[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Notices]
[Pages 2559-2560]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1362]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36747; File No. SR-PHLX-95-87]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to a Proposed Rule Change by the
Philadelphia Stock Exchange, Inc., Relating to Advice F-15 and the
Expanded Equity Option Hedge Exemption
January 19, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
7, 1995, the Philadelphia Stock Exchange, Inc. (``PHLX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is approving this proposal on
an accelerated basis.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PHLX proposes to amend paragraph (b) of Floor Procedure Advice
(``Advice'') F-15, ``Minor Infractions of Position/Exercise Limits and
Hedge Exemptions,'' to indicate that the maximum allowable position for
each option contract ``hedged'' by 100 shares of stock or securities
convertible into the stock will be three times, instead of twice, the
standard position and exercise limit of the option.\1\ The proposed
amendment to Advice F-15 will make Advice F-15 consistent with a
proposal approved previously by the Commission which expands the
maximum allowable hedge exemption for equity options to three times the
standard limit of the option.\2\
\1\ Position limits impose a ceiling on the aggregate number of
option contracts on the same side of the market that an investor, or
group of investors acting in concert, may hold or write. Exercise
limits impose a ceiling on the aggregate long positions in option
contracts that an investor, or group of investors acting in concert,
can or will have exercised within five consecutive business days.
\2\ See Securities Exchange Act Release No. 36409 (October 23,
1996), 60 FR 55399 (October 31, 1995) (order approving File Nos. SR-
NYSE-95-31; SR-PSE-95-25; SR-Amex-95-42; and SR-PHLX-95-71) (``Hedge
Exemption Order''). See also Securities Exchange Act Release No.
36371 (October 13, 1995), 60 FR 54269 (October 20, 1995) (order
approving File No. SR-CBOE-95-42).
---------------------------------------------------------------------------
The text of the proposal is available at the Office of the
Secretary, the PHLX, 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 self-regulatory organization
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 IV below. The self-regulatory organization
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
Recently, the Commission approved proposals by various options
exchanges, including the PHLX, to create two additional tiers of equity
option position and exercise limits and to expand the equity option
hedge exemption from two times to three times the applicable position
limit for the option.\3\ The PHLX's equity option hedge exemption,
which is contained in Commentary .07 to PHLX Rule 1001, ``Position
Limits,'' was adopted originally on a pilot basis, and recently was
permanently approved by the Commission.\4\ The equity hedge exemption
applies where each option contract is ``hedged'' by 100 shares of stock
or securities convertible into such stock, (in the case of an adjusted
option, the number of shares at option), as follows: (1) long call and
short stock; (2) short call and long stock; (3) long put and long
stock; and (4) short put and short stock.
\3\ Id.
\4\ See Securities Exchange Act Release No. 35738 (May 18,
1995), 60 FR 27573 (May 24, 1995) (order approving File Nos. SR-
Amex-95-13; SR-CBOE-95-13; SR-NYSE-95-04; SR-PSE-95-05; and SR-PHLX-
95-10).
---------------------------------------------------------------------------
Advice F-15 was adopted in 1993.\5\ Paragraph (a) of Advice F-15
provides for a fine for violations of the Exchange's position and
exercise limits which do not exceed the position and exercise limits by
more than 5%. Paragraph (b) of Advice F-15 governs the equity option
hedge exemption, with paragraph (b)(1) requiring the filing of a hedge
exemption report and paragraph (b)(ii) providing for a fine if an
option position is not reduced when the stock side to a hedge exemption
is decreased.
\5\ Securities Exchange Act Release No. 32423 (June 7, 1993), 58
FR 32976 (June 14, 1993) (order approving File No. SR-PHLX-92-21).
---------------------------------------------------------------------------
The PHLX proposes to amend Advice F-15(b) to reflect the recent
expansion of the equity option hedge exemption,\6\ which was
inadvertently omitted from the PHLX's proposal to expand the equity
option hedge exemption. Specifically, the PHLX proposes to amend Advice
F-15 to provide that the equity hedge exemption permits positions up to
three times the applicable equity option position limit, rather than
two times the applicable equity option position limit.
\6\ See Hedge Exemption Order, supra note 2.
---------------------------------------------------------------------------
The PHLX notes that because Advice F-15 contains a fine schedule
which is administered pursuant to the PHLX's minor rule violation
enforcement and reporting plan (``Minor Rule Plan''),\7\ the proposal
necessarily amends the Exchange's Minor Rule Plan. Since the equity
option hedge exemption has already been expanded to three times the
position limit,\8\ the PHLX believes that the proposal does not raise
new regulatory issues; rather, the Exchange believes that the proposal
enhances investors' hedging abilities by correcting Advice F-15 to
correspond to PHLX Rule 1001, as amended by the Hedge Exemption Order.
\7\ The PHLX's Minor Rule Plan, codified in PHLX Rule 970,
``Floor Procedure Advices: Violations, Penalties, and Procedures,''
contains Advices with accompanying fine schedules. Pursuant to
paragraph (c)(1) of Rule 19d-1 under the Act, a self-regulatory
organization (``SRO'') is required to file promptly with the
Commission notice of any ``final'' disciplinary action taken by the
SRO. Pursuant to paragraph (c)(2) of Rule 19d-1, any disciplinary
action taken by the SRO for violation of an SRO rule that has been
designated a minor rule violation pursuant to the plan shall not be
considered ``final'' for purposes of Section 19(d)(1) of the Act if
the sanction imposed consists of a fine not exceeding $2500 and the
sanctioned person has not sought an adjudication, including a
hearing, or otherwise exhausted his or her administrative remedies.
By deeming unadjudicated minor violations as not final, the
Commission permits the SRO to report violations on a periodic
(quarterly), as opposed to immediate, basis.
\8\ See Hedge Exemption Order, supra note 2.
---------------------------------------------------------------------------
The PHLX believes that increasing the maximum levels of the
automatic hedge exemption should provide greater depth and liquidity,
and, hence, greater protection to investors against market declines.
Because the proposal codifies the expanded exemption in Advice F-
[[Page 2560]]
15, the PHLX believes that the proposal is consistent with Section 6(b)
of the Act, in general, and, in particular, with Section 6(b)(5) in
that it is designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and protect investors and the public interest by incorporating
the new, broader equity hedge exemption in to the Exchange's Minor Rule
Plan.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The PHLX does not believe that the proposed rule change will impose
an inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Exchange has requested that the proposed rule change be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act in
order to promptly correct Advice F-15 to reflect the expanded equity
option hedge exemption approved in the Hedge Exemption Order and to
clarify the application of the Minor Rule Plan to the exemption.
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, the requirements of Section 6(b)(5) in that it is designed
to protect investors and the public interest and to facilitate
transactions in securities.\9\ Exchange Rule 1001, Commentary .07 and
Advice F-15(b) set forth an exemption from equity option position and
exercise limits for equity options hedge by 100 shares of stock or
securities convertible into the stock. In the Hedge Exemption Order,
the Commission approved a proposal to amend PHLX Rule 1001, Commentary
.07, to expand the maximum allowable hedged position for equity options
to three times the standard position and exercise limit of the option.
However, a corresponding amendment to Advice F-15(b) was inadvertently
omitted from the PHLX's proposal to amend PHLX Rule 1001, Commentary
.07.
\9\ 15 U.S.C. Sec. 78f(b)(5) (1988 & Supp. V 1993).
---------------------------------------------------------------------------
The Commission believes that the proposal protects investors and
the public interest by making Advice F-15(b) consistent with PHLX Rue
1001, Commentary .07, as amended by the Hedge Exemption Order, thereby
clarifying the Exchange's rules and eliminating potential confusion.
Specifically, the proposal amends Advise F-15(b) to indicate that the
maximum allowable position for each option contract hedge by 100 shares
of stock or securities convertible into the stock, will be three times,
instead of twice, the standard position and exercise limit of the
option.
As the Commission found in the Hedge Exemption Order, the
Commission believes that the proposal to expand the hedge exemption is
an appropriate method to accommodate the needs of options market
participants. By increasing the hedge exemption, the Commission
continues to believe that large hedge funds and institutional accounts
will be provided with the means necessary to adequately hedge their
stock holdings without adding risk to the options market. Based on the
PHLX's experience, the Commission believes, as it concluded in the
Hedge Exemption Order, that the increased equity option hedge exemption
should result in little or no additional risk to the marketplace.\10\
\10\ The Commission notes that to the extent the potential for
manipulation increases because of the expanded hedge exemption, the
Commission believes that the PHLX's surveillance programs will be
adequate to detect as well as to deter attempted manipulative
activity. The Commission will, of course, continue to monitor the
PHLX's surveillance programs to ensure that problems do not arise.
---------------------------------------------------------------------------
In addition, the Commission believes that it is appropriate to
continue to administer Advice F-15, as amended, pursuant to the PHLX's
Minor Rule Plan. Under the proposal, violations of the hedge exemption
continue to be objective in nature and easily verifiable; therefore,
the enforcement of the expanded hedge exemption should not entail the
complicated factual and interpretive inquiries associated with more
sophisticated disciplinary actions. Accordingly, the Commission
believes that violations of the equity option hedge exemption continue
to lend themselves to the use of the PHLX's Minor Rule Plan and the
fines provided for in Advice F-15.
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 proposal clarifies the PHLX's rules by making Advice
F-15(b) consistent with PHLX Rule 1001, Commentary .07. In addition,
the proposal does not raise any new regulatory issues since the
Commission previously approved an identical amendment to PHLX Rule
1001, Commentary .07. Accordingly, the Commission believes that
granting accelerated approval of the proposed rule change is
appropriate and consistent with Sections 6(b)(5) and 19(b)(2) of the
Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to the file
number in the caption above and should be submitted by February 16,
1996.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-PHLX-95-87) is approved.
\11\ 15 U.S.C. Sec. 78s(b)(2) (1982).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
\12\ 17 CFR 200.30-3(a)(12) (1995).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-1362 Filed 1-25-96; 8:45 am]
BILLING CODE 8010-01-M
