Pursuant to Section 19(b)(1)
The Exchange proposes to list and trade, principal protected notes, linked to the performance of the Dow Jones-AIG ExEnergy Sub-Index (the “DJAIG ExEnergy Index” or the “Index”).
The text of the proposed rule change is available on Amex's Web site at
In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
Under Section 107A of the Amex Company Guide (the “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.
The Notes will conform to the initial listing guidelines under Section 107A
The Supplemental Redemption Amount that a holder of a Note will be entitled to receive is defined as the greater of zero or the product of $10, the performance of the Index and the Participation Rate (which is 106.92%). The performance of the Index will be determined at maturity based on the relation of the “Ending Value”
At maturity, a holder will receive a maturity payment amount per Note equal to:
The Supplemental Redemption Amount may not be less than zero. If the Ending Value is less than the Starting Value, the amount paid at maturity will be 100% of the Principal Amount. The amount paid at maturity per Note will never be less than the Principal Amount.
The Dow Jones-AIG Commodity Index and the DJAIG ExEnergy Index are proprietary indexes that AIGI International Inc. (“AIGI”) developed, that each year are determined by “AIG-Financial Products Corp. (“AIG–FP”)
The DJAIG ExEnergy Index tracks what is known as a rolling futures position, which is a position where, on a periodic basis, futures contracts on physical commodities specifying delivery on a nearby date must be sold and futures contracts on physical commodities that have not yet reached the delivery period must be purchased. An investor with a rolling futures position is able to avoid delivering underlying physical commodities while maintaining exposure to those commodities. The rollover for each Index Component occurs over a period of five Dow Jones-AIG business days each month according to a pre-determined schedule. Currently, Dow Jones calculates and disseminates the DJAIG ExEnergy Index level at least 15-second intervals from 8 a.m. to 3 p.m., Eastern time (“ET”),
The fifteen commodities for 2006 that comprise the DJAIG ExEnergy Index are (weightings as of November 15, 2006 noted in parentheses): aluminum (9.31%); coffee (3.49%); copper (10.24%); corn (11.87%); cotton (3.48%); gold (8.41%); lean hogs (5.03%); live cattle (6.58%); nickel (6.54%); silver (3.33%); soybeans (9.81%); soybean oil (4.03%); sugar (2.73%); wheat (8.43%); and zinc (6.73%).
The calculation of the DJAIG ExEnergy Index follows the same rules as the calculation of the Dow Jones-AIG Commodity Index; provided that the daily value of the DJAIG ExEnergy Index is determined by summing the product of the prices of the Index Components and their respective CIMs (as defined below).
The Dow Jones-AIG Commodity Index was created by Dow Jones and AIGI to provide a liquid and diversified benchmark for commodities. The Dow Jones-AIG Commodity Index was established on July 14, 1998 and is currently comprised of futures contracts on nineteen physical commodities.
The nineteen commodities for 2006 that comprise the Dow Jones-AIG Commodity Index (the “Dow Jones-AIG Commodity Index Commodities”) are (weightings as of November 15, 2006 noted in parentheses): aluminum (6.90%); coffee (2.59%); copper (7.59%); corn (8.80%); cotton (2.58%); crude oil (10.30%); gold (6.24%); heating oil (3.16%); lean hogs (3.73%); live cattle (4.88%); natural gas (9.34%); nickel (4.85%); silver (2.47%); soybeans (7.27%); soybean oil (2.99%); sugar (2.03%); unleaded gasoline (3.06%); wheat (6.25%); and zinc (4.99%).
The Index was created using the following four main principles:
• Economic significance. The Dow Jones-AIG Commodity Index is designed to reflect the importance of a diversified group of physical commodities to the world economy. To achieve a fair representation, the Dow Jones-AIG Commodity Index uses both liquidity data and dollar-adjusted production data in determining the relative quantities of the commodities. The Dow Jones-AIG Commodity Index primarily relies on the liquidity of a particular commodity (
• Diversification. The Dow Jones-AIG Commodity Index is designed to provide diversified exposure to commodities as an asset class. Disproportionate weightings of any particular commodity or sector may increase the volatility and negate the concept of a broad-based commodity index. As described further below, diversification rules have been established and are applied annually. Additionally, the Dow Jones-AIG Commodity Index is re-balanced annually on a price-percentage basis in order to maintain diversified commodities exposure over time.
• Continuity. The Dow Jones-AIG Commodity Index is designed to be responsive to the changing nature of the commodity markets in a manner that does not completely reshape the character of the Dow Jones-AIG Commodity Index from year to year. The Dow Jones-AIG Commodity Index is intended to provide a stable benchmark, so that end-users may be reasonably confident that historical performance data is based on a structure that bears some resemblance to both the current and future composition of the Dow Jones-AIG Commodity Index.
• Liquidity. The Dow Jones-AIG Commodity Index is designed to provide a highly liquid index. Liquidity
A futures contract, known as a Designated Contract, is selected by the Dow Jones-AIG Oversight Committee (the “Oversight Committee”)
With the exception of several LME contracts, where the Oversight Committee believes that there exists more than one futures contract with sufficient liquidity to be chosen as a Designated Contract for a Dow Jones-AIG Commodity Index Commodity, the Oversight Committee selects the futures contract that is traded in the U.S. and denominated in U.S. dollars. If more than one of those contracts exists, the Oversight Committee will select the most actively traded contract. Data concerning this Designated Contract will be used to calculate the Dow Jones-AIG Commodity Index. If a Designated Contract were to be terminated or replaced, a comparable futures contract would be selected, if available, to replace that Designated Contract.
The Designated Contracts for the Dow Jones-AIG Commodity Index Commodities included in the Dow Jones-AIG Commodity Index for 2006 are traded on the LME, the CBOT, the New York Board of Trade (the “NYBOT”), the Chicago Mercantile Exchange, Inc. (the “CME”) and the New York Mercantile Exchange (the “NYMEX”).
The Dow Jones-AIG Commodity Index is reweighted and rebalanced each year in January on a price percentage basis. The annual weightings for the Dow Jones-AIG Commodity Index are determined each year in June or July by AIGI under the supervision of the Oversight Committee. The annual weightings are announced in July and implemented the following January. The weightings for 2006, as listed below, have been approved and became effective in January 2006.
The relative weightings of the component commodities included in the Dow Jones-AIG Commodity Index are determined annually according to both liquidity and dollar-adjusted production data. Each June, for each commodity designated for potential inclusion in the Dow Jones-AIG Commodity Index, liquidity is measured by the commodity liquidity percentage (the “CLP”) and production by the commodity production percentage (the “CPP”). The CLP for each commodity is determined by taking a five-year average of the product of the trading volume and the historic dollar value of the Designated Contract for that commodity, and dividing the result by the sum of the products for all commodities that were designated for potential inclusion in the Dow Jones-AIG Commodity Index. The CPP is determined for each commodity by taking a five-year average of annual world production figures, adjusted by the historic dollar value of the Designated Contract, and dividing the result by the sum of the production figures for all the commodities that were designated for potential inclusion in the Dow Jones-AIG Commodity Index. The CLP and CPP are then combined (using a ratio of 2:1) to establish the Commodity Dow Jones-AIG Commodity Index Percentage (the “CIP”) for each commodity. The CIP is then adjusted in accordance with the diversification rules described below to determine the commodities to be included in the Dow Jones-AIG Commodity Index and their respective percentage weights.
To ensure that no single commodity or commodity sector dominates the Dow Jones-AIG Commodity Index, the following diversification rules are applied to the annual reweighting and rebalancing of the Dow Jones-AIG Commodity Index, as of January of the applicable year:
• No related group of commodities designated as a Commodity Group (
• No single commodity may constitute more than 15% of the Dow Jones-AIG Commodity Index;
• No single commodity, together with its derivatives (
• No single commodity in the Dow Jones-AIG Commodity Index may constitute less than 2% of the Dow Jones-AIG Commodity Index.
Following the annual reweighting and rebalancing of the Dow Jones-AIG Commodity Index in January, the percentage of any single commodity or group of commodities at any time prior to the next reweighting or rebalancing
Following application of the diversification rules discussed above, CIPs are incorporated into the Dow Jones-AIG Commodity Index by calculating the new unit weights for each Dow Jones-AIG Commodity Index commodity. Near the beginning of each new calendar year (the “CIM Determination Date”), the CIPs, along with the settlement prices on that date for Designated Contracts included in the Dow Jones-AIG Commodity Index, are used to determine a Commodity Index Multiplier (“CIM”) for each Dow Jones-AIG Commodity Index commodity. This CIM is used to achieve the percentage weightings of the Dow Jones-AIG Commodity Index commodities, in dollar terms, indicated by their respective CIPs. After the CIMs are calculated, they remain fixed throughout the year. As a result, the observed price percentage of each Dow Jones-AIG Commodity Index commodity will float throughout the year, until the CIMs are reset the following year based on new CIPs.
To avoid delivering the underlying physical commodities and to maintain exposure to the underlying physical commodities, periodically futures contracts on physical commodities specifying delivery on a nearby date must be sold and futures contracts on physical commodities that have not yet reached the delivery period must be purchased. The rollover for each contract occurs over a period of five DJ-AIG Business Days
The Dow Jones AIG-Commodity Index is calculated by Dow Jones by applying the impact of the changes to the futures prices of commodities included in the Dow Jones-AIG Commodity Index (based on the commodities' relative weightings). Once the CIMs are determined as discussed above, the calculation of the Dow Jones-AIG Commodity Index is a mathematical process whereby the CIMs for the Dow Jones-AIG Commodity Index commodities are multiplied by the daily settlement prices in U.S. dollars for the applicable Designated Contracts. These products are then summed. During the rollover period, the sum includes both nearby and deferred contracts weighted according to the specified roll percentage. The percentage change in this sum from the prior day is then applied to the prior Dow Jones-AIG Commodity Index value. Finally, the value of one day's interest is added, calculated using the most recent (lagged by one day) 91-Day U.S. Treasury Bill Auction High Rate to arrive at the current Dow Jones-AIG Commodity Index value.
From time to time, the Exchange states that disruptions can occur in trading futures contracts on various commodity futures exchanges. The daily calculation of the Dow Jones-AIG Commodity Index and the Index will be adjusted in the event that AIGI determines that any of the following index calculation disruption events exists: (i) The termination or suspension of, or material limitation or disruption in the trading of any futures contract used in the calculation of the Dow Jones-AIG Commodity Index on that day; (ii) the settlement price of any futures contract used in the calculation of the Dow Jones-AIG Commodity Index reflects the maximum permitted price change from the previous day's settlement price; (iii) the failure of an exchange to publish official settlement prices for any futures contract used in the calculation of the Dow Jones-AIG Commodity Index; or (iv) with respect to any futures contract used in the calculation of the Dow Jones-AIG Commodity Index that trades on the LME, a business day on which the LME is not open for trading. In the case of a temporary disruption in connection with the trading of the futures contracts of the commodities comprising the Index, the Exchange believes that it is unnecessary for a filing pursuant to Section 19(b) under the Act
The Notes are cash-settled in U.S. dollars and do not give the holder any right or other ownership interest in the Index or commodities comprising the Index. The Notes are designed for investors who desire to participate in, or gain exposure to, an index composed of a basket of actively-traded commodities, are willing to hold the investment to maturity, and who want to limit risk exposure by receiving principal protection of their investment amount.
The Notes will trade as equity securities subject to the Amex equity trading rules including, among others, rules governing priority, parity and precedence of orders, specialist responsibilities, account opening, and customer suitability requirements. In addition, the Notes will be subject to the equity margin rules of the Exchange.
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.
• If the aggregate market value or the principal amount of the Notes publicly held is less than $400,000;
• If the value of the Index is no longer calculated or widely disseminated by a major market data vendor on at least a 15-second basis during the time the Notes trade on the Exchange; or
• If such other event shall occur or condition exists which in the opinion of the Exchange makes further dealings on the Exchange inadvisable.
Additionally, the Exchange represents that it will file a proposed rule change pursuant to Rule 19b–4 under the Act,
• Dow Jones and AIG–FP substantially change either the index component selection methodology or the weighting methodology;
• If a new component is added to the Index (or pricing information is used for a new or existing component) that constitutes more than 10% of the weight of the Index with whose principal trading market the Exchange does not have a comprehensive surveillance sharing agreement; or
• If a successor or substitute index is used in connection with the Notes. The filing will address, among other things the listing and trading characteristics of the successor or substitute index and the Exchange's surveillance procedures applicable thereto.
The Exchange will halt trading in the Notes if the circuit breaker parameters of Exchange Rule 117 have been reached. In exercising its discretion to halt or suspend trading in the Notes, the Exchange may consider factors such as those set forth in Exchange Rule 918C(b), in addition to other factors that may be relevant. In particular, if the Dow Jones-AIG Commodity Index value is not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the Dow Jones-AIG Commodity Index value occurs. If the interruption to the dissemination of the Dow Jones-AIG Commodity Index value persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption.
The Exchange submits that current Rule 1203A will be applicable to the Notes. In connection with the Notes, Rule 1203A provides that the prohibitions in Rule 175(c) apply to a specialist in the Notes, so that the specialist or affiliated person may not act or function as a market maker in the underlying commodities, related futures contracts or options, or any other related commodity derivative. Consistent with Rule 193, an affiliated person of the specialist may be afforded an exemption to act in a market making capacity, other than as a specialist in the Notes on another market center, in the underlying commodities, related futures or options, or any other related commodity derivative. In particular, Rule 1203A provides that an approved person of the specialist that has established and obtained Exchange approval for procedures restricting the flow of material, non-public market information between itself and the specialist member organization, and any member, officer, or employee associated therewith, may act in a market making capacity, other than as a specialist in the Notes on another market center, in the underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives.
Additionally, the Exchange further submits that Rule 1204A will be applicable to the Notes. Rule 1204A was adopted to ensure that specialists provide the Exchange with all the necessary information relating to their trading in physical commodities and related futures contracts and options thereon or any other related commodities derivative. This Rule further reminds members that, in connection with trading the physical asset or commodities, futures or options on futures, or any other related derivatives, the use of material, non-public information received from any person associated with a member, member organization or employee of such person regarding trading by such person or employee in the physical asset or commodities, futures or options on futures, or any other related derivatives is prohibited by the Exchange.
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 exchange-traded funds, trust issued receipts (including the iShares Comex Gold Trust, streetTRACKS Gold Trust and DB Commodity Index Tracking Fund) and index-linked securities.
The Exchange believes that the proposed rule change is consistent with Section 6 of the Act,
The Exchange believes that the proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
No written comments were solicited or received with respect to the proposed rule change.
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:
• Use the Commission's Internet comment form (
• Send an e-mail to
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090.
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.
Information sharing agreements with primary markets are an important part of a self-regulatory organization's ability to monitor for trading abuses with respect to derivative securities. The Commission believes that Amex's comprehensive surveillance sharing agreements with the NYMEX and the LME for the purpose of providing information in connection with the Notes create the basis for Amex to monitor for fraudulent and manipulative practices in the trading of the Notes.
Moreover, Amex Rules, including Rule 1204A, give Amex the authority to request information to monitor for fraudulent and manipulative trading facilities. The Commission believes that these rules provide the Amex with the tools necessary to adequately surveil trading in the Notes.
The Commission believes that sufficient venues for obtaining reliable information exist so that investors in the Notes can monitor the underlying Index Components, the Dow Jones-AIG Commodity Index, and the Index. There is a considerable amount of information about the Index Components, the Dow Jones-AIG Commodity Index, and the Index available through public Web sites, and real time intraday prices and daily closing prices for the Index Components are available by subscription from major market vendors.
The Commission notes that the amount paid at maturity, per Note, will be based on the percentage change or performance of the Index over the term of the Note. As more specifically described herein, the amount paid at maturity, per Note, will consist of at least 100% of the Principal Amount, plus a Supplemental Redemption Amount, but it will never be less than the Principal Amount.
The Commission believes that the wide availability of such information will facilitate transparency and reduce the potential of unfair informational advantage with respect to the Notes and, when coupled with the principal-protected nature of the Notes, will diminish the risk of manipulation.
The Commission finds that the Exchange's proposed rules and procedures for the listing and trading of the Notes are consistent with the Act. The Notes will trade as equity securities subject to the Amex equity trading rules including, among others, rules governing priority, parity and precedence of orders, specialist responsibilities, account opening, and customer suitability requirements. In addition, the Notes will be subject to the equity margin rules of the Exchange, set forth in Amex Rule 462. The Commission believes that the listing and delisting criteria for the Notes should help to maintain a minimum level of liquidity and therefore minimize the potential for manipulation of the Notes.
The Commission notes that prior to trading the Notes, Amex will distribute a circular to the membership providing guidance with regard to member firm compliance responsibilities and highlighting the special risks and characteristics of the Notes. Specifically, the Exchange will require those recommending a transaction in the Notes to determine that such transaction is suitable for the customer, and to have a reasonable basis for believing that the customer can evaluate the special characteristics of, and bear the financial risks of, such transaction. The Commission believes that the information circular will inform members about the terms, characteristics and risks in trading the Notes.
The Commission finds good cause for approving this proposed rule change, as amended, before the thirtieth day after the publication of notice thereof in the
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.