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SEC Approves Stock Basket Trading

March 14, 1989

WASHINGTON (AP) _ Federal regulators on Tuesday formally approved the sale of a new type of security that allows investors to bet on the direction of the stock market as a whole rather than purchasing individual stocks.

However, the decision by the Securities and Exchange Commission was challenged immediately in court by the nation’s two largest futures exchanges, which could lose business from the new competition from stock exchanges.

The futures exchanges contended that the new investment instrument, known as a stock-basket, was a thinly disguised stock index future. Stock index futures also allow investors an opportunity to bet on the overall direction of the stock market.

The SEC voted unanimously to approve the stock-baskets proposed by the Philadelphia Stock Exchange, American Stock Exchange and the Chicago Board Options Exchange.

In granting the requests, the SEC rejected arguments that the new products should be regulated by the Commodity Futures Trading Commission and not the SEC.

The SEC action prompted a court challenge by the Chicago Mercantile Exchange and the Chicago Board of Trade. The two futures exchanges filed suit in a U.S. Court of Appeals in Chicago, contending that the SEC had exceeded its jurisdiction.

The stock baskets would be priced to reflect increases and declines in broad market averages such as the Standard & Poor’s 500-stock index.

The Philadelphia exchange submitted its request to trade in a product it designated as a Cash Index Participation in February 1988. Similar proposals were submitted by the American Stock Exchange last April for sale of an Equity Index Partipation. The Chicago Board Options Exchange named its product a Value Index Participation in requesting SEC approval last May.

All of the index participation products would be based on the current value of various indexes of stocks. Investors would receive quarterly cash payments equal to a proportionate share of any regular cash dividend declared on the component stocks of the underlying index.

Officials of the Philadelphia and American stock exchanges had hoped to offer their index products beginning next month but after the suit was filed, officials said it would be up to the court to decide whether to allow the products to go on sale while the legal issues were being resolved.

Nicholas A. Giordano, president of the Philadelphia Stock Exchange, said that the court suit was ″yet another desperate attempt by certain futures exchanges to avoid competition.″ He said it would prevent ″the introduction of a product that could add depth, liquidity and stability to the marketplace.″

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