading
of Accelerated Return Notes linked to the Nikkei 225 for Nasdaq);
38940 (August 15, 1997), 62 FR 44735 (August 22, 1997) (approving
the listing and trading of notes based on the Major 11 International
Index); 34821 (October 11, 1994), 59 FR 52568 (October 18, 1994)
(approving the listing and trading of warrants on the Nikkei 300);
and 27565 (December 22, 1989), 55 FR 376 (January 4, 1990)
(approving the listing and trading of warrants based on the Nikkei
225 and noting the existence of a Memorandum of Understanding
between the Commission and the Japanese Ministry of Finance for
surveillance purposes).
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As of May 26, 2004, the market capitalization of the securities
included in the Nikkei 225 ranged from a high of approximately 14
trillion yen ($128 billion) to a low of approximately 30 billion yen
($257 million). The average daily trading volume for these same
securities for the last six (6) months ranged from a high of
approximately 8.257 million shares (7 trillion yen) to a low of
approximately 1.696 million shares (1.2 trillion yen). The Index is
composed of 225 securities and is broad-based. The highest weighted
stock has a weight of 3.5% while the top five (5) stocks in the Index
account for 14.2 %. The level or value of the Index is calculated once
per minute during TSE trading hours \15\ and is readily accessible
[[Page 43025]]
to U.S. investors at http://www.nni.nikkei.co.jp and http://www.bloomberg.com. NKS is under no obligation to continue the
calculation and dissemination of the Index. In the event that NKS ever
ceases to maintain the Index, the Exchange will contact the Commission
staff to consider prohibiting the continued trading of the Notes.\16\
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\15\ TSE trading hours are currently 9 a.m. to 11 a.m. and from
12:30 p.m. to 3 p.m. Tokyo time, Monday through Friday. Due to time
zone differences, on any normal trading day the TSE will close prior
to the opening of business in New York City on the same calendar
day. Therefore, the closing level of the Index on a trading day will
generally be available in the U.S. by the opening of business on the
same calendar day.
The TSE has adopted certain measures, including daily price
floors and ceilings on individual stocks, intended to prevent any
extreme short-term price fluctuations resulting from order
imbalances. In general, any stock listed on the TSE cannot be traded
at a price lower than the applicable price floor or higher than the
applicable price ceiling. These price floors and ceilings are
expressed in absolute Japanese yen, rather than percentage limits
based on the closing price of the stock on the previous trading day.
In addition, when there is a major order imbalance in a listed
stock, the TSE posts a ``special bid quote'' or a ``special asked
quote'' for that stock at a specified higher or lower price level
than the stock's last sale price in order to solicit counter-orders
and balance supply and demand for the stock. Prospective investors
should also be aware that the TSE may suspend the trading of
individual stocks in certain limited and extraordinary
circumstances, including, for example, unusual trading activity in
that stock. As a result, changes in the Index may be limited by
price limitations or special quotes, or by suspension of trading, on
individual stocks that comprise the Index, and these limitations
may, in turn, adversely affect the value of the Notes. Telephone
conversation between Jeffrey Burns, Associate General Counsel, Amex,
and Florence Harmon, Senior Special Counsel, Division, Commission,
dated July 9, 2004.
\16\ Telephone conversation between Jeffrey Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, dated July 9, 2004.
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In order to maintain continuity in the level of the Index in the
event of certain changes due to non-market factors affecting the
Underlying Stocks, such as the addition or deletion of stocks,
substitution of stocks, stock dividends, stock splits or distributions
of assets to stockholders, the divisor used in calculating the Index is
adjusted in a manner designed to prevent any instantaneous change or
discontinuity in the level of the Index. The divisor remains at the new
value until a further adjustment is necessary as the result of another
change. As a result of each change affecting any Underlying Stock, the
divisor is adjusted in such a way that the sum of all share prices
immediately after the change multiplied by the applicable Weight Factor
and divided by the new divisor, i.e., the level of the Index
immediately after the change, will equal the level of the Index
immediately prior to the change.\17\
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\17\ Telephone conversation between Jeffrey Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, dated July 9, 2004 (pertaining to discussion
of the continuity of the level of the Index). Underlying Stocks may
be deleted or added by NKS. However, to maintain continuity in the
Index, the policy of NKS is generally not to alter the composition
of the Underlying Stocks except when an Underlying Stock is deleted
in accordance with the following criteria. Any stock becoming
ineligible for listing in the First Section of the TSE due to any of
the following reasons will be deleted from the Underlying Stocks:
bankruptcy of the issuer; merger of the issuer into, or acquisition
of the issuer by, another company; delisting of the stock or
transfer of the stock to the ``Seiri-Post'' because of excess debt
of the issuer or because of any other reason; or transfer of the
stock to the Second Section of the TSE. Upon deletion of a stock
from the Index, NKS will select, in accordance with certain criteria
established by it, a replacement for the deleted Underlying Stock.
In an exceptional case, a newly listed stock in the First Section of
the TSE that is recognized by NKS to be representative of a market
may be added to the Underlying Stocks. As a result, an existing
Underlying Stock with low trading volume and not representative of a
market will be deleted.
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Because the Notes are issued in $10 denominations, the Amex's
existing equity 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.\18\ Second, the Notes will be subject to the equity margin rules
of the Exchange \19\ and will be subject to the regular equity trading
hours of the Exchange. 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, 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, Citigroup will deliver a prospectus in
connection with the initial sales of the Notes in accordance with its
standard prospectus delivery procedures.
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\18\ Amex Rule 411 requires that every member, member firm or
member corporation use due diligence to learn the essential facts,
relative to every customer and to every order or account accepted.
\19\ See Amex Rule 462 and Section 107B of the Company Guide.
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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 that include additional monitoring on key pricing dates,\20\
which have been deemed adequate under the Act. In addition, the
Exchange has an effective surveillance sharing agreement with the TSE
that may be used as a basis for listing and trading securities linked
to the Nikkei 225.\21\ The Exchange also notes that the TSE is a member
of the Intermarket Surveillance Group (``ISG'').\22\ As a result, the
Exchange asserts that market surveillance information is available from
the TSE, if necessary, due to regulatory concerns that may arise in
connection with the component stocks. In the event that it becomes
necessary, the Exchange will seek the Commission's assistance pursuant
to memoranda of understanding or similar inter-governmental agreements
or arrangements that may exist between the Commission and the Japanese
securities regulators.
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\20\ Telephone conversation between Jeffrey Burns, Associate
General Counsel, Amex, and Florence Harmon, Senior Special Counsel,
Division, Commission, dated July 9, 2004 (pertaining to key pricing
dates).
\21\ See Information Sharing Agreement between the Amex and the
TSE dated September 25, 1990.
\22\ ISG membership obligates an exchange to compile and
transmit market surveillance information and resolve in good faith
any disagreements regarding requests for information or responses
thereto.
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The Exchange also has a general policy that prohibits the
distribution of material, non-public information by its employees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act \23\ in general and furthers the objectives
of Section 6(b)(5) \24\ 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.
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\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition 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 did not solicit or receive any written comments on the
proposed rule change.
[[Page 43026]]
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-Amex-2004-42 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 Number SR-Amex-2004-42. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://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 Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal offices of 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-2004-42
and should be submitted on or before August 9, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
Amex has asked the Commission to approve the proposal on an
accelerated basis to accommodate the timetable for listing the Notes.
The Commission notes that it has previously approved the listing of
securities the performance of which have been linked to, or based on,
the Index.\25\ The Commission has also previously approved the listing
of securities with a structure similar to that of the Notes.\26\
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\25\ See Securities Exchange Act Release Nos. 49670 (May 7,
2004), 69 FR 27959 (May 17, 2004) (approving the listing and trading
of Accelerated Return Notes linked to the Nikkei 225 for Nasdaq);
and 38940 (August 15, 1997), 62 FR 44735 (August 22, 1997)
(approving the listing and trading of Market Index Target-Term
Securities, the return on which is based on changes in the value of
a portfolio of 11 foreign indexes, including the Nikkei 225 Index).
\26\ See Securities Exchange Act Release Nos. 47464 (March 7,
2003), 68 FR 12116 (March 13, 2003) (approving the listing and
trading of Market Recovery Notes Linked to the S&P 500 Index); 47009
(December 16, 2002), 67 FR 78540 (December 24, 2002) (approving the
listing and trading of Market Recovery Notes linked to the Nasdaq-
100 Index); and 46883 (November 21, 2002), 67 FR 71216 (November 29,
2002) (approving the listing and trading of Market Recovery Notes
linked to the Dow Jones Industrial Average).
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After careful consideration, the Commission finds that the proposed
rule change, as amended, 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,\27\ in that it is designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market, and, in general, to protect
investors and the public interest.\28\ The Commission believes that the
Notes will provide investors with a means to participate in any
percentage increase in the Index that exists at the maturity of the
Notes, subject to the Capped Value, while also reducing the risk
exposure to the principal investment amount as long as the Index does
not decline at any time during the term of the Note to a pre-determined
percentage decline, expected to be 65% of the initial value of the
Index--the Contingent Level. Specifically, as described more fully
above, if the value of the Nikkei 225 Index has increased, a beneficial
owner will be entitled to receive at maturity a payment on the Notes
based on the appreciation of the Index by an Upside Participation Rate
of 127%. If the Index declines but never reaches the Contingent Level,
the holder will receive the principal investment amount of the Notes at
maturity. If, however, the Notes experience a Contingent Event at any
time during the term, the holder loses the ``principal protection'' and
will be entitled to receive a payment based on the percentage change of
the Index, positive or negative.
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\27\ 15 U.S.C. 78f(b)(5).
\28\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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Thus, the Notes are non-principal protected instruments, but are
not leveraged. The Notes are debt instruments, the price of which will
be derived from and based upon the value of the Nikkei 225 Index. The
Notes do not have a minimum principal amount that will be repaid at
maturity, and the payments of the Notes prior to or at maturity may be
less than the original issue price of the Notes. Accordingly, the level
of risk involved in the purchase or sale of the Notes is similar to the
risk involved in the purchase or sale of traditional common stock.
Because the final rate of return of the Notes is derivatively priced,
based on the performance of the 225 common stocks underlying the Nikkei
225 Index, and because the Notes are instruments that do not guarantee
a return of principal, there are several issues regarding the trading
of this type of product. However, for the reasons discussed below, the
Commission believes that Amex's proposal adequately addresses the
concerns raised by this type of product.
The Commission notes that the protections of Amex Rule 107A were
designed to address the concerns attendant to the trading hybrid
securities like the Notes. In particular, by imposing the hybrid
listing standards, suitability, disclosure, and compliance requirements
noted above, the Commission believes that Amex has addressed adequately
the potential problems that could arise from the hybrid nature of the
Notes. The Commission notes that Amex will distribute a circular to its
membership calling attention to the specific risks associated with the
Notes. The Commission also notes that Citigroup will deliver a
prospectus in connection with the initial sales of the Notes. In
addition, the Commission notes that Amex will incorporate and rely upon
its existing surveillance procedures governing equities, which have
been deemed adequate under the Act.
In approving the product, the Commission recognizes that the Index
is a stock index calculated, published and disseminated by NKS, which
measures the composite price performance of selected Japanese stocks.
The Index is currently based on 225 common stocks traded on the TSE and
represents a broad cross-section of Japanese industry. All 225
underlying stocks are listed in the First Section of the TSE and are,
therefore, among the most actively traded stocks on the TSE. The Nikkei
is
[[Page 43027]]
a modified, price-weighted index, which means a component stock's
weight in the Nikkei is based on its price per share rather than total
market capitalization of the issuers. NKS calculates the Index by
multiplying the per share price of a component stock by the
corresponding weighting factor for the stock, calculating the sum of
all these products, and dividing that sum by a divisor.
As stated above, NKS is under no obligation to continue the
calculation and dissemination of the Index. In the event the
calculation and dissemination every minute of the Index is
discontinued, Amex represents that it will contact Commission staff and
consider prohibiting the continued listing of the Notes. The Commission
notes that the changes in the composition of the Nikkei 225 Index is
made solely by NKS. The changes to these common stocks tend to be made
infrequently with most substitutions the result of mergers and other
extraordinary corporate actions. As of May 26, 2004, the average daily
trading volume for the securities included in the Nikkei 225 for the
last six (6) months ranged from a high of approximately 8.257 million
shares (7 trillion yen) to a low of approximately 1.696 million shares
(1.2 trillion yen). As of the same date, the market capitalization of
the components ranged from 14 trillion yen ($128 billion) to 30 billion
yen ($257 million). The highest-weighted stock in the Index has the
weight of 3.5% while the top five (5) stocks in the Index account for
14%. Given the composition of the stocks underlying the Nikkei 225
Index, the Commission believes that the listing and trading of the
Notes that are linked to the Nikkei 225 Index should not unduly impact
the market for the underlying securities comprising the Nikkei 225
Index or raise manipulative concerns. As discussed more fully above,
the underlying stocks comprising the Nikkei 225 Index are well-
capitalized, highly liquid stocks.
In light of the fact that the Nikkei is a foreign index, the
Commission believes adequate surveillance sharing agreements between
the Amex and the TSE are a necessary prerequisite to deter and detect
potential manipulations or other improper or illegal trading involving
the Notes. While many of the issuers of the underlying securities
comprising the Nikkei 225 are not subject to reporting requirements
under the Act, Amex represents that an adequate surveillance sharing
agreement exists through the ISG between the Amex and the TSE to deter
and detect potential manipulations or other improper trading in the
underlying components. Therefore, Amex's surveillance procedures will
serve to deter as well as detect any potential manipulation. This
agreement obligates the Amex and TSE to compile and transmit market
surveillance information and resolve in good faith any disagreements
regarding requests for information. Accordingly, the Commission
believes that the surveillance sharing agreement through ISG is
adequate for the Amex to surveil the components of the Nikkei 225 for
potential manipulation or other trading abuses between the markets with
respect to the trading of the Notes based on the Nikkei 225.
Furthermore, the Commission notes that the Notes are depending upon
the individual credit of the issuer, Citigroup. To some extent this
credit risk is minimized by the Amex's listing standards in Amex Rule
107A, which provide the only issuers satisfying substantial asset and
equity requirements may issue securities such as the Notes. In
addition, the Amex's hybrid listing standards further require that the
Notes have a market value of at least $4 million. In any event,
financial information regarding Citigroup, in addition to the
information on the 225 common stocks comprising the Nikkei 225 Index,
including the dissemination of the Index value once per minute, will be
publicly available.\29\
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\29\ See http://www.nni.nikkei.co.jp and http://www.bloomberg.com.
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The Commission also has a systemic concern, however, that a broker-
dealer such as Citigroup, or a subsidiary providing a hedge for the
issuer will incur position exposure. However, as the Commission has
concluded in previous approval orders for other hybrid instruments
issued by broker-dealers,\30\ the Commission believes that this concern
is minimal given the size of the Notes issuance in relation to the net
worth of Citigroup.
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\30\ See, e.g., Securities Exchange Act Release Nos. 44913
(October 9, 2001), 66 FR 52469 (October 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 (September 27, 1996),
61 FR 52480 (October 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, as the Commission noted, the value of the Nikkei 225 Index
will be disseminated at least once every minute throughout the trading
day. Because the Nikkei 225 Index contains foreign securities and is
composed of highly liquid and well-capitalized securities, the
Commission believes that providing access to the value of the Index at
least once every minute throughout the trading day is sufficient and
will provide benefits to investors in the product.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. 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. In addition, the
Commission notes that it has previously approved the listing and
trading of other derivative securities based on the Index and
securities with a structure similar to that of the Notes.\31\
Accordingly, the Commission believes that there is good cause,
consistent with Sections 6(b)(5) and 19(b)(2) of the Act,\32\ to
approve the proposal, on an accelerated basis.
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\31\ See supra notes 25 and 26.
\32\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-Amex-2004-42) is hereby
approved on an accelerated basis.
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\33\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16321 Filed 7-16-04; 8:45 am]
BILLING CODE 8010-01-P