[Federal Register Volume 60, Number 219 (Tuesday, November 14, 1995)]
[Notices]
[Pages 57256-57257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27993]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36460; File No. SR-Phlx-95-61]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to a
Reduction of the Value of the Phlx National Over-the-Counter Index
November 6, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 22, 1995, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to reduce the
value of its National Over-the-Counter Index (``Index'') option
(``XOC'') to one-half of its present value by doubling the divisor used
in calculating the Index. The Index is a capitalization-weighted market
index composed of the 100 largest capitalized stocks trading over-the-
counter. The other contract specifications for the XOC remain
unchanged.
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 Phlx 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 Phlx 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
The Phlx began trading the XOC in 1985.\3\ The Index was created
with a value of 150 on its base date of September 28, 1984, which rose
to 548 in June 1994, and to 700 in June 1995. On September 14, 1995,
the Index value was 868. Thus, the value has increased significantly,
especially during the last year. Consequently, the premium for XOC
options has also risen.
\3\ See Securities Exchange Act Release Nos. 21576 (January 18,
1985), 50 FR 3445 (January 24, 1985); and 22044 (May 17, 1985), 50
FR 21532 (May 24, 1985) (File No. SR-Phlx-84-28).
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As a result, the Phlx proposes to conduct a ``two-for-one split''
of the Index, such that the value will be reduced by one-half. The
number of XOC contracts will be doubled, such that for each XOC
contract currently held, the holder will receive two contracts at the
reduced value, with a strike price of one-half the original strike
price. For instance, the holder of an XOC 800 call will receive two XOC
400 calls. In addition to the strike price being reduced by one-half,
the position and exercise limits applicable to the XOC will be doubled,
from 17,000 contracts to 34,000 contracts until the last expiration
then trading.\4\ Currently, the last expiration month trading in
[[Page 57257]]
March 1996.\5\ This procedure is similar to that employed with equity
options where the underlying security is subject to a two-for-one stock
split, as well as the recent split of the Phlx's Semiconductor
Index.\6\ The trading symbol will remain as XOC (plus any necessary
wrap symbols).
\4\ Separately, the Exchange is proposing to increase the XOC
position and exercise limits to 25,000 contracts. See SR-Phlx-95-
38).
\5\ The Exchange notes that following September expiration, June
1996 options are listed.
\6\ See Securities Exchange Act Release No. 35999 (July 20,
1995), 60 FR 38387 (July 26, 1995) (File No. SR-Phlx-95-41).
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In conjunction with the split, the Exchange will list strike prices
surrounding the new, lower Index value, pursuant to Phlx Rule 1101A.
The Phlx will announce the effective date by way of an Exchange
memorandum to the membership, which will also serve as notice of the
strike price and position limit changes.
The purpose of the proposal is to attract additional liquidity to
the product in those series that public customers are most interested
in trading. For example, a near-term, at the money call option series
currently trades at approximately $1,200 per contract. With the Index
split, the same option series (once adjusted), with all else remaining
equal, could trade at approximately $600 per contract. Thus, certain
investors and traders may currently be impeded from trading at such
levels. A reduced value should, therefore, encourage additional
investor interest.
The Phlx believes that XOC options provide an important opportunity
for investors to hedge and speculate upon the market risk associated
with the underlying over-the-counter stocks. By reducing the value of
the Index, such investors will be able to utilize this trading vehicle,
while extending a smaller outlay of capital. This should attract
additional investors, and, in turn, create a more active and liquid
trading environment.
For these reasons, the Phlx believes that the proposed rule change
is consistent with Section 6(b) of the Act in general, and with Section
6(b)(5) in particular,\7\ in that it is designed to promote just and
equitable principles of trade, as well as to protect investors and the
public interest. The Exchange believes that reducing the value of the
Index does not raise manipulation concerns and will not cause adverse
market impact, because the Exchange will continue to employ its
surveillance procedures and has proposed an orderly procedure to
achieve the Index split, including adequate prior notice to market
participants.
\7\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
The Phlx does not believe that the proposed rule change will impose
any inappropriate burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The Phlx received one comment letter opposing the proposed rule
change from a financial planner at Smith Barney Shearson.\8\ According
to the commenter, one of the primary inducements to trading the XOC
Index is its volatility. If the Index is split in half, however, the
commenter believes that investors will be unnecessarily forced to trade
twice as many contracts in order to maintain their current degree of
leverage. The commenter also opposes the proposed rule change because
he believes that splitting the Index will reduce its value to an
inappropriately low level. The commenter also suggests alternative
split levels (e.g., a 4 for 3 split, or a 3 for 2 split) as a less
problematic approach. In this manner, according to the commenter, the
Index will retain a greater percentage of its current value. Finally,
the commenter suggests that the Exchange postpone the splitting of the
Index to provide investors with a reasonable amount of time to adjust
their positions as a result of the proposed rule change.
\8\ See Letter from Barry J. Weisberg, Vice President, Smith
Barney Shearson, to Andy Kolinsky, Vice President, Phlx, dated
August 1, 1995.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Phlx consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing also will be available
for inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-95-61 and should be
submitted by December 5, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27993 Filed 11-13-95; 8:45 am]
BILLING CODE 8010-01-M
